Can RUS Turn $2.5 Bn to $25 Bn? Loan Gaurantees May Work Better Than Loans or Grants.

Unsurprisingly, a lot of folks at David Isenberg’s excellent Freedom 2 Connect Conference this past week had a lot of attention focused on the stimulus. Most of the discussion has centered around NTIA’s Broadband Technology Opportunity Program (BTOP) Rather than around the US Department of Agriculture’s Rural Utilities Services (RUS) Program. After all, BTOP has more money ($4.7 bn to RUS’s $2.5 bn) more potentially eligible grantees, and more terms that will need definition.

But the $2.5 Bn for rural broadband is certainly nothing to sneeze at, and because of its more specific focus (rural infrastructure build rather than broader digital inclusion) and narrower set of eligible applicants, it may have greater opportunity to do some very clever things to maximize the impact of its spending. On the one hand, $2.5 Bn is more money than we have ever seen committed by the federal government to building rural broadband access infrastructure. OTOH, it is a pitifully small amount when compared to what most folks think it will take to bring meaningful broadband to rural America. Ideally, therefore, every dollar spent should stimulate more spending in this area.

Enter Geoff Daily at App-Rising, who writes this intriguing piece on how to leverage the wackiness of the financial system to our advantage (for a change). Unlike NTIA, which gives only grants, RUS can give loans and loan guarantees as well as grants. in fact, RUS has traditionally given loans and loan guarantees rather than grants. Geoff thinks this provides a way to turn the RUS $2.5 Bn into $25 bn in actual spending on rural broadband infrastructure. Unfortunately, it runs into a Dilbert-esque paradox. This is such an efficient and effective way for the government to use the money RUS is afraid that Congresscritters and pundits eager to declare the stimulus a failure will point to RUS’ “unspent” loan guarantees as a sign of waste and a failure to “spend” the money.

Fortunately, I think RUS can set up the program in a way that minimizes this risk.

More below . . .

Lets start by saying we need fresh ideas and original programs — because if we could do this with business as usual and conventional wisdom we’d have done it already. We need accountability and transparency — which requires creating whole new systems to track the money and provide that information to the public in an accessible and meaningful way. And, above all else, RUS needs to spend the money quickly. Already we have pundits and naysayers eager to declare the stimulus package a failure and all set to chide the government for not injecting money into the system fast enough.

Geoff argues that loan guarantees would allow RUS to increase the impact of the money ten-fold, effectively turning $2.5 Bn into $25 Bn for rural build out. Basically, it works like this. If a program is worthy of money, a bank or other lender would normally finance it. But in this climate, even worthy projects can’t get loans. By providing loan guarantees, the feds bring in what amounts to matching private capital. But because loan guarantees are scored against RUS’ budget on an assumption that the loan will be repaid, only a relatively small portion of the money allocated as a guarantee is considered “spent.” So a $500 million loan guarantee leaves most of that money free to act as a guarantee of other worthy projects.

And now comes the Dilbert moment. According to Geoff, RUS doesn’t want to do loan guarantees because staff are worried they won’t spend enough money fast enough.

I wish I could say their fears are stupid. But sadly, I can just see those looking to score points against the very idea that the stimulus is effective yacking about unspent money and jaw-boning about the inefficient bad bad bureaucrats and how tax incentives would be sooo much better when RUS would deserve a freakin’ Medal of Freedom for finding a way to turn $2.5 Bn into $25 Bn while simultaneously getting banks to lend again. That’s the sad thing about being an agency that does something really brilliant, it makes you a target for folks who have little regard for the truth but an unfortunate ability to manipulate often all too malleable press that is conditioned to believe the “all government spending is inefficient, corrupt or just plain useless” story.

Fortunately, the problem only happens for RUS if it does not get enough applications. To move the money out, RUS would need to receive a huge number of loan guarantee requests, say $25 Bn or more. Then the money would be “spent” and RUS would get credit for spending the money quickly AND for being clever about giving it 10 times the bang for each buck. But the folk at RUS apparently do not believe they will get that many request for loan guarantees.

I suspect they seriously underestimate the demand for loan guarantees. Sure, as a business I’d rather have a grant or a direct government loan. But a viable business caught in the current credit crunch would gladly have a loan guarantee. OTOH, maybe I am wrong. Maybe lending institutions won’t want to make the loans even with federal loan guarantees — a situation which could leave RUS holding the bag and looking like morons rather than heroes before a Congressional oversight committee when no money is spent and no build out happens.

So here is my recommendation: Have RUS set a threshold for loan guarantees. NTIA is doing multiple traunches. RUS could say “we are reserving $1 Bn for loan guarantees. If we do not receive $10 Bn or more in requests for loan guarantees by [date], then we will disperse the $1 Bn as a second wave of grants and loans.” RUS could also have applicants elect for consideration for a loan guarantee in the event they are denied a grant or loan rather than have to chose between loan guarantee or loan. “Dear Applicant, we are sorry we cannot give you a loan, but if you can prove that a loan guarantee will provide you with sufficient capital, we will give you one.”

The one silver lining in the ridiculous deadlines around the program is that there is leeway to do things in stages. RUS can give Geoff’s loan guarantee plan a try, while still getting money spent on the timetable demanded by OMB and the statute. If it doesn’t work out, the money can still be spent in a second wave. Nor does RUS have to commit the entire $2.5 Bn to loan guarantees. It can still have a healthy mix of loans and grants, while using the multiplier effect of loan guarantees to spread the wealth around as effectively and productively as possible.

Stay tuned . . .

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One Comment

  1. bj says:

    And then we’ve got Pennsylvania idiots in the Senate, who will try to legislate against us here getting ANY money for rural buildout in this mostly rural Commonwealth, if it MIGHT compete with the incumbents . . . oh joy.

    Let’s just say I don’t hold out hope that any politician or government bureacrat these days will Do The Right Thing.

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