Should Government Budgets Be Rich in Fiber?

With the avalanche of federal cash to boost and enhance broadband connectivity will come a temptation for Minnesota to deviate from a proven track record of what works.

Ever since the federal government’s spigot was turned to “full open” to deal with the pandemic, broadband access and expansion has been an increasingly prominent feature of all the COVID economic recovery initiatives.  The amount of money the federal government has appropriated over the last couple of years to broadband access resembles the progression of pot size over the course of a poker tournament.  It started with a very modest $125 million in the CARES act, followed by $7 billion in the Consolidations Appropriations Act, followed by $20 billion in the American Rescue Plan Act (which included economic assistance to low-income households for broadband access).[1]  Now the government has gone “all in” to try to close the digital divide with another $65 billion dedicated to broadband in the Infrastructure Investment and Jobs Act.  And this doesn’t include $20 billion already provided but not yet spent through the federal government’s Rural Digital Opportunity Fund Program or the Governor’s proposed $170 million in his supplemental budget.  That $170 million by itself, according to the Governor’s news release, is intended to “finish the job of bringing border-to-border broadband access to all Minnesotans.”

There is good reason for the effort.  Broadband has now joined the basics like water and electricity as fundamentals of the modern economy.  As the FCC in its National Broadband Plan stated, it is “the foundation for economic growth, job creation, global competitiveness and a better way of life.”  Numerous studies by the Federal Reserve and others back this claim up.  The World Bank has estimated a 10-percentage point increase in broadband participation can lead to a 1.2% jump in real per capita GDP growth in developed economies.

All this money is guaranteed to turn up the heat on an ongoing and highly contentious policy debate: if and to what extent governments should be in the business of building and operating broadband networks themselves.  The debate has been on high simmer for well over a decade.  The billions in new funds will likely bring the topic to a full rolling boil.

Few would dispute that government has a role to play in closing the digital divide and making broadband accessible to the unserved and underserved.  But government owned networks (GON) cross a controversial line from being a regulator/partner to competitor in the commercial telecommunications marketplace while retaining the role of regulator by controlling access to the public right of way and approving, denying, or delaying permit applications of existing providers. 

The information warfare between the community broadband advocates and private sector communications providers over the last decade-plus has been fierce.  Advocates argue lack of access, substandard services, and need for more competition all justify communities and local governments providing this service to meet the needs of citizens and local economic development.  Opponents argue a lengthy list of GON failures indicates governments are ill-equipped to develop, operate and maintain commercial broadband networks.  And those that continue to operate owe their existence and viability to large direct and indirect subsidies that constitute unfair competition while at the same time often targeting the most lucrative submarkets to make the economics work and impeding private infrastructure investment in the process.  

The debate is complicated by the fact that GON captures many different governance and service offering models.  Plus, the contexts and circumstances surrounding each situation are unique making broad generalizations difficult.  Even the definitions and significance of “successes” and “failures” in these ventures is up for debate.  Nothing captures this better than the fact that both proponents and opponents of GON sometimes cite the same case studies to bolster their arguments.  

This Is Not the Local Muni Liquor Store

What government broadband advocates and critics do agree on is that these ventures entail far more financial risk than the usual types of business enterprises governments run.  In situations where an existing municipal owned utility or an electric cooperative is available to add broadband to their services, preexisting advantages and spillover benefits between electrical and communications segments (e.g., bonding authority, existing rights of way, poles, interdivision loans, etc.) help improve deployment economics.  The most prominently promoted success stories often involve an expansion of some existing municipally-owned utility’s service offerings, although some have concluded that detailed financial analysis of these success stories show that many remain cash flow negative and those that achieve positive cash flow still require decades to recoup their costs.[2] Operating and maintenance demands are no less part of the risk calculus.  In an era in which “crumbling” has become the default adjective used to describe the condition of road, water, sewer, and other already existing government infrastructure, the details and requirements of governments assuming another and more technically complex infrastructure maintenance regime bears consideration. 

Financial risk is also a function of GON business models and service offerings.  From our review of the case study literature, government retail networks competing directly with established ISPs appear to entail the greatest risk.   Ineffective marketing programs and campaigns, negotiation failures, inadequate staffing levels and competencies, pricing misjudgments, uptake projection shortfalls, and insufficient economies of scale are just some of the problems government retail networks have experienced leading to their demise or takeover.  In efforts to foster greater competition in the marketplace, retail GONs find themselves battling incumbent providers for customers resulting in price wars in which their private sector competitors’ response demonstrates them to be more than up to the challenge. 

Because of the elevated risks accompanying retail broadband, many GONs are now focusing their efforts instead on providing wholesale or “open access” services – creating fiber infrastructure that is leased to retail providers to connect them into the government network.  The intent is to promote competition and choice among ISPs while providing the highest quality, fastest, and relatively most “future-proof” broadband infrastructure to the community.  The federal government’s largess will likely prompt a lot more interest in this model, since the significantly higher upfront capital cost of fiber infrastructure is the primary economic barrier. 

But wholesale models entail their own operational and financial risks.  Constructing and maintaining a network to meet the needs and constantly new and evolving service offerings of a diverse array of ISPs is a technically challenging task (which is why many GONs choose to hire independent parties to operate the network).  Other challenges include recruiting credible ISP providers to participate in this venture.  Moreover, if a product has little differentiation (like an ISP offering only internet access), this can trigger “destructive competition” in econospeak.  Providers competing solely on price will inevitably run most of the providers out of business (or they consolidate) and the sought after competition effectively disappears.  Accommodating service differentiation among ISPs helps avoid this problem but comes with ongoing operating complexity and cost. 

It’s worth noting the Department of Treasury’s final rules for the use of state and local fiscal recovery funds for broadband “encourage recipients to prioritize investments in fiber-optic infrastructure wherever feasible.”  Some commenters on final rule making, however, argued that such high standards may have the potential to slow down expansion to unserved or underserved rural areas and observed that lower speeds best balance the dual needs of reaching all communities and maximizing the impact of federal funds.

Duplication of Infrastructure

The risks magnify where a significant and competitive private sector presence already exists.  One recent example from the Twin Cities area offers a representative study of commercial reality differing from expectations.

In September, 2011, the Eagan city council authorized construction of a 17-mile-wide open access wholesale fiber network owned by the city and open to any telecommunications carrier wishing to direct retail services to Eagan businesses.  “AccessEagan” as it was called was internally financed with some $1.5 million in transfers of telecommunications cell tower antenna lease revenues from its public utilities fund.  By 2017 it had expanded to 40 miles of fiber infrastructure supported by an additional $1.1 million of city public utility fund transfers.   

By 2019 another $500,000 in Public Utilities Fund cross-subsidies had been appropriated to address “revenue projections and anticipated future build-outs.”  This included $50,000 to hire outside marketing and sales support in an effort to boost customer and revenue numbers falling below projections and the city assuming more responsibility to build the “last mile” to customers in an effort to reduce ISP fiber leasee costs and ultimately end customer costs.  According to city budget documents, in 2019 budgeted operating expenses were expected to be more than twice revenues with additional capital outlays nearly equaling revenue projections.  In 2019, having incurred operating losses every year, the City accepted a recommendation to terminate AccessEagan as an enterprise operation and recognize it instead as a city asset which continues to serve the public sector’s broadband needs within the community. 

The classification flip from commercial enterprise to government asset is one way money losing commercial ventures can show up as government broadband success stories in the case study literature.  But click the dead-end weblink for AccessEagan today and you find a wide-eyed basset hound struggling with a stick way too big for it to handle by itself with the caption, “Whoops, we couldn’t fetch that.”  It’s perhaps a far more apt and descriptive final word on the venture than was ever intended.

Fiber to the Fish House?

Regardless of cautionary examples like this, the amount of money being made available will undoubtedly encourage local governments to explore developing and operating their own networks.  And a burgeoning broadband and economic development consulting industry is ready and able to help.  Duluth has now embarked on such an exploration and we would expect many other Minnesota county and municipal governments are putting together RFPs for consultants to undertake community interest surveys. The surveys themselves can be highly leading in nature and seemingly designed to generate more consultant work in the form of feasibility studies and design cost investigations.   (For example, one question we came across in a recent consulting firm’s community interest survey was “How likely would you be to support a city-sponsored broadband initiative if it led to increased competition, lower costs, and faster speeds?”)

Some GON financial troubles across the country appear to have roots in overly optimistic consultant reports concluding communities could build a better, cheaper, more reliable and faster internet service with breakeven levels of participation less than what was really needed.  Communities should recognize GON development efforts aren’t insulated from private sector self-interest and profit motive if for no other reason than to avoid a Monorail![3] broadband experience.  Anytime so much money is chasing something so reflexively enticing and popular is a time to be extra vigilant.

In Minnesota we know what does work and has a proven track record.  The state is recognized as a national leader in expanding broadband deployment.  The centerpiece of what’s become known as the “Minnesota Model” is the Office of Broadband Development’s Border to Border grant-matching program.  According to program officials, the secret sauce has been to create a process that embraced and promoted public-private partnerships in which internet service providers were incentivized to work with local communities.  As the Office advises others, “Work collaboratively … No one entity has the resources to solve the problem on its own. No one knows it all.”[4]  According to the 2020 state broadband report, Minnesota has made great progress toward its 2026 goal with 88% of Minnesotans now having access to broadband speeds of 100/20 Mbps.  The latest rounds of federal support, and the opportunities for public private partnerships it creates, should allow the state to handily meet this goal and perhaps even exceed it on performance dimensions.  But impatience with the status quo, the cache of providing the fastest broadband (even if it far exceeds market demand), all enabled by large amounts of federal subsidies may incentivize more local governments to eschew working with established telecommunication providers and go it alone.  Ideally, these subsidies would be competitively awarded on an ownership-neutral basis.

In its evaluation of the role of GON in meeting U.S. broadband needs, the Information Technology and Innovation Foundation concludes although local governments are not well suited to providing broadband service, broadband policy “should not be ideological or absolutist.”  “If there are areas that private providers are not interested in serving, even with subsidies,” the report concludes, “then municipalities should be empowered to step in and offer broadband.”[5] 

If governments do forego the public-private partnership approach -- and especially in places where competition already exists and services are already being provided -- they need to do so with eyes wide open to the financial risks they are embracing.  One of the leading national experts and advocates for community broadband has observed, “Community broadband networks are higher risk than traditional utility and local government ventures and must be operated in an entrepreneurial manner.”[6]  With more GON proposals on local government dockets in the future, one question taxpayers may need to ask themselves will be: “is ‘entrepreneurial’ the skill set that jumps to mind when I think of my local government?”

[1] “The Benefits and Costs of Broadband Expansion” Campbell, Castro, and Wessell, Brookings Institute November 9, 2021

[2] “Municipal Fiber in the United States: An Empirical Assessment of Financial Performance” Yoo and Pfenninger,   University of Pennsylvania Law School Center for Technology, Innovation and Competition


[4] “What Policymakers Can Learn From the ‘Minnesota Model’ of Broadband Expansion” Pew Broadband Access Initiative, March 2, 2021

[5] “Does Municipal Broadband Scale Well to Fit U.S. Needs?”  Brake and Bruer, Information Technology and Innovation Foundation, June 2021

[6] “Learning from Burlington Telecom: Some Lessons for Community Networks,” Christopher Mitchell, The New Rules Project, August 2011.