March 18, 2013

Maine Voices: With better liquor deal, state could capitalize on highly valuable asset

Leasing the contract would allow Maine to keep the revenue for itself, not outside interests.

By RICHARD NASS

ACTON - As the state begins a new process for rebidding the liquor contract that was first awarded 10 years ago, there are lessons to be learned from our experience that can be enormously valuable to the state of Maine.

First, let me start by saying that the liquor deal of 2004 -- in which the state of Maine sold the Maine Beverage Co. an exclusive 10-year license to distribute spirits in the state for $125 million -- has been roundly criticized in the press and by others for a host of reasons, including the fact that it left upward of $200 million in revenue to the purchaser and not the state.

But as with any new deal, hindsight is 20/20, so it is important that we focus on what mistakes were made in the initial process so that the state can learn from those lessons moving forward.

In hindsight, the deal is easy to criticize: Since 2004, the Maine Beverage Co. has paid itself dividends and management fees in excess of $200 million, while parsing out another $64 million to the state.

The deal was crafted so that the Maine Beverage Co. would receive the majority of the entity's profit, while the state would share in profits only above a certain threshold. Needless to say, it was a heck of a deal for the Maine Beverage Co.

As an investor, I tip my cap to them. As a former legislator, I can understand (but yet not agree with) the need to plug budget shortfalls with easy guaranteed money. As a taxpayer, I know that paying off debt with major cash infusions does nothing to fix the structural debt problem this state repeatedly faces.

This year, there are two competing proposals on how the contract for 2014 should be structured. Without getting into the merits of one over the other, we should agree that there are positive components in each proposal that should be adopted.

The larger question, though, is whether the state should sell off the contract for a large up-front sum, as it did in 2004 -- or lease the contract to vendors for a yearly sum, keeping the revenue for the state and not outside interests.

A quick financial overview of why selling off the contract by requiring a large up-front payment made bad economic sense for Maine in the first contract.

When you receive money from private equity investors, you have to understand this -- the investors demand a very high rate of return. While a bank might loan you money at 5 percent, and the state might issue a revenue bond at 4 percent, investors such as the Maine Beverage Co. are looking for returns in excess of 30 percent annually.

This means that when the state takes money "up front" from private equity investors, it's like the state is borrowing on a credit card, but even worse. And it begs the simple question: Why in the world would you do this, if you could issue a revenue bond at 4 percent?

Yes, the state gets $200 million up front to plug the budget hole -- but by giving away $200 million in revenue that the company realized rather than the state.

While there are those more qualified than I to make assertions on some of the more technical and operational aspects of the two proposals, I think my role as a former legislator who was part of the negotiations in 2004 offers a unique and unvarnished perspective on why the proposal to have the new contract be rebid on the exact same terms as 2004 is a bad deal for the state.

While the economics of it are simple, the politics are not. In trying economic times, $200 million to plug budget gaps is real. But let's not mistake short-term gain for economic gain.

If the state really wants to realize the full capacity of this contract, and stimulate economic growth in the process, then leasing the contract is by far the better deal for the state and the taxpayers.

Albert Einstein once suggested that the definition of insanity was "doing the same thing over and over again and expecting different results." Maine legislators have the opportunity to capitalize on the significant value of the asset we (as taxpayers) own, and follow the plan that allows for the contract to be leased. Let's invite open bidding and let the best bidder (and the state and its taxpayers) win.

Richard Nass is a Republican former state senator and representative from Acton.

 

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