MUNICIPAL BROADBAND: A CAUTIONARY TALE

(September 2011) The municipal government claimed its plan would expand broadband, a telecommunications process providing greater bandwidth. The idea was to provide universal coverage to all residents.

Ten years later, residents in the city of 112,488 have broadband, and a debt obligation of nearly $40 million, more than $1,300 for every business and home residence. Fortunately for Arkansans, the city is Provo, Utah, not a community in our state. But the debacle, a failed public-private partnership, provides a cautionary tale of the consequences for taxpayers when municipal officials stray beyond their field of economic knowledge.

The Government Knowledge Problem

Friedrich Hayek understood the knowledge problem. Hayek won the 1974 Nobel Prize in Economics for insights including the idea that government officials lack the knowledge to plan a modern complex economy. It’s simply too dynamic. Hayek spent part of 1950 at the Univ. of Arkansas-Fayetteville, well before achieving world fame in his specialized field.

Hayek’s insight can be applied to the idea that municipal units should attempt to operate enterprises in complex economic markets. He observed the economic problem of society “is mainly one of rapid adaptation to changes,” a telling description of the telecommunications industry. Provo officials thought they could operate an enterprise in a dynamic market, and now their experiment might be retried in Arkansas.

Fifteen Arkansas cities could operate such a system, though only two (Conway, Paragould) have done so. The other communities are Augusta, Benton, Bentonville, Clarksville, Hope, Jonesboro, North Little Rock, Osceola, Paris, Piggott, Prescott, Siloam Springs and West Memphis. The issue is being considered in Siloam Springs, where a government official has publicly stated such a system could generate more revenue.

Friedrich Hayek, “The Use of Knowledge in Society,” American Economic Review, September 1945

Sounds Nice, Costs Taxpayers Tens of Millions

Universal coverage, to some, is a ‘nice idea’ that ‘feels right.’ Provo approved a $39.5 million bond deal in 2004, but four years later officials added $1.2 million in sales tax revenue to help its iProvo system pay its debt. The Deseret News (May 7, 2008) reported iProvo, “originally touted as a moneymaker, has cost the city $7.5 million since 2003,” and is “on track to cost another $2 million this year.” So Provo city fathers sold the iProvo system—not through competition but after negotiations with a sole entity. Provo took out a new loan and agreed to keep ownership of the network if the entity was unable to meet its financial obligations.

The knowledge problem reemerged. The Great Recession of 2007-2009, a complex macroeconomic event blindsided municipal officials and iProvo. The entity merged into a new structure. The Salt Lake Tribune (July 27, 2011) reported Provo decided to loan the “company $1.48 million by allowing it to reduce its payments for 18 months, then pay back the loan through extra payments for seven years.” Then the “worst-case scenario” for iProvo, termed “troubled” in The Tribune, began to unfold. The company was forced to “draw its payment from a security deposit with the city, dropping that account to a level that could trigger a default.”

“The solution is painful but the right thing to do,” Provo’s mayor explained on his blog in late July. “We need to pay our debt. Each and every Provo resident, regardless of intent, picked up an obligation to repay the $39,000,000 bond when the network was built. What is your portion? Right now it is still too early to give an exact amount. However, the bond payment divided by the number of residences and businesses equals $7.65 per month for the next 15 years.” Universal coverage, it developed, wasn’t free, and is destined to cost Provo citizens a bundle of money.

The moral of this cautionary tale is that citizens should pay attention to the Nobel laureate who spent time in Arkansas and warned that government officials lack the knowledge to operate in complex markets. But never assume that officials in Utah or elsewhere will heed that advice.

--Greg Kaza