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Press Release


Government Imposed Broadband Schemes Trap Taxpayers, Sap Competition, Study Warns

For Immediate Release April 9, 2012
Pete Sepp, (703) 683-5700

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(Alexandria, VA) – Local officials continue touting government-backed municipal broadband networks, but hard experience shows that the illusory benefits are far outweighed by the very real liabilities to taxpayers and the economy. That’s the conclusion of a new Policy Paper released today by the 362,000-member National Taxpayers Union (NTU).

“While high-speed Internet is indisputably a boon for consumers, businesses, and the economy as a whole, government-driven broadband projects have often proven to be a bust,” the Policy Paper’s authors, NTU Vice President for Government Affairs Andrew Moylan and State Government Affairs Manager Brent Mead noted. “Whether their intent is to bring new capabilities to the underserved or simply look ‘hip’ to constituents and businesses, municipalities’ trendy plans to construct or expand broadband networks can go horribly awry, terribly fast.”

In 2011, more than 100 government-owned broadband networks in 33 states were completed or underway, constituting a more than six-fold increase over 10 years. Drawing on a variety of examples from around the country, Moylan and Mead make a strong case that municipal broadband ventures can often lead to underwhelming results and overburdened taxpayers.

Among their critical contentions:

Government-driven broadband fails to meet the definition of a public good, whether as a technical term or as a practical matter. In economics, a “public good” is something whose cost of extending to each additional person is near zero, and whose use can’t be blocked for one person without other consumers being excluded. Broadband wiring costs for each household are not inexpensive considerations, and access must be controlled to prevent free-riders from taking unfair advantage. Moylan and Mead contend that municipal broadband supporters really believe their schemes are “good for the public,” a highly subjective term. The authors ask: “After all, coffee undoubtedly improves employee morale in the workplace, but is anyone seriously touting a government-funded coffee machine program for private businesses in the name of worker productivity?”

Contrary to its oft-stated goal of stimulating competition, municipal broadband can actually reduce consumer choice and hurt the development of a healthy marketplace. Private providers can be better off leaving a given market rather than fighting a government entity with advantages such as captive financing (from taxpayers) and no tax liability.

The hidden costs to taxpayers from municipal broadband are considerable and growing ominously. Annual debt service costs for nine broadband networks in Tennessee have risen from just over $100,000 in 2001 to nearly $12 million in 2010. Last month, one sponsoring entity of this project, Chattanooga’s Electric Power Board, faced a downgrade in its debt in part due to concerns over the reliability of its revenue stream from cable and Internet operations. In Utah, the “UTOPIA” network’s $202 million debt is four times larger than the combined general obligation debt of its 11 member cities (general obligation debt is commonly used to finance municipal infrastructure).

Municipal broadband networks can also be poor investments. Despite a business model built on leasing broadband “backbone” as opposed to providing actual service, Memphis Networx failed to turn a profit and was sold at a loss of over $27 million. A somewhat similar arrangement in Burlington, Vermont, led to $17 million of unpaid funds to its parent city, along with allegations of fiscal malfeasance. In places such as Lompoc, California and Marietta, Georgia, subscription rates have fallen short of break-even targets by 50 percent or more, stranding taxpayers with operating liabilities.

The authors also compared municipal broadband projects with other failed government business ventures, such as Harrisburg, Pennsylvania’s incinerator project and the MidAmerica Airport near St. Louis. They determined that one common factor in the anemic returns (or even losses) on these projects is government’s innate inability to play venture capitalist and properly weigh risks against rewards. Unfortunately, city-level broadband schemes show no sign of slowing down, even as the Federal Communications Commission calls for a “National Broadband Plan” whose ambitious goals could entail $23 billion in public expenditures.

Yet, Moylan and Mead also point to hopeful developments. Twenty states have passed laws to curb municipal broadband excesses, among them North Carolina, which requires localities to compete fairly with private providers and ensure that subscribers rather than taxpayers fully fund their operation. Georgia is considering a reform that would go one step further – by stipulating voter approval for any government-sponsored broadband service. South Carolina legislators will be deliberating prudent limits on localities’ broadband ventures this week.

“The march of broadband Internet service has been steadily growing without government subsidies, and there’s little reason to believe it will slow without creation of whole businesses from scratch with taxpayer backing,” Moylan and Mead concluded. “Indeed, this is a march whose pace and direction should be led not by governments, but by consumers – with private providers responding to the drumbeat.”

NTU is a non-profit, non-partisan citizen group founded in 1969 to work for lower taxes, smaller government, and economic freedom at all levels. NTU Policy Paper 128, Municipal Broadband: Wired to Waste, is available online at www.ntu.org.