A capital requirement for broadband funding could exclude thousands of providers
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A coalition of state broadband leaders said in a letter that a condition of the federal BEAD program would shut out all but the biggest providers.
A coalition of state broadband leaders, nonprofits, lawmakers, businesses and associations this week called on the federal government to change a capital requirement for its multibillion-dollar program designed to close the nation’s digital divide.
An open letter to the Department of Commerce and the National Telecommunications and Information Administration, or NTIA, warned that the $42 billion Broadband Equity Access and Deployment, or BEAD, program “will not achieve its objective of delivering internet for all” unless something is done to address the program’s irrevocable standby letter of credit requirement.
The requirement states that participating internet service providers must obtain a letter of credit from a bank for 25% of the amount they are awarded under BEAD to build out broadband infrastructure. But banks that provide letters of credit typically require that they be collateralized by cash or cash equivalents.
Connect Humanity, a company that provides funding for community-led broadband solutions, estimated earlier this year that the requirement means that a provider seeking a $7.5 million grant for a $10 million project would need to put down at least $4.6 million in capital upfront to get the letter of credit required.
“As a result, awardees will have to lock away vast sums of capital for the full duration of the build, likely several years,” the letter said.
That would likely mean that only the biggest ISPs would be able to participate in the BEAD program, the letter’s author said, as they have enough capital available to meet the collateral requirements. The letter also warned that the requirement will “prevent the internet service providers best positioned to connect unserved and underserved Americans from participating.”
Those ISPs include those that are small and community-centered, those owned by minorities and women, nonprofit ISPs and those owned by municipalities. State and local governments have been trying out different ways to close the digital divide, according to the letter, and the capital requirement could shut out these methods, which have included city- or community-run networks, and open access networks.
The letter also said that the banking sector has indicated it “does not have the appetite” to issue letters of credit at the rate needed to satisfy the program, especially as banks with lower bond ratings or other financial institutions are not eligible to provide them.
NTIA has previously said that letters of credit are the most effective way to protect taxpayer dollars and ensure they are not wasted. The Commerce Department did not respond to requests for comment on the letter or its contents.
State leaders said if the current rules are not changed, it could result in higher broadband costs for residents and less competition. In an email, Vermont Community Broadband Board Executive Director Christine Hallquist called for a “fair process” that allows everyone to take part, regardless of their size.
The letter called on NTIA to allow the use of performance bonds, which are common in construction projects. The bonds would provide financial guarantees for the project without requiring upfront capital and would also ensure the issuer performs due diligence on the applicant, which provides additional security for the investment.
The letter’s authors also urged the agency to consider delayed reimbursement, which allows providers and state broadband offices to agree on a series of goals or milestones that must be met to allow the release of a portion of the grant. The signees said this approach—another common one—would help those broadband offices “work effectively with the applicants they deem best positioned to connect unserved and underserved communities in their state.”
The coalition behind the letter includes the Communications Workers of America, the American Association for Public Broadband, the American Library Association, state broadband offices, cities, counties and other public sector organizations.
Former NTIA officials have echoed the view that using letters of credit is not the best path forward. In an opinion piece for Fortune, Larry Irving, the assistant secretary of commerce for communications and information during the Clinton administration, said the requirement is the “wrong tool for the job.” He added that he was unaware of any government agency using it in this way before.
“Thousands of communities have waited almost three decades to be connected,” Irving wrote. “Let’s not force them to wait longer because of an unnecessary bureaucratic burden.”
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