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The Perils of Government Owned Networks

January 9, 2012

You may remember the iconic line that Kevin Costner made famous in the movie Field of Dreams, “build it, and they will come.” And while simply believing hard enough in the success of a dream may work in the movies, some state and local governments have experienced a rude awakening when gambling with their budget dollars on risky government owned network (GON) projects.

“The Hidden Problems with Government-Owned Networks,” a study published today by Joseph P. Fuhr Jr.,PhD, Professor of Economics at Widener University, in conjunction with the Coalition for the New Economy, examines the budget-crushing dangers for towns all across the country that attempt to use funds that might be best utilized for essential services such as fire protection, law enforcement, and education. The paper also offers a cost-benefit analysis of government-owned and -operated broadband networks throughout the United States and finds that many are high-risk, low profit generating expeditions.  It shows that municipalities seeking broadband access may want to rethink entering into these costly ventures, especially considering the fast-paced, in-depth, high-tech and high-cost nature of the telecom industry, whereas private sector companies may be best equipped for the task.

Highlights from the paper include:

  • Several case studies in which government-owned networks (GONs) suffered significant failures and as a result taxpayers in those states were left with limited access to broadband and an extremely high deficit within their small communities. In fact, “the National League of Cities reports that the financial status of cities continues to deteriorate and that declining revenues have forced cities to decrease their workforce, infrastructure and key services;” meaning that all funds with in a municipality are sacred and should be used for essential needs such as public safety workers, and teachers, not government provided broadband.
  • There is a definite need for a more in-depth cost-benefit analysis provided by municipalities before funding is awarded. “According to our study Government-Owned Networks fall short in four major ways: (1) The initial investment is generally higher than planned; (2) Penetration rates are systematically overestimated; (3) Revenues earned are lower than expected due to responses from competitors; and (4) Operating costs are almost always underestimated.” To date these issues have not been discussed realistically in business plans provided by GONs.
  • Government-Owned Networks often compete unfairly within a municipality, making it difficult for private industry to remain relevant or enter into a market. “Government can compete unfairly with private firms because it does not face the same burdens of taxes, cost capital, rights of way and liability insurance… Freedom from taxes is a special advantage to GONs since telecommunications services is one of the most highly taxed, industry.”
  • Solutions to the problem of limited broadband access include government subsidies to private companies to build out in areas that are not profitable; lower disincentives such as taxes and fees for private companies to encourage private build out. “Cooperation between government and private firms will, in most cases, maximize consumer welfare.” It is through partnership and innovation that we will be able to expand broadband access to all Americans.

 

We want to thank Dr. Fuhr for his insightful analysis of Government-Owned Networks.  We are extremely excited to share his work with you. Click here to read the paper in its entirety.

 

 

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