Connecticut’s Call for a Fiber PPP

Fiber CableA large number of municipalities in Connecticut have banded together and let it be known that they would love gigabit fiber. They’ve recently made numerous announcements about the initiative as well as assembled a list of the things that each municipality is prepared to contribute to somebody who will build fiber for them. This list includes the typical sort of things that cities offer to potential commercial partners – expedited permitting, real estate and building access, access to existing conduits or other sorts of existing telecom infrastructure, etc.

What these cities are doing is not unusual, but it’s by far the biggest such initiative I have seen. I have no doubt that these cities would love gigabit fiber, and they clearly understand the benefits and implications of getting it. But unfortunately, I see very little chance of their approach working. The Connecticut group is calling this a PPP (public private partnership). I love the ideas of PPPs and I have worked with some successful ones. In addition to being a telecom consultant I also am on the Board of Directors for a PPP financial consultancy firm that works across a wide range of infrastructure projects.

Numerous cities have taken this same approach to try to find a private partner. The first one I recall was the city of Seattle nearly a decade ago, a project that I helped with. The city made the same sort of appeal to investors to build fiber in their city and they had no takers. Since then I have regularly seen similar appeals made from cities all over the country. And except maybe for a few small cities that might have found a small local ISP or telco to partner with, I am not aware of any of these attempts that has ever been successful in attracting a partner. There are a number of reasons for this:

  • I saw several quotes from Connecticut officials that said that they are hoping that some venture capitalist will see this offer and become interested. That is not the way that venture capital works. Venture capitalists don’t invest in ideas for good projects; they invest in management teams that they trust. And they expect those management teams to have a strong track record and to bring them shovel-ready projects. Venture capitalists never go and seek opportunities, but instead wait for fully fleshed-out opportunities to be brought to them. For the Connecticut opportunity to be shovel-ready someone will have to expend significant millions up front to perform the engineering to determine the cost of the build, undertake market research to understand the potential for customer interest, and then create financial business plans to demonstrate that the project can make the kind of returns that venture capitalists or other financial sources will find acceptable. For just one decent sized city, that development work can easily cost half a million dollars or more, and for the 40+ towns in this consortium this would be a huge outlay. There are probably not many companies around willing to take a multi-million dollar risk on doing this upfront development work without knowing for sure that they can get it financed.
  • I have done several recent financial analyses of large fiber PPPs. These studies show that the kind of contributions that these cities (and most cities) are willing to make to a fiber project are not worth very much to a potential builder. One of the few benefits that might get somebody’s attention would be if a city already has a significant network of empty conduit through which fiber could be pulled. The other things these cities are offering don’t change the potential IRR (internal rate of return) of a project by much at all. Sadly, cities are overvaluing the benefits they can bring to a commercial fiber partner as part of a PPP. If a city really wants to attract a private builder they ought to be thinking about providing an economic development bond to pay for some significant portion of the fiber – a bond that they would repay out of tax dollars. That would be real skin in the game that would create a real partnership opportunity which might attract investors.
  • There are not many companies building fiber that would be large enough and have the ability to respond to the Connecticut group. To build to the fifty plus communities in this group must be a billion dollar venture and there are not many companies that have the wherewithal to raise that kind of money to build fiber. Only a company with deep pockets and a proven track record of building and operating telecom networks would have any chance of raising this kind of money. Even for companies with deep pockets this kind of construction is going to require at least 30% to 40% equity and there are not many firms sitting on the cash and equity needed to pay for this.
  • The various announcements said that since fiber is profitable that they ought to able to attract the needed money, But is it that profitable? Venture capital investors normally seek risk-adjusted returns of 30% or better and since fiber is a capital intensive undertaking it’s hard to achieve returns that high. It’s not impossible, but if building fiber was really that lucrative there would be fiber projects everywhere.

I hope these communities prove me wrong, because I think what they want is terrific. I really don’t want to be throwing a wet blanket on this because I am a huge believer in the benefits of fiber networks. But this sounds to me like wishful thinking on the part of economic development people who do not understand the market reality of how large amounts of money are raised in this country today. These cities are basically wanting somebody else to bring the money to build fiber in their communities, and you can count the firms who are capable of doing this on one hand – and most of those are the giant telcos who are no longer building fiber at all.

2 thoughts on “Connecticut’s Call for a Fiber PPP

  1. It was pointed out to me, quite correctly that most of Connecticut has not been served by Verizon, and thus will not have FiOS. That’s one of those facts that I knew but which got buried in a deep part of my brain.

    I am amending the article to remove a reference to Verizon, but some of you by email may have the version that includes that.

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  2. SNET got acquired by SWBT got acquired by AT&T, then got spun off to Frontier (minus the wireless business). All in the last 20 years or so. VZ, for strictly historical reasons, has a small salient in the middle of Western Connecticut. It does not fit the profile of communities where Verizon has built out FiOS.

    On the plus side, the state regulators have done a great job of making the state friendly to telecom competition. Most important, there is a state pole administrator with teeth. And there is a lot of dark fiber and municipal fiber. We’ll see what happens.

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