Policy Documents

November 2004: Broadly Speaking, This Is Not the Government’s Business

Joseph L. Bast –
November 1, 2004

Most people know, either from reading the newspapers or common sense, that local governments should not attempt to compete with private businesses to provide goods and services. Nevertheless, every few years a gaggle of consultants emerges seeking to sell local officials on the idea of getting into this or that business. The latest fad is municipal broadband networks.

A Familiar Story

Everywhere municipal broadband is being considered, the story is pretty much the same. Some elected officials decide their community is being “underserved” by local telephone and cable companies and that the lack of state-of-the-art broadband services hurts economic development efforts, schools, libraries, hospitals, the police department, local utilities, and, well, fill-in-the-blank.

The city hires consultants to study the matter, and (surprise, surprise!) the consultants say a fancy fiber-to-the-home (FTTH) broadband network is just the thing to turn Smallville into a “business magnet” and “the next Silicon Valley.” Such a network runs fiber-optic cable directly to homes and businesses and makes possible fast uploading and downloading of very large files, including video, data, and computer software.

The consultant (surprise, surprise!) offers to act as general contractor for the municipal broadband network, lining up other firms with expertise in building and operating broadband networks. The price tag is high, though, so voters are asked to approve general revenue bonds to pay for it.

Around this point, the public starts to learn about the effort. First they experience sticker shock: The proposed network for Illinois’ Tri-Cities (Batavia, St. Charles, Geneva) would cost between $57 million and $62 million, or nearly $4,000 for every home and business connected. Then they learn the prices won’t be lower than, and the applications won’t be as comprehensive as, what they are currently getting from cable, telephone, and satellite companies. Finally, if they are lucky, they will learn other communities that attempted to build their own broadband networks lost their shirts, leaving taxpayers or ratepayers (in communities that own electric utilities) holding the bill.

Broadband Is Everywhere

Two years ago, not everyone who wanted it could get Digital Subscriber Line (DSL) service from their telephone company or cable modem service from their cable company. Today, DSL and cable broadband are nearly ubiquitous, and they are facing strong competition from Direct Broadcast Satellite (DBS) service available from DirecTV and EchoStar and MDS (multipoint distribution service), or wireless cable, from many local providers. Starting next year another platform, WiMax, will be deployed in communities across the country.

The price for DSL is now generally between $27 and $37 a month, cable broadband is about $43 a month, and satellite broadband is between $59 and $89 (after the dish is paid for) a month. WiMax will probably cost only $25 a month.

Critics say these platforms are inferior to FTTH, but the performance gap has closed in the past 24 months and is likely to get smaller still in the near future. DSL now can reach 3 to 6 Mbps (largely in support of video applications), and an enhancement to the standard that can accommodate up to 15 Mbps will begin deployment in 2005. Cable modems provide high-speed data distribution between 500 Kbps to as high as 3 Mbps. Wireless broadband can reach 54 Mbps, depending on several factors. WiMax will offer speeds of between 17 Mbps and 75 Mbps, depending on distance from the tower and other factors.

No Economic Boon

Consultants often try to sell municipally owned broadband networks by claiming they are essential to economic development efforts, but their reports invariably present no evidence of a link between broadband and economic growth. In fact, econometric research consistently finds subsidies to corporations--whether in the form of cheap access to land, sewers, or broadband--are an unreliable and often counterproductive strategy for economic development.

Cities and states that try to bribe businesses to locate in their borders do not create jobs or increase personal income at higher rates than cities and states that don’t. One reason is that the cost of paying for these subsidies, borne by everyone in the community, hurts existing businesses and prevents them from growing. Another reason is that politicians are notoriously bad at picking winners.

How Efficient?

Another claim commonly made by advocates of municipalization is that public utilities operate more efficiently than private companies. They do, after all, have some advantages, such as access to rights of way, tax-free financing, and no shareholders to pay off.

However, research on the costs and quality of public services produced via municipal ownership versus private provision is extensive and conclusive. It shows privatization, not municipalization, delivers significant cost savings, greater accountability and responsiveness to consumers or elected officials, and a level of quality equivalent or superior to public-sector delivery.

Experts who have studied the matter say private firms typically outperform government agencies because they have less bureaucracy and higher worker productivity, attributable to better supervision, less paid time off, and superior equipment. Those factors are more common in the private sector because firms must compete to produce higher quality and lower costs or they lose business to more-efficient competitors. Because they do not need to compete to survive, government agencies can remain indifferent to these considerations.

Warning: Losses Ahead

Of some 55,000 towns and municipalities in the U.S., only about 200, or 0.5 percent, operate municipal broadband networks. Many communities that have taken the plunge have experienced large losses that must be paid for by taxpayers or ratepayers.

For example, Iowa Communications Network “consistently requires large subsidies to continue in business”; California’s CALNET system was some $20 million in debt when it was privatized in 1998; Lebanon, Ohio originally projected the cost of building its FTTH network at $5 million and ended up spending $9 million and later had to authorize $14.8 million in mortgage revenue bonds to cover operating losses; and Marietta, Georgia lost more than $35 million operating its municipal broadband network before it was sold (at a loss) to American Fiber Systems in September 2004.

A few minutes spent on the Internet searching for “municipal broadband losses” produces many newspaper articles reporting similar financial troubles facing municipal broadband and cable networks in many other towns and cities.

Conclusion: No Deal

Municipal ownership of broadband networks, in short, is probably not in the best interests of residents and most businesses, even in communities not well served today by private providers. Access to broadband services is more widespread than advocates of municipalization claim or admit, suggesting the real issue is not availability but price and who should pay it.

It is unlikely that more than a small number of residents would benefit from a municipally owned broadband network, that their benefits would justify the steep cost, or that it is fair to force other residents and businesses to subsidize them. It is fanciful to imagine that municipal broadband is a cost-effective way to promote economic development.

Very few cities attempt to build and own broadband networks because the costs and financial risks are simply too great. Cities that have taken the leap simply illustrate the riskiness of the venture, costing their taxpayers and ratepayers millions of dollars in subsidies with no end in sight. Threatening to build a municipal broadband network may have been a good strategy two years ago, to prompt the incumbent cable and telephone companies to make good on past promises. Following through with municipalization, however, is not a good idea.

Joseph L. Bast is president of The Heartland Institute.