[1st-mile-nm] Fwd: A New Way to Finance Fiber
Richard Lowenberg
rl at 1st-mile.org
Wed Oct 17 11:32:09 PDT 2018
A New Way to Finance Fiber
by Doug Dawson, CCGConsulting
https://potsandpansbyccg.com/2018/10/17/a-new-way-to-finance-fiber/
I recently was part of a team that brought the financing to build fiber
in Dallas, Oregon. The new fiber business is operating under the name
Willamette Valley Fiber. Dallas is a community of over 15,000 located
near to the state capital of Salem. As the title of this blog suggests,
this project was funded in what I am sure is a new way for the industry.
The funding uses what might best be described as private activity bonds.
This are municipal-like bonds that are distributed in the public bond
market. In this case the bonds, and the network, are owned by a
non-profit corporation. The primary benefit to this financing structure
is that the City doesn’t have to go onto the hook for the new debt –
something that many cities are reluctant or unable to do. Building fiber
networks is expensive and many cities are unable to tackle the size of
the needed debt. In this case, the City of Dallas, while thrilled to be
getting the fiber network, is not associated with or a party to the bond
financing.
If there is any one hurdle to the financing structure it’s that these
are pure revenue bonds – meaning that they only are supported by the
revenues of the project. There are no backdrop guarantees by a City or
anybody else to support the bonds if the project doesn’t perform as
expected. That means that any business plan funded this way must be
solid and conservative to make sure that revenues will cover costs. That
leads to a few key characteristics for a project to be funding in this
way:
Bond financing generally will have higher up-front costs than other
kinds of financing, but they are usually offset by lower interest rates.
The high up-front costs mean this kind of financing is only cost
effective for projects the size of Dallas or larger.
It’s essential that there are no cost overruns from construction because
there is no party, like an underlying City, that can step in to make up
for any cash shortfalls. This means that engineering must be done before
funding, and that a design-builder must be found that’s willing to build
the network for a guaranteed price. This means tying down not only fiber
costs, but the costs of drops and electronics.
It’s also mandatory to understand the community, and that means doing
surveys and other market research to make sure that the community is
receptive to buying from a new fiber network. It’s easy to just assume
that fiber sells, but one of our products at CCG Consulting is doing
surveys and we’ve seen major differences from market to market,
sometimes even within the same region.
It’s also mandatory to have a cost structure that minimizes expenses.
The best way to do that is to find an ISP operator who’s already
successfully operating a fiber business. There are significant expense
saving when an ISP opens an additional market. The fiber business is
largely an economy of scale business and there are huge benefits to an
operator for spreading joint and common costs across an additional
market.
This means that the best structure for this kind of financing is to find
an existing ISP willing to tackle operating the new market. That
operator will benefit financially by allocating costs to the new market,
and the new venture benefits by lower costs. As an example, if an ISP
opens up a new market that doubles their size, the cost for something
like the salary of their CFO effectively is halved for the original
business as half of the CFO’s cost is allocated to the new market. The
new market benefits by getting a CFO for half of the cost compared to
hiring one.
In Dallas the operator is MINET, a municipal ISP that is owned jointly
by the nearby cities of Monmouth and Independence Oregon. MINET has been
effective as an ISP with a market penetration in their own markets of
nearly 85%. The Dallas expansion offers the opportunity to double their
customer base, meaning that they can allocate a high percentage of
existing costs to the Dallas venture – a win-win for both parties.
Our team is interested in developing more fiber ventures that meet the
above criteria. I’d like to hear from communities that want fiber and
that already know of a nearby quality ISP that would be interested in
operating the business.
I’m also interested in hearing from existing ISPs that can meet our
criteria. We’re only interested in ISPs with a track record of success.
An ISP can benefit two ways from such a venture – they can gain economy
of scale and allocate a lot of existing expenses away from their current
business. An ISP-operator also can benefit from profit sharing if the
new venture is successful.
You can contact me at blackbean2 at ccg.comm if you think you have a
project that can benefit from this kind of financing.
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Richard Lowenberg, Executive Director
1st-Mile Institute 505-603-5200
Box 8001, Santa Fe, NM 87504,
rl at 1st-mile.org www.1st-mile.org
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