Download Public Expenditure Analysis

Municipal Wireless in San
Francisco: A Cost Benefit
Analysis
90-744: Public Expenditure Analysis
Jacob Collins
Juan Cristiani
James Wilson
Municipal Wireless in San
Francisco: A Cost Benefit Analysis
1.
2.
3.
4.
5.
Introduction
Benefits
Costs
Synthesis
Conclusion
Introduction: Closing the Digital
Divide
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
Does broadband internet meet the
standard for a natural monopoly?
Public Utility
Private Firm
Water
Cable
Gas
Telephone
Electricity
Broadband
Municipalities have found different
models to offer wireless broadband
Non-Profit Model
Cooperative Model
Contracting Out Model
Public-Private
Partnership Model
Municipal Model
Government LoanGrant Model
Municipal wireless in San Francisco
began with a promise
October21
October
212004:
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
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
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
Benefits: Fees and cost saving
opportunities
Our benefit analysis includes those
benefits identified in the study
Benefit
Period
Expected
Business Access Fees
Monthly
$250
CPE (per resident)
One time
$140
Replacement of T1
Connections
Annual
$534,600
One time
$162,640
Replacement of
Mobile Devices
We added these benefits to the
analysis
Benefit
Period
Expected
City Resident Fees
Monthly
$5
Additional Access
Monthly
$45
We separated benefits to consider
the best and worse case scenarios
Benefit
Business Access Fees
City Resident Fees
Worst
Exp.
Best
$200
$250
$300
-
$5
$10
T1 Replacement
$534,600
Mobile Replacement
$162,240
Additional Access
$30
$45
$60
CPE (per resident)
$80
$140
$200
We identified benefits could not be
accurately measured

Grant funds


Advertising fees




Funding provided by federal agencies for infrastructure
development
Fees paid by corporations to advertise on the broadband
services
Fees charged to tourists

Fees generated by tourists wishing to use broadband services

Gains that occur as a result of the city being able to use
broadband in service provision
Increased efficiency of city functions
Economic growth

Based on SF’s ability to attract business and citizens that can
be attributed to broadband infrastructure
Costs: Initial investment and
operation
Our analysis of costs includes the
costs identified in the study
Cost
Initial Investment
Annual Operating
Period
Expected
One time $8,000,000
Yearly
$1,750,000
T1 Replacement
One time
$500,000
Mobile Replacement
One time
$500,000
We added these costs to the
analysis
Cost
Period
Expected
One Time
$350,000
Advertising Costs
Yearly
$4,000,000
Call Center Costs
Yearly
$2,000,000
Interest Cost
Yearly
$360,000
Bond Financing
We separated costs to consider the
best and worse case scenarios
Cost
Initial Investment
Annual Operating
T1 Replacement
Mobile Replacement
Bond Financing
Advertising cost
Call center costs
Interest Cost
Worst
Exp.
Best
$6,000,000 $8,000,000 $10,000,000
$1,500,000 $1,750,000
$2,000,000
$500,000
$33,800
$42,250
$50,700
$250,000
$350,000
$450,000
$3,000,000 $4,000,000
$5,000,000
$1,000,000 $2,000,000
$3,000,000
$270,000
$360,000
$450,000
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
Synthesis: Discount rate and
additional assumptions
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
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
Our results show that NPV of the
project is high in all cases
Worst
Exp.
Best
7.0%
$79.7 million $221.9 million $346.7 million
3.5%
$106.1 million $307.2 million $476.6 million
Conclusion: The feasibility of
municipal broadband
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
There are less expensive
alternatives to municipal provision
 Regulatory reform
 Encourage new technologies
 Satellite
 Broadband over Power Lines (BPL)
 Cellular broadband
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
Municipal Wireless in San
Francisco: A Cost Benefit Analysis
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