Sunday, October 15, 2017

Karl du Fresne: Licensing trusts - a great social experiment that mostly failed

It probably comes as a surprise to many people to learn there are still places in New Zealand where it’s not possible to buy wine or beer in a supermarket. Invercargill is one such place. West Auckland is another.

These are not “dry” areas, where local voters have chosen to remain liquor-free. New Zealand lost the last of those (two in Auckland, one in Wellington) in 1999.

They are, however, a lingering hangover – although that may not be the most appropriate word – from an era when anti-liquor fervour caused legislators to seek a balance between total prohibition and an open-slather alcohol regime where the much-vilified booze barons, the rich men who controlled the liquor trade, would hold sway.

The solution, as prohibitionist sentiment gradually abated and areas that had previously been dry chose to go “wet”, was for voters to be given a choice: they could either allow ownership of liquor outlets by private enterprise, or they could opt for community control.

Under the community control model, voters would elect licensing trusts to run hotels, taverns and bottle stores. Each trust would enjoy a monopoly on liquor sales within its area and profits would be ploughed back into the community.

In a country that remained deeply suspicious of the privately owned liquor trade, the trust option seemed an ideal “third way”. People would have access to alcohol, but its sale would be controlled by elected local representatives who would ensure it was managed responsibly for the community’s benefit.

The first licensing trust was established in Invercargill in 1944, after 38 years as a “dry” city. The Invercargill trust still enjoys a monopoly on liquor sales in that city (other than in clubs and licensed restaurants) because apparently that’s what the community wants. 

Three other trusts – Mataura (also in Southland) and Portage and Waitakere (both in West Auckland) – have retained similar monopoly rights, which explains why mystified visitors to those areas can’t find wine or beer in local supermarkets.

But in all other areas where licensing trusts have survived, voters – often frustrated by lack of choice or disheartened by the trusts’ poor performance – have taken advantage of “competition polls” to strip them of their monopolies. Hence in places like Masterton, trusts are still active in the local liquor trade but must now compete with privately owned bars and liquor outlets, including supermarkets.

A government working party headed by Sir George Laking in the late 1980s recommended that trust monopoly powers, which were out of step with the general trend toward deregulation, should be abolished altogether. But parliament, which was often cautious to the point of timidity on liquor issues, decided that the public should have a choice – hence the competition polls, which gave voters a chance to register their dissatisfaction with trusts that failed to measure up.

The patchy history of the trusts is told in the recently published book A Great Social Experiment, by Bernard Teahan. It’s a story of social and political idealism that often collided disastrously with commercial realities.

Teahan sets the story against a backdrop of wowserism, the deeply ingrained suspicion of alcohol and its purveyors which brought New Zealand to the brink of country-wide prohibition in 1919.

Licensing trusts grew out of dissatisfaction with widespread drunkenness, primitive drinking conditions and distrust of powerful brewing interests. Rex Mason, the reformist Minister of Justice in the Labour government of the 1930s and 40s, threw his weight behind the idea and so did prime minister Peter Fraser, who saw trusts as a way of eliminating profit as the sole motivator of liquor sales. Profit was explicitly not intended to be the trusts’ primary goal.

Masterton followed Invercargill’s lead in 1947 and other trusts were established in quick succession. Between 1947 and 1975, voters in 57 areas backed the creation of trusts, although only 30 became operational. Nineteen are still functioning today.

Teahan records that brewery companies, which effectively controlled the hotel industry, opposed the trust concept every step of the way. The National Party showed little enthusiasm either, although up-and-coming National politician Jack Marshall, a devout Presbyterian who would eventually lead the party, supported trusts and thought they might force brewers to lift their game.

Local councils were often instrumental in getting trusts established. A key figure behind Auckland’s ill-fated Mt Albert trust – which never became operational and was eventually swallowed by the neighbouring Portage trust – was Frank Ryan, long-serving mayor of Mt Albert (and the father of actress and environmental activist Lucy Lawless).

Ironically, as trusts struggled to get established because of inadequate capital and the crippling cost of loan finance, many ended up depending on supportive arrangements with the big two brewery companies – in effect, sleeping with the enemy.

The last functioning trust, Flaxmere (Hastings), was established in 1975. By then the flaws in the trust model were becoming obvious. Even with a monopoly, many were unable to stay afloat.

The enthusiasm and good intentions of the elected boards that controlled trusts were all too rarely matched by the necessary business skills or funding.  Many trusts tested the patience of their communities by taking years to open their first outlets.

One, the Stokes Valley Licensing Trust in Lower Hutt, failed spectacularly after only a year because the Licensing Control Commission required it to provide hotel accommodation where there was no demand for it.

Others over-reached themselves of their own volition, incurring massive debt to build grandiose premises on the basis of wildly over-optimistic business projections. One example was the Orewa trust, north of Auckland, which destroyed a healthy balance sheet by investing heavily in a substantial restaurant where there was no market to support it.

In their desperation to prove themselves, a few trusts resorted to dodgy practices (such as borrowing money without approval) which attracted the attention of the Auditor-General.  Management was often sloppy: Wellington’s Johnsonville trust somehow lost $200,000 worth of stock for which no one was held accountable.

Poor service and sub-standard facilities are other factors cited by Teahan as harmful to the image of the trust movement. Civilised drinking conditions were central to the trust philosophy, yet Teahan describes the Otara trust’s pub in South Auckland as a “dark and dingy barn”, designed to maximise consumption.

Otara also had problems with violence and lawlessness, as did some other trusts. The Porirua trust’s first tavern was known locally as the Flying Jug because of the frequency with which brawls erupted. This was not what the architects of the trust movement had envisaged.

Even Teahan, a true believer in the trust model (he spent most of his career in trust management), acknowledges that trustees and their managers were often not up to the job. Communities grew tired of hearing promises of good things to come, only to be let down when trust-owned outlets closed or another dismal set of financial results was announced - always with a fresh batch of excuses.

By the 1980s, the great social experiment was in peril. A few of the longer-established trusts, having had decades in which to build up a solid base, were strongly embedded in their communities and trading profitably. But changing social expectations and a more liberal and sophisticated drinking environment placed demands on the newer trusts that they were hopelessly ill-equipped to meet.

Teahan says the trust model fell out of favour because “the market philosophy became the all-powerful belief”. But in fact most of the “demised” trusts, to use his own euphemistic terminology for those that failed, were undone by their inability to live up to their idealistic vision.  

Addressing a licensing trusts conference in 1990, former prime minister David Lange described trusts as a bizarre experiment and said they were an endangered species.

He was almost right. Four trusts in the Wellington area subsequently collapsed after years of governance so shambolic and muddle-headed that it became almost painful to watch. Even Teahan is scathing in his criticism of trusts that imploded because of egos, personal whims and political agendas.

The 1990s was also the decade in which competition polls – usually initiated by supermarket chains chafing at their inability to sell wine and beer – began turning the tide against trust monopolies.

Where areas voted to renounce their “dry” status but chose to reject the trust option, as in Auckland’s Grey Lynn and Wellington’s Tawa, Teahan acknowledges that the poor performance of trusts in neighbouring areas was a factor.

Yet the better-managed trusts survive, and a few weaker ones have been saved by being brought under the control of successful operators.

At least one has moved far beyond its original remit. What was originally the Masterton trust (which Teahan managed) is now Trust House, which operates licensed premises on behalf of several trusts and also has substantial investments in social housing, aged care and even supermarkets.

The Invercargill trust, the mother ship, is still flying and seems to enjoy solid support from its community. According to Teahan, the southern city is one place where supermarkets haven’t bothered to push for a competition poll because they don’t think they could win.

Teahan points out that successful trusts return millions of dollars to their communities: nearly $27 million nationwide in 2014.

This is the argument that trusts always fall back on, even when their performance has been dire. It’s what they emphasise whenever their monopolies have been under attack from supermarkets and other private interests.

But much of the money invested in community assets comes from gaming profits which, under law, private hotel and bar owners with gaming facilities must also return to the community.

Teahan retains an almost evangelistic faith in the trust concept despite its many failures. The irony is that his book, which is obviously intended to promote the virtues of trusts, also serves as a crushing indictment of the concept because it can’t avoid acknowledging the many ways in which it was flawed.

Karl du Fresne blogs at A shorter version of this article was first published in the Dominion Post.

No comments: