Tag Archives: feasibility study

The Need for Development Capital

Somebody asked me the other day what one critical element is missing from the rural broadband landscape. My response was developmental capital – money that does the early leg work to turn conceptual projects into shovel-ready projects. Communities and small carriers everywhere struggle with the lack of easy funding aimed at identifying projects and getting them ready to seek funding.

Communities everywhere decry the fact that nobody is investing in new broadband in their community. More times than not, this is due to having nobody willing to spend the development costs needed to define a viable broadband project. There are a few key elements that are needed for any new telecom project. First is feasibility engineering that is done in enough detail to understand the cost of a network needed in a community. Next is market research to understand the potential market demand for buying broadband and other products. Also needed us a financial business model that looks to see if a project can be successful and meet investor requirements. The final part of the development effort is finding the funding needed to make a project work, be that grants, equity, bank loans, or municipal bonds. These development steps are not inexpensive, and it can easily cost as much as several hundred thousand dollars to create a project that can be considered as shovel-ready.

There was a time in the past when this role was played by big banks. Cities or carriers could borrow the money for the developmental costs of a new telecom or other infrastructure projects. But over time this changed. For several reasons banks lost interest in funding infrastructure – not just telecom networks but everything else like roads, electric grids, you name it. The municipal world took up this slack by moving almost all municipal funding to bonds. But in doing so, it became harder to fund the development stages. Assuming a community is credit-worthy, it’s relatively easy to raise bond money to build a new telecom network or a highway – but it’s hard to fund the development work to make such projects shovel-ready to go for bonding.

This had even bigger consequences for commercial companies. Big companies like AT&T or Verizon self-fund project development. They internally fund the engineering effort to consider new projects. The ones that pencil in with good results get built and bad ones are scrapped.

Communities always ask me why nobody comes and builds fiber in their community. They look at me with puzzlement when I tell them that it’s the lack of development capital for ISPs. Small and medium ISPs don’t have a budget for project development where they can spend a few hundred thousand just to see if they should build in a new community. Most small ISPs simply chase low-hanging fruit where it’s easy to identify a profitable opportunity rather than to look at half a dozen projects to identify the most profitable one.

There are a few funding sources that cover part of the cost of development. There are foundations grants or government grants from agencies like the EDA that will fund feasibility studies to look at some of the aspects of project development. Local communities sometimes directly fund feasibility studies to look at some aspects of project development. But funding a feasibility is generall half or less of the total effort required to turn a concept into a shovel-ready project.

Lack of development funding doesn’t just affect broadband projects, but almost all infrastructure. Where it might take $150,000 or more to enable a broadband project, the cost of building new roads, dams, or other infrastructure can cost a lot more. Without an easy way to pay for the project development costs, I’ve seen communities do ridiculous things like pay for the engineering for a big road project over five or ten years to be able to afford it out of annual tax revenues.

I groaned earlier this year when I read that a few states offered to provide funding from CAREs Act monies for shovel-ready broadband projects. By that, they meant projects that could start spending money immediately since some of the pandemic-related funding has to be spent by the end of this year. They quickly found what anybody who works on broadband projects already knew – there were practically no shovel-ready projects sitting around that could launch immediately. At best there are projects at some stage along the project development timeline.

I’ve wracked my brain for years trying to find a workable solution to the lack of development capital. Some grants will pay for the most obvious parts of project development such as funding an engineering estimate of the cost of building broadband. But I’ve never seen any grants that fund the whole project development process.

When a Consultant Says ‘No’

Doug Dawson, 2017

One of my competitors recently held a webinar where they told a group of municipalities that they should never accept ‘no’ from a consultant who is evaluating fiber business plans. This is about the worst advice I think I have ever heard for many reasons. I think perhaps this consultant meant that one shouldn’t be afraid to be creative and to look at alternative ideas if your first ideas don’t pan out. But that’s not what they said.

Building and operating a fiber network is like any other new business venture and sometimes a new business venture is just not a good idea. This is why anybody launching a new business of any type does their homework and kicks the tires on their ideas to quantify the opportunity. A feasibility study means going through the process of gathering as many facts as possible in order to make an informed decision about a new opportunity.

The advice in this webinar was given to municipalities. Somebody giving this same advice to for-profit ISPs would be laughed out of the room. Established commercial ISPs all understand that they have natural limitations. They are limited in the amount of money they can borrow. They understand that there are natural limits on how far they can stretch existing staff without harming their business. They understand that if they expand into a new market and fail that they might jeopardize their existing company. My experience in building business plans for existing ISPs is that they are as skeptical of a good answer as a bad one and they dig and dig until they understand the nuances of a business plan before ever giving it any real consideration.

But municipalities build fiber networks for different reasons than for-profit ISPs. Existing ISPs want to make money. They also undertake expansion to gain economy of scale, because in the ISP world being larger generally means better margins. But cities have a whole other list of motivations for building fiber. They might want to solve the digital divide. They might want to lower prices in their market and foster competition. They might want to promote economic development by opening their communities to the opportunities created by good broadband.

These are all great goals, but I have rarely talked with a municipality that also doesn’t want a broadband business to at least break even. I say rarely, because there are small communities with zero broadband that are willing to spend tax dollars to subsidize getting broadband. But most communities only want a fiber business if the revenues from the venture will cover the cost of operations.

Sometimes a strong ‘no’ is the best and only answer to give to a client. Clients often come to me determined to make one specific business plan idea work. For example, many communities don’t just want a fiber network, but they want a fiber network operating under a specific business model like open access. That’s a business model where multiple ISPs use the network to compete for customers. Open access is an extremely hard business plan to make work. I’ve often had to show municipalities that this specific idea won’t work for them.

Or a commercial ISP might want to enter a new market and want to make it work without having to hire new employees. My advice to them might be that such an expectation is unrealistic and that over time they will have to hire the extra people.

My advice to clients is that they should be just as leery of a ‘yes’ answer as a ‘no’ answer. For example, every one of the big open access networks has an original business plan on the shelf that shows that they were going to make a lot of money – and those business plans were obviously flawed. If they had challenged some of the flawed assumptions in those business plans they probably would not have entered the business in the way they did. It’s a shame their original consultant didn’t say ‘no’.

I’ve always said that ‘dollars speak’ and any new business has to make financial sense before you can think about meeting other goals. Every business plan contains hundreds of assumptions and it’s always possible to ‘cook’ the assumptions to find a scenario that looks positive. I have created business plans many times for commercial and municipal clients where an honest look at the numbers just doesn’t add up. I’ve had a few clients ask me to create a more rosy forecast and I’ve always refused to do this.

I personally would be leery of a consultant that doesn’t think that ‘no’ can be the right answer for doing something as expensive as launching a fiber venture. Sometimes ‘no’ is the right answer, and if somebody tells you ‘no’ you ought to listen hard to them. It makes sense to kick the tires on all of the assumptions when you hear ‘no’ and to get a second opinion, if needed. But it’s important to kick the tires just as hard when you get ‘yes for an answer.