Capital is Power: Financing Broadband for the Long Haul - Episode 654 of the Community Broadband Bits Podcast

Brian Vo (00:07):
Capital is power. And in the context of designing, deploying, and operating a network, if a community can bring capital to the table, they can have a seat at the table of how that network is designed, which community anchor institutions does it run through, et cetera, et cetera. And so it is much more of a [00:00:30] collective collaborative experience with the ISP.

Christopher Mitchell (00:34):
Welcome to another episode of the Community Broadband Bits podcast. I'm Christopher Mitchell. I'm at the Institute for Local in St. Paul, Minnesota, and today I'm speaking with, I guess one person I've talked to a lot and one person I haven't spent as much time with. We got Brian Vo, Chief Investment Officer at Connect Humanity, a long time partner of ILSR in this work. Welcome Brian.

Brian Vo (01:00):
[00:01:00] Thanks Chris.

Christopher Mitchell (01:01):
And we also have Clara Miller, Visiting Scholar at the Federal Reserve Bank of New York, who is a warrior of finance.

Clara Miller (01:08):
Hi everybody. Hi

Christopher Mitchell (01:10):
Clara. I don't think we've ever done a show together before, but you obviously have a ton of experience thinking about this. And I think, would it be correct to just say that you are looking for creative ways to bring, I think, capital to solve problems?

Clara Miller (01:27):
Yeah, that's kind of one way to shorthand my career. [00:01:30] I guess there's a real analogy to my work in the CDFI world for years and years and the kind of work that is going on with Brian and Connect Humanity. So I'm hoping to be able to make a contribution.

Christopher Mitchell (01:46):
Yeah, maybe actually we'll just spend one minute there. And so CDFI's credit, Community Development Finance Institutions, this is something that didn't always exist. I mean, actually it was. So for me, when I read [00:02:00] the Color of Money, I forget. There was a book that Mehrsa Baradaran wrote, and I learned that there weren't always banks. I just sort of assumed for a thousand years we've had banks. But it turns out it's actually a much shorter period of time. And it's worth noting there weren't always CDFIs. And you were involved in the creation of this institution that has helped to bring investment to thousands of communities.

Clara Miller (02:24):
Yeah, I think that what has happened over time is, and that's somewhat different, [00:02:30] is that banks have consolidated and withdrawn from certain communities or for reasons of their own, some of them nefarious, some of them economic, have withdrawn from certain making loans, extending credit in certain areas. And those left out areas I think gave rise to CDFIs. And I think that there's a real parallel between the left out areas for broadband and the left out areas for banking [00:03:00] services. It's like it's a public utility. Everybody needs it.

Christopher Mitchell (03:04):
One of the things that I've learned that anyone working in this space will ultimately learn is that you could say the rise of CDFIs, it was some sort of natural process, but it was hard work in which you were not always sure it was going to work out, I'm sure, right? Yeah. And these things don't just happen.

Clara Miller (03:20):
No, no. And I've got to say, the people who came before me in the movement were real warriors back then. They were extraordinary and very [00:03:30] smart, and also kind of combined on the ground savvy of how to put money on the street and political muscle and strategy and understanding of how to get something done at the federal level. It should be noted that there was good timing. It was a president then. I think it was Bill Clinton and Hillary Clinton who really liked the idea of CDFIs and had seen them in action in Arkansas. [00:04:00] So all those things conspired to make this that a moment.

Christopher Mitchell (04:05):
Good lessons. Now, today we're going to be talking more about finance with relation to networks. And this is what Connect Humanity was created to focus on, and I tend to think of this as creative finance, not because it's creative in the negative way of people sometimes creatively changing the way their asset portfolio is to make it look better than it is, but because [00:04:30] there's capital out there that could be used to solve our problems and by capital, there's a better definition of it. I just think of it as the ability to turn money into networks for this purpose. And there's capital out there that we think would be a good use for this, but they don't always know it. And this is something that Brian has been very passionate in talking about. So Brian, just give us a sense of why this is important and also I think that it's not a fool's errand, [00:05:00] that there's really a There. There.

Brian Vo (05:01):
Yeah, absolutely. And it's not financial engineering. I think the biggest aha that I had when we're building out this investment platform with Connect Community was the amount of just information asymmetry between the stakeholders who are needed to put a network together. You had the community, the municipality, the ISP, maybe the incumbent, which might have been different, [00:05:30] and certainly then the financing role of it. And it can be so easy to just get folks' eyes to glaze over when you start getting very technical with broadband. And so what we found a lot of found in that void of information asymmetry was it was the wrong types of capital, lesser motivated ISPs or incumbents in and being able to take advantage of this [00:06:00] situation. And what we're trying to do now is if you believe that broadband creates significant economic value, begs the question to boom, does that economic value is through. The other question is if broadband really is a forever problem between the future maintenance and upgrades, how can we get capital that is more patient, that is more mission driven, that understands community needs? Maybe not necessarily [00:06:30] understanding the technicality of broadband, but understanding the outputs and outcomes they can create. How can we really integrate that when they're separate?

Christopher Mitchell (06:41):
Claire, is there anything you wanted to add on to that?

Clara Miller (06:43):
I'm with Brian. A hundred percent. There's some distinctions here. One of them being that there's actually, I mean, one of the things, the thing that gives capital agency and value is revenue is reliable revenue. And unlike some other propositions, [00:07:00] there's reliable visible revenue here. And it's a question and there's a lot of technical complexity. There's some worry about maintenance over time. There's some ownership issues, there's all sorts of things like that and control issues. But that basic, if you're talking just about the money aspects that exists, that's very powerful. That's not always the case. And this just seems to me like [00:07:30] it would be relatively easy to make this happen in a way that's really good for communities because of that underlying positive reality about the money.

Christopher Mitchell (07:42):
We know from 150 years of experience with telephone service that telecommunications networks are lucrative financially. Exactly. Well, it's less lucrative in rural areas and it's less lucrative in cities where there's a lot of poverty in those sections of cities. But Brian, I feel like you're saying there's still enough [00:08:00] revenue and promise there that even if you segment out the areas that have been most left behind where we would expect are the hardest challenges to generate revenue, there's still an attractive picture there for some pools of capital.

Brian Vo (08:13):
Yes, absolutely. When I talk to investors, I code switch and break it down into investors speak, right? And if I were to tell you there was a type of cashflow that was utility like with a monthly recurring revenue that [00:08:30] was low volatility, high predictability, and the underlying consumption of the thing in this case, bandwidth data had been growing at 35% annually for the last 15 years, is expected to continue growing at that rate for the next 10, 15 years, if not faster. What type of investment vehicle would that be? And when you see something that is that utility like uncorrelated to [00:09:00] market returns in the investor world, it just screams credit. Yet what we see in the market is big pools of public grants, which will never be enough, but also carries its own constraints and baggage and private equity, which is targeting really high rates of return.

(09:21):
So when folks ask, is this type of investing concessionary or below market, I [00:09:30] would actually challenge that to say, nah, I think credit is the most appropriate tool. And when we think about how other infrastructure classes are financed, whether that's water, electricity, roads, bridges, tunnels, all of that highly utilizes credit and often in the single digits. So I would actually point back to some areas where private equity is going into and say if true market might [00:10:00] actually be where credit is, there is a role for equity, but equity in certain communities can often be extractive.

Christopher Mitchell (10:09):
I want to say, and I've told you this before, that I'm mostly taught myself a lot of this stuff by going to people that knew a lot and picking their brain, but I still have blind spots. One of the things that I assume, and Clara, I'm curious if you can address this, is that much like in the popular press, there's a focus on the Dow Jones and as though that measures the market and people [00:10:30] have a sense, and similarly, when you think about investments, I think people naturally tend to think about, oh, these are people that want number go up and they want to have an 18 month return and a significant return, and they want figure that out, but there's other kinds of return. And so when Brian talks about a utility type return, can you just share a little bit about how different investors have a different need in terms of the return that they get over different times?

Clara Miller (10:57):
Absolutely. One sort of simplifying [00:11:00] factor is that there's only really two types of financial instrument. One is debt and one is equity. There's some playing around in there, but that's it. And the stock market is the public equity market. It's these publicly held companies. Thing about debt is that there's various tenors, meaning longevity of the loan instrument, let's say. Is it a one year? Is it a credit [00:11:30] card, which is very quick or is it a tax exempt bond or some other version, which could be 30 years or even a hundred years now. And the latter is about reliability and not necessarily the highest quickest profitability, but it is something that if you're matching it to a diversified, you want to have that nice base note in there as well as some piccolos and [00:12:00] other things in the orchestra of your finance if you want to put it to torture a metaphor. And I think that what's happened in the financial markets is that everything's become kind of short time horizons and high profitability hurdles, even when people don't really need that unless they're extremely rapacious private equity investors or have extremely high expectations for [00:12:30] quick term gains. And so there's a lot of us who kind of say, well, gosh, that's not always needed in somebody's finance.

Christopher Mitchell (12:39):
Yes. So let's talk about mission-driven capital and how that relates to this. So there's obviously different sectors in which that's when I hear the term mission-driven capital I, but I think that's an oversimplification that doesn't capture all the nuance.

Clara Miller (12:58):
The real thing to focus [00:13:00] on really is the enterprise. What is delivering the benefit to society? And there's lots of, most enterprises are social enterprises. Yes, there are some antisocial enterprises like crime syndicates, and we can go on, but really the pizza place downtown is a social enterprise in some way, in some sense. But there are special purpose organizations. [00:13:30] Some of them might be nonprofit organizations, cooperatives, worker owned ESOPs, et cetera, et cetera, that have a particular social goal built into their enterprise. And the way those are financed is meant to honor that underlying mission. So that's one of the things about what social capital is or mission-driven finance. And the other is really [00:14:00] there's a group of investors who are saying, look, I don't need this short term high yield thing. What I really need in my life is to make sure that when I'm investing my money, it's actually improving the environment or it's improving people's lives in some way. It's making sure they have Internet, for example, and that's mission-driven capital. It might be an investment in a nonprofit or a for-profit [00:14:30] or a B Corp, for example. I mean, there's many flavors of that, but that to me is mission-driven capital.

Christopher Mitchell (14:39):
Good. Brian, do you want to bring in wider examples that go beyond Internet access as we think about this?

Brian Vo (14:46):
Yeah, absolutely. One of the things we've been noodling on is there's of course been lots of discussion around BEAD and a lot of the federal and state buckets of capital for broadband [00:15:00] deployment. Right now, one of the things that concerns us is because broadband is like any other infrastructure a forever problem. How can we use this moment to also think about a larger financing ecosystem to make sure marginalized communities low income and rural communities just are not continually at the back of the line waiting for better Internet? And so a comp [00:15:30] that we think about a lot is really similar to affordable housing. When you think about how affordable housing is financed right now, you have that spectrum of mission-driven investors from community development finance institutions. You have folks who are able to bring in new markets tax credits or low income housing tax credits.

(15:53):
You have bank, CRA investors, you have market rate investors, but most importantly [00:16:00] the entire ecosystem. All of those players know how to work with one another to get a housing deal done. And you can bring a housing deal to virtually any bank or CDFI and say, Hey, here's a housing deal. They may not do housing, they may still say no, but most importantly, they're not going to be intimidated by housing. And so what we see a lot of right now is you try to bring a broadband deal to any loan officer, and [00:16:30] there's that initial knee jerk intimidation that information asymmetry of not knowing how to due diligence this or underwrite this. What we're thinking about really broadly is if broadband in the communities that really experienced the digital divide acutely, if what they need for long-term connectivity is this financing ecosystem, and it took housing and the CDFIs [00:17:00] really 10, 20, 30 years to build that infrastructure, what do we got to do today to start seeding that path?

(17:09):
Right? And is that states thinking differently about the pools of grants that they have instead of just granting to deployments? Can that go through something like a revolving loan fund? And so at least recover some of that and use that as a way to bring in CDFIs or CRA [00:17:30] so that they can start getting exposure to broadband deals in a lower risk type of environment. And hopefully just getting folks more exposed to how to think about broadband risk and return. And really through that, I think the more that we can pull some of those buckets of capital together, I think we can solve for a lot of the friction that we see at the deal level broadband deal level. [00:18:00] We see a lot of smaller communities often, sometimes adjacent, sometimes disparate, all with $2 million, $5 million, 10 million asks, and they can inadvertently be competing with one another, right? If we can do this at more of the portfolio level, state level or some type of metal level, we can aggregate those projects together. And the funny thing is, from a risk return perspective, that actually makes the entire [00:18:30] portfolio better spreading the risk across many different broadband networks.

Christopher Mitchell (18:35):
One of the other concepts that we want to make sure people appreciate is that we're not talking about the need. For instance, if I like to use the example of Cleveland with DigitalC, they're doing a great job building out there and they got a number of grants. We're not looking for taking another city that would want to do DigitalC and saying, you need to find a hundred percent mission-driven capital. I think it's recognizing that there can be a mix, [00:19:00] and I want to end Dhar conversation. I think talking about those mixes and how they work and how this is fairly natural in the financial world of recognizing that you need to build what is called a stack. So Clara, do you want to jump in and just share a little bit on that?

Clara Miller (19:20):
Just to start? Banks themselves are the ultimate capital mix. People are depositing in banks for all kinds of different reasons and so [00:19:30] on. And similarly, there's a kind of manufactured capital mix in a market like the one that Brian is describing that's a little bit, people don't have much experience or they're afraid of this and that. And the way one overcomes that, certainly the way it's been overcome in housing and community development is by having different investors exist at different places. People who are looking for a [00:20:00] high quick return maybe are at a certain place in the capital stack, or as a friend of mine used to call them crazy straws. It's kind of these layers. Then there's people who are saying, look, just take the money. And all of those are different flavors and different longevity of money, and they are about the risk appetite of whoever's providing the funds. And some of them [00:20:30] want them it back. Some of them don't. Some of them want high returns, some of them don't. And you put that all together and you can get something that's affordable for the project and ultimately for the people who are going to live in the project or use the service. In the case of broadband,

Christopher Mitchell (20:46):
And this is where what California was trying to do with the loan loss reserve fund, I think was really exciting. And they had established a state fund, which would be the one that takes the part of the stack that would take the first loss if [00:21:00] a project wasn't able to pay itself off. Now in my history of looking at these financial projects, Brian, one of the things that I see is that I think people have a sense like, oh, a project succeeds or fails. Well, no, a lot of times a project is expected to break even maybe in the fifth year, the seventh year, the ninth year, something like that. Not necessarily an odd year, but they're looking for a time to break even. And if that doesn't happen in that year, they're likely already making adjustments to make sure that in future years they will be solvent and they'll be able [00:21:30] to pay all of their bills, all of their creditors and things like that. And in the meantime, you have someone that might be able to absorb some losses, often a government who can think on a longer time horizon. And so that's one of the things that for me, that I think about the capital stack that it brings is that you can have those who are not willing to take a lot of risk and couple them with those who are willing to take risk. And so I'm curious if there's other aspects of the stack or you want to expand on that at all?

Brian Vo (21:55):
Yeah, we hear the terms splendid finance capital stack, and for those [00:22:00] who have been less experienced with it, or in the finance world, I think it is often made out to be more complicated than it really is. The public sector has been doing this for quite some time. I've heard the terms like braided finance for well before blended finance was in the ether. And so the example I like to give a lot is really how do you finance college? You might [00:22:30] get some money from cash from your parents. You might get a bank loan, you might get some student aid, you might have a work study job. And amongst all of that, you may not pay your parents back completely. That would be the first loss element of it. And so it sounds a lot more complicated than it really is.

Christopher Mitchell (22:51):
Can any of us really pay our parents back completely?

Clara Miller (22:56):
That's a Different show

Brian Vo (23:00):
[00:23:00] Beyond the sausage making around the risk return element and who gets what risk and therefore what return. I think also a really important element to having access to capital is capital is power. And in the context of designing, deploying and operating a network, if a community can bring capital to the table, however you want to define community, [00:23:30] they can have a seat at the table of how that network is designed, which community anchor institutions does it run through, what are the thresholds of affordability, et cetera, et cetera. And so it is much more a collective collaborative experience with the ISP. And what we found a lot in our underwriting as well is if and when operators do that level of community engagement [00:24:00] and really earnest collaboration with the community, we often see the highest take rates. This is where I think broadband really highlights that ability to really bring together not only the financial returns, but what that means for the community. And this really is an asset class broadband where really the tide lifts all votes.

Christopher Mitchell (24:28):
Yes. And as we're running [00:24:30] out of time, I want to just take one last minute to make sure we cover a specific example if you can share about Macon, Alabama, but also to note that one of the things that we haven't talked about is that over time we expect demand to increase both in terms of the user demand, but also the number of users. And so that's one of the ways in which when you talk about utility type, even if it's getting more utility type over time,

Brian Vo (24:57):
Yeah. Making county really [00:25:00] hats off to the economic development authority. And Joe Turnham there who leads it really assembled this amazing public-private partnership with a private ISP. They had federal money secured, they had state money secured, and there was just a small chunk left that the Economic Development Authority was responsible for and just struggled to raise. And so when we were introduced to them, I would say [00:25:30] from start to finish, I think it took us three or four months to get the capital out where they've really been on the roadshow for, I think over a year we were able to close the deal and it was really a small loan. Since then, we recently did a look back and I think the outcomes are inspiring, but honestly not surprising for anybody who works in the broadband space. And so what we've seen [00:26:00] is we did a $500,000 loan supported by rural lisc who provided in kind support the utilities board that provided in kind support for make ready for what was otherwise like a three or $4 million deployment.

(26:16):
Not big in the grand scheme of markets, but that broadband deployment is now passing around 5,500 households. It has attracted [00:26:30] about $200 million worth of private sector investment. So an auto parts manufacturer came to town, a logistics park is being planned. They're expecting over 2000 jobs to be created. I think it was 30 million of net new GDP for the county. And Tuskegee University, the HBCU in Macon County launched a Telemed [00:27:00] service that was on their campus first in the state on health is what it's called. So we talk so much about all the goodness that broadband can create, and again, the amount of economic value that it can generate. It just boggles my mind then that the credit and community finance community could play such a huge role in replicating a lot of [00:27:30] those making stories and more importantly, making outcomes.

Christopher Mitchell (27:33):
Right? We've missed some of those in other places. I do think the for want of a nail parable comes to mind of how many communities missed out on some of that investment because they didn't have the right people that knew how to pull together that stack. Clara, I'm curious if you have any concluding comments.

Clara Miller (27:53):
I would just say old friend of mine who's sadly departed, Jeremy Noack used [00:28:00] to have a great saying, which was in the community development world, how can we help communities capture the value they create? And I think that that's at the kind of foundation of what Connect Humanities able to do, which is to make sure that value to the community gets maximized. It's not just a fix a widget, it's a utility for the long term.

Christopher Mitchell (28:30):
[00:28:30] Yes. And that's something that I feel like we haven't explored as much, but when you talk about the utility nature of it, this is not like eating at restaurants, which during a decline, people are going to do less of. If anything, people find that streaming services like Netflix are a greater bargain during economic downturn because the amount of value you can get out of it for one fixed price. So the value of these networks increases significantly. And then as you mentioned with Macon [00:29:00] County, the ability to bring so much more investment to the community, it's a catalyst. So this is important, and I really appreciate the work of Pioneers like you. I know that you're not alone. We could probably spend 10 minutes listing people who got this, and I've been working patiently at it, at the office of the controller of the currency, at the Federal Reserve Banks at all kinds of places that no one will ever appreciate their contributions, but we're seeing progress and that's exciting.

Clara Miller (29:28):
Yeah, they're good [00:29:30] people everywhere. We got to remember that.

Christopher Mitchell (29:32):
Yes, absolutely. So Brian and Clara, thank you so much for coming on, sharing your expertise, and I hope that we'll be able to revisit this and talk about the early days as we continue to see this field develop.

Clara Miller (29:45):
Super. Thanks so much.

Brian Vo (29:46):
Thanks for Having us, Chris.

Ry Marcattilio (29:48):
We have transcripts for this and other podcasts available at communitynets.org/broadbandbits. Email us at podcast@communitynets.org with your ideas. For the show, follow [00:30:00] Chris on BlueSky. His handle is @SportShotChris. Follow communitynets.org stories on BlueSky. The handle is @communitynets. Subscribe to this and other podcasts from ILSR, including Building Local Power, Local Energy Rules, and the Composting for Community Podcast. You can access them anywhere you get your podcasts. You can catch the latest important research from all of our initiatives if you subscribe to our monthly newsletter @ILSR.org. [00:30:30] While you're there, please take a moment to donate your support in any amount. Keeps us going. Thank you to Arnie Hesby for the song Warm Duck Shuffle, licensed through Creative Commons.