Broadband infrastructure ripe for public finance

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Federal lawmakers and municipalities are showing growing interest in expanding government-owned broadband infrastructure, a sector ripe for growth via tax-exempt financing.

Across the country, cities and towns have searched for ways to finance and build their own broadband infrastructure, with some in the past faltering under pressure from private companies and state laws.

“We’ve definitely seen an increased interest in the space with various jurisdictions, be they a state or city, considering it,” said Fitch analyst Scott Zuchorski.

However, since broadband is still an unproven space, municipalities have to get comfortable with usage and revenue projections, Zuchorski said.

Municipalities may be inclined to shift the financial risk onto the private sector via public-private partnerships because servicing broadband can come with risks.

“The challenge is that since it’s so new, there’s not a lot of history there,” Zuchorski said. “So it’s a fine line of how much the government is willing to take in terms of revenue risks and the demand risks versus how much is the private sector willing to take on.”

In late June, Sens. Susan Collins, R-Maine, and Doug Jones, D- Ala., introduced the American Broadband Buildout Act of 2019. The bill would give rural Americans access to broadband services by providing matching grants for local broadband build-outs. The bill would direct the Federal Communications Commission to provide up to $5 billion in such grants.

So far, the bill has been introduced and awaits action by the Senate Committee on Commerce, Science and Transportation.

Municipalities are pushing for broadband infrastructure because they are starting to see broadband as a human right as well as a public utility. Some rural areas without any broadband services are concerned that private companies will never come out to deliver broadband, creating demand for municipalities to provide it instead.

However, 26 states have laws that ban or place prohibitions on localities looking to build their own networks, according to BroadbandNow, a consumer-focused company that tracks broadband.

Over $92 million was spent on lobbying by the telecom industry in 2018 to protect business interest at the national and state level, according to BroadbandNow. The group wrote that there are about 500 communities that are served by some form of a municipal broadband network.

“They (public companies) don’t want public competition to wherever they are servicing so they go to the state level to make sure they don’t get state competition,” said Adie Tomer, a fellow at the Brookings Institution Metropolitan Policy Program.

In 2018, nine Democrats backed the Community Broadband Act of 2018 which would have prohibited states from adopting regulations or requirements that prevent municipally owned broadband networks. The bill, introduced by Rep. Anna Eschoo, D- Calif., didn’t go past the House.

In January 2019, South Carolina’s House of Representatives passed a bill that would allow the state to pay for expanded broadband internet access in its poor counties. South Carolina’s state laws impose restrictions and procedural requirements on municipal broadband projects that are considered burdensome, according to BroadbandNow.

The bill is awaiting action in the South Carolina Senate.

North Carolina introduced its FIBER NC Act in March. It would change existing barriers to allow municipalities and local governments the authority to invest in publicly owned broadband infrastructure in order to work with private sector partners.

“The growing interest in publicly financing broadband infrastructure or executing public capital expenditures is driven by a mix of both the persistent digital divide and a feeling of local governments wanting to take their digital economic prospects into their own hands,” Tomer said.

Through overcoming legal barriers, municipal broadband should lead to new opportunities for municipal bond financing, Tomer said.

There is an increased interest in broadband, but John Medina, vice president senior credit officer at Moody's Investors Service, said he couldn’t determine if it was on a municipality level.

On the state level, there is increased interest in building out broadband networks for greater commercialization and economic opportunities. However, until the fiber is the ground, it’s hard to commercialize it, Medina said.

States have the right of way since they own the roads, making it easier to install the fiber, Medina said. It would also be a step down the road to autonomous vehicles since they would need 5G internet.

At the smaller municipal level, there is a policy approach for "last mile" connectivity to link communities to broader networks. If it’s not economically viable for a large company to go out into the rural areas, they won’t do it, Medina said.

“The build-out is happening and some munis are taking it on themselves because just like they would widen their roads through their town or provide connectivity for public service,” Medina said. “This is the transportation of today.”

Many municipalities are deciding to provide the fiber and opt out of providing the services, Medina said. For those cities that provide services, they are competing with private companies.

Some municipalities have weathered those challenges, such as Burlington, Vermont.

Burlington received a two-notch credit upgrade from Moody’s on Wednesday, citing strong fund balance levels and elimination of risks from debt tied to a past partnership with Burlington Telecom. Moody’s action puts Burlington at the same rating it held prior to facing six bond downgrades from 2010 to 2012 while facing a financial crisis driven by troubles with the city-run telecom enterprise.

Chattanooga, Tennessee, is plugging along on its broadband network.

In 2008, Chattanooga issued $220 million of bonds, with $169 million related to fiber for its smartgrid and then later its fiber optics network.

Greg Eaves, Chattanooga’s Electric Power Board chief financial officer, said there is an overall increased interest in municipally owned broadband as people realize that internet services are a utility.

The city’s bond issue was intended to help the city build-out to about 75% of its customers. In 2010, they received an award from the Department of Energy and received smartgrid investment grants, securing $111 million in a matching grant and reaching the remaining 25% of customers.

In 2009, with the build-out of its smartgrid, Eaves said the city rolled out television, internet and phone services. The city has paid off its fiber network debt and now has 185,000 customers. Customers pay on average $125 a month.

“More and more people are realizing that internet services are a utility,” Eaves said. “They are a necessity of life like water systems and freeways.”

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