This commercial is one of many running in the US from J.G. Wentworth, a predatory company specialising in transforming annuities into up front cash. As Matt Taibbi recently wrote:
Companies like J.G. Wentworth feast upon the financial anxiety/desperation of middle America, where most people can’t wait to collect the whole $100,000 they won in court after losing an eye at work, and will settle for $20,000 they can use to pay the rent (or, more often, the doctor or the pharmacist) this week. Money is so tight out there that people will take a bad deal, even a draconian deal, just to make it to next week, especially when the idea is getting rammed into their heads in high-production-value commercials during football games and American Idol broadcasts five hundred times a week.
Now one cannot (and should not) legislate against stupidity, and desperate people often will take desperate measures even if they could have much more cheaply converted some of the annuity to an upfront loan at a less-than-draconian implied interest rate. It seems that J.G. Wentworth has taken between 25 and 67 per cent of the annualised valued of the annuity.
To give an example. Assume a ten-year annuity of $1000 per month. The present value of that annuity with a 10% discount rate is $75671. At the minimum J.G. Wentworth rate it is $43957 and at a reported 67% it is $17884.
My principal concern with such arrangements is where (for example) a person receives a disability compensation as an annuity to cover their excess health and living costs for the remainder of their life. If the annuity is traded for a cash settlement, and that is exhausted/squandered, the taxpayer would then be exposed to the expense of looking after this person. So in the presence of strong social security benefits, there is a case for restricting the ability of persons to transform such annuities into lump sums.
However, Governments too have been selling off the silver (or annuities) at ridiculous discounts. Taibbi cites the example of Chicago selling off 75 years of its parking meter revenue to a consortium of investors, which Mayor Michael Bloomberg now proposes to do in New York City, putting up 90 000 parking meters for lease to get an estimated $11 billion upfront.
Selling off the rights to tax collection isn’t exactly novel; after all the Romans used to run auctions for the right to tax farm a province. This led to problems of some tax farmers going a little too keenly about their jobs – the Emperor Tiberius warned of the excesses of some tax farmers:
It is the duty of a good shepherd to shear his sheep, not to skin them.
Unfortunately many of these deals sell an asset to repair a deficit. The sale of an asset should be used to either purchase another asset or to retire a liability. But it should never be used as a short-term fix to address a revenue and expense mismatch or cash-flow problem.
As Taibbi writes
A New York parking meter deal like the Chicago deal would be a perfect example of the deeply cynical short-term thinking of many American politicians these days. These deals involve a sitting executive selling off a valuable piece of city property at a steep discount to private financial interests (often, to friends or campaign contributors) in order to solve a current cash flow problem that, surprise, surprise, will still be there the year after you finish spending the proceeds of your sale.
In Chicago’s case, Mayor Richard Daley sold 75 years of meter revenue – worth an estimated $5 billion – for $1.2 billion. So he gets 20 cents on the dollar for the city’s parking meters in 2008, and then in 2009 the city still has a budget problem that’s now worse, because there’s no parking meter revenue anymore, ever.
…
Ultimately, these infrastructure deals operate under the same basically predatory, let’s fuck-the-uninformed elderly business model that guides companies like J.G. Wentworth.
…
Sure it [selling off the parking meters] makes sense for [Mayor Michael] Bloomberg personally – he gets to govern for another year without having to make tough decisions on budget cuts and taxes – but for the city in the long run it’s a disaster. Criminal, even. This is like a man with a wife and dozen dependent children selling his family’s lottery winnings to J.G. Wentworth so he can go on a skiing vacation in Gstaad with his mistress before the divorce goes through.
It couldn’t happen in Australia, surely?
But what about many of the toll-road projects in Australia which have left the risk with the taxpayer and the upside with the financier/operator?
Take a look, for example, at at a report from the Treasury on infrastructure. According to the news coverage, it apparently states that greater use of tollways and user-pay charges is necessary to
unlock private finance for new projects
I think that tollways and user-pay charges have their place, and can be superior to funding entirely from tax revenue. But these type of projects structured in that way only make sense if there is appropriate risk transfer. As discussed in a Productivity Commission paper the form of financing should be subject to a cost-benefit analysis.
Moreover, if the government can borrow at (say) 3.5 per cent when an alternative private financier would lend to the government project at 7 per cent, why should the Government not consider issuing its own paper? Indeed consider two options:
- a tollway, operated and financed by the private sector with the residual risk borne by the Government; and
- a tollway, financed by Government debt, operated by the private sector with the residual risk borne by the Government.
In this case, the second option is most likely the best for the taxpayer and the national interest.
Just because a project is financed by government debt, doesn’t mean that the debt should not be repaid by user-charges and tolls. The key is an appropriate CBA taking account of who bears the risks.
I think California, Illinois, vities like Newe York and Chicago all run by Democtrats assume like the far left is Greece that the central/federal government will in the end retire the debt.
Leftists are disgusting examples of the worst examples of human nature.
Satatism aloways makes the human individual worse
JamesK
16 Jun 12 at 7:36 am
Companies exist to bear risk. Governments exist to provide stability. A difference in interest rates doesn’t change that.
Driftforge
16 Jun 12 at 8:42 am
Where does privatisation end and “selling off the silver” begin? I think we’re all in favour of flogging off government businesses and surplus assets. But at some point you are exposing the government to loss of revenues and ongoing costs.
I’m sure a case can be made that private enterprise will run a more efficient parking meter collection business. So the question becomes at what price to the government would this transaction make sense and be about economic efficiency. And there is a reason that it was cheaper for the NSW Govt to contract with a private company to operate mobile speed cameras and split the fines then pay public sector employees to do the job and keep all the revenue.
On the other hand, take the Howard government selling off all the public service office buildings. In the short term they retired debt, but in the long run they hit up the taxpayers for ongoing rents. And given the interest differential, I can’t see how it worked out in the taxpayers long term interests.
And if I recall correctly, the Public:Private Partnership business (aka shifting loans off the govt balance sheet) began in NSW under Greiner. The theory is fine, but the practice has left a lot to be desired.
I agree with the thrust of the argument, but I think we need to clearly delineate what is good privatisation (putting parts of the economy back into the hands of the private sector, mainly for efficiency reasons) and what is a bad waste of taxpayers assets.
Tim
16 Jun 12 at 8:44 am
Obviously a case by case analysis is required. Take the office buildings. If you dont inflate the public service you don’t need more office blocks. That is easy.
Parking meters? Other revenue-raising stuff? Well if you sell them to your mates for a fraction of their value, that is not a smart business move.
The idea is to get things into the hands of people who, unlike public servants, have real incentives to deliver cost-effective services.
Some kinds of outsourcing look very suspicious, like Therese Rein’s little earner. Incidentaly, have the ABC types ever made fun of her appearance?
Major infrastructure projects? Difficult call, but beware the kind of corruption that blew out the cost of the big freeway under Boston that became a byword of government mismanagement.
Rafe
16 Jun 12 at 10:22 am
Boston freeway, the Big Dig.
Compare with the NBN.
Rafe
16 Jun 12 at 10:24 am
Am I seeing a catallaxy column that agrees with Ross Gittins? I recall reading ages ago that the primary reason for PPP’s was to offload government debt onto a private companies balance sheet. Driven by a political mantra of “reduce debt”. As Gittins said:
We’re all paying a high price for hiding our debt
SteveC
16 Jun 12 at 10:41 am
Am I seeing a catallaxy column that agrees with Ross Gittins?
If you look back you’ll find many. Gittins flip flops in every direction. Sometimes he’s clever and insightful and other times he’s idiotic. It’s his gross inconsistency that makes him unreadable.
John Mc
16 Jun 12 at 12:07 pm
At the project level, the numbers would indicate that government debt at 6% or so is preferable to engaging the private sector to build fund and operate cash flow infrastructure at their 12% or so cost of capital.
However if the government is accepting some level of risk i.e. volitile cash flow, then the 6% is not enough for a risk rated return. A risk rated return is a tough call, which is why governments prefer the private sector to take on the risk. Mind, the Macquaries of the world are experts at shedding risk and keeping the reward. In the final analysis if governments want something done its best to engage the private sector to do it. Even private sector firms may be more efficient at running “natural monopolies” like parking meters, as they will make investments in new technology in response to profits. Some of you may have noticed these new technologies being introduced.
Also, Governments gets debt “off its books” for the simple reason that too much of it will result in a credit rating agency downgrade and the entire portfolio will then cost more.
oil shrill
16 Jun 12 at 12:32 pm
It all depends on the investment type. If there is already a road but it is overused then yes a toll road is an exceptional idea as it provides for those that wish to get ahead by spending their wherewithal. If there is no basic public option to allow transit then this toll road becomes an icon of government weakness and curse to all who are forced to use it whether wealthy or not.
I’m a big believer in governments selling off assets to private enterprise provided they are forthcoming about when they plan to build newer ones e.g. power plants, phone networks and yes roads too. The example of tax farming is capitalist vandalism at it’s worst with medieval ideas of bailiffs and sheriffs shaking down locals in the name of some private landowner/rightholder with the full but not necessarilly willing support of the beaurocracy.
Simon
16 Jun 12 at 12:45 pm
Hang on a sec, is this post saying that the government should be borrowing to fund infrastructure projects?
If so I totally agree.
Les Majesty
16 Jun 12 at 2:16 pm
State governments, Macquarie Bank and the civil engineering contractors have effectively killed off toll roads as an private infrastructure investment through short term financial structures and unrealistic traffic forecasts. Only money to be made now is through class actions and litigation funding for collapsed projects.
Desalination litigation is next.
Only certainty – taxpayers will be out of pocket no matter what happens.
H B Bear
16 Jun 12 at 3:08 pm
Yes Les, that does appear to be what it’s saying. Who would have thunk it?
SteveC
16 Jun 12 at 3:37 pm
Les Majesty: I think that Government borrowing to fund infrastructure is fine provided:
. it doesn’t crowd out the private sector (ie; the project would be done by the private sector without a public-private partnership (this rules out the NBN by the way)
. a proper cost-benefit analysis is undertaken
. it is trading a liability (government debt) for an asset (a tollway).
Note that I’m arguing for restricted public financing for infrastructure in such circumstances. This would rule out the government borrowing to fund a white elephant project (since it would not be making financial returns). A properly assessed tollway would be fine since the tolls would repay the loan.
The trouble is that some governments – eg the present government – would bend these criteria and use debt to fund any project.
PRIVATISATION
As for privatisation, this can be quite productive to the economy, as long as governments realise that they are selling an asset (which may have a financial return) and consider the full opportunity costs.
But I agree that some privatisations in Australia were inappropriate in a number of ways. Selling off the asset at a deep discount is against the national interest. Selling off a purpose built asset (eg: the Defence building) which is then rented back is also probably negative to the national interest.
Selling off assets just for the sake of reducing debt per se is not a sufficient argument. It needs to account for the loss of revenue from the loss of the asset, and/or the additional costs from having to purchase another asset or to rent the services that the sold asset once provided. Hence major privatisations (or nationalisations for that matter) should be assessed using a proper cost-benefit analysis in full understanding of opportunity costs and the affects on competition and the prviate sector in general.
Samuel J
16 Jun 12 at 3:38 pm
There is a tunnel under the river here in Brisbane which was built on traffic forecasts that were simply insane. I remember thinking it at the time. It is now the subject of litigation. Unfortunately no taxpayers funds are involved. Thanks to the previous Lord Mayor (now Qld Premier).
I regularily drive past this tunnel and take an extra 5 to 10 minutes and $1.50 in fuel to go around rather than pay the $4 toll.
oil shrill
16 Jun 12 at 3:42 pm
Only is the projects involve increased productivity outcomes and reduce costs to the community.
This excludes almost all of the wasted billions by Gillard and ALP thieves and liars on pink bats, clean energy future, desalination, NBN,
oil shrill
16 Jun 12 at 3:44 pm
is = where
oil shrill
16 Jun 12 at 3:45 pm
I cannot flaw Sam J.
Now let’s the Government actually do it!
.
16 Jun 12 at 3:49 pm
Samuel, brilliant thoughts, wonderful theory. In practice governments and government departments facing budget restriction cannot properly maintain assets, such as buildings, and need to rely on selling them off to someone who can. In the long run this is probably more expensive, but governments have short time horizons of 3 to 4 years.
oil shrill
16 Jun 12 at 3:51 pm
let’s SEE, FFS!
.
16 Jun 12 at 4:36 pm
We’re all keynesians now!
Les Majesty
16 Jun 12 at 5:52 pm
Maybe Les, I notice state governments are using successful PPP to build hospitals. WA & QLD are at it at the moment.
Token
16 Jun 12 at 6:03 pm
PPP hospitals are great, if only i wasn’t subjected to the tax liability of Medicare
dan
16 Jun 12 at 6:24 pm
Forgive me all if this sounds dumb, but I have a question to ask based upon this statement.
Moreover, if the government can borrow at (say) 3.5 per cent when an alternative private financier would lend to the government project at 7 per cent, why should the Government not consider issuing its own paper?
In Sydney there is talk of some new tollways, so why can’t the Govt borrow the money itself, build the road via contractors, have the RTA manage it, and then charge a toll that directly pays off the road over some period, say 20 years? I know I’d be happier paying say $2, distance based or whatever, knowing that it is being paid for repayment of the road loan etc. I’m sure most people would, rather than it going to a private company’s profits. Then when paid off, ditch the toll a la M4.
brennan
16 Jun 12 at 7:17 pm
No that’s a good question Brennan.
Governments aren’t in the business of credit arbitrage in other words they aren’t in the business of borrowing at 3 and lend at 7%. They are in the a business of implementing policies to raise living standards.
Even though a toll road looks like are no-brainer to you there are commercial risks involved. An uncomfortable number of toll roads built with private risk capital have failed to measure up. Secondly the government can’t be trusted in taking a hit if an investment goes bad rather than conducting monopoly actions to protect its investment- see the nbn. Also there is the habit of people that work in government sectors treating the investment as captured capital.
Look I could borrow at say 4% and find investments with much higher returns. However I’m not interested as I don’t like the sector and consider that sort of thing too risky.
Finally if a business (toll road) fails that’s the investors problem, whereas a failed government investment is our problem.
Governments shouldn’t borrow and if they do it ought to very limited and non-recourse. A government could borrow for project specific reasons such as toll roads, but it ought to be non-recourse which means the lenders can’t go after the taxpayer in the event of a default.
The only reason the government is able to borrow at 3% or so is because it is able to institute taxes on its population.-
JC
16 Jun 12 at 7:58 pm
JC is right to warn of the risks he outlines. But I don’t agree that the Government should not issue debt to finance viable infrastructure that the private sector would not undertake.
There has been more than enough corporate welfare for banks. The amount thrown at brokers, investment banks and assorted advisers for the Telstra floats was outrageous.
I have been very careful at the constraints:
. if the government is going ahead with the project anyhow
. if the government is unable (or unwilling) to credibly transfer risk to the private sector in some PPP arrangement
then it is axiomatic that it is in the interests of the taxpayer for the government to issue its own debt rather than borrowing from the private sector at a significantly higher interest rate.
One should undertake a thorough CBA, be cogniscant of why the private sector is undertaking the project anyhow, and not take on so much debt that the cost of the portfolio of Government debt increases its borrowing costs.
But if after all that, one still is of the view that the project should (or will) go ahead, then it is the responsibility of a sensible adviser to Government to offer the option of issuing government debt to finance the project.
Again, JC is right about the risks associated with tollways. But in practice the risks are not transferred to the private sector in many PPP contracts. They are all gain to the financier and all loss to the taxpayer.
Samuel J
16 Jun 12 at 8:49 pm
Why shouldn’t government borrow if they are investing in infrastructure assets with economic lives of 50+ years?
One of the major problems with land affordability is that developers are required to fund all the roads, drainage, utilities, public open space etc and hand it over to government for no charge. This infrastructure cost plus developers margin is then repaid by land purchasers and refinanced with 30 year mortgages.
H B Bear
17 Jun 12 at 12:00 am