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Review of Gaming Arrangements in the Lead up to 2022

Review of Gaming Arrangements in the Lead up to 2022

By Wisewould Mahony
March 23, 2016

The Victorian Government announced on 7 August 2015 that it would undertake a review of the current regulatory arrangements for gaming machines in the lead up to the expiration of the current entitlements in 2022.

The current position

The current Victorian State Government policy took effect in August 2012 and saw Victoria shift from a duopoly gaming operator model to a venue operator model. The effect of this change enabled venue operators to operate gaming machines providing that they held gaming machine entitlements. It also meant that venue operators became responsible for matters that had been previously assumed by Tabcorp and Tattersalls including the acquisition and operation of machines, associated monitoring and supervision fees as well as payment of gaming machine taxes.

Under the current system, gaming machine entitlements were offered through a competitive process which saw some 27,300 entitlements allocated to venue operators of both clubs and hotels, at a total value of roughly $980 million. Each entitlement had an initial 10 year term from 16 August 2012 to 16 August 2022 and venue operators were granted an option to enter into a deferred payment plan over 4 years for hotels and 4.5 years for clubs.

Of the current gaming machine entitlements in the State of Victoria, 71.2 per cent carry a geographic area condition in metropolitan Melbourne. The remaining 28.8 per cent carry a geographic area condition outside of metropolitan Melbourne.

The current tax imposed on gaming machines differs from both hotels and clubs. Clubs have a lower tax rate, representative of the benefits they provide back to the community. In order to qualify for this reduction clubs must demonstrate that an equivalent of 8.33 per cent of net gaming expenditure is applied to community benefits.

The State Government accepted submissions on this matter up until 26 February 2016 with a report to be provided by the Department of Justice and Regulation to the Minister for Consumer Affairs, Gaming and Liquor Regulation in July 2016.

Outcomes sought from the review

The Victorian Government’s review will focus on an assessment of the existing regulatory framework. The review will take into consideration the degree of success of the current gaming venue operator model and help to inform the Government in relation to the appropriate structure for Victoria, including the appropriate number of gaming machine entitlements to be made available to both hotels and clubs.

The current regulatory settings for the venue operator model direct that:

  • There is a cap of 27,372 machines in the state of Victoria;
  • 105 machine cap per venue;
  • There is a 35 per cent ownership restriction, meaning that no hotel or venue operator may own or have a connection with more than 35 per cent of hotel entitlements;
  • A requirement exists that a minimum of 20 per cent of entitlements are used in non-metropolitan municipalities; and
  • Entitlements are divided equally between clubs and hotels.

The Government will look to assess whether revenue from gaming is distributed fairly, taking into account the current structure of gaming machine taxes including the tax differential between clubs and hotels.

Further, the review will assess the appropriate type of allocation of entitlements, be that an administrative allocation requiring the involvement of the government to direct who obtains entitlements and what is paid for them, or a competitive allocation, allowing the market to determine allocation based on its own perceived value.

In addition, the review will evaluate the appropriateness of the current 10-year term for gaming machine entitlements, and whether entitlements should be issued for a longer fixed term or in perpetuity as is the case in New South Wales, Queensland, South Australia and the Northern Territory.

The review will look to assess

  • Whether new entitlements should be allocated, and if so how many should be allocated;
  • How the price of any new entitlements should be determined;
  • Whether changes are required to the terms of payment for entitlements;
  • How the entitlement transfer market should operate; and
  • How the future value of gaming entitlements which are on sold.

The government is proposing that the review be conducted across two stages being:

Stage 1: A broad assessment of the performance of the venue operator model and whether it is the appropriate model to continue to use, as well as a review of the regulatory settings for that model and any changes required. 

Stage 2: Will focus on the implementation of any reforms which arise from the new arrangements including any reforms required in respect of the allocation of new entitlements.

The primary focus of the review from a governmental perspective is to ensure that the new arrangements act to establish a system of allocation that is both “effective and efficient” for all stakeholders involved.

How 2022 will change the Industry

The review being conducted in the lead up to 2022 has the potential to significantly affect the industry.

The government is tasked with the job of ensuring that the distribution of revenue from gaming is both fair and equitable for all stakeholders.

One of the main issues dealt with under this review will be the term of entitlements and subsequently, the way in which entitlements are to be paid for. As noted, the current term is 10 years, however other States and Territories operate by providing entitlements in perpetuity. Should perpetuity be favoured as the best way forward, the government will look to ensure that the transfer market is structured in a way which enables not only the seller of the entitlements, but also other stakeholders including the government, to benefit from these transactions.

With the increase in urban sprawl and the unofficial extension of what is described as metropolitan Melbourne, there is no doubt that the government will look to review their position regarding the current geographic location structure for the distribution of entitlements.

It is well known that in general, hotels have a higher level of turnover from gaming entitlements than those held by clubs. While the government will no doubt look to ensure that the distribution of gaming entitlements between hotels and clubs remains at parity, the difficulties currently being experienced in the hotel industry require attention. The a lack of consumer confidence and the breadth of new options and non traditional offerings have acted to dilute the capacity of this traditionally strong industry, necessitating further consideration as to the longer term affects on the industry as a whole and the needs of operators. 

In addition to these concerns it must be emphasised that hotels have historically been better placed to cover the costs associated with gaming entitlements. If the government intends to continue to deliver parity with regard to the disbursement of gaming entitlements it must first ensure that it provides a stable platform from which to deliver these entitlements. There is no denying that 2010 saw the current system commence with several inconsistencies as clubs and hotels purchased entitlements at differing price levels and through different mechanisms. In order for the government to ensure that owning and operating gaming entitlements remains a desirable form of income for industry operators they must ensure that not only are the costs associated equitable for all operators, but further, that they take into consideration that not all venues have the capacity to benefit from these assets at the same level.

The current 10 years term effectively fuels the disparity of capacity that exists in the industry. With such a short period under which to operate these entitlements, venues with lower levels of turnover effectively have less time to benefit from these assets. The ability to recover the initial cost of entitlements is of course linked to the direct and associated income derived from these assets making it difficult not only to operate short term, but also to strategically plan for the future. 

Discussion will continue within the industry regarding the length of tenure provided to the next issue of entitlements, and the government will no doubt look to ensure that the ongoing capacity of operators maintains a positive direct correlation to the distribution of entitlements. In order for all sectors of the industry to be successful in acquiring and operating gaming machine entitlements, the system that is put in place post 2022 will need to benefit the Victorian hospitality industry as a whole and not just the strongest tier of venues. It is transparently evident that the ability of the industry to service the State in its entirety through the appropriate distribution of entitlements is the most productive outcome not only for venues and their operators, but for the also for the government to enable it to derive its expected share of income from the gaming industry.

While 2022 is some seven years away, there is little doubt that the government has and will continue to take a proactive approach to the review of gaming entitlements. The impact of the input received from industry stakeholders will help shape the government’s positon for the future, however there is little doubt that the government will also carefully consider the initiatives of neighbouring States in their pursuit of an efficient and effective system under which entitlements shall operate.

As the submissions of the stakeholders are not publicized at this stage, it is premature to speculate on how the Hotel and Club sector will pitch their respective submissions but it can be expected that their recommendations may differ in seeking the best deal for their constituents.