The following is a chart I put together to outline the Public Private Partnership relationships and financing alternatives. Please feel free to comment. It is a work in progress and will include many more topics that just can’t fit in the picture.
Month: April 2012
700 MHz Wireless Spectrum Sharing with Public Safety
The following is a High Level Discussion on Network Build-out Cost and Financing Options.
These are meant as discussion points.
The question: how could the Utilities play in the Public Safety Broadband initiatives?
Using the design, build, operate and maintain (DBOM) model of constructing the Public Safety Broadband Network (PSBN) will follow traditional models of wireless communication development. There are a host of contractors who currently deploy, nationally, varying degrees of 3G and 4G platforms today. The important aspect of how these networks are built and funded has traditionally been based on a revenue-generating model such as AT&T and Verizon. The business model itself impacts the primary difference at the conception of the network design. Thus the design considerations for the PSBN will follow a different path, which itself is primarily not a revenue based business model, but can be modified to have revenue generation as part of the design.
There are two primary business models associated with self-funded deployments for large-scale telecommunication networks; a subscriber based and a leased contract base. Both of these constructs will impact the design and build phase differently.
The subscriber-based solution will require immediate subscriptions to help fund the initial design. Given that this is the latest generation of wireless we should expect complications in that the OEM (Original Equipment Manufacturers) have not had time to fully development user devices to communicate with the network through a large amount of available handsets. There will be a small amount of user devices available, but nothing to the scale that will be needed to self-fund the entire DBOM scenario.
Another area of concern with the subscriber-based model is that the model itself has been proven to lack justification and assurance that it truly pays for itself. It is well know in the Telco industry that the largest players are having difficulty funding their own deployments using this model. The ARPU (Average Rate Per User) modeling of revenue generation continues to decline with the onset of more cost effective technologies as well as consolidation of technology platforms, i.e. move towards all IP and the convergence of 2G, 3G into 4G. One has to remember that these commercial networks have more than 80 Million subscribers each (AT&T and Verizon); thus if they themselves are having an issue it would be unwise to believe that a few thousand handsets for First Responders within a given State would suffice.
The alternative modeling to a self-funded solution could derive from long-term leased contracts that are better suited for just such an implementation. Such a model is conceived through the use of Public Private Partnerships (PPP or P3) in that all parties involved have similar requirements for the technology; may have infrastructure or processes that can benefit the network; have long-standing expenditures already for communications (primarily in the capital and operational expenses associated with already installed solutions); and have an open standing to generating revenue.
Executing such a model will ultimately require the PSBN to be built at the State level. The State is most likely better prepared to construct, control and maintain their portion of the PSBN all while closely maintaining the varying Public Safety entities requirements within the State; to include Power Utilities. In essence we are not building anything new. The only thing that is unexplored is the PPP model funding the initiative.
What would the network build look like? What should the expected costs be? As it pertains to any large-scale complex program we truly won’t know that answer until a detailed cost estimate of the scope of work can be administered. As it stands, any of the States that have already submitted waivers to access the PSBN frequencies have most likely completed such preliminary estimates. Although the figures are not concrete, by any means, we could expect that the cost structure of the build outs will incorporate two essential elements; cost of the services (construction and integration) would be roughly 80% of the entire capital budget for the entire solution. The remaining 20% will be allocated to materials and equipment (both OEM, tower, tools, etc.).
As an example: the cost of a highly populated region for 113 existing tower solution; with fiber already provided; and a single Core (LTE controller); such a solution would typically be in the ballpark of about $40 Million. That equates to roughly $350 K per tower, where as $30-$32 Million for deployment and construction related services (including design) and roughly $8-$10 Million in equipment and materials.
Similarly, a rural 201 new site solution could be expected to be in the ballpark of $80 Million. That equates to roughly $400 K per tower, where as $60-$64 Million for deployment and construction related services (including design) and roughly $12-$16 Million for equipment and materials.
There is a vast host of variable cost impacts associated with these builds, so these numbers should be taken with a grain of salt. But, in conceptualizing a State budget for a Centralized model of a P3 this provides you with enough insight to start aligning potential investors as well as required allocations from the entities within the State that will require the broadband service. It is imperative that these figures be updated to reflect true cost of the capital program to build the solution and subsequently should include the Operation Expenditures (OpEx) required to run it.
As a note: typically the OpEx portion of running a network equates to roughly 10% of the total Capital Program to build it.
Having a rough estimate of what the network solution could eventually cost, it is now the time to look at the available resources within the P3 to help DBOM the solution for the State. Following a standardized process of procurement and design considerations that the FirstNet Board would have created. It will be essential to understand what entities could be involved, such as Power Utilities for example. There are many other entities that are similar but Utilities makes the point.
For any given Utility it is relative to point out that roughly 20-25% of its total installed assets, i.e. cabling, towers, trucks, etc., has to do with IT and Telecommunication solutions. That means that if a Utility provider such as AEP, which has an installed asset base of roughly $50 Billion (reference latest Investor Reports) and covers 11 States they typically have spent, on average, as much as $10 Billion on all their combined IT and Telecommunication needs. That could mean that they would spend annually about 10% of that total $10 Billion, or $1 Billion a year in CapEx and Opex necessities to build and maintain technology solutions just to keep their business in operations. What if they could now offset that $1 Billion annually to a fraction of that cost by joining forces with a Statewide centralized P3 partnership?
In joining a PPP that is designed to DBOM a Statewide LTE broadband network could ultimately save the Utility a lot of capital at the same time alleviating risk to a player who has its best intentions at heart all while investing in the same solution for added revenue. Simultaneously the Statewide centralized network operator that is created under the PPP would benefit from offsetting deployment and infrastructure costs as well as implementing a large possible investor by joining forces with a Power Utility that already has the footprint and the know-how in building such complex solutions.
These solutions are at the cusp of reality and should be expected from any of the Public Safety entities within the State, or Nationally. All of the State, or National, Public Safety entities have similar demands, infrastructures and requirements; most importantly they all have a common demand for the latest broadband technology.
In conclusion, it’s imperative to understand that the PSBN is itself a carrier class network that has the technical capabilities similar to the commercial carriers. But in this context has a limited pool of potential users. It is crucial that the right construct of a model to self-fund the program be instituted. Although there are many ways to fund such an endeavor there is only one way that meets all the requirements of a solid business case that can compliment all who take part in its implementation – that is the Public Private Partnership model funded with long-term contracts from fixed users.
1. Financial Approach: Funding
a. Introduce and define possible funding scenarios
i. Federally subsidized
ii. State subsidized
iii. Public Private Partnerships
b. Public Private Partnership Model
i. Centralized Special Purpose Vehicle (CSPV)
1. Design
2. Build
3. Operate
4. Maintain
ii. Recurring Revenue or Self-Funding Requirement
iii. Clients/State Public Safety Entities to access Broadband Service
1. Client Requirements/demands
1. Police
2. Fire
3. DHS
4. DOD
5. Utilities
1. Power
2. Water
6. Transportation
1. Mass Transit
2. Rail
3. Highways/Bridges
2. Service Level Agreements
3. Contractual Obligations
4. Long-term SLA Contracts
5. Subscriber Based Comparison
iv. Private Investment
1. Investment Startegy
2. Investment Needs
3. Investment controls
v. Centralized SPV Board Control
1. Investors
1. Private
2. State
3. Public
vi. Revenue Model
1. State Entity entitlements
2. Asset and Infrastructure Offsets
3. Revenue sharing model
4. No Commercial Service
2.
Public Private Partnerships in Public Safety
Recently the press has been out talking about possible funding issues in building the Nations First Responder Broadband Network (FirstNet). President Obama allocated $7 Billion towards the funding of which $2 Billion will be made upfront with the remaining $5 Billion being gained through auctions of spectrum. With the requirement of LTE being the technology of choice it comes with many design, build, operate and maintain expenditures and it is the consensus that $7 Billion is just a drop in the bucket — especially for a network that may be twice the size of AT&T and Verizon combined. As it stands today there have been various scenarios going around about how to subsidize that $7 Billion, but none fit better that the use of Public Private Partnerships.
Public Private Partnerships (or P3s) are not new to the market. The P3 concept has been around for a long time and has been successfully adapted both nationally and internationally on many vertical market initiatives such as; transportation, infrastructure programs, power builds, etc.. What is new is the adoption of the P3 model when advancing telecommunications within the wireless space.
Since the boom of 1996 when the telecommunication industry started to take off it took the tone of a commercial private enterprise flavor, only to be packaged and sold to various client types, i.e. Carriers, Government, Police, fire, Transportation, etc.. After the collapse of the telecom market in late 1999 to early 2000 things changed in regards to the viability of deploying telecommunications in a holistic fashion as private networks; yet at the same time our dependence on the technology continues to increase through which subscriber based methods of commercial business blossomed. But the demand for enterprise telecommunications continued to increase as well and the cost justification of building the solutions were convoluted with the commercial aspirations of subscriber based billing. Yet the vertical industry clients would continue to believe that the answers to their needs still lay with the telecommunication OEM vendors and the associated contractors who deploy the commercial telco networks. Does that scenario work here?
With the push to build FirstNet came the fact that it will take money to build it. Not only that — it will take well coordinated requirements to design the right broadband solution that can feed all the elements of First Response. There are a lot of personal definitions of what a “First Responder” is. We need to look beyond the upfront characteristics of just the Police, EMS and Fire and start to include the thought process of owners, investors and infrastructure alignment as well. With a properly outlined P3 you can actually start to see a private model of investment and funding that correlates with the need for a private network. At the same time you can see many advantages of infrastructure trade-offs, business requirement alignments and revenue potential for long term contracts — long term recurring revenue.
As an example: lets say we are a large State and have many entities in the State both public and private, i.e. Police, fire, DHS, DOD and Utilities. All of these players will require some facet of a communications network, most specifically LTE, to sustain their business objectives for the next 20 years. Each entity has gone through capital budgets many times over in building their own private communication platforms to sustain what their operations need to day. Those platforms were adapted and deployed for specific reasons. Along comes the latest technology that leapfrogs all the technologies deployed to which also comes the message that their existing communication technologies will be “end-of-life” within the next 5-10 years. So the State entities soon realize they need to re-start the cycle of capital budgets to ramp-up the latest and greatest, only to run into a wall. That wall is spectrum. You see the latest and greatest requires specific spectrum that is very limited, but those entities require the technology, because if the don’t adapt — then they die. Soon realization sets in that here are two options: go with a carrier to provide you with LTE, or, build your own private network if you have the spectrum.
Going the carrier route would be insufficient for any organization that needs to route critical public safety communications to include; Police, Fire and Utilities. The hardening requirements alone will drain the capital budgets of a carrier in order to outfit their entire infrastructure to meet the requirements of Public Safety. This is mainly due to the balance between commercial subscribers and the ability to pay for the infrastructure — I will cover this more later. But this is just one example. There are many more as in business objectives, footprint over the population base, and ability to cover the rural spaces. Soon the realization sets in that having a private broadband network is the way to go.
Due to the requirements for spectrum comes the need to partner. What better method than a P3 model to establish a state wide partnerships of entities that all require the same technology. But how do you get State entities to play together that have never played together, or have tried unsuccessfully in doing so?
By establishing, at the State level, a centralized P3 model (typically known as a “Special Purpose Vehicle” [SPV]) you can setup a centralized private entity to run the States Broadband Network needs. If I were that Centralized State entity, and I happen to be funded by a major private lender, then I would be most interested in the recurring revenue that will come from this business case. I would also be very interested in potential investors that can sustain long term assets and operations. Do I use a subscriber model? Or do I use a long-term contract model?
As was pointed out above the issue with a subscriber model is the word “subscriber”. You actually need subscribers to help fund and pay back the capital used in the network to build it. Being that the primary clients would be State owned or privately held Utility type organizations there may not be enough subscribers required to make that model viable. Plus, if the carriers face an issue of building and managing their own networks on a subscriber based model, and they have about 80 Million subscribers, what makes us think that it would work for Public Safety that only has a few thousand subscribers.
The only rational alternative would be long-term recurring contracts with fixed entities. In essence, if a Power Utility requires LTE for their SMART Metering program. Typically they would spend a few hundred Million dollars to build their own solution, only to face the same situation when the technology matures into the next generation, thus spending even more money to accomplish the same feat 3-5 years down the line. By setting up as a partner in the P3 the Utility will be able to adjust to a operational expenditure of a fixed yearly amount through a long-term contract of leased bandwidth from the established Centralized Statewide Broadband provider (SPV). This eliminates the Utilities capital needs to build their own and try to stay relevant with the maturing technology at the same time given the Centralized Broadband Provider the needed long-term recurring revenue stream. The yearly fixed payment, or SLA (service Level Agreement), will be a small fraction of the annual expenditure a Utility would typically be facing in its pursuit to maintain its core business operations. This same situation is not specific to just the Utilities; this same concept can easily be adapted to the other State entities, i.e. local Fire, Police who typically have a difficult time in acquiring a budget to build their own technology platforms.
Another interesting opportunity the P3 model presents is the offset of utilizing existing infrastructure from the State entities that already have an installed asset infrastructure of towers, fiber and control centers. For example; a Utility provider can off-set typical leasing revenue it would bring in by leasing space on its towers by augmenting its annual operational expense of leased bandwidth. In essence, if I own a tower, instead of leasing the tower to the State Centralized Broadband Provider I can discount my annual payment to that Provider for my required LTE service.
There is one more advantage. That advantage may be the ability for those same statewide entities to invest in the Centralized Broadband Provider itself. In essence becoming a equity owner of the Centralization of the Broadband initiative itself thus reallocating potential revenues back into the Statewide model to offset Rural Broadband arrangements. Being that the Centralized Broadband Provider will be a privately owned State entity, that only delivers broadband services to approved First Responders, then there wouldn’t be an issue with State laws not allowing State owned entities to play in the commercial market space.
In conclusion, there are many ways to fashion a P3 model that is best suited for the individual State requirements. The important aspect to remember, at this time, is that if you know you will have to do a P3 model anyway; its best to get yourself involved now. The more time you wait equates to an equal loss in positioning power — which is important on any investment strategy.
Advancing Telecom 