Public-Private Partnerships: Financing for Broadband Infrastructure
Public-Private Partnerships: Financing for Broadband Infrastructure
March 2023
Note: The Bank of New York Mellon and the Council of Development Finance Agencies (CDFA) partner on a monthly series called the CDFA // BNY Mellon Development Finance Webcast series. Guest speakers and a BNY Mellon moderator share insights, trends and expertise with state, county, and local development agencies on a wide range of development finance topics.
CDFA Webinar: Financing Broadband Infrastructure with P3s
The latest CDFA webinar sponsored by BNY Mellon explored funding and financing opportunities for broadband expansion. It focused on the resources available for financing broadband and using Public-Private Partnerships (P3s) for development. Webinar presenters shared their insights and expertise in P3 financing for broadband projects.
What is Broadband?
Broadband—defined as high-speed, always-on internet access at minimum speeds of 25 megabytes-per-second upload and three megabytes-per-second download—is critical for modern communication, commerce, and education. Increasingly, public stakeholders see it as a basic utility, like electricity or water. As a result, improving access to broadband internet is a priority, particularly in rural and underserved areas.
However, many governments lack the necessary resources to tackle such projects alone. P3s help them by offering an effective financial mechanism to fund projects to build and maintain broadband infrastructure.
Community-Level Funding Sources for Broadband Connectivity and Social Benefits
A panel of three experts, introduced and moderated by BNY Mellon’s Seth Crone, Vice President, Relationship Management, discussed funding sources and initiatives at the community level for establishing connectivity to deliver broadband’s social benefits.
- John P. Fletcher, Of Counsel, Kutak Rock LLP
- Seth Kirshenberg, Partner, Kutak Rock LLP
- Lindsay Miller, President, Lit Communities
Referring to his expertise in economic development finance, Crone spoke about the challenges of providing affordable high-performance broadband to communities in the U.S. The digital divide has persisted for decades. Projects typically call for significant capital investment.
However, P3s are emerging as an approach to closing the gap. By combining elements of both public and private models, P3s provide a framework for risk allocation during development and maintenance. “Corporate trustees like BNY Mellon play a crucial role by representing the various interests of all partners and investors and guiding the issuer over the life of the asset,” said Crone.
As a Partner with Kutak Rock, Kirshenberg has worked on financing and structuring over $20 billion in P3 transactions, including for broadband infrastructure. Public partners may provide funding through grants, bonds, or other mechanisms. According to Kirshenberg, P3s can take many forms, depending on the nature of the project and the goals of the public and private partners., adding that “they mean a lot of different things to a lot of different people.”
Common Types of P3s Include Concessions, Availability Payments, and Hybrids
- Concession/Demand-Risk Projects: The developer designs, builds and finances the project for new or existing facilities. User payments finance the project as the developer monetizes the new or existing asset. Projects such as toll roads, broadband, student housing, and parking often use this model. It can be an effective way to leverage the expertise of the private sector while ensuring that the infrastructure is well-maintained.
- Availability-Based Payment Structures entitle developers to payments from the government as long as construction is complete and contract conditions are fulfilled. Availability payments cover operating and maintenance costs, debt service costs (for the installation), and equity returns. They can be effective when the private partner is responsible for both construction and ongoing infrastructure maintenance.
- Hybrids include a mix of concessions and availability-based payments, evolving based on a project’s timeline and needs. Most P3 projects fall into this category. “If you look at the examples of broadband P3 projects, they’re really a mixture of concession and availability payments,” Kirshenberg added.
Challenges and Best Practices for Managing P3s in Broadband Deployment
P3s offer many benefits for broadband deployment. They bring private entity management and construction expertise to complex technical projects. In addition, they include checks and balances from capital market participants who want to see a return. In case of project trouble, investors have incentives to find other managers and make the project work. Finally, P3s create potential revenue in many jurisdictions. When they succeed, P3s help public entities achieve realistic goals while providing substantial community benefits.
However, success is not always a guarantee. P3s can be complex to set up and manage. Numerous legal issues can introduce challenges, Fletcher explained, drawing on his extensive experience drafting and negotiating telecommunication infrastructure agreements.
For example, per federal law, state and local governments have had to provide access to private carriers to the public rights of way in a manner that was not competitively discriminatory and did not create a barrier to entry. Even though local governments retain broad discretion, the private sector has licensed access. As a result, they own the poles, conduit, and cables.
According to Fletcher, “Policies around access are critical to whether programs will be feasible and whether they’ll be efficient or run into delays and obstacles.” In addition, state and municipal statutes can impose further restrictions or require political referendums to approve activity.
Given these complexities, “Selecting the right partner is the most important factor for P3 success,” concluded Kirshenberg. Lit Communities has helped several projects succeed. Lit is a private fiber provider that helps municipalities build fiber broadband networks in a way that keeps the community’s needs front and center. Deployments include Medina County, OH; Brownsville, TX; York County, PA; and Monongalia County, WV.
“What a public-private partnership comes down to is a balance of risk and control between the private and public entities,” says Miller. In that spirit, Lit Communities works with municipal leaders to imagine what a solution would look like, how it would benefit the community, and how the community can fund it. They work closely with local teams for the build-out and operations of broadband networks. Their model includes offering open access so that communities can also benefit from telehealth services, smart city applications, and other innovations that sit on top of the broadband network.
In addition, evaluating the capital stack is a critical step for P3 broadband. Mechanisms may include grant funding, accessing capital through partners, or exploring traditional financing tools that are becoming more available for broadband. “We bring capital partners to the table to ensure the best financing options are utilized to support the development of the broadband network. Through this process, we carefully consider and explore all available options to ensure the successful financing of the project,” explained Miller.
Unlocking Broadband Deployment Potential with P3s
Bridging the digital divide is essential for promoting equity and economic growth in the United States. P3s have the potential to be an effective way to address the challenges of building and maintaining broadband infrastructure. As governments seek to expand access to broadband internet, P3s can provide the necessary resources and expertise to ensure these projects are successful. First, however, it is crucial to carefully evaluate the benefits and risks of P3s and ensure that these projects serve the community’s needs. By working together across sectors and exploring innovative solutions, the P3 model helps deliver value for local governments, communities and capital market investors.
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