Privatizing Management of PA Wine & Spirits Distribution Could Reduce State Revenues & Add to Social Costs

KRC Urges Caution
Date of Press Release: 
September 17, 2015

Contact: Ellen Lyon, 717-255-7156
 lyon@pennbpc.org 

                                                                          

(HARRISBURG, Pa.) – Sept. 17, 2015 ­-- Keystone Research Center Executive Director Dr. Stephen Herzenberg released today the following statement sounding a caution about potential privatization of the management of wholesale and retail distribution of wine and spirits in Pennsylvania:

“News report yesterday indicated that the Wolf Administration has proposed leasing out the management of Pennsylvania’s retail and wholesale liquor system through a competitively bid process. Keystone Research Center advises legislators and the Wolf Administration to go slow on a proposed lease. This could end up being a money loser as well as increasing health and social costs from excess alcohol consumption.

The proposed lease raises several red flags which deserve careful consideration before the state moves forward.

First, the state’s proposed wine and spirits lease is similar to Gov. Corbett’s proposed lease of the management of the state lottery. As we noted at the time, that deal appeared to be structured in a way that was favorable to the contractor. In particular, it appeared that the contractor might capture a large portion of expected lottery revenue growth associated with expanding lottery products (e.g., to include keno). According to news reports, the state’s proposed privatization of the management of wine and spirits distribution would also be accompanied by changes that increase revenues: e.g., giving the manager free rein over the number and location of stores, expanding hours to seven days a week from 8 a.m. to 11 p.m., and flexibility in pricing. It could also lead to having wine and beer sold in supermarkets. All of these changes will increase revenues. How can we be sure that the private contractor does not capture an undue portion of these higher revenues? Wouldn’t having the publicly managed wine and spirits system make these changes raise more revenue for the state than privatizing management of that system?

Second, research by Roland Zullo and co-authors shows that states with the most control over wine and spirits distribution raise the most revenue from the industry. This research does indicate that the state might raise additional revenue by adding some privately managed ‘agency stores,’ particularly in rural areas where customers now travel long distances to a state store. A limited number of agency stores, however, is a far cry from a long-term lease of the entire system to a private contractor. On its face, and based on Zullo’s research, such a lease opens up the possibility that the private contractor, rather than state coffers, would capture a significant portion of revenues and profit from the industry.

Third, the pre-eminent U.S. task force of public health professionals and researchers recommended in 2011 against further privatization of retail alcohol distribution in U.S. states. This recommendation was based on an exhaustive review of research literature and, especially, on “high-quality” studies which examined actual outcomes of natural experiments in which states, provinces or European countries privatized retail alcohol distribution. The conclusion based on the literature review: privatizing retail alcohol distribution increases excessive consumption of alcohol and its associated health and other social problems (e.g., more traffic fatalities). While privatizing the management of the state-owned wine and spirits system may not technically qualify as full privatization, it could end up mimicking a full privatization in the degree to which it increases access to alcohol.

In sum, an evidence-based policy approach indicates that there is a real danger that privatization of the management of wine and spirits distribution could cost the state revenue and could increase social costs associated with excessive consumption of alcohol.

Given these dangers, lawmakers and the Wolf Administration should go slow on privatizing management of wine and spirits distribution in Pennsylvania. Evaluation of different options for the distribution of wine and spirits should be a transparent process subject to public scrutiny. This process should also ensure that modernization of wine and spirits distribution within the publicly managed and owned system is evaluated fairly alongside privatization proposals. If modernization within the public system is the best way to achieve  higher state revenues, low social costs and improvements for customers, then that is the option the state should adopt.”

 

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