THE ECONOMICS OF CANNABIS LEGALISATION

 

Speculation about the economic impact of legalisation is running rampant as medical cannabis markets open across the globe and Canada prepares for the introduction of a legal, commercial marketplace for recreational cannabis. Dan Rowland of 420 Advisory Management writes about the economic gains of legal cannabis models.

Governments, businesses and economic development organisations alike are told to open the floodgates, because the rivers of cash that legalisation brings will be flowing toward them any day now.

While there is no question that cannabis-related revenue can be a boost to local economies and governments, a little context and tempered expectations should be employed. 420 Advisory Management is here to provide that context and help organisations analyse both the costs and benefits of legalisation. Our experience has provided some unique insights into the economics of legalisation and what that means for communities that want to get it right.

Embrace change, and fund it appropriately

As we have seen in Colorado and some other American states that have permitted adult use, the most effective way to manage cannabis legalisation is to jump in with both feet and devote resources to this new industry. Elected officials and community leaders set the tone, and if the message is, “We’re going to do this, and we’re going to do it well,” then the sleeves of those implementing cannabis legalisation get rolled up in a hurry. The keys to success lie in recognising that this new, legalised industry touches all aspects of a community, and managing it effectively requires lots of resources.

For the City and County of Denver, that has meant spending roughly $16 million of cannabis-related revenue annually solely on the regulation, education and enforcement efforts required of the city post-legalisation. To understand how to fund regulation appropriately, jurisdictions must perform workload analyses and look at both direct and indirect costs of regulation.

Denver's analysis of 2016 showed that actual costs of regulation, education and enforcement were $2.2 million higher than the $9.1 million the city had budgeted. The study also showed an additional $4.7 million in indirect costs, and costs to additional departments that had not be included in previous work plans and budgeting.

Prioritise funding, and leverage it accordingly

Cannabis revenue will indeed flow to provinces and local jurisdictions, but it isn't likely to solve systemic budget shortfalls. While Denver has seen its overall revenue increase by about 3 percent thanks to cannabis taxes and fees, it has stressed the importance of budgeting conservatively and not to assume sustained, over-performing revenue.

Put simply, cannabis will not repair any one city or province's fiscal issues. It is not a budget game-changer — it doesn’t allow governments to start redoing parks and fixing all roads and bridges. However, it does fund the cost of regulation, and it does fund very carefully selected special projects.

Employment & Real Estate Impacts

Denver's analysis of the cannabis industry’s economic impact compared it to the retail and agriculture sectors of the economy. The city estimates that about roughly 1,000 jobs have been created by the cultivation and processing of cannabis, but that at an average wage of $18.50 per hour, the jobs are far less lucrative than the $24.50 per hour employees in similar sectors are making.

The city estimates that about 3,000 jobs have been created in the retail sector of the industry at an average wage of $15.50 per hour, compared to $17.40 per hour for retail sector jobs in other industries. On the flip side, bar and restaurant owners report having difficulty staffing their establishments, especially their kitchens, because they cannot compete with the pay offered by the cannabis industry.

A statewide analysis by the Marijuana Policy Group showed that the industry had directly created close to 13,000 jobs in Colorado in 2015. The jobs included retail operations, manufacturing and processing, cultivation specialists, administrators and managers. Interestingly, the analysis also attributed an additional 5,000 jobs to have been indirectly created or induced by the industry. Indirect jobs are those created outside the enterprise, like suppliers and contractors, and induced jobs are those that were created due to the existence of the cash, capital and other economic impacts of all these new enterprises.

As for real estate, less than 3 percent of commercial warehouse space (2.6) and retail space (2.8) in Colorado is utilised by the cannabis industry. However, cannabis business accounted for 36 percent of industrial space absorption from 2009-2014.

Particularly in Denver, this absorption coincided with changes in value. As of 2016, the city had about 5 million square feet of commercial space absorbed by the industry. Lease amounts increased by 50 percent or more and property valuations doubled. These increases coincided with the city's recovering economy and massive investments that had been made years before in revitalisation efforts, transit-oriented development and other capital improvements.

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Generally, the cannabis industry represented a significant share of new commercial leases and development, especially in non-institutional owned and non-bank financed properties, and class B and C retail spaces.

Here to help

420 Advisory Management works with clients that are eager to implement legalised cannabis responsibly, effectively and in ways that will benefit their communities. Those groups that are thinking about these economic impacts now are already setting themselves up for success. No, there will not be rivers of cash. But there will be opportunities to make positive changes that last well beyond the “green rush” is over.