Broadband Financing: Digital Infrastructure is More Important Now than Ever

While it’s not hard to underscore the importance of broadband internet connection in our daily lives, it seems more apparent now, in the midst of the coronavirus pandemic, than ever. With social distancing and work from home mandates being issued across the country, millions of people are depending on broadband internet connection to support their daily activities - from zoom calls with colleagues to online orders of essential items like groceries. In addition, with the coronavirus pandemic causing municipal budget shortfalls and revenue uncertainty due to less consumer spending and other revenue and tax generating activities, broadband could help towns and cities generate additional revenues through public leasing and other agreements aimed at utilizing existing or newly constructed fiber networks. This article will explore the importance of broadband to our economy while specifically focusing on traditional and creative ways that communities can finance and benefit from broadband infrastructure projects. 

A Layman’s Guide to Broadband

The term broadband commonly refers to high-speed internet access that is always on and faster than the traditional dial-up access. Broadband includes several high-speed transmission technologies such as digital subscriber lines (DSL), cable modem, fiber, and wireless technology. The broadband technology you choose will likely depend on a number of factors including whether you are located in an urban or rural area, how broadband internet access is packaged by providers along with other services (such as voice telephone and home entertainment), price, and availability to name a few[1].

The Economics of Broadband

Reliable broadband internet connection is fundamental for economic activity throughout the World. Access to high-speed internet is now vital for a diverse set of industries ranging from those that are generally centered in high density urban areas such as the financial, banking, and high-tech industries to those more concentrated in rural communities such as our agricultural production, manufacturing, mining, and forestry industries to name a few. Overall, broadband internet acts as a catalyst for prosperity by enabling efficient, modern communications in urban and rural households, schools, industries, and healthcare centers acting as the digital infrastructure for our modern-day economy. Access to broadband continues to redefine how we provide education and healthcare, manage energy, and ensure public safety in addition to how we store, access, and share information.

In a post-coronavirus world we will likely see dramatic shifts in regard to more of the population having the ability to work or pursue educational opportunities from home permanently, which means that communities with broadband infrastructure will have a competitive advantage in attracting future residents who no longer need to live in the same town or even part of the country as their company’s physical location. This brings a new perspective on the importance of broadband infrastructure, arguably making it just as important as funding other business attraction and expansion efforts, or repairs and upgrades to other critical infrastructure.

Financing Broadband 

There are a variety of ways that municipalities can fund broadband projects ranging from traditional debt financing, to public private partnerships, to leveraging state and federal grant programs. The following sections outline these financing methods in more detail, in addition to providing references to some of the other resources that communities can leverage as they look to finance broadband infrastructure projects.

Direct Municipal Funding

Unsurprisingly, municipalities seeking to finance broadband infrastructure projects tend to utilize traditional debt financing mechanisms in a similar manor to how they often finance large and more traditional infrastructure and capital projects. These traditional methods primarily include the issuance of general obligation or revenue bonds. Of course, with traditional debt financing comes traditional challenges for communities such as potentially having to gain council and/or voter approval, needing a solid credit rating in order to gain favorable financing terms, and the need for revenue sources that are sufficient enough to cover an additional debt service payment and that are not tied up in fulfilling fiscal obligations elsewhere. 

  • General Obligation Bonds - Tied to the city or town’s credit rating and ability to tax its citizens, in some communities these bonds are authorized through a public approval process, but in other areas only the City Council must approve taking on the obligation. This type of bond is repaid through citywide taxes and revenues, which can create risk to other public services should the broadband project fail to break even as spending in other areas funded through general revenues must be reduced in order to meet obligations.
  • Revenue Bonds – These bonds are typically tied to a specific revenue source, although any municipal service that generates some sort of revenue may be used to secure the bond. A broadband service itself may be used to guarantee the bond, but this is generally considered to be high-risk practice in the bonding community.

Public Private Partnerships

Public private partnerships utilizing private equity, public leasing agreements, or a combination of the two may be an option for municipalities who may not be able to or want to utilize traditional debt financing; or who are looking for creative ways to finance broadband infrastructure. While public private partnerships can offer creative solutions to funding broadband infrastructure that would not exist but for the agreements, these partnerships should be approached with caution by municipalities as they often include long-term agreements that outline everything from revenue sharing, to security, to long-term operations and maintenance agreements. These agreements and terms are often negotiated up-front, and exist through the life of the agreement which can benefit or in some cases harm the public enterprise if thoughtful, long-term considerations are not contemplated during the negotiation phases of the agreement.

Both private equity and public leasing are typically used to finance fiber-based services as fiber installation is attractive to both the public market and private equity investors. In brief, these agreements can be executed because of the installation of dark fiber along with the active fiber that will be utilized. Dark fiber is basically just extra fiber capacity that is laid to be utilized by third parties today or in the future. To install the fiber, a municipality could either fund the infrastructure costs (directly or by potentially guaranteeing to utilize future leasing revenues to fulfill debt service payments) or enter into a public private partnership to fund the installation of the required fiber in addition to dark fiber. The installation and use of dark fiber is a growing business for both private and publicly owned networks as the fiber can be used to encourage a private entity to rent or lease excess capacity. The most common users include those in need of large amounts of data such as data centers, private telephone and internet carriers, and other wireless providers. When it comes to funding broadband via private equity, investors view the market as a high-margin entry point into a growing sector that will only keep growing as IP traffic and bandwidth demands grow in the future.

Federal Funding Opportunities

A variety of different federal agencies offer financial assistance to fund broadband projects, primarily to address a lack of broadband infrastructure in rural areas of the country and/or areas that are economically distressed. Programs primarily aim at addressing these areas because not all regions of the United States have the same access to broadband internet, with 80 percent of the 24 million American households that do not have reliable, affordable high-speed internet being in rural areas according to a recent report by the Federal Communications Commission[2].

Agencies such as the Federal Communications Commission, U.S Department of Agriculture, U.S Department of Commerce, and others have programs that state and local governments, tribal organizations, non-profits, and/or for-profit corporations can take advantage of to fund broadband projects. These funding programs come in a variety of different forms such as direct loans, grants (that in some cases include various matching fund contributions), access to debt, etc. The following outlines some of the largest and more widely utilized federal broadband funding programs:

Federal Communications Commission (FCC)

  • Connect America Fund: Provides funding to accelerate broadband build-out and access to communities lacking the infrastructure capable of providing high-speed fixed broadband.
  • Schools & Libraries Service Support Program (E-Rate Program): The schools and libraries universal service support program, commonly known as the E-rate program, helps schools and libraries obtain affordable broadband.

U.S Department of Agriculture

  • Telecommunications Infrastructure Loan Program: Provides financing for the construction, maintenance, improvement and expansion of telephone service and broadband in rural areas.
  • Rural Development Broadband ReConnect Program: Furnishes loans and grants to provide funds for the costs of construction, improvement, or acquisition of facilities and equipment needed to provide broadband service in eligible rural areas.

U.S Department of Commerce

  • Public Works and Economic Adjustment Assistance Program: Provides economically distressed communities and regions with comprehensive and flexible resources to address a wide variety of economic needs, including broadband infrastructure.

U.S Department of Housing and Urban Development

  • Community Connect Grants: Funds broadband deployment into rural communities where it is not yet economically viable for private sector providers to deliver service.

State Funding Opportunities

Broadband infrastructure programs offered by states tend to vary. In many cases where they do exist, state programs tend to align with the various types of programs offered by the federal government (i.e. grants, direct loans, access to debt, etc.).

In New York State, the New NY Broadband Program is aimed at expanding broadband to rural and remote areas of the state. Applicants are encouraged to apply for available funds through the state’s annual consolidated funding application, and the program focuses on areas that are eligible to also receive funding through the FCC’s Connect America Funds program so that projects can be completed with both state and federal capital. While this is just one example of a state funded program, many other states offer similar programs in an effort to address broadband inequities especially in rural or economically distressed areas. For more information on what programs may be offered in your state (in addition to other potential funding programs), check out the U.S Department of Commerce’s BroadbandUSA website (https://broadbandusa.ntia.doc.gov/) which promotes innovation and economic growth by supporting efforts to expand broadband access and meaningful use across America.

 

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