Exclusive: Government admits booze price hikes were a risk of privatization
Was the doomed plan to privatize liquor warehousing and distribution too risky for the B.C. government to continue?
The controversial policy was scuttled September 27 when the B.C. Government and Service Employees’ Union agreed to a new two-year contract. The premature cancellation was announced a day later as a one-liner in a government news release heralding the labour deal for 26,000 government workers.
Now a nine-point risk register devised by the Liquor Distribution Branch and Citizens’ Services ministry during the summer has been obtained by Business in Vancouver via Freedom of Information. It identifies several privatization-related risks, including the fear that negotiated objectives, benefits and expectations would not be achieved, that the private contractor would suffer operational failures and that liquor costs would rise. It even pondered a failure of the procurement process.
The risks were graded on a scale of 1 to 5 for probability – 5 was “almost certain” and 1 was “almost certain not to happen.” They were also ranked on a five-step scale for importance, ranging from insignificant (“can be dealt with internally at the branch level, no escalation of the issue required, no media attention, no or manageable stakeholder or client interest”) to catastrophic, (“major problem from which there is no recovery, significant damage to ministry credibility or integrity, complete loss of ability to deliver a critical program.”) The two five-point scales were multiplied to create a 25-point scale.
The privatization-related risks scored between 2 and 6 points on the 25-point scale. The most likely risks were listed as “medium” for failure of the new and legacy information management/information technology systems. A supply chain failure during the transition to a private operator was third on the list.
Fifth on the list was the risk that came true: failure of the negotiated request for proposal process.
That risk event was listed as “inability to provide sufficient assurance of savings and efficiencies to decision makers” and it anticipated nine factors as a potential cause:
- lack of accurate/fulsome costing and baseline information from which to evaluate proposals, including:
- final consumer costs unknown;
- costs of current system not fully understood;
- costs of transition unknown;
- cost of affected employees;
- unclear policy objectives;
- costs of ending current vendor agreements/arrangements;
- costs to rehouse LDB data centre; and
- costs to rehouse remaining assets and non-liquor product operations.
Though it was listed as a low risk, LDB had begun an internal costing review and was planning to “cancel procurement if savings not borne out in results.”
LDB also worried about the capacity to facilitate or steer a successful transition to a private provider and saw the transition from HST back to PST as a challenge, along with the potential for negotiations with a proponent to stall or slow.
The last risk on the list was the fear that the cost of beer, wine and spirits for consumers would rise.
"Unknown/uncalculable factors manifest in increased costs to consumer," said the report.
It cited the mark-up model, agent price increases and an increase in the cost of delivery as consequences. Existing mitigators included the third and fourth stages of the RFP process (which was never finished), ongoing service delivery monitoring and bi-annual financial reviews. Additional mitigators would have been: understanding of costs during negotiation, controlling costs to government liquor stores, negotiating margins and monitoring efficiency gains in the supply chain and adjusting markup model as required.
Meanwhile, additional documents released to BIV by the government show that the four shortlisted proponents were notified of the cancellation by phone calls from the government’s top procurement bureaucrat, Richard Poutney, that were followed up by simultaneous 10:51 a.m. emails on September 28. A news release was issued at 11:18 a.m. The email messages were sent to Scott Lyons of Exel, Chris Jarvis of Metro Supply Chain Group, Craig Frank of Kuehne + Nagel and Brian Chipman of ContainerWorld.
“The province appreciated your teams' (sic) participation in the DLP procurement,” wrote procurement director Pelle Agerup, who welcomed the bidders to ask for post mortems.
"Yes, we would very much appreciate a meeting to discuss and review any feedback,” Jarvis wrote on October 1.
A September 28 reply from Lyons to Agerup read: "Thanks. I really enjoyed working on this project with you. I thought you ran an excellent process.”