A Uniform Transaction Markup

• Membership: As with the UK television licence, users could be charged an annual subscription allowing access to the national utility. 

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• Market-entry charge: Tolls could be charged for entering any new sector in POEMs, either to buyers, to sellers, or both.

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• Flat per-transaction fee: Every time something is sold on POEMs - a block of work hours, an item, a service - a charge of maybe $0.50 is added to fund the system, regardless of the sale's value.

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• Diverse income: America's Public Broadcasting System relies on a blend of donations, affiliations and sponsorship. POEMs could viably do the same.

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• Taxation, relative to impact: Government might pay operators to run the service, but strictly based on meeting key performance indicators such as "number of households earning at least $100 a week through POEMs. This keeps risks with the private sector.

 

The overarching aim with launch of an officially backed e-markets system is regional economic growth, inclusion and efficiency. Options above lack the low barriers to market entry which opens increased opportunity and unlocks resources, plus the simplicity, robustness and independence from politicians that best builds widespread trust. Inflation is another complexifier. It would require periodic contentious resetting of formulae underpinning any of the above.

 

 

2) The Case for a Fixed Percentage Markup

Britain's revolutionary "Penny Postage" facility highlighted the value of lowest cost, uniform, payment for use of a public utility. Previously, mail had been charged based on number of pages and distance. Making charging so cheap, simple and transparent led to an explosion of literacy and letter writing, dramatically increasing postal revenues. POEMs' equivalent is a uniform percentage charge.

 

Under this model, assuming a mark-up of 2% (see below), the buyer of a cake for which the baker wants $20 sees its price in POEMs as $20.40. As funds go across to the seller, 40c is retained as POEMs' income. Likewise, hiring a bricklayer, whose total employment costs $20, an hour for 5 hours is charged at $102; rental of a $1,000 an hour packaging machine for 10 hours requires $10,200. In each case the provider gets the price they listed; the buyer simply pays a sliver more.

 

This charge should be the only permitted source of income for POEMs' operators in the jurisdiction. To maintain neutral treatment of users, there can be no charges for offering, enhanced display or preferential treatment. Nor can a buyer's tolerance for fees at checkout be algorithmically predicted. Every buyer of every resource pays proportionally the same. Sellers pay nothing. It's a utility.

 

 

3) Under-the-Hood of a Fixed Percentage Markup

The simplicity for users of "send any letter weighing less than half-an-ounce anywhere in Britian for a penny" masked enormous complexity behind the scenes. Short, high-volume, urban deliveries subsidized long-distance post to rural areas. Retaining POEMs' neutrality and focus on low earners requires comparable mechanisms, about which users are unlikely to care.

 

Three potential distortions from a fixed percentage charge on each transaction need to be countered:

 

• Bias to big purchases: From our examples above, it is clear POEMs' operators would vastly prefer to trade packing machines (system income $20 per hour) over home-baked cakes ($0.40 per cake). With freedom to structure their markets, they will incentivize transactions involving high-value items and people. This is disincentivized by a Granular Transaction Formula.

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• Monolithic control: A consortium winning the concession to operate POEMs will want to capture the full value of each chargeable transaction. That end-to-end ownership of the mechanisms for so much regional economic activity is unhealthy and likely to breed sclerotic markets where managers struggle to understand trading of bespoke cakes, industrial packing machinery, and everything between. Keeping POEMs dynamic but with minimal power, requires decentralization which splits each charge with a franchisee.

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• Overcharging for financial services: Loans, factoring, investment, underwriting, cash transfers and other ways for users to deploy their cash in these markets could find POEMs uncompetitive. Financial transactions are structurally cheap because of their simplicity. There is a case for them being cross subsidized by real-world activity. See our Peoples' Financial Markets briefing, section 4(iii).

 

 

4) Non-domestic Income for Operators

Ensuring operators maximize their return only by growing market volumes keeps POEMs neutral. No income from any entity that might buy or sell through the system should be allowed, it creates temptation to favor that party's needs in market structures. But foreign revenue can offset costs.

 

Assuming an overseas entity has no related economic activity in the jurisdiction which a given POEMs system serves, there seems little justification in prohibiting operators from earning in that region. Assuming the operating consortium is a Special Purpose Vehicle, insulated, from members' other commercial activities, three sources of revenue are immediately foreseeable:

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• Software sales: POEMs will be sophisticated and able to prove itself at volume quickly. There is no reason operators can't sell copies of the technology to other regions.

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• Consultancy: Again, foreign governments might prize operators' insights in a bespoke setting. But nothing can be held back from domestic users for commercial purposes. The transparency test can be used to block retention of data or learning that hasn't been published.

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• Infrastructure capacity: This is a borderline case. Like Amazon Web Services, POEMs' operators will own, or lease, vast computing facilities. Could they sell access to unrelated businesses needing server access. Domestic entities might be barred because of perception of a conflict-of-interest but oversees entities needing datacenter space could provide subsidiary income.

 

Permitting the above can boost operators' income, lowering the charges to users. But these possibilities must be subject to a conflict-of-interest test. POEMs' users are entitled to know their markets are geared only to growing breadth and depth of activity, not operators' incentives to favor more commercially valuable opportunities over public service.

 

 

5) Calculating the Percentage Charged

At what percentage charge should a consortium commit to delivering POEMs for any government? Competitive bidding is intended to flush out the lowest charge for the region's users. Foundational factors about each jurisdiction will determine the income upside. 

 

Costs of any implementation of POEMs will be substantially determined by the extent to which a consortium already has the code and core expertise required, from operating POEMs in another territory perhaps. 

 

Predicting the earnings potential involves a standard set of factors:

 

• Economic potential: Population size, GDP per head and level of digitization in the target region combine into a baseline for the addressable market. Secondary metrics like levels of concentration in the economy (a small number of big sellers or buyers is bad news, they can resist open markets); likely fluctuations in activity (a region with variable weather will drive sectors like agriculture, construction and leisure to unpredictable needs, boosting the usefulness of responsive markets); robust institutions (to underpin fair trading) and stable governments (unlikely to mercurialy repeal predecessors' concessions) also increase attractiveness.

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• Concession term: Unless the bid is to replace the operator of an established POEMs concession (in which case publicly-available data will provide a baseline case), the early years of operation will likely be lossmaking as a territory transitions out of previous ways of doing business. Ten years to recoup setup costs obviously necessitates higher charges than 20 years to balance the books.

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• Assured volumes: A concession's commitment to channel public spending through POEMs creates a floor for income. If government accounts for 35% of GDP and 80% of that is labor, which can reasonably be expected to go through the new markets, there is a predictable revenue stream. (Public agencies should pay operators' markup, as they pay overheads for administrative and employee , systems that POEMs will replace.) If the markup percentage is too high, POEMs is more likely to fall foul of the "unless better value" clause.

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Behind the simplicity of a pledge that "all public spending will go through POEMs unless better value is obtainable through another channel" lurks multiple unknowns. Some government agencies will have signed 5-year monopolistic agreements with temporary staffing agencies for example, those companies would be welcome to use POEMs but may chose not to. A city mayor might be ideologically opposed and resist adoption, and so on. 

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• Transferred volumes: What proportion of the region's existing economic activity will come over to POEMs? This can be modelled based on overheads of existing channels, compared to the intended system markup.

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• Generated volumes: How much new economic activity will start because of POEMs' efficiencies and appeal? Calculating this could take in current levels of economic inactivity, latent spending and unmet needs.

 

Estimates of the above need to be filtered through under-the-hood factors listed above. Very broadly, using South Korea as an example country; assuming a 15-year concession, $83bn total costs and a plateau of 50% of the addressable market reached by year 5, a 2% markup could generate a 74% return according to our modelling.

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NEXT: A Granular Transaction Formula