In April, FCC Chairman Ajit Pai announced a new rural broadband initiative that will provide $20.4 billion of new funding. We don’t know many details, but one of the most likely parameters of that funding is that the money will be awarded by reverse auction. Today I ask if a reverse auction is really the right tool for this particular auction.
In a government reverse auction the winner is the entity willing to take the least amount of money to provide a given task. A reverse auction is much akin to awarding money to the low-cost vendor in government contracting. The big question to ask is if we really want to award grant money to the low-cost bidder? By definition that will reward certain behavior:
Favors Slower and Lower-cost Technologies. If the criteria for award is the percentage of grant matching, it’s far easier for an applicant to accept a lower match if they are deploying a lower-cost technology. Fixed wireless has a big cost advantage over fiber. Satellite has a huge advantage over every other technology since any award for them is 100% gravy. For a reverse auction to work it has to find an equitable weighting process to bring technologies into some sort of parity. The recent CAF II reverse auction is a good example. While some of the money went for fiber, a huge amount went to fixed wireless and satellite broadband – and fiber only got funded in areas where it wasn’t competing against the lower-cost technologies. If there is a reverse auction for the whole country, then the lower-cost technologies will win almost all of the grant funding.
Favors Lower-Cost Regions of the Country. Some parts of the country like Appalachia have a higher cost of construction for every technology, and a reverse auction is going to benefit lower-cost places like the Midwest plains. A reverse auction will also favor grant applications with higher density that include towns versus requests that are 100% rural.
Favors Upgrades over New Construction. A reverse auction will favor applicants that are seeking funds to upgrade existing facilities rather than build new ones. For example, it would promote upgrading DSL over building new fiber.
Formulaic and Allows for No Policy Awards. The FCC and Congress is going to want to see the awards spread across the country to every state. A reverse auction might favor a specific region of the country or even favor a single technology – all of this is outside of the control of the FCC once the auction begins. A reverse grant is self-selecting and once the process is started those willing to take the smallest percentage grant will win all of the money. I think the whole country is going to be furious if most of this huge grant only favors one region or one technology. Most states have elected to not use a reverse auction for state grants because they want some say to make sure that grants are awarded to all corners of a state.
There’s No Fix for Problem Grants. I have clients who think that fixed wireless companies that claimed they could deploy ubiquitous 100 Mbps broadband cheated in the CAF II reverse auctions. They claim the technology can’t deliver that speed to all customers. We’ll find out when these networks are deployed. This was relevant in that particular auction since bidders got extra bid credits for promising faster speeds. This is a cautionary tale about bidders who will manipulate the bidding rules to get an advantage.
Another issue we often see in grant programs is that some of those who are awarded grants find themselves ineligible to take the grants. This happened with the stimulus grants and the returned money was awarded to the next companies in the grant grading process. This is not possible in a reverse auction. By the time of the final award everybody else has dropped out of the process.
The bottom line is that a reverse auction is a terrible process for this grant program. No matter how carefully the FCC sets the eligibility rules, a reverse auction is always going to favor certain technologies or certain parts of the country over others – it’s inevitable in a nationwide reverse auction. A $20.4 billion grant program can bring great broadband to a lot of households. A reverse auction will be a disaster if it pushes money towards upgrading DSL or gives the funding to satellite providers rather than awarding all of the money to build permanent broadband infrastructure.
I know that taking the time to review and rank grant applications is hard work. A reverse auction simplifies this process by sinply declaring if a grant application is eligible for the grant. If you want proof that slogging through grants and choosing the best ones then look at the successful state grant programs. A reverse auction is inevitably going to allocate funds in ways that the FCC is not going to be proud of.
This blog is part of a series on Designing the Ideal Federal Broadband Grant Program.