Why Should the State of Vermont be Helping Fund Rural Telecom?

“Why should we subsidize rural residents?” asks a blog called Good Morning, Economics which describes itself as being “Economics and political philosophy commentary from two UW students”. It’s a good question even if the premise is somewhat flawed in its assumption that the Vermont e-state bill is about subsidies. BTW, Governor Douglas will be signing the bill today at scenic but hitherto communications-challenged Lake Elmore.

I’ve been debating the issue with the earnest students through the comments of their post but their questions are good enough to deserve answers here as well.  It’s good to be a skeptical of government intervention as they are.

In response to a Fortune post by Stephanie Mehta which quoted me on the dismal five year prospect for copper landlines and the need for places like Vermont to prepare for their demise, cdfox posted:

“…What bugged me was the anxiety about whether rural residents will get left behind. Nothing wrong with that per se, but predictably Mehta and Evslin move on to support the use of taxpayer money to solve the problem, in particular a Vermont program that subsidizes rural infrastructure investment through government bonds.

“Why on earth should taxpayers in the state of Vermont be subsidizing telephone and internet service for rural residents in the state?...”

My response summarized from several interactions is:

“First, Vermont is NOT planning to use any significant amount of taxpayer money for this. The bonds are REVENUE bonds which means that the infrastructure built with them must generate the income to amortize the principal and pay the interest. This is not to deny that the State is intervening in the allocation of resources but specifically to address the issue of “taxpayer money”. […anyone who buys the bonds must believe that there WILL be a payback.]

“Second, capitalism (of which I’m a firm adherent) has benefited from government backing of infrastructure projects. Just to list a few: the Erie Canal, the railroads, the Panama Canal, farm-to-market highways, most airports, the NY Port Authority, rural electrification. Broadband connectivity is the necessary infrastructure of our times.

“Third, the whole society benefits by moving to 100% availability of a new technology like electricity, highways, phone, or broadband. As long as any significant part of the population can’t participate, the technology can’t be counted on for service delivery or made a basic part of education. A large part of Vermont’s motivation in becoming an e-state with 100% adequate broadband coverage is to assure that both school curricula and the next generation of state and private service can be built on an assumption of broadband availability.

“…this is a much wiser use of state power than short-term tax incentives [or industrial development bonds for specific companies] and the other ways that states usually compete to win economic development. Vermont is building a better infrastructure for businesses which move here - largely through private efforts but with some state involvement (and municipal involvement) as well.

“Private enterprise will and is building towers [and other infrastructure] in the places where the economic case is best. The regulatory changes in the bill will make it easier and faster for all builders of towers to get the necessary infrastructure. The State will start at the other end - in the places where the economic case is worst; but, remember, there still has to be an economic case. The bonds have to be repaid.

“The bond money the State raises is more patient than most of the capital available to private enterprise. Eventually, private enterprise will get around to building access everywhere rural as well as everywhere urban. For both social and economic development reasons, Vermont is not content to wait for that. Vermont wants to lead in broadband access and education and services based on that. So we (the State) are raising the capital from private sources to do that.

“Final point: the telecom market in the US is dominated by a cable-telco duopoly. It does not function well as judged by what we [the whole nation] are provided for broadband access and what we pay for it compared to other developed (and some developing) countries. Vermont hopes that by investing in the middle-mile infrastructure layer, it can encourage greater competition and more choice in last mile access.”

Flash! Vermont Legislature Passes E-State Bill summarizes the bill.

Comments

[John]

Thank you very much for sharing your thoughts. It is always great pleasure to read your posts.

[cdfox]

Tom,

I am still a little unclear on how the bonds work in the case of the Vermont program. You said:

"These are revenue bonds; not “full faith and credit”. They are backed and will be repaid only from the revenue produced by the infrastructure built with the proceeds."

So the state does not back the bonds? Then what makes these bonds any different than a bond in the private market? I thought the nature of this program was that it would provide capital for projects that ordinarily would not get capital in the markets. What advantage does the state give to these bonds in order to move more capital into rural infrastructure than the market would?

"remember, there still has to be an economic case. The bonds have to be repaid."

But there still may be more valuable uses for this capital, even if these investments are good enough the repay the bonds. In fact, there must be more valuable uses if this rural investment can only be achieved through the state's involvement (barring something wrong with market).

"The State will start at the other end - in the places where the economic case is worst ... For both social and economic development reasons, Vermont is not content to wait for [private investment]"

I don't understand. For the sake of development, the state wants to focus on the places where the economic case is worst?

[Peter Sinclair]

If anyone questions the wisdom of this, you only need to look at broadband/wireless prices and speeds in Asia. The telcos/cablecos have been using the "infrastructure cost" crutch for years now while they soak every penny out of the exisiting infrastructure. This is the same infrastructure they claimed they couldn't afford to build with the ruralification of phone and power. The taxpayer payed for that too!
The fact is that you can get service that is 5 times faster and 5 times cheaper in so called "under-developed" nations. Somehow they managed to afford the infrastructure costs...This is the weakest and lamest argument to not provide quality service to rural areas. I think Verizon wants out of the landline business, because it sees the day coming when it is compelled by legislation to provide statewide DSL. They've made plenty of profit by providing us with 1950's style phone service for years...why invest now? Thus, once again, its left up to us ingeneous Vermonters to overcome another obstacle just to keep up...