Wednesday, May 24, 2017

Observations on Penn Law review of muni fiber

New Penn research assesses financial viability of municipal fiber networks •Penn Law: Using industry standard financial analysis tools on five years of official data, the study finds that 11 out of the 20 fiber networks assessed do not generate enough cash to cover their current operating costs and only two out of the 20 are on track to recover their total project costs during their 30-40 years of expected useful life. Key findings include:

  • 11 of 20 projects studied are cash-flow negative, many substantially so.
  • 5 of the 9 cash-flow positive projects are generating returns that are so small that it would take more than a century to recover project costs.
  • 2 of the 9 cash-flow positive projects would have a recovery period of 61-65 years, beyond the expected useful life of a fiber network.
  • Only 2 of the 20 projects studied earned enough to expect to cover their project costs during the useful life of the networks, one of which is an outlier that serves an industrial city with few residents.
  • The analysis also models the returns for a hypothetical project, finding it would take over 100 years to recover expected project costs.

Three observations on this study:

  1. The study's findings do not invalidate the concept of municipally operated telecommunications infrastructure per se. Rather, they suggest the financial model requires further assessment and adjusting and enhanced federal subsidization.
  2. The scope of the study does not encompass the external benefits of modernized telecommunications infrastructure, particularly in areas where investor-owned private network investment would also be NPV (Net Present Value) negative, miring these areas with substandard infrastructures and associated adverse economic implications.
  3. The executive summary states that "[a]lthough some claim that investing in fiber serves a necessary function of future-proofing a municipality’s infrastructure, evidence shows little current need for such high broadband speeds." This is the classic infrastructure planning error of estimating future infrastructure needs based on present needs and detracts greatly from the study's credibility since this point is typically made by legacy incumbent telephone and cable companies opposed to public sector telecommunications infrastructure modernization projects as an encroachment on their largely unregulated service territory monopolies.

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