Pokies in transition

 

Licenses to allow pubs and clubs to own and operate electronic gaming machines (EGMs) passed through Parliament in October/November of 2021 after the Labor party abandoned its brief flirtation with a principles based policy approach.

It was a watershed moment for the gambling industry. Years of funding and lobbying the government were finally about to yield a jumbo jackpot with net profits from EGMs estimated to rise by an average of 50 per cent for EGM pubs.

Federal Hotels lost its monopoly ownership of EGMs but was compensated by the slashing of taxes on EGMs at its two casinos and the knowledge that its twelve Vantage pubs with EGMs were about to be become even more lucrative. Federal was also considered as the front runner in the process to select a Licensed Monitoring Operator (LMO) to replace its own Network Gaming which has been running the monopoly network.

However subsequent events have put a dampener on the industry’s euphoria. Federal failed to win the LMO tender. Maxgaming a wholly owned subsidiary of the listed gambling behemoth Tabcorp was awarded the job in August 2022.

 Shortly thereafter the government announced the introduction of mandatory pre commitment cards as a way to limit player losses as part of a revised harm reduction strategy.

The outrage from pub owners was predictable. For years they have been telling us that problem gamblers were only 0.4 per cent of the population and the bleeding hearts in the welfare lobby just wanted to rob the overwhelming majority of a bit of harmless fun.

Private mutterings are now telling a different tale. Without obsessives playing the machines, bottom lines will be severely impacted. Federal Hotels in its 2022 Annual Report issued late October 2022 confessed it was unable to assess the impact “at this point in time”.

This is a far cry from a year earlier when Federal Hotels was able to independently value eleven of its twelve Vantage pubs as part of a sale and leaseback arrangement with various associated parties. This was disclosed in it 2022 Annual Report.

Future Gaming Mega profits

 FUTURE OF GAMING IN TASMANIA

Stage 2 Public consultation August 2021

 

The inescapable nagging question that needs to be answered is why does an industry with as few redeeming features as the gaming industry receive gold star government assistance?

 

Future Gaming Market reform: A windfall for pubs.

 

Everyone including Federal Hotels accepted the reality that the days of its money making machine Network Gaming were numbered. With the exclusive license to run electronic gaming machines EGMs due to expire in 2023, assuming the government has given Federal Hotels the requisite 5 years notice, pubs and clubs were eying off a bigger share for themselves. Both parties, Federal Hotels and THA representing the pubs, cobbled together a proposal in 2017 for a new division of the spoils which the Government has adopted and rebranded as Future Gaming Market reform.

At the time, on 18^th August 2017 Federal Hotel’s boss Greg Farrell told a Parliamentary hearing:

“The Vantage Group's viability would be enhanced as a result of this, as would every other licensed hotel and club. The average value of a Tasmanian hotel and club, post 2023, on this basis, would improve by about $1.5 million. That has been our model and it has been independently verified.” (Note: The Vantage Group is part of Federal Hotels with 12 EGM pubs and 21 bottle shops under the 9/11 banner).

A couple of points. Greg talked about the ‘average value’ and how it will ‘improve’. That pre-empts the question, what is the current situation? And how will the proposed changes impact the value of pubs?

When breaking a monopoly is appalling public policy

 

AT least we now know the excuse for the delay with Future Gaming Markets reform.

Minister Michael Ferguson in Talking Point said the release of the reform package followed “an extensive body of work, with licence fees and tax rates that apply for Far North Queensland casinos (a comparable market) used as a benchmark” (“Delivering best policy on gaming,” July 9).

It might be a coincidence, but the concept of this benchmark to justify low tax rates for casinos was first floated by Federal Hotels in December 2016 and again jointly with the Tasmanian Hospitality Association in 2017. The nature of the extensive body of work undertaken since is not evident. Nothing has changed.

There are three principal reasons why governments fiddle with tax rates and tax concessions. Firstly to raise more revenue or hand some back if they’ve got too much. Secondly to encourage activity if desirable, or to discourage if deemed undesirable. And thirdly as a reward for services or deeds, past, present or future.

Clearly the first reason does not apply in this instance.

The government has tried to pretend the second reason is why the North Queensland benchmark is being adopted. Yet there is no sound public policy basis why casinos in regional areas currently need assistance. The benchmark rationale is a cut-and-paste from the Handbook of Self Interest. We don’t need to attract more capital for new casinos packed with electronic gaming machines as they’re prohibited. Tourists don’t come to Tassie to play the pokies. Even if they did, the tax rate is irrelevant. “Let’s go to Tassie ’cos the EGM rates are lower” is not a marketing slogan you’re likely to hear. It’s the locals who play casino EGMs. Any concessions to Federal Hotels simply gives them an unfair advantage over other accommodation providers.

Which leaves us with the third reason for granting a tax concession, namely an ex-gratia reward.

Future of gaming in Tasmania

This paper was written in March 2020 as a submission to Treasury's Public Consultation process into Future Gaming Market policy. The process was deferred due to Covid. It is expected to resume during the spring 2020 parliamentary session.

TABLE OF CONTENTS

Introduction

Executive summary

Sharing the EGM spoils: Pubs and clubs

Transition

Gifts and perpetual licences

Community support levy and EGMs in casinos

Keno

Conclusions

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. 

RSL pokie porkies

The release of player loss figures for each individual pokie venue casts a huge pall of doubt over the claims by the Glenorchy RSL that removal of pokies will be the swan song for the Club and the end of life as we know it.

The Club’s haul for the 2015/16 year, the total of player losses, was $590,000. This is only a fraction of the $4.5 million lost at the Mecca of misery, the Elwick Hotel just up the road with the same number of machines.

But with losses of about $20,000 per pokie there’s no money being made by the Club. Anyone familiar with the industry knows that when player losses slip below $20,000 per pokie it’s time to summon the pokie machine undertaker.

Liberal pokie gifts

Andrew Wilkie in his latest media release reckons the Federal Group is “set to pocket an enormous $18 million windfall if the Liberals win government.”

Nonsense.

The figure is $75 million.

There’s obviously a bit of misunderstanding about how the Libs’ pokie industry welfare policy works. The value of pubs and clubs with pokies will receive a boost with increased pokie commission. If the venues are given licenses for a set period, then the amount of those future commissions will reflect in enhanced capital values of venues. If the licenses are in perpetuity, then the value of pubs and clubs with pokies will increase by $250 million.

Love your local

Just tuned into the latest Love Your Local promo on the LYL facebook page featuring the Beach Hotel Burnie. It was surprisingly frank. Whilst it only gave half the story that half was reasonably truthful. But telling only half the story can be misleading.

Pokie backflip?

The extension of pokie machine into community pubs and clubs was initially bitterly opposed by the Federal Group. Until it got a better deal. 

In the interim it submitted an alternative  to a LegCo inquiry in 1993 proposing increased numbers of pokies at the two casinos.

What Ms White is now proposing and what Federal Group now ferociously opposes, is virtually the same as the policy it fully supported in 1993. 

The following are snapshots from the 1993 submission:

Liberals' pokie policy

It’s easy to summarise the Libs’ pokie policy. They have simply adopted THA and Federal Group’s position. Without amendment.

When Rebecca White moved the goalposts the Libs were left flatfooted with a urgent need to find a plausible alternative.

Yet despite the mountain of evidence presented to the parliamentary inquiry plus its 72 findings and 23 recommendations, despite its own post 2023 framework  that specified allocation of venue licenses by a market based mechanism, the Libs opted instead to adopt the THA/ Federal proposal in its entirety, a proposal lodged so late in the life of the parliamentary committee it didn’t have enough time to consider it in detail.

Federal Group: What will the New Year bring?

As the clock ticks over to start what is bound to be a watershed year for the Federal Group, few will take as much interest as the Group’s bankers. Rebecca White’s undertaking to remove pokies from community pubs and clubs after 2023 should she be successful at the March 2018 election will precipitate a major overhaul.

Back in 2016 Federal Group was treading water. The most recent financials reveal there was no improvement in the 2017 year. Specifically:

·       Turnover was the same at $512 million.

·       Expenses increased slightly causing net operating cash to continue its downward slide from $51 million to $46 million. That’s the lowest figure since 2001, sixteen years ago.

·       Net profit before tax fell from $28 million to $20 million.

·       Net profit after tax fell to $14 million.

·       As per usual shareholders drew out most of the after tax profits. Dividends of $11 million were paid in 2017. Since pokies in pubs started in 1997 shareholders have withdrawn $250 million in dividends.

·       Capital hungry tourism businesses can’t keep up that level of dividend payments without borrowings. Another $4.5 million was needed. Capex spending was $31 million, about $20 million more than the inadequate annual spend of the last few years. The fit out of MACg01was probably the reason for this increase.

Pokie jobs, jobs,jobs?

Local parliamentarian Adam Brooks left no room for doubt. He confided to The Advocate that Rebecca White’s ”latte-sipping, lefty agenda ... will shut down jobs and will shut down the hospitality industry in the North-West Coast.”

Gosh, the entire hospitality industry?

What is Libs' pokie policy?

The Xmas break couldn’t have come quick enough for the Liberals in Tasmania. Barely three months from an election finds it completely stranded without a  poker machine policy post 2023.

Rebecca White hasn’t just shifted the goalposts. She’s moved grounds.

Pokie reflections

By all accounts Labor’s policy to remove pokies from communities after 2023 was unexpected.

However the risks involved when the gaming monopoly expires has previously been discussed by both parties to the arrangement, the government and Federal Group.

Treasury head Don Challen  told a hearing of the Public Accounts Committee on 16^th July 2003 which was looking at a premature extension of the original deal due to expire in 2009:

“I did say to Mr Farrell across the negotiating table a number of times that 'Come 1 January 2009 you don't have a business'.  I put a reasonableness test on the outcomes we get from the negotiations and if I didn't think they were reasonable in the interests of the Tasmanian community I would have kept pushing Mr Farrell until I got him to the point where I thought we had a reasonable outcome.  In the back of his head he knows that legal possibility of the licence coming to an end is there and that is a discipline on him to come to the negotiations with a realistic attitude.”

Quite clearly both parties negotiated the 2003 deed extension with a sunset clause in full knowledge the punch bowl may be removed in 2023. If Federal Group have a risk management strategy there’s little doubt what should be number one on the list.

Will the sky fall in if pokies are removed?

The sky will fall in if pokies are removed from regional Tasmania???

The impending devastation will be obvious from the figures. A close look at say the Braddon electorate, will reveal all, surely? It’s the most regional of the Tasmanian electorate, the most distant from the State’s two casinos and currently home to 730 or 30% of EGMs outside casinos.

Alas the figures fail to give any support for Federal Group’s doomsday predictions.

Treasury modelled the effects of EGM removal for the recent parliamentary inquiry. Unbundling the model and introducing the latest figures for player losses from the Tasmanian Liquor and Gaming Commission for venues gives a detailed look at Braddon.

Poker machine apocalypse?

There seems little doubt the fate of poker machines post 2023 will be an issue that will get plenty of coverage during the upcoming State election campaign.

Depite the government assuring the Joint Select Committee into Future Gaming Markets it would be open to recommendations based on evidence, Premier Stansfield and Chief Strategist McQuestin had their minds made up well before the Committee reported.  The government arranged for a Dorothy Dixer on the 11^th of September to allow the Treasurer to set out the government’s policy on gaming. If pokies are banned from communities it would have a “devastating effect on pubs and clubs” he told parliament.

Rather than blithely following the dictates of his political overlords the Treasurer should have read a paper prepared by his own department for the Committee.

A close analysis of Treasury’s modelling reveals in the case of regional areas beyond the 50 km reach of casinos where 40% ($42.9 million) of player losses occur, player losses will reduce by 75% ($31.4 million). There will be some migration to casinos and substitution with Keno, in total about 25%. Pubs and clubs will be worse off by $6.4 million, but the $25 million that previously flowed out of towns to Federal Hotels’ Network Gaming will be free to circulate within regional towns.

Currently on average, only 20% of player losses remain with pubs and clubs via net commissions from Network Gaming. The rest flows out of town to Network Gaming. It is well beyond the wit of this writer to figure why the government is so willing to accept the dumb proposition that stopping the haemorrhaging of regional towns will have a devastating effect on those communities. It’s going to be very difficult to convince an electorate growing weary of political lies. 

Regional pubs and clubs will be worse off by only $6.4 million. This is before any changes to their business models to attract some of the extra $25 million circulating in the community rather than being hijacked by Network Gaming.

Removing pokies

All’s quiet on the western front as Labor ponders its position on poker machines ahead of the March election.

What if and when pokies are reduced or removed from communities, players gamble at casinos instead? Will the community be better off? The consensus view seems to be confining pokies to a couple of enclaves will solve all problems. Will it?

The parliamentary select committee into Future Gaming Markets reported at the end of September. The written submissions were already on the public record, as were the transcripts of the public hearings. The minutes of the Committee’s meetings published at the time of the Report’s release revealed additional written evidence mainly from correspondence with interested parties.

One additional piece of evidence not mentioned in the Report was an eight page note from Treasury on the estimated economic impact to State tax receipts if EGMs were removed from hotels and clubs and a $1 bet limit was imposed on casino EGMs. It was a study worthy of more attention than it received.

Pokies: A time to be brave

Everyone is trying to pressure Opposition Leader Rebecca White to make up her mind what to do about poker machines post 2023, the government even bringing on a motion in Parliament a few weeks ago to try to embarrass her. A few weeks even a month or two isn’t going to make an ounce of difference.

All too often the overwhelming social arguments against poker machines are trumped by the gambling industry’s mantra of jobs jobs jobs. It’s important the bogus economic arguments are fully understood by Ms White.

Dear Ms White

You were right to delay framing a new position on EGMs until the Joint Committee presented its findings based on the latest evidence. That was the aim of the inquiry.

From a policy viewpoint an inquiry becomes pointless if trying to confirm predetermined policies drives the process.  Fortunately the Chair managed to keep focussed.

Confirmation bias however dominated the approach of both the Liberals and the Greens, culminating in Ms Courtney’s dissenting report arguing  that the significant reduction in EGMs in pubs and clubs recommended by four of the other five committee members would have “devastating economic and employment impacts on many businesses and communities..”.

Recommendations are supposed to be based on evidence presented. No evidence was offered by non EGM businesses stating withdrawal of some or all EGMs from communities would have adverse effects let alone devastating ones. Communities clamouring to retain EGMs to prevent devastation were also conspicuously absent.

Federal Group's pokie haul

Back in 1996 the Federal Group’s leisure business comprised the two casinos. Its revenue in that year was $134 million, well over half coming from gaming activities including tables, pokies and Keno. Net profit after tax for the leisure business was $4.4 million. The Group’s freight business provided another $2.2 million in profit. Borrowings were $50 million. In 1996 there was no spare cash to pay dividends to shareholders.

All was soon to change. On the first of January 1997 poker machines were rolled out into the community. Over the next 20 year the Group bought 12 pubs, the 9/11 bottleshop chain, built the Saffire resort, bought the leasehold business known as the Henry Jones Art Hotel, and acquired the lease on the new Maq01 hotel on Hobart’s waterfront.  The cash tsunami was such there was enough left over to pay $238 million as dividends to shareholders over the period. At the end on the 2016 year borrowings were $123 million, an increase of only $73 million over the 20 year period. Cash from pokies funded the show.