An interesting take on lobbying

I’ve been meaning to blog about this one for awhile, but am only doing so now because election season is gearing up in full swing (unbelievably, given that it is 13 months until the next major elections, but that is an issue for another day). Tim Harford has a neat piece in Slate attempting to assess the possible impact of lobbying on federal government spending decisions. The logic looks like this:

Federal government spending = $2.5 trillion per year

x 4 years per election cycle

= $10 trillion in total spend available to be “purchased” by lobbyists

But… lobbyists only spend $2 billion per year trying to influence that budget, a mere 0.08% of annual federal spending. If we exclude Social Security, Medicare/Medicaid, other safety net programs, interest on the national debt, and even defense spending, that leaves us with 21% of the total budget, or $420 billion, as truly “discretionary” spending for other programs (see chart below, from a great federal budget overview provided by the Center for Budget and Policy Priorities). Even against this smaller amount, $2 billion seems fairly insignificant.

As Harford writes,

What can we conclude from all of this? One possibility is that the people who have bought the government have got a fantastic bargain. For example, the economist Thomas Stratmann has estimated that just $192,000 of contributions from the American sugar industry in 1985 made the difference between winning and losing a crucial House vote that delivered more than $5 billion of subsidies over the five subsequent years.

I am not convinced. Think of Starbucks, McDonalds, Coca-Cola, or the Hershey Company. There is no shortage of candidates who would happily pay more than $192,000 to get lower sugar prices. That would mean a bidding war between sugar producers and sugar users to buy the right to rewrite sugar laws, and surely the price would be nearer to $5 billion than to $192,000.

The alternative view is the one you have been thinking since the second paragraph of this article: Thanks to whatever checks and balances we may have, government is not really for sale at all, or at least only in the most marginal way. If the lobbyists are not willing to spend more than $2 billion a year to influence a budget of $2.5 trillion, that suggests they believe that they’re going to be able to influence less than one dollar in a thousand of government spending. Put another way, the American government is, very roughly, 0.1 percent corrupt. It’s not perfect, but perhaps we can live with it.

Social networking and philanthropy

A recent article in the Wall Street Journal highlights the growing and exciting intertwining of social networking with philanthropy. The philosophy behind these new philanthropists is that impact should drive your choice of where/how to donate:

Some of the newer Web-based nonprofits, such as DonorsChoose and Kiva, are attractive because contributors say they allow them to connect directly with their recipients. Donors or lenders can hand over money directly to, respectively, teachers and students in urban public schools or individual entrepreneurs in developing countries, rather than sending a check that ends up with an abstract recipient.

“You can donate money to a charity, but it seems like it just goes into a pile and you never know what really goes on there,” says Mr. Alamo, the Kiva lender. “With Kiva, you just pick someone out and lend to them directly and watch what they do and how they succeed. That was the main appeal.”

There are a whole slew of good sites and organizations out there pushing change, but the WSJ picks out a few of the best. Their list is attached here, and it is a very good one. I especially like Change.org, which has a fantastic user interface and a network of folks who really know about the causes they’re recommending. I have also lent on Kiva.org, and have found it both user-friendly and exceptionally, well, fun.

Of course, I can’t resist give a shout-out to my own effort to encourage social networking and philanthropy, the Grafton Street Fund. GSF is a donor-advised fund that my friends and I started in 2005 to keep us in touch with one another as we spread out around the world and to establish the tradition of philanthropic giving at a young age so that we wouldn’t lose our “youthful idealism” as we got older. We think it’s a replicable model for other groups of 10-50 people who want to pool their resources to give more effectively.

More on the algae debate — Good overview of opportunity and challenges

This article from the American Scientist is from awhile back, but provides perhaps the best introduction and overview of the opportunities and challenges associated with biofuel production from algae. Also a very comprehensive list of companies involved in the space.

For those tired of reducing their carbon footprint…

 Check out Carbon Credit Killers. I especially enjoyed the display of the “tree destroyer.”

Innovators: Stoves for the Poor

It’s a little known fact, but biomass (e.g., combustible renewables and renewable waste) actually constitutes a reasonably large portion of total energy consumption worldwide — 10.6% in 2004, even more than nuclear! Does this demonstrate the success of all the waste-to-natural gas plants we’ve been reading about? No. Rather, this 10.6% largely comes from the poorest of the poor, who are often forced to scavenge for firewood and anything else flammable in order to cook their dinners. It’s a terrible waste of resources (labeling it “renewable” is an awful misnomer, given the de-nuding of forests that has happened in, for example, Sudan and Ethiopia as a result of scavenging for wood), it’s exceptionally energy inefficient, and to top it off, it often has a terrible impact on the health of its consumers, who inhale smoke and particles while cooking in close quarters.

The efforts of Ashok Gadgil, creator of the Berkeley-Darfur Stove, are to be heralded. Though he’s not the only one desperately trying to find a solution for this challenge, he seems to have made real progress, having developed a new stove for use in the world’s poorest countries. He’s testing it one of the most challenging: Sudan.

Newsweek recently highlighted his efforts. The impact this stove could have is tremendous:

Designed with a smooth airflow to fuel the fire and an upper rim that fits snugly with different-size pots, the stove requires 75 percent less wood than an open fire, and a wind collar makes for a steady flame. That means fewer risky trips outside the camp. And those who now pay for firewood, Gadgil estimates, could save as much as $200 a year, which could be used instead for luxuries like new clothing and fresh meat.

For what it’s worth, one should not mention stoves for the poor without mentioning Shell Foundation’s worthy efforts in this area. As far as I know, they were one of the first to really identify this as a problem and work towards a possible solution, and they are convinced they have found a good one. After several pilots, they are rolling out massively. See more on their work here.

An Innovator: Good Capital

Great profile of Good Capital in Forbes, an innovative hybrid, social development investment fund. As a finance guy, it’s hard for me not to puzzle through the fund structure. With a target initial fund of $30 mm and average deal size of $1-2 mm,

Good Capital is structured much like your typical private equity fund. It requires a minimum capital commitment, in this case $250,000. The life of the fund is seven years; small distributions will likely begin in the fifth year. Fees are rich: 2.85% annually and 20% of any profits. The justification, per Jones, is that Good Capital has to analyze social benefits as well as business prospects. Like some venture capitalists, it will do lots of hand-holding for the businesses in which it invests.

I’m always interested to see how hybrid funds resolve the “pay-for-performance” conundrum — in order to get good people, especially in a financial services-type role, you’re going to have to pay for performance, but this is made hard by your social mandate, which is specifically focused on developmental capital and often requires a smaller fund size. In this case, it looks like Good Capital can feasibly resolve the conundrum. They’ll have $885,000 per year to cover expenses. Assume 50% of that goes to generic operating expenses — travel, IT, rent, hiring consultants for due diligence or mentoring, etc. — and this leaves $442,500 for staff. This isn’t a huge amount, but I imagine at least one of the founds, Kevin Jones, a dot-com millionaire and serial entrepreneur, doesn’t need a large salary. So, with $100k each for both of them, you’ve got $242,500 left for two associates and an office manager. It’s tight, but it can work.

The other interesting feature here is the deal structuring, and in particular, the tax implications. There’s not enough detail in the article to really figure out the tax ramifications for LPs and portfolio companies, but it looks as if Good Capital may have some advantage over traditional investors:

Half the organizations Good Capital invests in will be nonprofits, and they can’t dole out any equity because they have no equity. But they can pay interest. Jones aims to get gross annual interest of 10% on loans to nonprofits. Interest will be tied to revenue growth, so that a nonprofit could forgo payments until it reaches a preset revenue goal.

“This is patient capital,” says Jones. Risky capital, too. Good Capital won’t have any claim on assets if its investments go awry. “If we blow up, we really blow up,” he admits. Also, tax regulators might not appreciate that Good Capital’s investors get a nice break up front. Charities don’t pay taxes on income so long as it is related to good deeds. This is intended to benefit the charity, not outside investors. Jones says the tax break still is benefiting the charity’s mission, as are the funds from Good Capital.

For the most part, however, Good Capital won’t have any tax advantage over conventional investors. If, for example, Kraft Foods (nyse: KFT – news – people ) finances a sausage factory entirely with bonds, the sausage operating profits escape corporate taxation because interest payments are deductible in computing corporate taxable income. And if the bonds are held by Princeton University, the return escapes taxation at the holder level, too, since Princeton is a tax-exempt entity. Meanwhile, if Princeton buys a sausage factory outright (with no debt), it gets no advantage over Kraft. That’s because charities owe corporate income tax on business profits unrelated to their charitable mission.

Taxable investors in Good Capital (individuals, for example) will pay income tax at their usual rates on any distributions from the fund: 15% on capital gains, 35% on interest. A charity investing through Good Capital gets a free ride.

So the tax break comes through the fact that charities don’t pay taxes on income, so if Good Capital funds a revenue-generating effort, owned by a charity, it will be tax-advantaged relative to its competitors. For example, imagine a restaurant that is a 501c(3) and employs only ex-convicts (like Delancey Street). This restaurant can actually charge lower prices because its income is earned tax-free. Interesting… Doing a rough cost-benefit in my head, this is interesting, but likely not enough to encourage this organizational form over more traditional LLCs or C-corps, which actually offer the opportunity to earn a profit.

The challenge of algae

Interesting interview with one of the leading companies pursuing the alga fuel opportunity. The opportunity is clear:

An acre of algae can produce 50 times more oil than an acre of soy, estimates John Sheehan, now vice president of strategy and sustainable development at LiveFuels.

How we get there is not.

Top 10 signs that the apocalypse is upon us

I’m not sure where this ranks, but it’s up there. Two kids from Malibu are scheming how to be famous by doing nothing. Well, not nothing, rather filming themselves living contrived lives of fame and fortune, where they are famous only because they’re famous. I don’t even know which part of this recent article in Details to quote, because it is all so disturbing and sad. Perhaps the capper is the end of the article. Though I hate to ruin a good punchline, those of you with short attention spans will be able to appreciate the awfulness in just one paragraph:

Later, we take a drive with Pratt in Jenner’s Mercedes G55 (MSRP: $105,275) down the Pacific Coast Highway, passing Mel Gibson’s house and eventually David Geffen’s. Pratt spends 20 minutes talking about how he plans to make a tape of himself and Heidi Montag having sex, which he’s thinking about posting online. Plunging ahead to tap the next vein of almost-stardom, he tells me I should have been at Jenner’s the other night after Hyde, at five in the morning. “Guess who showed up,” he says. “Lindsay Lohan. I’m telling you, man, she’s obsessed with Brody. She wrote him a note that says how she could cuddle with him forever. Kissed it and signed her name and everything.” As Pratt speaks, I glance at Jenner, looking for a reaction, but he shows no sign of emotion.

“Hey,” Pratt asks me, “do you think Details would publish that note, like a copy of it?”

Maybe, I tell him, if he gives it to me.

“All right, but only if I can film myself giving it to you. Is that cool?”

Wow. Mark Burnett, what have you wrought?