Pokie gifts revisited

The economic benefits from breaking up Federal Group’s exclusive license to operate electronic gaming machines (EGMs) in pubs and clubs are an assortment of half-truths and baseless assertions.

Whilst the Federal Group holds an exclusive license, it does so as the lead member of an oligopoly which includes the pubs and clubs which provide premises for EGMs in the community. 

Currently player losses are split between the government (via taxes), the pubs and clubs (via commissions) and Federal Group (network fees), roughly one third each.

The government’s proposal will split losses between the same three groups. The government will get a larger share as will pubs and clubs. Federal Group will get a smaller share if it remains as network manager, which is highly likely. Its network losses will be softened by the extra from its twelve top performing EGM pubs.

The government rather than use the tax windfall to fund government services will hand it back to Federal Group as compensation, by reducing EGM taxes at its two casinos. The current EGM exclusive license was a gift pursuant to a Deed that is about to lapse. The reason for paying compensation is yet to be revealed.

The end of Federal Group’s monopoly is an inaccurate description of what will occur. It will be a continuation of the same oligopoly but with a different split. The existing sole license plus permits for each pub and club will be replaced with licenses for each venue. It will be harder and more costly to monitor compliance. No advantages will flow except to pubs and clubs who will get a bigger cut. The government’s 2016 policy was to allocate licenses using a market mechanism such as a tender. The Federal Group and the Tasmanian Hospitality Association (THA) jointly submitted in August 2017 that a market based solution “would be very costly and generate uncertainty and massive disruption for all stakeholders”. The government changed its mind.

Leaving aside questions of social harm, it’s not the monopoly per se that is a problem. It’s the super profits that flow to a selected few. Monopolies and oligopolies can be quite benign if regulated and taxed in the public interest. It’s not as if venues with their own licenses will offer a more competitive product. Prices, in this case the percentage extracted from players, won’t change. Any competition will be confined to offers of $10 parmas and free bus trips for residents of old folk homes.

We’re likely to hear much talk about the need for ‘competitive’ tax rates. This is based on two false premises. The first is the industry pretence that the tax burden falls on license holders. EGM players bear the cost. Woolworths may remit GST but shoppers bear the cost. The after-tax amounts retained by license holders will be from players. A small amount may arguably be a payment for providing a leisure experience to players, but most are excess profits from a government sanctioned oligopoly. How can receiving a lesser gift be construed as a burden? It’s false to claim taxes need to be competitive. How player losses are split doesn’t affect player behaviour. Nor will it affect investment decisions as the second premise, the need to be competitive compared to other States, implies. We don’t need more EGM facilities. EGM numbers are capped. Why should EGM operators be allowed to make much higher returns than the rest of the hospitality industry that already benefits from a large government funded marketing budget?

Federal Hotels and the THA, have claimed gifting licenses to existing EGM hotels and clubs “will allow them to make further investments in their businesses.  These investments would have a positive impact on the communities in which these hotels and clubs operate, especially in regional areas that badly need new investments, increased economic activity and jobs.” That may happen but is equally true of almost every industry everywhere. It’s hardly a reason for singling out EGM venues for additional government handouts. There’s no evidence whatsoever that assistance to EGM pubs is the best way to boost economic activity anywhere.

Back in 1993 the Federal Group was bitterly opposed to extending EGMs into the community. In its 1993 submission to the Legislative Council inquiry into the matter it observed:

“Claims of substantial economic benefits through the development of expanded facilities in hotels and clubs may be overstated. It is generally acknowledged that Tasmania is over supplied with licensed premises. In this situation, revenue from machine gaming in many instances would be applied to debt reduction or hoteliers’ profits rather than improved facilities...”  Or maybe to paying $250 million in dividends to interstate shareholders as the Federal Group has done in the period since 1997 when EGMs were let loose following its change of mind about EGMs in the community after negotiating a more favourable deal.

The government is always dismissive of the social harm argument by constantly asserting 99.5 per cent of the population use EGMs responsibly. That figure includes all those who avoid EGMs like the plague. Between 25 and 40 per cent of regular players become problem gamblers. We could similarly trivialise the ice epidemic by using the same deceptive analysis.

Dismissing problem gambling and instead focussing on the right to gamble was a message from a Love Your Local ambassador campaigning in the last election against a proposal to remove EGMs from the community by suggesting his mother’s monthly trips to her local to happily lose $10 was a fundamental right and an important contributor to our social fabric. The right to add 75 cents a week to a pub’s bottom line deliberately diverted attention away from problem gamblers without whom EGMs wouldn’t exist. It was a disingenuous proposition.

The government has been slow to detail post 2023 EGM arrangements. Finding economic arguments to justify gifts to a privileged few at a time of a budget emergency will be a Sisyphean task.

The writer is a non-executive director of a company with tourism interests. Published in The Mercury 11^th January 2020.