FRANKFORT — It was supposed to bring high speed internet access to all of Kentucky by 2018 and it was supposed to cost the state only $30 million.
Instead, the “KentuckyWired” project is far behind schedule, $100 million over construction budget and likely to cost Kentucky taxpayers as much as $1.5 billion over 30 years, according to an examination by the Kentucky Auditor of Public Accounts. Its latest completion date is now estimated to be in 2020.
“When KentuckyWired was announced by the prior administration, Kentuckians were told they would only be responsible for a $30 million investment approved by the General Assembly in 2014, and that the majority of funding would come from private investment,” said Auditor Mike Harmon, who was a Republican member of the legislature in 2014.
The project began after Republican U.S. Congressman Harold “Hal” Rogers secured a $23.5 million appropriation to extend broadband services in eastern Kentucky which includes his district.
But then-Gov. Steve Beshear sought to piggyback onto the project in order to extend broadband to the entire state through a public-private partnership in which the Australian contractor, Macquarie Capital, would assume most of the financial risk for the $324 million cost.
But, Harmon said, his examination indicates that between what the state has already paid out, including settlements for construction and operational delays, and the bonds the state has issued and future obligations, the state is responsible for 93 percent of the total cost.
That happened because, for unexplained reasons, the state almost immediately altered the agreement, creating a non-profit agency to issue bonds. Then, during a procurement process in 2014 and 2015, most of the project’s costs and risks were shifted to the state instead of Macquarie.
The altered agreement was signed by Beshear’s Finance and Administration Cabinet Secretary Lori Flanery — but Harmon said his auditors want to learn who made the actual decision to alter the agreement or authorized Flanery to sign it.
Harmon said the question remains of why the contract terms were changed in ways “that placed responsibility of almost $1.5 billion on the commonwealth” when the original design put very little risk on the state and its taxpayers.
“Essentially, the commonwealth played a shell game and appears to make taxpayers the losers,” Harmon said at a Thursday morning press conference.
Both current Gov. Matt Bevin and lawmakers from both parties have increasingly questioned and criticized the project. Last spring, the General Assembly appropriated another $110 million — $88 million for a settlement with a construction company and $22 million for future costs and settlements.
Harmon told reporters he will refer his examination to the Executive Branch Ethics Commission.
His auditors discovered other problems as well. The plan was to transfer the state’s public schools from private internet providers to KentuckyWired using that funding to cover as much as 45 percent of the costs. But the Kentucky Department of Education — which uses federal funds to purchase internet services — informed the Beshear administration that the project couldn’t meet eligibility requirements for the federal funds.
But the project proceeded, still counting on that funding, Harmon said. In fact, Harmon said, the project increasingly relies on “speculative revenues from sales of the completed network to private and corporate users.
The state significantly underestimated the difficulties of acquiring “pole attachments,” using existing infrastructure owned by private providers, and acquiring easements.
Other findings in the report are:
• Private sector funding was overstated;
• The public was misled about viable revenue streams to pay for construction and operation of the network;
• There are significant cost over runs;
• The state proceeded with the project despite unrealistic contract terms for pole attachments, permitting and easements;
• Inadequate financial analysis and monitoring;
• Insufficient analysis of the $88 million vendor settlement.
Ronnie Ellis writes for CNHI News Service and is based in Frankfort. Reach him at email@example.com. Follow him on Twitter @cnhifrankfort.