Financial Myths: Goodness Had Nothing To Do With It – Part II

Michael McTague  |

In part I of our investigation of this myth, we uncovered some interesting – and quite large – business opportunities that relate to human traits and actions that are not good. Keen market observers will note that since Part I came out, Aramark’s (ARMK) stock has risen almost 5% ($32.28 3/16/16 to $33.76 4/15/16). Mae West’s quip is proving insightful. In addition to prisoners and their needs, a few other business opportunities that reside in the shade need comment.

The US government advocates energy independence and conservation. The massive fall in oil prices has removed the urgency for the government’s push for ethanol, windmills and solar energy. Among the most peculiar alternative energy sources is animal waste. Our firm, Able Global Partners, has been approached for funding in this area. Companies use pig and cow waste as a fuel to produce energy. It sounds like a business that would be difficult to sustain. But companies with this kind of “natural” energy source prove attractive to government organizations that are required to find energy from non-fossil fuel. If you have ever driven past a pig farm or a chicken processing plant, you will immediately see that Mae West was right: Goodness had nothing to do with it.

Animal Waste At Work

Several years ago, Qingbin Wang, a professor at University of Vermont, estimated that it takes an initial investment at $2 million per farm for equipment, but grants and subsidies from government agencies would be necessary to make a manure-to-energy project feasible. He projected that converting manure from the 95 million farm animals in the United States could produce enough renewable energy to replace 8 billion gallons of gasoline, which totals about 1 percent of the country's total energy consumption.

Both the federal and state governments embrace the idea. In the state of Washington, Skagit County received $500,000 in grants from the state and more than $2 million of U.S. Dept. of Agriculture funding to build a plant that generates enough electricity for 500 homes. Two Skagit dairies provide manure from 1,500 cows for Farm Power’s anaerobic digester. Puget Sound Energy (PSE) also invested in Farm Power to help reach the state’s goal of 15 percent of PSE's electricity coming from renewable non-hydro sources by 2020.

Smart investors will immediately see that these efforts do not match the direction and cost of energy production. The fall of oil prices has even removed the attractiveness of converting to natural gas. As has been the case with ethanol – plants closing, product being exported – animal waste energy is -- you’ll pardon the expression – dropping(s). In Wisconsin, for example, some dairy farmers are canceling new manure-to-power plants and shutting down existing ones.

Justice May Be Blind, but Well Funded

Part I looked at products and services related to prisoners. Entrepreneurs will quickly think about how they got to be prisoners. Another sizeable change in the US is the immense growth of courthouses and related services. The General Services Administration (GSA) maintains a five-year construction plan for courthouses. Using a ranking system, the plan covers future construction based on the urgency of the need. For example, a US courthouse in Las Cruces, New Mexico encompasses 237,000 square feet. So, if someone with a criminal bent were looking for a nice place to live or retire, stay away from New Mexico! They are licking their chops.

The California Courts system offers detailed planning; their website indicates that courthouses in California cost $591/square foot to build. On the federal level, the Consolidated Appropriations Act of 2016 provides $948 million to the GSA to fund construction costs of the top eight courthouse construction projects on the Judicial Conference’s courthouse priority plan, and partial funding for a ninth. This means that there are many other courthouse plans not funded by this law. But, be patient, the next Congress will be busy.

Justice is expensive. The federal Salaries and Expenses account, which funds court operating expenses, received $4.93 billion, an increase of $73 million from 2015. That includes $26 million for information technology initiatives to improve court operations and $15 million to expand evidence-based practices by probation officers. We can expect judges and prosecutors to have mobile access, and all those students studying criminal justice will have plenty of work.

According to the Bureau of Labor Statistics (December, 2015), jobs for Forensic Science Technicians are growing at a rate of 27% (much faster than average). The website http://www.worldwidelearn.com/online-education-guide/criminal-justice/criminal-justice-major.htm states boldly: “The study of criminal behavior and law enforcement is becoming more sophisticated. Professionals who work in today's police forces, court systems, correctional facilities, or related agencies need a broad social science background to be prepared for the range of career opportunities.”

Taxpayers also fund a large portion of criminal defense. The federal Defender Services account received $1.0 billion for this year. Court-appointed panel attorneys receive an hourly rate of $129 for non-death penalty cases. The Court Security account received $538 million, which funds a new staffing standard to increase the number of court security officers. Even the federal Juror Fees account received $44 million.

Next month, the Myth Buster will pursue more financial myt6hs that need careful analysis.

*******************

Michael McTague, Ph.D. is Executive Vice President at Able Global Partners in New York, a private equity firm.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer.


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