- Tuesday, 24 July 2012 17:58
I have been trying hard not to write about the BC Government's liquor privatization project because it's summer and I would rather enjoy a glass of wine in the sun. Unfortunately, whenever I turn on the radio, a politician seems to be on explaining why the project is either a disaster or a great idea. Sadly, and in my view, much of the commentary (from both sides) seems to miss many of the relevant points. So here is a short primer on BC Liquor Economics for those poor souls who are not out in the sun ...
Wholesale Distribution System. Opponents of the privatization project have been saying that the government has presented "no business case" for privatizing the wholesale level of the system. Instead, they seem to want to keep things exactly the way they are. The reality is that the BC liquor distribution system is inefficient and archaic. It is an outdated system that was largely designed to address the problems of the post-prohibition era. Today, it is an unaccountable bureaucracy that shields itself from a modern retail and wholesale world where the norms are fair competition, reasonable pricing and e-commerce. If you want some stories from the trenches on this issue, please read these articles: Rod Phillips on Private Liquor Stores vs. Public Liquor Stores in BC and Ralf Joneikes on All Importers, Restauranteurs Have Tales of Liquor Board Foulups. If British Columbia wants to encourage a normal food and wine culture replete with economic growth and jobs, it is not an option to keep the system the way it is. Unfortunately, and as I have written earlier (Privatization and BC Wine Pricing), the government's proposals for reform are limited and it is still unclear whether they will address the underlying problems in the system. Consequently, in my opinion, there is absolutely no doubt that there is a massive and undeniable "business case" for broad reform. What is not clear yet is whether the government's privatization project is the right set of reforms.
Privatization: Loss of Revenue? Some opponents of the privatization project have been saying that government should not privatize because the BCLDB is a reliable source of revenue for the government and that we should not be selling a "government asset" that produces revenue. This is absolute bunk. Let me explain why. Governments make all of their liquor revenue from imposing “liquor board markup” on all products at the wholesale level. These markups are hidden taxes. They apply regardless of whether the product is sold in government liquor stores, private retailers or bars/restaurants ... so the government will get its money no matter what (and already does so because about 60% of liquor in BC is already sold by the private sector). It does not matter if the government privatizes the wholesale business and/or the entire retail business, it will still get all of its liquor revenue through taxation. The only "asset" that is producing this revenue is the government's ability to charge taxes on liquor and this will continue regardless of what they do to the system. In fact, the costs of running the wholesale and retail arms of the BCLDB are actually a drag on government revenue. The Government raises about $1.2 billion annually from liquor board markups ... but it costs them $300 million to run the BCLDB so their net annual revenue is reduced to about $900 million. It is really nothing but an expensive tax collection system ... if they eliminated the costs of running the BCLDB, they could certainly make more money.
Give Us Better Retail and Wholesale Pricing. Voters and consumers are tired of government liquor distribution systems which restrict selection and which fix prices at ridiculously high levels. In BC, any meaningful reform of the system needs to fix our arcane wholesale and retail pricing structure so that competition is restored, prices moderated, and selection increased. Critics of privatization have pointed to high prices in BC's private liquor stores as evidence that privatization is not a good idea. They have also pointed to the fact that prices have gone up for spirits in Washington state after their recent privatization. But these observations are wrong since they ignore the reasons behind the pricing problems. In BC, the reason that prices are usually higher in private stores than in government stores is because the BCLDB controls all prices by denying normal wholesale discounts to the private stores so that they have no margin to work with. If we had a proper wholesale pricing structure with a level playing field for all businesses - and with competition, I can guarantee you that prices would be much lower in private stores. In Washington state, prices went up because new fees/taxes were imposed at the same time as privatization. The new taxes were designed to increase Washington's revenue from spirits sales by 50%. If you raise taxes, prices will go up ... and it is actually a testament to the benefits of privatization that they have not gone up very much in Washington. In this regard, I am puzzled as to why the BC government continues to assert that it will "continue to control liquor prices" as part of the privatization project ... and that those prices "will stay the same". That is not an attractive position for voters and consumers. From the average voter's perspective, the entire exercise is a waste of time if the issues of pricing and selection are not addressed. The government should be putting forward reforms that will reduce prices toward global levels and that will increase selection. Anything less provides no benefits to consumers and voters.