Emerging Funding Models for Government Infrastructure & Smart City Projects Post-COVID

Till now, governments globally have generally funded infrastructure projects through traditional means, including:

• Taxes to pay for infrastructure;

• Issuing municipal bonds;

• Public-Private-Partnership (P3) models where a private entity participates in some form across the Design, Build, Fund, Operate and Maintain infrastructure-life cycle for a period of 20 or so years, and in return, the Private party usually inherits the infrastructure thereafter; or

• Through divestiture of assets and infrastructure

Outside of paying for infrastructure through taxes and issuing municipal bonds, the other means require complex structures to be established and end up with the government or city losing control and/or ownership of the asset. Funding a project through taxes-alone is limiting and provides a finite pool of rate payers who contribute to the project. Plus adding taxes in challenging times is usually neither practical nor popular. Lastly, bonds, while help to broaden then investor base, tend to have high entry fees for the average investor, requiring one to invest at least $5000 through expensive brokers, these barriers to entry for many investors tend to restrict the possible funding municipalities can get through bonds.

While we have worked with governments on several infrastructure projects using traditional means for funding as part of the business and governance models of such deals. Most recently, given then challenging economic times as a result of COVID pandemic globally, organizations have asked for ways we can help them explore and viably leverage emerging technologies, and develop associated business and governance models to address funding of important projects in these challenging times.

The internet, which leverages distributed computer and networking infrastructure, helped to scale networking and enable mass connectivity without relying on a single organization or entity to invest in it. Likewise, over the last decade, Blockchain has enabled the ability to digitize assets, assign them value through what is known as tokenization, and then conduct commercial transactions with them by buying and selling these tokens, etc. In addition to this, Blockchain has enabled the use of cryptographically secure digital currency known as cryptocurrency.

Cryptocurrencies and tokens can be structured along a broad spectrum of issuance, ownership, participation and transactions from being totally open and globally distributed– such as those used in cryptocurrencies such as ether or bitcoin; to issuance of asset-backed securities to a limited group of investors in a regulated manner via a non-fungible token that cannot be transferred to another party, thereby attempting to comply with securities regulations such as AML/KYC.

Over the last several years, there has been a marked increase in interest from Central and State Banks to issue cryptocurrency-like sovereign digital currency. And most recently, with the need to support contactless payments while social distancing and thereby reducing use of cash, even the Central Bank of Canada has been exploring contingency measures to use a state-sovereign digital (crypto-like) currency.

Similarly, while governments and municipalities have been exploring ways to use a combination of Blockchain technology and tokens, digital and cryptocurrencies to raise funding for government and municipal projects in a manner similar to issuing digital or cryptocurrency bonds to investors, the current situation as a recent of COVID provides a compelling driver for municipalities to explore new ways of funding projects.

The benefit of this approach is multi-fold.

1. Large municipalities and governments can offer a city token (city coin) to its residents, businesses, visitors for use within the city to conduct transactions such as paying taxes or buying property, etc.

2. Cities of all sizes can offer to investors from within the city or outside of the city – similar to a bond. Unlike traditional bonds, however, investors can invest a small fraction of a token thereby easing the minimum entry barrier and significantly broadening the potential investor pool. Cities do not have to rely on just their own tax payers or investors that can invest the minimum amounts via a broker;

3. Cities can offer asset-backed tokens or a “stablecoin” that is pegged to a physical asset such as infrastructure;

4. Cities can also issue tokens that are used to fund the development of infrastructure and establish rules for paying back the investment with gains over a period of time.

The entire process offers a great deal of flexibility though software contracts known as smart contracts. These smart contracts automatically execute when pre-defined and agreed upon conditions are met. For instance, payout upon expiry of the issue, etc.

This creates an open and transparent issuance and investment paradigm and is attractive to investors. Cities that are early adopters of this model can also benefit from the growing number of cryptocurrency holders that are looking for investment and can be accredited and compliant investors.

This goes well beyond a city simply accepting cryptocurrency to pay taxes and bills, and governments need to make sure they explore this area carefully and design the token / city coin offering accordingly to ensure that it meets the criteria for being regulatory compliant as well as being secure.

Several governments and cities around the world are actively exploring this avenue as an alternative to traditional means of transacting. These include Dubai, UAE which has been leading the global race on Blockchain, wanting to have government records secured via Blockchain by 2020. While, given COVID, whether this ambitious goal will be met this year is yet to be seen, however, the City has been on a roar as it relates to its Blockchain initiative. In 2017, Dubai launched emCash to push forward with its drive to be the smart city of the world. Busan and Seoul are both exploring city issued coins. The City of Berkley in California is looking to issue a bond-like cryptocurrency to fund housing projects. Most of these initiatives are in their exploratory stages, however, they have garnered considerable interest globally, and one expects the socio-economic impact of COVID will accelerate this.

TransformationWorx has worked with dozens of municipalities and federal government leaders to understand the applications of Blockchain technology for government and smart city projects, as well as exploring legal, and regulatory compliant funding, business and governance models with use of cryptocurrency, tokens and digital assets. If you are a government exploring these emerging avenues, you can contact TransformationWorx for an initial consultation.