The Year of Regulatory Reform: How Licensing Rewards the Connected
When the regulatory process is expensive and involves the arbitrary application of ambiguously worded statutes, don't be surprised at the dominance of the politically connected.
Rhode Island’s Department of Business Regulation recently closed an application period for those interested in operating medical marijuana dispensaries in the state. As local media reported, the list of applicants is rife with political insiders: state house lobbyists and individuals with ties to current governor Gina Raimondo. Others currently hold office, or have a close family member who is, or are prominent area business figures who’ve donated thousands of dollars to big-name politicians in the state.
Of the 45 applications submitted, 6 will ultimately be chosen by a random lottery, so there’s a good chance that those with political ties will end up as license holders.
From the lay person’s perspective, the optics of this are obviously not good. It looks like those who’ve been loyal to government leadership are being rewarded with a lucrative contract and those who’ve donated large sums of money to those in government leadership are getting a kickback. Marijuana remains illegal in the state (though possession of under an ounce for recreational use was decriminalized years ago), but it’s not hard to speculate that soon may change. Between budgeting issues (the state just plugged its budget hole with federal coronavirus relief dollars) and an historically large contraction in the state’s economy as a result of the governor’s coronavirus policies, Rhode Island is in a woeful fiscal situation. In the past the state hasn’t balked at implementing new forms of taxation, such as its toll on truckers traveling along Interstate 95, in order to raise revenue. Given how lucrative weed entrepreneurship has become over the past few years, it’s not that hard to imagine Rhode Island legalizing the drug in order to tax it.
But there’s also another explanation for the political connectedness of most of the compassion center applicants: the associated costs and nightmare of navigating the regulatory process. Both these things can act as barriers of entry for those who are cash-strapped and connection-poor.
Just submitting an application costs $10,000, (the annual licensing fee for those who are successful carries a hefty price tag of $500,000) and that’s just the tip of the iceberg. The application requires would-be compassion center operators to demonstrate their plan would meet zoning laws for the zone in which they plan to operate.
In Rhode Island complying with local zoning laws likely means obtaining a special use license, which means shelling out more money. In the city of Providence, for example, a special use license for commercial facilities carries a $870 processing fee.
Then there’s the thorny issue of cultivation fees and the variance compassion centers (yet more money out of pocket) will need from local zoning boards in order to grow their own plants, rather than purchase them from dedicated growers.
In early 2020, a power struggle between the legislature and the governor emerged over this issue. The legislature wanted the power to veto regulations for new compassion centers. Chief among these was a prohibition on new dispensaries growing their own marijuana, a move supported by Rhode Island Cannabis Association. But Raimondo sued the legislature and eventually forced them to remove that language.
Fundamentally, the spat was about the separation of powers. The legislature claimed the Department of Business Administration, a part of the executive branch, was trying to enact regulation it had vetoed, which represented a power grab by the governor. Raimondo countered this with the claim that the legislature would have destroyed her carefully constructed regulatory process by injecting politics into the mix. Because apparently one-woman rule is a lesser threat to fair application of the law than the deliberative process of the legislature.
Supporters of licensing laws will no doubt point out that there are positives to throwing up impediments to the market, namely safety. However, the power struggle between Raimondo and the legislature reveals the often capricious and arbitrary nature of regulation. It can be more about political gamesmanship—and different sides, backed by different interest groups, each looking to prove that their interpretation is correct. Fundamentally, that’s the immutable flaw of even the most judicious set of laws in the world: they have to be enacted by people, who each interpret the world through the lens of their personal experience.
Then there’s the involvement of lobbyists, which clouds the issue. Arguments over which branch has the final word on regulation aside, would the legislature have been so staunch in defending not just that it had the right to veto legislation, but that new compassion centers shouldn’t have the ability to grow cannabis, if it weren’t for the support of the Rhode Island Cannabis Association?
Their position is also troubling because it represents something less than an open attitude towards new business and the growth of the industry. Rather, it defaulted, as so many special interests do, to existential concern. Rather than embrace new members whose success might carry it to new heights, it turned against them. And it ran to the government for help, hoping to erect walls that gave it an unfair competitive advantage.
In the long run, this is inevitably damaging to the industry. Once the government has the power to regulate, interest groups like this have no guarantee the policies it pursues will continue to protect them. On top of this, interest groups who argue they should be protected and whose argument is covered, whether intentionally or not, by the position of legislators, are given credence, which inevitably carries weight with the public and can contribute to perceptions of cronyism.
With this in mind, is it any wonder that the list of applicants for the 6 new compassion centers the state will license is so rife with lobbyists and politicians? By the government’s behavior, it’s as much a political process as one driven by consumer-safety. A perspective dispensary owner would not be unwise to conclude that having connections would give them a greater chance of success in running a compassion center, if not in receiving a license.
Because the barriers of entry into the industry don’t end with the arbitrary awarding of licensure (which makes little sense if licensing is designed to protect consumers: why not reward those who’ve demonstrated a commitment to putting out an affordable and quality product?). The list of regulations with which compassion centers must comply is endless and poorly worded. The number of compassion centers licensed by the state, for example, is never really defined. Per § 1.2(C)(1) of the regulations, “The number of zones, the geographic boundaries of each zone, and the number of compassion centers permitted in each zone are set forth in § 1.15 of this Part.” Read that section, though, and it references right back to “the criteria set forth in § 1.2(C)(1),” where no criteria, other than a reference to R.I. Gen. Laws § 21-28.6-12(c)(3 ), which gives regulators discretionary power to determine how many compassion centers can be licensed depending on factors like patient convenience and the interests of the town where it would be located. In short, this ambiguity can mean whatever regulators want it to.
So, in the minds of the savvy businessman, it probably pays to have connections who can walk you through the regulatory process and hopefully reduce the cost—in time, money and frustration—of meeting the licensing requirements.
And that’s a shame because it prioritizes meaningless distinctions like who one’s friends are and the depths of their pockets over actual skill and experience. And it’s hard to see how that ultimately serves the customer: people who have a prescription for medical marijuana in order to assuage some debilitating condition.