Failure to Connect

Political motives make for bad business decisions. It is amazing how often people see that truth play out right before their eyes without being willing to accept it. The U.S. Department of Agriculture’s Rural Utilities Service’s mishandling of $3.5 billion in taxpayers’ money designated for rural broadband is just the latest case in point.

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In 1994, Congress created the Rural Utilities Service to provide loans and grants to help finance rural utilities projects, replacing other USDA programs – among them the Rural Electrification Association – that had played effective roles in rural development. Created in 1935, the Rural Electrification Association subsidized farmers and others to build electrical systems where none existed. In its first four years, the percent of rural households with electricity went from 10 percent to 25 percent. I remember my own rural community obtaining USDA financing in the 1960s to build our first water lines.

The Rural Electrification Association was a great example of how the government can support rural development. The Rural Utilities Service was expected to carry on that tradition. Alas, we were not so lucky. Indeed its work in rural broadband development has been embarrassingly ineffective according to recent research by Politico and the Government Accountability Office. In the rush and hype of the stimulus spending at the start of the Obama administration, Congress gave the service $3.5 billion to fund rural broadband infrastructure. In testimony before Congress, its then head Jonathan Adelstein trumpeted that it would connect nearly 7 million rural Americans, 360,000 businesses, and more than 30,000 schools, health care facilities and the like to new or improved broadband services.

But politics and ideology mattered more than sound decision-making and the initiative faltered badly. How badly? Imagine a commercial bank lending millions without doing its due diligence, monitoring loan performance, ensuring that borrowers maintained the required financial integrity, and verifying that loan applications were complete and accurate. Such a commercial bank would go out of business, or a lot of people would lose their jobs. But accountability doesn’t work that way in politics and government.

We don’t actually know how badly things have gone, because the service has not allowed anyone information sufficient to evaluate whether it reached its goals or had a positive impact, according to the GAO. But what we do know isn’t pretty. According to Politico, 40 out of the 297 approved projects never started. More than $137 million of the approved loans had incomplete or inaccurate applications. Despite the rural mission, some money went to suburban areas that already had effective broadband. One company in Omaha, Nebraska, qualified for a $10 million wireless project in Nevada. But the business model was so ill conceived that the company went out of business before seeing any of the money.

According to both the GAO and Politico, the Rural Utilities Service has been sitting on data that reveal its shortcomings. And maybe for good reason. Remember the 7 million people that were to benefit? In May 2014, the service projected the number will be a mere 729,000 – almost 90 percent less. And that projection is for 2019, almost 10 years after the stimulus bill passed. (Politico notes that the service has since quit providing numbers in writing.)

Why such disappointing results? First, the authors of the stimulus package either failed to check, or didn’t care to check, whether the service was up to the job. It had been struggling with broadband initiatives since being tasked with them late in the Clinton administration and had been confronted with its problems by the Bush administration. It already sat on plenty of failing projects well before becoming responsible for the $3.5 billion.

Making things worse, in their desire for quick spending the Obama administration and Congress created unrealistic deadlines and failed to provide proper management. The service was required to commit its entire $3.5 billion by October 2010 – a mere 17 months after the president signed the stimulus legislation. Compounding the challenge, its new head, Adelstein, whose background was as a Hill staffer and FCC commissioner, wasn’t put in place until July 2009, giving him little time to ensure his organization properly performed a task in which he had no experience.

On top of all this, the entire program was ill conceived and riddled with politics. The Politico report points out that a 2001 study, which stated that widespread adoption of broadband would add $500 billion to the US economy, gave intellectual cover to spending-minded politicians and their supporters early in the broadband initiative. What studies of this type generally fail to explain, however, is that such benefits arise from commercially viable broadband, not broadband that depends on subsidies to make it worthwhile. Broadband that has great economic benefits is worth paying for and customers generally know that. At least they know more about it than distant bureaucracies and politicians.

Government broadband subsidies in general are difficult to justify on an economic basis. Profs. James Prieger and Janice Hauge, respectively of Pepperdine University and the University of North Texas, conducted one of the few studies looking into the impacts of such programs and found that substantive cost-benefit evaluations are at best rare.

Thankfully these professors have tried to fill that void. Their findings are discouraging. In her study of a sister program to the Rural Utilities Service’s initiative – the U.S. Department of Commerce’s Broadband Technology Opportunities Program, which was also funded by the stimulus bill – Hauge found that the money disproportionately went to states with Democrat governors, to states with Democrat voting majorities, and to counties with powerful congressmen and senators, rather than to areas with a large low-income or minority population, i.e. the target populations of these programs. In their study, the professors could not find a clear correlation between funds spent and increased broadband penetration, but point out that this result may be due to the spending needing more time.

The Rural Utilities Service program is indeed a lesson in how to not build broadband. However, given the context, it is surprising that the program did not have more failures.