Inflation and Grants

TekWav, Nextlink, and Plains Internet won Rural Digital Opportunity Fund (RDOF) funding in the December 2020 reverse auction. Two of the three providers were quoted as saying that the cost to build the networks to satisfy the RDOF obligations has doubled since they won the award – the third said costs have risen materially. Most providers I’ve been working with estimate the increase to be between 15% and 30%, differing by region and the planned technology. However, there are a few issues related to the cost of building broadband that isn’t talked about a lot. One issue that is not being widely discussed is the availability of loans. One of the things that always happens when interest rates increase is that banks drastically curtail making loans to new customers. They may still offer higher interest rate loans to existing customers, but an ISP looking for a new banking relationship is going to hit a stone wall. The difficulty in getting bank loans creates a dilemma for a provider trying to fulfill an obligation to build a broadband solution with specified construction deadlines. The other issue is the time lag between the cost of a new network and the revenues needed to pay for them. Most providers have historically expanded organically in the past. They add new territory and customers each year that are partially funded by the cash flow from the existing business, supplemented with short-term loans. A provider trying to grow fast must abandon the organic growth model. This means spending a lot of money before there is any new revenue. The bottom line is that RDOF winners will either have to absorb these unexpected costs or default on the subsidy. There is a fairly minor penalty for defaulting on RDOF funding before any funding has flowed or construction begins. But I would suspect the Federal Communication Commission will level much bigger fines on somebody who has already taken funding, and the fine would likely include returning everything they’ve received.