Financing New Fiber Networks

Numismatics_and_Notaphily_iconTraditional financing is not always the solution for financing a new fiber network. For example, many rural communities don’t have the borrowing capacity to fund a fiber network strictly from bonds. And banks are still being extremely cautious about lending to infrastructure projects or for floating loans over twelve years in length. Recently I have seen several creative ideas in the market that are worth highlighting. These concepts could be used to fund municipal fiber projects or public private partnerships that combine a municipality partnering with a commercial operator.

I note that I am on the Board of an infrastructure banking firm and our firm would be interesting in helping to financing fiber networks using these or other financing ideas. Our firm can help in those cases where traditional financing might not offer a solution. We will consider looking at projects as small as $50 million but we have found that its much easier to get funding for projects of $100 million or more. If you have a fiber project of this size in mind please contact me.

TIF Financing. Wabash County Indiana wants to use Tax Increment Financing (TIF) as a way to finance a new fiber network. TIF financing works by borrowing today against future increases in property taxes. TIF has been used for decades to finance infrastructure projects, but I don’t think I have ever seen it used to build fiber. This is very different than the normal way of financing municipal fiber projects which has involved bonds that pledge customer revenues and the value of the network as collateral. In this case, the County is expecting that the project will be able to pay the annual debt service and the property taxes only have to be increased if the fiber network is unable to cover the whole cost of debt. This means that property taxes become the collateral for the project and assure a lender that they will be repaid for lending to the project.

There are also other counties and municipalities in the state looking at TIF financing. Interestingly the Indiana Association of Cities and Towns helped to recently defeat proposed AT&T legislation that would have stopped municipalities from using TIF financing for fiber projects. It is not unusual to see incumbents try to stop or ban any new financing ideas for municipal networks.

Utility Fees. Anybody who watches the industry understands the troubles that have plagued UTOPIA, a municipal network in Utah. The company has been refinanced several times and has never raised sufficient capital to build to enough homes in the area to become solvent.

UTOPIA is now working with Macquarie Capital of Australia on a financing plan that would finance the construction of the rest of the network and that would be funded by a monthly utility fee billed to each home within the network footprint for 30 years. This is similar to what has been done in Provo. There the City sold their fiber network to Google for a dollar and there, customers are billed a monthly fee of about $6. For that small fee customers can get 5 Mbps download Internet, or they can elect to pay more for Google’s gigabit speeds.

This plan differs from the one in Wabash Indiana in that customers begin paying the utility fee at the beginning of the project and will pay it for thirty years. Rather than act as collateral for a loan, the utility fees help to directly finance the project.

Economic Development Bonds / Local Bank Consortium. There is a new cooperative trying to get financed in Sibley and Renville Counties Minnesota that is combining two different financing ideas. First, a portion of the project would be finance with an economic development bond guaranteed by a number of municipal entities within a fairly large rural service area. This bonds would cover less than one fourth of the project cost and would act as seed equity in the project.

The rest of the project will be financed through loans from a consortium of banks. The idea of bank consortiums has been around for a while and has been used to finance other infrastructure projects. It generally requires the involvement of a local bank which then solicits additional banks to carry a part of the loans. It’s well known that local banks often have significant cash on hand to lend but often lack for quality borrowers. And local banks are also generally constrained by the amount that they are willing to lend to any one borrower. By combining many banks together, no one bank lends too much and each gets to participate in a quality loan.

This project is a great example of a public private partnership. It will be operated as a commercial entity, a cooperative, and will draw on both municipal and commercial funding. All three of these ideas step outside of the normal financing channels. In today’s world it often takes this kind of creativity to get needed infrastructure built.

 

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