The Impact of Privatization of the Liquor Control Board of Ontario on Economics - Case Study Example

The impact of Privatization of the liquor control board of Ontario (LCBO) on economics Table of contents Introduction and background. 2. The impact of LCBO privatization on consumers in terms of prices, choice and service. 3. Revenue. 4. Social problem. 5. Conclusion. 1. The sale of alcoholic production is always a good source of income in Canada as well as in other countries. So, the control over alcoholic beverages sale provides also a control over prices, consuming choice and service. Is the privatization of alcohol beverages necessary How can it impact Ontario economics and other life spheres of the province "The Liquor Control Board of Ontario was established in 1927 by the Liquor Control Act to "control the sale, transportation and delivery" of alcoholic beverages in Ontario" (Jazairi, 1994). The main objectives of the LSBO are: "regulatory control of the sales of alcohol to protect society; balancing regulatory control with the need to raise revenue for the provincial and federal governments through profits and taxes on alcohol sale" (Jazairi, 1994). The LCBO also develops wine and bear production in Ontario, its price and marketing policies are very supportive. The LSBO has successfully achieved all these objectives. "The LCBO"is one of the most profitable public agencies in Canada. It has delivered billions in profits and sales taxes to the taxpayers of Ontario over the past decade..." (Retail alcohol monopolies, 1993). So there is a question: will it be more efficient to divide the alcohol beverages market among smaller private firms which are not easy to be controlled rather than to provide reasonable policy in this market This paper will discuss possible impacts of privatization of the liquor control board of Ontario (LCBO) on economics and social sphere of Ontario. Privatization of alcohol beverages industry is a serious step touching all main spheres of Ontario population, so it can result many (basically negative) consequences for the province. 2. Economical analysis and experience can prove prices increasing under privatization. There are some reasons for it. The LCBO is a monopoly in the market which has its efficient net of stores, so it can "bargain for lower prices and greater special discounts from suppliers and carriers" (The Legislative Assembly, 2005). It also is able to provide efficient costs: "The liquor control boards are also likely to have lower operating costs. The privately-owned outlets are fragmented and multiply rapidly, while the control stores are open for fewer hours, and are integrated and centralized in their operations and distribution network" (The Legislative Assembly, 2005). In addition, privately-owned firms have higher capital costs than the LCBO that also leads to the price increasing. Experience analysis of other areas and countries follows the same tendency. In Alberta "the price of beer rose from 5 to 6%, the price of whisky from 6 to 8%, and the price of certain liqueurs rose up to 23% compared to ALCB prices" (Bernard M. and Lauzon L.-P., 1995). One more example: "Iowa, privatized the wine trade in 1985, and the sale of spirits in 1987. After a short period of stability, sale prices gradually rose by 7% within a year, mainly to ensure a margin of profit for new private firms." (Bernard M. and Lauzon L.-P., 1995). Another impact of the LCBO privatization is a smaller product selection. At first it seems strange, but a corporation has more possibilities for providing consumer choice. It "consolidates orders and makes it possible to obtain a greater number of brands; a small retailer cannot afford to order items which are not best sellers" (Bernard M. and Lauzon L.-P., 1995). An example of Alberta illustrates the tendency: "before privatization, certain ALCB stores displayed over 2000 products; after privatization, the choice offered to consumers was reduced to less than 500 products. Inventories were reduced and discontinued items became a frequent occurrence" (Bernard M. and Lauzon L.-P., 1995). Customer service is also affected by the privatization: "alcoholic products will still be required to meet the standards of the federal Food and Drug Act, but regular quality control testing, and quality screening by product experts and consultants will disappear" (Jazairi, 1994). But it cannot be done by small firms: "Small, privately-owned retail stores have neither the means nor the expertise to provide this type of service" (Jazairi, 1994). It can in turn affect prices: "The convenience of one being able to buy liquor in corner stores open for business for longer hours than LCBO stores normally are, will come at a heavy price in terms of the range of products available, guaranteed quality, and alcohol abuse in society" (Jazairi, 1994). 3. The LCBO is very successful in alcohol market, so the whole amount of profits and taxes generated by the LCBO is also rather high. "The LCBO is a highly profitable business owned by the government of Ontario; it is also a significant component of the economy of the province" (Jazairi, 1994). The LCBO as a society-controlled corporation provides different kinds of benefits for the population of Ontario, and "it pays large sums of taxes to the provincial and federal governments. It employs about 5000 people, and its contribution to the gross domestic product of the province is about two billion dollars a year" (Jazairi, 1994). Experience of other countries shows that alcohol monopolies controlled by government (like the LCBO) can provide larger amount of taxes and profits than those owned by small private firms: "Comparisons in the USA between monopoly states and those with a system of licensed private retailers have shown that monopolies generate more state revenue than license systems" (Retail alcohol monopolies, 1993). State revenue rate impacts the salary level of employees: "This finding is consistent despite the fact that monopolies tend to pay their employees higher wages and have slightly lower retail prices" (Retail alcohol monopolies, 1993). The reasons are: "the increased overhead and distribution costs of a system with many private outlets and the need to allow a profit margin for licensed retailers" (Retail alcohol monopolies, 1993). The LCBO as a corporation controlled by the government has more resources for paying great sums of taxes as their system of production purchasing is more effective than that of smaller private firms. "Both levels of government still have the same degree of need for public funds today, and it is very clear that exchanging reliable and relatively foreseeable revenues for the uncertainty associated with privatization would be harmful to the financial health of the province" (Privatization Report, 1996). There is an opinion that the LCBO privatization will help to reduce provincial debts. Analysis of the LCBO economical activity for some recent years doesn't prove it. The LCBO was and still is one of the main taxpayer in Ontario: "Without the profits and taxes paid by the LCBO into the treasury, both the deficit and the debt are likely to worsen" (Jazairi, 1994). Small firm turnovers cannot achieve those of government-controlled monopolies: "Beverage alcohol sold in drug stores and grocery stores under privatization will certainly mean, among other things, that the provincial treasury would no longer receive the more than $600 million from the LCBO in profits only" (Jazairi, 1994).So, privatization can result tax losses: "the treasury will also lose much of the personal income tax paid by the LCBO employees - the small business corporate tax paid by stores selling alcohol under privatization is not likely to compensate the province for even a fraction of those losses" (Jazairi, 1994). So it is obvious that there is absolutely no need for the LCBO privatization as a reason for paying debts of the province and its deficit covering. If the privatization occurs, private-owned firms will try to avoid paying appropriate taxes to the province treasury using different legal or illegal schemes that in turn leads to the budget deficit of the province. First of all it will affect social, educational and other important development programmes. The beverage alcohol market privatization will also result falling sales and the illegal alcohol market increase in Ontario. However, the falling sales tendency also partially takes place now: "the value of sales of Canadian spirits fell from $941 million in 1989 to $756 million in 1993, LCBO total sales also fell by about 11% from $1.99 billion in 1990 to $1.78 billion in 1993" (Jazairi, 1994). It is a result of global economical tendencies: "general trend of falling alcohol consumption, especially spirits; general trend of falling sales of alcoholic beverages in Canada and other western countries; the climate of economic recession; the resentment of heavy taxes on alcoholic beverages; legal competition from breweries, wineries, and cross-border shopping" (Jazairi, 1994). Illegal production and alcohol beverages smuggling can also lead to falling sales and the illegal alcohol market increase. Illegal spirits smuggling and wine manufacturing is actually growing in Ontario: "illegal alcohol seizures from licensees have increased by 3000% during a period of one year recently, hardly a week passes by without thousands of cases of smuggled liquor being confiscated in Ontario" (Jazairi, 1994). It results the LCBO losses: "The LCBO estimates its losses due to the black market during the fiscal year 1993-94 at just over $806 million, or about 15% of the total alcohol market in the province" (Jazairi, 1994). Smuggling and illegal manufacturing also result budget losses: "Smuggling accounts for about $496 million (19.081 million litres at a unit price of $26 per litre). Illegal manufacturing accounts for about $321 million, or almost 6% of the total alcohol market (about 40 million litres at $8 a litre)" (Jazairi, 1994). Illegal spirit and wine production certainly affects health of people who buys poor-quality alcohol beverages. It also leads to the taxes paying decreasing to the province treasury. But as it was shown above, the problem cannot be solved by alcohol beverages privatization. Only the government-owned corporations (like the LCBO) are able to influent the global market development, its problems and trends. 4. The LCBO tries to control alcohol abuse by different measures. "The economic and social costs of alcohol abuse in Canada have been estimated, at $5.7 billion in 1981 ($1.7 billion in Ontario)" (Jazairi, 1994). The LCBO also takes part in different governmental programmes on alcohol abuse increasing among the population of Ontario. "Measures aiming at educating and protecting the public include co-operating with groups such as Mothers Against Drunk Driving through anti-drinking and driving messages and education material" (Jazairi, 1994). A lot of people are affected by alcohol intoxication: "The LCBO has also launched its own Challenge and Refusal programme under which figures available by the end of March 1993 indicate that more than 210,000 persons were challenged when they wanted to purchase alcohol while appearing intoxicated or under the legal drinking age" (Jazairi, 1994). Private small-size firms don't provide any measures against alcohol abuse. So, the LCBO privatization will result decreasing of social responsibility of private-owned companies - they can sale alcohol production at lower prices for sales increasing and don't care of society health. The LCBO privatization can also affect the wine industry of Ontario. The people working in wine production don't welcome the privatization: "The grape growers and wine producers of Niagara and southwestern Ontario need the LCBO more than ever to allow fair promotion of our product in their stores across Ontario, particularly when our wine faces stiff and often unfair competition from offshore producers" (The Legislative Assembly, 2005). Ontario wine sales value is rather high: "The total sales value of wine from Ontario is $257 million. For every $10 million in wine sales, there's $14.8 million in economic activity in Ontario, according to a Deloitte and Touche study. Total wine industry related employment is 4,000". (The Legislative Assembly, 2005). High quality of wine attracts visitors to the regions of wine manufacturing: "the value of grape purchases in 1996, $20 million; acreage for grapes in Ontario, 18,000; 200,000 visitors attracted to the Niagara wine region during special summer events" (The Legislative Assembly, 2005). The government of Ontario invented a lot of money in grape and wine industry, so there is a potential danger of its privatization. Unemployment is another social problem linked to the possible privatization and its consequences. State-controlled alcohol industry corporations can employ more people than private small firms. The LCBO will result unemployment increase in Ontario, and it will lead to the further negative changes of Ontario employment market: "In West Virginia, after privatization in 1991, only 10 to 25% of State employees found jobs in private stores. In Alberta, 1500 employees were dismissed. The experience acquired by these employees is therefore lost - this will result in considerable public costs" (Bernard M. and Lauzon L.-P., 1995). Of course, some people who cannot find a legal job in alcohol industry can turn to the underground economy. This illegal sector of the alcohol market is recently growing in Ontario. It affects the whole society: "increased health care costs, production losses, crime, fires, traffic accidents, and welfare costs" (Jazairi, 1994). Higher taxes policy often turns consumers from the LCBO to illegal production. However, the alcohol industry privatization cannot solve the problem of underground economy, it can just aggravate it: "Under privatization alcohol smuggling is likely to intensify, and social and law enforcement problems related to the black market economy in beverage alcohol will increase" (Jazairi, 1994). Privatization can lead to smuggling and black market blooming: "It is easier for smugglers to sell their products to the owners of private stores than directly to individual consumers; and it is more profitable for owners of private stores to join the underground economy than to buy their merchandise legally" (Jazairi, 1994). Illegal alcohol production increases health affection for people who uses poor-quality alcohol. In case of the LCBO privatization, as was shown above, private firms can decrease prices to achieve higher level of sales. It certainly will result alcohol abuse and hence health impact on different parts of the population. Moreover, "In a private system, the private alcohol retailers would not permit government to closely regulate prices. Privatization would create a new group of persons with a strong vested interest in minimizing government taxes on alcohol and keeping prices low" (Privatization Report, 1996). Government must keep control on the alcohol monopoly as only the LCBO controlled by the government is able to take under control alcohol market processes: "In the past several years, Ontarians have witnessed the significant expansion of the agency store system. These changes can be predicted to increase alcohol problems in Ontario, and frankly were done in spite of the objections of the public health and addictions communities." (The Potential Impact, 2004) 5. As was shown above, the privatization of the LCBO is "counterproductive". It will increase alcohol production prices; the consumer choice of alcohol beverages will decrease; the level of consumer services will not as high as that provided by the LCBO controlled by the government; the revenue level through privatization will also be decreased. The LCBO privatization will cause many social problems, too. The economic and social costs of alcohol abuse will be increased; privatization will cause unemployment rising in Ontario; it also will support the underground economy blossoming. And the main thing is high health risks caused by negative consequences of the LCBO privatization. References About the LCBO. (http://www.lcbo.com/aboutlcbo/index.shtml) Bernard M. and Lauzon L.-P. (1995).Perspectives on Privatization/Alcohol De-Regulation (http://www.apolnet.org/resources/rp_pri4.html). CTF says McGuinty must cut. (2002). New Democratic Party of Ontario, Attention News Editors/Political Reporters. (http://www.newswire.ca/en/releases/archive/September2003/11/c9866.html) eG Forums - Liquor Control Board modernizing. (http://forums.egullet.org/index.phpshowtopic=19566) eG Forums - State Liquor Stores and Liquor Control Boards. (http://forums.egullet.org/index.phpshowtopic=22466) George Heyman meets with Minister, again. (2003), BCGEU (www.nupge.ca/privatization/privatization.htm) Jazairi Nuri T. (1994). The Impact of Privatizing the Liquor Control Board of Ontario. Department of Economics, York University, Toronto (www.yorku.ca/nuri/lcbo.htm). The Legislative Assembly of Ontario. (2005) (http://www.ontla.on.ca/hansard/house_debates/36_parl/Session1/L181.htm) Mark Milke: Mark Milke Reports. (2003) (http://www.howestreet.com/story.phpArticleId=89) Mark Milke: Mark Milke Reports. (2005) (http://www.5starsnews.com/grocery-stores/159683.htm) Ontario government still wants to privatize the LCBO. (2004) (www.nupge.ca/privatization/privatization.htm The Potential Impact of Privatization of the Liquor Control Board of Ontario (LCBO) on Alcohol Promotion and Advertising. (2004) (http://www.web.net/apolnet/apolnet-l/doc00007.doc) Privatization Report. (1996). Toronto Public Health Department. (http://www.apolnet.org/resources/pp_pri4.html) Retail alcohol monopolies: preserving the public interest. (1993) (http://sano.camh.net/geninfo/monopoen.htm) Talk: Liquor Control Board of Ontario, from Wikipedia, the free encyclopedia, (http://en.wikipedia.org/wiki/Talk:Liquor_Control_Board_of_Ontario) What Is Ontario's Anti-Social Liberal Bloc Up To (September 9, 2004 - No. 136). (www.cpcml.ca/tmld/D34136.htm) Why did Mike Harris take a pass on his biggest privatization candidate -Ontario Hydro, the country's largest electrical utility (1999, June1). (http://www.energyprobe.org/EnergyProbe/index.cfmDSP=content&ContentID=1236) Zeiger Hans A. (2002). Liquor Control Board: A case for the state giving up the booze business. Evergreen Freedom Foundation, Volume 12, Number 2 (www.effwa.org). Read More