Why the Letter of Credit requirement could sink BEAD
Without ‘equity’ the Broadband Equity Access and Deployment program will not deliver
What’s the problem? BEAD, The US government’s $42 billion broadband grants program, requires recipients to provide a Letter of Credit for 25% of the grant award. Alongside the additional 25% match requirement, this capital barrier will shut out a huge number of ISPs.
Why it matters: The small and community-centered ISPs, minority and women-owned businesses, nonprofits, and municipalities that the program claims to be targeting will be most affected. These are the providers best positioned to connect un(der)-served Americans.
What we can do: There are alternatives that can safeguide taxpayer dollars while ensuring a wide pool of providers can participate in BEAD. Together, we must engage NTIA to explore these alternatives and ensure the ‘Equity’ is not lost from the Broadband Equity Access and Deployment program.
GO DEEPER
The United States Government recently announced the allocation of $42 billion dollars to states to support new broadband builds in unserved and underserved communities.
This investment has been billed as a transformational opportunity to power community-centered providers, inject competition into the US broadband market, and finally bridge America’s digital divide — particularly in rural, economically disadvantaged parts of the country.
In President Biden’s own words, the plan “prioritizes support for broadband networks owned, operated by, or affiliated with local governments, non-profits, and co-operatives — providers with less pressure to turn profits and with a commitment to serving entire communities.”
The poetry is encouraging. But what about the prose?
The Notice of Funding Opportunity issued by the NTIA — the agency administering the Broadband Equity Access and Deployment (BEAD) program — encourages the participation of ‘non-traditional providers’ such as municipalities, cooperatives, non-profits, Tribal Governments, and utilities. It also calls for small, women-owned and minority-owned businesses to be prioritized. Yet, the program includes requirements that are so difficult for these entities to meet, that, as things stand, the vast majority of them have little chance of securing funding.
One requirement in particular stands out: the non-revocable standby letter of credit.
What is the letter of credit?
BEAD applications must come with a letter of credit issued by a qualified bank for 25% of the grant amount. This is a guarantee to the grant administrator (in this case, a state broadband office) that there is liquid cash in an account that it can claw back should the applicant not deliver on their grant requirements.
To receive a letter of credit, applicants will be required by the issuing bank to provide collateral. In most cases, this will be cash equal to the full value of the letter of credit. That means ISPs hoping to secure BEAD funds will have to lock away vast sums of capital that will be untouchable for the full duration of the build, likely several years.
Banks will also charge applicants a fee for this letter of credit — typically 2%-5% of the letter of credit amount annually — adding hundreds of thousands of dollars to the cost of a network build.
On top of the match requirement? Say it ain’t so, Joe.
To be clear, this letter of credit is separate and in addition to BEAD’s match requirement, which demands that applicants contribute a minimum 25% of the total build cost. So, with a 25% letter of credit plus a minimum 25% match requirement, hopeful applicants for BEAD funds will need to front millions of dollars.
Consider the following example. An ISP aims to build a broadband network costing $10 million to connect an unserved community. They must start by securing a minimum $2.5 million match. Then they will then need to raise $1,875,000 to collateralize the letter of credit. Finally add around $200,000 interest and fees. To be in the running to secure a $7.5 million BEAD grant, the provider will need north of $4,600,000. Many simply won’t apply.
This example underlines the gap between the rhetoric and the rules of BEAD. These capital demands create enormous barriers to all but the best funded providers. Many of the small ISPs, minority and women-owned businesses, nonprofits, and municipalities that the program claims to be targeting have little hope of meeting these requirements.
Perhaps most concerning of all, the letter of credit requirement does little to demonstrate a provider’s ability to build robust infrastructure, provide high-quality broadband for underserved Americans, and satisfy the grant requirements. Rather, it simply tests whether a provider has deep enough pockets to lock up valuable working capital over multiple years.
The result is a herculean thumb on the scales for the large, well-funded incumbent providers that have historically failed to serve all Americans, even when subsidized to do so. It locks out smaller, efficient, local ISPs that are typically faster, more affordable, and more willing to connect America’s least served communities — the kind of providers President Biden talked about.
By steering so much money to large incumbents rather than the small to medium ISPs best placed to end the digital divide, the administration risks repeating the mistakes of the past decade, in which the US Government spent $54 billion on broadband programs which went overwhelmingly to the largest providers, resulting in just 1% increase in Americans connected.
Nobody’s a winner
While this financial burden impacts smaller and community-centered businesses most, it’s a problem for all providers — even large, well-funded telcos. The Comcasts and AT&Ts of the world are eyeing billions of dollars of subsidies. That means ring-fencing hundreds of millions, even billions, for letters of credit. They have the means, but their CFOs would probably tell you there are ways they’d rather deploy their capital.
Banks aren’t excited about it either. As Pierce Verchick, Head of Broadband Lending at LiveOak Bank, said on a recent episode of ‘Where’s the Funding’, letters of credit are not an attractive product for banks, which prefer more traditional investments like senior debt construction financing. And, since under the program’s rules, letters of credit can only be issued by FDIC insured banks with Weiss ratings of B- or better, the many banks with lower ratings won’t be able to issue them. Similarly, community development finance institutions (CDFIs), philanthropic funders, and the impact investor community are unable to fill the gap. Can letters of credit be supplied at the scale required for a $40 billion+ program? Doubtful.
Bottom line: the letter of credit requirement is the wrong tool for this program. And while we need to get more capital into building broadband, the $42 billion in BEAD grants require that more than $10 billion dollars are sitting idle in escrow accounts and not being used to buy equipment, lay fiber, and train the next generation of broadband engineers.
Finding alternative solutions
Let’s be clear: the requirement comes with good intentions. Nobody wants to see billions of dollars of taxpayer’s money handed to providers that default on projects and fail to deliver the broadband so many desperately need. There’s a balance to be found to mitigate this risk while honoring the program’s aim to broaden the pool of awardees and fund community-oriented networks.
But while the program’s mechanisms should be geared to protect un(der)served communities from being let down, the letter of credit risks stopping them from being served altogether. The NTIA needs to course-correct so that when states start issuing grants, they have the freedom to fund the proposals and providers best able to connect communities, rather than those simply with the most capital behind them.
There are alternatives to explore. From tools such as performance bonds to having less onerous requirements for smaller ISPs, non-profits, and municipalities, to expanding the types of entities that can issue letters of credit, there are ways to protect taxpayer dollars while ensuring that BEAD can live up to its promise.
Share your views
The NTIA will only make a change if those affected speak out. Are you concerned about the letter of credit requirement? Do you have views about possible solutions? Are you willing to add your voice to push for change? We want to hear from you.
Complete this 3-question survey to share your views. Or email press@connecthumanity.fund to be involved.