Ontario Progressive Conservative Leader Tim Hudak has rightly been receiving positive press lately as the only provincial leader who is proposing serious policy ideas to turn this province around. His latest paper, A New Deal for the Public Sector has a number of bold initiatives. There is a lot to unpack in the PC Leader’s series of white papers, but the policy that has achieved the most reaction, surprisingly, is the plan to reform the government-owned liquor monopoly and get rid of the private-sector beer store.
As can be expected, the status quo is moving to defend itself. But the quality of the debate has been stunningly low. This should worry every Ontarian, as the number of substantial reforms that are needed to put Ontario on a path that will produce both growth and quality public services remains significant. Moreover, the scope of some of these choices that will have to be made by future governments (whether PC, Liberal or NDP) make the LCBO decision look insignificant in comparison. So it would at least be a good start to get this one right. Here are some key facts to keep in mind when considering the issue of the LCBO.
1. Government ownership does not mean higher revenue to government
There is no relationship between government control of an alcohol sector and the amount of revenue remitted to the treasury. This was the conclusion of a 2005 study by the consulting firm Grant Thornton commissioned by the government of Ontario. Its striking conclusions were drawn from 19 jurisdictions in the United States, Canada and the United Kingdom. Thus the fear mongering about “giving away” the current LCBO dividend makes little sense.
In fact, the report found that in Canada “government revenues per capita are relatively consistent regardless of the level of government operation.” It also found that on a per-litre basis, net revenue to the government “is considerably higher” in both Alberta and B.C., two provinces that have mixed public/private systems. Different jurisdictions transform their liquor monopolies for different reasons – some to raise money, others to allow for consumer choice and others to create small business opportunities. None have an interest in losing money to the treasury. The good news is that at the very least it appears relatively easy to maintain revenue neutrality while altering a system. Most jurisdictions in the report demonstrate that changes “did not have a detrimental impact on revenues.”
2. Privatization can mean more revenue to the government and more jobs
Privatising will generate more revenue, according to an Ontario government panel on reforming the beverage alcohol system. The report emphatically states: “part of our mission was to determine if more government revenue could be generated by the system. Our finding, after close analysis with our financial advisors, is that it could.” The privatisation model proposed by the panel estimated at least an extra $200-million annually to the government.
On the jobs front, the Alberta example is helpful. Since privatization, employment in this sector has grown from 1,300 to over 4,000. Moreover, because the government monopoly has been broken, many entrepreneurs have entered the market, creating new and exciting retailing models. Prior to partial privatization, Alberta had just over 200 retail outlets, now it has over 1300. The Globe’s Marcus Gee wrote an excellent article on why there is a strong economic case for allowing for small businesses to sell alcohol.
3.Taxes will still exist
The government will still be in the taxation game after any transformation of the LCBO. Thus the government will do what it always does when it needs more revenue: raise taxes. Governments everywhere have few qualms about raising taxes on “sin” goods such as gambling or cigarettes. It would be the same for the sale of beverage alcohol; this is how our system is meant to work. Private-sector operators run businesses efficiently and for profit (which the government cannot do) and the government taxes those businesses. This is an elementary concept that will still apply in a post-transformation world.
4.The rules of finance won’t be suspended
How the government decides to privatize will matter. If it decides to sell or lease the LCBO as a monopoly, it would be worth much more in upfront payments than if the government created true market competition. But in either case, a purchase price will reflect the net present value of the future stream of profits using the concept of the time value of money (for example, $100,000 dollars received in five years from now, assuming a 5 per cent interest rate, is worth approximately $78,350 today).
If all things were considered equal and nothing changed, then at a certain price the government should be indifferent between selling the LCBO and keeping it. However, the future streams of profit will be higher in the hands of a private sector owner and therefore the LCBO will be worth more today than under the current structure. The key is to ensure the government captures this increased value, which is accomplished through negotiating “chump insurance” or a system ensuring participation in any upside. While there are many variables to consider in a privatization, what is certain is that nothing will be given away. The current government certainly has no interest in giving anything away and deployed the same concept when negotiating the sale of Teranet, ensuring an ongoing royalty payment. Tim Hudak has committed to ensuring ongoing participation in any sale.
The proposal to privatize the LCBO should be debated. But it should be debated based on facts and specific public policy outcomes. Ontario faces a crisis in governance and in its economic model. There will be no easy fixes for either challenge. Our public sphere must evolve to discuss complex policy choices in an informed way, or we face a difficult road ahead where the moribund status quo will prevail.
J.C. Bourque is a business strategy consultant in Toronto. He has worked on several campaigns for the Progressive Conservative Party of Ontario.