June 4, 2017
Sometimes, rules and regulation get in the way of creative solutions in business.
Creatively growing business often means re-thinking everything and pushing the boundaries that may be constraining your activities. Create Business is speaking with Leah Sertori, CEO of Be.Bendigo, a platform for visionary organisations to help shape the business climate and conditions of Victoria’s third largest city. We are talking about how Bendigo is going to become a Smart City.
So what is a Smart City and why be one?
A smart city is an urban development vision to integrate information and communication technology and Internet of things technology in a secure fashion, to increase the city’s sustainability and personalise the experience of living in the city for residents. Smart city strategy generally includes a major focus on smarter asset management. These assets include local departments information systems, schools, libraries, transportation systems, hospitals, power plants, water supply networks, waste management, law enforcement, and other community services.
Last year, the Australian Federal Government launched the $50 million Smart Cities Plan for local governments to collaborate and apply innovative technology-based approaches to improve the liveability of cities and their suburbs, and to solve urban problems.
A key challenge is the need to find new sources of funding for infrastructure, as government budgets are increasingly constrained in their ability to fund projects. While government spending will remain an important part of the mix, user charges and other funding sources need to be considered to ensure that Australians continue to enjoy world-class infrastructure.
Over a cup of tea, Leah shares with me some of the unique and creative thinking that Bendigo is pitching to shake up Australia’s financial and energy sectors and re-think how business is done.
Our Smart Cities proposal for Bendigo includes the idea of bond issue for major infrastructure projects. In the financial sector, a bond is a debt instrument which allows the issuer to roll together projects with both high and low rates of return. Bonds provide the borrower with external funds to finance long-term investments, and, depending on the terms of the bond, they are obligated to pay interest and repay the principle.
Each of our projects has a different forecast rate of return—some with low returns at 4%, some at 11%.
We plan to offer investment opportunities with projects grouped together, rather than individually. Low investment returns are matched with more attractive returns to make the ‘bundle’ of returns balance out to be more in the ‘middle.’ More viable for an institutional investor, such as a superannuation fund.
The idea of bundling projects is an important option to make social and community infrastructure projects with lower rates of return viable. The projects we are looking to establish in Bendigo using this financial bond model include:
• Renewable energy projects
• Affordable housing
• Mixed use and purpose buildings e.g. health
• Water treatment infrastructure
Bendigo is seeking to pitch for both bond projects and social impact bonds. Social impact bonds pay for an outcome that has not yet been achieved. For example, in Bendigo, lifestyle-related illnesses cost our health system $80million annually. Social investment bonds to fund preventative health measures over the medium to long term will reduce the cost of health services.
Fixed infrastructure leased out to a user such as a water authority, will have a predictable income stream over a period of time, and the supplier and user can put this fixed activity into their existing business model and plan accordingly. Unlike physical infrastructure, social impact bonds can be more difficult when specifying the anticipated return, due to forecasted future costs reducing.
What we definitely know, is that the government can’t afford to keep paying for infrastructure and social services under the current policy/business model of taxation.
Health services are always seeking increasing funding levels, as costs are increasing exponentially. Having the option of social impact bonds is very exciting because the incentive to create real outcomes that result in better health will influence investment. Investment decisions will be made upon the best preventative evidence for a distinct community.
Social impact bonds have the potential to disrupt the current funding model, which is defined by short term commitments, influenced by the political cycle. Under the current model, organisations and sectors often receive funding commitments during an electrol cycle based on the perceived value for the government of the day. If communities were required to make their own case for investment, with an evidence-based approach that preventative health care services (for example) would reduce cost further downstream…..they can attract investment in the form of a social impact bond. Such a model offers greater independence and resilience for the community. It decreases the community’s reliance on government investment in preventative health as the primary resource for such important work. Organisations, with the best evidence of outcomes for the health of a community and the best business case, are most likely to be supported under such a model.
Bendigo’s Smart City has seven key areas:
• Research & Evaluation
Bendigo’s Smart City submission is currently being finalised and submitted to local, state and federal governments to form a City Deal. City Deals, an idea borrowed from the UK, are agreements between federal, state and local governments to develop collective plans for growth and commit to the actions, investments, reforms and governance needed to implement them.They can work across whole metropolitan or regional cities or areas.
City Deals are long-term in their nature—around 20 years. We believe Bendigo is best placed to test out our proposed City Deal model.
There are existing City Deals around the world in Barcelona, Glasgow and Amsterdam—each investing into a mix of smart resources, governance, investment and technology.
Bendigo’s Smart City pitch is unique because it focuses on an innovative financial model—including bonds and social impact bonds. Another point of difference we are drawing attention to is the fact that our region is the perfectly-sized living laboratory to test data and smart sensors, etc.
Rather than asking for cash, we are asking for a smaller financial investment from the government with a regulatory ring fence to allow for the creation of innovative ways to re-think financial services and other services like energy-use.
We are proposing to introduce peer-to-peer energy services for householders and industry. For example, a neighbour who has a large solar-energy system and is away from home most of the day will be able to sell cheap energy to a pensioner who lives next door, at a lower cost than a retailer. Our vision is to establish an energy enterprise using a similar, successful model that Bendigo Bank has established through its community-banking sector.
In industry, we are seeking regulatory relaxation so that industries can build their own power stations and share energy generated with their neighbours and other large manufacturing companies.
It really is an issue that needs to be addressed. This year, a manufacturer in East Bendigo has seen their energy costs increase by over 100% in the last 12-months. By investing into energy production, they reduce their costs over the long term and also have a secure energy supply.
Australia’s regulatory environment is admired the world over for delivering strong consumer and environmental protection and it is imperative that Australian and state-based regulators continue to play this vital role. However, there is also a need to review some individual rules within regulations pertaining to individual sectors, such as energy, finance and land use. For example, energy regulation does not allow a generator to pass electricity over a property title without a license as an energy retailer. To obtain a license as an energy retailer the applicant requires a surety of several million dollars. In this case, our concept of precinct level, clean energy generation for our manufacturing sector is not supported under the rules. We are asking governments at all levels to partner with us, to explore the need for regulatory relaxation and possibly reform through innovative pilot projects in Bendigo.
We need to think beyond business as usual, to think about innovative investment. Investment purely into infrastructure isn’t enough. Digital channels will drive our economy and manufacturing will be automated—we need to get ahead of the curve now and ensure our city is relevant for investors in the future.
Bendigo’s Smart City bid will be presented late June and it is expected that the outcome will be known later this year.
Stay in touch with Be.Bendigo and the Bendigo Smart City bid by liking the Be.Bendigo Facebook page.