Tag Archives: Buy America

The High Cost of BEAD

I keep having a nagging premonition that BEAD grant requests are going to ask for a lot more money than State Broadband Offices are predicting. There are a number of reasons I’m sensing this is what is coming.

First, there has been considerable inflation in the industry over the last two years. Building a new network using any technology is easily 20% or 30% higher than when Congress first established the grant program. Any ISP using debt financing has to be concerned about interest rates, which are way higher than in 2020 when BEAD was first announced.

There are also extra costs associated with complying with the BEAD grant rules:

  • The biggest impact comes from the requirement that BEAD grants must pay prevailing wages. Most State Grant offices have interpreted that to mean Davis-Bacon wages, which can be anywhere from 15% to 20% higher than the labor rates that might be found in the market.
  • Anybody accepting a BEAD grant must obtain an irrevocable letter of credit, which equates to paying additional interest expenses for the BEAD project.
  • In many cases, a BEAD award will require environmental or similar studies prior to starting construction. This adds cost, and also time (which always equates to cost).
  • Buy America Build America requirements will translate, in some cases, to paying more for things like electronics.
  • Many State Grant Offices have proposed a slow reimbursement process for BEAD, which means that many ISPs will need a temporary line of credit to cover labor outlays while waiting for BEAD payments.
  • Most ISPs are going to accept the 2% administrative fee that can be added on top of construction costs to cover the heavy cost of grant compliance paperwork.

There is one impact in the costs of building BEAD locations that I haven’t seen anybody talking about. Over the last four years there have been a lot of other federal, state, and local broadband grant awards in areas that would still be eligible for BEAD if these grants hadn’t been awarded.

These other grants have often been awarded to projects to cover the ‘lowest hanging fruit’. For those not familiar with that slang, state and local grants have often been awarded in areas where the grants had the biggest benefit by covering the most locations possible with grant funds.

It doesn’t take a lot of state or local grant funding to change the cost profile of the remaining locations. For example, I’ve seen a lot of state broadband grants awarded to serve rural towns and villages with 50 to 200 homes. Peeling such locations away from the BEAD-eligible areas leaves a higher cost per passing for the remaining homes. That’s important, because most State Broadband offices will use the average cost per passing as one of the most important factors in scoring grant applications.

On top of all of these factors is the biggest unknown factor – which is local conditions that can drive up construction costs. The two biggest such factors are the cost of pole make-ready for aerial construction and the percentage of rock in the substrate for buried construction. State Broadband Offices have made estimates of the total cost to build BEAD networks. In doing so they had to estimate these kinds of cost drivers. If a Broadband Office estimated that 10% of pole have to be replaced as part of fiber construction, the actual costs for BEAD will be a lot higher if that turns out to be 15% or 20% of poles.

It will be a pleasant surprise if State Broadband Offices have been conservative and have overestimated the amount of BEAD grant they will be asked to fund. But my nagging premonition is that most will have underestimated.

The Buy America Waiver for BEAD

If there is any upside to the interminable delays in the BEAD grant process, it’s that American manufacturers have had the time to gear up to build the components needed to build broadband networks in the U.S.

When the BEAD grants were first announced, there was a widespread expectation that the industry was going to need a lot of blanket waivers from the tough Build America, But America (BABA) rules. But in the last two years, a wide range of equipment manufacturers have begun making gear in the U.S. and gone through the process of being approved as a BABA vendor.

Early in the process, the NTIA announced that it hoped that as much as 90% of the materials needed to build networks would be made in the country. At that time, that sounded like an impossible goal. But vendors of all sorts now have an American-made product. In a recent NTIA blog, NTIA claims there are now reliable sources of fiber, fiber cables, electronics, and enclosures – the key elements of a fiber network.

The  Department of Commerce just announced a minor BABA waiver for BEAD that recognizes that U.S. chip manufacturing will not be ramped up in time to supply the millions of chips needed for BEAD. The limited waiver also covers some non-optic glass inputs that are used in the glass manufacturing process. The limited waiver will recognize the chip issue by relaxing the rule that 55% of optical terminals and optics must be U.S.

The bottom line of the limited waivers is that NTIA is still estimating that 90% of the materials used to build BEAD networks will be America-made. That is phenomenal, and it’s great to see a big chunk of the $45 billion in grants supporting American manufacturers.

This is a drastic change since the $2.5 billion BTOP grant program in 2009 that was funded by the American Recovery and Reinvestment Act. Those grants had to issue widespread waivers of the BABA requirements since there was not a lot of American manufacturing of fiber components at the time.

One of the best long-term consequences of the BEAD effort is that U.S. factories and jobs can continue to make network components in the U.S. The determination to adhere to the BABA rules is also being applied to a wide range of other components that are being funded by the Infrastructure Investment and Jobs Act. That’s going to pay dividends in the U.S. economy for decades to come.

 

BEAD and Buy America

The NTIA recently issued a clarification of its intentions for the Buy America rules that are part of BEAD. In a blog released on August 22, the NTIA said that it still plans to take a strict approach to enforcing Buy America. In practical terms, that means that NTIA intends to only seek minor waivers from the Buy America rules.

NTIA first adopted a strict position on Buy America after the State of the Union address this year, when President Biden stressed that one of the key principles behind the Infrastructure Investment and Jobs Act, which funded the upcoming BEAD broadband grants, was to use American materials and labor.

As a reminder, the rules that determine if something is manufactured in America are included in Section 70912 of the Build America, Buy America Act. The Act requires that the iron, steel, manufactured products (including fiber-optic communications facilities), and construction materials used in a federally-funded project are produced in the United States unless a waiver is granted. That Act defines to be produced in the United States if the final product is manufactured in the United States and that at least 55 percent of the total cost of components are mined, produced, or manufactured in the United States.

The NTIA is proposing that 90% of the materials used to construct BEAD projects meet that definition. The NTIA made this recent announcement to provide incentives for fiber vendors to bring manufacturing to the U.S. for key broadband components. The NTIA says it will be leery of asking for waivers for materials that meet the following criteria:

  • Strategically important technologies that ensure the security, integrity, and reliability of network data should be produced in America.
  • If a product’s domestic manufacturing line can be scaled quickly, it should be produced in America.
  • A product, like fiber-optic cable that comprises a significant portion of the overall network cost should be produced in America.

The NTIA recognizes that some of the chips needed for broadband might not be manufactured here in time to support that BEAD grant implementation and may file a limited waiver for chips. However, there is a lot of progress being made to move chip manufacturing to the U.S. But chip factories tend to specialize in specific kinds of chips, and there may not be anybody making enough chips here for fiber electronics in time to meet the BEAD timelines.

The good news is that there is a lot of movement to build fiber electronics in the U.S. to meet the BEAD requirements. For example, both Nokia and Adtran have announced manufacturing plans in the U.S. Calix doesn’t have a U.S. solution yet but recently announced it should have one by the time that BEAD grants are awarded.

There are new fiber cable facilities being constructed by Corning, CommScope, Prysmian, and Superior Essex.

Overall, the Build America requirements don’t appear to be the big bottleneck that was feared a year or two ago. It will remain to be seen if the new U.S. manufacturing will be able to keep up with the demand from BEAD. It looks like most states are going to try to award as much money as possible in 2024, which means that construction for BEAD grants across the country will all start within a fairly narrow time window.