On Muni Broadband, Buyer Beware

By Kelly McCutchen

A year after the Savannah City Council approved a $62,500 contract asking consultants to explore potential demand for a municipal broadband network, the firm finally has released its findings and recommendations. 

Magellan Advisors outlines three options: building and operating a taxpayer-financed network providing service directly to consumers at a cost of $116 million; building and operating a taxpayer-financed network providing service only to government offices at a cost of about $13 million; or joint ownership of a fiber-to-premises system with a private entity at a total cost of nearly $13 million, with taxpayers responsible for $6.6 million.

Thankfully for the strained city budget, Magellan says the first option wouldn’t work here. Perhaps that’s because the system would require the city network to attract 43 percent of all households and businesses in order to pay back the bonds needed to build it. (Interestingly, 43 percent is the same percentage broadband consultants told Seattle it would need in order to keep a city-run system afloat. Seattle abandoned the idea of a city-run network after that report was issued.)

A subscription rate of 43 percent would be virtually impossible since the vast majority of residents already have access to broadband. According to Broadband Now, a group that believes “broadband Internet should be available to all Americans,” 95 percent of Chatham County residents have access to Internet speeds of 100 megabits per second or faster. In Savannah, residents can get speeds up to one gigabit per second. (For those unfamiliar with broadband lingo, that’s fast service. In fact, those are some of the fastest speeds in the United States.)

City-owned networks also compete on an unfair playing field. Not only are they subsidized by taxpayers and, often, electricity ratepayers (which means the government can come in and bail them out whenever they want), they don’t play by the same rules. Their regulatory barriers to entry are less significant and they’re exempt from certain fees.

Savannah doesn’t want to end up like Marietta. As the Georgia Public Policy Foundation has highlighted, Marietta spent more than $30 million on a government-run network. After a few years, that network was sold to a private developer for only $11 million. Why did it fail? According to the National Taxpayers Union, the city managed to lure only 180 customers away from those existing providers. No wonder Marietta’s mayor said the city should never have tried to offer internet service.

Magellan agrees a network wholly owned by the city is a bad idea, but it’s not clear a public-private system would be any better, or even necessary. The public-private partnership would still cost taxpayers $6.6 million. Annual bonds payments on that would be an estimated $571,000 a year and the city would only save about $112,000 through lower Internet service costs. That leaves a budget shortfall of $423,000 a year. The city would never become cash flow positive and is unlikely to be able to pay back the bonds within 20 years.

Savannah residents also deserve to know whether the consultant will be asked to partner with the city to build this network, as sometimes happens. If the consultant producing the report that says a city needs government-run broadband is in position to score the lucrative contract to build it, that’s a big conflict of interest that should be disclosed.

Encouraging a competitive market in broadband internet services for residents and businesses is a good idea. But when consultants suggest government needs to enter this business to “improve” it, we have two words: Buyer beware.

Kelly McCutchen is President of the Georgia Public Policy Foundation, an independent, nonprofit think tank that proposes market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the view of the Georgia Public Policy Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

© Georgia Public Policy Foundation (June 28, 2017). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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