A Proposal for Fast-Track Partial Loan Guarantees at RUS and NTIA

[Note: These are the comments I just filed to the BTOP program on behalf of the Rural Fiber Alliance. They build on the arguments I've made on this blog previously about the many benefits of loan guarantees, and it lays out a specific action plan for how both RUS and NTIA can implement a fast-track partial loan guarantee program to make more money available more quickly then a straight grants-only approach.]

  The Rural Fiber Alliance represents rural fiber deployers and their supporters who believe that all Americans deserve equal access to the global gold standard of broadband: full fiber networks. RFA members are pragmatic practitioners focused on creating self-sustaining networks that strive to maximize the impact of every dollar spent on deployment, be it public money or private.

The biggest obstacle to laying fiber to every last building in rural America today is NOT the economic viability of rural fiber or project sustainability.  It is the lack of sufficient private capital, a reality exasperated by the current credit crunch. In fact many RFA members have rural fiber projects that would already have been funded and deployingif it weren't for the private capital markets seizing up in the fall of 2008.

To that end, the RFA has developed the following proposal to transform a reasonable portion of the BTOP budget at RUS and NTIA into fast-track partial loan guarantees that can both free up billions in private capital and do so in a matter of weeks.

Benefits
Unlike grants that only deliver a dollar-for-dollar worth of deployment, or loans that require government to take on all the risk, partial loan guarantees use public dollars to leverage private investment to make more capital available while lowering government risk by sharing it with private investors.  And because guarantees require private investment, approval can be fast-tracked, relying on the private investors who must assume real risk to vet projects. So guarantees deliver more money with less risk at the speed of the market instead of the speed of government.
 
Action Plan
RUS: Carve $500 million out of its $2.5 billion BTOP budget to create a fast-track partial loan guarantee program that will enable the distribution of at least $5 billion in guarantees.
 
Approve projects within 30 days of receiving a qualified application using a simple checklist to confirm  the project has the pieces in place to be market ready, including a business plan, financing plan, proven management team, etc.
 
Attach a 90-day shot clock to these guarantees to ensure that once awarded they're used quickly to raise funds and start deploying.
 
Change the current guarantee from an 80/20 split on all losses to a ratio that better incentivizes private investors to assume risk.  RFA proposes that the federal guarantee instead cover 100% of losses from dollar one but only up to a maximum of 50-60% of the total value of the loan. Most projects would be guaranteed at 50% of a loan's value.  But the program should offer higher guarantees for less dense projects on a sliding scale up to a 60% guarantee. Making these changes will lower the interest rates of guaranteed loans and increase lenders' interest in funding projects.
 
The loan guarantee should be available for the full amount of the project capital costs.  The willingness of the private sector to capitalize the project, accepting 100% of the 40-50% residual risk, is the appropriate test for whether a project is eligible for a guarantee.  There should be no arbitrary restrictions on the exact form of the private capital participation.
 
Open up these guarantees to all comers on a first-come-first-served basis. If multiple applications come in for the same community at the same time preference should be given to previous RUS borrowers, but only if they're delivering comparable connectivity, otherwise whichever project is delivering the best broadband should get priority.
 
The intent of these guarantees is to support shovel-ready projects that would've already been deploying absent the credit crunch.  RUS (and NTIA) should accept the presumption that pre-packaged private financing that satisfy the above criteria and were not funded because of the credit crunch should be eligible for the government guarantee.  The presumption can be challenged if the agency believes there is sufficient reason to doubt the claims of the applicant.
 
To help protect against liar's loans, the applicant must provide sworn affidavits from the project manager and from the financing institution that sufficient due diligence has been performed on the financial viability of the project to allow the financing to go forward and that the financing will be paid back under the terms and conditions outlined in the financing package.
 
Let these guarantees subsidize all broadband technologies so long as the speeds they're delivering are higher than what's currently available in an area and/or the networks they're building already have a significant amount of local support/demand.
 
Still analyze the financial viability of projects but do so after the guarantee is granted and applied to a loan, working under the assumption that if a project can raise private capital that it's worth subsidizing. This after-the-fact vetting would be used to gauge the risk of a project for purposes of determining how to score it against the budget.
 
And the RFA calls on Congress to take action in legislating a waiver for municipal projects so that they don't lose their tax-exempt status by using a federal guarantee.
 
NTIA: The NTIA has two options for leveraging its dollars to realize the benefits of guarantees,
 
1 - Set aside a pool of funds dedicated to the same fast-track partial loan guarantee program as RUS but make it available to non-rural areas.
 
2 - Include specific language authorizing that NTIA grants can to be used to purchase letters of credit that can serve as partial guarantees for larger loans, and putthe applications for these letter of credit guarantees on a fast-track, first-come-first-served basis.
 
To ensure that Option 2 isn't abused, NTIA should require appropriate safeguards be put into place such as requiring applicants to have lenders apply alongside them to prove the lender's interest/commitment, and/or have the government buy the letter of credit directly on behalf of the applicant to ensure funds are spent appropriately.
 
In either case, by dedicating between $500 million and $1 billion of budget authority towards this loan guarantee approach, NTIA can free up billions in additional capital to spur deployment.
 
Both: Not only do these guarantees maximize leverage, lower exposure, and speed up the approval process, but implementing a guarantee program can be done in such a way as to retain flexibility in how those dollars are spent. If these guarantees aren't sufficient to free up private capital and there's still money left in these programs after the rest of the BTOP dollars are spent, then NTIA and RUS can convert the budget authority back to grants.
 
In this way instead of NTIA/RUS leaving dollars to sit around waiting for projects to be thoroughly vetted and grants to be awarded, NTIA/RUS can support immediate deployment of shovel-ready projects on an ongoing on-demand basis as market-ready projects get to the point where they're prepared to go to the private capital markets.