ISPs: Inflation has doubled RDOF build costs

Inflation is wreaking havoc on several operators’ rural build plans, making financially tough projects even tougher. A number of operators with Rural Digital Opportunity Fund (RDOF) commitments told Fierce the cost estimates for their builds have skyrocketed. Some are finding it difficult to find banks willing to lend them the money needed to complete their projects. That means those ISPs without a hefty amount of cash on hand could be at risk of defaulting on their obligations.

Fierce conducted a series of email interviews with Joseph McGrath, owner of Texas-based fixed wireless provider TekWav, Nextlink CEO Bill Baker and Plains Internet COO Andrew Monroe. Two of the three – McGrath and Monroe – told Fierce the estimated build costs for their RDOF projects have doubled since they were originally calculated, while Baker said costs have risen “materially.” In the case of Plains Internet, that meant a jump from an estimated $500,000 to $1 million.

For context, Plains Internet won $345,624 in the RDOF auction to cover 250 locations in Kansas, Texas and Wyoming. Nextlink got $429.2 million to cover 206,136 locations in 12 states. TekWav bid as part of the NexTier Consortium, which won $126.3 million to cover over 80,000 locations in 14 states. Of that, TekWav’s portion totaled $372,240 to build to 5,886 locations in Texas. All three offer a mix of fiber and fixed wireless service.

Baker and McGrath attributed the change to inflation, which is pushing the cost of things like labor, materials and fuel skyward. Monroe also pointed to materials, but added it’s also more expensive now to train and hire the workers necessary to actually build the networks.

“There's also a small argument to be made that some technology has been introduced post bid that we'd rather install than what we'd originally planned that comes with a higher price tag, but it's negligible enough of a difference to actually count, in my opinion,” Monroe continued.

It’s hard to say whether the worst has passed. Baker said he believes the biggest cost impacts have “mostly rolled through the system at this point.” Meanwhile, McGrath tipped costs to continue increasing but said he was hopeful they would stabilize in the near future. One thing seems certain, though: costs likely aren’t going back down anytime soon. And for ISPs without a piggy bank, that means they’ll need bigger loans to cover the higher cost of their builds.

As it turns out, that’s easier said than done, even for government-backed projects.

“If we had to point to a singular concern, it would be having enough capital to buy enough equipment far enough in advance. We traditionally have bootstrapped on customer growth to generate more customer growth. Having to order equipment a year in advance and sit on the loss of income is tough and could make things difficult if it gets any worse,” Monroe said.

He continued: “Day-to-day, though, we're fairly confident we'll finish…With that said, we still struggle to get loans to build out anything. At this point, it's comical how many refusals we get for loans relating to our business.”

McGrath seconded this point, noting conversations with other ISPs have revealed “a lot of concern” about finding additional funding to complete their RDOF builds.

He argued the U.S. government should consider extending its broadband loan programs to include RDOF winners in order to ensure ISPs can meet their commitments. McGrath pointed to the U.S. Department of Agriculture’s ReConnect program as evidence that such loan arrangements work well for rural broadband projects.

“To be clear, this is not a grant. This is a loan that the ISP has to repay, but under more favorable terms since it is providing for the public good,’ McGrath said. “If ISPs struggle finding supplemental funding, it increases the potential risk of defaults occurring thus slowing down the deployment of internet access to those areas that the FCC deems lacking and those people struggling to get internet access.”

Absent some sort of help, Baker predicted poorly-funded or overly-leveraged operators will face “severe problems” in the current inflationary environment. He pointed out rising interest rates are impacting the cost of debt and many new funding programs require letters of credit from banks.

“I would not be surprised to see the industry entering a period of consolidation beginning in 2023,” he concluded.

No quarter

But Conexon partner Jonathan Chambers had little sympathy for the concerns expressed by the other three. He argued RDOF was never designed to cover construction costs. Instead, it was simply meant to bridge the shortfall between the expense and revenue associated with rural deployments.

Chambers pointed out that’s the calculation the FCC used to set reserve prices for census blocks in the auction. And if participants bid down those reserve prices down to a fraction of  their original total – as many did, going down to 1% in some cases – and netted less support as a result, then that’s their own fault. Conexon’s Rural Electric Cooperative Consortium (RECC) walked away from the RDOF auction with $1.1 billion to build broadband to 618,000 locations across 22 states.

“If they can’t make that work…they shouldn’t be in business of taking public money and not being able to satisfy their public obligations,” Chambers said.

While Chambers acknowledged construction costs have a role in determining whether the FCC’s subsidy calculation was sufficient or not, he said rising costs should have been factored into operators’ build estimates. He added Conexon has actively taken steps to mitigate cost increases and thus far the cost increases it has seen have not outpaced its predictions.

According to the FCC, RDOF participants have already defaulted on obligations covering more than 265,000 census blocks. A total of nearly 787,000 eligible census blocks were included in the auction. Though some defaults have been caused by participants’ failure to secure the required state certification necessary to receive federal funding, Starry notably backed out of all of its commitments to focus its financial resources elsewhere.

With more defaults looming, Chambers said it’s partly the FCC’s fault for not coming up with a more robust auction design. For instance, he noted the agency could have structured the auction such that the next bidder in line in a given census block would receive support if the original winner defaulted. Or it could have given participants an easy out by offering a no-penalty default window after the auction for those who bid beyond their means. The money could then have been redistributed through a rapid follow up proceeding, he said.

But that didn’t happen. And now, because RDOF-funded areas won’t be eligible for support from the $42.5 billion Broadband Equity, Access, and Deployment (BEAD) Program, Chambers warned there’s a risk that late defaults could allow some unserved areas to slip through the cracks.

"Now, they've cleaned up a lot of it. But you tell me people are going to say 'Oh, oh, we didn't know there were going to be cost increases, what can be done?' Default! Good! Because a default at least clears it up," he concluded.