Tag Archives: Macquarie Capital

Trouble in Kentucky

I’ve been reading dire headlines coming out of Kentucky related the operation of the 3,200 KentuckyWired statewide middle-mile network under the administration of the Kentucky Communications Network Authority (KCNA). Headlines have been warning about a shutdown of the network due to a dispute between KCNA and Accelecom, a for-hire operator of the network.

KCNA terminated the agreement with Accelecom in January. KCNA accused Accelecom of violating the operating contract. Accelecom was said to be using the network to provide retail connections while denying dark fiber connections on the network to other ISPs. KCNA also accused Accelecom of not allowing an audit and of not making payments to the State. The dispute between the two parties ended up in court and resulted in an order to give customer a 30-day notice in mid-April that service might be terminated.

The KentuckyWired network has been controversial since its beginning in 2015. The network got its genesis in discussions between the State and Macquarie Capital from Australia, a large international infrastructure funder. This agreement was touted as a public-private partnership, but Macquarie only funded about 2% of the network while eyeing a lot of profits to be made as the operator of half of the network as a wholesale operator.

Macquarie originally asked the State to fund $1.2 billion to fund the network – money that was not readily available at the time. The State signed an agreement with Macquarie to proceed and counted on funding from the FCC’s E-Rate program as a major source of funding. That funding was not actually available as had been promised by a consultant who was the husband of a Cabinet Secretary. The State pivoted to try to move all state buildings to the network but ran afoul of State procurement rules. Kentucky proceeded to fund and build the network since it still saw great value in the ability to bring backhaul to the many rural parts of the state.

There were a lot of problems building the network due to getting access to rural poles that were often in bad shape. The project went significantly over budget and took a lot longer to build than originally planned. Macquarie remained as the operator and renamed itself as Accelecom.

To some degree the network has fulfilled its goal and provides backhaul to 44 ISPs and directly serves a wide range of locations from court houses to hospitals. However, part of the dispute that led to the cancellation of the contract is that Accelecom wouldn’t provide dark fiber access to ISPs as is required by the open-access rules.

It’s a little unclear how many customers might go dark when Accelecom stops operating this month. In many cases, ISPs have other backhaul connections or are scrambling to find them. But it seems that some rural ISPs completely rely on the KentuckyWired connection.

I guess there are several lessons to be learned from this mess. One is that governments ought to be careful of the partners they choose for public-private partnerships. Macquarie Capital has been accused in numerous ventures around the world of skirting the rules and violating agreements to maximize its earnings. Kentucky would have been much better served by working with the ISPs in the state to build and operate a middle-mile network, as has been done in other states. Macquarie was chosen without the open bidding process and public discussions that would be expected for such a large undertaking.

The second lesson is that any agreement related to a network ought to have provisions that the network can’t be shut down if there is a dispute between the operators. It’s extremely rare for a network to go dark and strand customers. Even if Accelecom walks away, the network is still in place operating and there should have been a contractual contingency plan to keep the lights on while the parties separately negotiate dollar issues. The State and Macquarie will continue to point fingers at each other, but the truth is that both contributed to the current disaster.

The third lesson is that middle-mile fiber networks can bring great benefits. Kentucky is the poster child of a state with remote pockets of rural households, and the KentuckyWired network has brought broadband to areas that would not have otherwise had it. There are a lot of better ways to fund and operate a middle-mile network than the mess Kentucky created, but there is no denying that building the network was a good idea.

Financing New Fiber Networks

Numismatics_and_Notaphily_iconTraditional financing is not always the solution for financing a new fiber network. For example, many rural communities don’t have the borrowing capacity to fund a fiber network strictly from bonds. And banks are still being extremely cautious about lending to infrastructure projects or for floating loans over twelve years in length. Recently I have seen several creative ideas in the market that are worth highlighting. These concepts could be used to fund municipal fiber projects or public private partnerships that combine a municipality partnering with a commercial operator.

I note that I am on the Board of an infrastructure banking firm and our firm would be interesting in helping to financing fiber networks using these or other financing ideas. Our firm can help in those cases where traditional financing might not offer a solution. We will consider looking at projects as small as $50 million but we have found that its much easier to get funding for projects of $100 million or more. If you have a fiber project of this size in mind please contact me.

TIF Financing. Wabash County Indiana wants to use Tax Increment Financing (TIF) as a way to finance a new fiber network. TIF financing works by borrowing today against future increases in property taxes. TIF has been used for decades to finance infrastructure projects, but I don’t think I have ever seen it used to build fiber. This is very different than the normal way of financing municipal fiber projects which has involved bonds that pledge customer revenues and the value of the network as collateral. In this case, the County is expecting that the project will be able to pay the annual debt service and the property taxes only have to be increased if the fiber network is unable to cover the whole cost of debt. This means that property taxes become the collateral for the project and assure a lender that they will be repaid for lending to the project.

There are also other counties and municipalities in the state looking at TIF financing. Interestingly the Indiana Association of Cities and Towns helped to recently defeat proposed AT&T legislation that would have stopped municipalities from using TIF financing for fiber projects. It is not unusual to see incumbents try to stop or ban any new financing ideas for municipal networks.

Utility Fees. Anybody who watches the industry understands the troubles that have plagued UTOPIA, a municipal network in Utah. The company has been refinanced several times and has never raised sufficient capital to build to enough homes in the area to become solvent.

UTOPIA is now working with Macquarie Capital of Australia on a financing plan that would finance the construction of the rest of the network and that would be funded by a monthly utility fee billed to each home within the network footprint for 30 years. This is similar to what has been done in Provo. There the City sold their fiber network to Google for a dollar and there, customers are billed a monthly fee of about $6. For that small fee customers can get 5 Mbps download Internet, or they can elect to pay more for Google’s gigabit speeds.

This plan differs from the one in Wabash Indiana in that customers begin paying the utility fee at the beginning of the project and will pay it for thirty years. Rather than act as collateral for a loan, the utility fees help to directly finance the project.

Economic Development Bonds / Local Bank Consortium. There is a new cooperative trying to get financed in Sibley and Renville Counties Minnesota that is combining two different financing ideas. First, a portion of the project would be finance with an economic development bond guaranteed by a number of municipal entities within a fairly large rural service area. This bonds would cover less than one fourth of the project cost and would act as seed equity in the project.

The rest of the project will be financed through loans from a consortium of banks. The idea of bank consortiums has been around for a while and has been used to finance other infrastructure projects. It generally requires the involvement of a local bank which then solicits additional banks to carry a part of the loans. It’s well known that local banks often have significant cash on hand to lend but often lack for quality borrowers. And local banks are also generally constrained by the amount that they are willing to lend to any one borrower. By combining many banks together, no one bank lends too much and each gets to participate in a quality loan.

This project is a great example of a public private partnership. It will be operated as a commercial entity, a cooperative, and will draw on both municipal and commercial funding. All three of these ideas step outside of the normal financing channels. In today’s world it often takes this kind of creativity to get needed infrastructure built.