Municipal Wireless in San Francisco: A Cost Benefit Analysis

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Municipal Wireless in San Francisco A Cost
Benefit Analysis

• 90-744 Public Expenditure Analysis
• Jacob Collins
• Juan Cristiani
• James Wilson

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Municipal Wireless in San Francisco A Cost
Benefit Analysis

• Introduction
• Benefits
• Costs
• Synthesis
• Conclusion

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Introduction Closing the Digital Divide
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Private firms have failed to provide universal
broadband internet

• Rural and low income urban communities still lack
  access
• The Digital Divide has been identified as the gap
  between those with regular, effective access to
  digital technology and those without
• Closing the digital divide has been identified as
  a precondition for reducing poverty, resolving
  terrorism and achieving sustainable world
  markets.

Source http//www.digitaldivide.org
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Does broadband internet meet the standard for a
natural monopoly?
Public Utility
Private Firm
Broadband
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Municipalities have found different models to
offer wireless broadband
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Municipal wireless in San Francisco began with a
promise
October 21 2004 Mayor promises free wireless
internet to every San Franciscan
October 21 2004 Mayor promises free wireless
internet to every San Franciscan
April 5 2006 Dept of Telecommunications
finalizes negotiations of a public-private
partnership with Earthlink and Google
January 11, 2007 A feasibility analysis is
completed by the Boards budget analyst three
models are analyzed and a fully private model is
found to be fiscally feasible if financial risk
can be managed and contained
Pending Approval from Public Utilities
Commission, Planning Department, environmental
impact reports and final approval from the Board
of Supervisors
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Our cost benefit analysis is based on the fiscal
feasibility study

• A range of outcomes are predicted Annual
  shortfalls of 1,444,835 to annual revenue gains
  of 923,390
• Does not include all revenue producing
  opportunities or account for potential costs
• Sensitivity analysis is incomplete

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Benefits Fees and cost saving opportunities
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Our benefit analysis includes those benefits
identified in the study
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We added these benefits to the analysis
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We separated benefits to consider the best and
worse case scenarios
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We identified benefits could not be accurately
measured

• Grant funds
• Funding provided by federal agencies for
  infrastructure development
• Advertising fees
• Fees paid by corporations to advertise on the
  broadband services
• Fees charged to tourists
• Fees generated by tourists wishing to use
  broadband services
• Increased efficiency of city functions
• Gains that occur as a result of the city being
  able to use broadband in service provision
• Economic growth
• Based on SFs ability to attract business and
  citizens that can be attributed to broadband
  infrastructure

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Costs Initial investment and operation
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Our analysis of costs includes the costs
identified in the study
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We added these costs to the analysis
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We separated costs to consider the best and worse
case scenarios
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These costs were considered but not included in
our analysis

• Cost to existing broadband providers
• Lost revenue to providers as a result of
  government entering the market
• Lost tax revenue
• Lost taxes as a result of drops in purchasing of
  private sector broadband
• Additional operating costs
• Physical costs associated with running a public
  sector arm as if it were a private sector company

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Synthesis Discount rate and additional
assumptions
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Our analysis required several other assumptions

• Adoption rate in the first year 8
• Rate of growth
• Best case 4 in the first 5 years, 2 after
• Worst case 2 in the first 5 years, -2 after
• Percentage of low income residents that will use
  network 10
• Project life 20 years, with 4 years between
  equipment upgrades

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Our sensitivity analysis includes two discount
rates

• 3.5 Suggested rate for intragenerational
  projects that are likely to crowd out private
  investment
• 7.0 OMB revised rate

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Our results show that NPV of the project is high
in all cases
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Conclusion The feasibility of municipal broadband
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Despite positive net present value the project
carries high risks

• Obsolescence due to technological change
• If municipal network is unpopular
• Growth rate will be negative
• Aggressive advertising will be needed
• Political will is needed to launch yearly
  advertising campaigns and upgrade the network
  every four years
• Positive NPV does not guarantee positive cash
  flows

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There are less expensive alternatives to
municipal provision

• Regulatory reform
• Encourage new technologies
• Satellite
• Broadband over Power Lines (BPL)
• Cellular broadband

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Telecom is evolving as city leaders argue the
merits of these models

• Earthlink is reviewing its municipal wireless
  investments
• A proposed Fiber to the Premises (FTTP) network
  is expected to cost at least 560 million
• 93.8 of municipal networks have generated
  negative direct incremental cash flows since
  inception
• New technologies raise the stakes Voice over
  internet protocol (VOIP) and internet protocol
  television (IPTV) are on the horizon

Source Wi-Fi Waste The Disaster of Municipal
Communications Networks Pacific Research Institute
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Municipal Wireless in San Francisco A Cost
Benefit Analysis

• Questions and Comments?