Getting Started With Broadband Public-Private Partnerships

Adapted from EFF, CC BY 3.0 US, via Wikimedia Commons

With an influx of broadband funding on the horizon, local governments are considering a wide variety of structures and partnerships to help meet their connectivity goals. Public-private partnership models (often abbreviated as P3s) for broadband deployment are common — but complex — so we are launching a series of posts to help people understand everything they need to know about P3s to make informed decisions for their communities.

For those who know a little bit about this topic already, CTC Technology & Energy’s guide to P3s is an advanced resource that we highly recommend. However, if you want a more introductory P3 course, please follow along with us over the next two weeks as we share learnings from our experience and distill some of the main concepts to the essential points.

Foundational P3 concepts

A broadband P3 is when a public governing body works collaboratively with a private company to provide infrastructure and services. There is considerable variation among broadband P3 arrangements because the structure of a P3 is often customized to the conditions of the community and the private partners.

Many factors unique to the situation will impact the structure of broadband P3s, including:

• The division of labor and roles each entity can or wants to perform
• The risk tolerance of each entity
• The goals of the public sector entity
• The business practices and rate-of-return expectations of the private entity
• How much control the public entity wants to have over the infrastructure build and eventual network
• How much funding the public entity can contribute
• Whether and how local and state laws restrict P3s

To understand how P3s can be beneficial for deployment, it is useful to understand how public sector entities provide broadband services on their own (or, largely on their own, with contractors hired as needed). Municipalities that operate their own networks often do so either for middle-mile or last-mile service.

Municipal last-mile broadband

Some municipalities have elected to do almost everything an ISP does — building the last-mile infrastructure (e.g., fiber-to-the-home), owning the network, and operating the network — by covering all or most of the major roles with internal staff or contractors. Municipally owned electric utilities deploy most municipal broadband networks because they can leverage their existing infrastructure (e.g., utility poles), they can make their electric transmission more efficient, and there is overlap in the knowledge and expertise required to manage electrical and telecommunications systems. The work is usually more difficult if the municipality does not own the local electric utility, and without grant funding, this model typically involves significant public investment and therefore can be perceived as risky.

However, if executed well and with full municipal control over all aspects of the network — customer service quality, net neutrality, speeds, installation fees, and more — the municipality can provide exceptional, affordable services that meet all of the community’s connectivity needs.

Municipal middle-mile broadband

In a municipally run middle-mile model, the public sector builds fiber infrastructure to certain locations within the jurisdiction — often to government buildings and community anchor institutions — but not to homes. Then, in many cases (but not all), the municipality sells capacity on their middle-mile network to a last-mile provider to serve residents and businesses. Middle-mile ownership can reduce infrastructure costs and associated risks, but it also lowers control since homes and businesses are connected by a third party rather than the municipality.

P3 frameworks

There are a number of frameworks that involve more of a blend of public and private participation, which can balance risk and reward and leverage the strengths of the entities involved. To round out this first post, we’ll cover the following frameworks:

1. Public facilitation of private investment
2. Public funding and ownership with private “fee-for-service” operation
3. Public funding and ownership with private lease
4. Shared investment and risk

P3 model 1: Public facilitation of private investment

In this P3 model, a municipality offers material support to incentivize a private entity to build or build more in the community. Public support could include economic development incentives, tax benefits, access to public assets (e.g., fiber conduit) and data, streamlined/expedited permitting processes, staffing assistance, or capital contributions.

Although the public sector does not necessarily need to contribute large sums of money under this model, the lower the value of municipal contributions, the less leverage and control the municipality has over the actions of the partner ISP. Often, this model results in simply a bigger private network that has extended into areas where an ISP otherwise would not have built.

Another way to think about this is ISPs often have a target passing cost where they will build with their own money if they can meet those costs. If an ISP’s target passing cost is $6,000/premise, but an unserved area of town would require $8,000/premise to build, the municipality may subsidize enough of the capex to bring the passing costs down in line with the ISP’s expectations, thereby incentivizing them to build.

P3 model 2: Public funding and ownership with private “fee-for-service” operation

Under this model, a municipality typically pays for and owns broadband infrastructure and enters into a long-term agreement (typically at least 10 years) with a private partner that is paid to operate the network by the municipality (rather than by customers directly) via a set, standardized fee structure.

For example, the public entity may collect an average of $65 per customer per month and pay a private company a predetermined amount (e.g., $32 per customer per month) for operating the network. The balance of the funds stay with the municipality (often to pay down debt used to build the network).

This arrangement lowers risk for the private partner because they can rely on predictable revenue from the public entity, but it also lowers their potential financial upside since they don’t have access to revenue beyond the set fee structure.

The public entity, on the other hand, assumes more risk because their ability to pay the operator (and often their debt service on the infrastructure) relies on meeting penetration and revenue targets.

This model is useful for jurisdictions that want to ensure every address in town gets access to the same service and want to retain control over customer pricing, but don’t want to be involved in network operations.

P3 model 3: Public funding and ownership with private lease

Under this model, a municipality provides funding for the project and retains ownership of the network, and a private entity leases the network from the municipality and then provides service and collects customer revenues with less involvement from the municipality.

In this arrangement, the predictability, risk, and potential financial upside are reversed between the municipality and the private operator compared to the fee-for-service model. The ISP tends to have more access to upside given they collect revenues directly from customers, while the municipality tends to have more predictability because their revenue is standardized from the beginning with a single ISP partner, rather than relying on customers.

For example, a municipality may lease their network for $10 per passing, meaning the municipality’s revenue is very predictable, and the ISP’s revenue will vary greatly depending on how effective they are at adding subscribers.

This model is similar to some variations of the “open-access” model, where publicly owned infrastructure is leased to multiple operators, increasing ISP competition and giving customers more choice, even though the ISPs all use the same infrastructure.

P3 model 4: Shared investment and risk (hybrid model)

The hybrid model offers a middle ground between the other P3 models. Under this model, the public and private entities share both the costs and risks associated with building and operating a network, as well as the resulting capital and benefits. There are many ways to share the risk; for example, both entities could agree to split profits from customer revenues by a predetermined formula and/or split the cost of debt-service shortfalls if customer revenues do not meet projections.

Each negotiated agreement will be unique, but financial upside and control should be proportionate to risk and exposure for all parties. The more funding contributed by the public entity, the more control they should have over when and where to build, and the more leverage they will have for certain outcomes, like universal service or agreements for low-income residents and municipal institutions. The ultimate contractual terms can vary significantly based on the division of ownership, roles, responsibilities, risk, and access to financial upside.

Stay tuned for the next post in this series, which will explore how P3s are established.

Though these are some of the more common models, there are many other successful P3 models. Have you seen examples of P3 models in your community?