Broadband Boondoggles in Southwest Virginia

Throughout the Central Appalachian region — Virginia, West Virginia and Kentucky — community leaders have a keen understanding that they must find new industries to replace coal. And there is a near universal conviction that any hope to diversify local economies requires high-bandwidth connections to the outside world. This conviction has led to a series of initiatives, some misguided and some on target, to bring broadband to this isolated region.

Ronald Bailey with Reason Magazine has visited Central Appalachia to examine these efforts and concludes pessimistically, that they’re not accomplishing much. The article’s headline says it all: “The Noble, Misguided Plan to Turn Coal Miners into Coders: Expensive high-speed internet and job training will not transform Appalachia into ‘Silicon Holler.’”

The story begins in 1999 with the decision of Bristol Virginia Utilities (BVU) to build a fiber-optic network connecting its eight electric substations and all of the city’s public facilities. In 2002 BVU OptiNet began deploying a fiber-to-the-home network with the help of state and federal grants, tobacco settlement money, and revenue bonds — $132 million all told for 13,000 customers. (That’s a capital investment of about $10,000 per customer.) The end result:

Cash inflows from successive government grants enabled OptiNet to function like a Ponzi scheme, masking the fiscal rot at the heart of the enterprise. Eventually in 2013, an audit found extensive misuse of funds—personal trips, bribes, and kickbacks—by board members, officers, and contractors. In 2016, nine people associated with the BVU Authority, including its CEO, chief financial officer, and board chairman, were sent to prison for conspiracy and fraud. The state government’s 2016 final report noted that the OptiNet division was operating at a net loss, that this was expected to continue, and that therefore it was unlikely to generate enough cash to pay both the principal and interest owed on $45.5 million in bonds it issued in 2010.

The audit also found that the BVU Authority used an improper methodology to account for and cancel debt when it became an independent entity, and as a consequence it now owes the Bristol city utility division nearly $14 million. The auditors’ blunt assessment: “These conditions raise substantial doubt about OptiNet’s ability to continue as a going concern.”

Now a Southwest Virginia entity, Sunset Digital, has negotiated a deal to acquire OptiNet’s assets for $50 million. As the author Bailey notes, that’s a “smart move” for Sunset Digital and its owner Paul Elswick, who are backed by a Miami, Fla., based private equity firm.

Meanwhile, in nearby Dickenson County, the county also has been investing in building a fiber-optic cable network. In 2004 the board of supervisors created the Dickenson County Wireless Integrated Network (DCWIN). Next year  DCWIN issued $1.5 million in bonds to build 10 cell towers. To pay off the bonds, the network had to sign up 1,500 customers. Never happened. Five years later, the county board dissolved the authority, assumed its debts, and sold the wireless network to a local company for $277,000.

Those are relatively small potatoes compared to the shenanigans in eastern Kentucky, which Bailey describes in considerable detail. The author came away impressed by some of the entrepreneurs who want to bring broadband to the region, but not so impressed by the efforts of local government officials, who don’t know what they’re doing. He calls into question the entire premise of trying to rejuvenate the economy by pumping money into highways, broadband, and other infrastructure.

It is hard to see the seeds that are supposed to someday sprout and grow into a nascent Silicon Holler.

It’s difficult to tell how many employers, if any, have decided to relocate to Southwestern Virginia due to better access to high speed data networks. As with the highway construction project before it, the internet infrastructure push has not created a detectable boom. Population in the counties covered by various government-subsidized broadband networks continues to fall, dropping from 334,000 in 2000 to 324,000 now. Between 1980 and 2000, by contrast—without any high-speed internet to speak of and with the highways uncompleted—the area’s population dropped by a smaller amount, from 336,000 to 334,000.

For more than 50 years, the feds have poured billions in job training and infrastructure funds into central Appalachia with the goal of spurring economic growth and reducing endemic poverty. There is very little to show for all that effort.

Bacon’s bottom line:

I kinda sorta agree with Bailey. But not entirely. I share Bailey’s skepticism about how local governments have tried to jump-start broadband connectivity. Clearly, Bristol and Dickenson County lost a lot of money they could ill afford to lose. If local governments are going to get into the broadband business, they need to be better stewards of scarce public dollars..

But I sympathize with the desire of Southwest Virginians to salvage their economy, and I agree that having broadband connectivity is a necessary condition to achieving that revitalization. In other words, without broadband, there will never be an economic revival. Unfortunately, investing in broadband is no guarantee that new jobs and opportunities will come. It’s the ticket the region must buy to get into the game.

Hat tip: Jack Lucas

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6 responses to “Broadband Boondoggles in Southwest Virginia”

  1. LarrytheG Avatar

    If you had X dollars to spend to help rural Va , would you spend it on some kind of economic development effort to restart the coal mines or attract manufacturing or would you spend it on broadband?

    We spent , probably billions of dollars to get more/better roads to the rural areas of the state to boost their economies. We even have one called the Coalfields Expressway. As I recall.. all kinds of futile economic development efforts have been undertaken – across Virginia – and I don’t see folks saying that economic development overall is a failed approach.

    I don’t see much difference in building roads, stringing electric lines, telephones, cell towers, or even pipelines to these rural areas so why is bringing in broadband much different?

    As far as Ronald Bailey retort that you can’t make coders out of coal miners… or for that matter his wider-scale “abandon hope all ye who enter” fatalist vision is not particularly intelligent. That attitude taken up by Mr. Moret would not be a good thing.

    Maybe miners won’t be coders, who knows… there are other things they can be if they get better connected to the knowledge economy and their kids.. yes… their kids CAN become much better educated to the degree needed for them to actually be competitors in the 21 century labor economy.

    Just about any economic development endeavor – has fails… not all succeed.. some are truly harebrained… but to throw away the concept because the geography is rural – .. that in itself is a fail… Ask Mr. Moret.

  2. I think SW Virginia has to invest in broadband. But it has to do so intelligently, recognizing that local governments cannot afford to provide service to all comers and cognizant that they have limited resources to piss away.

    1. LarrytheG Avatar

      I think the State should put in the backbone and then offer grants to matching grants to localities that choose approved providers and follow cost-effective guidelines for extending from the state-provided backbone.

      The State may want to actually do a PPTA but then guide localities to actually follow cost-effective, fiscally-responsible procedures by matching locality money if it does follow the State rules.

      The provision of the internet is absolutely imperative – both for economic development potential but also for education of the kids so they can obtain a competitive 21st century education… and .. can leave .. if they have to and go to where the jobs are.

      I just reject the idea that we write off the rural… it’s our fellow citizens who don’t want anything more for themselves and their families that those of us who inhabit more prosperous areas. It’s morally right for us to help them but it’s more than that – it’s economically irresponsible to not do what we can to help them become more productive tax paying citizens rather than unemployed opioid entitlement takers…

      We should no more be tossing them into prisons than we should the inner cities folks. both have the same needs.. and we do have a responsibility and a duty to address them.

  3. Your tone is exactly right. “Kinda, sorta, agree.” Broadband is a necessary precondition but not an assurance of development. Especially not if poorly implemented.

    That said, why doesn’t the State get into this and encourage broadband expansion with the expertise these Counties and municipalities are clearly not bringing to the task? Think of all that tobacco commission money that could logically be put to this (unlike some other ‘economic development’ boondoggles). A commission or authority or you-name-it staffed with the right expertise and able to supply matching funds (to induce localities to put up with their “guidance”) could spur and steer a lot of broadband to places the private sector would go last, if ever.

  4. LarrytheG Avatar

    I note that the state provides “grants” for water supply, sewage treatment, libraries, jails, schools, roads, etc.. many are “matching” which requires the locality to do things in specific ways rather than Ad Hoc, roll their own approaches.

    A good example is subdivision streets – that the state will accept for maintenance IF they are designed and built to state standards.

    The internet is basic, fundamental infrastructure… The folks that talk and write like it’s some kind of discretionary “frill”… are out to lunch.

    There is almost no chance that physical, on-site economic development is going to return to the rural areas… the internet is their lifeline back ..for many… to become educated or re-trained or even start up a business that is based on the internet.

    In terms of localities “pissing away limited resources”.. you could actually say the same thing about a wide variety of things – not just internet – take Buena Vista and their golf course…. or some of the other localities that have managed to get on the State’s fiscal “danger” list…

  5. Peter Galuszka Avatar
    Peter Galuszka

    A couple of points:

    The scandal in Bristol is really old news.

    The blog post does not raise the most important question. Why isn’t broadband available in rural and inner city neighborhoods? The reason is that Big Broadband companies like Verizon and Comcast don’t want to pay for the last mile in linkups. Some smaller broadband companies are doing that but the big boys want to maximize their profits by selling bundled services costing at least $200 a month in porr areas.

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