[1st-mile-nm] Fwd: A New Way to Finance Fiber

[Richard Lowenberg]

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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