Towns considering partnerships as they go after federal broadband funding need to reckon with real differences between public and private interests.
There’s a new set of rules in place for Round 2 of the competition for federal broadband money (also known as NOFA 2). Some communities have decided to sit out the race and find, or raise, funds in other ways, but others are strapping on their skates and heading back out on the NOFA-2 ice.
One of those others, from rural Missouri, tweeted me: “Don’t have a choice. We are sitting on the New Madrid fault. We NEED a public safety network in a strategic location.”
NOFA 2 has given top priority to middle-mile projects (infrastructure projects that primarily connect data centers to each other rather than delivering broadband to end-users. Find a fuller definition here.) And it’s also been announced that NOFA 2 will look with favor on applications that partner public and private interests.
Communities that are responding with plans for public-private technology partnerships should not take such efforts lightly or pursue them in haste. This promising approach is also fraught with challenges great enough to knock you off track.
Michael Johnston, Vice President of Internet Technology and Broadband at Jackson Energy Authority, a public utility in Tennessee, described some of these challenges. While Jackson isn’t rural, Michael Johnston’s extensive experience, both positive and negative, offers rare insights that rural communities can use.
Jackson’s current fiber network is a success story with 16,000 subscribers, but it had a rocky start. Johnston gives a blunt assessment of why communities, particularly local governments and public utilities “need to do a gut check before you go after broadband. You can’t be a nice fluffy business person,” he said.
Whether any applicant writes a proposal to get broadband stimulus and other government grant money or creates a standard business plan to secure traditional commercial funding, a broadband project will have to show how the network will be sustained financially after it’s built. NTIA head Larry Strickling, head of the National Telecommunications and Information Administration (NTIA), said in a recent speech, “We want these projects to be up and running five years or more after the government grant money has run out.”
Communities need to ask themselves: What’s the return on investment under normal, best case, or worst case scenarios? Understanding these forecasts is key to financial sustainability.
“Let’s say we just borrowed $10 million with the assumption we’ll get 100 new subscribers every month for a year,” Johnston proposed. “What about the price of greater success? If you get 200 subscribers a month, what’ll do you do? You need more customer service people, more technicians. Beating your ‘take plan’ is counterproductive if you can’t get any more ‘free’ government money and you have to go to the bank for real money.” In this respect, the business of broadband is as much about managing growth as curtailing losses.
The challenge of public-private partnerships
The public/private partnership for establishing community broadband service has become the Holy Grail for some, but it also can be the source of heartburn.
“Partnering with a telco does help because you have to be ready for the different world of telecom operations,” said Johnston. But difficulties often arise, he said, because “you can have completely different goals that are at cross-purposes. The town or county wants to deliver services in places where it’s currently not offered. The partner needs to make money.”
It’s essential that a lot of time – and strenuous effort, if necessary — be spent in frank conversation so that both parties thoroughly understand how the other’s business works. Such discussions will spot where potential troubles may lie, troubles that could lead to irreconcilable differences. More positively, these talks will help to construct and evaluate a business model with clear knowledge of how it affects all partners.
UTOPIA, a collective of 16 rural towns building their own fiber network in Utah, took on debt via a bond and couldn’t (by law) provide anything but the Internet pipe. Prior to NOFA, this had been a typical middle-mile project scenario. Service providers then connect to the pipe to build last-mile infrastructure that delivers services directly to consumers. UTOPIA makes money on fees from providers based on how many of their customers use the network.
“This kind of arrangement should be a winner, but it doesn’t always work,” Johnston said. “My plan says if the provider adds 100 customers per month, the total amount of fees from the provider that I get for those 100 subscribers pays off the monthly bond debt. But what if the partner doesn’t add that many customers? The community has no leverage because private partners want the least number of customers to ensure the most profit.”
There’s a point in the profit and loss equation at which the cost for adding and supporting more customers doesn’t produce enough of an increase in profit margins to justify the costs. From the service provider’s perspective, acquiring more customers beyond this point can even cut into profits. If the community insists on getting its fee anyway for 100 customers, the partner leaves. “So obviously the community can’t raise fees,” Johnston said.
In other words, Johnston stresses that the respective returns-on-investment needs of public or nonprofit partners and commercial partners have to be reconciled – not always easy to do. The agencies awarding stimulus grants structured the rules to encourage applicants for middle-mile networks to form partnerships with institutions, such as schools and hospitals. By including institutions as part of middle-mile projects, the NOFA acknowledges that these institutions generate revenues to offset the potential fee-shortage scenario that Johnston describes.
The Intelligent Community Forum (ICF) studies the economic and social development of the 21st Century community. The organization annually recognizes communities around the world for leadership in making their citizens’ lives better, with broadband often playing a major role in this accomplishment.
ICF co-founder Robert Bell believes that public and private partners can work past their conflicting financial objectives. “It is important for the private and public sides of a partnership to enter the deal with their eyes wide open,” Bell said. “Private companies want to gain access to markets; governments want to gain access to expertise and the assets of the provider.” When the assets remain in the carrier’s control or ownership, this leaves the carrier’s [return-on-investment] issues with the carrier. That’s a clean line of demarcation. Where a partnership creates shared ownership of assets by the public sector and private sector partners, things get more complicated, and both sides need to work out a wide range of issues well in advance.
One constant among successful community-owned and public/private broadband networks is the execution of sound business fundamentals. Communities, such as Jackson, Tennessee, may have struggled initially, but they eventually got on the right track once these fundamentals were put in place. Others, such as Wilson, North Carolina, focused very heavily on sound business practices from the start and subsequently are progressing very well.
Internet consultant Craig Settles, based in Oakland, California, is the author of Fighting the Next Good Fight: Bringing True Broadband to Your Community.