Alcohol, Social Harms, and the State: The Case for Privatizing the NLC

“Let us henceforth make war on all monopolies— whether corporate or union. The enemy of freedom is unrestrained power, and the champions of freedom will fight against the concentration of power wherever they find it.” – Barry Goldwater, The Conscience of a Conservative

The Newfoundland and Labrador Liquor Corporation (NLC) has, once again, increased the price of beer, wine, and spirits in the province. In an open market, raising the price of any given product is a decision that, among other things, reflects competitor pricing, however, the NLC and its provincial counterparts retain a monopoly on the sale and distribution of liquor products and consumers cannot purchase them from other retailers. Yet, it is not sufficiently clear why the provincial government is involved in the liquor industry and one must question whether the NLC should exist at all.

One justification for the existence of publicly-owned and operated liquor monopolies is reducing “social harms.” In other words, the state’s role is to protect individuals from the harmful effects of alcohol, which it can achieve through setting the price and regulating the sale of liquor products. By appealing to microeconomic theory and empirical evidence, however, the logic behind government-run liquor monopolies begins to crumble.

Regardless of whether individuals consume alcohol purchased from the government or from a private retailer, there exists some “dangers” associated with excessive alcohol consumption. Of course, alcoholism is a very serious illness with roughly 600,000 Canadians reporting a dependency on alcohol in 2002, but there is no evidence that government involvement in the sale and distribution of alcohol curbs this ailment. Furthermore, the link between alcohol consumption and prices is weak and there is little evidence that raising prices will discourage alcohol consumption. In fact, because alcohol is an inelastic product, dedicated consumers will not purchase less of it when the price rises (or when their income falls). Essentially, the NLC’s decision to raise the price of beer, wine, and spirits is unlikely to discourage consumption and will simply generate additional revenue, albeit at the expense of consumers (and their health).

An extension of the “social harm” justification for government involvement in the liquor business (and, correspondingly, the justification for limiting private sector involvement) is protecting children from early exposure to alcohol. In practice, there is at least some empirical evidence to support this arrangement. A study conducted in British Columbia revealed that private stores are more likely to sell alcoholic beverages to individuals who do not meet the province’s legal drinking age. (Conversely, a study conducted in Prince Edward Island, which recently made headway for private retailers to sell liquor at licensed establishments, found that government-owned stores were less likely to check for IDs.) Yet, it is not clear whether this finding justifies a government-owned and operated monopoly. It does illustrate a need for stringent regulations in the liquor industry and harsher punishments for retailers who break the law.

Of course, the primarily justification for government involvement in the liquor industry is revenue. Alcohol sales provide a significant stream of revenue for the provincial government–the NLC projects a $154 million profit in 2015. Thus, once again, the fact that the NLC generates revenue for the province does not justify its existence, particularly when actual operating expenses in that year reached $53 million, which reflects larger-than-average management and administrative costs, including generous employee benefits. Further, Prince Edward Island’s experience with privately operated liquor stores actually recorded higher revenues for their provincial government than under a solely publicly-operated model. If the provincial government privatized the NLC, taxpayers would no longer fund these excessive operating costs while the provincial government could actually increase their total revenues from liquor sales.

Government-owned and operated businesses are generally less efficient and less innovative than private sector counterparts and that remains the case with the NLC. Moreover, an appeal to evidence suggests that the state does not need to involve itself directly in the sale of alcohol to “protect” individuals and their children. As a result, it remains unclear why the NLC should remain an extension of the provincial government and the province should consider privatizing it.

Devin Drover is an AIMS on Campus Student Fellow who is pursuing an undergraduate degree in economics at Memorial University. The views expressed are the opinion of the author and not necessarily that of the Atlantic Institute for Market Studies

Realizing the Benefits of Public-Private Venture

This past March, the Saint John Common Council voted to develop a new water treatment facility in partnership with the private sector, a policy route some observers argue would save the City of Saint John several million dollars. Likewise, Moncton entered into a similar agreement in 1999, which Public-Private Partnerships Canada (PPP Canada) believes will save the city $9 million in capital costs and $12 million in operating costs over the contract’s twenty-year term.

These policies align with the broader trend of delivering services to taxpayers in an efficient and less-costly manner, which, in the current economic climate of fiscal restraint, is necessary. Taxpayers, however, will rightfully continue to expect quality service, which presents a dilemma for government.

To sustain quality service, governments can look to collaborating with the private sector (in many cases, the private sector is better equipped to deliver services in a more efficient manner than its public sector counterpart, depending, of course, on the nature of the service).

Saint John, for example, is seeking to create a public-private partnership (P3), which is an arrangement whereby the government announces the delivery of a service and, rather than providing the service itself, contracts the private sector. Not to be confused with privatization–wherein the public sector gives control of a service wholesale to the private sector–P3s allow the government to maintain control over a service while capitalizing on the private sector’s efficiency.

The greatest benefit of collaborating with the private sector is the latter’s capacity to provide services in a more timely and cost-effective manner.

In a 2008 article published in the Journal of Canadian Public Administration, for example, Timothy Murphy provides strong arguments for why the private sector is better equipped to provide services than the public sector. One such arguments is a case study performed by the United Kingdom’s (UK) National Audit Office (NAO), which found that projects funded using the 3P model (formally titled ‘privately financed initiatives’ in the UK) were completed on-time and on-budget 76% and 78% of the time, respectively (compared to non-privately funded initiatives, which reported 30% and 27%, respectively).

Saint John, as well as other governments considering P3 initiatives, however, ought to keep in mind some lessons from Moncton’s 1999 public-private venture. Moncton, for instance, maintained ownership of its water supply and remains responsible for setting water rates and quality standards. Furthermore, the municipal government also transferred risk to the private sector by including strict maintenance and operating requirements that, if not meant, resulted in penalization. These factors allowed Moncton access to the private sector and its accolades, without entirely surrendering control over its service delivery.

Given these caveats, it is evident that P3s can be an important tool for governments throughout Canada that are seeking ways to improve services, while lowering costs and maximizing efficiency. Other governments, therefore, could benefit from pursuing private sector alternatives (certainly when the public sector alternative is untenable) as a policy option for delivering services to taxpayers in the most competent manner possible.

Randy Kaye is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

The Tawdry Tale of Canada Post-asaurus

It’s 2013, mail in Canada is still run by the government and it seems nothing can usher in transformation at Canada Post. The crown corporation which handles mail in this country has a remarkable ability to survive and resist every innovation reality throws at it. If the rest of the dinosaurs were as resilient and stubborn as Canadapostasaurus we mammals would be at the bottom of the food chain today, frustratingly trying to etch out a living in a world still ruled by reptiles. Meteors? Canadapostasaurus would eat those for breakfast, Climate change? Terrifying disease? Minor inconveniences which make the lengthy, sluggish stroll to the local watering hole a little lengthier. A makeover is desperately needed; the time has come for the Federal Government to privatize Canada Post.

From an economic point of view there’s really nothing too special about mail delivery, it’s a business that’s been around for a while. Yes it’s tedious and organizationally and logistically complex, but it doesn’t necessitate state control by default, there is no inherent market failure in mail delivery. Mail has largely been dominated by governments for a simple reason: they want their monopoly to grab our money, nothing outlandish about that at all. Unfortunately for the government, Canada Post incurred losses of $1.5 billion from 1982 to 1999. When the company does generate profits, they are usually very low in comparison to other public and private competitors. It’s true that these profits head directly for Federal government coffers, and yes, they pay for services which Canadians expect and depend on. The problem though, is that the money which Canada Post produces comes out of the pockets of ordinary Canadians through higher prices because of the absence of competition.

No competition also means that service quality and efficiency are abundantly lower than in a free market. If Canadapostasaurus competed with the other mail giants, the resulting absence of tax revenues would simply result in more money in the pockets of Canadians through lower prices and better service. Postal privatization and market competition has been introduced in a number of advanced, developed economies including Sweden, New Zealand, Germany, Japan, and Argentina. The German and Japanese cases, both full on privatizations, have been extremely successful, and Deutsche Post now competes with DHL and FedEx. The Conservative-Liberal Democratic coalition in Britain has announced plans to privatize the Royal Mail in 2013. Deregulation has almost always resulted in lower prices, higher quality service, and greater operational flexibility.

Apart from the economic basics and the need for heightened service efficiency, there are several central truths which should inspire privatization here in Canada. The first is that technology, email, texting and other digital mediums are resulting in lower and lower volumes of mail – the result will be falling revenues. Canada Post is also in desperate need of private capital to modernise and enter the 21st Century, a quick trip to a local post office should validate this claim. Canada Post has a $3.3 billion pension deficit, is it not fair for taxpayers to foot this bill given the fact that Canada Post employees already enjoy solid benefits and exceptional pay.

Finally, Canada Post is riddled with ineffective, lazy management and an aggressive, nasty, uncompromising and greedy union. Hard working front line staff and taxpayers suffer when the two clash, the inexcusable three week long 2011 labour dispute is a perfect example. A successfully privatized Canada Post would end further liabilities for the taxpayer, deliver lower costs, better service, and a stronger, freer economy overall.  The time has come for Canadians to emancipate themselves from the superstition that Canada Post should affectionately remain in public hands, it’s time to let this dinosaur roam free.

-Dino Alec