The bait and switch of Government Owned Networks

We are all familiar with bait and switch, the deceptive practice where a customer is enticed by one offer and then forced into a higher priced or inferior product.

Government owned networks (GONs) are a version of bait and switch, only instead of a few dollars lost to an unscrupulous salesperson, millions are being wasted or diverted from better uses. A GON is a broadband network owned and/or operated by a governmental entity, typically a municipality, county or other form of local government. GONs are touted as a genuine broadband network alternative but often end in failure and debt.

The pro-GON forces nonetheless believe in their cause and have the administration’s ear. So much so that the Infrastructure Act of 2021 provided $43 billion in GON funding.  The American Association of Public Broadband (AAPB) recently published a “how to” handbook for communities interested in building a GON.  AAPB’s strategy is to “double the number of public networks in the next five years…”

Notwithstanding that enthusiasm, a 2022 University of Pennsylvania study of a 15-project dataset shows the chronic financial underperformance GONs. It reported that “none of the projects generated sufficient nominal cash flow in the short run to maintain solvency without infusions of additional cash from outside sources or debt relief.”  Additional findings are: 

• 87 percent have not actually generated sufficient nominal cash flow to put them on track to achieve long-run solvency;
• 73 percent generated negative nominal cash flow over the preceding three fiscal years, leaving them poorly positioned to make up their deficits and causing them to fall farther into debt; and
• An assessment based on the net present value of these projects’ operating cash flow indicates that 53 percent of projects would not be on track to breakeven even assuming the theoretical best-case performance in terms of capital expenditures and debt service.

In light of this data, the GONs’ bait and switch is apparent.  But GON advocates tout how wonderful the network will be, often without transparency regarding taxpayer risk. 

While Infrastructure Act funds and other federal loans and/or grants may be available, GONs have typically been funded by local taxpayers through taxes and debt, such as general obligation bonds.  This means that every community member has to pay for the GON whether they want it or not and whether they use it or not.  And when a GON fails, the debt payment obligations can continue for years and total in the millions.  Examples of failed GONs abound, but a few are:

• Provo, UT – Provo issued $39 million in bonds to pay for its iProvo fiber network at a monthly debt service payment of $278,000 for 20 years. The city acknowledged that once operating expenses were covered the fiber network wasn’t producing enough revenue to cover the debt service. Provo ultimately sold the fiber network to Google for $1.
• Bristol, VA –Bristol spent over $100 million in subsidies and municipal bond funds on its OptiNet network. The build failed and Bristol sued its electric utility after audits revealed $6.5 million in accounting discrepancies. (Bristol settled for $2.1 million.) OptiNet was sold for $50 million to a privately held company, Sunset Digital. 
• Lake County, MN – Lake County received a $56 million loan and a $10 million grant from the US Department of Agriculture’s Rural Utility Service (RUS) to build its fiber network, Lake Connections. Lake Connections was unable to complete construction and was sold to Zito Media for only $8.4 million. RUS agreed to accept the $8.4 million sale price as satisfaction of the county’s remaining debt of approximately $48.5 million, leaving federal taxpayers to absorb the loss.
• Dayton, TX – Dayton’s uncompleted fiber network, DayNet, was approved at a $17 million cost. The City Manager acknowledged that “the project simply cannot be successful as designed” and that it will likely have a $10 to $12 million loss. The City Manager recommended that Dayton “sell DayNet for whatever we can get for it.”

The better approach is the way privately owned broadband networks have been historically funded. The company may borrow money from banks or issue corporate bonds but then relies on the revenues of customers to provide a sustainable return on investment. Only the customers that the company is able to acquire pay for the network. There are no general obligation bonds putting the entire community on the hook. The company builds the network with no guarantee that it will acquire any customers or make any profits. It is classic risk-taking.

And running a broadband network is hard. It requires ongoing investment, maintenance and upgrades. The network needs strong operating talent to manage it. Local governments quickly learn how challenging this is and as the examples show they frequently struggle, fail and leave taxpayers on the hook for millions.

This real-world experience shows that the bait and switch of promised high quality, affordable GON broadband often leads to fire sales, taxpayer losses, and debt.

To truly provide a service, AAPB could have published a single sentence GONs handbook:  Don’t do it.