Saturday, 10 February 2018

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.



The Federal Group told the parliamentary inquiry into Future Gaming Markets that increasing the commission to pubs and clubs from 30 per cent to around 50 per cent as proposed by Federal/THA and subsequently adopted by the Liberals as the way to take the State to the next level, would result in a windfall capital gain of $150 million. This was independently verified, so the joint committee was told.

The Labor party is proposing to remove pokies from pubs and clubs in which case the capital value of the pokie component of pubs will be zero. The Libs policy of gifting licenses which will earn a 50 per cent commission from player losses in perpetuity means the venues with those licenses will increase in value by $250 million.

That’s the booty the Love Your Local boys are trying to grab. That’s what the Vote Liberal campaign is all about. There is no doubt some jobs are at risk. But if there were 5,000 jobs then there wouldn’t be any profits in pokies and the licenses would be worthless.

However Federal Group/THA have categorically stated increasing the pokie commission from 30 per cent to 50 per cent will increase the value of venues with pokie licenses by $150 million. Applying the same methodology gives venues with pokies a value $250 million greater than if those same venues didn’t have pokies as Ms White is proposing.

That’s the value of the gift which the Liberals intend to give pokie venue owners should the Liberals win.  The gift will be funded over time by pokie players as pokies are a government regulated activity that largely shifts income from one section of the population to another, all in the name of a few jobs and the supposed unassailable right to spend money as one pleases.

The value of the gift varies in proportion to how profitable pokies are to a particular venue. Because all venues have the same level of fixed costs per machine, those that attract higher losses are proportionately even more profitable than others. Which means that Federal Hotels with 15 per cent of pokies via its twelve pubs receiving 25 per cent of player losses will be given about 30 per cent of the $250 million handout. That equals $75 million.

The seven groups (including Federal’s Vantage Group of pubs) with 65 per cent of pokies receiving 75 per cent of all losses will get 80 per cent or $200 million of the Liberal handout. Without this assistance there is no doubt all will suffer balance sheet losses if pokies go. There are some who will be forced to restructure as reduced asset values and reduced income will lead to breaches of loan covenants. Injecting more equity or selling assets at distressed prices are the only realistic options.

That’s why a Liberal victory is so important.

It beggars belief that the proposed handout hasn’t received more scrutiny. A government which has turned its back on its stated market-based principles to allocate licenses and instead plans to bestow enormous gifts on a few warrants some explanation.  The State was just about to turn over a new leaf. For a while David Walsh had us starting to look at the stars but there are still some determined to keep us mired in the gutter.

7 comments:

  1. Are they only getting revenue from Pokies and do they invest that money back into the community they so willingly ...I was going to say profit from but on this scale there must be another word for it...just Vultures?

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    1. Most economists regard investing as building developing and acquiring new assets. The Federal Group has done very little investing of this nature, certainly much less than the undertakings it gave when negotiating the extension of the exclusive gaming license in 2003.Most of the funds generated from gaming have been used to either buy more pokie pubs and bottleshops or to pay dividends to interstate shareholders.

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  2. Disgraceful liberal party are ignoring the fact that pokie addiction is a scientifically recognised addiction. The libs are instead blaming the addict for getting addicted.
    The club's and pubs and casinos are neglecting self-excluded pokie addicts and are letting them back into pokie venues to grab more money, taking advantage of the addiction.

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  3. I ran into Pat Caplice today and he recommended I read your article. My understanding of the current Liberal policy is not that they "gift" the licences to venues, but rather they put them to tender. The windfall to the industry would surely be $250m or $150m minus the total cost of the tenders.

    There are 2350 non-casino pokies in the state. If the tender cost per machine per year over a 20 year contract (as this one has been) was $3100, it would raise $150 million. If the cost was $5300 per machine per year, the total would be $250m. These are back of the envelope figures, and of course I am not accounting for inflation. Please let me know if my calculations or assumptions are wrong.

    Someone with a longer history than me in the state might be able to say whether this is a better deal than when the original licence was handed out, or when it was renegotiated.

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  4. There is perhaps another way of looking at it. Disregarding the tender prices, the Liberals say there would be a $1000 to $2500 licence fee per machine per year (totalling $2.3 million to $5.8 million per year) and the government would take 48 per cent of revenue ($56m per year on Mr Wilkie's 2015/16 figures of $113.5m in losses a year).

    So even if the tenders are handed out for nothing, which may or may not be the end result, the state would receive $58m per year on the low licence fee figure and $62m per year on the high figure. Over 20 years the total revenue to the state government is $1.1 billion to $1.8 billion. If operators retain 50 per cent of revenues, or $56m per year on 2015/16 assumption, their total revenue adds up to $1.12 billion.

    Of course under the Labor policy - and as I understand the Greens policy - from 2023, all those figures revert to zero, as does cost the social cost of poker machine gambling, which is calculation for someone far more qualified.

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  5. David, my understanding of Liberal policy is that the licence to provide network services will be put out to tender. The THS/ Federal Group proposed that Network Gaming will provide the network services at $2 per day per EGM, which is $730 per EGM per year or $1.73 m for 2,375 EGMs, but the Libs have decided to run a tender. But it’s really just paying lip service to the markets. There’s not much profit in it at those figures, so the tender won’t attract any fancy offers. With Network Gaming having the IT setup and just having acquired Odyssey Gaming it is unlikely there will be many bids for the networking. THA and the Federal Group are a cosy oligopoly so will another network operator really want to submit a tender to monitor EGMs operated by Vantage Group/THA members?

    The Libs further propose the right to operate EGMs in pubs will be allocated to existing venue operators. There will not be a tender. The benefits of the right to operate is the gift to venue operators.

    You are right to say the windfall gain will be $250m less any up front cost of the licence to operate, but the license to operate is free under the Libs’ plan.

    You mentioned a tender to determine a fee per EGM per year. The problem with that is will the fee be the same for The Elwick as for the Devonport RSL? Having each venue submit a tender would be pointless because who else could operate EGMs at that venue. Designing he tender specifications become difficult. The FGM committee recognised the difficulties. Recommendation 17 proposed stepped tax rates to remove extra from the more profitable venues. The government ignored this and opted to follow the THA/Fed Group proposal of a flat tax rate.

    The public policy issue is this. Where a government protected activity results in operators making above normal rates of return, then an upfront amount for the right to operate combined with suitable (in this case stepped) tax rates should be instituted to shift the excess profits to the government as the facilitator or the protected activity. The Libs have ignored this universally agreed approach (amongst public policy nerds at least) and given existing operators the right to operate for a further 20 years and make profits well in excess of normal returns in the hospitality industry.

    Handing out valuable rights to operate to existing operators for free is public policy nonsense. I commented more fully in my analysis of the THA/Fed Group proposal which was included in an Appendix to the final FGM parliamentary report.

    It mustn’t be forgotten that the Libs plan for pubs may result in more revenue for both the government and pubs, and less for Network Gaming. However the THA/Federal proposal that the Libs have largely adopted in the case of pubs, is to slash taxes on EGMs in casinos to make up for most of Federal Group’s losses. The government won’t be better off as a result. Nor will players. It’s just a different split of the spoils amongst oligopoly members.

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  6. Thanks for the clarification, you are indeed correct. I should refrain from posting late in the evening. I note the premier seemed to make the same mistake today by some reports.

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