Federal Hotels and the public interest

Nobody knows better than MONA owner David Walsh about making money at a casino. Establishing his own casino, however, requires Federal Hotels to agree – as it has exclusive rights to conduct casino operations, as well as gaming machines and keno, in Tasmania until at least 2023.

In 2014 player losses from Federal’s gambling operations were $231 million. It retained $162 million (70 per cent), the State Government got $55 million (24 per cent), with $14 million (6 per cent) going to pubs and clubs.

Earnings from casino tables are a small proportion of earnings from gambling. Table gaming losses for the two casinos of $8.5 million were split $5 million to Federal and $3.5 mainly licence fees to the Government.

Federal told the Public Accounts Committee in 2003 the deal would help underwrite “a significant investment strategy in Tasmania”.

For a while, with its expanded regional coverage, Federal helped promote the Tasmanian brand and it was possible, with a long bow, to argue the spin-offs of the exclusive licence were flowing. Its advertisements promoted Tasmania, indistinguishable at times from those of Tourism Tasmania.

The exclusive licence required the building of a premium resort at Coles Bay. The original proposal for a 160-room complex was cut back by over 80 per cent and delivered five years late.

Federal also bought accommodation businesses at Freycinet and Cradle Mountain and developed Strahan, but then spent far more acquiring the 9/11 chain of pubs and bottleshops and two high-turnover North-West gaming machine pubs.

Abandoning the West Coast Wilderness Railway and selling regional tourism businesses, apart from the mandated Saffire at Coles Bay and a few improvements at Henry Jones Art Hotel in Hobart, Federal has nothing to show but more bottleshops and gaming machine venues, and a winding back of capital expenditure and advertising as it benefits from rising occupancy rates due to the success of Mr Walsh.

To block expansion moves by Mr Walsh when he has been responsible for propping up Federal’s bottom line would be a bit rich, especially as the northern casino is unlikely to be affected. How much Wrest Point will suffer is uncertain as MONA’s casino is likely to attract a new crowd and expand the market if anything. Besides, casinos don’t contribute much to Federal coffers, unlike the pokies.

It would be remiss of the Government to grant further gaming machine concessions. Any losses from another casino licence are dwarfed by the benefits provided by MONA to Federal.

Federal shareholders have received dividends of over $150 million in the past 10 years, averaging 75 per cent of after-tax profits.

Tourism businesses are capital hungry and almost all need a much higher level of retained earnings.

Federal borrowed as if there were no tomorrow. Loan borrowings peaked at $200 million in 2011 before banks got nervous, not keen to be left with stranded assets if something happened to the exclusive money-making licence. In 2013 the dividend take slowed as gambling trended down and banks demanded loan repayments.

Federal’s three regional tourism businesses were sold for $38 million in 2014. Banks grabbed $26 million.

Shareholders made up for a disappointing 2013 by removing the entire net profit after tax of $26 million.

The 2014 profit was similar, but needed a boost from the sale of previously depreciated plant in the regional tourism businesses of almost $4 million and revaluation of Arabian stud horses totalling $1 million.

Federal’s public comments emphasise the tourism aspect of the group. The 180 rooms in Launceston plus 370 rooms in Hobart at various properties plus a few rooms at Saffire contribute to the bottom line.

It is likely the bulk of earnings come from 3500 poker machines, a chain of bottleshops plus 11 gaming machine pubs crammed with the maximum permissible number of machines.

If the exclusive licence was issued as part of a social contract to benefit the tourism industry generally, there surely must be a breach.

Federal’s shareholders have plundered most of the gambling profits. Shares have been closely held and a fresh face has not appeared on the board for over 20 years.

Borrowings allowed the business to grow, but now the salad days are fading and loans need repaying. The strategy of a benevolent godfather overseeing the Tasmanian tourism industry has become one of survival.

What exactly will be the rationale if the exclusive licence is extended?

David Crean may have been the best state treasurer for a generation, but he was not too concerned with assessing risks when he commented on the exclusive deal as treasurer at the time [2003]: “Let us face it with that family that is unlikely to be a problem because they are a terrific operator.”

For too long we have been forced to accept the notion that what’s good for Federal is good for Tasmania. The industry has been cowered.

Criticisms are made in private, but rarely in public.

Mr Walsh’s licence proposal will have minimal impact on Federal.

The latter’s problems are self inflicted and governments should not assist.

The State Government should restore a public interest approach to public policy.

The public returns from the exclusive licence deal pale next to the private benefits extracted by Federal Hotels.

( Published in The Mercury 4^th September 2015)