We're all familiar with bait-and-switch tactics, deceptive practices that lure customers with one offer and then push them toward a higher price or inferior product.
Government-owned networks (GONs) are a type of bait-and-switch, where for every few dollars lost to unscrupulous salespeople, millions of dollars are wasted or repurposed for better uses. A GON is a broadband network owned and/or operated by a government entity (usually a municipality, county, or other form of local government). GONs are touted as an alternative to true broadband networks, but they often fail and end up in debt.
Still, pro-GON forces believe in their cause and are listening to the regime. So much so that the Infrastructure Act of 2021 provided GON with $43 billion in funding. The American Association for Public Broadband (AAPB) recently published a “how-to” handbook for communities interested in building GONs. AAPB's strategy is to “double the number of public networks in the next five years”.
Despite that enthusiasm, a study of the University of Pennsylvania's 15-project dataset in 2022 shows that GON's financial performance is chronically poor. “None of the projects were able to generate sufficient nominal cash flow in the short term to remain solvent without additional external capital injections or debt relief,” the report said. Additional findings include:
- 87% actually do not generate enough nominal cash flow to put them on track to achieve long-term solvency.
- 73% generated negative nominal cash flow in the past three fiscal years, leaving them in a poor position to cover the deficit and sinking further into debt.and
- A valuation based on the net present value of operating cash flows for these projects shows that 53% of projects would not break even assuming the best theoretical performance in terms of capital expenditures and debt service. I am.
Given this data, GON's bait and switch is clear. However, GON proponents tout how great this network will be, often with a lack of transparency regarding the risks to taxpayers.
Although Infrastructure Act funds and other federal loans and grants may be available, GONs have typically been funded by local taxpayers through taxes and debt such as general obligation bonds. This means that all community members have to pay for GON, whether they want it or not, whether they use it or not. And if GON goes bankrupt, debt obligations can last for years and total millions of dollars. There are many examples of failed GONs, some of which are listed below.
- PROVO, Utah – Provo has issued $39 million in bonds to pay for its iProvo fiber network with monthly debt payments of $278,000 for 20 years. The city acknowledged that even with operating costs covered, the fiber optic network did not generate enough revenue to cover debt service. Provo ultimately sold its fiber network to Google for $1.
- BRISTOL, VA – Bristol has spent more than $100 million in grants and municipal bond funds on the OptiNet network. Construction failed, and Bristol sued the utility after an audit revealed $6.5 million in accounting discrepancies. (Bristol settled for $2.1 million.) OptiNet was sold to privately held Sunset Digital for $50 million.
- LAKE COUNTY, Minn. – Lake County received a $56 million loan and $10 million grant from the U.S. Department of Agriculture's Rural Utilities Service (RUS) to build Lake Connection, a fiber optic network. Lake Connections was unable to complete construction and was sold to Zito Media for just $8.4 million. RUS agreed to accept a sale price of $8.4 million as repayment of the county's remaining debt of approximately $48.5 million, leaving federal taxpayers to shoulder the loss.
- DAYTON, Texas – DayNet, Dayton’s unfinished fiber optic network, has been approved at a cost of $17 million. The city manager admitted that it was “impossible for this project to succeed as planned” and that he would probably incur losses of between $10 million and $12 million. The city manager recommended that Dayton “sell Daynet for whatever he can get.”
A better approach is the way privately owned broadband networks have historically been funded. The company may borrow money from banks or issue bonds, but sustainable investment returns depend on revenue from customers. Only the customers the company can acquire pay network fees. There are no general mandatory guarantees that put the entire community at risk. The company is building its network with no guarantee that it will gain customers or make a profit. That's classic risk-taking.
And running a broadband network is difficult. Requires ongoing investment, maintenance, and upgrades. Managing the network requires strong operational talent. Local governments quickly realized how difficult this is and, as examples show, frequently struggle and fail, leaving millions of taxpayers in a bind.
This real-world experience shows that the promised bait-and-switch of high-quality, affordable GON broadband often leads to fire sales, taxpayer losses, and debt.
To truly serve, AAPB could have published a line in the GON handbook: “Don't do that.”
