Municipal Wireless in San Francisco: A Cost Benefit Analysis

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 • Introduction • Benefits • Costs • Synthesis • 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? Public Utility Private Firm Broadband

6. Municipalities have found different models to offer wireless broadband

7. 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 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 Pending: Approval from Public Utilities Commission, Planning Department, environmental impact reports and final approval from the Board of Supervisors

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

11. We added these benefits to the analysis

12. We separated benefits to consider the best and worse case scenarios

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

16. We added these costs to the analysis

17. We separated costs to consider the best and worse case scenarios

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

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?