Where's the Funding Episode 9: The Challenges of Matching Funds

Gary Bolton: Okay. We are live. Great. So it looks like we're live. So we'll go ahead and get started. Good morning everyone, and welcome to Where's The Funding? Hosted by the Fiber Broadband Association and sponsored by Broadband.money. I'm Gary Bolton, President and CEO of the Fiber Broadband Association. And this is our ninth episode of 2023. This is a 12 part series designed to help you understand, navigate, and obtain matching funds for broadband grants. The NTIB program requires grant applications to come up to the table with a minimum of a 25% matching funds and a letter of credit upfront with the application. For many smaller non-traditional providers and communities, this may sound daunting, but it doesn't have to be. This 12 part series is designed to help you understand how and why meeting these requirements can be straightforward.

Gary: Last month we had a great session where we discussed matching funds for rural electric co-ops and telcos with Darren Farnan, the Chief Operating Officer of United Fiber. If you missed it, you can go to the FBernie website under events or go to broadband.money.io and watch the replay. Today on Where's The Funding? We'll be discussing the challenges of matching funds with Jochai Ben-Avie, the co-founder, and CEO of Connect Humanity. Jochai's career has been centered at the intersection of technology and human rights, and as a leader in global policy advocacy and philanthropy. He is the co-founder and CEO of Connect Humanity, a nonprofit fund which provides access to capital and knowledge to underserved communities, enabling them to build out their own internet infrastructure and take control of their digital futures. He's also a Truman National Security Fellow, a non-resident fellow at Atlantic Council's DFRLab, a World Economic Forum global shaper, and a Code for Science and Society board member.

Gary: He was previously Mozilla's Head of International Public Policy and led the Firefox Makers Open Source funding arm, where he spearheaded Mozilla's work on connectivity around the world. Before Mozilla, he was the inaugural policy director at Access Now, which under his leadership became one of the largest global digital rights organizations. Early in his career, Jochai worked in the educational policy, affordable housing, terrorism and reconciliation as an advisor of some of the largest foundations in the world. He received his education at Bard College at Simon's Rock, where he graduated summa cum laude and at the University of Oxford's Lincoln College. So Jochai, welcome. And for our audience, please put any questions you have in the chat as we go and we'll work them into the questions into our discussions. So, Jochai, before we jump into the challenges of matching funds, let's start with a little bit about you. You have this long history in public housing and human rights and public policy and technology, what's been the driver for your passion to helping people? 

Jochai Ben-Avie: Thanks so much for having me, Gary. I've always believed that the internet is a gateway to the wide realization of different human rights and causes. So whether we care about education or we care about political participation, or we care about social development, cultural exchange, access to healthcare, all these things are increasingly intermediated by the internet. And those without internet access are falling further behind just by staying where they are. Ultimately a digital economy in a digital society only exists for those who are connected to it. And so both defending sort of internet policy and working to shape the sort of rules and policies and laws that govern our use of the internet, as well as expanding access to the internet itself has been the driving force of my career.

Gary: I always thought it was ironic, during the pandemic the people who needed the PPP and the subsidies the most weren't connected. [chuckle] And the race to apply for your PPP online, that just seemed crazy, and that's the way the world's gonna be going forward.

Jochai: Absolutely. And I think if you look even further down this sort of spectrum in terms of need, we saw a lot of folks who lived in affordable housing. You mentioned earlier in my career, I worked in affordable housing at the Beacon communities. A lot of housing authorities start to move their paperwork, their rental assistance programs, Section 8 rent certification, things like that online, and increasingly online only, which means that folks who don't have internet access, who are already low income families living in affordable housing might lose their homes because they aren't able to submit their paperwork through these online portals. And so the consequences of being unconnected have never been so grave.

Gary: I just... And we were just talking, I bought a new house and I had to... The only thing available was Comcast and even to try to subscribe to broadband, there's no phone number. You either have to... You have to go online and then you might get a chat bot, but you just cannot... There's not a person to call or... So tell us a little about Connect Humanity? How'd that come about? How'd you guys decide that you need to start up this fund? 

Jochai: Yeah. So I was at the time the, as you mentioned, the head of international public policy at Mozilla, and spearing a lot of work on connectivity. And probably why the man who went on to become my co-founder, Chris Worman, called a group of us from leaders in tech, in philanthropy, in nonprofit land, together to sort of talk about, "What does building back better even mean? What are the needs that pandemic has exposed?" Like we've just been talking about. And you had folks who were talking about kids who were losing a year or more of education. You had folks who were talking about people who were falling into poverty and struggling to provide for their families, or who couldn't talk to a doctor or make a vaccine appointment or get actual information about COVID.

Jochai: And at certain point, I said, "Y'all may come from different walks and causes, but you're all talking about connectivity here." And looking out at the world and seeing half of humanity lacks reliable, affordable access to the internet, including one in three Americans who don't use the internet fast enough, at speeds fast enough to use Zoom. There's just this overwhelming feeling that it doesn't have to be this way. What I find in some ways most frustrating and most inspiring about working in this area is we generally know how to connect the unconnected. That's not the hard part. And we know that neither the largest traditional telecom operators, the market for lack of a better word, [chuckle] nor government alone have not and will not connect everyone. It's just not in the business models to do so.

Jochai: And so at Connect Humanity, we focus on community-focused ISPs, folks who are more community oriented, often community owned. But if we look at sort of the US market of about 2800 licensed ISPs, 60% of the markets serves fewer than 500 census blocks. And it's really what we see both in the United States and around the world, these small and medium ISPs are providing some of the fastest speeds at the lowest prices, which is not surprising. You would imagine that folks, like small businesses in any sector, who are ground in the community are committed to providing great service in that community, have faster response times 'cause they live in the community. But nearly universally those folks struggle with access to capital.

Jochai: And for me, that has always been the hard part of digital equity for all. And so we created Connect Humanity to provide low income, rural and communities of color with the access to capital and knowledge that they need in order to build their own internet infrastructure and take control of their digital futures. And so we sit sort of uniquely positioned between sort of communities in need, these community focused ISPs, and funders and investors. And by their powers combined and providing advice and support to all three, we can really help the internet to get built in communities in need today.

Gary: So are these... Do you look mostly at established community ISPs, or do you have just basically community champions that come to you and say, "Hey, we've been left behind. We have to figure out how to stand up, let's get broadband in our community."

Jochai: We do nothing without a community champion. And so on the community side, that might be a mayor, it might be a pastor, it might be a nonprofit, it might be a tribal leader, but someone who has community trust and sort of that local community knowledge which is just so important to building that buy-in and really getting these kind of builds right. Sometimes they have their own ISP, and then sometimes the community champion is an ISP. Someone from the community said, "You know what? We need to go build our own internet infrastructure." We talked about electric co-ops earlier in the show. If we look at the history of rural electrification, a lot of that was from folks coming together who said, "No one is gonna come serve us, we gotta go build our own electricity infrastructure."

Jochai: And with a little bit of help from the government they started these co-ops. And the legacy of that is one in eight Americans still gets their power from an electricity co-op. But I think we look for that sort of community champion, and sometimes they are an ISP, sometimes they're already in touch with an ISP. Sometimes our work is to help match them with an ISP who's gonna meet their needs and help them speak each other's language and sort of help to bring that partnership together. And sometimes, we get approached by ISPs who say, "Hey, I want to build into this area. That seems like the next logical choice for my business." And we can help support them thinking through how do you do community engagement, how do you do the wraparound digital equity services like digital literacy, device access and think holistically about supporting the needs in these communities.

Gary: So your profile is then largely these unserved communities, underserved communities that are really being left behind and and need someone to help them find a way forward. Is that pretty much...

Jochai: Yeah. Again, we focus on low income communities, rural communities and communities of color. You don't necessarily have to fit all three, but that's generally what we're looking at as we think about where we prioritize our support both financially and in terms of advice and strategic guidance.

Gary: So let's talk about matching funds. So how big of an issue for a community provider is matching funds? 

Gary: I think it's a huge issue. Again, if we look at... If you look into overlap of low income communities and underserved communities, there's a whole lot of overlap there, both in rural places, but also in urban centers where you sometimes have sort of neighborhoods where you have the Swiss cheese problem, where folks have built sort of around but not into those kinds of lower income communities within the city. And in order to qualify for a dollar of BEAD, you need a 25% capital match. And that as you said in the beginning, Gary, daunting [chuckle] is definitely I think a word that we hear from a lot of folks. And I don't wanna underestimate that. It is a significant challenge and we haven't even gotten to a letter of credit, which I would say is an even bigger problem.

Jochai: But I do think that there are ways to sort of do this. I think we've seen some guidance from NTIA that they're willing to sort of... Have given guidance that the local match can be waived down to zero in high cost areas. Just because we mentioned electricity co-ops, sometimes you can have your make ready work or rights of way or other assets that are contributed to the project count toward local capital match, you can sometimes have labor count. Each state office is gonna have their own interpretation of what's gonna count. I think it's a little concerning that NTIA's guidance sort of instructs the states to give priority to those who bring more local match. And so you run the risk of a smaller, more community-minded ISP losing out in an area to a larger incumbent who may be able to sort of put more money on the table, but doesn't have that sort of connection to the community and community buy-in there that ultimately I think would lead to a better outcome for the residents.

Gary: And that's one thing, when we had United Fiber on here, just the electric co-ops are in a great position because they already have assets so they can be able to pledge their assets from an electric business for their broadband and vice versa, and be able to leverage employees on both sides of the fence. And so they're in a great spot to do that. So it's great to see. And I'm in Huntsville, Alabama and our utility put up fiber and Google lit it up. And so we were... And I wouldn't call us rural and I wouldn't call us... But we didn't have broadband. We were kind of trapped with some incumbents that were... That I was way down on their priority list, so it kind of changed the whole landscape. Right now I got four fiber providers across my front yard. So once you have fiber, everybody wants to jump in. But let's... So beyond the match, then you have this whole thing, letter of credit. So can you kind of explain the letter of credit requirements under B NOFO? 

Jochai: Just one more point on the local match is to say, we've also had a lot of conversations with local foundations and some local businesses who are also a potential source of match. And so I would encourage folks to think broadly about how to get creative in terms of securing the funds for the match. Letter of credit is a much tougher problem. So in addition to the local capital match, which is again 25% of the total award, the letter of credit is 25% of the federal funding of the BEAD money. And this is an irrevocable standby letter of credit, which means that you need to go to a bank and get them to issue one of those. And it's not just any bank, you gotta go to a FDIC regulated, which is a depository institution, the sort of largest banks, but not community banks or community development financial institutions or impact investors, it has to be a very specific type of bank with a Weiss rating of B minus or better, which further narrows the field.

Jochai: And in order to issue one of these letters of credit, you generally have to provide cash or cash alternatives. But generally banks wanna see cash because the thing with a standby letter of credit is the bank's on the hook if you don't perform. And the government can come and sort of say, "Conditions were met, I'm demanding my money." And so the bank doesn't want to be liable for your... The ISPs under performance. And so they want to be pretty confident, they're gonna require cash. Maybe if you're a very established entity, they might take some assets in the mix, but they generally want cash. And then they're gonna charge you on top of that for the service that they're providing here. And you have to do all of this before the BEAD application.

Jochai: So one, you're tying up a ton of capital, which you may not necessarily have. Two, you gotta pay those fees and interest on that letter of credit regardless of whether you actually get the BEAD award. And so folks could be out depending on the size of the project, thousands to hundreds of thousands to potentially millions in a really big project, before they have even applied to BEAD or found out if they got it. And with a standby letter of credit, you also have to keep that cash locked up for the duration of the project. And so it's not just being the... All that working capital, 25% of however much money you're getting in BEAD money, that is tied up for years and years that can't actually be used to build the network. And so even taking a conservative calculation, when you combine these requirements together, for every dollar a project costs, the local community is gonna be coming up with 61 cents of local capital between the local community and the ISP. And does anyone think that there's $25 billion available [chuckle] in the lowest income communities in the United States to meet these requirements? It's really sort of really risks the success of the entire program, these requirements.

Gary: When and how should a community provider prepare to address this whole letter of credit? 

Jochai: So I think there's a lot of conversation going on right now about the letter of credit. You may have seen we were part of a coalition of about 300 different organizations who recently wrote to NTIA about the letter of credit requirement. It's a pretty... It's a big tent coalition here. You've got large ISPs, you've got small ISPs, you've got bankers, you've got digital equity focused non-profits. Everyone is pretty universally [laughter] opposed to this requirement.

Jochai: And so this isn't the guidance for NTIA. Alan and the NTIA team could wave their hands and update this guidance tomorrow if they want to. So partly, I think, we're hoping that NTIA will see the light here and issue that updated guidance and give greater clarity and flexibility. And then ultimately, these decisions are gonna come down to state broadband offices. And so they're really gonna be the final arbiters of these projects. And so I think part of it is being in touch with... By all means, tell NTIA [laughter] that this requirement doesn't make sense and doesn't reflect the reality of how broadband is built and needs to be built in the communities most in need today. But I think it's also about talking to the state broadband office. And I think in pretty short order, because folks need to get this before the application, folks should be starting to think about, "Well, okay, what are my options here? How can I go about doing this?"

Gary: All right. So say you go and you're able to secure your letter of credit before you put your application in, and then you put your application in, you're successful, you get your award. Is there any relief? At what point can you get a irrevocable standby letter of credit? What happens then? 

Jochai: Well, so for an irrevocable standby letter of credit versus a letter of credit or other mechanisms that exist, irrevocable means that the bank can't change the terms. And standby means it's a sort of payment of last resort. And so whereas with a letter of credit, the banking institution generally is the one cutting the check, in a standby letter of credit, it's sort of a reserve that's kept in case something goes wrong. And so the government... At a high level, we support the objectives of trying to make sure taxpayer funds are well used to actually build broadband. But this means that folks, even if you get the award and even if you make progress, you start actually building the network, that money is gonna be tied up in that irrevocable standby letter of credit, at least until the project is finished. And often sometime after that, because they wanna have some kind of period where they can sort of make sure everything's working, make sure you've built everything and really sort of assess the awardees performance under the grant. And so it could be two, three years, even after you finish construction, that that capital is still tied up.

Gary: So if we look at all the local capital, the matching funds, letter of credit, and then even potential taxes, what's the way forward for these communities? 

Jochai: [laughter] Taxes is another issue. You add... There's a question about whether the awards are taxable. I don't know. As far as I understand, maybe you know better, Gary, jury is still out on that one. But if it is taxable, then that's even more local capital that's required from the ISP and from the local community, which makes it, this money, even more expensive to take. I think that a lot of times folks are thinking about the sort of, where are they gonna build? Where are they gonna put their equipment? They're thinking about some of the digital equity questions. They're thinking about mapping community and good institutions. Those things are all important. But I would say, if you are not thinking about the financing and capitalization side, you're really gonna struggle and be in a problem and in a hurry come next year when these application windows are opened up. And I think we're also hearing from banks that there's not a ton of appetite to issue these irrevocable standby letters of credit. And again, there's a limited number of banks that can issue them to begin with. And so I would get on this problem early if you think you're gonna be looking at applying to BEAD money to start exploring this.

Gary: So Connect Humanity, you guys do a whole mix of grants and loans. What are some of the creative ways that you can help these communities put together a capital stack that allows them to get by some of these hurdles? You come from a housing background, you can talk a little bit about maybe the Community Reinvestment Act and how that might be leveraged.

Jochai: Affordable housing doesn't work without blended finance and I don't think connecting the unconnected will. This is not a problem that the market alone on just a straight commercial basis is gonna solve. And so essential to Connect Humanity's model is sort of building these blended capital stacks. So on a housing deal, you might have tax credits, you might have a Section 8 subsidies from HUD, you might have some equity from the developer, you might have soft debt from a housing authority. There's a lot of different tools. And a lot of it is capitalization from the Community Reinvestment Act, which was passed in the '70s in the wake of the sort of mortgage redlining crisis and obligates big banks in the United States to spend about $200 billion a year on investing in low-income communities.

Jochai: And so especially for folks who are not gonna be BEAD eligible, we see CRA as a very powerful tool to providing the capital and the financial resources that communities, under-connected communities, need to get connected. And I think it's about sort of, how do you layer these things together? So we did a deal in, I know you're in Alabama, we did a deal in Macon County recently in Alabama, where we were joined by, I think, five other capital partners. And without any one of them, I think the whole deal would have fallen apart. But coming together and building the stack that sort of meets everyone's needs, and this is part of what Connect Humanity does, is to sort of sit between the community, in that case, our community champion was the MCEDA, the Macon County Economic Development Authority, working with the ISP Point Broadband and working with that sort of range of capital partners, including Rural LISC, we were able to get that deal done and get those folks connected to fiber.

Jochai: And so I think that's really essential. I think part of what we're doing is also on the advice side, working with communities to sort of think about, "How can we get creative?" Thinking about... I think so much of, especially philanthropy, is sort of needs or gap space. Like we talk about the shortcomings in communities or what they don't have. And we really take an asset-based approach to our support, where we work with our community partners to see what kind of assets do they have. So we were doing a bill... A deal in North Carolina. And this community has been... There are some service providers, but generally struggling to provide 25/3 broadband speeds.

Jochai: And basically everyone's priced out. Average intranet was like $90, $95 a month. And this ISP came and they said, "Hey, we really want to... " It was a gentleman from the community who wanted to connect his neighbors. At the time, the library was also sort of in the same building as town hall. And at the time there wasn't really internet access for free in the library. And they said, "Hey, if you let us put an antenna on your roof, which basically costs the city nothing, we will provide internet in the library and to your offices." But that's a vertical asset. [chuckle] And then when they went to expand, they said, "Hey, can we use that water tower you have on the other side of town to sort of extend the network?" And again, that's another asset that belonged to that community that they hadn't necessarily seen as an asset. But by thinking about it in that way really helped to get that network built and those folks connected.

Gary: So one of the questions that came in here is, can the new market tax credits be used for match? 

Jochai: For local capital match? I think so, yeah. You're gonna have to figure out how to do the deal, but yeah, that's a... I think that would be an attractive way of meeting some of the match. Generally, new market tax credit can't cover the totality of the deal. You generally, for an NMTC deal, you wanna bring at least 70% of the capital, if not more, before you go and talk to your sort of tax credit syndicators and so forth, but definitely could be a part of the solution for communities. Not every community that is qualified for BEAD necessarily will be qualified under the new markets tax credits. So someone it would have to sort of take a look at that, but certainly would be part of the range of options I'd take a look at.

Gary: Is that something that you guys... When people come to you and say, "Hey, we're trying to build our capital stack, can you help us with how to blend in what we can find from ARPA or capital projects or all the other things that are out there, how can we pull together this capital stack?"

Jochai: I don't want like a million folks asking me to go do a new market tax credit deal. [laughter] But generally, yes. Part of our work is talking to communities about the assets they have, about the needs that they have and designing an investment structure that's gonna meet their needs. A lot of investment and finance is, capital has need, that need gets expressed in a financial product. And then you sort of go to market, to communities and say, "Hey do you wanna buy my product?" And if you fit into my box, great. And if you don't, go forth and have a nice life. And I think that's backwards. We really start with the needs of the community and then let that sort of determine the investment structure. And then we go out and sort of bring together the right blend of investors and funders that will help to make that deal successful for everyone.

Gary: So if I was to summarize, if there's community will, the community says, "Hey, we've been left behind. We need to do something, take matters in our own hands, stand up a broadband network for our community and make sure everyone in our community is connected." If they come to you and say, "We have this community will, we gotta make this happen," you guys can kind of figure out a creative way to get this thing financed.

Jochai: Yeah, generally. [chuckle] That's the goal. And I would say also ISPs. And I would say it's not... We work, we often start on the community side, but we also get a ton of inbound from community focused ISPs who are looking to meet the needs in low-income communities who wanna grow. And we also... Sometimes the story starts with an ISP approaching us.

Gary: Well, and certainly we've seen a lot of recent success stories with public-private partnerships, 'cause I've never met a mayor that says, "I wanna be in the broadband business," but every mayor is gonna say, "I'm in the job creation business."

Jochai: Absolutely.

Gary: And whatever it takes to be able to get economic development and jobs and be able to really lift up their community.

Gary: Well, Jochai, I really appreciate you sharing your insights on the challenges of matching funds and the work that you and your team at Connect Humanity are doing to really close our nation's digital equity gap. So thank you for that. And I wanna thank everybody for joining us today and look forward to getting back together next month for our next episode of Where's The Funding? You're not gonna wanna miss that. We'll see you guys in October. Thanks everyone.