In November of 2021, President Biden signed into law the Infrastructure Investment and Jobs Act. Within this Act was something called the Broadband Equity, Access, and Deployment (BEAD) Program. The intent of the BEAD Program is to provide high-speed internet access to rural unserved and underserved areas within all 50 U.S. states, plus Washington D.C., Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, and the Commonwealth of the Northern Mariana Islands.
The BEAD Program will provide $42.45 billion worth of funding for planning, infrastructure development, and adoption programs within the above-listed locations. One caveat, however, is the requirement to obtain a Letter of Credit (LC) worth 25% of the awarded amount for Internet Service Providers (ISPs) who apply for the responsibility to service these rural Locations. In addition to the LC, each “Eligible Entity shall require its subgrantee to provide, or provide in concert with its subgrantee, matching funds of not less than 25 percent of project costs.” With an LC, a 25% match requirement, and associated fees, that means each eligible ISP must be prepared to provide capital upwards of 60% of their grant.
The BEAD Program will provide $42.45 billion worth of funding for planning, infrastructure development, and adoption programs within the above-listed locations. One caveat, however, is the requirement to obtain a Letter of Credit (LC) worth 25% of the awarded amount for Internet Service Providers (ISPs) who apply for the responsibility to service these rural Locations. In addition to the LC, each “Eligible Entity shall require its subgrantee to provide, or provide in concert with its subgrantee, matching funds of not less than 25 percent of project costs.” With an LC, a 25% match requirement, and associated fees, that means each eligible ISP must be prepared to provide capital upwards of 60% of their grant.
A Letter of Credit is a financial instrument, typically issued by a bank, used to ensure funds to a specified party, should the originating party default on the terms of an agreement. In the context of the BEAD program, the LC would guarantee the completion of a project to the project owner (the federal government) on behalf of the individual or business entity hired to complete the project (the ISP). LCs are required for large-scale infrastructure projects funded by the government when a high level of assurance and control is necessary.
To qualify for a Letter of Credit, a business must establish a relationship with an FDIC-insured bank that offers trade finance services. The bank will analyze the credit and finances of the applicant to determine their qualifications. Furthermore, LCs typically require a significant amount of collateral to be held by the bank, which can range from 25% to the full 100% amount of the letter of credit.
The intent of the BEAD program by the federal government is to minimize America’s digital divide. However, an LC worth 25% of the eligible entity’s awarded grant amount and an additional 25% match requirement creates a capital hurdle that could prove difficult (if not impossible) to overcome for small and community-centered ISPs, minority and women-owned ISPs, nonprofits, and municipalities. Meaning the federal government would be inadvertently barring a significant number of businesses from serving their communities.
Yes; While many businesses would argue for the removal of the Letter of Credit requirement entirely, they understand the government’s need to minimize the risk associated with a project this large. Alternatively, businesses are petitioning to replace the LC requirement with a surety bond similar to a Payment and Performance Bond. A Payment and Performance Surety Bond is a financial guarantee on behalf of the principal (the entity who must obtain the bond: the ISP) to the obligee (the entity requiring the bond) that they will pay all associated partners (contracts/material suppliers/etc.) and complete the project as specified while adhering to all terms of the contract. Please note that the obligee for a bond like this is usually a government entity, but has yet to be determined for this specific scenario. This financial instrument is guaranteed by the surety company: the licensed business entity that evaluates the principal’s eligibility for and issues the bond.
In this instance, the surety bond would ensure that the federal government would have the means to recover financial damages should the ISP fail to complete the project as established by the contract. Should the ISP break the contract, the federal government could recover funds from the surety company. However, the ISP/principal is financially obligated to reimburse the surety for any damages paid out as a result of a default on the project. Essentially, this allows the federal government to transfer some of the financial risk from itself to the surety company and the ISP.
To summarize, as of October 2023, the government’s Broadband Equity, Access, and Deployment (BEAD) Program requires both an Irrevocable Standby Letter of Credit and a 25% matching requirement. Unfortunately, this Letter of Credit, paired with the matching requirement, will create a barrier of entry for small ISPs, minority and women-owned ISPs, nonprofits, and other businesses that wish to participate in the BEAD program solely due to the capital needed to qualify. An alternative that many businesses are petitioning for would be a surety bond. The surety bond requirement would provide the government with the assurance that the approved entities participating in the BEAD Program will complete their projects according to the contract. If not, the government could recover some of its losses from the surety company that issued the bond while holding the ISP that defaulted on the project financially accountable for their actions.
