Report: Taxpayer-Funded Broadband a Resounding Failure
June 14, 2017
This article appeared in The American Spectator on June 7, 2017.
The first comprehensive study on the financial viability of government-owned broadband networks in the U.S. found that just two of the 20 networks examined are expected to generate enough revenue during the life of the networks to recoup the money that taxpayers or ratepayers forked over to pay for the construction.
“Municipal Fiber in the United States: An Empirical Assessment of Financial Performance,” written by University of Pennsylvania Law School professor Christopher Yoo, along with co-author Timothy Pfenninger (a fellow at Penn Law’s Center for Technology, Innovation and Competition), paints a dark picture of municipal broadband, using standard financial analysis tools. For example, 11 of the 20 projects assessed have a negative cash flow, many of them deeply in the red.
The report analyzes the “Years for a Project to Turn Positive (YPTP)” as a metric of financial viability. The YPTP ranges from two years (Vernon, California) to “never” for 11 of the 20 systems. Yoo and Pfenniger’s study shows that the system in Powell, Wyoming, will take 1,253 years — no, that’s not a typo — to show a profit.
Two more city networks earn enough revenue to repay project costs in 61-65 years. Considering that the expected useful life of such networks is just 30-40 years, 60 years is bad news for ratepayers and taxpayers.
And even those in the positive aren’t in much better shape: five of the nine generate returns so tiny it would take more than a century to recover the cost to build the networks.
Chattanooga’s Electric Power Board, often held up as a shining example of municipal broadband success by advocates, is among this group. The authors note EPB’s broadband financials are aided by the fact is has less debt service due to a $111.5 million federal stimulus grant for the network’s construction. Including that money in the project cost would increase the time needed for the project to break even from 412 years to 683 years, they wrote.
If a project fails to generate adequate cash flow to pay the debt that leaves cities with unattractive options: Default on the debt and thereby increase the cost of any other future debt-financed projects, raise taxes or reduce services to citizens.
Yoo and Pfenninger said city leaders should tread carefully, given the results of the study.
“Underperforming projects have caused numerous municipalities to face defaults, bond rating reductions and direct payments from the public coffers,” they wrote. “In addition, troubled municipal broadband ventures take a toll on community leaders in terms of personal turmoil and distraction from other matters important to citizens. Although some claim that investing in fiber serves a necessary function of future-proofing a municipality’s infrastructure, evidence shows little current need for such high broadband speeds.”
They note that wireless technology, such as 5G, may soon provide gigabit speeds without the cost of expensive-to-lay fiber.
Yoo and Pfenninger would have given further study to more municipal broadband projects, but transparency was an issue: They note that of 88 such networks identified, only 20 report the financial results of their broadband operations separately from the financial results of their electric power operations.
The authors argue this doesn’t bias the sample size in ways that would make the projects look artificially unattractive, writing, “If anything, municipalities with poorly performing fiber projects are more likely to obscure their poor performance by consolidating their results with other operations.”
They also note that the 2010-14 time frame of the study omits by necessity municipal broadband projects that became insolvent and were sold to private companies at substantial losses prior to that date in Marietta, Georgia; Quincy, Florida; and Provo, Utah. This “provides further reason to believe that if anything, the sample studied in this report portrays municipal fiber in a more favorable light than would a financial assessment of the entire universe of municipal fiber builds,” they wrote.
As this study was being released, Mountain Connect, an annual broadband conference in Keystone, Colorado, was wrapping up three days of discussions. The mission of those gathered was to accelerate the growth of broadband infrastructure in the West, increasing economic prosperity and technological innovation for communities.
Jeff Gavlinski, co-chair of the conference, said part of the reason for the growth of municipal broadband is that gigabit internet has become such a buzzword, and few providers offer speeds that fast outside the major cities. He said the rise of Google Fiber created the perception that everyone needs gigabit speeds, although much slower speeds are plenty capable for most internet usage.
That’s a point echoed by Tom Struble, tech policy manager for R-Street Institute. He said his home internet clocks in at 150 megabits per second — less than one-sixth the speed of a gig — and he uses it heavily for streaming, downloading, and gaming.
“That’s great for me,” he said. “I get by fine on that connection and I’m a power user. If I had a gig I don’t know what I’d be doing with that extra data.”
“There are not a lot of communities out there where this makes sense,” Gavlinski said of gigabit internet. “Quite frankly, if you look over the past three or four years, these communities do these feasibility studies and then put out a [request for information] and it goes nowhere.”
Gavlinski said that private providers have learned not to trust municipal broadband consultants and the information from their studies. He argues the consultants don’t spend enough time learning the lay of the local land, often depending on generic surveys to glean information.
“At the end of the day, they don’t give you useful data to make a decision,” he said.
The end result is often a city then setting out to build its own network, often partnering with one of the consultants. Denver-based Magellan has helped build dozens of networks, in addition to providing feasibility studies for more than 200 communities.
Gavlinski gives such consultants some credit, however. He said they do provide the useful service of helping communities catalog their existing infrastructure and assets.
Gavlinski said he’s trying to help change the mindset of those in the smaller, more rural regions who learn at conferences what other communities are doing in the municipal broadband sector and come home with the feeling they need to keep up with the joneses.
“I’m trying to get communities to think differently about these projects,” he said. “There is a lot of peer pressure among the communities.”
The authors of the municipal broadband study hope for the same effect by simply laying out the reality of past missteps.
“Some may cite this report as a red flag to communities considering taking the plunge on municipal broadband, but it simply describes the facts about what has happened in communities so far,” Pfenninger said.