Stirring the Pot – More thoughts on partnering

As originally posted on the Blandin on Broadband blog

More thoughts on partnering…

Based on the number of prospective Border to Border grants that I have been hearing about,  I was thinking about how competitive this grant round will be.  This is a new world for both providers and communities.  At a recent Blandin Foundation Broadband Strategy Board, one member was smart to remind us “These are not partnerships, they are business transactions.”  It would be smart to remember some economic development basics as communities negotiate these deals with providers.  As in most site selection competitions, there are many more communities than expanding provider companies.  This smaller set has the advantage as they negotiate with multiple communities and know what each community is offering as incentives.  Communities, possibly under non-disclosure agreements, will be tempted to sweeten the pot to become a selected community partner of that limited set of providers.  With such a new program, the parameters of a good deal are more uncertain than more standard manufacturing or housing development deals.

Many communities will be talking prospective partnerships with CAF2 providers.  In some ways, this will require a more sophisticated approach than dealing with a competitive provider building a new Fiber to the Home network.  In the latter case, there is likely a feasibility study done by a third-party consulting firm on behalf of and paid for by the community.  That consultant generally has a legal and professional obligation to represent the best interests of the community.  Prospective costs, revenues, take-rates and pro forma financial statements can be used to determine the financing gap and reasonable local partner share. In addition, the new network will already be able to provide services well in excess of the 2026 state broadband standard of 100 x 20 Mbps and probably up to a Gigabit of service on Day One so future risk is minimized.  That network is a permanent community asset.

Striking a deal with a CAF2 provider on an improved fiber-copper hybrid network will be more complicated both financially and strategically.  Obtaining financial information from these larger providers may be more difficult and communities will be relying on the prospective partner rather than a third party under contract to the community. In addition, with the larger company, the financial accounting is likely to be complex.  Most challenging will be understanding the net result of the network investment.  With fiber-copper hybrid networks, delivered speeds will be inconsistent depending on loop lengths and condition of existing copper lines  both outside and inside the customer homes.  While DEED OBD requires that networks be scalable to deliver 100 Mb x 100 Mb services, significant additional future investment may be required to obtain that network capacity, and unless contractually agreed to, the company is under no obligation to make those future investments.  And the same difficult rural countryside business investment case will be present that exists today.

In the economic development world, clawback provisions are often included in incentive packages.  If a company fails to meet the goals set in the contract agreement, it must pay back all or some of the paid incentive.  Communities should consider inserting clawbacks into their agreements with provider partners.  For example, the state’s 2026 goal for broadband is 100 x 20 Mbps to all households in Minnesota.  Committing to reach that goal by 2022 or 2026 would be a minimum standard to include in any agreement with a provider partner.  Clearly, with gigabit services being increasingly common today, setting a standard of one-tenth of that to be met in ten years seems almost inadequate. More aggressive agreements could be negotiated, including the idea that any local funds would only be committed if all affected residents would have access to the 2026 goal with this project is completed in 2017-18.   If the community can not reach an agreement to get the network they need to compete for residents and businesses, it may be best to wait for the next grant round and to seek a different partner.

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