County Should Stay Out of Wi-Fi Business

Sandoval County’s scandal-plagued effort to create a county-wide publicly financed broadband system has been widely-reported on. The project has received $3 million in state and county funding for the supposed purpose of providing cheap, ultra-high-speed wireless access countywide, but much of this money has been wasted or perhaps even stolen. State auditor Hector Balderas is now looking at the situation.

Though it would be easy to simply blame the contractors and government officials who are attempting to get the project up and running by 2009 for being corrupt and/or incompetent, the fact is that Sandoval County should not be involved in such a project in the first place.

As Sonia Arrison, Dr. Ronald Rizzuto, and Vince Vasquez, report in their recent report, “Wi-Fi Waste: The Disaster of Municipal Communications Networks,” published by the Pacific Research Institute, publicly-financed broadband systems invariably cost more and deliver less than promised.

The survey examined 52 government-owned networks that compete in the cable, broadband, and telephone markets. It concludes the government-owned systems are “financial disasters.”

Among the major problems with these systems is that they rely heavily on loans and transfers from established municipal utilities such as electricity and water. Even with the power of the public purse, 77 percent of the time municipal networks can’t pay their way, the report observes.

Those subsidies enable the government-aided networks to use their funding advantage to drive out more efficient private-sector competitors.

As government officials rush to show leadership and take credit for delivering the goods, they often trade short-term political benefits for serious, long-term financial problems: cost overruns, mounting debt, and tepid profits, the report observes. The report clearly shows what Sandoval County now knows: “Public telecom networks are risky gambles, regardless of the technology or the business model.”

The report also reveals the extent to which these operations rely on interest-free loans, inter-utility transfers, and permanent subsidies, the details of which in many cases are buried in financial reports, if reported at all.

“The footnotes in most of the networks’ financial statements have omitted any discussion of cost allocation between the telecom utility and other utilities, which suggests that utility accountants may be shifting around costs to enhance the appearance of telecom profitability,” the authors report.

The utilities also appear to be hiding other significant costs. “There is also the issue of system accountants’ failing to divulge major financial transactions on the printed public record. For example, at the end of the 2003 fiscal year, the telecom network of Harlan, Iowa, received an intra-utility loan for $768,025. In 2004, this intra-utility loan was forgiven but the financial-statement disclosures did not provide any explanation for this transaction,” the report says.

Even with access to subsidies and loans not available to private-sector companies, municipal systems can’t break even, let alone establish positive cash flow, the report notes.

“Adding all the operating years together, our select sample of publicly-financed systems has been in existence for 294 years,” the authors write. “Of these 294 years, these operations have incurred negative free cash flow in 227 years. In other words, 77.2 percent of the time, these networks have not paid their way.

Sandoval County is not alone. The county’s venture into providing the latest in high-speed Internet access was likely to cost taxpayers more and deliver less than was expected from the very start. The fact that governments run businesses poorly is a lesson that needs to be reinforced regularly lest other New Mexico governments repeat Sandoval County’s mistakes.

Rather than throwing more money at a wireless project that is clearly going to cost taxpayers far more than the original $9 million estimate, Sandoval County should “pull the plug” on this foolhardy taxpayer-financed venture immediately.

Some people are clearly willing to pay for high-speed wi-fi access in their own homes or at their local coffee shop. Why should they make the rest of us pay for a county-wide system?

PAUL GESSING is president of the Rio Grande Foundation, a non-partisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.