Friday, August 26, 2016

FirstNet – How did Kentucky Wired go from the most “coveted” P3 program to almost dead?

We have seen this before with such ventures as Utopia in Utah and Nevada, the SF-RICS, LA-RICS and now the Kentucky Wired Program. They never came close to achieving what they set out to do and some have bitten the dust. It’s all about the business model and how you construct your Public Private Partnership (P3).

Governor Beshear took a lot of credit for the P3 in Kentucky and the State won numerous awards during 2015, such as the coveted 2015 Deal of the Year award from The Bond Buyer”. By 2016 Governor Bevin downgraded it to just a few counties, then most recently it was put on hold indefinitely due to lack of funding.  The problem isn’t that the P3 format is flawed, the problem is in the balance of power, financial arrangement and some shady deals.  

I was part of a team that provided the competitive bid to the Macquarie and Kentucky Wired Program; but we proposed a fully funded network and a self-sustaining long term contract to the State without any need for taxpayer funding -- The Myers Model. Our solution even consolidated all the States fiber resources and would have established the base transport network for the State’s Public Safety Broadband effort. But, the State went with a bonded taxpayer deal, whereas Macquarie was the sole financier on the private side.  The Macquarie deal called for $23 Million from the State taxpayers, another $25 Million from Federal taxpayers, and Macquarie would finance the rest of the $150 Million with the State paying a $25 Million fee every year for 25 years. Good for Macquarie, bad for the taxpayers. Then came the change in administration and a new Governor.

Enough was enough for programs funneling enormous amounts of taxpayer funds to questionable deals was not going to fly anymore. The fact is that the Macquarie deal may have started as a typical bonded program with honorable intentions to deliver broadband, but it was managed by a government entity influenced by one private investor. Had Kentucky Wired been setup as a true privately owned commercial broadband company, then the framework of the P3 model would have changed. In essence, Macquarie would have never taken on the entire risk of the deal without bringing in partners. Those partners would have scrutinized the revenue projections and the market economics to a point of not bidding. Why? Well because the only thing different from the model proposed, to what the market has been doing for more than 30 years, is the bonded program. What Macquarie was trying to do was position the State to inforce payment for services on its constituents through their Utility Bills  – the same solution they tried to sell to the State of Utah called Utopia. That was political suicide.

The deal Macquarie was proposing tilted the balance between the parties in the P3. Macquarie was doing whats best for Macquarie, while staying mute on acknowledging the faults in the model. In short, Macquarie did what Macquarie needed to do for its own best interest – the State was naive to what was going on. It wasn’t like the State wasn't warned, they just decided to ignore it, then got greedy with the private entity that was created (reference “Something’s Rotten In The State Of Kentucky”). 

The format that Macquarie was peddling was never going to work, because this was the same model that commercial fiber providers have been struggling with for years, the only difference was that Macquarie was getting the State to put the taxpayers at risk by mandating an added cost to their utility bill, while at the same time getting them to pay for some of the build, then on top of that they positioned the State to use taxpayer money in its self-sustainment for the next 25 years.

The competing bid by Sterne Agee is still the way all the States should follow when trying to deliver their broadband needs. There needs to be a cooperative strategy that includes the wireless Public Safety Broadband Network with the fiber broadband aspect of the deal, doing so increases the amount of services and customers the network can use. It will provide the State with a hardened infrastructure so that its economic engine can thrive while at the same time generating enough revenue to attract private investment. But, there were other issues like the structure of ownership as well.

The ownership of the Macquarie deal had only one private investor – Macquarie. There was also no shareholder agreement between the investor(s) and the State. The framing of this deal had all the revenue hidden from State coffers, while the private entity reaped the benefits of the profit, at the same limiting their exposure to the capital cost structure of the buildout. Had this been a balanced approach with multiple investment parties coordinated under an ownership board, then all the eggs would not have been in one investors hands while the State held all the risk – thus the taxpayers. Then again it looks a lot like a bait and switch, which would have meant that Macquarie had positioned itself for an early exit once the network got to a certain point in development, allowing itself to capitalizing on its investment by selling its stake at a higher price to another party.  

The only way to get a solid P3 to work for any State, is the need to create an entity that is not reliant upon just one or two entities. We saw similar problems with the BT project in the UK called AirWave, whereas BT was the sole provider of investment for the takeover of the Nation’s Tetra network. The entity itself needs to be able to drive itself and not reminiscent of a game of Jenga. If Governor Bevin wants to get broadband to their rural areas, then they should study the competitive bid from Sterne Agee  - available through FOIA.

 Just some guy and a blog....

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