Hey RUS: What Happened to Loan Guarantees?

When Congress passed the stimulus back in February they allocated $2.5 billion to RUS to distribute as loans, grants, or loan guarantees to stimulate broadband deployment.

When RUS released its NOFA a couple weeks ago it included the ability for rural broadband projects to apply for loans, grants, and loan/grant combos.

This begs the question: whatever happened to those loan guarantees? Why didn't RUS listen to Congress and include them as an option? Why did RUS choose to ignore this important component of their funding toolkit?

The short answer is likely because while RUS already has a loan guarantee mechanism in place no one's ever used it before for two primary reasons: the 80/20 guarantee isn't enough to entice private lenders to open their coffers, and it takes just as long to get approved for a guarantee from RUS as it does a direct loan. Since a direct government loan will always have a lower rate than a guaranteed private loan there's little incentive to go for a guarantee. So not only does the current guarantee system not free up private capital, it doesn't give applicants any incentive to use that option.

And yet guarantees hold so much promise. They allow government to lower their risk and leverage private capital without having to write a single check.

That's why the Rural Fiber Alliance, an ad hoc coalition of pragmatic rural fiber deployers, has suggested a simple way of tweaking the guarantee program so that it can be used as a viable tool for increasing the capital available for rural broadband deployment.

The two tweaks to be made are as such:

Have government cover 100% of losses up to 50% of the value of the loan.
Doing this lessens the risk significantly for lenders as they're no longer on the hook for losses starting from dollar one. Plus it can lower the government's overall exposure. We've spoken with a handful of lenders and have confirmed that guarantees that cover 100% of losses up to 50% of the value of the loan would open up the funding floodgates, unlocking and unleashing the frozen credit markets.

Create a fast-track approval process.
With these new guarantees in place RUS can significantly lessen the amount and depth of vetting they have to do. The reason for this is because if a private lender is willing to write a check for the whole amount and take on half the risk, then government can assume that that lender's doing the vetting necessary to insure that only viable projects are getting funded. What this then allows for is a streamlined approval process where government simply goes through checklist to confirm projects have all the components needed to raise funds from the private capital markets.

Getting a bit more specific, the RFA has proposed in comments it has filed that RUS peel off $500 million of its $2.5 billion to be applied to the creation of a fast-track partial loan guarantee program.

By doing this, that $500 million of budget authority could be used to distribute at least $10 billion in partial guarantees (like a loan, guarantees don't count dollar-for-dollar against the budget), which could free up at least $20 billion in private capital to fund rural broadband deployment. All without government having to write a single check.

Even better is that this money can potentially be freed up in a matter of weeks, allowing these subsidies to move at the speed of the market rather than the snail's pace of government.

In fact, if the RUS would've adopted this proposal back in the spring when it was made, we could already have billions of dollars flowing into rural broadband deployments, creating jobs and getting the unserved connected. Instead we're stuck waiting for the gears of government to slowly churn out the money.

Fast track partial loan guarantees represent the smartest kind of broadband policy. They maximize how much we leverage government dollars. They can work quickly to turn dollars into deployment. And they reduce the administrative overhead associated with vetting applications.

So why has RUS refused to embrace them? Why aren't we using this intriguing tool in our funding toolkit? Why can't we think outside of the box just a little bit to realize new and better ways of conducting broadband policy rather than just pursuing the same old, same old?

The time for a new day of pragmatic broadband policy has dawned. So let's acknowledge this new reality and embrace what could be the most powerful tool government has at its disposal to spur the deployment of broadband: fast-track partial loan guarantees.

My message to RUS - It's time to step up to the plate and take full advantage of the resources at your disposal. Realize that there are better ways to be utilizing government resources than just writing checks. Try to see past the old ways of doing business to open your eyes to new possibilities.

Rural America's counting on you to make the most of the resources given to you. To get the biggest bang for the broadband buck. And the best way to accomplish these goals is through offering fast-track partial loan guarantees.