Michigan Cities Getting Around State Ban On Risky Internet Projects

Michigan law imposes conditions on municipalities that want to create government-operated broadband systems. It’s only supposed to happen if there are few or no willing internet providers, or when a city or township can provide the service for less and without taxpayer subsidies. Yet several municipal broadband ventures have appeared in areas with more than one private internet provider. A new paper examines how this is possible.

The government projects are usually promoted with overly optimistic cost and revenue estimates, and they claim to be more efficient than commercial vendors. The reality is often very different, though, as the study by Theodore Bolema at the Institute for the Study of Economic Growth at Wichita State Universities shows. Before taking his current position as the institute’s director, Bolema spent years studying government regulation of regional utility monopolies. Bolema is also a member of the Mackinac Center for Public Policy's Board of Scholars.

In addition to using overly optimistic scenarios, Bolema writes, municipal broadband planners often fail to account for the negative impact of government regulations on private sector competitors. Moreover, some less-efficient local government broadband services sell their service for less because they are exempted from regulations commercial providers cannot escape.

For example, the city of Marshall, Michigan, exempted its own broadband service from costly permitting mandates it imposes on private providers. Unsurprisingly, Marshall’s cost-benefit analysis showed it could beat the prices of private service.

Even so, Marshall’s broadband system has not lived up to projections. As Bolema writes, “Despite the advantages the city of Marshall gave itself, its municipal broadband system is already lagging behind the projections in its cost-benefit analysis. The project also has delayed repaying its loans for the projects at least twice, suggesting that the project may be on its way to requiring additional funding from city residents.”

Other Michigan municipalities have been even more aggressive in raising obstacles to private broadband competitors. In Traverse City, Holland, and Lyndon Township, officials have used what Bolema calls a predatory strategy of intentionally undercutting private providers .

Local governments’ lack of industry know-how has also caused their broadband networks to “consistently fail to achieve the financial results and penetration rates promised by their supporters.” Bolema writes that municipal broadband efforts often fail completely, with the network “sold off for a loss, which can become a burdensome obligation for a local government and its taxpayers.”

By contrast, he writes, “Established private providers have far more knowledge and experience in building networks, marketing to potential customers, and operating networks. Private providers also can take advantage of their economies of scale and spread their fixed costs over multiple geographic areas where they operate, giving them an actual economic advantage over government-run systems operating only within the municipal borders.”

Bolema recommends that Michigan municipalities reexamine how these projects are pitched to taxpayers and residents. He writes, “There is good reason to be skeptical that the city has any true economic advantage that makes it uniquely capable” in operating a broadband system. Instead, “any claimed advantages for a proposed municipal broadband network are more likely due to subsidies, self-dealing, or regulatory advantages favoring the networks they operate.”