The Infrastructure Crisis

infrastructure revealed

infrastructure revealed (Photo credit: nicolasnova)

This country has an infrastructure crisis. A lot of my blog talks about the need for building fiber since I consider fiber as basic infrastructure in the same way that roads, bridges and sewers are infrastructure. Any town without adequate fiber is already starting to get bypassed in terms of opportunities for its citizens and businesses. And this is only going to get worse with the upcoming Internet of Anything, because only fiber is capable of carrying the vast amounts of data that are going to be generated.

But this country has a crisis with every kind of basic infrastructure. We are not spending enough money to keep our roads, bridges, power, water and other basic infrastructure from slowly deteriorating. The backlog of infrastructure upgrades needed just to get the country back to adequate is staggering.

It has historically been the purview of government to take care of a lot of this infrastructure – and while the federal government takes care of interstate highways and some bridges, the obligation for keeping up with infrastructure falls largely on state and local governments.

And those government entities do not have anywhere near the borrowing capacity to begin tackling the cost of fixing everything that needs fixing or updated. And local property and other taxes would have to be increased a huge amount to pay for it all. Even if there was a taste for doing the needed upgrades, the recent economy has brought many local governments up against their borrowing limits. And we are starting to see municipal bankruptcies, small and large, which is a sign that the municipal borrowing system is cracking around the edges.

And the ability for municipal entities to borrow could get much harder. The recent Detroit bankruptcy is just the tip of the iceberg in terms of large cities that are buckling under accumulated pension costs. And the nonsense going on in nonsense going on in nonsense going on in Washington with the federal debt ceiling might drive up interest rates.

Given all of these factors one has to ask if government financing is the best way to build infrastructure. There certainly are mountains of evidence that municipally funded projects cost more than similar projects constructed by private firms. And while municipal bond interest rates sound cheap, bond money is extremely expensive money due to the additives to bond borrowing such as capitalized interest and debt service reserve funds.

If this country has any hope of putting a dent in the huge infrastructure hole we find ourselves it is going to have to come from bringing private capital to bear on the problem. Where there is a financial crush in the public sector today we are looking at huge amount of private equity on the sidelines today just waiting to be invested in good projects.

The trick to attracting private money for infrastructure is to find a good way to forge public / private partnerships. Unfortunately, there is one key missing component that is making it hard to bring private money into infrastructure deals. And that is development capital.

Development capital is the money that is spent up front in a project to take it from concept to working plan. This includes such things as creating business plans, doing basic engineering, identifying hurdles and solutions – all of those early steps that private equity expects to be done before they will consider a project. In layman’s terms, private equity investors expect somebody else to have done the legwork to prove the feasibility of a project before they will consider it.

We have a development capital gap in this country. There are very few entities today that are willing to tackle spending the development capital needed to prove infrastructure projects. And so hundreds, even thousands of worthy projects are going undone because nobody is willing to spend that first 1% of a project needed to get it started.

What we need is a person or a group of people to step up to provide development capital. This could be government. For instance, for the cost of building one bridge they could instead provide the public development capital to build one hundred bridges. So state governments might be a great place to get this done.

It could also be done privately, meaning that somebody needs to create funds that strictly are development capital. Such funds could produce fantastic returns. But this is a concept that is alien to US investors.

But somebody needs to figure out how we get development capital or our infrastructure is going to continue to deteriorate until we have no choice but to fix it directly with tax dollars.

Public Private Partnership Financing

Wipe our Debt

Wipe our Debt (Photo credit: Images_of_Money)

Yesterday’s blog talked about finding partners for telecom ventures. Today I want to talk about a specific kind financing. Commercial companies have often complained that municipal telecom ventures get an advantage because they can borrow with bonds instead of normal commercial loans. And this makes me laugh because having worked with a lot of ventures financed in both ways I can’t see any particular advantages to bonds over commercial loans.

It has always been generally assumed that because bonds normally carry a lower interest rate that they are a far better deal than a bank loan. But let’s look at the realities of bonds used for telecom projects:

  • Bonds do generally have lower interest rates. But looking back over the history of commercial versus bond financing, the spread between the two interest rates in has usually not been very big. Certainly when we hit market conditions where there is a big benefit for tax-free bond interest rates then bonds can be a really great deal, but this has generally not been the case.
  • Bonds require that you borrow all of the money up front, meaning that everything you borrow goes into escrow and you begin paying interest on the money from the day you close on the bond. Commercial loans generally start projects with construction financing, meaning that you only take the cash as needed by construction and only pay interest on the money that has been borrowed.
  • It generally takes around three years for a new telecom venture to get a positive margin, and so a normal aspect of bonds financed for this purpose is capitalized interest. This means that the borrowing must include the funds required to make the interest payments, and often principle too, for the first three years of the project.
  • Many bonds have required the borrower to have a debt service reserve fund. This is essentially self-insurance to hedge against a default and normally this would mean doing something like borrowing an extra amount of money equal to a year’s principle and interest and keeping it in escrow against a time when there might be a full or partial default on bond repayment. And this money accrues interest expense for the entire term of the bond.
  • Depending upon the bond credit rate of the borrower, some bonds also require bond insurance. This is similar to the debt service reserve fund and has the borrower taking out an insurance policy that will guarantee one year’s payment on the bond in case of default. These policies are paid in full upfront at the beginning of the bond. I have seen bond issues that have both a debt service reserve fund and bond insurance.
  • Bonds have longer terms. It is not unusual for bonds to have terms of at least twenty years and I have seen bonds as long as thirty years. This is a mixed blessing. While having a longer term lowers the payments a little each year, the new business is saddled with debt for decades. In the long run this keeps the pressure on a bond-funded venture to always perform to a pretty high level. However, once any business is debt free they can perform at a lower level and still be quite successful without having to cover debt payments.
  • There are significant fees to be paid up front to sell bonds. There are bond sellers who specialize in finding buyers for bonds, but they charge a significant fee up front. The legal expenses requires to issue bonds are generally also much higher than the costs needed to borrow commercial debt.
  • When taken as a whole, these various items add costs to a bond issue and it’s not unusual to see the size of a bond issue be 20% to 25% higher than an equivalent commercial loan. That extra borrowing generally more than offsets the savings from interest rates and in reality I think that bond financing is generally more expensive than commercial financing.

Because of this there is a big opportunity for public private financing. If a venture can get funds from both sources through a public private partnerships then you can benefit by the best of both worlds. Consider, for instance a financing that is 1/3 bonds and 2/3 commercial. It would have the following advantages:

  • The bond money could act as equity and mean that no other equity is required for the project.
  • The smaller bond size means relatively small capitalized interest and other bond costs.
  • Some of the project is spread long-term with the bulk being medium-term, making it easier to make debt payments in the early years.
  • The bond can be used to cover the early debt payments on the commercial loan, eliminating the need for capitalized interest.
  • Construction can be done using normal construction debt financing.

I recently looked at a structure like this for a client and this public private financing looked to be superior to both normal bond and normal commercial financing. So there is a strong financial incentive for telecom partnerships between commercial and public entities.

In my next blog I will talk about what it takes to be good partners. It’s not always easy.

Are You Spending too Much on Mailings?

English: First 4 digits of a credit card

English: First 4 digits of a credit card (Photo credit: Wikipedia)

When I look at client’s books, one expense that I almost always think is too high is what companies spend on mailings for billing and marketing. Every carrier has tight budgets these days and so it is important to get by with less. Anywhere you can cut back on an unnecessary expense goes straight to the bottom line. There are some fairly easy things that can cut down on the postage, supplies and labor that goes into the mailings you are doing today.

Simplify Billing

Go Paperless. One of the first questions I always ask is if a company has given their customers a chance to go paperless for billing. I know in my personal life that I have been able to go paperless for every monthly bill I get except my electric bill. And even they let me check my balance on-line. I am sure that a number of your customers now pay their bills by electronic checks and don’t return a payment in the envelope you provide for them.

So you need to give your customers the option of going paperless.  Most companies who have done this have been able to cut down on the number of bills that they mail out by 50% – 70%. Some companies have carried this to an extreme and now charge extra for a paper bill as a further incentive for customers to go paperless.

Bank Debits / Credit Cards. You might also want to consider giving your customers the option to pay by bank debit or credit card as a way to get more of them to go paperless. This also improves your cash flow significantly. But it also means you have an extra obligation to keep their banking information very safe.

Typical credit card fees are around 3% of the bill, so take that cost into consideration when looking at this option. The credit card fee is a bargain compared to cost of mailing for a customer with a $50 bill. It’s not much of a bargain for a carrier paying for a DS3.

Portal. I recommended in an earlier blog that you create a portal so that customers can look up their current and past billing and payment history on-line and also can add or drop products. Such a portal makes it easier for customers to pay you electronically and will help you go paperless.

Simplify Your Products. I never miss a chance to say that you should simplify your product offering to make your billing easier. The easier the billing the easier it is to go paperless.

Marketing and Mailing

A lot of carriers still use mailings as their primary tool for marketing. What they fail to recognize is that there is a large percentage of their customers who never read bill stuffers. And so they end up spending a large portion of their marketing budget trying to sell to only a subset of their customers while another subset of customers never even gets their message.

I am surprised by the number of companies that don’t take the time to measure how successful their mailing campaigns are. It’s easy to tie specific mailings to offer codes so that you know where customers got your message.

I am not saying to not conduct mail campaigns, but also to email these to customers when possible. Emailing cuts down on postage and printed materials and means you can do more campaigns for the same money. And you will reach more customers.

Bill Stuffers and Newsletters. Companies often say that they don’t want to go paperless because they want to continue to send bill stuffers and newsletters to their customers. But bill stuffers and other marketing materials can all be sent to a lot of your customers electronically.

One thing to remember is that today a lot of people are looking at emails on smartphones. Your web page and any advertising materials need to be put on the web in both normal html and also in a phone-friendly format. Otherwise you will have ignored a percentage of your customers. Your bills, newsletters, portal and everything marketing related needs to be able to be seen at a decent size on a smartphone to be effective.

It’s Still a Regulated World

It seems like every few weeks I have a conversation with a carrier and in the course of conversation I find out that they are not in compliance with some regulation or another. It seems like a lot of companies that sell VoIP services, in particular, think that somehow that makes them immune from regulation.

But regulation has not gone away. If you bill an end-user customer for a voice, data or video product then there are regulations that you have to comply with. If you are an ISP for other entities, even if those entities are large, you are subject to some regulation. The only category of carrier that might not be subject to regulation is what I call a carrier’s carrier, and who only serves other carriers as customers. And in some states even they are subject to regulation.

It matters that you follow the rules. It seems like regulators at both the state and the federal level are getting surly about offenders and there some big fines being handed down to carriers who ignore regulation. I think the cost of compliance is cheaper than the cost of getting caught.

Here is a sample of the kinds of federal regulations that we see carriers ignoring. There are other state requirements that are also being ignored:

  • CALEA. There are significant obligations to be read to immediately give access of your customer’s voice and data records to law enforcement. You must have a manual filed that describes the processes.
  • CPNI / Privacy. You must have a manual and processes describing how you will protect your customers’ privacy.
  • Red Flag. You must have a manual and processes in place to demonstrate how you will protect your customers from identity theft.
  • Net Neutrality. There is very specific information about your company, your products, your network and your technology that you must inform customers about.
  • 21st Century Communications Video Accessibility Act. You must file a plan on how you will help disabled customers get access to voice, video and data products.
  • Universal Service Contributions. We find carriers that should be contributing to the USF fund who are not. The fines for getting caught for this can be huge.

I told my readers that I wasn’t going to write too many blog entries that are direct sales pitches for CCG services. I will admit that many of my blogs hint at the services we offer, but the main intentions of these blogs is to discuss issues for carriers that I think they will find to be useful. But in many cases CCG is able to help clients with a lot of the topics discussed in my blog.

CCG has three regulatory products that make it easy for anybody to stay in compliance with the rules. We have many clients who use CCG as their regulatory arm and many have said that it’s far cheaper to use us than to do it themselves. Here are the three products you ought to consider if you want to hand make sure that you are in compliance with the regulatory side of the business.

Regulatory Assessment. We will do a one-time assessment of your business and tell you every regulation that we think applies to you. Why guess if you are in compliance. For a modest fee we will make a list.

Regulatory Compliance Monitoring Service. In this service we develop a calendar for your company and we remind you of every regulatory deadline you must meet during the year.

Regulatory Compliance Filing Service. If you want it, we can create all of the needed paperwork and manuals, fill out the quarterly and annual forms and file everything for you. We think we have some of the best prices in the market for this kind of work.

If you want help to get into regulatory compliance or stay incompliance, give Terri Firestein of CCG a call at (301) 788-6889. We can help you take regulatory worries off your plate.