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By VIKAS BAJAJ
November 29, 2005
DALLAS CENTER, Iowa - Daniel
and Linda Hawkins expected to lose some amenities
when they moved to this small farming town, population
1,759, from a slightly larger city nearby. But
they were so sure they would have high-speed Internet
access that they had high-capacity wiring installed
in every room in the house.
After all, many farmers who live nearby subscribe
to a high-speed wireless service provided by Prairie
iNet, a small company based outside Des Moines,
and they zip effortlessly around the Web.
But to the couple's dismay, their new house, complete
with a fishing pond in the back, lies in a wireless
dead zone, one that Prairie iNet is not likely
to fill soon. Turned down by a federal loan program
meant to bring high-speed access to rural areas
in 2004, the company is using its limited private
funds to expand service to small businesses in
the Des Moines suburbs rather than farmers and
homes spread among the rolling corn and soybean
fields of Iowa and Illinois, a constituency it
started serving in 2000.
"There is demand on the commercial side,
and we recover our costs quicker on that side,"
said Neil J. Mulholland, Prairie iNet's founder
and chief executive. "And it's too bad, because
there are a lot of people out in these areas that
really want to get our service, and they will
pay the $50. Many of them are paying $70."
Across rural America, entrepreneurs, lawmakers
and Internet company executives say they are frustrated
with a loan program created by Congress in 2002
to help extend high-speed Internet service to
rural areas. Run by the Rural Utilities Service,
an arm of the Department of Agriculture, the program
has been allocated nearly $3 billion but the agency
has lent less than half that.
As of Sept. 30, the end of the 2005 fiscal year,
the utilities service had rejected 87 loan applications
totaling $1.1 billion and approved 48 loans totaling
$770 million. The agency had nearly $2 billion
in unused money, and $556 million of that must
be committed to new loans before the end of the
fiscal year next September or its authorization
will expire. Most of the loans carry the same
interest rates as United States Treasury bonds,
about 4.5 percent.
Critics say the agency's standards are so tough
that applicants that have not been profitable
for at least two years are rejected if they do
not have enough cash on hand to cover a full year's
operating expenses. When Prairie iNet applied
for a $7.7 million loan in 2003, it was losing
money (though it registered two small quarterly
operating profits early in 2005). Its investors,
among them Liberty Media, said they would chip
in $4.2 million in new capital, but the lending
agency wanted an investment of at least $7.7 million.
"This has created ridiculous situations where
companies have sought $5 million and as a condition
for approval they have been required to have that
much money in the bank," said Senator Tom
Harkin, Democrat of Iowa, who helped create the
program and is now a big critic of the agency's
handling of it. "If they have that much money
in the bank, why would they need the loan?"
Agriculture Department officials acknowledge that
the program has had a slow start and agree that
some of the financial restrictions may need to
be revised. But the rules, those officials say,
were meant to ensure that borrowers were financially
stable and that the loans would be repaid in full.
"I am empathetic to those concerns, but we
do have a responsibility to make sure that we
utilize the taxpayers' dollars judiciously,"
said Tom Dorr, the Agriculture Department's under
secretary for rural development. He declined to
discuss Prairie iNet's application, saying he
was not intimately familiar with it.
Started as the Rural Electrification Administration
by President Franklin D. Roosevelt in the 1930's,
the Rural Utilities Service has a storied record
of underwriting loans that brought electricity
and phone service to rural America. None of its
telephone company borrowers have ever defaulted
on a loan, though $30.4 million in loans for high-speed
Internet access, or broadband, are in default
now.
Mr. Dorr, whose family once owned a farm in Iowa,
said that the agency historically lent to monopolies
that had reliable and steady revenue and that
most borrowers had no trouble qualifying for loans
or repaying them. But with broadband, the agency
has had to create new methods to assess the creditworthiness
of start-up firms.
Indeed, 70 percent of its broadband loans have
gone to established telephone companies, even
though 42 percent of its applications are from
start-ups. Companies that have received loans
praise the program, but even they express some
frustration with it.
The Rural Telephone Service Company, a 50-year-old
phone company based in Lenora, Kan., has received
four loans totaling $21.4 million to bring high-capacity
fiber optic lines to towns with populations of
500 to 3,000.
"I don't think we could have done what we
have done without it," Larry Sevier, the
company's chief executive, said noting that private
lenders had been reluctant to finance broadband
projects since the telecommunications bust.
But he said the utilities service can take up
to a year to approve loans and disburse the funds.
"They have put a tremendous demand on their
work force," Mr. Sevier said. "They
have not hired more people."
Hilda Gay Legg, who was administrator of the utility
service from 2001 until February and is now a
private consultant, said the agency was not allotted
money to hire more people to run the broadband
program. She added that the agency was less demanding
than private lenders in requiring companies to
have at least one year's operating expenses or
20 percent of the loan's value in cash. "There
have been some very good loans, and there have
been some lessons learned that need to be evaluated,"
she said.
Mr. Dorr said the Agriculture Department would
revamp the program once a new administrator takes
over at the utilities service, but he declined
to discuss the details until then. [On Nov. 10,
the Senate confirmed the nomination of James M.
Andrew, a former president of the National Rural
Electric Cooperative Association and a former
Georgia utility official.]
Christopher A. McLean, a Rural Utilities Service
administrator in the Clinton administration and
now a consultant, said the agency must take the
kind of risks that made rural electrification
successful if President Bush's goal of having
ubiquitous national broadband access by 2007 is
to be achieved.
"The agency should never lend money where
it knows that it's going to lose money,"
said Mr. McLean, who helps companies apply for
loans. "But at the same time, the agency
should not forget that its whole mission is to
go to places where the marketplace hasn't been
able to go before."
Critics, which include rural cable companies,
say the program has often done the opposite. A
recent audit by the inspector general of the Agriculture
Department faulted the program for approving $103.4
million in loans to suburban areas, including
$45.6 million to 19 affluent new subdivisions
just outside Houston. The utility service contends
that those areas qualify as rural because the
law was written to include small towns near urban
areas.
Iowa farmers who use broadband say their lives
are immeasurably better for having the service.
"I don't know what I would do without it,"
said Diane Fox, who manages the business affairs
on a 600-acre farm near Dallas Center that has
been in the Fox family for four generations. "They
can take away my TV, they can take away my refrigerator,
but they can't take away my central air and Internet."
Ms. Fox, who lives a few miles from the Hawkinses
and pays $50 a month for Prairie iNet service,
checks on corn subsidies, detailed weather forecasts
and soil conditions online. Along the way she
browses Amazon and eBay to buy gifts for her daughters,
who live in Washington.
There is no cable TV line running to her house,
and Qwest Communications, her local phone company,
cannot tell her when it will offer high-speed
Internet service to her.
A spokeswoman for Qwest, Kara Rovere, said the
company, which is based in Denver, expected to
have broadband in all Iowa telephone exchanges
by the end of 2006.
The Hawkinses said a high-speed connection would
help their 18-year-old son, Luke, research high
school assignments. A faster link would also allow
them to send a video of him winning a track meet
to family members and let Mrs. Hawkins take online
classes to keep up her nursing license.
But the signal from one Prairie iNet wireless
transmitter near their house is too weak, and
the transmission from another is blocked by a
stand of trees.
Mr. Mulholland said that Prairie iNet could install
wireless transmission equipment onto a water tower
near the Hawkins home. Each new wireless site
typically costs the company $12,000 to $20,000,
not including the $400 it spends on each receiving
device in a home or business.
Such an investment, which could serve several
dozen farms and rural homes, would have been far
more affordable had the company received the federal
loan. But with its private funds, Prairie iNet
is better off spending that cash in the fast-spreading
suburban office parks outside Des Moines.
Daniel Hawkins, a loan officer at a community
bank, said he understood Prairie iNet's position
but was not sure why the government did not step
in to fill the void as it had in the past.
"This is no different than back in the 30's
when farms didn't have electricity - people used
to have kerosene lights," Mr. Hawkins said.
"This is just a matter of keeping you in
touch with the world. I think it would be a huge
economic benefit for rural areas."
For additional information contact:
Neil J.
Mulholland, Prairie iNet, 515/440-0848, ext.
106
Copyright 2005 The New York Times Company
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