The Market for Smart Cities Is Worth €800 Million and Growing

The market for Smart Cities in Italy is growing, projects are proliferating and Italian municipalities are beginning to reap the benefits. However, there is still a lack of a structured strategy for the integration of the different verticals related to Smart Cities, and the exploitation of data is not yet matched with dedicated skills and valuable collaborations between Public and Private.

In this context, programs such as Bravo Innovation Hub dedicated to “Green Mobility and Smart Cities” offer startups a significant growth opportunity and our cities the chance to increasingly transform themselves into smart, green, and collaborative places. Bravo Innovation Hub is Invitalia’s acceleration program, implemented by Nana Bianca, Apply Consulting, and StartupItalia, being held in Cagliari. Ten startups are completing acceleration at the Metropolitan Library and Multipurpose Hall, inside Monte Claro Park.

The use of digital technologies applied to Smart Cities will improve the efficiency of traditional services for the benefit of citizens and businesses, with the aim of making cities more sustainable. Let’s look at the international and Italian scenarios.

Read more about the Smart Cities market and find the latest business news of the day with the Born2Invest mobile app.

World Population and Smart Cities

Currently, 56 percent of the world’s population lives in cities, a percentage that is constantly growing. By 2050, the urban population is projected to account for 66 percent of the world’s population. Projections indicate that the world population could reach 9.7 billion individuals by 2050 despite predictions of a slowdown in population growth. This population growth will lead to a significant increase in urban population, with an estimated increase of about 2.5 billion people, mainly in Asia and Africa. In this context, Smart Cities and the adoption of innovative technologies can play a crucial role in ensuring efficient resource management and improving citizens’ quality of life.

How much do our cities consume?

Focusing on the numbers helps to better understand the order of priorities and the importance of thinking about cities from a Smart perspective. According to World Bank 2018 data, the PCC Special Report on global warming, and the United Nations Report, contemporary cities produce 75 percent of the world’s waste, 80 percent of the world’s greenhouse gases, and engage 75 percent of total energy consumption.

Numbers that motivate investments and forecasts to make urban aggregates more efficient and less polluting. In fact, smart city devices have increased from 117 million in 2018 to 399 million by the end of this year. The projection for 2025 sees more than 500 million devices worldwide. According to MarketsandMarkets’ Smart Cities 2022 report, the value of goods and services currently stands at $577 million but is estimated to exceed $1 trillion by 2027. The distribution of growth will be mainly in services, followed by transportation, utilities, and building construction.

In Europe, we can rely on unprecedented public funding to promote the sustainable development of urban areas. Just think of EU programs such as Horizon 2020 and Horizon Europe. In the 2014-2020 period, Horizon 2020 has allocated more than €85 billion to support research and innovation projects, including those dedicated to Smart Cities. The new European project, Horizon Europe, covering the period 2021-2027, has an even larger budget of €100 billion. Again, a major item of spending is earmarked for Smart Cities. The goal of the project is to support the systemic transformation of 100 European cities toward climate neutrality by 2030.

Among the major segments of the Smart Cities market, a report by Grand View Research estimates that smart infrastructure will be the most profitable sector, with an estimated value of more than $1 trillion by 2025. At the same time, research by MarketsandMarkets indicates that the traffic management sector will be worth about $400 billion by 2025. Energy efficiency, public safety, waste management, digital health, and e-government services will help consolidate the Smart Cities market.

The Smart Cities Market in Italy

As far as Italy is concerned, investments in ICT solutions for Smart Cities were worth just over €800 million in 2022 and are expected to grow to nearly €1.6 billion in 2027 according to estimates by the Smart Cities Observatory of the Politecnico di Milano. More than €100 billion are coming through European programs, plus €2.5 billion for metropolitan cities in the National Recovery and Resilience Plan (NRP).

The year 2022 was a good year characterized by a very marked growth, + 23%, compared to 2021. Growth is also due to the allocation of the first PNRR-related funds. Weighing most heavily are well-established applications, such as public lighting (24%), Smart Mobility (21%), and Smart Metering (the systems that enable remote reading and remote management of electricity, gas, and water meters) along Smart buildings (12%). Energy-related solutions (13%), such as Smart Grid and renewable energy communities, are also growing, thanks precisely to NRP funds.

39% of municipalities above 15,000 inhabitants have launched at least one Smart City project in 2022. 21% when considering all Italian municipalities. And almost all municipalities that have initiated projects in recent years (89%), want to continue investing in new smart city initiatives. Projects destined to increase in the future: in fact, 41% of municipalities say they want to invest in Smart City initiatives in the next three years. Last year it was 33 percent.

In particular, municipalities will focus on developing Smart Mobility, Smart Building, and data analytics projects related to tourism, mobility, and events in the city, all areas with great potential for developing connected and integrated solutions. In sharp contrast is the position of municipalities that have not yet initiated projects. Among them, only 28 percent say they are interested in implementing them in the coming years.

Italian cities typically approach the Smart City concept through two distinct approaches. The vertical approach, which is the most widespread, focuses on one or more specific aspects related to the urban dimension such as mobility, energy, and transportation. On the other hand, the systems approach considers the city as a whole, as a socio-technical system that can support and promote innovation. So, especially for this second approach, it is important to understand the structure of a country’s cities in order to make a particular focus on it.

In Italy, in 2021, about 75.5 percent of the population, or 44.5 million people, lived in urban areas. This number is expected to increase to 45.3 million in 2050. Our country has a distinctive urban fabric, characterized by several cities with more than 200,000 inhabitants (14 in total) and an additional 30 cities with more than 100,000 inhabitants. In addition, Italy has numerous medium-sized cities, and 85 percent of municipalities have fewer than 10,000 inhabitants. The 14 metropolitan cities account for more than 36 percent of the entire Italian population and cover 15.4 percent of the national territory. They also include 15.9% of Italian municipalities.

The development of Smart City projects in Italy is therefore strongly influenced by this peculiar situation characterized by significant disparities between different areas of the country. We can simplify this schematically into three categories:

● Large cities such as Rome, Naples, Genoa, Turin, Bari, Milan, and Florence, thanks to the push of Italian and European calls for proposals, have started structured processes toward the implementation of Smart Cities. These cities adopt a holistic approach that integrates projects and interventions in a coherent way. Moreover, they rely on multilevel governance mechanisms involving public actors, the private sector, banking institutions, research bodies and cultural institutions;

● Municipalities, especially medium-sized ones, have experimented with and implemented quality interventions in specific areas such as sustainable mobility, e-government, energy efficiency, cultural heritage enhancement, and integrated data management. They are now beginning to work toward integrating these sectors with other areas of urban intervention;

● Some urban contexts and larger areas, due to significant spatial, dimensional, and infrastructural divisions, are still lagging behind in adopting planning and intervention models based on the integration of networks, services, and spatial actors.

Smart Cities and PNRR: the possible turning point?

The National Recovery and Resilience Plan represents a great opportunity to develop Smart projects in Italian cities and territory. According to the estimate from the Observatory, funding dedicated to smart cities exceeds €17 billion; 82 percent of municipalities are planning investments financed with PNRR funds, focusing on digitalization, sustainability, and inclusion.

Of these €17 billion, €2.9 billion falls under Mission 1, which relates to the digitization of public administration, within which are several interventions that enable the Smart City. In terms of funding, much of the NRP’s “smart” potential comes from Mission 2, related to the Green Revolution and Ecological Transition, where €10.7 billion is allocated to solutions aimed at increasing energy efficiency and sustainability in Smart Land. Prominent among these are interventions for integrated land monitoring, hydrogeological risk reduction, and the creation of energy communities, especially in urban centers with fewer than 5,000 inhabitants. Mission 5 provides ad hoc funding for cities: €2.5 billion is earmarked for Integrated Urban Plans. An intervention that aims to improve the suburbs of 14 Metropolitan Cities, creating new services for citizens and digitizing infrastructure to transform the most vulnerable areas into smart and sustainable realities. Finally, €1 billion will be allocated to urban regeneration projects.

Growing awareness among the general public

Without participation, there is no solution, but participation depends on the spread of awareness by broad sections of the public. In this regard, surveys are encouraging. According to the survey conducted by BVA Doxa, 65 percent of respondents have heard of Smart City, and associate the concept of “innovative city.”

64% of the sample thinks the concrete realization of an entirely Smart city is far away. Only 11% express a fully positive opinion, while 47% believe that the city they live in has adopted some digital technologies, but that more could be done. Thirty-five percent do not believe the digital offerings in the city are adequate.

Narrowing the focus to issues on which technologies could cause very positive impacts, respondents complain of difficulty in finding parking (54 percent), poor road surface conditions (53 percent), crime and vandalism (39 percent), excessive traffic levels, and poor public transportation (both at 37 percent).

The impact of COVID on the idea of the city

Since the COVID-19 pandemic, the conception of the city has changed. Increased digitization, even if forced, the redefinition of work that has led to the widespread use of Smart Working, and greater attention to the environment and the circular economy have contributed to the increased interest in Smart Cities. According to a survey conducted by the Milan Polytechnic’s Internet of Things Observatory over the 2020-2021 period on Italian municipalities, it was found that the Smart City is considered of great or fundamental importance by 42 percent of administrators in centers with fewer than 15,000 inhabitants. Moreover, in 31% of these municipalities there is a figure dedicated to the Smart City. For cities with more than 15,000 inhabitants, 80 percent of respondents believe that the Smart City is a fundamental or very relevant issue, and in 72 percent of municipalities in this category there is a dedicated figure.

Investment in startups in Italy and the world

Let’s broaden the focus globally by talking about startups, analyzing those that change the face of cities, and going on to drain most of the investment in the world. Let’s take as a reference the evidence of the study by the Internet of Things Observatory and Startup Intelligence Observatory of the Politecnico di Milano: during the research, 307 startups globally operating in the Smart City field were considered. Of these, 212 received funding from institutional investors (69 percent) in the previous three years, reaching a total of $8.5 billion, with an average of about $39.9 million per individual startup.

From a financial perspective, the United States dominates the scene, raising a total of $3,749 million (44% of total global funding), with an average of $49 million per startup. In contrast, Italy still lags behind, showing difficulties in raising funding, with a total of $37 million and an average of $3 million per startup.

These data highlight a significant gap between the United States and Italy in the context of investments in startups related to Smart Cities. While startups in the United States have enjoyed considerable financial support, Italy faces challenges in attracting investment and financial support for the development of innovative solutions.

In the landscape of startup offerings, there is an observed focus on the software component. Startups tend to focus more on software solutions to be offered individually (16 percent of the total), in combination with additional services (17 percent), or as an integrated package together with hardware devices (24 percent, taking the top spot in the ranking). The latter type of offering takes on even greater significance in the Smart Building sector, where 40% of startups offer a complete hardware + software solution. The percentage of startups offering all three components (hardware+software+service) simultaneously is also significant, accounting for 14 percent of the total.

The products and services offered by the startups were further classified according to their main target functionalities with a detailed analysis of two macro-categories: Smart Building and Smart Mobility.

In the Smart Building sector, scenario management appears to be the most popular functionality, accounting for 25 percent of the total. This is followed by energy consumption monitoring (23 percent) and security (16 percent). Despite ranking third in terms of deployment, security is the functionality that has raised the highest total value of funding, with $739 million raised in the past 3 years. Regarding average funding, however, lighting startups receive the largest funding, with an average of $83.2 million per startup, which is significantly higher than the $38.9 million of security startups, which ranks second in terms of average funding.

These figures highlight the strategic importance of software in the solutions proposed by startups, underscoring the growing centrality of scenario management and energy consumption monitoring in smart buildings.

In the context of Smart Cities, the topic of mobility is one of the most relevant areas, finding application mainly in the areas of private transportation, traffic management, parking management, and public transportation, which together account for 52 percent of the sample analyzed. Interestingly, there is a correlation between the spread of these applications and the funding received by startups operating in the mobility sector.

In fact, public and private transportation are the application areas that received the highest value of total funding, with $2.7 billion and $2.6 billion raised in the past three years. This trend is also reflected in average funding, with the two types of transportation dominating the ranking of the most funded features, with a very high gap compared to the other categories.

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First published in StartupItalia. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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