Valdosta Should Think Twice Before Taking Telecom Gamble

By Kelly McCutchen

If you owned stock in telecom companies last year, you probably learned a lesson about the risks of investing in the technology sector. These risks point to the need for caution as residents and leaders of Lowndes County review recent proposals for local government to enter the technology business.

Much of the support for the proposed Valdosta Telecommunications Network (VTN) is based on a concern for high prices, particularly for broadband (techno-speak for fast) Internet service. An article in the Valdosta Daily Times reported that Lowndes County residents and businesses would save more than $80 million by entering the telecom business based on a recent study. This sounds enticing, but residents would be wise to remember the old adage, “There ain’t no such thing as a free lunch.”

It would, in fact, be cheaper (and less risky) simply to pay for the assumed savings up front. If the City simply wrote checks to each of the residents equal to the cost savings they would have received had they built the VTN network — 10 percent discounts on telephone services, 15 percent discounts on cable television and up to 33 percent discounts on broadband Internet services — the cost would be less than $7 million in today’s dollars. Compare this to paying more than $31 million in today’s dollars for the VTN network. The difference is that for the VTN network, most of the expenses come at the beginning and most of the revenues come much later as the customer base grows.

The study estimates an initial capital investment of more than $25 million, and a total investment of more than $47 million over ten years. But will even this large outlay be enough? All too often, such networks fall victim to costly overruns and persistent revenue shortfalls. Local communities face a steep learning curve on the technical and financial particulars of the telecom industry, and smaller governments are further hindered by traditional bureaucratic inefficiencies and funding constraints.

And where does that money come from? If existing tax revenues are used, who will plug the holes in the social service, health care and transportation budgets? Who will make up for the franchise fees and other local tax revenues that will be lost? If taxpayers put their savings on Internet, telephone and cable TV services in one pocket, and then pay higher taxes out of the other, are they any better off?

Installation of telecom networks is very capital intensive, even for cities that provide electrical power service and have much of the infrastructure already in place — which Valdosta does not. And the expenses don’t stop after the system is up and running. These networks require constant upgrades as new technology becomes available, and as many natural gas marketers can now attest, you cannot overlook billing and customer service expenses generated when customers move from one provider to another. Finally, government accounting systems were designed for government fund accounting, not the cost accounting necessary to run a business. Without accurate cost accounting, taxpayers, competitors and even local government officials have virtually no way of knowing whether other government functions are subsidizing the service.

Many communities embark on their telecom projects based on rosy financial scenarios or the wishful philosophy of “build it and they will come.” But what if they don’t come? Then taxpayers, rather than private stockholders, will be left holding the bag. Just ask the taxpayers in Marietta who have seen a $33 million investment in their city-owned telecom network lose more than $6 million since its inception in 1996 — and its still losing money.

In addition, major technological advances are now occurring about every 18 months. Communities that invest millions of dollars in creating a telecommunications network today may quickly find themselves owning an overpriced, obsolete network.

Valdosta residents already enjoy the same high-tech services as residents of other major cities — DSL and cable versions of broadband Internet access and cable and satellite digital television. And the prices are competitive with providers in competitive major markets such as Atlanta. Building a taxpayer-funded telecommunications network should be the option of last resort. Not only is this a questionable government activity, but it simply doesn’t make financial sense.

Kelly McCutchen is executive vice president of the Georgia Public Policy Foundation, an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views 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 (April 15, 2003). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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