Municipal Broadband Subsidies Are 'a Waste'

Municipal Broadband Subsidies Are 'a Waste'
May 1, 2007

Steven Titch

Steven Titch is a policy analyst at Reason Foundation focusing on telecommunications, Internet and... (read full bio)

Fifty-two municipal broadband systems have soaked up $840 million in taxpayer money over the past 20 years while providing little benefit, according to a study released in February.

Wi-Fi Waste: The Disaster of Municipal Communications Networks, by Sonia Arrison, Dr. Ronald Rizzuto, and Vince Vasquez, published by the Pacific Research Institute, represents the latest round-up of municipal broadband financial performance.

The report confirms again what past studies have shown: Municipal broadband systems invariably cost more and deliver less than promised. They rely heavily on loans and transfers from established municipal utilities such as electricity and water. Even with the power of the public purse, 77 percent of the time municipal networks can't pay their way, the report observes.

The survey examined 52 government-owned networks that compete in the cable, broadband, and telephone markets. It concludes the government-owned systems are "financial disasters."



Dubious Practices

"Muni telecom networks have been sold to the public as the answer to everything from municipal cash-flow problems, to high cable prices, to the 'digital divide' between 'Internet haves and have-nots,'" says the report.

"Many received their initial funding through suspicious means, including insider loans at special rates," the report states. "As many as 19 were originally financed with questionable non-interest-bearing loans from public utilities. As of 2004, long after the initial start-up phase, 13 were still shamelessly dependent on these schemes and were unable to break even financially."

The report continues, "Muni networks demand constant reinvestment; the ones in our sample have raided more than $840 million from taxpayers over 20 years. Analysis of the total track record of muni systems shows that 77 percent of the time they don't pay their way."

Muni Telecom

The government-aided networks use their funding advantage to drive out more efficient private-sector competitors, the report notes. "When faced with strong competition from the private sector, most government-run networks have resorted to predatory pricing to achieve fiscal solvency. Of those in our sample that reported their earnings in 2004, 69 percent priced their services below cost, recklessly undercutting incumbent providers in hopes of forcing them to capitulate and leave the marketplace."

As government officials rush to show leadership and take credit for delivering the goods, they often trade short-term political benefits for serious, long-term financial problems: cost overruns, mounting debt, and tepid profits, the report observes. The numbers clearly show muni telecom networks are a risky gamble, regardless of the technology or the business model, the authors write.



'Inferior Technology'

"When it comes to bridging the digital divide, government-controlled Internet access is not the solution," said co-author Vasquez, who is skeptical even of public-private partnerships such as the proposal by EarthLink and Google in San Francisco to provide a citywide system that would have a free service tier.

"The Google/Earthlink Wi-Fi agreement that [Mayor Gavin] Newsom wants rubber-stamped by the Board of Supervisors is a white elephant, costing San Franciscans more than it's worth, and will prove difficult to dispose of," said Vasquez. "In economics, there's no such thing as a free lunch, and there's certainly no such thing as free WiFi."

Vasquez continued, "So when a city like San Francisco hatches a deal with a private provider for free wireless service, what are the real costs? It's lost innovation. It's monopoly control of an inferior technology and the marginalization of neighborhoods where broadband investment is low but the human need for greater investment is high."



Hidden Costs

The report also reveals the extent to which municipal operations rely on interest-free loans, inter-utility transfers, and permanent subsidies, the details of which in many cases are buried in financial reports, if reported at all.

"The footnotes in most of the municipal networks' financial statements have omitted any discussion of cost allocation between the telecom utility and other utilities, which suggests that utility accountants may be shifting around costs to enhance the appearance of telecom profitability," the authors report.

The utilities also appear to be hiding other significant costs. "There is also the issue of system accountants' failing to divulge major financial transactions on the printed public record. For example, at the end of the 2003 fiscal year, the telecom network of Harlan, Iowa received an intra-utility loan for $768,025. In 2004, this intra-utility loan was forgiven but the financial-statement disclosures did not provide any explanation for this transaction," the report says.

"While virtually all the municipal telecom utilities have borrowed funds from the other utility departments--electricity, water, waste, and gas--it is especially disturbing that 19 systems were initially financed either with non-interest-bearing loans from affiliated utilities or with equity investments from affiliated utilities without expectation of repayment. In both scenarios, the affiliated utility is providing financing without any compensation for the use of the funds, letting telecom networks off the hook from any semblance of fiscal accountability," according to the report.



Persistent Deficits

Even with access to subsidies and loans not available to private-sector companies, municipal systems can't break even, let alone establish positive cash flow, the report notes.

"Adding all the operating years together, our select sample of muni systems has been in existence for 294 years," the authors write. "Of these 294 years, these operations have incurred negative free cash flow in 227 years. In other words, 77.2 percent of the time, muni networks have not paid their way.

"Even adjusting the numbers to examine the performance of only the older networks fails to make much of a difference in the verdict," the report continues. "A full 71.9 percent of the municipal telecom systems that had at least four years of operation by 2004 could not pay their way, generating a combined [negative] free cash flow of $93 million."

"This report confirms what a variety of reports on individual municipal broadband ventures has shown: They are bad for consumers and bad for taxpayers," said Marc Kilmer, a technology research associate at the Buckeye Institute in Columbus, Ohio and author of a 2006 study that analyzed the financial problems with the municipal broadband system in Lebanon, Ohio. "The government should leave the supply of broadband and video services to private company and stop wasting taxpayer money on these white elephants."


Steven Titch (titch@heartland.org) is senior fellow for IT and telecom policy at The Heartland Institute and managing editor of IT&T News.


For more information ...

Wi-Fi Waste: The Disaster of Municipal Communications Networks, written by Sonia Arrison, Dr. Robert Rizzuto, and Vince Vasquez and published in February 2007 by the Pacific Research Institute, is available through PolicyBot™, The Heartland Institute's free online research database. Point your Web browser to http://www.policybot.org and search for document #20849.

Steven Titch

Steven Titch is a policy analyst at Reason Foundation focusing on telecommunications, Internet and... (read full bio)