Earlier this year the University of Pennsylvania’s Carey Law School released a study that assesses the long-term financial viability of municipal fiber networks. The study analyzed available data from municipal fiber-to-the-home projects undertaken between 2004 and 2011, by 15 mid-size and small towns in seven states. It turns out that none of the projects generated sufficient short-term adjusted nominal cash flow (ANCF) and all required cash infusions from outside sources or debt relief to maintain solvency.
Bottom line: The ability of municipal fiber projects to generate sufficient subscriber revenue that produces positive ANCF is more important than whether the network can be built and operated efficiently. The study authors recommend that cities carefully weigh the tradeoff between funding fiber projects and other municipal priorities, and to use rigorous technical, financial, and competitive analyses to obtain “the clearest possible picture of their likelihood of success.”
Study Scope
The Penn Law study looked at municipal fiber projects in Tennessee, Utah, Vermont, North Carolina, Florida, Louisiana, and Minnesota. The mean population of the municipalities under study was nearly 52,000 people. The largest city of the group was Utopia, UT with 474,442 people and the smallest being Dunnellon, FL with a population of 2,057. The other 13 locales included municipalities such as Burlington, VT; Chattanooga, TN; Lafayette, LA; Windom, MN and Salisbury, NC.
Mean household incomes were just under $50,000. Mean initial project financing was almost $46 million for fiber to pass an average of 39,000 housing units. Utopia had the largest expenditures at $185 million while Dunnellon spent $5.5 million. Debt maturity terms averaged 22 years. Note that all the projects were overbuilds to existing telco or cable networks in those municipalities.
Municipal Fiber Performance
Short term, none of the 15 projects generated cumulative ANCF surpluses in the first several years of operation, prompting the need to raise cash or reduce debt through refinancing.
Over the longer term, only two projects generated sufficient cumulative ANCF to cover their initial debt ahead of maturity deadlines: Chattanooga reached a breakeven point in the first year with financing from the city’s electric power division; Wilson, NC achieved break even after six years, well ahead of its initial 14-year debt maturity date.
Of the remaining 13 projects, only three generated positive cumulative ANCF (Clarksville, TN; Lafayette, LA and Windom, MN) but at levels too low to break even by their average 11-year initial debt maturity date.
The remaining 10 projects were never going to reach breakeven, even under best-case scenarios in terms of capital expenditures and debt service. Consequently, three projects (Burlington, VT; Dunnellon, FL, and Provo, UT) sold their operations at a significant loss.
Key Takeaways
Municipalities have justified their investment in municipal fiber networks as a way to promote economic growth or improve broadband price and service quality. The Penn Law study determined that such benefits only represent part of the story. The question becomes: Can municipal fiber projects support themselves, or will they create deficits that cities must cover from general tax revenue and/or with government subsidies?
To reduce the risk of failure, the Penn Law study recommends that a municipality compare its plan to similar other projects that succeeded or failed. Broadband Access, Equity, and Deployment (BEAD) grants are available for state and local governments to extend broadband infrastructure in unserved and underserved areas, as Inside Towers reported. But instead of using BEAD funds for their own project, municipal officials might find more efficient ways for public funds to subsidize citizens in areas where high-speed internet service already exists.
The study noted that as an overbuild, a municipal fiber project is not likely to gain subscribers very quickly following launch. An incumbent’s natural response to a new market entrant is to lower prices, making it harder for that new entrant to attract paying subscribers and to generate positive ANCF.
At the same time, it is unclear whether greenfield municipal fiber projects in unserved areas would be more likely to succeed. Greenfield projects involve areas that other providers generally regard as financially unattractive. But then again, there is no competition.
By John Celentano, Inside Towers Business Editor
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