Page 34 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

(d) consumption-based financing: a project sponsor finances the creation of technology based on
the usage, and adjusts capacity up or down as needed. Financing is, therefore, at the supplier
level rather than the project level;
(e) “as-a-service” financing: in this case, rather than using finance to purchase technology, the
project uses financing as a service. Financing is therefore at the supplier level;

(f) concession financing: this is when a project benefits from technology at very little or no cost,
while enjoying incremental revenues and cost savings;

(g) revenue-share financing: this is financing in which a project obtains funding for technology
investments in exchange for a share of the revenues from customer contracts. Revenues may
be committed (planned and occurring regularly, for example, a subscription) or uncommitted
(occurring on demand, for example, items purchased from a shop); and
(h) equity financing: traditionally, this kind of financing aims to scale business across multiple cities
using capital and expertise provided by a strategic private equity partner who purchases a
percentage of the company.

Four important financing tools

A more detailed list of several existing financing instruments that can be used to stimulate investment
in urban development with the aim of producing economic, environmental and social benefits can
be found in Annex II. While a lot of traditional and innovative financing tools exist, four exemplary
tools are described in detail below:

1. Municipal bonds or municipal securities (munis) are bonds issued by states, cities, regions
and other governmental entities to raise money to build roads, schools and other public
infrastructure. These bonds pay the buyer a specified amount of interest and return the capital
on a specific date; the maturity date ranges from short term (two to five years) to very long term
(over 30 years). There are three common types of munis:

(a) general obligation bonds are issued by states, cities or counties, and are backed by the "full
faith and credit" of the government issuing them. Their creditworthiness is based primarily
on the economic strength of the issuer's tax base;

(b) “revenue bonds” are generally backed by fees or other revenue generated by a facility,
such as tolls from a bridge or road, or leasing fees. Their creditworthiness depends on the
financial success of the project they are issued to fund; and

(c) “conduit bonds” are a type of revenue bond often issued to fund a private entity with a
public purpose, such as a not-for-profit hospital or an affordable housing development.
One common structure is for the private entity to use a governmental issuer (a city, state or
instrumentality of a state, for instance) as a "conduit" for the financing of such projects.

A good example of the potential bonds available to support public projects are property-
assessed clean-energy bonds (PACE bonds), due to their high environmental impact. These

16 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects