Smart Cities Public-Private Partnership Using A Value Exchange Funding Model

The concept of smart cities or smart communities has been around for more than a decade now. There is no doubt about the value that technology brings to solving pressing urbanization challenges. Globally there is umpteen number of smart city pilot deployments targeted at several use cases, but only a handful of true city scale deployments. Funding, resource constraints, lack of expertise and unfeasible business models are proving to be some major impediments in the path towards wider adoption. This has put the spotlight on alternate procurement models like Public-Private Partnership (P3/PPP/Private Finance Initiative (PFI)). By definition P3's are contractual agreements between a public agency and a private sector entity to deliver a service or facility for use by the general public.

Funding in traditional infrastructure P3's come from multiple sources including taxpayer dollars, government grants, private financing, user surcharges, etc. One variant of the P3 funding model being pioneered by some major telecommunication companies (telcos) in the US is the value exchange model. For this model to gain ground there are several business drivers from a telco and city perspective. But the one that trumps them all is the challenge that telcos face in the efficient expansion of the current generation of 4G network services and in the infrastructure build-out for their next-generation 5G network services. And from a city perspective, what is drawing them to this model is the resource constraints they have in funding and executing the much required smart city initiatives to help address community challenges. In its simplest form, the partnership is a long term, non-exclusive, mutually beneficial arrangement between a city and a telco partner. It involves trading of assets and/or services of equivalent monetary value, one that ultimately delivers value to all parties concerned, and most importantly to the citizens of the community. Below, I've delved deeper into the business drivers, how the model works and some relevant case studies.

The Fiber Imperative For The Next-Generation Mobile Network Services

The 5G network revolution is not anymore a talk. Commercial roll-outs by major global telcos for different use cases like fixed wireless, mobility, and the Internet of Things (IoT) are already underway. While the 5G network roll-outs may have started, telcos continue to densify their 4G network as the 5G and 4G networks are expected to co-exist for the foreseeable future to meet the data demands of the marketplace. The 4G and 5G network services rely on two key infrastructure components: small cells and a dense fiber-optic network backbone. The fiber backbone is critical as most service providers are looking to connect their cell towers and small cells directly to the fiber backhaul, in order to stay on top of their growing transport needs.

In the USA alone, approximately 1.4 million miles of fiber would be required to provide full 5G service to just the top 25 metropolitan land areas, assuming all of those 5G cells were served by fiber connections and the US is expected to see an estimated $130 billion to $150 billion in fiber investment over the next five to seven years. To reinvent its network architecture around a next-generation fiber platform that will support all of the company's businesses, one of the leading telco players in the US market will invest over $1.05 billion in just fiber purchase in the three years between 2018-2020. This emphasizes the importance of fiber in next-generation mobile network services and to net it, fiber construction - both aerial and terrestrial, will be an integral part of telco network transformation plans.

The Small Cell Imperative In 4G And 5G Network Services

Given the growing data needs of consumers, the other critical part of the 4G and 5G services is the small cell infrastructure that would add capacity for these services. Most 5G services are expected to operate in the higher frequency millimeter wave spectrum band (>5 GHz). In relation to the 4G service, 5G will need a denser configuration of small cell radios that will be closer to the service consumers. This is because while millimeter wave frequency waves support higher bandwidth, they cannot travel long distances. For example in the City of San Jose, just between the top two telco players, each is expected to deploy anywhere from 1500 to 2500 small cells (count includes small cells for 4G densification and 5G deployment). There is no industry estimate on the total number of 4G and 5G small cells that will be deployed. Based on telco install plan data available for some cities in the public domain, one can assume that it will run in the hundreds of thousands across the entire country. To net it, the telco industry's demand for small cell deployments is very obvious. And most of them will be deployed on city, county, and utility owned buildings, public right of way assets like street light poles, utility poles and some private properties.

So fiber and small cells are an integral part of next-generation telco network transformation. But what's the issue?

The Challenge With The Permitting Process

Above and beyond the billions of dollars spent in acquiring the right radio frequency spectrum bands, telcos incur significant costs to enable the next-generation network services. Fiber trenching, road restoration (post trenching), materials (conduit, fiber), passive parts (splice closures, patch panels, terminations, drops, etc.), active electronics (GPON, OLTs and ONTs, transceivers, monitoring equipment, routers, etc.) and other business costs (technicians, customer service, technical support, etc.) to name a few. These aspects can be considered as a cost of doing business, can be planned and controlled. But the real challenge from a telco perspective and one that is not in their control is the permitting process that they need to go through with local government agencies. Because these agencies (e.g. cities, counties, highway authorities, transit authorities, utilities, etc.) control the right of way access to trench streets, run aerial fiber lines and to attach any equipment to street furniture like light poles, utility poles, etc.

Franchise licensing (depending on the state), trenching for fiber, Master Lease Agreements (MLA) for small cell installation on public assets etc. all require permit submission, review and approval by the appropriate local jurisdiction. Depending on the agency, permitting costs vary and the timeline for review and approval can range anywhere from a few days or weeks to a few months and in some cases years. Also, until the recent Federal Communications Commission (FCC) ruling on small cells, each jurisdiction had the liberty to decide an annual recurring per pole attachment fee what they perceived was right. Depending on the city and location, the fee could range anywhere from a few hundred dollars to a few thousands of dollars. Imagine having to go through all these overheads for every city. One can see that building a quality telco grade network infrastructure is no mean task and it takes a significant amount of time and money. No wonder this industry has very high barriers to entry for new competition.

The Value Exchange Model In A Mutually Beneficial Partnership Arrangement

On one hand telcos, cable operators and carriers have their challenges with their network build-outs and service expansion. On the other hand, communities face a range of urbanization challenges such as increasing traffic congestion, choking cut through traffic, rising traffic fatalities, uncontrolled gun violence in some neighborhoods, the impact of climate change, widening digital divide, an ever-increasing citizen expectation for quality municipal services etc. to name a few. There are several new age technology solutions in the market that can address many of these challenges. But given the competing municipal priorities and unending fiscal deficits, mayors and city managers are challenged to fund smart city initiatives.

The key question is, can the telcos and local government agencies work out a complimentary win-win partnership, one that not only helps them in overcoming their respective challenges but can also create value for the communities. This is where a smart community partnership using a value exchange funding model can play a vital role. As explained before, this type of non-exclusive, mutually beneficial partnership arrangement involves trading of assets and/or services of equivalent monetary value. So what exactly gets traded and how does the arrangement work?

From a city perspective, by streamlining and providing transparency to the permitting process, they can help telcos expedite the network infrastructure roll-out. With predictable timelines, telcos can minimize the cost overheads in the network build and improve the time-to-market for their next-generation services. In addition, communities can minimize the disruption caused by trenching to their streets and also monetize their investment in unused conduits and dark fiber by leasing or selling them to a telco or other private partners who need them. There is a Net Present Value (NPV) associated with all these savings that accrue for the private partner. And the private partner can reinvest these savings in the local communities to help address their critical needs.

The Case Of The City Of San Jose's Digital Inclusion Fund:

The City of San Jose might be in the heart of silicon valley, the digital innovation capital of the world. But approximately 100,000 of its low-income residents (representing ~10% of the total population) are not connected to the internet at home. Given that everything from a job search, applying for government benefits, completing school home works, access to quality healthcare, etc. are all digitized, lack of internet connectivity at home puts them at a significant disadvantage to be a part of the new age economy. So the city made bridging the digital divide as one of its strategic priorities and launched the Digital Inclusion Fund (DIF). The fund totaling $2.2 million per year will be supported by the revenue from the small cell usage fees paid by telecommunications companies to upgrade broadband networks that lay the groundwork for 5G in San Jose. Part of the fund will be used to bolster and streamline the public works department's small cell permitting and governance processes and the remainder will be going into initiatives that will help bring broadband internet to low-income homes, schools and community centers.

The Case Of The City Of Sacramento's Smart Community Partnership:

In June 2017, the City of Sacramento entered into a Strategic Joint Development Agreement with a telco partner, to achieve a P3. The P3 will implement smart cities technologies and facilitate the installation of fiber-optic and wireless infrastructure throughout the city to improve the quality of life for residents, reduce costs to the city, and deliver services to the community in smart and effective ways. As part of this agreement, the city committed to waive lease payments for small cells on city-owned assets, streamline permit approvals for wireline and wireless network deployments, and provide access to the city's fiber conduit where available. These concessions were given in exchange for funding for youth development programs, access to fiber-optic infrastructure, smart cities solutions for traffic congestion management, traffic safety, public safety and internet connectivity in public parks. The combined value of the investment in the city by the telco partner is estimated at $100 million.

Conclusion

In light of the recent FCC ruling on small cells, and the legal scrutiny that some of these deals had to face, one can question if these type of partnership arrangements are sustainable, financially viable and can be replicated in other cities. While it is is a very valid concern, forward-thinking communities can take learnings from the prior deals and still identify opportunities that could help them reap potential benefits under this model. Not only that, cities can look to extend this type of partnership arrangement to other relevant industries that rely on timely and efficient municipal services.

In a digital age where businesses and citizens rely on high-quality internet connectivity for their day to day activities, communities with poor or no network coverage stand to lose out their competitive advantage. The barriers to next-generation network build-out and service enablement have to be minimized if not eliminated. Failing which, communities and the nation as a whole can fall behind the global competition in the 5G adoption curve and the resulting economic, and societal impact can be significant. Innovative P3 model like this not only benefits the private sector but also the community as a whole and will help keep the nation at the forefront of the digital revolution.