Month: July 2012

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 It is an outdated system that was largely designed to address the problems of the post-prohibition era.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. 

The BC Government have announced that they are modernizing BC\’s wine laws to permit corkage. This is great news for wine lovers in the province as it will now be legal to take a bottle of wine to a restaurant to enjoy with a meal. Previously, it was not legal for a restaurant to permit the consumption of wine that had not been purchased directly from the restaurant. Restaurants will be free to set their own corkage policies including whether or not to permit corkage at all and to set whatever corkage fees they wish. Corkage is permitted in most other jurisdictions including our neighbors, Alberta and Washington state. Corkage is good news for wineries and retailers. It is also particularly beneficial for wine lovers who have been saving a \”special bottle\” for a particular occasion – now they will be able to take that bottle out for dinner rather than staying home. Restaurants can also tailor their corkage policies to fit their own needs – i.e. setting corkage fees that reflect average profits on a bottle of wine and adjusting those fees up or downwards to increase traffic on slower nights. See additional coverage at BC Wine Lover: Bring Your Own Wine Comes to BC Restaurants.

Update: Here are some useful links for restaurants wondering about the changes. Here is the Order-in-Council that amends s.42 of the Liquor Control and Licensing Regulation to permit corkage. Here is the LCLB Policy Directive introducing the BYOW program. These are the amended Terms and Conditions for Food-Primary Licensees which permit corkage.

The BC Government\’s liquor privatization project (the Distribution of Liquor Project or \”DLP\”) has been in the news a great deal this past week, getting increasingly negative coverage. Many commentators have correctly identified that the existing government monopoly system is inefficient and flawed but have criticized the DLP process for a lack of transparency and failure to consult with both the public and industry. In addition, some have questioned the scope of the reforms being put forwards and the wisdom of replacing a public monopoly with a private one (particularly given that the new operator will be bound by existing BCGEU labour contracts and costs). There have been many stories but see in particular: multiple stories by Bob Mackin in BIV and the Tyee, multiple columns by Vaughn Palmer in the Vancouver Sun as well as a critical Sun editorial piece, Liquor monopoly silences competition, plus another editorial and other coverage of the issue by Bill Good on CKNW.

It is hard to argue with the criticism of the process. However, there is no doubt that the entire system is in dire need of reform. Unfortunately, it now appears that another opportunity to modernize and reform our outdated liquor distribution system is about to be lost due to poor policy making and implementation at the bureaucratic and political levels. In my view, the government needs to change its strategy to one that should have been in place all along: put the interests of consumers and voters first. BC has long suffered under an archaic prohibition-era system that restricts selection to government listed products and which fixes wine prices at exorbitant levels both by imposing absurd levels of taxation and by preventing competition. BC wine consumers and voters really only care about two things: selection and pricing. Proper reform of the system could provide major benefits on both those fronts but to achieve those goals, two objectives have to be accomplished: 1) the government should restrict its involvement in the liquor business to regulation along with the collection of fair taxation, and 2) the government should replace the current monopoly system with a competitive free market system at the wholesale and retail levels so that consumers and voters will see a meaningful increase in product selection and reduced retail prices. It would not be that difficult to achieve these goals: BC could simply adopt the best elements of the systems now in place in our neighbouring jurisdictions, Alberta and Washington state, both of which have privatized either entirely or almost entirely. In this respect, see my previous article, Two Wine Neighbours – Two Approaches to Liquor Regulation, and this recent op-ed in the Vancouver Sun: Province\’s Soviet-Style Liquor Monopoly Past Its Sell-By Date.

Unfortunately, at the present time, it is not clear whether the DLP will provide any benefits on selection or pricing, the only two areas that matter to consumers and voters. In this regard, government should probably change the DLP, change its message, or perhaps change both.

As reported earlier this morning, the BC Government has  announced that they will permit inter-provincial wine shipments in unlimited amounts for personal consumption from other provinces free of provincial liquor board markup (which is a form of hidden tax) if the wine is 100% Canadian wine and if the wine is shipped from the producing winery in the other province. The press release does not refer to the legal authority for this change which is important since the BC Government introduced a Liquor Possession Regulation last month which only permits BC residents to possess a cumulative total of 1 case of wine imported from another province at any given time and only if the wine was imported \”in-person\” rather than by shipment from a winery. Last month\’s regulation would have to be changed in order to give effect to the new policy. [Update July 13, 2012: the Liquor Possession Regulation has been amended to permit the possession of unlimited quantities of wine from other provinces (either shipped or imported \”in-person\”) if the wine was purchased from a winery in another province and is made entirely from agricultural products grown or produced in the province where the winery is located.] 

For wineries, the new policy is a step in the right direction. The BC government currently exempts all 100% BC wine from liquor board markup if the wine is delivered direct from the winery to consumers or to licensees within British Columbia. This exemption is significant because the base liquor board markup on wine is essentially a 123% hidden tax at the wholesale level. In respect of consumers, the new policy would essentially extend the markup exemption to all 100% Canadian wine regardless of the province of production. This makes sense on a national level … why should one province discriminate against wine produced in a different province? BC wineries can now hope that other Canadian provinces will adopt a similar approach to the application of markup and thus permit BC wineries to ship to other Canadian provinces free of liquor board markup. Indeed, from a legal perspective, there is a very good argument that this approach is required by law in many provinces because s.121 of the Constitution Act guarantees a \”free trade\” zone within Canada for Canadian produced products. Without getting into the details, this law generally requires that, while a province can impose taxes on to products coming from another province (e.g. sales taxes), it cannot impose fees or charges on to goods from another province which it does not impose on the same goods within the province. In other words, if a province exempts its own wines from liquor board markup, it cannot charge that markup on wines from another province.

On a less positive note, BC\’s new approach is likely to raise international trade law problems as it is inconsistent with Bill C-311\’s neutral approach to all wine within Canada. Bill C-311 was carefully crafted to ensure trade agreement compliance by treating all wine the same regardless of wine type or origin. Indeed, I testified before the House of Commons Finance Committee that it was my opinion that all wine (domestic or imported) had to be treated the same in order to comply with Canada\’s obligations under NAFTA and GATT. In this regard, BC\’s new approach could prompt a trade agreement challenge since it provides preferential treatment to Canadian wine. BC wine consumers may also be partly disappointed since the new policy does not permit them to order wine direct from a retailer in another province. In this respect, BC has not followed the lead of Alberta and Manitoba which have opened their provincial borders to all inter-provincial wine shipments regardless of wine type and origin. The new approach also raises questions of enforceability … will wine consumers/wineries/retailers/shipping companies really care what is in the bottle when they process an order?

The BC Government has just announced that they will permit inter-provincial wine importations from other provinces free of provincial liquor board markup (which is a form of hidden tax) but only if the wine is 100% Canadian wine and only if the wine is shipped from the producing winery in the other province. While this is a step in the right direction and an improvement on the BC government\’s previously announced position (which restricted BC residents to \”in-person\” possession of a cumulative total of 1 case of imported wine at any given time), it is inconsistent with Bill C-311\’s neutral approach to all wine within Canada (i.e. domestic vs. imported and winery vs. retailers) which was carefully crafted to ensure trade agreement compliance and to benefit all wine consumers. BC\’s new approach could cause a trade agreement challenge since it provides preferential treatment to Canadian wine. In this respect, BC has not followed the lead of Alberta and Manitoba which have opened their provincial borders to all inter-provincial wine shipments regardless of wine type and origin. More analysis to come.