Poker machines: Super profits or a new way?

(An abridged version of this blog was published in The Mercury here)

 

The odds on Federal Hotels retaining an exclusive license to conduct gaming operations in Tasmania after 2023 lengthened considerably after the Tasmanian Hospitality Association (THA) publicly aired a rift with its hitherto close ally and largest member.

It was reported here that THA members wanted a bigger share of the spoils from gaming losses that currently go mainly to the exclusive license holder.

What exactly are the spoils up for grabs?

Will Minister Harriss outlast FT?

Resources Minister Paul Harriss’ performance at Forestry Tasmania’s scrutiny hearing last Friday will do little to muffle  calls for his removal.

It was a shocker.

A bad day was assured when Mr Harris’ opening address referred to 470,000 tonnes of peelers being supplied to Ta Ann for 2014/15.

What?

The actual figure was 144,000 tonnes just below the contracted amount.

How could a Minister get it so wrong? How could a Minister with the lightest load in Cabinet make such a mistake reading from a prepared statement?

The Minister again talked about the massive turn around in ‘comprehensive income’ from a loss of $43 million in 2013/14 to a profit of $31.7 million, shown elsewhere to be a mirage.

 A few minutes later Chairman Annells corrected the record:

“It shows a remarkable turnaround........ from the board's point of view, it is interesting,....... but does it have any real significance?  None whatsoever.”

Federal Hotels nonsense

Greg Farrell is at pains to emphasise Federal Group's contribution to the Tasmanian economy.

His desperation is starting to show.

He was reported as telling staff at a recent Xmas function that “overall, payments from our company account for eight percent of all State Government revenue. These payments have allowed Tasmanian Governments over that period to invest in major services for the Tasmanian community such as hospitals, schools and roads.”

When you’ve got a captive audience and you’re supplying free grog, you can get away with anything.

The figure’s not 8%. It’s closer to 1%.

Has FT turned the corner?

A bit of lipstick makes no difference.

It’s still a pig.

Resources Minister Harriss’ media release that accompanied FT’s 2015 Annual Return was a pathetic attempt to gloss over the reality of FT’s situation.

The cardinal rule when assessing the financials of an insolvent entity is to skip the income statement and focus instead on the cash flow statement detailing what comes in and goes out the door.

The 2015 cash flow statement reveals things are worse.

Federal Hotels' predicament

Federal Hotels’ disappointing 2015 financials lodged last week with ASIC highlights its current predicament coinciding with the shock horror realisation that its exclusive gaming license may not continue into perpetuity under existing generous terms and conditions.

Net operating profit after tax was $20 million, down from $21 million in the previous year.

The profit soon disappeared with banks grabbing $9 million and shareholders $15 million.

Notwithstanding that Federal Hotels have $100 million worth of capital expenditure projects on the drawing board including redeveloping Wrest Point and Launceston Country Club casinos plus a new hotel at Port Arthur the shareholders appetite for dividends continued unabated, a craving that has seen $162 million vanish from company coffers in the past 10 years.

We now hear that Federal Hotels will put a handbrake on investment in Tasmania if it does not get certainty over a gaming license in the State.

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.

Carbon accounting & FT profitability

As FT contemplates its future, a future free of government subsidies, its rolling 3 year production plan for native forest harvesting has been posted on line.

Almost all the planned coupes are small in size and disparate in location inevitably increasing the extraction costs of timber, thereby making a return to profitability even less likely.

Notably included in the current 3 year plan is the clear felling of a 51 hectare coupe FD 053A at Lapoinya in NW Tasmania.

FT privately suggests harvesting the coupe will be a profitable operation. This is a rare occurrence for FT which, on average loses $20 for every tonne of timber harvested or $250k in cash terms for a coupe this size.

It is therefore a little surprising FT bypassed the opportunity to showcase its profitability and sustainability bona fides and release a little more info about a alleged profitable operation, one that needs to be replicated across many coupes if FT is to survive the current insolvency period currently overseen by the head of Treasury as a newly appointed director of FT.

The Friends of Lapoinya Action Group (FLAG) has engaged with FT with a view to fully understand what is planned. However the perfunctory community consultations have raised more questions than answers.

As part an overall economic assessment of the coupe FLAG undertook a carbon audit to ascertain likely carbon losses from a clear fell operation.