Funding fiber to the farm
Like finding well-situated season tickets to your favorite sports team, it can be daunting to get a telecom grant or loan from the Rural Utilities Service. But once the task is accomplished, the payback can be enormous.
Start-up communications service provider Air Advantage, for example, was able to use RUS grants and low-interest loans to expand its high-speed wireless network to serve a sparsely populated area of Michigan that had no high-speed connectivity.
“Our cost of expansion prior to the RUS loan was very expensive,” said Scott Zimmer, president of Air Advantage. “I'm not sure we would be in business today if we had continued on that track. In fact, I'm quite sure we wouldn't be.”
Another start-up, Allband Communications Cooperative, is constructing a fiber-to-the-home (FTTH) network to serve around 300 customers in another sparsely populated area of Michigan. (Because the community had no basic phone service, Allband is actually the ILEC for the area.) The company would have been unable to build its network without the RUS loan, said Paul Hartman, general manager at Allband. “No one else would have given us the money,” he said.
Yet, while traditional lenders might look askance at some of these rural telecom business plans, RUS loan recipients have a track record of adhering to their plans and making good on their payments — in large part, it seems, because the requirements for getting the loan are quite stringent. Some say the filing process imposes a crucial measure of discipline on loan recipients.
“It forced us to make a business plan and follow a business plan, and I think our company is successful because of that,” Zimmer said. “You've got to have the mettle to wade through the application process, and it's not an easy process. But the assets far outweigh the challenges of that.”
Since 1935, the RUS has made long-term loans at the government's cost of money to ILECs to provide voice service to communities with 5000 or fewer inhabitants. Since 1996, the program has required that loan recipients build networks capable of providing data connectivity of at least 1 Mb/s, although companies are not required to offer connectivity at that speed at this time.
A broadband loan program was added in 2002 that covers communities of up to 20,000 inhabitants. Unlike the traditional loan program, the broadband loan program is open to alternative communications service providers such as Air Advantage.
Companies get about 18 years to repay traditional telecom loans. The length of broadband loans varies depending on technology, but averages about 16 years.
In 2006, the RUS granted 45 traditional telecom loans totaling $689.8 billion and 15 broadband loans totaling $329.4 billion. The total amount loaned under the traditional telecom program was virtually the same in 2006 as in 2005, although 19 more traditional telecom loans were granted in 2005. An increased emphasis on building FTTH networks caused the size of some loans to increase in 2006.
The total number of broadband loans was up somewhat in 2006 compared to 2005, when only 13 loans were granted. The average loan size increased, too. All 13 loans for 2005 combined totaled just $111.4 billion. Part of the large increase in the broadband loan total for 2006 can be attributed to Fiber 520-522 LLC, which achieved the distinction of receiving the broadband program's largest-ever loan — $127.8 million to build an FTTH network interconnecting 81 communities in Illinois.
A third component of RUS efforts to bring broadband to rural America is its grant program, which includes both a telemedicine/distance-learning program and a program called Community Connect. The latter is another possible source of funding for communications service providers, which can receive grants of up to $500,000 to bring broadband to unserved communities. In addition to broadband connectivity, grant recipients must provide a public area with 10 computer terminals. In 2006, the RUS awarded 21 grants totaling $8.9 million as part of Community Connect.
“I personally don't like the word ‘grant,’” said Jim Andrew, administrator of the Rural Development Utilities Programs, which include the RUS programs. “The word ‘grant’ implies you're giving something. It's our responsibility to make sure these are investments, not handouts. The applications may be tougher than what a local bank would ask for. We do more monitoring, and there are more questions asked.”
Air Advantage was the recipient of two grants totaling $450,000 in 2003, which it used to install wireless towers in two small towns that had no broadband connectivity. Community residents have clearly welcomed broadband. In one of the towns — Unionville, Mich. — part of the grant money was used to expand the library to include the requisite 10 computers. The town of 250 now generates an average of 350 user-sessions per month on the library computers. Donations to the library have increased now that people use it more often.
“It gave us the ability to put some customers on our network at very low cost to us, so we could get some cash flow,” Zimmer said.
Air Advantage's success with the grant money was one of the factors that drove the company to apply for two RUS broadband loans — an initial $1.5 million loan to install 19 additional towers and a $1 million loan to install 12 more towers. Without the loans, the company would have struggled to expand beyond the two towers that were covered by the grant money and the five, self-funded towers it began with in 2002. Air Advantage has 10 years to repay the RUS loans and anticipates no problems in meeting that requirement, as its service area now enables it to reach as many as 65,000 customers in three counties.
Another company that has used RUS loan money to benefit itself and its community is Rural Telephone Service Co., a Lenora, Kan.-based ILEC. The company, incorporated in 1951, has been receiving RUS loans for almost as long as it has been in business.
“Every third or fourth year, we got a loan,” said Larry Sevier, Rural Telephone CEO and general manager, who added that loan money typically is spent over a period of no more than five years. “As we grew from one rural exchange to 29, we put in the latest technology,” he said. “All through the process, we used the RUS program. This area is extremely sparsely populated, with an average of two households per square mile.”
Like many independent telcos, Rural Telephone started a CLEC business, Nex-tech, to overbuild neighboring towns where the incumbent was a major telco that tended to focus its investment dollars outside the community. “We researched some small communities in eastern Kansas that were desperate for broadband,” Sevier said. “With the use of an RUS broadband loan, we began overbuilding some communities with fiber-to-the-home. We've now overbuilt seven small communities. In many, we brought broadband for the first time.”
One of the major ILECs whose territory Nex-tech overbuilt was Sprint. In just one exchange, the new network provided such strong competition that Sprint made a deal to sell that exchange and nine others to Rural Telephony. The ILEC then was able to get a loan to upgrade the additional nine exchanges.
“When we acquired the exchanges, they were going to be brought into our regulated unit, so we used the traditional loan program,” Sevier said. When such a scenario occurs, he explained, “The acquisition must be incidental to the improvement of service. If you want acquisition money, you have to improve services in the area.”
Rural areas like those Sevier serves often struggle to keep residents from moving away. Broadband can help stem or even reverse the tide. “We've had a huge number of success stories from individuals who moved back into Kansas because they wanted to get back into a small community, and now with broadband, they can do business from home,” Sevier said.
He also points to an agricultural manufacturer in Osborne, Kan., that now can use broadband connectivity to do business with overseas customers. “We virtually saved the business because of the speed with which they can now do business,” Sevier said.
Rural Telephone is still paying off some older loans that were granted for periods of up to 35 years, but more recent loans have been for 15 to 20 years. As of 2005, Rural Telephone's loan balance was around $35 million. Sevier said he borrowed another $56 million for the 10 exchanges his company acquired or are rebuilding, and Nex-tech has about $10 million in broadband loans.
It took a lot of courage to increase the company's total debt so dramatically, Sevier said. But he is confident the company will be able to repay it. “We've never had a problem meeting our business plan,” he said.
Despite success stories like Air Advantage and Rural Telephone/Nex-tech, the RUS telecom programs have some critics.
“As far as I can tell, there's never been a cost/benefit analysis done on this program,” said Scott Wallsten, director of communication policy studies for The Progress and Freedom Foundation, a conservative think tank. “If you look at their annual report, they talk about success stories, but none of those demonstrate that there wouldn't have been investment otherwise.”
The program, he said, “should start by trying to identify market failures — what areas won't be served because it's not privately profitable.”
Other critics are concerned about the relatively low numbers of RUS loan recipients, particularly within the broadband program. “The program hasn't been as successful as it could be,” said Rebecca Murphy, an associate at Bennet & Bennet PLLC, a law firm that specializes in rural telecom issues. “The RUS has made an effort to publicize it, but they're not getting enough applicants.”
Murphy speculated that voluminous reporting requirements may deter some applicants. The process also can take longer than some companies may want to wait. “We've had several clients apply for loans. One didn't hear he was denied until two years after the fact,” she said.
Yet, despite such critiques, most companies that make it through the RUS loan application process today ultimately get their loans. The organization didn't reject a single traditional telecom loan application in 2006, said Jacki Ponti, assistant administrator for telecommunications for the Rural Development Utilities Programs.
It's a little different story for the broadband program — perhaps because it is newer. In 2006, 33% of applications to that program were rejected, Ponti said. He then added rejections typically occur because applications don't meet basic regulatory requirements.
Companies that have received grants and loans encourage applicants to work closely with RUS field representatives early in the process to help ensure paperwork is completed properly. “As long as you follow their guidelines and work with them, they're extremely helpful,” Zimmer said.
Read this story's sidebar, “The biggest RUS broadband loan to date,” which was awarded to Fiber 520-522 LLC.
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