Wednesday, 4 January 2017

Gaming inquiry submissions

Federal Hotels has presented its vision of gaming in Tasmania after 2023. Lower taxes for table and EGMs in casinos and higher EGM taxes for pubs and clubs. Despite the absence of a link between tourism and gaming Federal Hotels suggested a low tax model which covers the casinos in Townsville Cairns and Darwin is the way forward for Tasmania. 

Federal Hotels’ views are contained in one of the 147 submissions to the parliamentary inquiry into post 2023 gaming arrangements in Tasmania. Over one hundred of these only comprised a few sentences, of varying levels of disgust/displeasure at EGMs in the community. Another twenty five were contributions from church groups and NGO’s who have seen the effects of social damage from EGMs.

Thursday, 22 December 2016

Future of gaming

Submissions to the Joint Parliamentary Inquiry into Future Gaming Markets in Tasmania have now been posted on line. My full submission which includes an analysis of gaming losses and Federal Hotels’ profits since 2003, how the spoils have been divided, a review of Federal Hotels’ promises and outcomes, discussion of the economic and accounting features of gaming as practised in Tasmania and suggestions for the way forward can be found HERE.

The executive summary is provided below.

Executive summary

One of the key terms of reference of this inquiry is to report on the potential structural features of the Tasmanian gaming markets from 2023 onwards. As a prerequisite, it is incumbent to fully understand the current arrangements, the size of the pie and how it is distributed. The primary focus of this submission is to cover the financial aspects of current arrangements.

Monday, 12 December 2016

Poker machine profits

Pubs and clubs have been battling to maintain gaming revenue since overall player losses from gaming peaked in 2008. Losses in pubs and clubs has been relatively stable over the past eight years. Casinos have suffered declines in that period..

The annual report of the Liquor and Gaming Commission revealed overall gaming losses in 2016 were similar to the previous year at $237 million. Casino EGM losses fell again but Keno in pubs and clubs came to the rescue with turnover jumping 10 per cent. The total tax take fell slightly as Keno tax rates are much lower than EGM tax rates.

Federal Hotels has offset reduced gaming income in casinos by expanding its stable of gaming pubs. Since 2003 when its sole license to conduct gaming in Tasmania was renegotiated Federal Hotels has increased pub numbers from four to twelve.

Gaming in pubs and clubs is the major focus of public concern, and will be at the forefront of the parliamentary inquiry into post 2023 gaming arrangements. If gaming is to continue outside casinos then a better understanding of the financial aspects is a prerequisite.

Federal Hotels cop most of the attention but other owner/operators with multiple sites have a significant presence in the industry. Glenorchy epitomizes the issue. Five out of eight of the State’s top EGM performers are in Glenorchy. Eight of nine Glenorchy venues are held by groups/persons with multiple establishments, with four of Federal Hotels’ twelve pokie pubs located here.

There is a logical reason for this hive of activity. Average losses per machine in Glenorchy are $80,000 per year or $217 per day compared to average losses across the State of $130 per EGM per day.

However it’s the split up of the associated costs, between fixed and variable, which helps make the bottom line so attractive for the top EGM earners..

For every $1 in player losses:

·       The State government gets 30 cents

·       The venue gets 30 cents

·       Federal Hotels as licencee gets 31 cents

·       GST is 9 cents

Third party pub operators get 30 cents in every dollar. If Federal Hotels own the pub the share is 61 cents.

There are direct costs that have to be met. In the case of pubs the hire of EGMs is a fixed cost. Wages of gaming staff are the main variable cost which is no more than 10 cents. Hence once fixed costs are covered a venue is making 20 cents in every dollar of player losses.

Federal Hotels as sole licencee and network operator will face mainly fixed costs to administer the network via network Gaming. Once the fixed costs are covered, Federal Hotels is making 31 cents for every $1 of losses, or 51 cents if it owns the pub. There are few variable costs. The El Dorado Deluxe EGM at the Elwick Hotel costs no more to administer than an EGM in the Dover RSL.

In economist’s speak EGM gaming has low marginal costs. Once fixed costs are covered every extra dollar of player losses sees a significant increase in the bottom line. Better than for bar operations and far superior to bottleshops. In the case of a pub the marginal EGM costs are mainly wages and these probably decline with increased turnover. For Network Gaming marginal costs would be close to zero.

In an area of public policy with heightened social risk, the current gaming system is perversely structured. Once fixed costs are covered tax removes only part of the bountiful booty. That’s why Glenorchy is so attractive, why multiple site owners already dominate and are looking to expand.

A system of stepped tax rates makes public policy sense if parameter changes such as altering the house percentage and the frequency of spins doesn’t remove some of the excess profits.

Even pubs with below average EGM turnover can easily make normal profits on their gaming, equivalent to levels in other areas of hotel operations. Average and above average venues currently make super profits.

The number of gaming staff in pubs in full time equivalent terms is only about 200 (based on gaming staff in pubs as a percentage of EGM losses). Network Gaming boasts a business unit with 30 staff running the network. Figures will be trotted out listing the number of licenced gaming staff, a total of 4,000 Statewide, but the number of FTE’s working at any time is a fraction of that figure. Stand by, however for the bogus employment argument.

Keno has exhibited contrarian behavior over time. Its relative share of the gaming pie has almost doubled since 2004, which combined with low tax rates and lower commissions to pubs and clubs compared to EGMs, is now making Keno an important contributor to Federal Hotels’ bottom line. Merely taxing Keno at the same rate as EGMs would increase Keno taxes five times. And raise $8 million per year

It’s always been a mystery why the community service levy of 4% of EGM losses doesn’t apply to losses in casinos. The notion that EGMs are part of the tourism industry is hopefully one that the parliamentary inquiry will lay to rest. Granting favourable licence conditions for EGM and Keno gaming on the pretext that the benefits will spill over into the tourism industry has demonstrably failed. The proceeds of gaming have been paid to shareholders and used to buy more gaming pubs and bottleshops. Not only is this contrary to the community’s understanding of what the 2003 sole licence agreement would provide, it has given Federal Hotels an unfair advantage over its competitors jostling to benefit from the spillover effects of MONA, paradoxically the sort of benefits that Federal Hotels were supposed to generate with the extension of its sole license in 2003 and the promised expansion of its tourism investments.

The gaming industry if it is to continue outside casinos will be a regulated industry. There’s no argument in logic, equity or economics why a regulated gaming industry should allow operators above normal rates of return compared to other industries or above normal rates of return compared to other offerings of the hotel industry.

The parliamentary inquiry has much to consider.

(Published in The Mercury 12th December 2016)

Sunday, 6 November 2016

Australia's new class war: A return to the Gilded Age

The betrayal of an entire generation of young Australians by the political classes by refusing to do anything about the Great Housing Bubble is a national disgrace.

Matt Ellis writing as Rational Radical sets out the arguments.

 “Even the so-called party of the youth, the Australian Greens, and the traditionally progressive Australian Labor Party are just as leveraged into landed wealth as any political force in the country.”

.        .        .        .        .

“But for the most part, the vanishing class consciousness of the newly minted home owner or property investor has created a political and media culture of looking the other way as wealth inequality and economic imbalances threaten to tear the system and community apart. It is so ingrained in the every day Australian cultural psyche, that it has become a truly rarified exceptionalism, wherein any person of influence or power who dares to question the path of the great Australian Housing Bubble is patronisingly reminded that history does not apply to Australia, and that genuine reform is for doomsayers and bankrupt European states.

Indeed, our exceptionalism has morphed into full a blown collective denial of the very same imbalances that brought half of the modern world to its knees only 8 years ago. That somehow these forces do not apply to the economic miracle that is Australia, and that income inequality is only a matter of a few mega-rich corporations evading their tax obligations.”

Spend five minutes to read Matt’s compelling blog..

Monday, 31 October 2016

Forestry Tasmania's insolvency report

Resources Minister Barnett’s recent statement following the release of Forestry Tasmania’s 2015/16 annual report was by no means the first attempt to report on problems in the forest industry.

Another report summed it up pretty well:

“I received from the Hobart Chamber of Commerce a statement on “The hardship suffered by the timber industry in Tasmania,” in which it is stated “For the past few years....... the sawmilling industry has been in a very bad state, until now, with the added effect of the general depression, the position is really desperate.”

“While the Chamber of Commerce of Hobart considers “there is every justification, nay, necessity, for assistance and relief being granted by the Commonwealth to this State,” no useful information is afforded in the shape of any practical proposal for the betterment of the methods of production.”

That’s from a Report of an Inquiry into the Financial Position of Tasmania as Affected by Federation.  Its author was Sir Nicholas Lockyer.

The date of the report? April 1926. 

Here we are ninety years later.

The current government whilst in opposition didn’t appear to realise that the margins on forest sales were still failing to cover overheads, not dissimilar to problems in1926.  For some dumb reason they thought they could grow the industry and reduce the losses, and as a consequence went to an election saying no more handouts. No more budget funding for FT.

When things didn’t work as they told us they would, $30 million was slipped in the back door from Tas Networks on 1st July 2015. That was quickly seen for what it clearly was, viz a less than honest continuation of the same sins condemned when committed by political opponents.

Since then FT has received further cash of $26.5 million from government, the latest amount on 30th June 2016 being another $4.4 million from Tas Networks, this time for a transmission network at the Southwood plant.

Now Minister Barnett has announced the government will take over FT’s superannuation liability of $158 million. The 2015/16 mill door sales after contractor payments barely provided enough to cover payments to retired foresters of $12.5 million. Only $4.5 million remained to cover remaining cash operating costs of $30 million and capex payments of $8.5 million.

Whether it’s a budget appropriation, a back door injection, an arranged asset transfer or the takeover of a huge liability, it is still a government handout. If it looks and walks like a duck there’s little doubt what it is.

Wednesday, 26 October 2016

Forestry Tasmania to reveal all?

It wasn’t really surprising to hear Resources Minister Barnett finally admit Forestry Tasmania’s model is broken, the last Tasmanian to do so.

What was a little surprising was that he didn’t bother saying anything, nor did FT’s 2015/16 Annual Report released at the same time on Tuesday 25th October, about the sale of hardwood plantations needed to cover FT’s losses for 2016 and the current year 2017.

Perhaps he will reveal all today?

Perhaps he will tell us about FT’s agreement with Gunns’ Liquidator about the MIS trees growing on 14,000 hectares of FT’s land? The very trees that will bail out FT, either as a result of the proceeds of sale of both land and trees to a third party or alternatively the harvesting  for plantation chips.

The Annual Report showed a large reduction in private plantations growing on FT land and a consequent large increase in FT plantations growing on FT land, so it was logical to assume FT had done a deal with Gunns to take over ownership.

Most of MIS trees growing on Gunns’ land were all sold to New Forests two years ago and are now managed by Forico.

Other MIS trees were growing on land leased from third parties. The biggest lessor was FT. Land owners with smaller areas leased to Gunns have been encouraged to buy the trees growing on their land for $1 rather than attempt to get the Liquidator to pay rental arrears.

But the Liquidator wasn’t going to sell the trees to FT for $1. He believed they were worth much more. Some were ready to be harvested and the remainder could either be harvested or thinned so there was immediate money to be made.

A year ago the Liquidator claimed $40 million from FT for the trees, this amount being the establishment and maintenance costs. There’s probably about 2 million tonnes of trees at this stage which makes the price $20 per tonne. New Forests when they purchased from Gunns probably paid between $5 and $8 per tonne. Incidentally that’s why plantation harvesting is currently profitable. Anything below $20 is profit for New Forests.

FT weren’t going to pay that price even if it were to offset the amount of rental arrears which as at today are probably about $6 million.

We know from court documents lodged by Gunns’ Liquidator that an agreement was reached a month ago with FT and its legal representatives Abetz Curtis.

Perhaps Mr Barnett will tell us today what was agreed.

Monday, 24 October 2016

Hydro ups ante in Basslink dispute

Hydro Tasmania has upped the ante in its dispute with Basslink Pty Ltd.

A month ago it unilaterally stopped paying the monthly facility fee for use of the interconnector linking Tasmania with the national electricity market. It is using the cable, but refusing to pay.

Basslink P/L is part of Keppel Infrastructure Trust, part-owned by the Singapore Government and listed on the Singapore Stock exchange.

On Monday last week, Keppel lodged financial statements for the period ending September 30.

It revealed the woes of its wholly owned subsidiary Basslink P/L. Basslink is a reasonably simple operation. It owns an interconnector cable. Hydro has an agreement for exclusive use of the cable for another 15 years. The facility fee varies from month to month, depending on whether it is available for use, the electricity price differences between Tasmania and the mainland, and prevailing interest rates.

During the outage from December 2015 to June 2016 the facility fee was zero. It resumed again after the repair, roughly at the rate of $75 million per annum, until a month ago when Hydro stopped paying.

Basslink owes $700 million to its banks. The estimated amount Hydro owes Basslink is $500 million. That is the estimated facility fee over the next 15 years in today’s dollars.

If Hydro doesn’t pay Basslink, then Basslink has trouble paying its banks. With no income from Hydro during the outage it managed to keep paying the banks, but found itself in breach of loan covenants. It found itself unable to meet the minimum debt service coverage ratio and therefore was required to agree on a new long-term financing plan. Basslink’s $700 million of borrowings are listed as current liabilities, meaning they are repayable in this current year. A new long-term financing arrangement is the only other option.

Just as Basslink’s $700 million loan is being renegotiated with its banks, Hydro played its card. It stopped paying the monthly fee. Hydro was not insured against the Basslink outage. Hydro may have to prove Basslink was at fault to recoup damages from Basslink. But Basslink’s insurers accepted the outage was a force majeure event, an act of God, and have paid out compensation of $40 million. Hydro does not accept it was a force majeure.

The immediate problem for Basslink is that while $11 million went to partially pay for the cost of interconnector repairs, the balance was snookered by the banks. It is yet to be released. The banks are hanging on to it, pending finalisation of the new long-term financing plan.

Hydro just made Basslink’s cash situation even worse.

Everyone has a different agenda. The banks would like to see their exposure lowered, I guess. Hydro would like some compensation, no doubt. I’m sure it would accept a lower fee. It is a classic standoff. Either Basslink’s parent has to put in more, or Hydro has to resume paying, or both, else Basslink is insolvent. Basslink is an Australian registered company, so Australian insolvency laws apply.

The worst-case scenario for an insolvent company is liquidation. This is possible, but unlikely. Basslink’s banks will not want to take control of the interconnector in an attempt to recover its loans.

Yet Keppel, Basslink’s parent, will not want to tip in too much unless it can be assured the interconnector asset is worth it. What the interconnector asset is worth, however, depends almost entirely on the revenue it receives from Hydro. It is difficult to envisage a situation where someone other than Hydro operates the cable.

Has Hydro made a strategic play? A risky one perhaps?

Whether Hydro manages to negotiate a lower fee with Basslink might not have any effect on the $350 million it owes Macquarie Bank in respect of a poorly judged side deal to protect itself from interest rate rises impacting on the facility fee. Macquarie agreed to pay Hydro any extra fee that resulted from a rise in interest rates. In return Hydro agreed to pay Macquarie the fee saving resulting from a fall in interest rates. Interest rates started falling the minute Hydro agreed to the side deal. It pays Macquarie Bank about $30 million a year. Hydro will not reveal the actual figure. It is commercial in confidence.

Basslink was insured against physical loss and also business interruption. Unlike Hydro. At the parliamentary inquiry on August 4, seven weeks after the interconnector resumed, Hydro chief executive Steve Davy, in response to a question as to whether Hydro will insure against future outages, said: “We have not, as a corporation, considered or entered into discussions with other parties about covering that possibility.”

There you have it.

Imagine almost writing off the family car and then saying, “gosh I didn’t expect repairs to take so long and be so costly and I didn’t anticipate paying for hire cars for six months. How was I to know it was going to cost $180 million? It was a one-in-2600-years event, but will I insure the car now that it’s back on the road? I haven’t considered that.”

Imagine saying that?

The Basslink deal is an example of a public private infrastructure arrangement. Essentially the interconnector forms part of Hydro’s generating assets. The traditional way was to fund these was with debt. The annual finance charges of $100 million paid by Hydro to Basslink and Macquarie Bank  are de facto finance charges and were these added to interest  payable on Hydro’s other borrowings of $900 million , the total would place Hydro close to a breach of its own loan covenants.

One thing for sure is there’s plenty of water yet to flow under the bridge.