Securitisation of Services
Securitisation of Services – Efficiency Gains to Economy
Any service provider or entrepreneur tries to estimate the demand for the services he wants to provide and then invest on the assets needed accordingly. He tries to have a margin of safety and tries to ensure that his assets will be utilised efficiently to realise returns exceeding his cost of capital or the returns he can get from other types of assets/investments.
At present commodity markets provide the information through the prices needed for the entrepreneur to invest in assets that produce commodities. So he has some estimates through which he can be assured of the returns from his assets. He can for example sell forward his produce in the commodity markets to assure him self of the price realised. Or he can get funds/loans against his produce stored in warehouses which give reciepts. Commodity markets also attract investors/companies who want to invest in some commodity to hedge against their requirements of that commodity. Some investors also invest in commodity indexes and treat the index as a currency that does not have inflation.
In the Service markets no such forward markets exist which have prices published or open in nature. There are some service providers such as telecom cos, banks, news paper cos, cable cos etc which sell forwards or they assure a service over a period of time. Ex: 1-2 years or 6 months etc. but all of them are closed in nature and the forwards of services are non transferable.
In consumer/retail goods market also no such forward markets exist. There are some manufacturing companies that lease their goods to the customer and upgrade them as necessory. They try to provide a service instead of a product. But there are no retail goods companies which sell forwards on the goods they manufacture.
Let us consider the effects of the presense of a goods/services forwards market where a person can buy/sell forwards of goods/services. For example. A senior citizen would like to insure himself from the effects of inflation and reduction in his claims over society through inflation. He buys forwards of goods/services from the manufacturers of goods and service providers. He is then unaffected by the inflation as his claims remain the same. A manufacturer has more certain information provided in the forwards market and he assured of the returns of his assets. A service provider also enjoys the similar benefit. Investors can buy forwards to provide funds/loans to the manufacturers/service providers. The entrepreneur will be able to rise capital in this forwards market for providing services or manufacturing goods and create new assets. The service providers and manufacturers will be able to hedge their raw material requirements in the commodity markets.
So the information of aggregate demand of the economy will be reflected in the forwards markets of goods/services and reduce the effects of recessions and booms. The consumers of goods and services will be able to finance the producers through securitization of the forwards.
The elements/pieces needed to start a forwards market for goods/services.
A Standards body/Agency.
The Agency has to formulate, device standards for each type of goods and services to be introduced in the market.
Assurance Agency.
It has the ensure that the forwards are enforceable and transferable and tradeable.
Scenarios
consider a person who likes to drink Tropicana Orange Juice every morning in his break fast. And he is sure that he will continue to drink all his life/most of his life. He goes to the forwards market and buy a forward contract or just buys in advance the Orange Juice in units for each month of his remaining estimated life. He pays whole amount in advance or some margin money to cover the forward contract.
The company which sold him the contract will go to the commodity market and buys the raw materials that go into making an Orange Juice Pack like concentrate,sugar, paper, vitamins etc..
consider a person who likes to travel by a high end car when he goes out but doesnt want it lie unused when he doesnt go out. So he buys 100 days per year of that high end car from the car rental company. And he buys it for the remaining part of his life. And the car rental company will go to the manufacturer to buy the appropriate number of cars for the future. And the manufacturer will buy forwards for the raw materials used in making the car.
Ram is retired happily with most of his savings invested in goods and service index. With the index he is sure that his future needs of goods and services will be met through delivery of the goods and services that he contracted for while investing in the index. As he invested in the middle income index he will have monthly supply of groceries, foods and services like rental cars and bookings on tourist spots and travel options.
Forwards for long duration of 5 or more years:
at present there are few commodity markets for duration of more than 5 years. The problem with long durations is the difficulty of estimation of different factors involved in the cost of production of a good or service. But a reasonable estimate can be made about the cost in terms of employee costs and capacity creation costs in future.
For example:
to estimate the cost of production of Tropicana orange juice after 10 years:
we have to estimate the cost of creation of processing capacity, transport infrastructure cost, rent of farm land, labor cost after 10 years.
Labor cost in a year can be estimated as a function of the middle class goods and services index(MCGSI) in that year. The cost of creation of the above assets/capacity needed can be estimated as a funtion of MCGSI in the year of creation and of the prior years.
So, we get the cost of Tropicana orange juice as a function of MCGSI in that year and prior years.
Any service provider or entrepreneur tries to estimate the demand for the services he wants to provide and then invest on the assets needed accordingly. He tries to have a margin of safety and tries to ensure that his assets will be utilised efficiently to realise returns exceeding his cost of capital or the returns he can get from other types of assets/investments.
At present commodity markets provide the information through the prices needed for the entrepreneur to invest in assets that produce commodities. So he has some estimates through which he can be assured of the returns from his assets. He can for example sell forward his produce in the commodity markets to assure him self of the price realised. Or he can get funds/loans against his produce stored in warehouses which give reciepts. Commodity markets also attract investors/companies who want to invest in some commodity to hedge against their requirements of that commodity. Some investors also invest in commodity indexes and treat the index as a currency that does not have inflation.
In the Service markets no such forward markets exist which have prices published or open in nature. There are some service providers such as telecom cos, banks, news paper cos, cable cos etc which sell forwards or they assure a service over a period of time. Ex: 1-2 years or 6 months etc. but all of them are closed in nature and the forwards of services are non transferable.
In consumer/retail goods market also no such forward markets exist. There are some manufacturing companies that lease their goods to the customer and upgrade them as necessory. They try to provide a service instead of a product. But there are no retail goods companies which sell forwards on the goods they manufacture.
Let us consider the effects of the presense of a goods/services forwards market where a person can buy/sell forwards of goods/services. For example. A senior citizen would like to insure himself from the effects of inflation and reduction in his claims over society through inflation. He buys forwards of goods/services from the manufacturers of goods and service providers. He is then unaffected by the inflation as his claims remain the same. A manufacturer has more certain information provided in the forwards market and he assured of the returns of his assets. A service provider also enjoys the similar benefit. Investors can buy forwards to provide funds/loans to the manufacturers/service providers. The entrepreneur will be able to rise capital in this forwards market for providing services or manufacturing goods and create new assets. The service providers and manufacturers will be able to hedge their raw material requirements in the commodity markets.
So the information of aggregate demand of the economy will be reflected in the forwards markets of goods/services and reduce the effects of recessions and booms. The consumers of goods and services will be able to finance the producers through securitization of the forwards.
The elements/pieces needed to start a forwards market for goods/services.
A Standards body/Agency.
The Agency has to formulate, device standards for each type of goods and services to be introduced in the market.
Assurance Agency.
It has the ensure that the forwards are enforceable and transferable and tradeable.
Scenarios
consider a person who likes to drink Tropicana Orange Juice every morning in his break fast. And he is sure that he will continue to drink all his life/most of his life. He goes to the forwards market and buy a forward contract or just buys in advance the Orange Juice in units for each month of his remaining estimated life. He pays whole amount in advance or some margin money to cover the forward contract.
The company which sold him the contract will go to the commodity market and buys the raw materials that go into making an Orange Juice Pack like concentrate,sugar, paper, vitamins etc..
consider a person who likes to travel by a high end car when he goes out but doesnt want it lie unused when he doesnt go out. So he buys 100 days per year of that high end car from the car rental company. And he buys it for the remaining part of his life. And the car rental company will go to the manufacturer to buy the appropriate number of cars for the future. And the manufacturer will buy forwards for the raw materials used in making the car.
Ram is retired happily with most of his savings invested in goods and service index. With the index he is sure that his future needs of goods and services will be met through delivery of the goods and services that he contracted for while investing in the index. As he invested in the middle income index he will have monthly supply of groceries, foods and services like rental cars and bookings on tourist spots and travel options.
Forwards for long duration of 5 or more years:
at present there are few commodity markets for duration of more than 5 years. The problem with long durations is the difficulty of estimation of different factors involved in the cost of production of a good or service. But a reasonable estimate can be made about the cost in terms of employee costs and capacity creation costs in future.
For example:
to estimate the cost of production of Tropicana orange juice after 10 years:
we have to estimate the cost of creation of processing capacity, transport infrastructure cost, rent of farm land, labor cost after 10 years.
Labor cost in a year can be estimated as a function of the middle class goods and services index(MCGSI) in that year. The cost of creation of the above assets/capacity needed can be estimated as a funtion of MCGSI in the year of creation and of the prior years.
So, we get the cost of Tropicana orange juice as a function of MCGSI in that year and prior years.