Balancing Risk and Reward: The Rise of Smart Cities

Capital & Economics

Balancing Risk and Reward: The Rise of Smart Cities

July 26th, 2017

Overview

Everything about your morning commute is about to change. Just imagine: You pull your electric car out of your garage, which houses your residential energy storage unit that charged it the night before. As you pull into traffic, automated systems and smart signals reflow cars to the most efficient routes, cutting your total drive time in half. You pass a city crew performing preventative maintenance on a water main, notified in advance by equipment sensors. After parking your car in a space you reserved via your smartphone the night before, you stride into your office, where automated climate controls have optimized the space according to weather conditions.

Welcome to life in a smart city, which harnesses data from systems, sensors, and infrastructure to reduce costs and increase productivity.

These scenarios might sound optimistic, but have already begun to implement smart city technologies. In the very near future, such technologies will enable cities to unlock massive benefits such as reduced emissions, better resource allocation, and a higher quality of life for residents. This potential has left elected officials scrambling to implement these technologies as one way to continue to deliver for their residents.

“Given that municipalities are funded by taxpayers, there is constant pressure to get the most out of each dollar,” said Carleen C. Patterson, managing director and U.S. public sector practice leader at Aon. “Therefore the public sector stands to benefit from smart city technologies.”

But it’s not all optimism: For all the potential benefits, these technological innovations are not without risks. The more cities rely on technology, the more vulnerable they become. A greater understanding of the benefits and potential drawbacks will ensure that stakeholders, from elected officials, to city managers, property owners and technology providers, can chart the best path forward.


In Depth

Smart cities and the promise of increased productivity

The Internet of Things (IoT) is changing everything. For our cities, the possibilities to use sensors and connection points on roads, power lines, water systems, buildings—and almost every other aspect of our lives—are boundless. And the rewards could be significant: improving the lives of people, businesses, property owners, and public entities.

“Plain and simple, the greatest benefit of smart cities is increased productivity,” said David Bowcott, global director of Growth, Innovation, and Insight for Aon’s Global Construction and Infrastructure Group.

Bowcott explains that we’re in the Fourth Industrial Revolution—a world where data and technology such as artificial intelligence could generate productivity increases greater than those of the previous three revolutions combined.

“Smart cities and connected infrastructure will lead to tremendous increases in the reliability of entire portfolios of assets within a city, country, or region,” Bowcott said. “Imagine a world in which physical assets such as buildings will be given a nervous system and a brain, and humans will connect to these new beings in search of an optimal productive state.”

And this world isn’t too far off. Many of the smart technologies that cities will deploy are governmentally driven and directly related to the maintenance and safety of roads, bridges, and other infrastructure, noted Jose Peralta, director at Aon Risk Solutions. Applications include:

  • High-tech/energy efficient housing
  • Connected business parks
  • Microgrid and residential energy storage
  • Smart meters for utilities
  • Smart LED lighting

Copenhagen, for example, has established Copenhagen Connecting, which aggregates data from multiple sources such as sewers to public dustbins to decrease the city’s carbon footprint and reduce travel times. Similarly, Barcelona uses data from smart parking technology, smart streetlights, and sensors to lower carbon emissions. These applications are promising, but the massive potential of an automated and analytical smart city has yet to be fully unlocked.

Savings, safety, and efficiency

Adoption of these smart technologies hasn’t yet reached critical mass. And the delays are understandable. Rapid urbanization, budget shortfalls, and public safety concerns are just a few of the more pressing issues that governments tend to prioritize over the kind of significant investments needed to become a smart city.

As governments implement smart technologies, however, they will need to consider the risk side of the equation. “From a public sector point of view, most city officials are stretched thin dealing with the day-to-day it’s difficult to do  the necessary long-term planning around how smart cities and changes in infrastructure might help them better manage risk,” said Peralta.

More connectivity brings more risk: Addressing cyber vulnerabilities

Cyber attacks are a part of everyday life for the private sector, but the increasing use of smart city technologies will inevitably extend this risk to the public sector. Every piece of internet-enabled equipment represents a potential entry point for hackers, thereby making cities a soft target. “Cyber attack is perhaps the greatest threat to this impending Fourth Industrial Revolution,” Bowcott said. “If not properly protected, these now connected—almost living—physical assets could be used as weapons.”

On top of that are issues of safety and public expectations. While smart technologies will collect data and enable analytics, it will also raise public expectations around the accuracy and reliability of the new system. What happens the first time a traffic signal malfunctions and causes a fatality? Public confidence in these technologies is critical to capturing their potential value. “The public sector is often held to a higher standard and has to meet the expectations of diverse populations—from those who expect high-functioning civil services to those who rely heavily on technology and expect quick results,” said Patterson.

Moreover, smart technology systems will need to be properly maintained. Failure to do so could make any of the public bodies and businesses liable. So the people running a smart city will have to consider not just the initial cost of their projects but also expenses for ongoing maintenance, upgrades and who’s directly responsible for their safe installation and upkeep. At the moment, laws and regulation are still playing catch-up with the new technologies of the smart city.

The Smart Building: Smart Business

And then there is the real estate industry. With the rise of the smart building, landlords are exploring how they can use smart technologies to make their properties more connected and automated. However, the inclusion of smart environmental systems isn’t just a decision to “go green;” it’s also a way to decrease costs. Kevin Madden, a leader of Aon’s U.S. real estate practice, explains: “By having a smart building, a landlord’s energy costs decline significantly. Going green is extremely reliant upon technology, and the by-product is significant energy savings.”

The results of those economic incentives are buildings that are more energy-efficient and provide tenants with various technologies that allow them to live and work more easily. But again, those benefits aren’t without risks. “Unfortunately, real estate is increasingly a soft target for cyber attacks,” Madden said. “Elevators, sprinkler and HVAC systems—everything is now computerized. And with increased connectivity, there’s growing concern on the impact cyber breaches will play as it relates to such infrastructure.”

Navigating the path forward

As cities become smarter, new technologies, and the risks and opportunities they present will be assessed at the implementation stage and beyond.  New methods and the necessary risk management mechanisms for addressing such emerging risks will continue to arise.

And as cities are paving the way forward, such large-scale investments are already beginning to address many of the maladies currently afflicting cities. Even with the many barriers to entry, smart technologies are proving that we can prevent—and even eliminate things such as congestion—before they actually become an issue; it’s all about forward-thinking.


Talking Points

“Fundamentally, technology has the capacity to change our communities in profound ways, prying out previously unimaginable opportunities. The question is who gains from this newfound power. Handled badly, the smart cities revolution . . . could become some dystopian nightmare of centralized surveillance and regulation rather than an empowering tool for social betterment.” – Dipa Joshi, director, Assael Architecture

“We are not saying that existing cities are dumb, but we need to use technology to create an environment where people are better off in terms of pollution, traffic, education, health, jobs, living conditions, and cultural spaces.” – Sam Pitroda, father of the Indian telecom revolution and co-chair of the People for Global Transformation think tank

“At its very core, a smart city is a city that has been able to look inside and identify what its challenges are—what its people and residents need to have the quality of life they want to have—and to craft unique solutions that enable the city and the community to deal with those challenges.” – Steve Adler, mayor, Austin, Texas


Further Reading

Why Smart Cities Need to Be Happy Ones, Too—Knowledge@Wharton, July 7, 2017

The Rise Of The Smart City—The Wall Street Journal, April 16, 2017

Smart Cities Can Help Deliver Khan’s “Good Growth” —The Architect’s Journal, July 18, 2017

“Smart” Cities And Buildings: The Emergency Of The Cyber Safe Building —The Urban Developer, July 18, 2017

From Research To Results: The Substance Behind Smart Cities—Government Technology, July 12, 2017

Enterprise Internet Of Things—Balancing The Value Versus Vulnerability Equation – Aon, 2017

 

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