The Infrastructure Crisis

infrastructure revealed

infrastructure revealed (Photo credit: nicolasnova)

This country has an infrastructure crisis. A lot of my blog talks about the need for building fiber since I consider fiber as basic infrastructure in the same way that roads, bridges and sewers are infrastructure. Any town without adequate fiber is already starting to get bypassed in terms of opportunities for its citizens and businesses. And this is only going to get worse with the upcoming Internet of Anything, because only fiber is capable of carrying the vast amounts of data that are going to be generated.

But this country has a crisis with every kind of basic infrastructure. We are not spending enough money to keep our roads, bridges, power, water and other basic infrastructure from slowly deteriorating. The backlog of infrastructure upgrades needed just to get the country back to adequate is staggering.

It has historically been the purview of government to take care of a lot of this infrastructure – and while the federal government takes care of interstate highways and some bridges, the obligation for keeping up with infrastructure falls largely on state and local governments.

And those government entities do not have anywhere near the borrowing capacity to begin tackling the cost of fixing everything that needs fixing or updated. And local property and other taxes would have to be increased a huge amount to pay for it all. Even if there was a taste for doing the needed upgrades, the recent economy has brought many local governments up against their borrowing limits. And we are starting to see municipal bankruptcies, small and large, which is a sign that the municipal borrowing system is cracking around the edges.

And the ability for municipal entities to borrow could get much harder. The recent Detroit bankruptcy is just the tip of the iceberg in terms of large cities that are buckling under accumulated pension costs. And the nonsense going on in nonsense going on in nonsense going on in Washington with the federal debt ceiling might drive up interest rates.

Given all of these factors one has to ask if government financing is the best way to build infrastructure. There certainly are mountains of evidence that municipally funded projects cost more than similar projects constructed by private firms. And while municipal bond interest rates sound cheap, bond money is extremely expensive money due to the additives to bond borrowing such as capitalized interest and debt service reserve funds.

If this country has any hope of putting a dent in the huge infrastructure hole we find ourselves it is going to have to come from bringing private capital to bear on the problem. Where there is a financial crush in the public sector today we are looking at huge amount of private equity on the sidelines today just waiting to be invested in good projects.

The trick to attracting private money for infrastructure is to find a good way to forge public / private partnerships. Unfortunately, there is one key missing component that is making it hard to bring private money into infrastructure deals. And that is development capital.

Development capital is the money that is spent up front in a project to take it from concept to working plan. This includes such things as creating business plans, doing basic engineering, identifying hurdles and solutions – all of those early steps that private equity expects to be done before they will consider a project. In layman’s terms, private equity investors expect somebody else to have done the legwork to prove the feasibility of a project before they will consider it.

We have a development capital gap in this country. There are very few entities today that are willing to tackle spending the development capital needed to prove infrastructure projects. And so hundreds, even thousands of worthy projects are going undone because nobody is willing to spend that first 1% of a project needed to get it started.

What we need is a person or a group of people to step up to provide development capital. This could be government. For instance, for the cost of building one bridge they could instead provide the public development capital to build one hundred bridges. So state governments might be a great place to get this done.

It could also be done privately, meaning that somebody needs to create funds that strictly are development capital. Such funds could produce fantastic returns. But this is a concept that is alien to US investors.

But somebody needs to figure out how we get development capital or our infrastructure is going to continue to deteriorate until we have no choice but to fix it directly with tax dollars.

The Last Telephone Monopoly

English: Concertina razor wire at a prison

English: Concertina razor wire at a prison (Photo credit: Wikipedia)

There is still one last monopoly in the telephone world and that is for rates charged in many of the prisons and jails in the US. Some of the rates charged to prisoners for making a call are extremely high as will be shown below.

The prison calling industry has changed a lot over the last thirty years. Thirty years ago most of the calling from prisons was handled by the telephone companies, and for the most part inmates had to go through live operators and make collect calls. But over the years the prisons and jails have required a number of special features, referred to as penological features, that allow them to monitor and control inmate calling. These various penological features have forced the industry to shift to specialty providers who have developed solutions that deliver the needed penological features. So today there are a handful of prison telephone providers who each serve large numbers of facilities – companies like Securus, Global Tel-Link, ICS and FSH Communications.

I call this a monopoly market because at each jail or prison there is only one service provider. Generally the service providers compete to serve a facility through an RFP process, so one would assume that the calling rates would be competitively set. But just the opposite occurs. In most states the telephone service providers are required to pay a commission back to the prisons for each call billed. Over the years these commissions have increased and there are some commissions as high as 60%, although most are more in the range of 30% to 40% of the billings. The RFP generally seems to get awarded to the carrier that will offer the highest kickback to the prisons.

This Table of Prison Rates is a summary from a magazine called Prison Legal Review from 2011 that summarizes the rates in each state. The rates don’t change much over time so this ought to still be fairly accurate. As you can see, rates vary widely by state and also by jurisdiction. The lowest rates are in New York where rates for all jurisdictions are a flat 4.8¢ per minute and the highest rate is in Washington state where an interstate call has a $4.95 setup fee plus 89¢ per minute.

You can see from this table that the intrastate rates in most states are lower than the interstate rates because the state commissions in most states have set a cap on the prices that can be charged for prison calling. But most of those rates were set in a different time in the past where a lot of the calls from the prisons required a live operator. Today very few calls require an operator and most prisons offer both collect and pre-paid calling to prisons which are both totally automated. Other states have set prison calling rates to be the same as payphone rates since the phones in a prison resemble a payphone in technology (although none of them allow for coins to be used to pay for calling).

The prison service providers are obviously making a lot of money on the calls with high rates. If there are service providers willing to bid on the business in a state like New York or other states where the calling rates are relatively low, then these same providers are obviously making a huge margin per call in states where the rates are high, even after paying commissions.

One might ask why it matters what the rates are in prisons and I think there are several reasons:

  • Studies have shown that allowing prisoners to keep in contact with family is an important aspect to rehabilitation and of them not returning to prison. The high rates make it very difficult for most prisoners to keep in regular contact with the outside world. The real victims of high calling rates are the families of inmates. It only takes a few short calls at the rates shown in the table to hit a $100 monthly bill for calling. Many families are forced to severely limit calling due to the cost.
  • The high rates make it very hard for prisoners to stay in contact with their lawyers, for the same reason of cost.
  • It just feels wrong to have a niche of the market where a carrier can land a deal that allows it to charge a huge set-up fee and 89¢ per minute. And the whole system of commission kickbacks feels wrong. This is not analogous to having high rates for public payphones because the public can choose to avoid payphones. But if an inmate wants to call they have no option but to go through the monopoly provider at their prison.

There does not seem to be much momentum to change things. Prisons are very happy with the commission kickbacks. It’s a source of revenue outside of what they are funded by the states or federal government. Very few state commissions seem to be concerned enough about the issue to accept dockets that examine the issue. There has been an open docket at the FCC for many years that has never been decided.

But I think everybody in the industry understands that cost of long distance calling has fallen through the basement. Wholesale long distance can be purchased for a penny or two at most per minute, and it’s obvious by the prison rates in New York that the penological requirements can be met for a relatively low amount per minute. And so anything over the New York rates are simply the last abuse of a monopoly power that has been broken for every other kind of calling.