JAN

10

How the Trump Infrastructure Vision Should Include Broadband— and Stimulate New Broadband Investment

One of the hallmarks of President-elect Trump’s candidacy was a commitment to major infrastructure investment across the U.S. This memorandum makes the case for including broadband, particularly in rural areas, among the infrastructure categories in any such program—and recommends particular mechanisms that can be included to increase the likelihood of the necessary capital flowing to the areas with the greatest needs.

Broadband gaps align with income level and population density; the infrastructure bill can address this disparity

Americans access the Internet over networks built and owned by phone companies, cable companies, and, in a few fortunate locations, competitor companies. It is the divide in how and where these companies have deployed (or not) and upgraded (or not) their networks that defines the broadband infrastructure deficit in America.

Densely populated, higher income areas have seen not only upgrades of old phone and cable networks to enable new services and high-speed Internet access but also, in many areas, additional investments by competitors in new infrastructure to provide even more competition—and all the pricing and other benefits that competition affords.

In contrast, less densely populated areas and lower-income areas offer lower returns on private investment and have thus stagnated with respect to broadband infrastructure investment. Rural areas, for example, often have only phone company infrastructure and have thus never benefited from competitive cable networks that could provide access to the Internet.

At the core of this broadband investment divide is the relative lack of return on investment in areas with low population density and income level—the private sector simply does not have good reason to invest in certain markets in the fiber optic lines that are the most critical and most costly element of any communications network. Broadband, like any other type of infrastructure, requires massive upfront capital for deployment of services.

Simply put: In those areas, many of them rural, where broadband infrastructure is sparse, the economic reasons are clear—there exists insufficient market and revenue potential to justify the capital cost of either deployment of new facilities or upgrade of existing facilities.

This economic conundrum is the key broadband challenge of our era and the challenge the Trump administration can impact if it so chooses. Governors and mayors, too, can voice their support for such investment in their states and nationally.

Federal strategies can cost-effectively stimulate new private broadband investment to areas that would otherwise not attract private capital

The following are strategies that the President-elect and the new Congress can use to stimulate the deployment of new broadband facilities and to encourage private sector investment and innovation. They range from directly funding fiber and other broadband infrastructure to approaches of modest cost but likely profound impact.

First, include broadband in any infrastructure program, in recognition that the broadband Internet represents the electricity of the 21st century; can more cost-effectively reach remote Americans than can roads or highways; and is absolutely necessary to growth in economic activity. If, as is currently anticipated, the Trump Administration proposes a major infrastructure financing bill, fiber and other broadband infrastructure construction should be part of the bill.

Second, in light of the fact that private capital will flow to the most economically viable projects in the areas where return on investment (ROI) is likely to be highest, the new program should create focused and specific incentives for areas where private capital would not otherwise flow. These incentives could include more robust funding or financial benefits for infrastructure investments in rural and low-income areas—with a particular focus on regions of the country that have suffered most from technology change and globalization. Indeed, in a letter she wrote recently to the President-elect, West Virginia Senator Shelley Moore Capito cited the lack of adequate broadband across much of her state (and the economic impacts of those gaps) in urging the President-elect to prioritize broadband deployment in his infrastructure proposal.

Third, include mandatory Dig Once and construction efficiency strategies, which capitalize on opportunities presented by construction in the rights-of-way—whether by government agencies, utilities, or private entities—to cost-effectively install fiber and conduit. For example, consider a scenario in which funding is allocated to replace an aging municipal water system. If the Trump infrastructure bill includes requirements that the water project simultaneously install conduit in all of the trenches that are dug to replace water mains and supply pipes, the investor would effectively construct extensive broadband infrastructure at very modest incremental price. Dig Once is thus an enormous opportunity at the local level to create a multiplier effect on federal infrastructure funding.

Fourth, create mechanisms for states, localities, and non-profits to partner with the for-profit private sector under the new infrastructure funding mechanisms. State and local governments are in a position to make private investment even more attractive than would be the case purely with the federal incentives that may arise through the President-elect’s infrastructure bill. They should have the opportunity and authority to do so, including by making investments locally, or by accessing some of the mechanisms created by the bill. For mechanisms that are grounded in tax benefits, those benefits should be transferrable and saleable—so as to enable public and non- profit entities to participate and to efficiently resell such tax benefits as tax credits on the market. Sale of tax credits to private entities would bring private capital to areas of the country where private investors may be less likely to directly invest.

Fifth, and in a similar fashion, expand the New Market Tax Credits program and set aside a significant part of it for broadband infrastructure. This two decade-old, proven program allows investors in economic development infrastructure to sell their investment tax benefits on the market, thus realizing cash inflows that can help finance and support the project. This program has long seen bipartisan sponsorship, and it should be renewed and enlarged as a particularly efficient way of attracting private capital to areas that otherwise offer insufficient returns on investment.

Sixth, enable use of tax-free municipal bonds for deployment of communications infrastructure in partnership with the private sector to stimulate a new generation of broadband public– private partnerships (P3). In rural areas of the country, in particular, broadband deployment will not happen without a public role—and P3s frequently require some level of municipal financing through bonds. But tax-free bonds cannot currently be used for P3s because the infrastructure would see “private use” by the private partner. The prohibition on tax-free bonds for P3s makes many P3 infrastructure projects less viable (and less likely to close). Allowing tax-free bonds to fund broadband P3s would not only attract new private capital but would also have modest impact on the Treasury, given that many of these projects would not otherwise happen and thus little potential tax revenue would be lost.

Published: Tuesday, January 10, 2017 by CTC Technology & Energy