1. Municipal Wireless in San Francisco: A Cost Benefit Analysis 90-744: Public Expenditure Analysis Jacob Collins Juan Cristiani James Wilson

2. Municipal Wireless in San Francisco: A Cost Benefit Analysis 1.Introduction 2.Benefits 3.Costs 4.Synthesis 5.Conclusion

3. Introduction: Closing the Digital Divide

4. 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

5. Does broadband internet meet the standard for a natural monopoly? Cable Telephone Water Gas Electricity Public UtilityPrivate Firm Broadband

6. Municipalities have found different models to offer wireless broadband Non-Profit Model Cooperative Model Contracting Out Model Public-Private Partnership Model Municipal Model Government Loan- Grant Model

7. Municipal wireless in San Francisco began with a promise October 21 2004: Mayor promises free wireless internet to every San Franciscan Pending: Approval from Public Utilities Commission, Planning Department, environmental impact reports and final approval from the Board of Supervisors January 11, 2007: A feasibility analysis is completed by the Board’s 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 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

8. 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

9. Benefits: Fees and cost saving opportunities

10. Our benefit analysis includes those benefits identified in the study BenefitPeriodExpected Business Access FeesMonthly$250 CPE (per resident)One time$140 Replacement of T1 Connections Annual$534,600 Replacement of Mobile Devices One time$162,640

11. We added these benefits to the analysis BenefitPeriodExpected City Resident FeesMonthly$5 Additional AccessMonthly$45

12. We separated benefits to consider the best and worse case scenarios BenefitWorstExp.Best Business Access Fees $200$250$300 City Resident Fees -$5$10 T1 Replacement $534,600 Mobile Replacement $162,240 Additional Access $30$45$60 CPE (per resident) $80$140$200

13. 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 SF’s ability to attract business and citizens that can be attributed to broadband infrastructure

14. Costs: Initial investment and operation

15. Our analysis of costs includes the costs identified in the study CostPeriodExpected Initial InvestmentOne time$8,000,000 Annual OperatingYearly$1,750,000 T1 ReplacementOne time$500,000 Mobile ReplacementOne time$500,000

16. We added these costs to the analysis CostPeriodExpected Bond FinancingOne Time$350,000 Advertising CostsYearly$4,000,000 Call Center CostsYearly$2,000,000 Interest CostYearly$360,000

17. We separated costs to consider the best and worse case scenarios CostWorstExp.Best Initial Investment $6,000,000$8,000,000$10,000,000 Annual Operating $1,500,000$1,750,000$2,000,000 T1 Replacement $500,000 Mobile Replacement $33,800$42,250$50,700 Bond Financing $250,000$350,000$450,000 Advertising cost $3,000,000$4,000,000$5,000,000 Call center costs $1,000,000$2,000,000$3,000,000 Interest Cost $270,000$360,000$450,000

18. 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

19. Synthesis: Discount rate and additional assumptions

20. 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

21. 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

22. Our results show that NPV of the project is high in all cases WorstExp.Best 7.0% $79.7 million$221.9 million$346.7 million 3.5% $106.1 million$307.2 million$476.6 million

23. Conclusion: The feasibility of municipal broadband

24. 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

25. There are less expensive alternatives to municipal provision  Regulatory reform  Encourage new technologies Satellite Broadband over Power Lines (BPL) Cellular broadband

26. 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

27. Municipal Wireless in San Francisco: A Cost Benefit Analysis Questions and Comments?