Insight

Financial incentives for broadband democratization

Blog series: Telecom ESG

  Sean Sullivan

Sean Sullivan

National Telecommunications Industry Leader, KPMG US

+1 303-296-2323

Nathan Gabig

Nathan Gabig

Principal, Advisory, Capital Solutions, KPMG US

+1 703-286-8583

Telcos can help bridge the digital divide by using targeted incentives and social bonds to invest in underdeveloped markets as they look to maximize their ESG impact.

COVID laid bare the struggles disadvantaged communities experience because they lack advanced telecommunication services, with the lockdowns proving how valuable access to digital resources and communications are to our daily lives. 

Many of the 42 million Americans who today lack high-speed internet1 must make do with limited and even barely functioning broadband service—a mere 3 or 4 megabytes. This service is completely inadequate for individuals, families, and businesses to access and benefit from increasingly essential digital content and services, including tele-medicine, remote video learning, and tele-work opportunities.

In the previous blog, we looked at how telecommunication companies (Telcos) can enhance their credentials around Environmental, Social, and Governance (ESG) concerns by developing broadband service and internet-accessibility tools for these underserved populations. In this blog, we’ll look at some of the financial options telcos should consider when introducing or enhancing services in these low-income areas and to other disadvantaged groups, and how companies can strategically accelerate their investments by utilizing several valuable tax and other economic incentives.

Over the last three decades, telcos have competed in largely developed urban and suburban areas to provide the fastest internet services, approaching gigabytes speeds with today’s 5G marketing of 1,000 Mbit per second (1 Gbit/s). In contrast, thousands of underdeveloped, low-income, and rural communities remain underserved and continue to lag further and further behind. Telcos wanting to reverse this trend can find financial incentives by looking to Qualified Opportunity Zones (QOZs), which offer attractive and impactful opportunities to utilize shared infrastructure in their pursuit to expanding internet access and high-speed broadband services. 

Populations with limited broadband often live in QOZs, which were established by the Tax Cuts and Jobs Act of 2017 and recently extended by the U.S. Treasury to include more than 8,700 census tracts2 across all 50 states (including many poorer urban areas). QOZ’s serve many valuable purposes, including the ability to spur outside investment for economic growth and job creation in low-income communities, while providing tax benefits to investors that commit to longer-term projects (typically 10 or more years) and capital expenditures. Investments are made through Qualified Opportunity Funds (QOFs), where corporations can use their own capital gain dollars to invest and then defer significant federal taxes.

Bringing broadband into an area through QOFs can have a long economic and “quality-of-life” tails. It can be an incredible catalyst for bringing new jobs and fostering growth for local businesses. For example, a telco providing broadband would be an incentive for other non-telco companies to move into and invest in the area since they will have access to adequate digital service. And that could unlock even more opportunities for Telcos with subscriber growth, both consumer and enterprise, as well as a set of first-mover advantages, including brand loyalty.

Aside from QOFs, Telcos can use other financial products to fund these investments. For example, Social Bonds, which allow investors to raise funds ear-marked for projects with positive social outcomes. Investment frameworks like the International Capital Market Association, outline particular eligible categories for Social Bonds that include and promote access to essential services, affordable basic infrastructure, food security and sustainable food systems, socioeconomic advancement, and affordable housing, etc.

As a start, telco executives can look at the precedence of other companies that have successfully invested in Social and Green Bonds. For example, if a Fortune 500 company were to choose a rural town to open a new manufacturing or customer service facility, a strategic telecom firm could come alongside and provide the vital 5G network, infrastructure, and internet of things (IoT) technology for those operations. This alliance then creates more valuable opportunities that build on the brands of both firms, winning goodwill amongst employees, and boosting workforce productivity, and ESG “quality of life” metrics. It could be argued that these investments by Telcos will not only expand high-speed services in underserved areas but also enable and enhance a number of these social benefit, especially those dependent on broadband and infrastructure.

Whether it’s through QOFs or other social-investment incentives, Telcos looking to initiate these ESG-principled investments can work with advisors that have experience maximizing impact and optimized structures.

In this ESG era, telcos can play a critical role in the revitalization of underserved areas that has suffered during the pandemic. Providing vital broadband services can be the beginning of sustained economic development as well as enabling the delivery of a suite of digital services that have become essential for modern life.

In our next blog, we’ll dive deeper in what investing in underserved communities can mean for telcos’ ESG efforts, brand reputation, and employee satisfaction.

Footnotes

  1. Source: BroadbandNow Research, FCC Reports Broadband Unavailable to 21.3 Million Americans, BroadbandNow Study Indicates 42 Million Do Not Have Access (May 5, 2021)
  2. Source: Realized1031 online, How Many Opportunity Zones are There?, Clay Schmidt (January 4, 2021)

Contact us

  Sean Sullivan

Sean Sullivan

National Telecommunications Industry Leader, KPMG US

+1 303-296-2323
Nathan Gabig

Nathan Gabig

Principal, Advisory, Capital Solutions, KPMG US

+1 703-286-8583