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Navigating the Hidden Costs of Federal Funding: Capacity-Building to Improve Participation

The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.

By Patrick Mulhearn
September 18, 2023

Federal funding is an effective means of enacting real-world policy priorities as an intervention into certain market failures. Whether in social services or infrastructure, federal policy priorities to ameliorate dysfunction are enacted at the local level via an infusion of federal cash. But complex regulatory regimes affect private participation in these public administration systems, incentivizing certain features of private interests and preventing poorly-organized or capitalized organizations from participating. This is often counter to legislative intent or community benefit.

Federal support for the development of high-capacity data infrastructure to connect the country to the Internet has manifested as the Broadband Equity, Access and Development (BEAD) program. Via this policy mechanism the Federal government seeks to enable public and private entities to build infrastructure in areas that have proven to be too complicated or expensive to build.

Similarly, as government seeks to devolve and privatize the provision of social or human services by leveraging non-governmental entities, compliance and regulatory requirements favor organizations with internal capacity to meet those needs.

The notion that “government will receive better services at lower costs because of the expertise and innovation of private providers” is true insofar as non-governmental entities are capable of both delivering services and complying with the complex reporting and auditing regimes required for programs utilizing taxpayer funds. In such an environment, though, administrative homogeneity encourages centralization of market players reducing choice and diversity.

Closing the Digital Divide

One of the primary social and economic problems facing government in the United States is access to reliable, affordable and fast broadband; and it is a problem faced by both urban and rural communities. Broadband access affects everything from healthcare to education, and the Federal government is nearing deployment of billions of dollars to mitigate some of these access issues through the BEAD program.

BEAD provides much-needed subsidies to infrastructure projects in areas that have been heretofore neglected by internet service providers. With BEAD funding, though, these areas become much more financially feasible; but without internal capacity to manage federal compliance requirements, these funds could be out of reach for many small providers. Compliance with procurement requirements alone presents a daunting challenge.

Incumbent providers, cable companies and telephone companies who have been navigating these sorts of programs already have compliance teams in place. But lack of market diversity has contributed to the current digital divide, and an economic case could be made for broadening consumer options beyond well-positioned legacy providers to close that gap. Indeed “facilities-based competition is effective at incenting more investment and supporting a more dynamic and innovative ecosystem—a fact well supported by empirical evidence”: speeds go up and costs go down in markets with multiple players. Furthermore, local government officials are often looking for opportunities to broaden their constituents’ options for data delivery utilities.

The Devolution Solution

Delegating delivery of social services—or devolution—is seen by many national and local governments as an effective solution to challenges they face “providing more and better service while meeting difficult fiscal limits.” As constituencies of need grow, public social services providers have increasingly become pass-through agencies for funding to support private non-profits serving those communities.

But the specific administrative requirements of many publicly-funded programs often force nonprofits to focus on developing specific metrics to align with federal standards. The Obama administration recognized this feature of devolved governance and recommended the creation of support processes to “enhance capacity and performance”. These programs, though, facilitate the transformation from a bespoke entity to a more generalist organization fine-tuned to comply with federal regulatory priorities. 

Additionally, “Bureaucratic and procedural hurdles lead to slow, long, and cumbersome dealings, and the rigidity of these requirements often stymie an agency’s ability to make timely and meaningful changes,” which can affect service delivery. An Urban League study recommended that organizations specifically shape themselves to conform to these processes to more successfully implement government grants. In one study, smaller human service nonprofits were found to be 20 times more likely to fail than larger agencies due in part to capacity issues, but more broadly due to the influences of policy-influenced environmental factors affecting even “who deserves care”.

Market Intervention?

Local administrative systems have the most opportunity to influence how these factors impact their local service partners. In 2022 the City of New York implemented the Clear the Backlog Initiative, an effort to “reform and improve the city’s procurement process”. In public comments, Mayor Eric Adams promoted this new effort as a response to market failures resulting from the “city’s inefficiency” which “has forced some providers to take out loans in order to pay staff and keep the lights on.” New, streamlined processes are intended to provide $4.2 billion in funding for nonprofits whose applications have been tied up in complex bureaucratic processes.

Author: Patrick Mulhearn is the Director of Public Policy & Community Engagement at Ting Fiber Internet. He previously worked in state and local government on infrastructure and telecommunications policy, finance, and implementation, followed by a stint consulting state and local governments on strategies for closing the Digital Divide. He can be reached at [email protected]

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