Stimulus Update: Broadband Program Doesn’t Connect (Part II)

Last week, the Taxpayers Protection Alliance (TPA) reported on the failure of the National Telecommunications Information Administration’s (NTIA) Broadband Technology Opportunities Program (BTOP) to complete any projects (read full posting here).  Now, as promised, Part II of the series focuses on the Rural Utilities Service’s (RUS) $2.5 billion handout from taxpayers through The American Recovery and Reinvestment Act (aka The Stimulus Bill) for broadband deployment.  Even with less money allocated to it than BTOP, RUS has experienced more problems and even bigger questions about the federal government’s role in funding broadband.

RUS’s roots go back to 1936 with its predecessor, the Rural Electrification Administration (REA).  The REA was established to bring electricity and telephone service to America’s hinterlands.  Even though REA’s mission was completed long ago, Congress gave the program a superficial makeover by renaming the program to the Rural Utilities Service and adding another mission of subsidizing broadband service in rural areas in 2002 as part of the Farm Bill.  The intent was to classify broadband as if it were a utility similar to electricity and telephone service.  RUS’s primary goal is to provide loans to help bring Internet broadband service to unserved rural communities, which are generally defined as communities with populations of less than 20,000.  With a $2.5 billion taxpayer cash infusion the program has been super-sized and is wreaking havoc on the free market and taxpayers.  As many people say: more money, more problems.

Even before the $2.5 billion, the Washington Post reported on February 12, 2009 that there were existing problems with oversight of the program.  “Since it began 6 years ago, $1.8 billion in loans have been distributed.  Of the 68 projects funded, 21 are nearly complete and about half have not begun.  An Agriculture spokesman could not confirm whether the rural utilities service program has completed any projects.”

Even if the agency had completed the projects, there are questions as to RUS’s loss of focus on helping unserved areas.  According to the same Washington Post article, “According to the report, $45.6 million went to wire several luxury subdivisions near Houston. About $30 million in loans defaulted, and the agency approved another $137 million in loans even when applications weren’t completed. A separate report from the inspector general in June found that $430,000 went to a Lubbock, Texas high-speed Internet service provider that used the money for pilot lessons for its president and treasurer.”

Now there is evidence that the current loans are being used to build broadband in areas that are already being served.  Raymond Keating (chief economist for the Small Business & Entrepreneurship Council) points outs a specific example of why government subsidized competition is bad in a February 9, 2011 Daily Caller op-ed, “Consider the situation of Eagle Communications in Hays, Kansas. In a letter last year to Secretary of Agriculture Tom Vilsack and Rural Utilities Service Administrator Jonathan Adelstein, Gary Shorman, Eagle’s president, explained that a broadband stimulus grant would undermine the investment his firm made in providing broadband access to homes and businesses in Hays. According to Shorman, Eagle employs 277 workers, of which 212 are employee-owners. But a $101 million grant to Rural Telephone Service Company would do the following: ‘The use of this award money to overbuild Eagle, which has invested over $20 million in private capital in Hays and surrounding areas, jeopardizes the company’s survival and the jobs of its 277 employees. Eagle currently offers Hays residents and businesses broadband service of up to 100 mbps, as well as cable television and digital phone service. It also offers local businesses web hosting, e-business, and wireless solutions.’”

To make matters worse, in order to meet a September 30, 2010 deadline to award broadband grants, the Government Accountability Office (GAO) noted in a February 10, 2011 report that “NTIA and RUS streamlined their application review processes by issuing separate funding notices that targeted different types of infrastructure projects and reduced the number of steps in the due diligence review process.”  There were enough problems with these programs and now to acknowledge that less due diligence was taken should scare taxpayers even more.

Whether it is the Broadband Technology Opportunities Program or the Rural Utilities Service, government funded broadband is a clear example of what the government should NOT do to foster economic or technological growth.  Taxpayers should hope that Congress and the GAO undertake a thorough review of both programs and that Washington, D.C. can finally learn from its mistakes.  That would make a great Christmas present for all.