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The gift that keeps on taking

A headline of a recent Wall Street Journal piece read: "Municipal Broadband Is No Utopia. Many projects are white elephants." The piece was not about Champaign-Urbana, but it had a familiar ring. An 11-city consortium in Utah built a fiber-optic network to enhance the desirability of the area for citizens and businesses, spending over $200 million raised by bond issuance and borrowing from a federal agency in the Department of Agriculture.

Unfortunately, the high expectations for the project did not materialize. The 11,000 subscribers fell far short of the projected 50,000 users. Subscriber payments have not met the annual operating costs and the network now has a reported negative net worth of more than $100 million -- a burden that must be addressed by local taxpayers.

The Utah network began prior to the federal stimulus program initiated in 2009, so the local taxpayers had to bear most of the cost. Spurred by federal funds, there now are around 400 communities with broadband networks, including Champaign-Urbana.

Fortunately for Champaign-Urbana (but not for taxpayers at large), most of the Champaign-Urbana project was paid by federal stimulus funds and the state of Illinois. It was reported that the $31 million project was funded by $22.5 million in federal funds and $3 million from the state, with the remainder coming from local sources.

From the beginning, the project was beset by both technical and administrative problems. It took much longer than expected to complete the project and connect customers. The subscribers did not come in the numbers expected -- reaching only 40 percent of the projected number. This is explained by several factors. First, the broadband construction was targeted for so-called underserved areas, but these areas are the least likely to use the Internet even when it is available. Even with all the subsidies, the subscription costs were close to the fees of existing providers such as Comcast. The high-speed features of a fiber optic network were not highly valued by most potential users in the underserved areas. Further, numerous operational and administrative problems frustrated subscribers. Not surprisingly, government agencies were not well-equipped to manage an Internet network.

The end of federal operating subsidies in 2013 put additional financial and operational pressure on the local governments. These problems were met with attempts to outsource the operations to private providers. The existing situation is not viable in the long run. The system must expand both the number of subscribers and the geographic coverage with private funds. It is not clear that this expansion will be forthcoming.

The situation in Champaign-Urbana network illustrates the problem of decision-making by people and organizations that do not have to bear the full costs of a proposed activity or project. Does anyone believe that the local community would have raised $31 million in taxes or borrowed funds (similar to the Utah network) to build the network? However, when the federal government and the state of Illinois were willing to provide nearly four-fifths of the construction costs, it became an offer that could not be refused.

While it may have seemed like a good idea at the time, in retrospect, it appears to be a clear misuse of resources. The community now has $30 million of infrastructure that might in other circumstances be very useful, but is unlikely to meet ongoing operating costs without major changes.

There is a dual tragedy connected with the federal stimulus program. First, the stimulus appears to have not been effective in generating recovery from the 2007-2009 recession. The second regret is that the stimulus funds were spent on projects of dubious merit. Was a fiber-optic network the best use of $31 million to improve Champaign-Urbana? Had the community been provided a $31 million grant, would it have been spent on the network instead of badly need infrastructure improvements directed to transportation and education?

Economist J. Fred Giertz is on the faculty of the University of Illinois' Institute of Government and Public Affairs. He can be reached at 217-244-4822 or jgiertz@uillinois.edu.

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