Commenters Seek Alternatives to BEAD Letter of Credit Requirement

Commenters urged the National Telecommunications and Information Administration to consider alternatives to the letter of credit requirement in the Broadband Equity Access and Deployment program Friday.

Connect Humanity’s letter, submitted in response to the NTIA’s request for comment regarding implementation of BEAD program rules, said that the digital equity group  is “concerned that the program will not achieve its objective of delivering internet for all because, as currently written, the rules risk excluding thousands of providers whose participation is vital to closing America’s digital divide.”

Under current regulations for the $42.5 billion BEAD program, grant applicants must provide a letter of credit to demonstrate their financial capacity to meet the program’s obligations throughout the construction process. A letter of credit is a document a bank provides on behalf of a network operator to guarantee that in the event of default of the build, the bank will reimburse the agreed upon funds to the NTIA.

Grant awardees are required to submit a letter of credit of 25 percent of the project costs on top of the 25 percent match requirement. NTIA officials have said that the agency will enforce this regulation rigorously.

Experts have expressed concern over the requirement, claiming that due to the large investment, banks will insist on cash collateral which will significantly increase the cost of receiving grant funds. Furthermore, the cash held by banks as collateral is essentially untouchable during the project, which limits the capital available to invest in the projects.

Connect Humanity said that “banks providing LOCs require that they be collateralized by cash or cash equivalent. As a result, awardees will have to lock away vast sums of capital for the full duration of the build, likely several years. With the additional 25% match requirement, recipients will have a capital hurdle of more than 60% of their grant.”

The LOC requirement will prevent the internet service providers best positioned to connect the unserved and underserved addresses of America from participating in the BEAD program, read the letter. It claimed that the banking sector has made clear that it does not “have the appetite to issue LOCs at the scale required to satisfy this $42.5 billion program.”

Even if banks are persuaded to provide LOCs worth up to $10.6 billion, the capital needed to collateralize them will have billions of dollars sitting idle not being used to buy equipment, lay fiber, and train the next generation of broadband engineers.

Furthermore, “the LOC shuts out the vast majority of entities the program claims to prioritize: small and community-centered ISPs, minority and women-owned ISPs, nonprofits and municipalities.”

Rural Texas Funders, a nonprofit focused on rural philanthropy, said in its comments that it has found that the letter of credit requirement will also force smaller providers to move their banking outside of their communities. Large providers have existing relationships with banks with funds available for forthcoming projects whereas smaller providers have smaller banks that are not Weiss rated and not eligible to provide the letter of requirement.

The requirement will be “extremely difficult – if not impossible – for many of the communities that BEAD is designed to serve,” it stated.

The Schools Health and Libraries Broadband Coalition added in its comments that the LOC requirement may “effectively deny these smaller and community-based companies and non-profits an opportunity to bid for these projects.”

The coalition’s letter was signed by 49 parties, including representatives from Maine Connectivity Authority, Kansas Department of Commerce, Common Sense Media, American Association of Public Broadband, and Ready.net, among others.

“We appreciate the importance of ensuring that sub-recipients have adequate resources to complete the broadband deployment projects. We respectfully suggest that there are other ways to accomplish this goal,” read the comments. It cited that other federal broadband programs require applicants to verify financial viability but do not require a letter of credit.

Among alternatives to the LOC, Connect Humanity, Rural Texas Funders and the SHLB Coalition suggested performance bonds, which are commonly used in construction projects and provide a financial guarantee for the delivery of the project without requiring providers to front such a large amount of capital to secure the funds, and delayed reimbursement models.

Delayed reimbursement allows providers and state broadband offices to agree on a set of milestones that must be achieved to release grant funds, the letter continued. The grants will be issued to providers incrementally over the course of the build and will ensure that grantees are financially reliable.

“These alternatives do not supersede the due diligence that State Broadband Offices must perform on applicants to ensure proposals are viable and that applicants have the capacity to perform,” concluded Connect Humanity.  “Providing alternatives to LOCs ensures such objectives are achieved without unnecessarily excluding ISPs otherwise ready and able to connect communities across the U.S.”

“Eliminating the letter of credit requirement will promote competition and make it easier for smaller community-based ISPs, minority-owned and women-owned businesses, and nonprofit entities to be eligible for BEAD funding,” stated SHLB.