So far we’ve seen that when cities grow big enough, they need to install municipal infrastructure, especially water and sanitation; and that expecting the private sector to cover all this cost, for all a city’s denizens, is unrealistic.

Instead, places like Philadelphia and San Francisco announced “private/public” partnerships. That meant giving a private company the right to build a wireless network and try to make money off of it.

This is not dissimilar from inclusionary zoning.  The state discovers that because its laws give it the right to license an exclusive or limited opportunity, granting those rights has value. 

Often, this simply meant giving a company like Earthlink the rights to install Wi-Fi devices on street lamps and charge citizens for access.

If that value is high enough, then the right itself may be sufficient to pay the infrastructure costs.

The cities then washed their hands of the issue of success or failure.

Not my problem any more

Then again, maybe the land isn’t quite high enough:

The result, as this summer has made clear, has been telecom’s Bay of Pigs—a project the government wanted to happen but left [it] to under-qualified private parties to deliver.

There’s a danger with bidding public-private: since the highest bid (biggest promise) wins, only optimists win.  Judgment can give way to hope:

Firms like Earthlink promised too much, and the cities have stood by and watched as the firms trying to build Wi-Fi systems have twisted and died on the beachhead. This summer, Earthlink fired half of its staff, including the head of the municipal Wi-Fi division. Major projects in Chicago and San Francisco have been stopped cold, and Houston has fined Earthlink for falling behind deadlines.

A partnership is not a bid; the public sector doesn’t acquire something right away.  Instead, the value of the state’s position is proportional to the value of its partners’ position.  The parties have a joint interest in success – and the private partner’s failure is also the public’s, in terms of lost opportunity cost and otherwise.

We’re all in this together

Some observers blame these failures on Wi-Fi’s technical limits. Wi-Fi does have serious limitations, but wireless Internet technology has worked well even on large college campuses.

Vis-a-vis its students, a college is a mini-government in that it has the de facto power to tax (through tuition, room and board fees).  Colleges are thus the natural pioneers in municipal infrastructure, as attested by a fringe benefit for our occasional houseguests, namely the free broadband leakage from Harvard’s bio labs into our kitchen.

The deeper problem is economics. When municipal Wi-Fi became a private service, it fell into the same economic trap as the toilet robots. Private municipal wireless networks have to compete against competitors with better infrastructure who paid off their capital investments years ago.

That’s the flip side of stranded costs – infrastructure whose useful life runs much longer than its bond term.

Setting up a large wireless network isn’t as expensive as installing wires into people’s homes, but it still costs a lot of money. Not billions, but still millions. To recover costs, the private “partner” has to charge for service.

Bit of a betrayal of authorial feelings there, putting ‘partner’ in quotes.  The partner’s motivations are different, to be sure, and specific incentives are likewise not identical with the public partner’s, but they have shared interests and a division of responsibilities.

But if the customer already has a cable or telephone connection to his home, why switch to wireless unless it is dramatically cheaper or better?

Notice, once again, the rich/poor divide.  Rich people have already bought the nifty technology; poor people lack it.  When government brings it in for everyone, the poor benefit more than the rich.  (Anyone for public versus parochial or private schools?)

You pay your taxes even if you send your kid here

That’s a good thing, yet it also signals that government might not be as vigilant in policing if the tone set is content with its private benefit.

In typical configurations, municipal wireless connections are slower, not dramatically cheaper, and by their nature less reliable than existing Internet services.

The private partner, in its efforts to bring affordable infrastructure, offers a low-cost version.  For the poor that’s a step up that they gladly take; for the rich it’s a step down that they decline.

Those facts have put muni Wi-Fi in the same deathtrap that drowned every other company that peddled a new Net access scheme.

Today, the limited success stories come from towns that have actually treated Wi-Fi as a public calling. St. Cloud, FL, a town of 28,000, has an entirely free wireless network. The network has its problems, such as dead spots, but also claims a 77% use rate among its citizens.

Such public-calling is more feasible when (a) the community is economically homogenous, so a vast number of people are all benefiting from the same upgrade, and (b) when the community is small enough to garner a strong consensus.

Cities like St. Cloud understand the concept of a public service: something that’s free, or near-free, like the local swimming pool.  

Another piece of urban infrastructure that depends on clean water

Such cities are also small, and nowhere near as diverse as Boston, New York City, or Chicago.

Most cities have been too busy dreaming of free pipes to notice that their approach is hopelessly flawed.

The lesson here is an old one about the function of government.

One such of which is to bring forward innovations and infrastructure for the common goal – to take, in short, an extremely long view of the situation.  As Rakesh Mohan put it when I was at Bellagio:

If the world is urbanizing, it’s because people think it’s a good idea. 

Despite the problems of urban environments, overall welfare has increased in cities in every dimension we can think of.  Despite massive inequality, even Mumbai pavement dwellers have access to municipal schools.  They still have a benefit compared to where they came from; they all say, “We are much better off than our relatives back home.” 

Reversing my frequent quote from Fields of Dreams, if they come, you must build it. 

People will come, Ray.

Ray Kinsella built his infrastructure – a wildly uneconomic stranded-cost venture called a baseball diamond, plowing up valuable agricultural land – in the hopes of attracting people.

We’re here for the jobs

In the developing world, the people have come to the City of Dreams, forging lives even amid their squalor.  Now that they are here, we must help them build the infrastructure they need and deserve. 

Concentration into cities allowed countries to achieve great economies of scale in urban infrastructure and services.  You can improve the welfare of more people if you concentrate.  Meanwhile concentration also allowed dispersal and disaggregation of activity, where you ship components from place to place. 

Yet our city planners have a third-class-carriage mentality: “I’m inside, don’t you dare come in.  You’re much better off where you are.”  Most urban planners live in some of the largest cities in the world, yet they complain cities are too large. 

That mentality eventually eases. 

As people move to cities, politics change.  Redistributing political power takes more time, because even when the population shifts, a majority of representatives often still come from rural areas. 

Faster, please.

The urban revolution of the late twentieth and early twenty-first centuries is reshaping the world: demographically, physically, and economically.

With increasing free trade in services, the price of traded products has almost stabilized across the world.  Goods now have very similar prices.  No city has any advantage over any other in traded goods.  But the price of services is not similar.  Efficiency in delivery will really make a difference; it’s a further force to making city-level efficiency work. 

For nations, comparative advantage will increasingly lie in the relative efficiency of their cities. 

This is precisely the argument I use regarding affordable housing

When it comes to communications, the United States relies on a privateer system:

I prefer the term, ‘letter of marque’

We depend on private companies to perform public callings. That works up to a point, but private industry will build only so much. Real public infrastructure costs real public money. We already know that, in the real world, if you’re not willing to invest in infrastructure, you get what we have: crumbling airports, collapsing bridges, and broken levees. Why did we think that the wireless Internet would be any different?

Because it’s wireless, and therefore magical.

The bottom line: City dwellers won’t be able to get high-quality wireless Internet access for free. If they want it, collectively, they’ll have to pay for it.

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Yesterday we explored the challenge of financing public-good infrastructure – big capital expenditures that create networks valuable to all of us.

In the US, we’re familiar with this via our friendly municipal power company,

or its close cousins, the water and sewer company.  So inextricably linked are they in American minds that even in our games, they are the utilities.

The basics

The emergence of municipal water and sanitation.  In the US, municipal water and sanitation are a late-emergent phenomenon, dating back to the late nineteenth century with civic-works projects (like Chicago’s) and continuing into the twentieth (with the Swift River’s damming to create the Quabbin Reservoir).  Before then, well owners charged money, and as for night soil, you tossed it out the window.

Overhanging, the better to splash in the mucky street

The point is, nobody wants to deal with our excretions, and for most of human history, we’ve simply hoped they’d biodegrade, or flow downriver and be our neighbor’s problem, not ours. 

Among the many reasons cities were born by riverbanks is that rivers represent our zero-capital-cost solution to sanitation.

Monasteries were always sited at streams, with the kitchen, privy, and misericordia all located abutting the downstream point – to carry away the filth.

Kitchens and privies lay over the stream, one upstream, the other down

That’s a major reason why London’s richest neighborhoods have always been on the west side, and the worst to the east; the Thames flows west to east.  It’s also why London’s center of gravity has steadily migrated westward.

The city moved steadily west from the Tower, which was the original Norman encampment

I speculate – any readers want to comment? – that municipal infrastructure in W&S arose when it did because our cities became too large to cope naturally with their excretions. 

Ancient Rome solved water with massive, astonishing aqueducts.

Amazing engineering, two millennia old

In the last hundred-plus years, we have solved our problem with technology: generators, wiring, filtration, pipes, treatment plants.  We had to build the technology, and to do that, we had to pay for it.  Thus, as it always does, finance is linked directly with physical improvement.

What happens when the finance is lacking?  When neither the city dwellers nor their local governments have the capital?

They go without.

Outside the US, and particularly in the informal communities of the global South, water and sanitation are very much not provided by the municipality. 

Leaving people to shift for themselves.

Bundle it into a plastic bag and throw it in the storm drain

People in informal communities aren’t dirtier than we are; they simply lack the capital to build the infrastructure to live cleaner lives.

We see this in developing cities within the global south.  High-income neighborhoods get water and sanitation first; poor ones get it last.  Governments go not just where the votes are but also where the taxes are.  Over time, local taxes have to be redistributive, otherwise the city subdivides into distinct and separate rich/ poor communities.

Back to the modern environment, and domestic Wi-Fi.

A few important points seemed to distinguish muni Wi-Fi from the toilet robots.

The problem with a high-capital-cost infrastructure is that sometimes it’s not fully paid for, and until then, you have to keep funding its debt service. 

First, wireless skipped the whole issue of feeding wires into people’s homes, the stumbling block for so many ventures. And Wi-Fi routers, if not perfect, are a proven and cheap technology. They work great on college campuses. Even my mother has a Wi-Fi router.

In short, it’s a way better, cheaper infrastructure.

Meanwhile, a heavy-cost infrastructure is thus hostage to its bondholders, reducing its flexibility and ability to embrace a lower-hard-cost technology, if one comes along.  As a result, established utilities are anti-innovation, even if only subconsciously.

Consider the bank and the electronic bank.  A brick bank is high-cost infrastructure to save and protect people’s money. 

Costly

By comparison, an ATM is very cheap infrastructure to do the same things, and electronic money is (remarkably) easier to protect – thus rendering obsolete the old bank-heist movie.

In 2004, when Philadelphia announced it was considering deploying the first major citywide Wi-Fi system, many assumed it would be free, or near-free, just like when you get Internet access from a generous neighbor. But that kind of system, of course, would cost real public money. The city would have to pay for the deployment with no hope of return.

Actually, cities are the ultimate and biggest beneficiary of infrastructure, because as their population grows, so does their revenue base. Far-sighted governments recognize this, which is why New York state sponsored the Erie Canal, and Chicago’s civic leaders banded together in the late nineteenth century to create their sewage system. 

In a future post, I’ll tackle the problem of trying to prove this proposition.  But now, back to our story.

By 2005, it became clear that major cities didn’t really want to build out Wi-Fi networks as public works projects.

Because their leadership, having succumbed to the chimera of free public Wi-Fi, have yet to grip the long-term economic implications.

Time for Plan B:

We’ll take the capital from anywhere, even outer space

[Continued tomorrow in Part 3.]

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You pay to look; lessons come extra

One player in particular had a mantra, if the bet was checked around to him.  “No free cards!” he’d practically shout, pushing in a bet, and while the shout was annoying, I eventually concluded that in our crowd it was sound strategy; every card costs money. 

These things are related

The same principle underlies Robert A. Heinlein’s most famous quote, ‘there ain’t no such thing as a free lunch,‘ which forms the centerpiece of his improbable lunar-libertarian-revolutionary saga The Moon is a Harsh Mistress.  As analyzed by Edwin G. Dolan:

The fundamental principle on which this strategy is built may be expressed in a simple slogan—There Ain’t No Such Thing As A Free Lunch, the “TANSTAAFL principle,” for short. The TANSTAAFL principle is closely related to the fundamental theorem of ecological economics: that everything depends on everything else. Everything worthwhile has a cost. Whenever you think you are getting something for nothing, look again—someone, somewhere, somehow is paying for it. Behind every free lunch there is a hidden cost to be accounted for.

For all sorts of reasons, elected officials – who often behave as if they were our collective subconscious, promising us things we cannot afford – do not wish to believe this, which makes them vulnerable to anybody who offers lunch that sounds, if not free, at least paid for by Sam Rayburn’s “fellow behind the tree.”  So they fall victim to things that seem too good to be true, as entertainingly chronicled in Slate by Tim Wu of Columbia Law School:

It’s hard to dislike the idea of free municipal wireless Internet access. Imagine your town as an oversized Internet cafe, with invisible packets floating everywhere as free as the air we breathe.

Are those little Wi-Fi balloons free as air?

As Heinlein cites at length in Moon, air is free only on Earth – and if you want clean air, why then you’re paying your ratable share of emissions control and everything else.

That fanciful vision inspired many cities to announce the creation of free wireless networks in recent years. This summer, reality hit — one city after another has either canceled deployments or offered a product that’s hardly up to the hype. In Houston, Chicago, St. Louis, and even San Francisco, once-promising projects are in trouble. What happened—was the idea all wrong?

When it seems too good to be true, it usually is … but when Wi-Fi first came along, some folks thought it would be free.

Cities have labored under the illusion that, somehow, everything could be built easily and for free by private parties. That illusion has run straight into the ancient economics of infrastructure and natural monopoly.

The basic idea of offering Internet access as a public service is sound. The problem is that cities haven’t thought of the Internet as a form of public infrastructure that — like subway lines, sewers, or roads — must be paid for.

Here beginneth the housing implications – because it provides us a bridge into the relationship between housing and municipal infrastructure.

The house and home is a private good. 

Built with the sweat of my brow

My home, my plot of land.  All of its essential benefits are private goods.  My cost of improvement, my appreciation, my security of tenure.

But the modern home is not complete without access (meaning roads) and utilities – meaning power, and water/ sanitation (which we in the developed world call ‘water and sewer’; either way it’s W&S) – in a word, infrastructure.

A lot of it is underground, and pulsing with fluids … which we’ll come back to.

In the developed and formalized world, these are the province of municipalities – indeed, the whole term ‘municipal finance’ refers to all these variations of infrastructure.  As with many public goods, the ultimate source of repayment is very seldom user fees (which include things like bridge or road tolls); rather, it’s a pledge of municipal revenues (that is, taxes).  The credit markets have concluded that they are willing to finance big immovable infrastructure only if the government stands behind it.

Once you lay the pipe, it’s hard to move it

This is telling, for it says that public-good infrastructure cannot pay for itself out of user fees. 

[This wasn't always the case.  Back in the Depression, Robert Moses figured out how to finance some infrastructure, like the George Washington Bridge, through separate borrowing authorities and tolls, plus up-front grants from the City of New York.   When GW Bridge traffic spectacularly exceeded the spectacularly conservative original projections, Moses' Triborough Bridge Authority was sitting on a gold mine, the cash flows from which became Moses' personal power base for the next three decades.]

You see a bridge, I see a power base

In networked situations, we further divide infrastructure into large-scale and localized, each of which needs the other (just as the heart needs the capillaries, and vice versa):

For the last 20 years or so, the thorniest economic issue in the telecommunications world has been the “last mile.” Physically, the last mile consists of the wires that run from your home or business to the local phone or cable company.

The cable/ internet analogy is very strong to W&S. Big infrastructure gets water from the aquifer to the neighborhood, or sewage from the street main back to the treatment plant.  Getting from the street to the home lot is W&S’s ‘last mile’:

It’s pricey and uses old technology, but almost everything depends on it and a few giant companies—like AT&T and Comcast—control it. The last mile is a bottleneck: The price and speed of the whole Internet depends on it. When people talk about the United States lagging behind the world in broadband speed and access, they’re talking about the last-mile problem.

Covering that last mile is agonizing

In the late 1990s and early 2000s, dozens of companies were launched that had new ideas for busting through the last mile and getting the Internet into homes. I remember going to industry trade shows where grown men demonstrated robots designed to crawl through city sewers and deliver a fiber-optic cable to your toilet.

Watch out for upwardly questing cables

Here’s another principle of infrastructure: once a network is built, it often winds up carrying another substance or signal than to build another network, because it’s so much cheaper.  The cost to dig trenches and bury mains or to string poles is much higher than that of running another line of pipes.  So we see light rail laid down interstate median strips, or fiber-optics running alongside co-ax cables.

(That firm, CityNet, received $375 million in funding and actually wired the sewers of Albuquerque, N.M.)  Others proposed to fire laser beams at homes to bring Internet access through the proverbial bathroom window.  And in 2004, the New York Times wrote that “Internet service over power lines is probably a year or more away from becoming widely available.”  

All the future that’s fit to print?

Oh, really? While both the FCC and paid industry analysts have continually predicted an “explosion” in broadband over power lines, its current market share is approximately 0.008 percent.

That’s 0.00008 of all homes, 8 in every 100,000. 

Each of these ventures proved a dismal failure.  With the exception of satellite service in rural areas, no competitor to DSL and cable has gotten far in the United States. The startups have run into the oldest problem in the regulated industries book: the barriers to entry created by sunk costs.

The Law of Economic Gravity implies that the minimum market-clearing price for an ongoing product or service can be expressed by a simple equation:

Capital cost ties together (x) the hard cost of building the system or infrastructure, times (y) the weighted average cost of capital.  Since capital recovery occurs over an interval, when that interval is completed, capital recovery cost drops dramatically.

Don’t laugh, it’s paid for

The phone and cable companies have already recovered the initial billions they’ve spent over decades, making it possible to set prices at levels that cannot be matched.

Here is the user-fee conundrum in a different form: an installed infrastructure drives down the market price of a networked product because the cost to recover capital investment can be low indeed.  That’s good for consumers, and for society generally.  Yet that inherent pricing advantage, and the market-standards-network monopoly effects, but tend to create a natural advantage to incumbency.

The competitors brought weak products that were not substantially different. Against that kind of competition, the newcomers never stood a chance.

So much for the market solution—how about government?

By their nature, these capital networks lower the marginal cost of adding another person – which is why, when we consider how cities scale, we find the (inflation-adjusted) incremental cost of bringing on the next subdivision is less than the one before it.  Yet even with that decreasing incremental cost, the new service is not free, and in public-good amenities, user fees generally don’t cover marginal costs. 

“Every time I make ends meet, somebody moves the ends”

The dear public wants its water at a bargain price (the bill should be less than the cost) – just as it wants the same for its power cost, its sewerage, and its roads.  Government, forced by the Law of Economic Gravity to make things work, packages up the unrecovered costs in that oldest of boxes, the tax – state or local as the case may be.  (By the way, this is why mayors are always yammering on about their need for city taxes.  The city is serving the infrastructure to many people who live outside its borders, and it cannot recover those extra costs simply by the marginal toll or parking fee.)

When the public-good is topical (like broadband) and the infrastructure costs invisible (like those flimsy cables), there’s a temptation to imagine they can be got free, as we resume the Slate article by Tim Wu of Columbia Law School:

The failures of other ventures made municipal Wi-Fi seem an ideal alternative. After all, cities provide their citizens with water and garbage pickup—why not the Internet, too?

Actually – as I’m sure Professor Wu knows, he was just oversimplifying – not all cities do this, and not all cities ever have. 

When in doubt, burn it

[Continued tomorrow in Part 2.]

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