Holland should leave internet to the private sector
A common measure of a right-sized government is it essentially leaves to the market everything except for the services or goods that cannot or will not be produced by the private sector. When government gets too involved in enterprise, it often leads to higher prices, worse service and a decrease in competition. By pursuing a municipal broadband scheme, the city of Holland is stretching beyond its proper role.
Important city services include parks, roads and public safety. But instead of focusing on that, Holland city officials are spending hundreds of thousands of dollars (and probably much more) to play in the internet service market. That’s a distraction for a city that needs to get its financial house in order.
Consider the city has racked up about $37 million in debt for retirement benefits it owes city workers. Most of that debt represents pension promises the city made but failed to set aside enough money to pay for — only 75 cents has been set aside for every dollar promised to workers in retirement benefits. And retiree health care benefits are funded on a “pay as you go” arrangement, meaning the city is not saving any money for these future costs.
Facing these fiscal challenges, why is the city risking its limited resources on this internet startup scheme?
The justification provided is public officials believe they can beat the current market competitors and offer residents high-speed internet at a low cost. But the odds are long that this gamble will pay off: The University of Pennsylvania analyzed 20 recent municipal broadband projects around the nation and found only two that were expected to recover their cost in the next 40 years.
The projections the city is using to support running its own internet service don’t hold up to real-world scrutiny. The city is relying on two reports pushed by proponents of expanding government fiber. The first is from a company that consistently promoted governments getting involved in this private market but went belly up in 2014. A 2016 study is better but also doesn’t hold up under a bright light.
For instance, the report projects nearly 40 percent of people will sign up for gigabit-per-second speed. The report authors expressly decline to determine “whether obtaining this required take rate is realistic,” likely because they know it’s not.
Chattanooga, Tennessee, is regarded as one of the cities Holland wants to emulate when it comes to installing and running its own fiber network. But Chattanooga had only 4.4 percent of customers choose the gigabit option in 2016, and Chattanooga had $111 million in federal stimulus funds for the network and bundled internet, phone and TV. Holland won’t be getting the federal funds or offer the other services, and it will be more expensive. So how can the city reasonably project a take rate that’s 10 times that of Chattanooga?
Phase four of the plan would expand fiber networks to the hardest-to-reach 366 houses at an estimated cost of $3 million. That’s a cost of $8,200 per house, plus an “annual utility fee or a special assessment” on every household connected in order to offset some of these costs.
This is unrealistic, which is perhaps why even the study pushed by proponents admits the type of network being pushed in Holland has “not proved successful in the U.S.” They believe this time it will be different, but why should tax dollars be used for something with such little chance of success?
That’s not to say the city shouldn’t be doing something to make internet faster and more affordable for residents. The council should lessen regulatory barriers that would ensure more competition and lower costs.
Holland could, for instance, follow the lead of other cities by laying new, smart conduit for private internet providers to use. City-owned utility poles could provide cheap rental rates for wireline or wireless providers. When replacing poles, the city should update them with new, larger ones and charge cheap rent. Streamlining the permitting process for digging trenches and renting poles also should be looked into.
It’s competition in the marketplace that leads to better and cheaper services for consumers. Right now, there are 13 internet providers in Holland — two of which offer speeds of more than 100 Mbps. The city should be removing obstacles to allow better competition — not trying its hand in an already competitive private market.
Jarrett Skorup is a policy analyst at the Mackinac Center for Public Policy, a research and educational institute in Midland.