Steering the QE2
September 29, 2011 in Adrian's tech blog
The hand wringing over the global economy continues, and the UK is now having to consider a second round of quantitative easing (QE – hope no-one thinks this will be about luxury cruises).
In normal times we have Qualitative Easing – changing the quality of the money supply by adjusting interest rates. When you can no longer adjust the quality of money then you need to adjust the quantity – in earlier times that meant printing new notes but today that typically means the central bank buys bonds (debt).
The last Government’s QE1 programme resulted in the Bank of England buying government bonds, and the money was used to fund general government expenditure. This resulted in criticism from some quarters that the new cash didn’t optimise its impact on the wider economy. Expanding the money in circulation can have two high-level impacts:
- It can ensure money is circulating so the economy doesn’t stop, and
- It can be used to re-shape the economy so its more competitive when recovery comes.
It was certainly true that the former happened – because nurses and policemen kept their jobs and were paid the economy kept flowing. But the process didn’t have any lasting impact on the efficiency of the economy.
If we are to have a second round of quantitative easing, so called QE2, then a lasting impact will require investment in the shape of the economy - infrastructure, for example.
It is widely accepted that the funds available to BDUK form only a small proportion of the investment needed to ensure every UK business benefits from super-fast broadband, even when added to the level of funding already committed by the industry. However, if QE2 was used to underwrite local authority bond issues, the sums committed to broadband could be dramatically increased – and I purposefully use the word “underwrite” rather than simply “buy”.
Under the localism agenda, communities are encouraged to become more involved in their area but for many its simply not reasonable for them to build their own broadband infrastructure as it was the first time around, but that isn’t to say they don’t have a role beyond simply marketing the benefits of broadband.
By encouraging their local authority to issue infrastructure bonds, the community may be encouraged to invest in their future; by having the Bank of England underwrite the issue means the risk is somewhat reduced and the full funds may be raised in areas where there isn’t the investment cash available. This could be the 21st century “Tell Sid” campaign!
By using a local authority to issue the bonds, rather than a commercial telecoms company, ensures the wider economic impact for the area can be embeded in the process, alongside the commercial reality.
But since bonds are essentially long term loans that need to be paid back at some point in the future, today’s preferred gap funding models favoured by BDUK may not be ideal. As the local authority is today essentially providing grants to a third party to own, build and operate the network, there is no obvious mechanism for the local authority to recoup such an investment.
However, a model where the local authority issues a concession to a third party to build and operate the network but ownership remains with the local authority – or at least a stake is owned by the local authority – means they can at a later date refinance their investment to repay the bonds.
The UK already has examples of this kind of structure. NYnet in North Yorkshire is an example where the local authority retains 100% ownership, while FibreSpeed is a joint-venture model between Geo and the Welsh Assembly Government. There are pro’s and con’s to both approaches but the essence is the same – the bond owner would retain a stake to secure their investment.
I’ve no idea if we will see QE2 but if we do, this kind of approach would ensure not just the immediate re-floating of the economy but also a longer lasting impact on the UK competitiveness – we could become the first G20 country to have a fibre switch-over!