Tag Archives: RUS

Subsidized Interest Rates

The recent increase in interest rates suddenly makes it more attractive to pursue subsidized government interest rates to build broadband. Meeting debt payments is one of the primary hurdles to launching a successful broadband expansion.

We’ve been lucky over the last decade that interest rates have remained historically low. At a few points, the Federal Reserve rate almost got to zero. In a cycle that I’ve seen many times during my career, businesses get so used to low interest rates that they begin believing that interest rates will stay low forever.

But historically, interest rates have risen and dropped in response to changes in the economy. Over the last decade, the federal government made the deliberate decision to keep interest rates lower than where the market would have normally taken them.

But this year, the reemergence of inflation has forced the Federal Reserve to raise its core federal funds rate several times, and it’s up to 2.5% after starting this year at around 0.25%. There are strong indications that the rate might be raised more, although some of the inflationary pressure is starting to ease. The Federal Reserve rate is important because it is the rate at which large banks borrow from the government, and so increases in the Federal Reserve rate translate instantly into higher bank loan rates and ultimately into higher municipal bond rates.

Suddenly, federally subsidized interest rates look attractive again. The primary federally subsidized interest rate for broadband comes from the Rural Utility Service (RUS) which is part of the USDA. The RUS has always had the ability to offer low-interest-rate loans for projects that hit its target profile of bringing broadband infrastructure to rural locations. The agency currently has several billion in available loans at its disposal.

There are a few other federal programs that can offer lower rates through loan guarantees. In these situations, a borrower works with a bank, and the loan repayments are guaranteed by a federal agency, which generally translates into a lower interest rate. The HUD 108 program can guarantee loans that are used to build infrastructure in areas with lower-than-average incomes. The SBA 504 Loan Program can guarantee loans to start-up businesses, with half of the loan coming from a bank and half loaned or guaranteed by the SBA. The USDA Business and Industry Guaranteed Loans (B&I) can be used to subsidize loans that spur economic development.

Many ISPs don’t like using federal loans for a number of reasons. Applying for federal loans requires a lot of paperwork and cost to prepare, and the loan approval process is not quick. Federal loans often come with harsher requirements for borrower surety, meaning a borrower often has to pledge the entire business to get the loan. Government loans often don’t mix well with other kinds of financing since the federal loan generally requires first priority for repayment. Federal loans sometimes restrict dividends from the loan project until the loan is retired. Finally, federal loans require more reporting.

But even with all of these restrictions, the lower interest rates start to look attractive when a project doesn’t pencil in at normal bank interest rates. An RUS loan at 2% might be worth all of the extra hassle if market interest rates are 5% or 6%.

I know many ISPs who purposefully weaned themselves from federal loans over the last decade to avoid the extra work and inconvenience. This was relatively painless when there wasn’t a big difference between bank rates and the interest rates offered by federal programs.

We have no way to know if today’s higher interest rates are a temporary blip or if interest rates will stay high and return to the traditional up-and-down fluctuation that has been more historically normal. One of the bets you’re making when you pursue a federal loan is that rates will stay high and that the benefits of the lower rates will provide a long-term advantage. ISPs all over the country are likely doing the math to consider the options, and I’m sure that in many of these deliberations that federal loans are back on the table.

Giving the BEAD Grants to the States

One of the most interesting discussions running around the industry is asking why Congress gave the immense power of the $42.5 billion BEAD grants to the states. Large grant programs in the past have been controlled at the federal level. Of course, the only people who know for sure are those that crafted the language in the Infrastructure Innovation and Jobs Act.

Congress had a number of options for how to distribute this grant funding. They could have given a role to the FCC, NTIA, USDA, or to the States. They easily also have divvied up the money and given some to each of the above – with the concept that this is a chance to see what works the best. The Act has a little bit of spreading the money around. For example, the Act gave an extra $2 billion to the USDA and the RUS ReConnect Grants. The FCC will be riding herd over the $14 billion that has been allocated to the Affordable Connectivity Program that provides discounts on broadband for qualifying low-income households. But the big grant money is going to the states with overall grant rules administered by the NTIA.

I think the awards make it clear that Congress doesn’t trust the FCC to administer a big grant program. It appears that the FCC has sullied its reputation in the way it administered the RDOF awards. Congress has repeatedly heard how unhappy constituents are with that program. Back when the idea of a giant infrastructure bill was first circulated, there was serious discussion about letting the FCC distribute the money in a giant reverse auction – and the first draft of the House bill did just that. Thankfully some sanity prevailed in Congress since that would have been a boondoggle of unprecedented horribleness. The FCC made a lot of blunders with the RDOF awards (as they had blown the CAF II program in earlier years).

It makes sense not to give the money to the FCC. I think the FCC chose the reverse auction because the agency knows it doesn’t have the staff or expertise to review complex and overlapping federal grant requests. But the agency is not supposed to have that kind of staff – the FCC is a regulatory agency that makes and enforces rules. There is nothing in that job description that would entail having a large technical staff capable of administering billions of dollars of grants. I can only hope that somehow this new gigantic funding will dissuade the FCC from holding a second round of RDOF or a 5G reverse auction that is being contemplated at the agency.

It’s clear that some in Congress like the RUS, which is part of USDA, and there have now been several annual rounds of ReConnect grants. But the RUS also doesn’t have a staff capable of quickly processing tens of billions of grants. The ReConnect grant program is paperwork-heavy, and the RUS is known for being deliberate in awarding grants and loans. Deliberateness is a great characteristic when dispensing federal dollars, but it would be a challenge for the RUS to award BEAD grants quickly.

Congress could also have given the grant obligation to the NTIA directly, but the agency has even less staff able to review grant requests than the RUS. It’s hard picturing the NTIA staffing up quickly enough to dispense $42 billion in grants. However, Congress did trust the NTIA to set the policy for the new BEAD grants. It could have given that task to any of the three agencies. The NTIA recently set the policies for the recent ARPA grants, and this probably means that somebody in Congress appreciated that effort.

Giving the money to the states might be the only practical way to dispense this money with any sanity. I’m hearing that state broadband offices across the country are adding significant staff in anticipation of these grants. That will mean many hundreds of grant reviewers and administrators – far more than any of the federal agencies could have mustered in a short period of time.

But giving the money to the states was an interesting choice because each state will put its own stamp on how to spend the money. I know that the NTIA has been given the task of making sure that the grants meet the intentions detailed by Congress in the Act. But I’ll not be surprised to see states push the boundaries of the grant rules or even defiantly disregard them. States know that this is likely the only chance to solve the rural broadband problem, and I don’t picture states failing to award grant money to places that need it, regardless of how Congress wrote the rules.

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.

Banking Challenges for Fiber Builders

I’ve often mentioned in this blog that it’s gotten harder to finance fiber infrastructure. Today I want to discuss a few of the specific issues that fiber builders face when trying to find bank financing. There are two traditional sources of funding for the industry – the Rural Utility Service (RUS) and CoBank.  However, many fiber builders don’t qualify for this funding since both institutions favor established mature companies. Any company that doesn’t fit the profile of these two lenders must turn to the only other source of funding – local and regional banks. Following are some of the issues I see when trying to borrow from banks.

Familiarity with the Industry. Local banks often are leery about lending to telecom companies because they are not familiar with the business and they fear lending into an unknown industry. Local banks are much more comfortable lending to businesses they understand and make loans to car dealers, retail stores and the other kinds of local businesses that have been their long-term core borrowers.

Amount of Borrowing. Every bank has some pre-determined maximum amount they are willing to lend to any one borrower and it’s easy for a fiber overbuilder to quickly hit this limit. I’ve rarely met a fiber overbuilder who doesn’t see endless opportunities for expansion and it’s not hard to hit a bank’s maximum lending limit.

Loan Terms. Local banks are often uncomfortable with the longer-term loans needed to finance fiber.  Banks prefer to make loans for relatively short periods of time, with their preference being short loans of 2 – 5 years. Fiber builders are often forced to only chase projects that fit the short loan terms – which means cherry picking only the best opportunities. In doing so they will be passing up opportunities that would thrive and produce good returns with a longer loan terms of 5 – 15 years.

Collateral. Banks are often uncomfortable with a fiber network as collateral. It’s not hard to blame them for this. A fiber network, once in the ground or on the pole does not automatically have a liquidation valley equal to the cost of the construction. The real value of a fiber network is the revenues from customers who are added to the network – and banks have a hard time accepting this concept. A little research will show bankers that failed fiber ventures have often liquidated the physical fiber network for pennies on the dollar, and that rightfully frightens them.

Quantifying Risk. It can be difficult for a bank to understand the downside risks of building a fiber project. One of the key steps to making a loan is to understand the likelihood of the borrower not meeting the proposed business plan, and bankers have a hard time quantifying and getting comfortable with the potential downsides of the proposed business.

Meeting Metrics. Many banks are driven by metrics – meaning that they look for key financial performance metrics from a borrower. It’s hard to meet the typical metrics for a new fiber network. When a network is first built it boosts the balance sheet – but revenues then lag a few years behind until the new network has enough customers to meet expected metrics. This cycle of early losses followed by eventual gains does not fit easily into the expectations of a metric-driven bank.

Unfortunately, any one of these issues can convince a bank that the fiber loan is too risky or doesn’t fit their comfort zone. Many banks are comfortable with infrastructure loans, but there are infrastructure loans that better meet their expectations. Consider a loan to build an apartment complex. There is the same period of zero revenues while the buildings are constructed, but the expectation is that the borrower will then quickly reach full revenues within a relatively short period after the end of construction. An apartment building also provides comfortable collateral because there is an established market for selling repossessed buildings. Bankers in general understand the apartment complex operating model and are comfortable with the variables of operating an apartment building.

Fiber overbuilders need to be prepared to tell a story that can get a banker comfortable with each one of these concerns. I always advise fiber builders that they must put themselves into the banker’s shoes and look at their own business plan as a skeptic. I’ve often seen fiber builders who point to a business plan that eventually makes a lot of money and who can’t understand why a banker doesn’t see their plan the same way they do. Many of the misgivings that a banker might have about funding a fiber project are legitimate and the borrower must convince the banker that the overall level of risk is small – a tall task.

Restricting RUS Funding

The major large ISP lobbyists have asked Congress to block the use of Rural Utility Service (RUS) funding to overbuild areas that have only rudimentary broadband today. The heads of the National Cable & Telecommunications Association, the American Cable Association, USTelecom and the ITTA – the major lobbyists for the big ISPs – wrote a joint letter to the chair of the Senate Agricultural Committee. The letter requests that the upcoming Farm Bill restrict funding from the RUS to be only used for overbuilding to rural areas where at least 90% of homes don’t have access to 10/1 broadband. There are almost no such places left in the country, at least on paper, so this would effectively gut RUS funding from being used to improve rural broadband.

In the original CAF II program the FCC gave the big telcos billions of dollars to upgrade a lot of rural areas to speeds of at least 10/1 Mbps. In the upcoming CAF II reverse auction the places that weren’t included in the original CAF II program are slated to get upgrades to the same 10/1 Mbps speed. On paper this means there will be few  places that don’t have access to 10/1 Mbps broadband. Even where the telcos have supposedly upgraded to 10/1 there are likely to be large number of homes that don’t even get that rudimentary speed. Unfortunately the big telcos control the rural agenda since they are the ones that report consumer speeds on the broadband maps – and those maps are going to show that the telcos did a good job with upgrades, even when they didn’t.

Meanwhile these same big telcos have made it clear that they aren’t going to be investing in rural America.

  • CenturyLink’s new CEO recently said the company was no longer going to invest in infrastructure with low returns, meaning that they won’t be making any more investments in their last mile networks.
  • AT&T and Verizon both have asked the FCC to make it easier for them to walk away from rural copper lines, and both companies are pursuing a fixed cellular solution for providing rural voice and broadband.

These giant telcos are not willing to invest in their own networks – but they also don’t want anybody else building there. These companies took billions in free federal money to nudge rural broadband speeds up to a crappy 10/1 Mbps, and they are now basically telling the people that live in these areas that 10/1 Mbps is all of the broadband they will ever need or are ever going to get.

The RUS money is largely being used by smaller independent telcos, rural electric cooperatives and Indian tribes that want to invest in better broadband in rural America. A lot of RUS funding is being used to build fiber, the ultimate broadband upgrade. I imagine a number of companies bidding in the CAF II auction are planning on using RUS funding to complete those builds – but if this makes it into the Farm bill  that won’t be possible.

The only other entities interested in building rural fiber are rural governments. In states where it’s allowed they are looking for broadband solutions for their rural towns and counties and are often willing to make significant investments to make sure that their communities don’t get left behind. Most rural communities don’t want to be ISPs and they are helping to fund public / private partnerships with these same small telcos and electric coops to get better broadband – and those partners often look to the RUS to complete the funding.

The big telcos have political smarts and are trying to get this buried into the Farm Bill – something that will inevitably pass. This will allow politicians to vote for this provision while not having gone on record as siding with the big telcos. But make no mistake about it – any politician that supports this idea is choosing the big telcos over their rural constituents. Politicians only need to visit any rural part of their state to understand that broadband is now at the top of the priority list for most rural communities. These communities understand that those places that don’t soon get broadband are going to become economically irrelevant and will eventually wither away.

This letter was prompted by the fact that Congress recently awarded $600 million for expansion of rural broadband through the Ray Baum’s Act of 2018 that reauthorized the FCC budget. Those funds will be administered by the RUS. I predicted when that bill was passed that the big telcos would look for a way to make sure that most of that new money goes to them. It looks like I’m right, because if the Farm Bill passes with the requested change, then little or none of the $600 million will be of use to anybody else for building better broadband.

I hope that the small telcos and electric cooperatives react promptly and loudly to this proposed bill amendment, because it effectively guts RUS funding. This funding has been used for decades for overbuilding better broadband networks in areas served by the big telcos – and this one change would kill that.

I spend a lot of time talking about the ‘rural broadband problem’. But as I look at this lobbying effort I need to start talking about the ‘big telco problem’. All of the rural places that still don’t have good broadband are served by these big telcos. The rest of telcos and other companies that operate in rural America are finding solutions for better rural broadband. These big telcos have refused to reinvest the billions of profits they have made back into rural America and are now trying to make sure that nobody else makes those investments. The big telcos want to milk every last penny they can out of rural America.

$600M Grants Only for Telcos?

The Omnibus Budget bill that was passed by Congress last Thursday and signed by the President on Friday includes $600 million of grant funding for rural broadband. This is hopefully a small down payment towards the billions of funding needed to improve rural broadband everywhere. As you might imagine, as a consultant I got a lot of inquiries about this program right away on Friday.

The program will be administered by the Rural Utility Service (RUS). Awards can consist of grants and loans, although it’s not clear at this early point if loan funding would be included as part of the $600 million or made in addition to it.

The grants only require a 15% matching from applicants, although past federal grant programs would indicate that recipients willing to contribute more matching funds will get a higher consideration.

When I look at the first details of the new program I have a hard time seeing this money being used by anybody other than telcos. One of the provisions of the grant money is that it cannot be used to fund projects except in areas where at least 90% of households don’t already have access to 10/1 Mbps broadband. One could argue that there are no longer any such places in the US.

The FCC previously awarded billions to the large telcos to upgrade broadband throughout rural America to at least 10/1 Mbps. The FCC also has been providing money from the A-CAM program to fund broadband upgrades in areas served by the smaller independent telephone companies. Except for a few places where the incumbents elected to not take the previous money – such in some Verizon areas – these programs effectively cover any sizable pocket of households without access to 10/1 broadband.

Obviously, many of the areas that got the earlier federal funding have not yet been upgraded, and I had a recent blog that noted the progress of the CAF II program. But I have a hard time thinking that the RUS is going to provide grants to bring faster broadband to areas that are already slated to get CAF II upgrades within the next 2 ½ years. Once upgraded, all of these areas will theoretically have enough homes with broadband to fail the new 90% test.

If we look at past federal grant programs, the large incumbent telcos have been allowed a chance to intervene and block any grant requests for their service areas that don’t meet all of the grant rules. I can foresee AT&T, CenturyLink and Frontier intervening in any grant request that seeks to build in areas that are slated for near-term CAF II upgrades. I would envision the same if somebody tried to get grant money to build in an area served by smaller telcos who will be using A-CAM money to upgrade broadband.

To make matters even more complicated, the upcoming CAF II reverse auction will be providing funds to fill in the service gaps left from the CAF II program. But for the most part the homes covered by the reverse auctions are not in any coherent geographic pockets but are widely scattered within existing large telco service areas. In my investigation of the reverse auction maps I don’t see many pockets of homes that will not already have at least 10% of homes with access to 10/1 broadband.

Almost everybody I know in the industry doesn’t think the large telcos are actually going to give everybody in the CAF II areas 10/1 Mbps broadband. But it’s likely that they will tell the FCC that they’ve made the needed upgrades. Since these companies are also the ones that update the national broadband map, it’s likely that CAF II areas will all be shown as having 10/1 Mbps broadband, even if they don’t.

There may be some instances where some little pockets of homes might qualify for these grants, and where somebody other than telcos could ask for the funding. But if the RUS strictly follows the mandates of the funding and won’t provide fund for places where more than 10% of homes already have 10/1 Mbps, then this money almost has to go to telcos, by definition. Telcos will be able to ask for this money to help pay for the remaining CAF II and A-CAM upgrades. There is nothing wrong with that, and that’s obviously what the lobbyist who authored this grant language intended – but the public announcement of the grant program is not likely to make that clear to the many others entities who might want to seek this funding. It will be shameful if most of this money goes to AT&T, CenturyLink and Frontier who were already handed billions to make these same upgrades.

I also foresee one other effect of this program. Anybody who is in the process of seeking new RUS funding should expect their request to go on hold for a year since the RUS will now be swamped with administering this new crash grant program. It took years for the RUS to recover from the crush of the Stimulus broadband grants and they are about to get buried in grant requests again.

Maybe Coops are the Answer

I’ve been talking with a lot of rural counties lately and also with rural service providers. For the vast majority of rural broadband projects the biggest roadblock to getting started is almost always funding. Building fiber-to-the-home or even fiber backbones to extend fiber deeper into rural communities is expensive and there are not a lot of funding sources ready to support fiber projects. But there is one business structure that can sometimes make financing a little easier and perhaps it is time for more communities to consider forming a cooperative as a way to get a broadband solution.

Cooperatives are governed under federal law by the Capper Volstead Act. There are also state laws governing coops that differ a bit from state to state, but are mostly the same everywhere. A cooperative is a legal entity owned and controlled by its members and members generally are also the consumers of its products or services. Cooperatives are typically based on the cooperative values of self-help, self-responsibility, community concern, and caring for others. Cooperatives generally aim to provide their goods or services at close to cost and any excess earnings are generally required by law to be reinvested in the enterprise or returned to individual patrons based on patronage of the cooperative.

There are several advantages of coops that make them worth considering:

  • Coops are corporations and not municipal entities. Coops ought to be exempt from all of the many state laws that prohibit or discourage municipal ownership of broadband networks. If you’re in a place that makes it hard to create a municipal broadband solution then a cooperative might be a great alternative.
  • Cooperatives don’t have the same profit-motive as privately-owned entities. From a financing perspective this makes them look more like a municipal venture in that a coop is happy with cash flows that cover costs rather than having to also make a profit.
  • Cooperatives often have some tax advantages over other kinds of corporations. For example, ‘profits’ from serving their customers is often income-tax free. This can vary by state, but for the most part cooperatives pay little income taxes as long as they focus only on serving their own members.
  • The typical financing sources for broadband are used to working with cooperatives. The RUS, part of the Department of Agriculture has a long history of lending to cooperatives. CoBank, a bank that is part of the US Farm Credit System was established specifically to loan to agricultural, electric and telecom cooperatives. While the RUS was tasked a number of years ago to include municipalities under their umbrella, the nuances of that program make it nearly impossible for a municipality to borrow from them.
  • Cooperatives have a unique funding source that is not available to anybody else. Coops are allowed to loan excess cash to each other and I’ve seen new coops get low, or even zero interest loans from other cooperatives to help them get started. Many older electric and agriculture coops sit on big cash reserves that they might consider lending – particularly when the new telecom cooperative covers the same member territory.

But as you might expect, there are other issues that present challenges for new cooperatives:

  • Any lender to a new fiber venture is going to want to see some equity put into a new venture so that it is not 100% financed. It can be more of a challenge for a cooperative to raise equity compared to a commercial company because there is no way to guarantee that such equity will earn a good return or that it can be returned in any reasonable time frame. So this basically means that an equity drive means asking prospective members in the community for money. I’ve seen a few cooperatives get started and it can be done – but it’s not easy.
  • Cooperatives are governed by Boards elected from the membership base. Existing coops hire employees to operate the business and these employees provide the technical expertise that makes lenders trust lending to the business. But until a new cooperative is funded and can hire those employees there is a classic chicken-and-egg dilemma in that a lender can’t be positive that the cooperative knows how to operate their business.
  • The local acceptance of the cooperative idea varies by region. In some places in the Midwest a majority of local businesses are cooperatives, but there are other places where there are few if any cooperatives.

There are many situations where a cooperative might be the only reasonable operating structure for a rural area to get the broadband they want. If a community is not finding any solutions from a commercial provider and is unable to provide municipal funding, then a cooperative is well worth considering.

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.