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.

The quality of the debate around gaming has not been very high” observed Peter Hoult former Chair of Tasmanian Gaming Commission in one of the more cogent submissions.  Mr Hoult rightly questioned the conventional wisdom that the State government is addicted to revenue from EGMs. He noted it only comprises 1% of government revenue. This is not to suggest that problem gambling should be ignored. On the contrary he pointed out the gaming industry’s downplaying of the harm from EGMs is based on specious arguments about the rights of recreational gamblers. Few play the pokies regularly, but if harm results to between 25% and 40% of those regular users then we do have a problem.

Mr Hoult confirmed that almost all gambling revenue comes from Tasmanians. The Tourism Industry Council (TICT) also observed there is no evidence to suggest gaming “has any influence on our appeal as a visitor destination”.

That should’ve been the end of the gaming/tourism link but the TICT still maintained it was appropriate that Tasmanian gamblers be used to prop up tourist operators in regional areas and Federal Hotels at its two casinos. The TICT turned a blind eye to all the evidence confirming that Federal Hotels’ profits from gambling since the licence extension in 2003 have been predominantly used to pay dividends to shareholders and buy existing pokie pubs and bottleshops , not investing in new infrastructure as promised. The TICT presented no evidence or analysis as to how the current arrangement have worked or establish any ground rules for assessing appropriate government assistance to industries. Its submission was a disappointing cut and paste of the usual unsubstantiated assertions one has come to expect from a lobby group.

The Tasmanian Hospitality Association (THA) based its submission on a consultant’s report. Consultants don’t necessarily produce more rigorous conclusions. Try this : EGMs in pubs should be encouraged because EGM pubs employ twice as many Tasmanians as those without EGMs. Hang on a bit. Didn’t the pubs get EGMs in the first place because they were better performing, had higher turnover and employed more staff ?

Another major recommendation from the THA is that a system of gaming licenses for each pub be adopted replacing the current sole license system. The introduction of licences at the venue level in Victoria coincided with an 80% increase in new hotel infrastructure. Correlation doesn’t necessarily mean causation. THA thinks it does. Venues will have to buy licenses, finance machines and spending on hotel infrastructure will skyrocket? Possible but only if the licenses are dirt cheap with a long term. The question as to why non EGM operators should they be disadvantaged was avoided?

Peter Hoult was dead set against licenses at the venue level: “Interstate experience has shown that such an ownership model results in dangerous inter venue competition to attract more gamblers and very high costs for the government in oversight and compliance.” This view was shared by the current Gaming Commission Board who argued it would be “highly problematic.”

Federal Hotels’ submission is clearly a product of its PR department. There is no analysis of the current arrangements for the inquiry to assess whether they’ve worked as expected. Isn’t that the first question that needs to be addressed? Instead we get details of $2 million worth of community sponsorship in the latest year. That’s only $1.4 million after tax, an insignificant sum in the context of the Group’s cash flows. Rather than more detail about the financial statements we instead get a report from Deloittes about the contribution of Federal Hotels to the Tasmanian economy, a report which will confuse lay readers rather than explain, full of disclaimers and assumptions.

The Deloitte report assesses the contribution of Federal Hotels in value added terms.

Player losses are one side of the coin, the debit amount. The equal and opposite amount, the credit amount, is gambling revenue to Federal Hotels. Pretty straightforward. Player losses equals Federal Hotels’ gambling revenue. To every debit there’s and equal and opposite credit. Then along comes an economist who says what we really should be looking at it the value added component. If an item costs a company say $90 and sells for $100 then the value added by the company is $10. Reducing revenue by any inputs bought interstate will give the value added to the Tasmanian economy. This is a valid exercise but in this case the method was structured to suit the occasion. One needs to look at the breakup of the value added amount across Federal Hotels’ business segments provided in Deloitte’s report. The following is the relevant table:

 Note2: Gaming includes all of the revenue and expenditure associated with Wrest Point and Country Club including non-gambling functions such as food and beverage services and accommodation

Direct contributions are Federal Hotels’ value added amounts. The indirect contributions are estimates of value added amounts by Federal Hotels’ suppliers.  Amounts only relate to value added in Tasmania. Five business segments are listed. ‘Transport’ relates to Federal Hotels’ Cope Transport which only has a small presence in Tasmania, hence the low contributions. ‘Other’ is the backroom area of the business which can be safely ignored. The striking thing about the breakup in the table is the amount allocated to ‘gaming’. This is because, as noted in footnote 2 above, gaming includes all accommodation food bar and conference/ seminar income from the two casinos. The 450 rooms at both venues comprise the bulk of the Group’s rooms statewide. Hotel operators like Federal Hotels know precisely the revenue and cost breakups between accommodation, food bar bottles and gaming. To lump it together as Deloittes have done appears to be designed to overstate the contribution of gaming, thus laying the groundwork for the thread running through Federal Hotels’ submission that the government needs to go softly with any changes to gaming because it could do damage to the Group which just want to do the best for Tassie, in the future as they have in the past, blah blah blah.

With 2015/16 Tasmanian gaming losses at $237 million, or $216 million net of GST, less, say, a few interstate inputs like the cost of the EGMs needed to extract the losses, a figure somewhere towards $200 million is the  likely ‘value’ that is added by gambling to the Tasmanian economy. But there’s nothing magical about the value added concept. Value added is simply a slight rejigging of player losses. When history is rewritten by economists, Robin Hood won’t be a thief. He will be a value adder.

To lump all business activity at the two casinos which contains significant tourism components and label it all as ‘gaming’ is misleading. As we saw above there is no evidence of a current link between gaming and tourism in Tasmania. But like most models used in consultants' reports, the way a model is used and the data fed in usually depend on predetermined conclusions. That looks like what has happened here. Gaming is alleged to contribute 80% of all value added by Federal Hotels to the Tasmanian economy. Gaming’s big but not that big. Probably not much more than half. Not 80%.  In any event value added by gaming equals gaming losses by punters. It’s important not to lose sight of this inescapable fact.

Then come the disclaimers and caveats. In other words the fine print. A quote from the Productivity Commission was one such caveat: “However, any particular industry’s contribution to these benefits is much smaller than might at first be thought, because substitute industries could produce similar, though not equal gains.” Other industries might add just as much value? Who’d have thought that? Then there was this: “The analysis assumes that goods and services provided to the sector are produced by factors of production that are located completely within the state or region defined and that income flows do not leak to other states.” In the 2015/16 year there appeared to be a bit of leakage....payment of dividends and repayment of loans totalled $31.5 million for instance. The disclaimer at the end says it all: “This report is not intended to and should not be used or relied upon by anyone else and we accept no duty of care to any other person or entity.” It’s not uncommon for disclaimers to suggest ‘reliance’ should be discouraged but this disclaimer includes ’use’. Does this mean the inquiry can’t use Deloitte’s report? Why attach it to the submission if that’s the case?

Having inflated the importance of gaming and casinos in its operations Federal Hotels made its plea for another special deal for casino gaming the central part of its submission. It called for reduced taxes and license fees covering table gaming, reduced taxes on EGMs in casinos with increased taxes for EGMs in pubs and clubs to make up the revenue shortfall.  Leave Keno taxes at the existing low rate.  It is quite a bold ask. No analysis of where all the funds have gone since the last special deal. Instead lots of smiling contented faces and stories how Federal Hotels gave $1000 to young Johnnie to help him make teddy bears for Xmas gifts. It was an appeal to the heart not the head.

The argument for reducing gaming taxes in casinos went as follows:

“Federal Group contends that the arrangements in place in other Australian regional centres with casinos should provide an appropriate model for Tasmania post-2023 – especially those applicable in Townsville, Cairns and Darwin.”

Notwithstanding that there is no evidence to link gaming and tourism and Tassie punters fund most player losses at casinos, Federal Hotels wants another special deal. A race to the bottom under the guise of offering competitive tax rates for casinos is the rationale.

Peter Hoult in his submission argued against the race to the bottom approach:

“There is little to be gleaned from other jurisdictions in these matters. Such arrangements have largely been the result of historical factors, the will of various governments at various times and the relative strengths and influence of the industry at various times in each location.”

Low numbers at one community forum was sufficient for the Dixon Hotel Group to claim “the absolute lack of community concern over poker machines”.  It makes you wonder about everything else they may say. “Gambling has always been accepted as part of the ‘Australian Way of Life’“. It was like reading a remedial Grade 7 essay rather than a position paper covering such an important economic and social issue confronting Tasmania. “Because areas like Glenorchy, Devonport and Burnie spend more per capita on EGMs, such data must prove that people in those areas enjoy playing EGMs more than people in other areas of the State, so logically that is where the machines should be located.”  No concessions were given to the almost universally held view that EGMs are addictive for some people at least, when explaining why they want more pokies in Glenorchy. Maybe Sutton’s Law, named after legendary bank robber Willie Sutton, has another disciple. When asked why he robbed banks Willie replied:” ‘Cos that’s where the money is.” Nevertheless one needs to be grateful for Dixon Hotel Group’s no nonsense explanation, free of PR gloss that suffocates most public discourse.

The Group labelled the thwarting of its EGM expansion push as “anti competitive behaviour”. That’s taking a long bow. The gaming market is ipso facto anti-competitive, because competition would have been a disaster. It’s been heavily regulated from day one. Appealing to the God of Competition is spurious. To be crass, it’s little more than a territorial dispute between unequal participants in a protection racket. Perhaps the government should remove the object they’re squabbling about, the excess profits, or to use the new vernacular, the value added by the addicted punters. One of the strengths of the current sole license system, as observed by Peter Hoult, has been the lack of inter venue competition which judging by interstate experience  attracts more gamblers, which if combined with the Dixons’ preferred model of venue ownership of EGMs would result in more losses and higher costs for government in oversight and compliance.

The Dixon Group’s apparent problem with the current setup is “the Tasmanian EGM system is pathetic in terms of return to venue when compared to other States.”  A  dodgy schedule, continuing the Grade 7 remedial  tradition, was attached highlighting “the exceptionally poor financial return from EGMs” for pubs caused by Federal Hotels grabbing too much for itself. The example chosen wasn’t representative. It was a less than average venue that had been selected. This  wasn’t adequately explained to the reader. Top venues in Glenorchy are 2 ½ times more profitable.  It just looks like further evidence of the squabble over how to divide the spoils.

We are always told by the industry that Tasmania has the most rigorous harm minimisation framework in Australia. Peter Hoult’s wry observation was “given the laissez faire approach taken in other jurisdictions this is not a massive achievement.”

The inquiry’s issues are gradually coming into focus.

·       There are a significant number of people who would prefer to see EGMs removed from the community.

·       Federal Hotels wants a special deal for casinos, a low tax regime similar to Townsville Cairns and Darwin.

·       TICT supported a special deal for the casinos hoping that the resultant casino upgrades would have spill over benefits for the tourism industry as a whole, despite rejecting any link between gaming and visitor numbers and failing to produce any analysis or evidence about the efficacy of the current arrangements which promised the same thing.

·        No one else argued that EGMs in casinos should be concessionally taxed or that the Community Service levy shouldn’t be extended to casinos.

·       Federal Hotels wants EGM taxes in pubs to rise to offset the reduced revenue from casino gaming. This would affect its pubs. That was the only concession it made.

·       Both THA and the Dixon Hotel Group favour licences at the venue level but gave scant details how the transition from the sole licence system may work .Peter Hoult thought it a retrograde step. The Dixon Group acknowledged it will be difficult and would probably favour Federal Hotels in any case. As an alternative it suggested a system with two network operators to provide choice and presumably in its case to avoid dealing with Federal Hotels.

·       A system of stepped tax rates seems to have support, the Dixon Group even suggesting rates from 5% to 60%. (The current rate is 30% including the Community Service Levy). Dixons suggested fixing a price for venue licences based on 2023 revenue/losses rather than via a tender. Why not just tax revenue/losses at stepped rates each year was not adequately explained?

·       No one mentioned the increasingly lucrative returns flowing to Federal Hotels from Keno. Federal Hotels wants to see a continuation of the tax rate at 6% (which it deceitfully represented as 15% by including GST)

·       There were no persuasive arguments presented in favour of adopting practices in other States apart from self interest.

·       There were no persuasive reasons presented why the parameters governing player losses, such as spin rates and the house percentage could not be altered as part of a revised arrangement.

The inquiry will commence its public hearings in February. All submissions can be found on the Inqiry website.


  1. It appears that most business submissions display an amazing testament to greed and a total lack of interest in the public who are loosing such large amounts to gaming.

    Sadly this rather confirms the view that the gaming operators just do not care about their victims.