European funds helped accelerate innovation projects that now risk stalling. Several critical issues remain, starting with a shortage of qualified professionals.
The push towards digitalisation and the adoption of “smart” technologies seen in recent years thanks to European funding could come to an abrupt halt. In this context, 20% of Italian municipalities risk seeing their smart city strategies come to a standstill when PNRR — National Recovery and Resilience Plan — funding comes to an end in June. This is the rather discouraging message that emerged during the presentation of the latest edition of the Smart City Observatory by the Politecnico di Milano. According to the university’s research, 76% of municipalities used PNRR funds for smart city initiatives in the 2023–2025 period. Among towns with fewer than 5,000 inhabitants, that figure rises to 84%.
The smart city market has reached a value of around €1 billion: smart mobility and public lighting are the areas that absorbed the most resources, with €400 million split evenly between them.
The fastest growth, however, was recorded in smart government projects, which accounted for €85 million — an increase of 13% — and in environmental and territorial monitoring initiatives, totalling around €120 million and growing by 10%. Spending on security and surveillance also accelerated, with investment rising by 7% to roughly €102 million. According to the Politecnico’s forecasts, while public administrations may find ways to reorganise after the PNRR ends, it remains unclear how intentions will translate into concrete action. Most local administrations, 85%, the Observatory reports, will try to access regional, national and European funding through calls for proposals, whenever these are actually issued and with amounts still unknown, while around half, 49%, will rely on increasingly limited internal resources.
According to the Observatory’s data, investment priorities for the 2026–2027 period will be security for 69% of municipalities, renewable energy communities for 67%, and citizen services for 56%. The most alarming finding is that 22% of local authorities have no clear idea of how to proceed and have not drawn up any post-PNRR strategy. “In the post-PNRR context, cities are called upon to reinvent urban innovation, finding new models and resources for sustainable and shared development,” comments Giulio Salvadori, Director of the Smart City Observatory. “It will be necessary to ensure the operational continuity of the infrastructure and applications that have been built, and to maintain the capacity to launch new projects.”
The end of the PNRR also risks bringing long-standing issues to a head:
67% of municipalities continue to struggle with a lack of qualified staff, while for 52%, financial resources are insufficient to make a genuine leap forward in innovation.
According to the research, artificial intelligence could help address some of these challenges. “AI introduces an unprecedented capability for public administrations: it does not merely process data and provide analyses, but can independently translate those analyses into operational recommendations, decisions and actions,” explains Matteo Risi, also a Director of the Smart City Observatory. Forecasts suggest that AI could enable a tangible expansion of operational possibilities, optimise resource allocation, personalise citizen services, anticipate problems before they arise, and streamline highly manual administrative processes. “The real challenge of AI is not technological — it is systemic,” Risi adds. “It requires ethics, skills and shared rules, but also attention to physical sustainability. The energy, water and land consumed by the data centres needed to power AI represent a contradiction that smart cities can no longer ignore. Responsible governance must be able to read these tensions, integrating digital ambition with the protection of local resources.”
Capgemini, in a study exploring upcoming smart city trends, also highlights the issue of data sovereignty. “Delivering seamless citizen services requires information to flow smoothly between different city entities. This involves a multitude of stakeholders. Collaborative innovation across the public, private and academic sectors — often extending beyond city and national borders — is accelerating. A trusted, secure and sovereign framework for data exchange is essential,” the report states. The report also references the “European data space for sustainable smart cities and communities” initiative, which provides an overarching framework to help create federated ecosystems where cities and communities can share and enrich urban data.
Smart cities, then, need to be reimagined: no longer as a collection of disconnected systems, but as a single living organism. “Sovereign data spaces,” the Capgemini report continues, “provide the trusted neural pathways that allow city departments, service providers, operators and partners to share and use data without losing control. The digital twin acts as the brain, continuously sensing current conditions and simulating future scenarios before real-world decisions are made. Agentic AI becomes the reflex system, automating complex, cross-disciplinary tasks and coordinating responses at machine speed.”
Cover image: Smart city — © Unsplash
