Wallsten and Rosston: Auction of Funds by Cost-Effectiveness a Better Alternative
Contact: Amy Smorodin
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November 14, 2013 – The National Telecommunications Information Agency process for awarding funds to projects through the $4.7 billion Broadband Technology Opportunities Program was “largely incoherent,” explain Scott Wallsten and Gregory Rosston in “The Broadband Stimulus: A Rural Boondoggle and Missed Opportunity,” released today by the Technology Policy Institute. The selection process failed to provide a means for measuring the expected cost-effectiveness of proposals, and, as a result, was highly inefficient.
Wallsten, TPI Vice President for Research and Senior Fellow, and Rosston, Deputy Director and Senior Fellow at the Stanford Institute for Economic Policy Research, question the rationale for targeting BTOP funds specifically to rural areas, noting that “only a small fraction of money designated to provide service in rural areas goes to low income rural residents.” In addition, “the programs turn out to be inefficient income transfer mechanisms and do not tend to increase subscriptions.”
More importantly, the authors claim, the NTIA’s selection process for deciding which broadband projects to support seemed largely subjective and lacked an objective mechanism for comparing the costs and benefits of proposals. As a result, the selection process created massive inefficiencies in the distribution of funds. NTIA ultimately awarded $3.5 billion for 123 projects, an average of $28 million per project. However, Wallsten and Rosston find, “some grantees received more than 30 times as much support as other grantees per mile of fiber deployed, and 100 times as much per new projected broadband connection.”
The author’s analysis reveals that “BTOP spent about $65 million for the most cost-effective 10,000 miles of fiber and close to $820 million for the least cost-effective 10,000 miles.” And while some difference in cost-effectiveness is to be expected, “it is not clear that funding some of the least cost-effective projects was a good idea when NTIA likely rejected other, more cost-effective projects, or could simply have determined that those projects would not pass any reasonable cost-benefit test.”
Wallsten and Rosston suggest a better alternative for distribution of stimulus funds would have been via an auction process, with the grants awarded on the basis of cost-effectiveness. “While an auction process would remove some flexibility from the decision process, it would have required NTIA to come up with objective measures to compare grants, thereby speeding the process and allow explicit tradeoffs between different characteristics [of the programs].”
The authors conclude, “The Recovery Act authorized a huge expenditure of public money, in some cases for questionable value. The BTOP program administered by NTIA and [Rural Utilities Service] falls into the category of money poorly spent.”
“The Broadband Stimulus: A Rural Boondoggle and Missed Opportunity” is available on the TPI website.
The Technology Policy Institute
The Technology Policy Institute is a non-profit research and educational organization that focuses on the economics of innovation, technological change, and related regulation in the United States and around the world. More information is available at https://techpolicyinstitute.org/.
