The US is lagging behind with its less proactive government but decentralised innovation has its upside.
North America may be the world’s most mature infrastructure market. But at the bleeding edge of the asset class – where utilities, transport and communications meet digitalisation – Europe and Asia are perceived to be leading.
No North American metropolis appears in the top 20 of the 2024 Smart City Index, compiled by IMD Business School in Lausanne with the help of the Seoul-based World Smart Sustainable Cities Organization. Criteria include economic and technological ratings as well as quality of life and environmental scores.
“At the top, it is becoming even more of an Asia-Europe game,” the report states of the race to incorporate high technology into urbanism. As US and Canadian cities fall behind, infrastructure is cited as a growing area of concern.
Public vs private
One reason for the disparity in smart infrastructure rollout is a difference in ownership models, according to Brent Burnett, a managing director at Hamilton Lane who heads infrastructure and real assets.
“In Europe, or in India or other parts of the developing world, certain types of assets tend to be more in a private-pay model,” Burnett says, “whereas in North America, these things tend to be owned and managed by public utilities and/or some sort of government entity, which somewhat dampens the incentive to be more efficient.”
One example is the evolving energy grid, where consumption is outpacing supply. “Both the consumer and the industrial power complex could benefit significantly from more integration of smart technologies,” adds Burnett, which can dynamically measure energy use and manage different sources of generation in order to match distribution to demand. Investment in grid management is especially necessary as more intermittent renewables and distributed energy resources come online.
Cecilio Velasco, a managing director on the infrastructure team at KKR, points to financial constraints on public utilities as one impediment to making upgrades. “Often in the US, services like water, sewage and electricity are run by municipalities or local entities, which work with the resources that they have. And many times you need a higher capital expenditure on day one to drive lower operating costs and improve services. An example is smart meters, where you reap the benefits over a long period of time. In some capital budgets, it can be a challenge to accommodate that.”
In Europe, policymakers have prioritised smart metering, with governments setting targets for replacing conventional electricity meters. “If there was more of a programme, a blueprint, to push for smart meters for public services around utilities, water and electricity, that would be quite helpful for the US,” Velasco adds.
Connecting the dots
Another factor holding back progress is a relative lag in installing high-speed connectivity, like fibre internet, across the US, according to Velasco.
“For us, the topic of smart cities is anchored in the context of driving more efficient utilisation of resources through connectivity, information sharing and technology,” he says. “There’s still a big chunk of the US that relies on cable, DSL, or older, slower technologies. That does hamper a certain level of economic activity.”
In part, this is a function of geography: “Obviously with cities there are high-density pockets, but the population of the US tends to be spread out overall. Whereas in places like Europe, Japan and Korea, people tend to be a lot closer together, so building that connectivity and that infrastructure tends to be easier.”
Extending high-speed connectivity to areas of the country that lack it has become an investment theme for KKR, whose portfolio includes fibre-to-the-home provider Metronet, soon to be acquired by a joint venture between the firm and T-Mobile. Other smart city concepts the firm has backed include European off-street “parking as a smart service” company Q-Park and UK fleet electrification provider Zenobē. The latter is looking to bring its solutions, including battery storage and technology to optimise routes and charging times, to North America.
Marketplace of innovation
One veteran investor in technology-enabled real assets offers “a slightly contrarian” take on the state of the nation’s smart-city efforts. Compared with the scale of plans like Neom – the automated city-state in the desert envisioned by Saudi Arabia – the US may seem to be playing for small stakes, but Jonathan Winer qualifies that view.
“I don’t necessarily think it is the case that either the Asian or the Middle Eastern projects are significantly more advanced,” says the co-founder and co-CEO of Sidewalk Infrastructure Partners, an Alphabet spinout whose mandate is the application of technology to infrastructure in North America. Rather, Winer perceives two models of development – one top-down, the other bottom-up – with the US approach providing a key advantage.
Singapore, for instance, has “probably one of the most sophisticated urban environments in terms of digitisation”, Winer says, “and that has been very much a top-down driven process”, with strong government edicts determining what gets built. The same is true of China and the Gulf states.
These projects can get underway rapidly – with quick resolution of permitting or regulation around personal data – but “it’s very, very hard to innovate from a top-down, prescriptive model”, Winer says.
In the US, by contrast, local officials are responsible for taking the initiative. “Of course, there are federal policies and grants, but if you ask who comes up with the innovative idea, it happens at the municipal level,” Winer says. “That means there is a far greater spectrum of innovation happening, and the winning projects tend to bubble up.”
As an example, Winer calls V2X, vehicle-to-everything communication – “a huge opportunity”. In Michigan, SIP is outfitting a stretch of road between Detroit and Ann Arbor with sensors and cameras, the data from which will be used to create “a digital twin” of the thoroughfare.
“We’re able to identify everything that’s going on in the roadway, and then communicate it directly to vehicles and to the Department of Transportation, to ensure its safety and throughput,” Winer says. SIP believes this is the first connected autonomous vehicle laneway in North America. On the other side of the Pacific, China also has a similar project.
“There isn’t just one group working on that in the US, with some set of standards imposed upon us,” Winer says. “There are dozens and dozens of pilot projects – some privately financed, some publicly financed, some of which are at scale, some of which are smaller. Right now, that might look messier than the road that they have in China, which was top-down designed and built faster. But in the long run, I think that it will lead to much better and more sustainable innovation.”
As infrastructure advances technologically, the asset class is evolving in turn. With interest rates up, several large LPs have created “opportunistic pockets” for allocations to innovative, value-add infrastructure strategies, Winer says: “Four years ago, I don’t think I knew a single one taking that approach, but now probably half of the top 10 have it.” Within technology investing, too, a subcategory of allocations to innovative physical assets is emerging.
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Autor(en)/Author(s): Eamon Murphy -
Quelle/Source: Infrastructure Investor, 06.10.2024
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