Today’s blog is a math lesson, and I know that may turn off some readers immediately. But this is important math for anybody planning on funding a broadband project with a grant. The point of today’s blog is that somebody receiving a 75% grant must come up with more than 25% to match the grant.
The easiest way to illustrate this is with an example. Let’s say that somebody pursues a $10 million grant with one of the federal programs where the grant will cover 75% of a project. I’ve seen a few folks do the mental math and assume that means they must come up with $2.5 million as matching. That’s not enough money for several reasons.
First, grants don’t cover all assets. Most grants cover network assets and assets needed to connect to customers. But grants typically don’t cover vehicles, computers, furniture, test equipment, and any other assets needed to launch a new ISP or a new market. Grants also aren’t going to cover major software costs like upgrades to billing systems or marketing software – costs that an ISP will incur, but which are not eligible for grants.
There are also nuances of grants that you need to pay attention to. For instance, I know of several state grant programs that won’t cover assets like buying land to place huts.
Grants also cover only minimal amounts of expenses, but they don’t cover any of the costs of operating the business until the time that revenues are sufficient to cover expenses. Grants often cover the cost of preparing the grant, and some grants give some funding for the overhead costs of tracking future grant paperwork – but many don’t even cover this.
But grants don’t cover the big expenses of launching a new market. For a $10 million grant, that probably means hiring a few new technicians and customer service reps. A new market will certainly need a sales and marketing program. Grants won’t cover additional bandwidth or maintenance agreements on the new technology. Getting into a new market often means fees to consultants, lawyers, and accountants. And it means all of other operating costs like higher power bills, new cellphones, pole attachments, number portability, regulatory filings, higher fuel costs, and increases in insurance. Grants also are not going to cover the cost of financing – with the biggest expense usually being interest.
The amount of the uncovered costs will largely be a function of how long it takes to launch a new market and connect customers. Connect customers quickly, and the operating loss might be small. Get stuck with supply chain issues that delay construction after you’ve already hired a few new employees, and losses could be significant.
What might that look like in practice? The following example is based upon an actual projection for one of my clients:
Grant Eligible Assets $10.0 M
Grant $ 7.5 M
Unfunded Assets $ 2.5 M
Ineligible Assets $ 0.5 M
Operating Losses Until Breakeven $ 0.9 M
Total Project Costs $11.4 M
Out of Pocket Costs $ 3.9 M
In this case, the $3.9 million is a lot more than the $2.5 million that might be the first guess of the out-of-pocket costs. My simple advice is: do the math!
Spot-on analysis. The financials look worse when grant matching can be 50%, which can be the case in NC. The reason for the grants to begin with is that the markets were not profitable for the ISPs to operate. Even with grants to help build the network, will it change the operating financials to make it worthwhile? ISPs need to do the math to determine if it will be profitable to run, even if they have help with the build cost.
I’d love to see a similar post of the economics of providing service in small polygons of underserved areas. It’s one thing if an incumbent is simply extending a few miles, It’s another situation for a new entrant. Do companies like Brightspeed know what they’re in for from an operating perspective if they win grants for pockets here and there? Or do the PE companies care, as they’ll simply sell and close their fund within 7 years?
This is a great take on this topic! We have people quick to mention all of the grant funds that we have received for our project, but do not mention the things you mentioned above. The cost of borrowing is a significant number on 7 figure borrowing, and the supply chain issues are delaying the projected revenue streams while the expenses are still rolling in and rolling in at inflated rates.
We use an approach of testing the project against a full investment of funds-with no grants. If the project proforma (which includes all the factors Doug laid out, et al) is viable with long term low cost bond funding then with grant funds and proper financing it is a go without question. If it couldn’t survive on its own without grants why would I want my tax dollars supporting it? The real solution to universal broadband is the kind of 30-50 year, 0-3% bonding that built rural electric & telephone in the last century. Grants are gravy on top.