WA State Gov. Gregoire Signs ABC Wholesale Privatization Bill

The ongoing policy saga over the potential privatization of Washington State’s alcoholic beverage control (ABC) monopoly took another twist today, as Gov. Chris Gregoire signed Senate Bill 5942 into law, authorizing the Washington State Liquor Control Board (WSLCB) to solicit private bids to operate the Board’s existing wholesale ABC monopoly. Per the Seattle Post-Intelligencer:

Gov. Chris Gregoire on Wednesday signed a bill that allows the state to seek and examine private sector bids to take over its liquor distribution system.

Costco, which is pushing it’s own plan to completely privatize the distribution and sales of spirits, had been aggressively lobbying Gregoire to veto all or part of Senate Bill 5942. Under S.B. 5942, the state would still maintain control of liquor sales but would sell a distribution lease agreement if the Liquor Control Board decide to accept a bid.

“The bill commits Washington state to nothing,” said Gregoire, adding she received a letter from the four legislative caucuses urging her to sign the bill as is. […]

The law Gregoire signed includes an emergency clause that Costco and other retail interests objected to. It lets the state immediately begin the 120-day process of sending out and analyzing bids. Costco worries that process could affect its plans to offer a citizen initiative in the fall. Last November, voters rejected two initiatives that would’ve removed state control of liquor. One, Initiative 1100, was the Costco measure. The retail giant contributed more than $3 million in an unsuccessful effort to pass it. Critics said Costco and others would getting a valuable business and the state was essentially getting nothing in return. […]

It’s interesting to see the political shifts on this issue in the months since the I-1100 initiative failed to pass last fall. At that point, ABC privatization was demonized by the political left, but then they subsequently found a version of it that they liked.

While the political climate for ABC privatization certainly appears to be improving in Washington State on the surface, the policy particulars at play now leave a lot to be desired. The new law appears to have been designed to forestall a more aggressive privatization proposal already in the works. Mainly, Costco, the Washington Restaurant Association, and the Northwest Grocery Association have recently filed a new ABC wholesale/retail privatization initiative (Initiative 1183) for the fall ballot, which a quick push towards wholesale monopoly privatization now would completely undermine. The Seattle Times rightfully complains on this point this afternoon, suggesting that voters should have the chance to decide on a superior, full-blown privatization option this fall before locking the state into a long-term contract that would “make a true competitive system impossible.”

The newly enacted bill would essentially preserve the existing monopoly in ABC wholesale operations—the same one there today, just operated under private management—as opposed to allowing for true market competition among wholesalers, a key feature of the various Costco-supported ballot measures. In fact, one of the central features of last fall’s I-1100 was that it allowed for, but did not mandate, the use of wholesalers. The implicit thinking was, if someone can pick up and distribute spirits on their own (as a Costco or other large retailer certainly could), then why force them to use a wholesale middleman at all? While there will always be a need for a vibrant wholesaler marketplace to serve the entire range of outlets, the mandatory use of wholesalers—a leftover vestige of the early post-Prohibition days—makes little sense in the 21st century economy.

The second, and very obvious, drawback of the newly enacted bill is that it leaves the state’s antiquated ABC retail monopoly in place. While off-premise outlets (restaurants, bars, etc.) might see some benefits from a private wholesale regime, the wholesale system overall is practically invisible to Washington State taxpayers and consumers. They interface with the ABC system via retail outlets, which are largely state-run in the Evergreen State. While there are some contracted private store operators in the system today, these are essentially outsourced stores designed to offer basically the same services and facilities that the state-run stores offer themselves, just at a lower overall cost to WSLCB. That’s a far cry from a true competitive retail market with a wider array of retail outlets (large retailers, grocers, specialty stores, etc.), robust price competition and more convenience overall to consumers.

Last, if the new law’s opponents are correct, and it sets into motion a mad dash towards procurement to render moot a more aggressive wholesale and retail privatization via ballot initiative, then I could easily see one of two equally disappointing scenarios. I could easily see WSLCB botching this procurement, asking for the moon and complaining when no one shows up to bid, setting the stage to say, “see, this privatization thing won’t work” whenever the issue comes up again in the future. Alternatively, I could also see WSLCB taking the concept somewhat seriously but rushing it, signing a suboptimal deal while leaving money on the table because they didn’t have time to conduct adequate due diligence and a proper market valuation of their assets.

For a good example of a solid ABC privatization/valuation report, see this PFM analysis prepared on Virginia’s retail ABC system late last year, probably the best and most substantive report I’ve seen of its kind. Pennsylvania Gov. Tom Corbett has hired the same firm to prepare a similar report on the PLCB’s alcohol monopoly. If Washington State does ultimately move forward with the current policy, flawed as it is, I would at least hope that policymakers and taxpayers would demand a similar type of market valuation before proceeding to ensure that there’s a solid target/benchmark when it’s time to evaluate what the private sector can offer.

That said, the best possible outcome would be total inaction on the current law, followed by the total dismantling of an unnecessary Soviet-style monopoly in both wholesale and retail operations. Those are properly the business of business, not a core function of government, as I’ve previously written here and here. Go to California, Arizona, Texas, Colorado and over 25 other states that never bothered to start state-run alcohol monopolies in the first place, and ask people if they think that government should run their liquor stores, then you’d get a lot of perplexed, blank stares for asking such a ludicrous question.

If you’re in Washington State, Virginia, Pennsylvania or one of the other 15 so-called “control” states with government in the liquor business, a sensible question to ask would be, “if we didn’t have this system today, would we set it up this way from scratch?” The most honest and sensible answer would be “of course not,” which makes the folly of preserving those systems even more obvious.

For more of the latest on ABC privatization, see Reason Foundation’s Annual Privatization Report 2010.