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Stimulating Competitive Disadvantages in Broadband

Posted By Diane Katz On August 31, 2010 @ 2:00 pm In Economics | Comments Disabled

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By now it’s obvious that the government’s “stimulus” spending spree has failed to achieve its intended results—just as critics of Keynesian economic theory predicted. Compounding the policy blunder is the failure of officials to properly vet some of the costly public works projects.

Case in point is the $7.2 billion broadband deployment scheme: Federal officials failed to determine whether targeted communities actually lack Internet service options. In a number of cases, in fact, the government subsidies will put existing private service providers at a competitive disadvantage.

Some $2.2 billion has already been allocated by the Departments of Commerce (DOC) and Agriculture (DOA) to enhance broadband services in “unserved” and “underserved” areas. (The balance of funding is scheduled to be awarded by September 30.) But according to a newly released report [2] by the Government Accountability Office (GAO), program officials “lack detailed data on the availability of broadband service throughout the country, making it difficult to determine whether a proposed service area is unserved or underserved.”

Up to $350 million of the broadband funding is earmarked for developing a nationwide map of broadband service availability. However, the mapping project [3] will not be finalized until at least 2011. And, given the dynamics of the broadband market, with customers constantly moving between various technologies, the map will likely be obsolete by the time it is completed.

In processing grant applications, both DOC and DOA solicited public comments on the availability of service to determine whether a subsidized project would constitute an “overbuild.” But according to GAO investigators, the process was “cumbersome,” and the resulting analysis “inconclusive” at times. During its review, in fact, the GAO found several instances of projects that compete with existing providers.

That helps to clarify why Texas, with some 161 existing providers of high-speed broadband service, was granted a whopping $184 million in deployment subsidies—more than any other state in the first round of funding. Kansas, with 96 existing service providers, was granted more than $121 million, while Pennsylvania received $135 million despite a total of 87 services providers statewide.

It turns out that the program rules allow up to 25 percent of a government-financed deployment project to compete with an existing service provider. Consequently, the subsidized projects could very well squeeze out the jobs and investment that stimulus funds are intended to promote. GAO investigators noted that “funding projects … where there may already be existing providers could potentially discourage further private investment in the area and undermine the viability of both the incumbents’ investment and the broadband stimulus project.”

This disregard for the private sector is all too reminiscent of the municipal broadband craze that swept the country earlier this decade. Dozens of local governments hatched plans to build and operate broadband networks or develop broadband infrastructure for wholesale lease to commercial service providers. But as they lacked the expertise and flexibility of the private sector, the results weren’t pretty. Many of the projects were never completed, while others saddled taxpayers with unwelcome debt.

Proponents contend that the broadband subsidies will stimulate economic growth, create jobs, and alleviate computer illiteracy. But that won’t happen if, in the process, the subsidized services undermine private sector investment. If public officials are so intent on promoting broadband, the far better alternative is to reduce the tax and regulatory barriers that inhibit universal deployment.


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URL to article: http://blog.heritage.org/2010/08/31/stimulating-competitive-disadvantages-in-broadband/

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[1] Image: http://www.foundry.org/wp-content/uploads/broadband.jpg

[2] newly released report: http://www.gao.gov/new.items/d10823.pdf

[3] the mapping project: http://blog.heritage.org../2009/11/25/ready-fire-aim-gao-questions-timing-of-broadband-stimulus-grants

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