Friday, August 17, 2012

A Dystopian UTOPIA

With many local governments confronting severe fiscal difficulties, you'd think they would be content to just focus their attention on trying to deliver essential public services in an efficient, economically sound manner.
You might think so.
But some cities and counties, and in some instances states, can't resist the temptation to get into running businesses that are much better left to the private sector – like building and operating telecom and broadband networks.
These government telecom ventures rarely turn out well.
Take, for example, the Utah Telecommunication Open Infrastructure Agency, with the once touted, but now unfortunate, acronym "UTOPIA".  UTOPIA is a decade-old government-run fiber optic project that is supposed to provide broadband services to eleven Utah cities.
In truth, UTOPIA ought to renamed DYSTOPIA.
Like most municipal communications networks, from the outset UTOPIA's promised benefits have fallen far short. On the other hand, UTOPIA's burdens on the public fisc – and the taxpayers – have far exceeded government projections, even as these burdens have been revised upwards on an ongoing basis.
Utah's Office of Legislative Auditor General recently prepared a lengthy report for the Utah State Legislature concerning UTOPIA's performance to date. Here are some of the key findings:
"[S]ince 2003, UTOPIA has had nine consecutive years of operating losses. These annual deficits have caused serious damage to the agency’s financial position. At the end of fiscal year 2011, UTOPIA had total net assets of negative $120 million."
"UTOPIA originally planned to build a broadband network in three years and to achieve a positive cash flow in five years. However, it has not met that schedule. Instead, the cost of financing and operating the network increased before UTOPIA could provide a substantial number of customers with service. As a result, revenues have not been sufficient to cover its costs. Year after year, as operating deficits have accrued, the agency has developed a large negative asset balance."
"Most of the bond proceeds have been invested in poorly utilized and partially completed sections of network. As a result, the network is not generating sufficient revenue for the agency to cover its annual debt service and operating costs."
"The use of debt to cover the cost of operations and debt service is symptomatic of an organization facing serious financial challenges."
"In addition to UTOPIA’s problems with poor planning, mismanagement, and unreliable business partner performance, a lack of sufficient customers is also a cause for the agency’s slow progress."
The Auditor General's Report is filled with facts and figures, almost of them dismal – or dystopian – if you will. You can read through the report and draw your own conclusions.
Here is what Utah's leading newspaper, the Deseret News, concluded in an August 3 editorial following the release of the legislative audit:
"Early projections presumed that UTOPIA's massive broadband network would be profitable within its first five years and have a subscriber base of 49,000 by 2007. Yet as of April 2012, it has a paltry 9,300 subscribers, and profitability is nowhere in sight."
"This is causing an impossible strain on the local municipalities that pooled their resources to make UTOPIA possible. The participating member cities have to scrounge up $13 million a year in sales tax revenues to keep UTOPIA going. Adverse economic conditions make that money a lot harder to come by than it was when the project was on the drawing board. Clearly, there are far more important civic priorities that ought to take precedence over the UTOPIA boondoggle. This constitutes an inexcusable waste of valuable public resources."
"UTOPIA's network duplicates more innovative projects taking place in the private sector. The free market recognizes the need for a robust communications infrastructure, and it has been able to provide customers with these services in a timely and cost-effective manner. Private enterprise doesn't have the ability to dip into public monies when their operations don't produce enough cash — they either sink or swim on their own merits. That's why the state should sell UTOPIA assets to the companies that would be in a position to use them profitably."
I have never taken an absolutist position that there might not be exceptional circumstances under which it may be appropriate for municipal governments to build and operate telecom networks. But UTOPIA's unfortunate experience, along with that of other government-run networks, provides a cautionary tale that such instances should be extremely rare. And a precondition for considering government ownership must be that no private providers are offering service in the area and none have indicated an intention to do so. Even then, of course, governments should proceed with the utmost caution. For there likely are good reasons, from an economical and practical point of view, why private operators are not yet offering service.
The cities that comprise the UTOPIA venture could do their citizens – and perforce their taxpayers – a favor by getting out of the telecom business. Indeed, they have an obligation to do so. History has shown that running a telecom network is a highly capital-intensive and complicated business much better left to private enterprise.