University of Pennsylvania Law School Professor Christopher Yoo and co-author Timothy Pfenninger today released the first comprehensive study of the financial viability of America’s municipal fiber networks — “Municipal Fiber in the United States: An Empirical Assessment of Financial Performance.” The paper was released at an event co-sponsored by the Penn Wharton Public Policy Initiative and the Penn Law’s Center for Technology, Innovation and Competition (CTIC).
Using industry standard financial analysis tools on five years of official data, the study finds that 11 out of the 20 fiber networks assessed do not generate enough cash to cover their current operating costs and only two out of the 20 are on track to recover their total project costs during their 30-40 years of expected useful life. Key findings include:
- 11 of 20 projects studied are cash-flow negative, many substantially so.
- 5 of the 9 cash-flow positive projects are generating returns that are so small that it would take more than a century to recover project costs.
- 2 of the 9 cash-flow positive projects would have a recovery period of 61-65 years, beyond the expected useful life of a fiber network.
- Only 2 of the 20 projects studied earned enough to expect to cover their project costs during the useful life of the networks, one of which is an outlier that serves an industrial city with few residents.
- The analysis also models the returns for a hypothetical project, finding it would take over 100 years to recover expected project costs.
The paper also includes case study narratives of seven of the broadband systems, including widely-covered operations such as Chattanooga’s Electric Power Board project and the Utah Telecommunication Open Infrastructure Agency (UTOPIA). These case studies describe the financial and operational impact of different approaches to municipal broadband and isolate likely causes of success and failure. Taken together, the financial analysis and case studies offer an analytical roadmap for local officials considering such investments.
“City and county managers bear heavy responsibilities and must often make costly and complex decisions based on incomplete information or data chosen by advocates on both sides of the debate to support their positions,” explained Professor Yoo. “Our goal is to put unbiased facts on the table to help decision-makers better understand the choices they must make. By systematically assessing every municipal fiber project in the U.S. and documenting our analysis step by step, we hope we can make a hard job easier by providing reliable baseline information about the risks and benefits of local investment in broadband operations.”
Former Pennsylvania Governor Ed Rendell also commented on the study, commending it as a vital tool for local leaders faced with tough decisions on infrastructure spending. “We have so much work to do on infrastructure in this country — with limited funds available for overwhelming needs. This new report is an incredibly valuable tool for decision makers deciding what projects to fund where they can get the most return on their infrastructure investment. It offers the best of practical, useful scholarship — a ‘must read’ for anyone community considering building broadband networks of their own.”
“This report will allow local leaders to learn from other cities’ experiences about the business case for government broadband and the benefits such a project can bring,” said Professor Yoo’s co-author, Timothy Pfenninger, a CTIC fellow during the drafting of the study. “Some may cite this report as a red flag to communities considering taking the plunge on municipal broadband, but it simply describes the facts about what has happened in communities so far.”
The full report and accompanying background information is available to read online.
Yoo is a professor of law, communication, and computer and information science, and director of CTIC.
Updated June 7, 2017: The study authors issued a response to comments in the wake of the report’s release, and announced plans to extend the analysis to cover the life of each project.
Updated May 26, 2017: The study authors note that the case-study portion of the report erroneously stated that the bonds used to finance the projects in Chattanooga, TN; Lafayette, LA; and Wilson, NC; call for balloon payments toward the end of their bond terms. These statements were based on the repayment tables listed on the second page of the Official Statements filed with regulators in support of each bond. The more detailed discussions contained inside the Official Statements revealed that each bond includes mandatory prepayment provisions that require each project to set aside roughly equal amounts of money to retire this debt during the last four-to-five years of each bond’s term. The statements in the study characterizing these projects as requiring large balloon payments toward the end of the bond periods are thus inaccurate. The authors regret the error. Please note that these errors do not alter the study’s financial analysis.
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The Penn Wharton Public Policy Initiative (PPI), headquartered at the Wharton School of the University of Pennsylvania, is a hub for public policy research and education with one overarching goal: to leverage the University’s resources to foster better-informed policymaking at the federal level on issues related to business and the economy. To that end, Penn Wharton PPI delivers independent, practical, timely, and nonpartisan policy briefs — authored and reviewed by our own Faculty Affiliates — to government decision-makers and their staffers. At the same time, the Initiative operates on Penn’s campus to offer students new academic and co-curricular opportunities to explore and understand the complex interrelationship between business and public policy. Altogether, Penn Wharton PPI’s activities foster a public policy “community of interest” at the University while building vital new bridges between academia, business, and government in Washington, D.C.