Progress on Federal Infrastructure Funding?

I’ve been continuing to follow the federal plans to launch a massive $1 trillion program to rebuild infrastructure, with an eye on possible funding for broadband.

The latest White House proposal includes $25 billion for broadband, spread over ten years. That’s obviously not enough to solve our broadband problem everywhere, but it certainly could put a big dent in it.

The first thing needed to understand the issue is a good estimate of the size of needed investment to build fiber. Back in 2013 an article in Forbes estimated the cost to build fiber everywhere at $140 billion, with the cost to get to most populated areas at half that. Just recently I saw a few news articles citing an estimated cost of $85 billion to bring ‘broadband’ to rural America. But I can’t track down who’s making that estimate or if ‘broadband’ means fiber everywhere or some mix of broadband technologies. But it’s obvious that the cost is going to be greater than $25 billion.

But there is another aspect of the White House proposal that we need to keep an eye on. They envision the government kicking in $200 billion with the rest of the $1 trillion coming from the private sector. Even if the entire $200 billion is in the form of outright grants, that means that a project funded under the federal plan would be getting a 20% grant and would have to somehow finance the other 80% of a project.

I’ve created a lot of rural business plans over the past few years and I can tell that a 20% grant is not going to work in financing rural fiber. That amount of grant might be sufficient when talking about rural county seats and other pockets of somewhat dense population. But all of the studies I’ve done show that it will require grants of 40% to 80% to finance building in rural America.

I also worry that part of the federal funding might also include loans, like was done a few years ago with the Stimulus broadband awards. Some of those projects got a mix of outright grants as well as long-term loans from the RUS. If the federal contribution is not all grants then its usefulness in rural America will be even more diminished.

This is not to say that the federal program might not offer different levels of grants and not stick to the overall 20% for everything. But if 20% grants are all that is offered there are not going to be many takers. A grant of that magnitude probably might bring fiber to suburbs and mid-sized towns, but not to rural America.

If the grants were set to 50% of the cost of a project it would stimulate a lot of rural fiber construction. We’ve seen this in action in programs like the DEED grants in Minnesota that have been funding $20M to $30M per year in the form of matching grants. In that state the various LECs, from the smallest up through CenturyLink, are using grant money to bring broadband to unserved rural customers. But Minnesota is unusual and is one of a handful of states where there are numerous telcos willing to branch out to serve the areas around them if these kinds of grants are available.

One of the biggest hurdles I see for building rural broadband is the availability of private capital. Even with a 50% grant the operators of these new networks will need to finance the other 50% of the projects. There is certainly cash available for this and having a federal infrastructure program might attract more lenders. But there is a natural lending limit on all telcos, big and small.

A large percentage of the smaller telcos I know have already been borrowing money to build fiber within their own operating areas, and those companies are not going to be able to borrow much more money even if it is available. Even the big companies have constraints. CenturyLink currently has an annual capital budget of about $3 billion per year and that is largely going towards building fiber in their urban markets. It’s hard to see them taking any real interest in building rural fiber if they have to borrow to do so. Many of the mid-sized telcos like Frontier and Windstream are already heavily leveraged and would have a hard time borrowing much. And Verizon and AT&T have made it very clear that they no longer want to be in the rural wire business. I’m not sure those companies would take on these networks if the federal government paid for all of it.

So having a federal broadband infrastructure program sounds great. But when you look a little closer at how it might work it starts to look troublesome. There are certainly a number of companies that would step up to build rural broadband if the grants are large enough to make the numbers work. But I’m not sure that there is any combination of companies that are able or willing to tackle all of the areas without broadband. It could end up being a program where there is more funding than takers.

An Effective Federal Broadband Program, Part 3

outdoor-indoor-cable-161This is the third in my series of blogs looking at the best way to administer a federal broadband construction program. Since there is talk of having an infrastructure program that might include money for broadband, I hope that the folks at places like the NTIA are giving these issues some thought. The last time around the stimulus grants caught them and the whole industry by surprise. But this time, with some advanced thought and planning we can do better and get more bang from any federal dollars. After all, if there is a broadband program, it ought to have the number one goal of bringing broadband to as many people as possible. Following are some additional thoughts on structuring a federal program:

Consider Local Conditions More. The stimulus grants included a simplistic formula that offered different levels of grant funding to served and underserved communities. We need to get more sophisticated this time around and realize that the cost of broadband networks has a lot more to do with terrain and density than it does with whether customers are served or unserved. There is a huge difference in the cost to reach an unserved customer in the open plains of the Midwest compared to Appalachia. And other local conditions like the state of poles can make a big difference in cost. The CAF II funding took a stab at the differences by using proxy cost models to try to reflect the relative cost to construct in different parts of the country. But even those models are too simplistic and we can do better.

This also means that there should be no predetermined formula that determines of the amount of matching funds that are available for any project. Sparsely populated areas might require more than 50% federal matching to make the numbers work. I know it’s difficult to not be formulaic, but ideally each proposal for funding should be analyzed on its own and the appropriate funding award made according to the circumstance.

Be Open to Funding All Qualified Providers. The stimulus grants (particularly the ones awarded by the RUS) had a built in bias to give the money to existing RUS borrowers. For broadband that means basically small telcos and some electric coops. If we want to get broadband to the most rural places, then anybody willing to step to the plate with a good business plan and some experience needs to have an equal chance. This might mean ISPs, municipalities, cooperatives, cable companies or fiber overbuilders. There is angst among smaller carriers that any federal funding will go to the largest telcos and that smaller providers won’t get an opportunity to try for the money, as was done with CAF II.

Takes Time to have Shovel Ready Projects. At any given point in time there are not many shovel ready projects that are positioned to take funding immediately. My fear is that any federal program is going to come with a built-in clock ticking and will try to give out the money in a relatively short amount of time like was done with the stimulus grants. It can easily take a year to create a shovel ready project even for a community that is highly motivated. There are a lot of steps that must be undertaken before completing a grant application. And if there is a requirement that the matching funding must be in place in order to participate then that time frame can easily be a lot longer. So my hope is that any program gives the industry enough time to get ready. If the funds are going to be awarded within a year then it’s going to be a disaster and a lot of bad projects will get funded just because they were able to scratch together the funding request quickly. This can be successful if broadband money can be awarded over a two to four-year period rather than all at once. The longer the time frame, the better the proposed projects will be.

Don’t Break the System. There are a limited number of firms available to help put together business plans and to make engineering estimates. If a federal program tries to give out a lot of money too quickly there are not enough qualified engineers and financial consultants available to get the work done – and it’s not easy for these firms to staff up with people that have the necessary existing knowledge. We also saw shortages with fiber cable and electronics right after the stimulus plan. All segments of the industry are staffed and geared to an anticipated level of demand and it’s hard for the whole industry to pivot and react quickly to a massive new demand for services and components.

Make the Grant Forms Understandable. I have been doing telecom accounting since the 1970s and there were things on the stimulus grants forms that I didn’t understand. Bring in a panel of industry experts early to make sure that the forms used to ask for money are done in a way that the industry understands. A format that asks for financial input in the manner that the industry keeps their books will provide a lot more consistency between grants requests.

Taking Federal Broadband Funding

USDAThe USDA recently announced a new round of loan financing for the Rural Broadband Loan and Loan Guarantee Program as authorized by the 2014 Farm Bill. The loans are administered by the Rural Utility Service (RUS), a part of USDA.

The loans are available to bring or improve broadband in areas where at least 15% of the households do not have broadband today. The loans can be used to build technologies that are as slow as the old FCC definition of broadband – 4 Mbps download and 1 Mbps upload, although the RUS will strongly encourage building technology capable of meeting the new broadband definition of 25 Mbps down and 3 Mbps up. The projects can range between $100,000 and $20 million.

Over the years I have helped numerous clients acquire these loans, but I have seen more and more reluctance to use them in recent years for a variety of reasons. Following are some of the issues my various clients have with this loan program:

Slow Response Time. I don’t know what the current backlog is, but there have been times over the last five years when a loan application might wait 18 months or more for a decision from the RUS. Those kinds of wait times might have been acceptable back in the days of all-regulated telephony, when companies worked slowly on five and ten year capital plans. But the world has gotten more competitive for everybody and nobody is willing to wait that long for a yes or no answer on a major capital program.

Paperwork. The loans take a lot of paperwork. The application itself is like writing a book and my firm has historically charged up to $20k for writing one of these applications – it’s that much work. And the paperwork doesn’t stop with the application. Once you’ve taken the loan there is major annual compliance paperwork that can overwhelm the staff of smaller borrowers.

Engineering. The loan applications for larger projects must be signed by a professional engineer, and this means that projects must be nearly fully engineered just to apply for funding. That differs from the rest of the industry where projects typically are done with ‘pre-engineering,’ which means that an engineer has made a very good estimate of the cost of the project, and in my experience those pre-engineered estimates are usually pretty reliable.

Extra Costs. Sometimes the loans require extra steps that are not required for other financing. For example, I’ve seen federally-funded loans require an expensive environmental study. Nobody else ever does this because fiber is almost always built into existing public rights-of-way, which by definition have already been cleared for these purposes. Depending on the size of the loan there can also be some kind of customer survey required.

Mostly Still for Regulated LECs. Most of the loans still go to regulated telephone companies for a variety of reasons. For instance, the projects usually require 10% to 20% equity from the borrower and also first lien against the assets built with the loan. These requirements have largely stopped government entities from using these loans. Another issue that these loans entail is that they have loan covenants that can be burdensome. As an example, there might be limits on dividends that can be paid to company owners while one of these loans is outstanding.

Rates are Not that Attractive. There have been times in the past when the RUS interest rates were significantly lower than commercial bank rates and thus were very attractive. But with today’s low interest rates there is currently not a lot of difference between the government rates and commercial rates. By the time you factor in all of the extra costs of applying for and complying with these loans, the RUS loans might be more expensive.

At times in recent years the RUS has built up billions of uncommitted funds because not enough borrowers have been interested in the money. Over the last decade I have helped more clients refinance RUS loans with other lenders than I have helped people get new RUS loans. I’ve read other articles that say that the RUS is too conservative. That may or may not be true, because for the carriers I know it’s generally one or more of the above factors that have turned them off government money.

I don’t want to sound like I am trashing the program, because RUS loans have helped to fund many worthwhile projects. But a lender needs to weigh all of their options and consider all of the costs of borrowing money from different sources. Borrowing money is about a whole lot more than just the interest rate and you need to take all of the other aspects of any loan into consideration.