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Publication Number:  FHWA-HRT-21-001    Date:  Autumn 2020
Publication Number: FHWA-HRT-21-001
Issue No: Vol. 84 No. 3
Date: Autumn 2020


Savvy City Financing Supports Future Infrastructure

by Thay Bishop and Courtney Chiaparas

Using value capture techniques enabled Santa Monica, CA, to build out a fiber optic network without taking on debt, positioning the city to better meet the demands of new mobility modes and emerging transportation technologies.

An intersection in Santa Monica, California, with pedestrians and vehicles.
Santa Monica's CityNet fiber optic network has enabled the city to better respond to transportation challenges and opportunities.

The city of Santa Monica, an affluent community in western Los Angeles County, CA, has a land area of about 8.4 square miles (21.8 square kilometers) and a population of more than 90,000, but its workday and weekend populations swell considerably. Workplaces and beaches draw 300,000 on weekdays and more than 500,000 on weekends, according to one estimate. The resulting traffic is so bad that the Los Angeles County Metropolitan Transportation Authority recently considered implementing congestion pricing for the city.

In the next decade, Santa Monica will need to integrate new technologies, such as drones and connected vehicles, into its transportation system. The city, like other localities around the country, will need to access new sources of revenue and enough communications bandwidth to enable the new technologies. Santa Monica's innovative approaches to using the public right-of-way (ROW) offer a strong example of how to achieve both objectives at once.

Telecom Hits the Streets

Local traffic congestion in Santa Monica became a subject of particular interest in the late 1990s, when the need for infrastructure improvements in the public ROW threatened to disrupt traffic and access to local businesses. The Telecommunications Act of 1996 deregulated the broadcasting and telecommunications markets. Across the country, policy changes were leading to more permit requests to build new networks in the public ROW. Telecommunications construction was likely to add to congestion and shorten the lifespan of streets, particularly because firms wanting to hide their investment plans from competitors were often reluctant to engage in joint trenching.

At the same time, Santa Monica was facing a growing need for fast, reliable, and affordable broadband services to meet its internal communications needs. In 1998, Santa Monica published a telecommunications plan recommending that the city install its own fiber optic network to connect with key public facilities, such as the local community college, K‐12 school district, and city buildings. The plan also included recommendations for managing the public ROW and leveraging public works projects to efficiently install telecommunications infrastructure. Rather than leasing expensive lines from the cable company, Santa Monica could invest those funds in building its own network in phases across the city. Using this approach, Santa Monica was able to build an extensive fiber optic network without incurring debt.

In 2010, the city designed and launched a 10-gigabit fiber network, Santa Monica CityNet, to deliver its own broadband for city operations and local businesses. Today, CityNet offers up to 100 gigabits of dedicated broadband capacity through a fiber optic network serving the city's major hospitals, medical clinics, community college, police and fire stations, libraries, and nearly all the tech and entertainment businesses in the city. The city also offers free Wi-Fi in city buildings, in the public ROW, and at other locations across the city. It recently began offering commercial broadband services to residents as well.

Leasing fiber to other service providers and providing services to local businesses has resulted in millions of dollars in revenue, which CityNet invests back into the network through equipment replacement, staffing, innovation, and special initiatives. That practice, along with the incremental expansion of the network over the years, holds important lessons for agencies large and small looking to capture value from their own infrastructure investments.

An aerial view of buildings and parking lots with superimposed lines indicating the connections between social infrastructure and communication technology.
Wi-Fi supports a range of services, including traffic cameras and synchronized traffic signals, at intersections across the city.

Capturing Value from the Public ROW

Beginning in 2002, as Santa Monica agencies opened the streets for a variety of projects, the city was able to install conduit and fiber underground. Laying the infrastructure in coordination with other capital projects that involved trenching—including street-widening construction, streetlight wiring upgrades, and replacement of irrigation mains—enabled a gradual extension of the network over the years. It also reduced the costs of installation by up to 90 percent and helped Santa Monica avoid redundant digging, which increased the lifespan of its streets and reduced traffic disruption.

When deploying the cable, Santa Monica placed extra fiber so that it could oblige higher demand and curb the costs of having to lay more cable later. Higher demand surely came. Google and other large businesses began leasing the city's dark fiber—unused optical fiber that is available for use in communication—which offers very fast, direct, low latency connections. Businesses that needed the dark fiber paid to connect it directly to their buildings, thus extending the network at no cost to the city.

Leasing the fiber installed in the public ROW is an important technique of value capture, which can harness a portion of the revenue from the lease to pay for city initiatives. ROW use agreements involve the sale or lease of development above, below, or adjacent to transportation ROWs or real properties. By tapping into ongoing revenue sources, value capture can raise funds for projects or provide a stream of funds on a long-term basis.

Workers at an urban roadway construction site.
Beginning in 2002, as Santa Monica agencies opened the streets for a variety of projects, the city was able to install conduit and fiber underground. Laying the infrastructure in coordination with other capital projects enabled a gradual extension of the network over the years and reduced the costs of installation by up to 90 percent.

Value capture is useful in urban, suburban, and rural settings, and there are tools and techniques agencies can use in each of those settings, but it is particularly useful for local governments.

"Federal resources aren't necessarily growing enough to keep up with the needs across the country for highways and bridges," says Stefan Natzke, the team leader for National Systems and Economic Development in the Federal Highway Administration's Office of Planning, Environment, and Realty. "There is a scarcity of resources and increasing demand. On top of that, about three-quarters of public roads aren't eligible for any Federal funding. The diminishing or constrained resources are really hitting local governments particularly hard. They are looking for ways to find sustainable, long-term funding that can support transportation projects."

Value capture also has the potential to boost local economies. "If a project is well-designed and well-executed," Natzke says, "it can support positive economic development outcomes in a region. So, these are self-reinforcing, where good transportation can lead to economic development, which can lead to demand for better transportation."

In Santa Monica, CityNet has had a significant impact on the local economy, attracting tech and entertainment companies to the city and helping businesses lower their costs for high-capacity connections and retain and generate jobs in the community. For example, UCLA Medical Center, Santa Monica connected to the network and then hired 180 software developers to implement a telemedicine initiative. The historic oceanfront Fairmont Hotel offers 2 gigabytes-per-second broadband to guests and markets itself for technology conventions and media production. Real estate companies emphasize the value of broadband in marketing and pricing their properties. As the city connects its network to more businesses, a cycle has emerged where the costs of new connections decline, leading more businesses to request connections, and further reducing the cost of connections.

CityNet Notable Milestones

2006: Begins leasing dark fiber to Google

2010 to Present:

  • Launches Santa Monica CityNet 10-gigabit fiber optic network
  • Offers up to 100 gigabit broadband services
  • Provides broadband to roughly 95 percent of tech and entertainment firms with Santa Monica offices
  • Includes new focus on shaping, informing, and piloting the city's "smart city" strategy

Capturing Value from Joint Development

2015: Launches Digital Inclusion Pilot, providing gigabit broadband service to affordable housing communities

2018: Begins piloting smart city initiatives

Value Capture Techniques

Value capture techniques take several forms. The most common mechanisms in the United States are:

  • Air rights
  • Impact fees
  • Joint development
  • Land value tax
  • Negotiated exactions
  • Sales tax districts
  • Special assessments
  • Tax increment finance
  • Transportation utility fees

Capturing Value from Joint Development

Public-private partnerships are a feature of joint development, another value capture technique that describes a public agency or a group of agencies that partner with a private developer to improve the use of land near, above, below, or adjacent to infrastructure. In Santa Monica, joint development facilitated the deployment of fiber broadband infrastructure when the city coordinated with the private sector to fund the expansion of its network and engaged with private service providers to help offer broadband services to customers.

Broadband service and the telecommunication infrastructure that facilitates high-speed connectivity are essential for modern transportation systems. This is evident in Santa Monica, where free Wi-Fi in 32 hot zones is available not only at major tourist destinations but also along key commercial and transit corridors. The Wi-Fi contributes to a range of city services, including public safety video cameras, pay-on-foot parking stations, real-time parking information on signs and smartphones, traffic cameras, synchronized traffic signals, and a transportation management center. CityNet also provides wireless backhaul services to ensure 5G wireless coverage for the entire city, and is gearing up to offer services using its millimeter wave wireless network as well.

An office building in Santa Monica.
In Santa Monica, CityNet has had a significant impact on the local economy, attracting tech and entertainment companies to the city and helping businesses lower their costs for high-capacity connections and retain and generate jobs in the community.

The network now supports advanced applications, like parking meters that accept credit cards and smart traffic routing, that lead to a higher quality of life for residents and visitors and a better environment for businesses. At the same time, not having to borrow funds has reduced the city's telecommunications expenses while increasing the availability of high-speed services for the city and area businesses.

But the work does not end there. The city commits itself to continuous innovation to keep up with the many new mobility options coming to market. Communities are demanding accommodations for all mobility modes, such as walking, biking, automobiles, and transit. Ridesharing services are well underway. Widespread use of connected and autonomous vehicles (AV) will soon become reality.

"People want to get around fast," says Gary Carter, the community broadband manager at CityNet. "[A major ridesharing company] started here. [A major electronic scooter-sharing company] launched here and—after a roller coaster ride of emergency policy analysis, enforcement, lawsuits, and negotiations-e-scooters are gradually evolving into a manageable mobility option. We recently demonstrated a geofencing solution that would automatically slow scooters down on our sidewalks."

Other startups in the city are developing autonomous helicopters and mapping the graphic information system coordinates for airspace for similar technologies.

An intersection in Santa Monica, California, with pedestrians and vehicles.
An intersection in Santa Monica, California, with pedestrians and vehicles.
Broadband service and the telecommunication infrastructure contribute to a range of city services, including real-time parking information on signs and smartphones and synchronized traffic signals.

"When we consider the rapid rate at which companies have introduced new mobility solutions into the ROW in the past decade," Carter said in a recent webinar hosted by FHWA, "it's obvious to us that we need a new [intelligent transportation system (ITS)] that can interface with and adapt to them all. It's a huge, expensive undertaking that will require a lot of talent."

ITS technologies use wireless communication to manage traffic flow and improve safety, facilitating medical emergency and fire response. Some States are using drones for facility management and maintenance, such as crawl drones in bridge inspection programs. This increases work productivity and reduces the size and cost of work teams.

"The go-to response as these technologies emerge is to stall and to regulate, but that only buys you so much time," Carter says. "What it will require is cities partnering with tech companies to create something that is the 3.0 of what we have now."

CityNet pilots and experiments with new technologies that it believes will benefit the public and position the city to best respond to anticipated challenges and technological advancement, rather than reacting after the fact. All CityNet revenue goes into its Community Broadband Enterprise Fund, which helps support the expansion and maintenance of the network. Consolidating and focusing all the revenue on CityNet enables the city to keep experimenting.

"In the ROW, there's tension between the innovators and the adoption cycle and the regulatory agencies," Carter says. "CityNet can help bridge that gap. For instance, we can help convey the need for 5G wireless service in small cells throughout the city, show how it will benefit the public, and make sure it rolls out the right way. And while a lot of people are hesitant about autonomous vehicles, our position is that it's better to assess the risks proactively than to react to them later.

"A lot of cities and municipalities are looking at ways to leverage their assets to generate or capture more value," says Carter. "Sometimes that value is financial, and sometimes it's the ability to innovate further. Here in Santa Monica, we're seeing both. The value we've captured from CityNet allows us to incubate civic tech opportunities."

The Benefits

CityNet Labs is the incubator working to assess and test emerging technologies, many of which would impact the way the public uses the ROW. Its AV pilot involves staff and subject matter experts researching ways to manage AVs as a mobility option and is introducing this to residents to assess the potential traffic impacts.

Carter explains, "We envision that, in the near future, there will be control mechanisms to interface with autonomous vehicles, and we're seeking opportunities to leverage our network and partnerships to prepare for that future."

Such an interface requires a robust wireless network. "I wouldn't be talking about an AV pilot right now if we didn't already have the network in place," Carter says.

Electronic scooters on a sidewalk by a street.
The city commits itself to continuous innovation to keep up with the many new mobility options coming to market, such as electronic scooters.

CityNet Labs is also pursuing a number of "smart city" initiatives. Smart cities use electronic sensors to capture real-time data to analyze and understand dynamic traffic patterns and trends and to aid in traffic management—a must as more mobility options hit the streets.

"Transportation is the primary focus of our smart city initiative," Carter says. "At our Smart City Working Group meetings, people often ask who will pay the ongoing operational costs needed to manage these options and the public ROW, particularly when roads, bridges, and tunnels are underfunded."

Value capture techniques can certainly help, as Santa Monica has seen with the success of its city-owned network. CityNet earns roughly $2.5 million in revenue annually, funding both the expansion and maintenance of its network as well as projects like its AV and smart city initiatives.

It also funds community engagement initiatives, such as its Digital Inclusion Pilot, which has expanded CityNet broadband to 10 affordable housing properties to help low-income residents have better access to wireless services. A Community Development Block Grant from the U.S. Department of Housing and Urban Development is helping to fund a $1.85 million ROW construction project to connect an additional 29 buildings, and the city is using its revenue from a scooter-sharing company to build out additional connections. The new expansion will offer more than 500 families in low-income housing free broadband delivered to their community rooms and the opportunity to purchase affordable service delivered to their units. They may also participate in no-cost technology workshops offered onsite.

"For Santa Monica, value capture in the ROW is central to our efforts to adopt innovation-driven policy updates that are key to our local transportation strategy," says Carter. "It has not only generated revenue, but also it has directly had a social impact in terms of our affordable housing and social mobility efforts, as well as our economic development."

Organizations interested in ROW value capture projects should be careful to follow relevant Federal and State legislation and guidelines. Profits from the non-highway use of any right of way purchased with Federal funds since the 1980s (according to 23 USC 156) or improved with Federal funds (according to 2 CFR 200, effective through individual project agreements) need to go to projects eligible under Title 23 of the U.S. Code. In California, agencies should review the California Department of Transportation's ROW manual (https://dot.ca.gov/programs/right-of-way/right-of-way-manual), which describes how the non-highway use of any ROW is handled by the State. Other States may have similar documents.

Every Day Counts

The FHWA Center for Accelerating Innovation (CAI) manages Every Day Counts (www.fhwa.dot.gov/innovation/everydaycounts), a State-based model that identifies and rapidly deploys proven yet underutilized innovations to shorten the project delivery process, enhance roadway safety, reduce traffic congestion, and integrate automation. For round 5, FHWA selected value capture as one of 10 innovations. CAI provides tools, resources, and technical assistance on value capture and other options to help the transportation community implement alternative financial strategies to deliver infrastructure.

A diagram of a generic city landscape is marked by icons indicating the types of data that smart cities capture and inform, including air pollution, education, electric vehicle charging, electromagnetic emissions, gas and water leak detection, intelligent shopping, Internet of Things, open data, public safety, smart buildings, smart energy, smart environment, smart health, smart home, smart parking, smart street lights, traffic management, waste management, and water quality.
CityNet is pursuing a number of smart city initiatives to capture real-time data to analyze and understand dynamic traffic patterns and trends and to aid in traffic management.

FHWA's Natzke recently shared key lessons to help local governmental agencies, as well as transportation organizations, incorporate value capture into their projects.

"Start thinking about using value capture at the earliest stages of project planning. It's never too early," he says. "When you start thinking about potential funding sources for a project, it's probably a good time to start thinking about value capture and exploring what value capture options might fit in with your funding and financing plan."

As the case in Santa Monica demonstrates, value capture can help fund the infrastructure needed to support tomorrow's transportation system.

Thay Bishop, CPA, CTP, is a senior advisor in the FHWA Office of Innovative Program Delivery. She has a B.S. in industrial management from the Georgia Institute of Technology.

Courtney Chiaparas is a senior copywriter at a global marketing company. She has a B.A. in government and international politics and an M.A. in English from George Mason University.

For more information, visit www.fhwa.dot.gov/ipd/value_capture or contact Thay Bishop at 404-562-3695 or thay.bishop@dot.gov.