There are multiple financing advantages that the public sector enjoys when compared with the private sector. Each state has a unique set of public finance rules and regulations, especially regarding telecommunications networks and services. Be sure to consult with your public finance advisors for specific information about financing rules in your state.
Local units of government fund their operations through a variety of taxes and fees—like property taxes, sales taxes, franchise fees, and water and sewer charges. Most of these taxes and fees support current operations for utilities, public safety, and other day-to-day functions.
When a government wants to make a large capital investment, it generally issues bonds whereby the private sector provides the capital, which the government pays back over time through either general tax revenue or a dedicated revenue stream. In general, the length of the bond is equal to or slightly less than the life of the financed asset. The long-term financing provides two benefits. First, the term makes capital investments more affordable. The long term also provides for some level of equity as people who may be using a facility sometime into the future will assume their share of the cost of that asset.
There are two primary kinds of government bonds: general obligation and revenue. Both give the government the ability to finance capital assets over a lengthy term—10, 15, or 20 years at affordable interest rates.
- General obligation bonds:
- Are backed by the full faith and credit of the local government; it is obligated to raise taxes to pay off the bonds if the identified revenue source falls short.
- Are tax exempt so that investors can collect interest tax free.
- Revenue bonds:
- Are usually issued to support public projects that collect fees—parking ramps, water, sewer systems, etc. These bonds are backed only by the revenue generated by the enterprise.
- Might be considered, for telecommunications projects, higher risk with higher interest rates for several reasons:
- The public sector is entering a competitive marketplace.
- The public might not be experienced in building and operating telecommunications networks.
- Do not obligate general tax revenue.
Bonds that are issued to serve a “public purpose” can be tax exempt, meaning that investors do not pay income tax on the interest received, thus providing a higher ROI for investors even with a lower interest rate. Public-private partnerships may not meet the “public purpose” threshold due to the involvement of private partners. Those bonds would be sold as taxable.
A 501(c)(3) nonprofit ISP can sell tax-exempt bonds, which provides a financing advantage.
Public-sector financing advantages
Private-sector ISPs generally finance projects:
- For shorter finance terms
- At higher interest rates
- Requiring an investment-worthy ROI
These three components all increase the need for higher cash flows and increase the risk for private ISPs. These considerations limit where private ISPs are willing to invest, leaving much of the country with uncompetitive markets.
The public sector has the benefit of patient capital through long-term financing. Public networks have no need to earn profits from the capital investment. Revenues need only cover the costs of the bond payments, plus operating and maintenance/upgrade costs. As noted earlier, public-network owners also can count the benefits on non-balance-sheet items such as economic development, better health care and education, and enhanced quality of life.
Alternative Funding Sources
The public sector has additional available strategies to finance broadband projects. Examples include:
- Internal loans from enterprise funds and reserves
- Joint builds with other public-sector agencies
- Joint builds with private-sector ISPs
- Philanthropy / Non-Profit Financing
Well-managed public utilities—like sewer, water, and electric—often accumulate significant capital reserves to deal with upgrades, maintenance, and natural disasters. These reserves are on deposit in interest-bearing accounts. Each state has its own rules on how these internal loans can be made, usually requiring a minimum interest rate and restrictions on cross-utility subsidization.
Joint build with other public-sector agencies
Many times, public-sector entities will join to build broadband infrastructure, often with the goal of connecting buildings and facilities. A community can knit together various public funding sources, often from grants and E-Rate subsidies for state agencies, colleges, schools, public safety, health care, and libraries to build networks. Funds currently going to pay private-sector ISPs for service, often substantial, can be devoted to debt service payments and network operations. Aggregating demand from community anchor institutions is a well-used strategy.
Joint build with private-sector ISPs
A community can reach agreement with a private ISP to build broadband infrastructure in a city or across a county or region. Oftentimes, this involves constructing a dual conduit network with public facilities in one conduit and the private network in the other. Another option is to share a large bundle of fibers within a single conduit. In these partnerships, the public sector may decide to contract with the private ISP to manage the conduit network, including managing fiber locates and fiber breaks. This type of partnership can generate construction cost savings and provide revenue opportunities and operational savings.
Philanthropy
Increasingly, philanthropic and other nonprofit organizations are working with communities to provide capital for and help build broadband infrastructure. Organizations like the Post Road Foundation and Connect Humanity provide grants and access to capital to cities and towns to plan and build public networks, provide workforce training, and promote internet adoption.
The federal government and some states have grant programs that can be sources of funding for public networks. Here are two examples of federal broadband grant programs:
Broadband Equity, Access, and Deployment Program
The Broadband Equity, Access, and Deployment (BEAD) Program provides $42.45 billion to expand high-speed broadband access by funding planning, infrastructure deployment, and adoption programs across all states; Washington, DC; and territories. These funds will go directly to the states for distribution to sub-grantees to improve broadband access and use.
Each state is tasked with creating its specific BEAD program rules that must comply with federal BEAD program rules. Infrastructure projects must focus on places where not less than 80 percent of locations are unserved, defined as 25 Mbps download and 3 Mbps upload speeds. Any community anchor institution that lacks gigabit internet service is also eligible. Fiber broadband deployments are a priority. NTIA has a robust website that provides a myriad of details.
States are required to include public-sector entities as prospective grantees for both infrastructure and digital equity projects. Communities must participate and attempt to influence the state broadband planning and rules development process.
US Department of the Treasury Capital Projects Fund
The American Rescue Plan’s Capital Projects Fund (CPF) provides $10 billion to the states to fund, among other things, broadband infrastructure designed to deliver reliable internet service that meets or exceeds symmetrical download and upload speeds of 100 Mbps. The program encourages states to focus on economically distressed areas, support community empowerment, and adopt strong labor practices. For a capital project to be an eligible use of CPF grant funds, it must be 1) an investment in capital assets designed to directly enable work, education, and health monitoring; 2) designed to address a critical need that resulted from or was made apparent or exacerbated by the COVID-19 public health emergency; and 3) designed to address a critical need of the community to be served by it. Co-ops, electric utilities, and other entities that build or operate broadband networks, including networks that are owned, operated by, or affiliated with local governments are all eligible to receive CPF Funds.
U.S. Department of Agriculture’s ReConnect Program
The USDA ReConnect Program provides both grants and loans to extend broadband services into rural unserved communities. According to the USDA, “a rural area is any area that is not located in a city, town, or incorporated area that has a population of greater than 20,000 inhabitants or an urbanized area contiguous and adjacent to a city or town that has a population of greater than 50,000 inhabitants.”
To be eligible, a project area must have at least 50 percent of the households lacking sufficient access to broadband. Grants can be up to 100 percent of project costs with no match requirement in project areas where 90 percent of households lack sufficient access to broadband. The ReConnect Program is a competitive program with specific funding rounds and application deadlines.
In a countywide approach, the ReConnect Program could fund the most rural, unserved areas, while other funding sources would be needed for areas classified as urban or served. The USDA has a reputation for not funding start-up entities due to their higher risk. Partnering with a successful ISP that is already a USDA borrower would be an option.
Other Federal Programs
The NTIA, through its BroadbandUSA initiative, has compiled a federal funding program guide. Public-sector network planners can work to package multiple programs that together can solidify a funding plan. For example, E-Rate funds for schools and libraries could be packaged with public-safety connectivity funding to help fund both capital and operating expenses. Telemedicine is another high priority for funding. Local leadership is critical to get key stakeholders to consider collaborative approaches rather than remaining in their silos.
Partnerships
With broadband projects, the phrase “public-private partnerships” or “P3” covers a wide range of interactions.
The profiles in this handbook showcase the range, variety, and intensity of public-private partnerships. Oftentimes, a “partnership” is just a contract for services. A true partnership is generally long term, formally executed, based on shared values, and designed to provide mutual benefits.
Partnerships with private ISP(s)
A very common arrangement is a public network owner entering into agreement(s) with one or more private ISPs to deliver retail internet services. UTOPIA and the Vermont CUDs are examples of this type of partnership. The Resources directory at the end of this handbook lists private ISPs that deliver retail internet services for public networks.
Partnerships with other public entities
Collaboration among public entities is also quite common. One entity may be well positioned to deliver a wide variety of capacity and services to another public entity. This could include access to a middle-mile network or to affordable bandwidth or to professional or contracted services such as engineering, billing, or marketing. UTOPIA Fiber provides several examples of this, including the shared public initiative that created UTOPIA Fiber as a joint venture among Utah communities or, more recently, partnering with newer public ISP ventures such as Yellowstone Fiber. In Minnesota, many telephone cooperatives joined together to create Cooperative Network Services (CNS) to take advantage of increased scale to acquire engineering, human resources, and marketing services effectively and efficiently.
Partnerships with vendors
Even public entities that are offering internet services as an end-to-end public utility are engaged in partnerships with the private sector. Public entities must select and maintain partnerships with network equipment and customer management/billing system vendors. These are very important choices, primarily because these decisions lock an ISP into a long-term relationship with high exit and transition costs. The Resources directory at the end of this handbook provides a list of vendors that provide various services to public networks.
Financing partnerships
Sometimes, public involvement is limited to providing capital, essentially economic development grants, to help fill in financing gaps for a private-sector provider/network owner. Even as this financing takes place in a moment in time, communities need to think about the desirability of the provider as a long-term community partner as well as acquiring long-term community benefits—such as access to dark fiber, low-cost public computing center connectivity and some voice in an asset transfer, such as a company sale.
Own Your Internet 