Improving Your Business

Politics and Municipal Partnerships

ppp_logoOne of the hot topics around the industry today is the creation of Public Private Partnerships (PPPs) with municipalities to provide fiber-based broadband. Today I want to talk a bit about the difference in partnering with a municipality compared to other commercial carriers.

Commercial carriers are often very used to partnering with each other. They will build fiber routes together and routinely share facilities. And many ISPs will outsource functions to another carrier when it makes economic sense. I see ISPs everywhere engaging in some very creative partnerships with other carriers.

But partnering with a municipality is different, mainly due to the very nature of how municipalities work. Any carrier that does not understand the differences and that doesn’t account for those differences in their plans is likely to get very frustrated over time with a municipal partner. Today I look at some political issues that arise in PPPs and I will look at financial and legal issues in subsequent blogs.

Municipalities are (by definition) political entities. The people at the top of the political pyramid are elected officials and that has to be considered when partnering with a municipality. The city you partner with today might not be the same city you find yourself working with in five years after a few elections. Change can happen with a commercial partner as well, but it’s rarely as abrupt or as expected.

I know one company that partnered with a city to build fiber and the city was an enthusiastic partner. But the next administration of the city came in with a bias against the city working to ‘enrich’ private businesses, and that partnership then became a lot more difficult to maintain. So the one thing that a good PPP needs is to be insulated from politics as much as possible. You don’t want to have the PPP structured in such a way that future decisions like raising rates or building new facilities must be approved by a city council.

It’s also important for a business to understand how slow municipalities are in making decisions. The whole municipal deliberative process is slow on purpose to give the public a chance to weigh in on things a city does. But it can drive a commercial entity crazy waiting for a municipal partner to make a decision when you are running a commercial business venture.

Another shock that those involved in PPPs are often surprised about is how everything they decide or do as part of the PPP is suddenly in the press. Local ISPs can often go for decades without making the paper for anything bigger than making a donation to a local charity. It’s very disturbing to see your business decisions discussed in the press, and often incorrectly.

Engaging in a PPP also can subject an ISP to an unusual kind of attack from the larger incumbent providers. They will make the argument that anything that a municipality provides as part of partnering with an ISP ought to be extended to all carriers. These arguments are labeled as ‘level playing field’ issues and incumbents can sound incredibly persuasive when talking about the unfair advantages given to one of their competitors (while ignoring the monopoly power they probably held over the city for decades before).

All of these issues can be managed as long as a carrier walks into a PPP arrangement fully aware of each of them and with a strategy for dealing with each one. Once a carrier has joined with a municipal partner they can never be free of these sorts of political issues – but they can structure the business arrangement in such a way as to minimalize the practical impact of them.

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PPPs – Issues to Consider

One of the hottest topic in the broadband industry today is Public Private Partnerships (PPPs) where a commercial ISP partners in some manner with a city or county to provide broadband. The trend is probably being nudged forward by the many communities that are becoming desperate to find better broadband and which are waking up to the fact that they are going to have to put some skin in the game if they want somebody to build broadband.

Many carriers are used to creating partnerships or joint ventures with other carriers. But many carriers have never considered working with a government entity – be that a city, a county, or perhaps a school district. Working with government entities is definitely different than working with commercial companies and below I highlight some of the differences to be prepared for.

This list might sound negative and drive a carrier away from thinking about a PPP. But there are strategies for dealing with each of these issues. And generally, the smaller the government entity, the fewer of these issues probably apply. Working with small towns can be fairly easy while big cities might have every issue listed below, and even more. There are some great PPPs in the country, and today there are more communities willing to commit some funding towards paying for a broadband network. So the rewards for working with a PPP can well be worth the extra effort needed to create a successful partnership. I use the word ‘city’ below very generically, and these same things can be true for any municipal entity.

Politics. Government entities, by definition, are political. The main issue with politics is not that you can’t negotiate a good deal with a willing city, but rather the fear that the city can change over time and in the future the city might turn into a partner very different than the one you partnered with.

Decision Making. Cities cannot make decisions very quickly. The process of making municipal decisions involves a very specific process that often requires public meetings and allowing time for public comment. This is not that much of a hurdle in getting a new partnership started, but after it is up and running, a city will not be a nimble partner that can make a quick decision when needed.

Public Disclosure. In most places there are public disclosure laws that mean that almost everything you do with a city will be subject to disclosure to the public should somebody want to see it. There are states where ‘commercially sensitive information’ can be protected to a degree, but in some states everything can be made public. Generally even any records of negotiating a PPP might be publicly discoverable.

Purchasing Process. Even when you negotiate a PPP with a city, some of them will feel obligated to then send the whole deal out to the public on an RFP or an RFI to make sure there isn’t a better deal available. Cities are often cautious about agreeing to sole-source deals without having gone through the process to see if they could have negotiated a better arrangement with somebody else. This is often a case of CYA in case the deal ever goes sour later.

Different Goals. It’s always important to remember that a city partner will not have to same goals as a commercial partner. They might care, for example, about making sure that there is broadband brought to the poorest parts of a city while the commercial partner cares most about profits and cash flows.

Ownership. Most cities cannot own a share of a corporation or a for-profit partnership. This means that if the city is to be a true partner that some alternate mechanism must be found to compensate them for their contribution to the partnership.

The “Anti-Voices”. Since the process is usually at least somewhat public, you must expect that there will be some citizens who will be loudly vocal against whatever the PPP is doing. This is inevitable because there are some citizens that are against almost everything. This is something that governments are all used to but which might be an eye-opener for an ISP.

You need to keep all of these things in mind when negotiating or working with a municipal partner. At the end of a day a city can be a great partner and there is at least anecdotal evidence that a broadband venture with a city partner will get more customers than a pure commercial venture – due probably to the fact that many people like their city governments and trust them to do the right thing.

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Highlights from the NTCA PPP Panel

I was just on a panel at the NTCA Spring Convention looking at the topic of Public Private Partnerships (PPPs). The audience was mostly independent telephone companies and cooperatives. I was one the panel with Curtis Dean of Smart Source Consulting, and Dan Olsen and Ben Humphrey of Finley Engineering. Together this particular group has a lot of day-to-day operational experience working with or for municipal telecom companies.  Following are a few of the major points made during the presentation and the follow-up questions:

Cities are Different. Cities don’t think the same way as commercial companies. They have different goals. They have a number of issues that make working with them a challenge such as slow decision making, open records laws, public purchasing practice, and of course, politics. They even have a different idea of what a successful venture looks like and any business that can cover costs and not need a subsidy is considered successful.

A Good Partnership Can be Harder to Maintain than a Good Marriage. In general, it’s hard to find a good partner, commercial or municipal, that you will feel comfortable with working over a long period of time. The recommendation was to take the time up front to ask the right questions to make sure that you understand the differences in working with a city, and to figure out an operating structure that will let both sides be comfortable with the differences over many years.

Don’t be Afraid of PPPs. There is no reason to be afraid of PPPs. There are numerous examples of successful PPPs already in existence and the parties in those ventures found ways to make it work. While cities and commercial companies are very different, if you do the hard work up front in creating a sustainable partnership it can work.

Shield a PPP from Politics. Probably one of the most harmful things that can happen in a PPP is for politics to influence decision-making after it’s up and running. You need to find a governance structure that isolates the business to some extent from direct political interference. A PPP should not require government approval to raise rates or to make operational changes needed in the business.

Have an Exit Plan. One thing that is often missing in the creation of a PPP (and in the creation of commercial partnerships as well) is for both sides to have an exit strategy. When negotiating a new partnership the two sides should always talk about what happens if things go south, and the contractual arrangement should allow both partners a way out of the partnership if it isn’t working for them.

Rural America is Growing Desperate for Broadband. Towns that don’t have great broadband today are seeing a huge gulf opening between them and neighboring towns that have good broadband. Cities are growing fearful that without broadband they will lose jobs, lose population as kids move elsewhere for work and will not attract new housing or businesses. Broadband has grown from something that is nice to have to an economic necessity and places without broadband are fearful that their towns will become irrelevant and disappear.

Municipalities Need to Put Skin in the Game. Cities are waking up to the fact that in order to get the broadband they want that they are are going to have to help pay for it. The numerous RFPs that are asking somebody to show up and build broadband are falling on deaf ears and they are realizing that they are competing against tens of thousands of other cities in the same situation and with the same need. Cities and citizens are getting more willing to put taxpayer money into the pot to find a good broadband solution. And municipal money can make it easier for a commercial partner to make the desired returns.

Seek Help. If you are considering a PPP, then seek advice from those that have already done this right. There are many things that can wrong, and no partnership is assured of long-term success or harmony. It’s worth the extra time and cost up front to make sure that you are not making one of the fatal mistakes that will be a problem five years down the line.

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