Friday, May 4, 2012

The progression of broadband internet from expensive and isolated to the service standard has occurred rapidly. Broadband access has become a necessary utility for organizational capacity and economic development. However, there are many areas of the country that are still working towards adequate access. Rural communities in particular suffer because their relatively small consumer markets do not provide a sufficient base for private firms to recoup initial investment costs. Additionally small communities offer spatial challenges in that they may be separated from other markets by greater distances than metropolitan areas. 

The following video shows how this challenge has affected businesses along the Gunflint Trail:

Some efforts to extend broadband to rural Minnesota have had measurable impacts:

Figure 1 displays how broadband access in greater Minnesota has grown most dramatically over the past decade. While this growth is undoubtedly a positive sign, there are still communities with problems of access. 
In west-central Minnesota, the Red River Telephone cooperative provides high-speed internet to much of the area. The cooperative’s coverage includes rural residents of Barnesville, but not to citizens within the city proper. In order to provide web access to all Barnesville residents, city leadership used a revenue bond to tackle the problem itself. They established an enterprise account, and installed the necessary wiring and equipment to provide internet, phone, and television access directly to its citizens. Barnesville now provides internet service to to 651 residential and business customers, representing 25.4% of the city’s population. 
Barnesville is a case of private production of public goods, but with public choice and financing. In a sense, Barnesville holds a natural monopoly, and because consumers of the service are directly identifiable, revenues are generated from user fees.  However, Barnesville cannot charge a fee equal to marginal cost, as users will vary in terms of bandwidth needs. For example, a family does not have the same internet needs as a business with multiple computers with internet access. To account for this, the city uses a two-part pricing method, levying a higher fee on users who consume “more” of the good. In this context, consuming more of the good means higher download speeds or bandwidth capacity. Barnesville's method for pricing and marketing mirrors how private companies charge customers for internet access. 
As previously noted, the motivating factor in providing municipal access was to fill a gap in the internet service provider market. Yet Barnesville also utilizes revenues from the service to aid in other government capacities. While city’s role in providing broadband internet is largely fulfilling a market need, the service has produced a surplus, and is currently budgeted to continue be a potential support for operational funds.

Of note in table 1 are the budgeted transfers to the general fund, indicating a planned reliance on the broadband enterprise fund as a revenue source. This dependence extends to other enterprise funds as well:

Barnesville has found adequate funding sources through self-reliance. While comparisons to a large sample of small communities would be helpful in evaluating Barnesville, the city’s large number of services typically fulfilled in some capacity by the private sector appears exceptional.
The city of Barnesville is a case of local government solving a private market problem.  While many small communities rely on successful partnerships with the nonprofit sector to address the rural web access challenge, Barnesville internalized the problem and in the process, created a funding source for day-to-day public activities.
 One recommendation for the city moving forward, is to monitor general reliance on enterprise revenues. In the event that any given service provided becomes obsolete, or a private competitor enters the market, it will be important for city leadership to be prepared for any significant revenue decreases that might result. For the foreseeable future however, this innovative approach to local service delivery has put Barnesville in a strong financial position.

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