Why municipalities should stop trying to subsidize broadband access

Some municipal governments concerned that their residents do not have sufficient access to broadband have launched their own broadband services, only to find that government-run broadband utilities lead to more problems than they solve. Fortunately, some municipalities are starting to recognize the downsides to government-run broadband services.

Traverse City, Michigan was considering adopting a municipal broadband project by its city-owned utility, but recently changed course. It is now seeking proposals from private providers to build and maintain a proposed fiber network. Municipalities should follow this example and carefully examine the economic consequences before investing in such costly broadband projects.

Government-owned broadband networks are not the only way to reach presently unserved Americans, and for most areas they are not the best option. Instead, Congress, the Federal Communications Commission, and local governments can do more to facilitate private broadband deployment to unserved areas. These actions, more often than not, are the preferred solution to the perceived problem of insufficient broadband access.

{mosads}The usual justification for municipal broadband is that having too few broadband providers chokes off opportunities for local businesses and individuals who depend on reliable broadband access. Economists call this a “positive externality” problem, which means that suppliers are producing less than is socially optimal because they are not considering the economic spillover benefits to other parties who would use Internet access to grow their businesses and hire more employees. Studies have generally found, however, that municipal broadband has had little impact on local employment, wages, and economic activity, especially in the long run.

Having a municipal broadband provider leads to other problems. The local government is both regulator and provider, so it has the incentive to favor the government-run service over private competitors. Any private firms considering investing in a market with a municipal broadband utility must be concerned that a future local government may try to prop up a failing broadband utility by favoring it over private providers.

Municipal broadband projects have proven to be risky investments. A recent paper by Professor Christopher Yoo, a member of the Free State Foundation’s Board of Academic Advisors, shows that the fiscal performance of government-run broadband utilities is very poor. Local governments usually finance the project with long-term bonds, which can become burdensome when the broadband utility does not live up to expectations. Some states offer guarantees for local bonds, but that only shifts the burden of failure to other state taxpayers who receive no benefits from failing municipal broadband services. And it is not uncommon for a failed municipal broadband project to be sold to a private provider for a loss.

Rather than resort to government ownership, the usual economic response to a positive externality is to encourage private firms to provide more of the service. Local governments that want to increase broadband availability should start with approaches they use to lure employers to their area. They should first lower regulatory impediments to private deployment, expedite permitting and licensing, and assist private providers in obtaining rights-of-way.

If a local government concludes that these regulatory approaches are not sufficient, they may want to consider carefully targeted subsidies to promote broadband deployment or partnering with a private provider. All these measures should be explored before resorting to creating a government-run broadband system.

At the federal level, policy should focus on reducing regulatory barriers for all broadband technologies. The FCC is already considering proposals to streamline the application process for pole attachment requests for fiber and cable providers, to expedite the replacement of copper wire, and to prevent the enforcement of local laws that inhibit broadband deployment. Congress is considering the Broadband Conduit Deployment Act of 2017 to implement a “dig once” policy to encourage installing broadband conduits during the construction of highway projects, which would reduce costs for broadband providers in unserved areas.

To the extent that wireless and satellite broadband services are becoming practical alternatives to wireline broadband services, much of the argument for government-run broadband no longer applies. The FCC has proposed a rule to streamline satellite broadband deployment, which could be a cost-effective solution to delivering broadband to unserved areas. The FCC is considering other rule changes to accelerate the deployment of mobile broadband, which is becoming a viable substitute for wireline broadband, especially as next-generation 5G technology emerges.

Even if only some significant proportion of municipal broadband subscribers switch to satellite or wireless broadband, that could threaten the already unstable financial viability of municipal broadband agencies, leaving local or state governments – and ultimately taxpayers – on the hook for future losses.

For Americans who live in unserved areas, the prospect of municipal broadband can seem appealing. But government-run broadband networks, at best, usually are only short-term solutions that lead to future economic problems. In most markets, encouraging more private investment, whether by lowering regulatory barriers or by providing carefully targeted government support to private firms, offers the most sustainable solution to the problem of markets unserved by broadband.

Theodore Bolema is a senior fellow and Michael Horney is a research associate at the Free State Foundation, a nonpartisan think tank in Maryland that aims to promote free market policies.

The views expressed by contributors are their own and are not the views of The Hill.