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The great booze boondoggle
Forget calling it bad policy — the privatization of Maine’s liquor distribution shows the State can’t even play by its own rules
BY ALEX IRVINE


Anyone with the energy to delve into the details of how screwed up the decision-making process in Augusta can get need look no further than the flap over privatizing liquor distribution.

Acting to close a $125-million-dollar budget shortfall, the state of Maine announced last year that it would lease a monopoly on distibuting liquor in Maine to the best bidder.

In a nutshell, here’s what happened: The state issued a request for proposals (an RFP). An out-of-state distributing company (rather, a newly created Maine subsidiary of Norwood, Massachusetts-based Martignetti Companies) won the bid, ticking off the local losers (Maine Liquors and MaineCentric), who claimed the money may be fine but the service to outlets won’t be as good as theirs. There was much suing and appealing, and the state was in jeopardy of not getting the $125 million they needed by June 30, the deadline for submitting the next biennial budget.

Then on May 10, things came up rosy. Martingetti struck a deal with Maine Liquors and MaineCentric; everybody dropped their lawsuits and the state got their money.

Those with a philosophical turn of mind might be inclined to dismiss the entire episode by recalling the view of that capitalist’s capitalist, Adam Smith, who would hold that this was merely the invisible hand of the marketplace distributing goods and services.

The problem is, the people doing the deciding aren’t quite invisible; rather, they are elected officials and political appointees and they appear to have distinguished themselves by their inability to follow even their own rules.

Thus, it was no surprise that the two losing bidders, Maine Liquors and MaineCentric, initially appealed to Bureau of General Services Director Elaine Clark on the grounds that the state had failed either to write complete guidelines for the process or to follow those guidelines it did write. They had a point. Representatives of the state admitted at the appeals hearing that they did in fact fail to follow the guidelines established by the legislature for the RFP and bid process, but despite this they argued that the award should stand.

As a result of their failure to undertake a rigorous selection process, though, the state found itself embroiled in costly legal proceedings that until last Monday threatened to delay the liquor-franchise income and leave the $125-million gap open.

This isn’t a case of arcane legal minutiae escaping the notice of state officials. This is simple stuff. The RFP guidelines stated that a member of the Veterans and Legal Affairs committee should be in attendance during RFP review committee deliberations and proposal scoring; that didn’t happen. The guidelines stated that scoring of proposals should focus on the quality of service that each bidder would provide to Maine consumers — but review committee members rather unanimously trumpeted Martignetti’s financial proposal in their public remarks after the award. The RFP made specific demands of the winning bidder’s financing. Winner Martignetti’s heavily leveraged bid fulfills them only in an extremely charitable reading.

Before Maine Liquors appealed, company general manager Nick Alberding told the Phoenix that he had no great faith that the appeal would be successful. Appeals committee members were chosen by a subordinate of Rebecca Wyke, commissioner of the state’s Division of Administrative and Financial Services (DAFS), who had overseen the original RFP scoring and deliberations in the first place. Alberding was frustrated for all kinds of reasons, not least because he thought Maine Liquors was perfectly situated; the review committee came to their warehouse to look around, and the RFP, Alberding says, "looked like we had written it." But in the end, he was right about the prospects of his appeal, which was rejected on March 8, despite the fact that Wyke and state Chief Information Officer Dick Thompson both admitted under oath that they had not followed mandated procedures.

Both Maine Liquors and MaineCentric promptly filed lawsuits in superior court, endangering the June 30 budget deadline and forcing the state to scramble for a way to rescue the process and keep its fiscal head above water. On May 10, they found their flotation device. The state announced that a deal had been reached under which Martignetti, "the winning bidder, entered a partnership with Pine State Trading Co. and Lindsay Goldberg & Bessemer (LGB) to operate the wholesale liquor business."

The deal as it stands gives LGB a 65 percent stake in the operating franchise. Martignetti has 32 percent and Pine State three percent. The arrangement among the three entities essentially melds Martignetti’s revenue-sharing proposal with Pine State’s financial backing and Pine State’s network of existing warehouses and distribution routes. This neatly eliminates the weaknesses in Martignetti’s proposal — shaky financing and lack of on-the-ground experience in Maine — while also quieting those critics who said that the liquor franchise should go to a Maine company. From any vantage point, it’s a deft bit of deal-making; the question is why it should ever have had to happen.

Wyke and Thompson readily agree that the scope of the deal made appeals inevitable. Both also defend the process even where it deviated from the letter of its mandate, and nobody can be certain that the result would have been different if every I had been dotted and every T crossed. It’s clear that the committee got pretty casual about the specifics of their process, though, and by doing so put the state at increased risk of legal action and endangered the payment of $75 million the state needed by June 30 to make its budget. In the end, things appear to have worked out, but not before the state spent money and time on shoring up a process that everyone (except Wyke) agrees could have been conducted with a little more attention to detail.

"Given the amount of money at stake," Wyke says, there were going to be appeals, and the state intentionally built appeal time into its schedule. Still, before May 10’s settlement, she rejected any responsibility for what has happened. "We did the best we could to try to protect the state’s interests" in the process and appeal. "Do you wish you’d done one or two things differently? Sure. But I think we’re very well positioned in the [then-pending court] appeal."

Thompson isn’t quite so aggressive. "Hindsight’s always 20/20," he says, but he acknowledges that some of the state’s actions gave losing bidders extra appeals ammunition. "If we had it to do over again, we’d hit every button." From the perspective of service to consumers and agency stores, he says any of the three bidders would have been a huge improvement over what the Bureau of Alcoholic Beverages and Lottery Operations (BABLO) is providing now, and in that sense it’s a win-win situation for the state’s agency stores and consumers.

Thompson didn’t want to comment on whether the move was sound public policy, and Wyke herself concedes that privatizing the liquor business isn’t an ideal solution to the state’s budget woes. "We often spoke of it as the lesser evil," she said on April 26. "There were a lot of bad choices out there." The state didn’t want to raise taxes, and in the end, the asset they were most willing to get rid of was liquor distribution. "There really is no reason for the state to be involved in liquor distribution," Wyke says.

‘WE CAN’T SHARE ANYTHING WITH THEM’

One of the primary concerns involving the RFP process is that the original statute that mandates legislative involvement in the process raises constitutional questions about separation of powers. "The legislature chafes at giving too much power to the executive," notes state senator Tom Sawyer (R-Bangor), and the executive is likewise resistant to legislative oversight. With hundreds of millions of dollars at stake, this kind of administrative tug-of-war had no possible outcome but protracted legal action, which threatened to hold up the liquor franchise money and force the state to make the cuts that were supposed to be avoided through privatization.

The review committee appointed to develop the RFP, score the bidders, and determine a winner consisted of Wyke; Thompson; Pamela Coutts, director of the Maine Bureau of Alcoholic Beverages and Lottery Operations (BABLO); Edward Karass, State Controller; and Ryan Low, Director of the Division of Financial and Personnel Services. All four of the members other than Wyke head service bureaus that fall under the general umbrella of her department, DAFS.

The statute under which the liquor-franchise transfer is to take place, Title 28-A, says specifically in Chapter 3-A, section 88 that "a member of the joint standing committee of the Legislature having jurisdiction over alcoholic beverage matters appointed by the Committee chairs must be included in meetings held by the Commissioner of Administrative and Financial Services regarding developing a request for proposal to transfer the wholesale liquors business, reviewing bids received and awarding the contract." Millinocket Democrat Joe Clark was the Legal and Veterans Affairs Committee (LVAC) member assigned to fulfill this requirement.

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Issue Date: May 14 - 20, 2004
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