The Extra Costs of BEAD Funding

A few weeks ago, when I did my first summary of the $42.5 billion BEAD grant program, one of my observations was that there are a lot of extra costs for an ISP to accept BEAD funding. This is something that anybody taking the funding must understand. Some of those extra costs include:

Environmental and Historic Preservation Reviews. I’ve occasionally worked on a non-grant network project that required these reviews. For example, these are normal requirements for building networks through state and federal parks. Indian tribes require these if there is any chance of construction through historically sensitive areas. I would expect to take extra precautions if I was building fiber close to the Liberty Bell or some other historical place. But other than those examples, no commercial project I’ve ever worked with has voluntarily done these reviews. Most networks are built using existing rights-of-way along roads where the soil was excavated in the past. I can’t imagine the slightest reason why these reviews would be required for placing fiber on existing utility poles.

Letters of Credit. I’ve written a separate blog on this issue. The grants require an irrevocable letter of credit just to apply, and a second letter of credit from grant winners. I think the NTIA saw the criticism leveled at the FCC in the RDOF process and wants to exclude bad actors, but this jacks up the cost of applying for a grant and could add a few percent to the overall cost of a grant project. This will also likely deter small ISPs who want to fill in some of the neediest pockets but can’t get a bank to provide the line of credit.

Prevailing Wages. Projects over $5 million must use prevailing wages. The majority of the projects will be rural, and the folks who made this requirement don’t understand the rural contractor environment. Rural contractors already pay wages that are some of the best paying jobs in a rural economy. They must do so, or in this time of technician shortage, they wouldn’t have any workforce. But they don‘t pay the extra-high prevailing wage rates that are charged in urban areas. Those rates are higher because of the higher cost of living in urban areas. If prevailing wage studies were done correctly, they’d find a separate prevailing wage for urban and rural communities. To make things worse, rural contractors don’t want to be required to pay prevailing wages if they also have non-prevailing wage workers because it causes dissension between crews who want to all work on the higher-paying project. This is a case of a solution seeking a problem because the existing wages in rural areas are balanced by the lower cost of workers not having to live in cities.

Requirements on Contractors. The BEAD NOFO layers a few new requirements on contractors. As an example, a construction contractor working on a BEAD project must certify that it has a workforce development program that includes participation in an apprenticeship program. This requirement ignores an important characteristic of most fiber and tower contractors – many of these contractors have few direct employees. They instead hire small crews of specialty subcontractors – and these small subcontractors will walk away if asked to meet this requirement or do extra paperwork. My fear is the contractors who have historically worked in rural markets won’t take BEAD work if it puts extra burdens on them – there is plenty of non-BEAD work.

Heavy Reporting Requirements. I don’t have a problem with requiring follow-up reporting on the effectiveness of grants, and in the past, some programs like CAF II had almost no follow-up. But the reporting requirements for BEAD are more detailed than anything I’ve seen, so it’s going to cost more to comply.

Grants are Taxable. We can’t forget that grants are taxable income to any taxable entity that accepts the funding. I’m hearing rumors of a D.C. workaround on this issue, but without a solution, it’s going to be hard for a small commercial ISP to justify taking millions in grant money if that means having to somehow fund paying 21% of that back to the federal government plus whatever will be due to the state. It’s not comforting to know that the tax savings will roll back over the next twenty or thirty years as grant-funded assets are depreciated. This is not specifically a BEAD issue and applies to all grants from local, state, or federal sources.

Summary. One of the sentiments I loved in the grant NOFO is that the NTIA wants to get broadband to even the most remote places, and they used the example that funding should be available to reach even a single location. But I have to laugh when I look at these requirements and see that reaching that single remote location might get layered with hundreds of thousands of dollars of extra costs.

The biggest drawback of expensive grant compliance is that it drives up the cost of every grant project. And that means that the BEAD money won’t stretch as far to bring broadband to as many homes. For an individual grant applicant, the extra cost translates into the need for more out-of-pocket matching funds – which in some cases will be enough to make a project infeasible.

I fully understand the desire at the NTIA to not fund bad projects. I imagine there are folks there that still remember the agency being accused in 2009 of funding projects that were “fiber to nowhere”. But the many extra grant requirements feel like we’re applying a pound of prevention to solve an ounce of risk. Any one of the various grant requirements can probably be justified, but when taken as a whole, the grant requirements are adding extra cost and hassle that will make many ISPs pass on the opportunity.

Gotchas in the e-Connectivity Grant Program

The high-level rules came out on Thursday for the USDA e-Connectivity grants being administered by the RUS. This is $560 million of grants and loans that were authorized by Congress last spring – this was first announced as a $600 million program and I’m not sure where the other $40 million went. I’m not going to list all of the rules of the grants – I’ve seen a dozen websites already that have summarized the key grant requirements. Instead I’m going to talk about a few requirements that I think will be show stoppers for many potential applicants.

RUS Loans are Still Draconian. Only 1/3 of the funding will be outright grants, with the other 2/3 being outright loans or 50/50 loans and grants. This means that most of funding can only go to those who are already RUS borrowers or who are willing and able to accept the draconian RUS loan provisions.

Anybody accepting an RUS loan must pledge 100% of their existing assets to the RUS and also give the RUS an exclusive first lien position on the company. What this means is that anybody that already has a loan elsewhere is not going to be able to take these loans. Existing lenders like CFC. CoBank, or any commercial bank will not accept a second loan position to these new awards. A huge number of telcos and electric cooperatives that borrow elsewhere won’t be able to accept RUS loans, eliminating them from consideration for anything but the 100% grant portion of the program.

These same loan restrictions also make it unlikely that any government entity can accept an award that includes am RUS loan. I’ve worked with nearly a dozen government entities that have pursued RUS loans and none of them have successfully been able to overcome the pledge and other lending hurdles.

The 10% Test. The program has a gotcha slipped in by Congress that no more than 10% of the locations covered by the program can already have existing broadband 10/1 Mbps or greater speeds. This is a giant change from past RUS award programs that allowed up to 85% to have 10/1 speeds. Applicants need to take this requirement seriously and I expect any applications that can’t the lack of existing broadband will be quickly tossed out of consideration. This is not a flexible rule and was inserted into the grant rules by big telco lobbyists who don’t want to see any competition.

This means that any parts of the country previously covered by any federal funding program that required 10/1 Mbps speeds will not be eligible – including past award areas that haven’t yet been upgraded, like the areas recently awarded under the CAF II reverse auction. Applicants are going to have to be extremely careful in defining study areas, almost on a home by home basis. I fully expect RUS to test the study areas hard and I’m positive that outside parties (like incumbent telcos) will be able to intervene if they think an applicant fails this test.

The worst part of this is that we know that the rural broadband maps suck and that there are many places that the FCC considers to have 10/1 broadband that doesn’t have it. Applicants will have a big uphill battle to get funding in these areas.

Requires Two Years of Sound Audits. Applicants need to produce two years of audited solid historical financial performance – meaning start-ups need not bother with the grants. The RUS hasn’t forgotten the big problems they had with start-up companies during the stimulus grant program.

Environmental Impacts. Applicants must analyze the environmental and national historic preservation impacts of a grant request. It’s possible to get out of this requirement if a state official will declare that these tests aren’t required for applicants from their state. Applicants are also going to need affidavits from a state official to describe state broadband grant programs and to describe any conflicts with a grant filing.

Record Keeping. In order to meet the 10% rule I expect study areas to be disjointed –pocket of homes here and there scattered over a larger area. Applicants will somehow have to track costs of construction in these small pockets and not mingle costs with other nearby areas that were not included in a grant supplication. It’s going to be hard to show an audit trail of invoices that are just for the study area.

Prevailing Wage. The announcement doesn’t mention prevailing wage, but I expect this to apply. In past RUS grants this requirement has been included in the detailed descriptions of the grant process that hasn’t yet been released. Prevailing wage means paying construction labor at rates determine by each state, and which in many states reflect the cost of building in the largest cities and not in the rural areas. Prevailing wages can sometimes be so much higher than actual construction company rates that the difference in the wages can wipe out most of the benefit if getting a 50% grant.

Matching Funds Spent First. The grants require that matching funds must be 100% spent before any RUS money. That means the funding sources that incur the highest interest rates must be spent first, adding to the cost of the project. The source of the matching funds needs to be identified by the time of the grant filings.

I’m positive that many will be excited about a new large broadband grant program, but the above grant requirements are going to scare off or disqualify many potential applicants. These hurdles are not by accident – the big telcos really don’t want anybody competing against them and have stacked the deck with the nuances of the rules.

An Effective Federal Broadband Program, Part 1

eyeballThere are a lot of rumors flying around the industry that there is going to be a big nationwide federal program to fund rural broadband infrastructure. So I’ve been thinking about what such a program might look like. We have the experience a few years back of a few billion dollars being handed out for broadband by the stimulus plan. It’s vital to learn from past mistakes, and so today I look at lessons learned from earlier federal grant programs.

This is the first in a series of blogs that will look a how a federal broadband program could be done to get the most bang for the federal buck. We might only get one chance at this as a country, so I hope we can do this right.

So, in starting with lessons learned from the past, here are a few things that a nationwide federal broadband build-out should avoid:

Don’t Impose Unnecessary Restrictions. There were three rules associated with the stimulus grants that added a lot of cost and delay to projects. A federal project could get a lot more bang for its buck by eliminating the following:

  • Environmental Impact Studies. Telecom networks are built almost entirely in existing rights-of-ways within a few feet of paves roads. So there is no reason to impose a time-eating study to prove that a fiber cable won’t bother endangered plants or animals unless the fiber is being built outside of the existing rights-of-ways.
  • Historical Preservation Rules. Having to check that fiber is not going to somehow disturb historic sites is also silly unless the fiber is being built across open fields. There should be no requirement to do archeological studies for work done in the narrow shoulders of existing highways that have been dug up in the past.
  • Prevailing Wages. I saw projects where requiring prevailing wages added 20% to the cost of the whole project. Prevailing wages sounds like a good idea, but in practice what happens is that large city wages structures are imposed on construction companies that have been building in rural areas for decades. Making these companies pay much higher wages to employees who have worked for them for years is great for employees, but is a terrible waste of the federal dollars.

Don’t Overwhelm the Industry. A federal broadband buildout could be a magnitude larger than the stimulus program and even that program overwhelmed the industry. There are only a finite (and small) number of consultants, engineers and construction companies available in the market and if the government tries to build a lot of infrastructure in a hurry, then a lot of projects are going to be designed and built by companies with no experience.

The stimulus program also showed that it’s not hard to overwhelm the companies that make broadband products. The stimulus program caused a shortage of fiber and prices spiked. There was also a shortage of some kinds of common fiber electronics that delayed projects. It’s hard to imagine what would happen if we tried to build a lot faster than the stimulus program.

Don’t Give Money to Start-ups. The stimulus program gave a lot of money to start-up businesses and a number of these networks have not done well. There was unfortunately a lot of fiber built to nowhere with stimulus funds that even today is barely carrying any traffic. Existing carriers already have the underlying talents and systems in place that are needed to be a successful telecom company. It does not good to get the fiber built to people’s homes unless the company doing so is poised to be a long-term successful ISP.

Hire Experienced People to Review Applications. There was no existing pool of experienced people to review the stimulus grant applications, and so the agencies involved scurried to try to find bodies. I’ve written about this before, but to see if the process was as bad as I feared I encouraged a guy who did my landscaping to apply to be a reviewer. He had done some computer coding years earlier but otherwise had zero experience with telecom. To both of our astonishment he was offered a position as a grant reviewer. If there are a lot of grant funds available there will be a ton of unworthy and faulty applications and it takes seasoned industry veterans to be able to distinguish the good ones from the bad ones.

Take Only Real Matching Funds. The stimulus grants required a significant amount of matching for the federal grant dollars. Unfortunately not all of the matching was with cash and they accepted ‘in-kind’ matching. In-kind matchings were supposed to be an asset that had significant and quantifiable benefits to the project. I reviewed a number of successful grant applications and saw that many of them had made outlandish claims of in-kind matchings that the feds accepted. As an example, I saw one grant that claimed a huge dollar benefit for already having existing rights-of-ways on state highways. The fact is that these same rights-of-ways are available to anybody who meets the qualifications. But the in-kind matching meant that the applicant didn’t need to have any actual matching cash to get the grant.

Get the Industry to Design the Grant Forms. I’ve been doing telephone accounting since the 70’s and the stimulus grants asked for expenses and capital expenditures in a format that baffled me at times. Most telecom companies keep similar books and it’s not hard to ask for financial information in a way that everybody understands.

The Hidden Costs of Accepting Government Money

Numismatics_and_Notaphily_iconThere are often strings attached to taking government money that must be considered before accepting such money. Some of the gotchas include having to comply with prevailing wage rules, environmental reviews and Historical Preservation Act rules.

Let me start with prevailing wages. Any company that works on a government infrastructure project is required to comply with prevailing wages. Prevailing wages are hourly rates that are created by government regulatory agencies to represent what workers and laborers of specific types must be paid in specific geographic areas. The original concept behind the prevailing wage laws was to not let public construction projects destabilize a local construction industry. Basically the government didn’t want laborers shipped into an area who would work for much lower wages than the people who lived in the area.

This sounds good in concept, but in practice, in many states the prevailing wages are set considerably higher than what local laborers are paid. In fact, in many states the prevailing wages are suspiciously close to urban union wages. And so the opposite of what the government was protecting against often happens and contractors working on government projects end up having to pay more for labor than what people in an area will willingly work for, and this can greatly inflate the cost of government projects.

The procedures of complying with prevailing wages for telecom projects is complicated. Typically the prevailing wages are published by job titles and these titles rarely line up well with the actual workers that are hired for a fiber project. And so a construction company must guess how to slot each position into one of the pre-defined wage categories and then hope that they guessed right, since their decision often doesn’t get audited until after the project has been built.

In the telecom industry there are only a few hundred construction companies around the country that build fiber networks. It’s a very specialized field and the workers are highly trained. Nobody is going to hire somebody who’s inexperienced off the street to be a cable splicer or to operate a cable plow. The fiber construction business has developed a good equilibrium between supply and demand. Construction companies can’t hire experienced workers if they don’t pay enough, and so their competitive prices include the kind of wages that cable splicers and others are willing to work for. It’s an equilibrium that the industry seems happy with.

Probably the biggest concern is that even when you take only a small amount of government money, the prevailing wages might apply to the total project. The prevailing wage doesn’t have to be very much higher than the actual wages for it to cost you money to take ‘free’ government money.

Another requirement that often comes with government money is that you have to undertake an environmental study. This means hiring somebody to certify that your project is not going to disturb endangered species, interfere with wetlands or cause pollution of the environment. But laying fiber doesn’t affect any of these items because fiber is almost always built in public right-of-way along existing roads. When the state first built the road they always set aside part of the right-of-way for utilities to build in the future. This means that fiber is placed into soil that was already excavated when the road was built. So an environmental review makes no sense and I’ve never heard of a commercial fiber project that did an environmental review when building in a public right-of-way.

There are similar issues with compliance with the Historic Preservation Act. These rules are designed to prevent construction from disturbing buildings that are designated as historic properties or to protect against disturbing archeological sites. Again, this doesn’t make sense when fiber is constructed in public rights-of-way along existing roads which were previously excavated when the road was first constructed. There are times when commercial companies undertake these reviews, such as when they build fiber across country away from roads or if they are going to build on an Indian reservation. But no commercial contractor would ever consider such a review if they are building along public roadways.

The primary problem with these requirements are that they add both cost and time to a project. The prevailing wage issue can sometimes drastically increase the cost of a project if there is a big difference between actual wages and prevailing wages. And the other reviews can cost hundreds of thousands of unnecessary dollars, but worse can add a big delay at the start of a project, which by definition makes a project more expensive.

So be careful before taking federal or state monies that you first read the fine print. I know of a number of projects that were part of the stimulus grants a few years ago where awardee returned the grant money once they understood the real cost of compliance. Sometimes government money costs more than its worth.