Burlington Telecom Has Failed
Burlington Telecom is an example of why municipal telecom and other similar government projects don't work.
Burlington Telecom is a failure. What was supposed to answer many Burlingtonians’ growing frustrations with their phone and cable companies has morphed into a boondoggle that has cost taxpayers more than $26 million.
By 2001, the city and Aptus had failed to raise the required funds, leaving the future of the fiber to the home (FTTH) network uncertain. In 2002, a telecommunications consultant was hired, and BT secured $22.5 million from Koch Financial to construct the network.From its inception, BT faced numerous problems and took nearly three years to get off the ground. Burlington citizens voted in 1997 to approve the creation of a municipal fiber network. Two years later, the Burlington Electric Department partnered with Aptus Networks to create BT. That venture would take another year to get approved and required a change to Burlington’s charter before the legislature and governor would agree to sign off on the project. BT was initially projected to cost about $21 million.
In 2005, nearly eight years after the initial vote, BT began offering FTTH to Burlington residents. But just two years later, in 2007, BT needed additional capital for the project, so it replaced its initial financing from Koch to borrow millions more from CitiFinancial, bringing the total to $33.5 million. And BT’s balance sheet only got messier from there.
In 2008, BT “borrowed” $16.9 million from Burlington’s cash pool, violating the terms of its Certificate for Public Good. A blue-ribbon commission executed an investigation that found BT had mismanaged finances and “the debt load is too great to be covered by the revenue earnings from [BT].” BT quit making payments to CitiFinancial in 2010, and eventually the financer and BT reached a costly agreement, one that included a $10 million settlement to CitiFinancial and required the City of Burlington to sell BT to a private company, although the city is permitted to maintain a share of BT’s ownership.
The initial financing came with a requirement that should BT fail, the financer would bear the loss of capital. This means the city is not in the hole for the entire $35 million, but it is responsible for $16 million, which the city wrote off as a loss in 2015.
A May 2017 study by the University of Pennsylvania Law School’s Center for Technology, Innovation, and Competitioncompared municipal telecom networks in multiple cities across the country. The study found that even though Burlington had “the highest population density of any city [in the study], its 2014 revenue … is below the levels achieved by the average project in [the] data set.” The study also found from 2010 to 2014, BT “generated a negative cash flow of $10.6 million.”
The study’s authors concluded the failure of municipal telecom is exemplified by the fact that advocates of municipal fiber who once looked upon BT “as a model for others to follow now hold it up as a lesson of how not to run a municipal fiber system.”
BT’s failure is just one of the many times municipal broadband projects have ended in disaster. In 2004, Joseph Bast, CEO of The Heartland Institute, highlighted in a Heartland paper several key few reasons why these projects fail so often: Construction costs are typically higher than what was initially projected; legal restrictions can restrain localities’ options; “contract-seeking consultants have misled many city officials,” by exaggerating numbers of expected customers; and “the failure to find content consumers will pay for limits the appeal of municipal networks.”
The Burlington City Council now has the power to remedy this situation and try to recover the millions of dollars taken from taxpayers. However, of the three bidders to purchase BT, only two would offer the funds up front that cover the lost tax dollars.
The two bidders with enough funding to cover the lost money are also offering Burlington up to 20 percent equity in BT. This would allow the city to maintain some involvement in BT, but the financial burden would not fall upon Burlington or its taxpayers, who have already paid enough to prop up this failed municipal telecom project.
The third offer, which was made by a local cooperative formed by Burlington citizens in 2011, would likely not be able to provide to the city the money that has been lost; it’s not even clear whether the co-op could maintain the funding needed to keep BT afloat in the future.
Burlington lawmakers should end the city’s involvement in this municipal project and choose a bid that would recover the costs previously imposed on taxpayers.
[Also Published at True North Report]