Faced with huge losses, New Brunswick considers privatizing cannabis sales

Amid shortages and price hikes, The chaotic first few months after legalization that Canada has experienced have put a strain on each province’s regulatory models. In New Brunswick, sales are managed entirely by a state-owned corporation: Cannabis NB. However, the corporation has recorded $11.7 million in losses in just 6 months of operation. These losses raise questions about the model's profitability and The government is considering privatization.

The Backlash Against Legalization

Far from the promises of significant tax revenue that the legalization of cannabis in Canada had led people to expect, the provinces and Ottawa have so far seen only meager returns that are insufficient to offset their investments. It’s not that demand is lacking, but there are problems further up the production chain. A shortage of producers and production delays have caused supply shortages, leading to out-of-stock situations and rising prices. Due to these uncertainties, the legal cannabis market has still not managed to attract a significant share of consumers (The black market continues to capture 71% of demand) and is therefore not likely to turn a profit anytime soon.

A Prophetic Report A report dated October 13 of last year had predicted the shortages and the resulting tax revenue losses. The report’s authors estimated that: «Based on the current rate of legal cannabis production, producers will be able to meet only 30 to 60 % of total domestic demand.» They further estimated that revenue from sales—between 300 and 600 million dollars—would be well below the anticipated losses, estimated at 800 million dollars.

The legalization of cannabis is not currently profitable for the federal and provincial governments, but the situation is even worse for the provinces that have opted for a sales monopoly. In fact, their losses are not only fiscal but also commercial. Among other things, they must purchase the product, pay employees, and so on. This requires an even greater investment. However, as long as the black market persists, the deficit of state-run companies is bound to grow.

A Model in Question

«It’s a terrible business model,» says New Brunswick Finance Minister Ernie Steeves. In light of Cannabis NB’s substantial losses, the provincial government is conducting an internal study to explore alternative regulatory models. Three scenarios are currently being considered: maintaining the status quo while closing the least profitable stores; privatizing the company’s management by entrusting it to a specialized firm through a public-private partnership; or full privatization, which would involve abandoning the monopoly and opening the market to private operators.

It was this latter model that economist Germain Belzile suggested to the Quebec government, which also opted for a distribution monopoly through SQDC. He believes that retail sales should be left to private operators, who, in his view, are better equipped to compete with the black market. A week after legalization, the SQDC’s 12 stores were forced to close on Mondays, Tuesdays, and Wednesdays due to a lack of inventory. In his article, The economist doesn’t mince words: «The only silver lining to the SQDC’s venture was that it allowed young Quebecers to become familiar with «the Soviet model» and «communism» by offering stores with empty shelves and products available only in limited quantities and in undesirable sizes.».

For New Brunswick Liberal Assembly Member Roger Melanson, however, it is still too early to judge the profitability of this model: «No one is going to invest money and expect a return on investment in six months. Normally, we should wait at least a full year of operation to fully understand the level of revenue that will be generated. For businesspeople, it often takes three to five years to turn a decent profit.».

New Brunswick is not the only province for opting for a government monopoly on distribution. In addition to Quebec, these include Newfoundland and Labrador, Nova Scotia, and Prince Edward Island. Some have opted for hybrid models, such as Manitoba, where private and public retailers coexist, or British Columbia, where wholesale is managed by the government while retail sales are left to private operators. Still others have changed course like Ontario which the previous government had decided to operate as a monopoly, whereas the new government has opened the market to private operators.

In short, Canada’s legalization of cannabis is an ongoing process that will serve as a model for other countries looking to legalize it.