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					RESPONSE TO NSW DEPARTMENT OF THE ARTS, SPORT AND RECREATION

CONSULTATION PAPER DATED 9 APRIL 2009

REGULATORY FRAMEWORK FOR PUBLIC LOTTERIES IN NEW SOUTH WALES

(hereinafter “The Consultation Paper”)

7 May 2009

By email as electronic copy : lotteries@dasr.nsw.gov.au

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OVERVIEW Key Assumption of The Consultation Paper This is set out on page 1 at 1.1 Background : “upon approval of a new operator for NSW Lotteries, issue an exclusive, long term licence of approximately 30 years or more, providing for the distribution of lottery products in NSW”. Hereafter this is referred to as “Exclusivity”. The balance of The Consultation Paper assumes Exclusivity.

Synopsis Exclusivity is vastly different with the situation that prevails in NSW at the moment where the legislation (pursuant to bi-partisan competition policy amongst other things) invites new parties to apply to run new games. Exclusivity is a ridiculous “straight jacket” on economic activity for NSW, made all the incongruous at a time of recession and job losses across NSW. If Exclusivity is implemented, it will:a. place the budgetary position of NSW after The Sale at serious evidentially proven risk of further real deterioration; make a mockery of The NSW Premier’s repeated claims that NSW is open for business and encourages new business, innovation and jobs growth; destroy the politically bi-partisan support for encouraging competition that has existed in NSW and Federally since the 1998; be seriously at odds with any notion that the Labor Party in government has any interest in harm minimisation (preferring hard addictive gambling over soft non-addictive entertainment for its revenue flows); demonstrate that the NSW Government prefers to see new business that can benefit the New South Wales Government’s budgetary position driven away not only now, but also for a further “30 years or more”; demonstrate that the NSW Government is repeating the mistakes of both the Cross City Tunnel and its mishandling of Betfair’s desire to establish itself in Sydney rather than Tasmania; & not be effective in preventing the sale of other lottery products in NSW, even though New South Wales will then derive no revenue from their sale (Betfair all over again).

b.

c.

d.

e.

f.

g.

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Irrespective of the position on Exclusivity Either : a. The Consultation Paper was devised for a short sighted pre-determined goal : ie presumably to (hopefully but far from necessarily) increase a sale price for a possible sale of NSW Lotteries (“The Sale”) or its authors are (on the kindest interpretation) very lazy.

b.

The Consultation Paper, with its self-evident lack of analysis from Exclusivity right down through its various permutations, is far below the standards expected of a thoughtful and professional analytical paper because it : a. demonstrates that there has been no thought or analysis of consequences beyond The Sale; merely reflects the uninformed, lazy and short-sighted goals of one uninformed, lazy and short-sighted point of view;

b.

c.does not mention this new proposed fundamental restriction of present and future economic activity represented by Exclusivity in the NSW economy, nor reasons canvassed as to why or its possible benefits; d. is seriously flawed at its most basic level and lacking in both analysis and discussion of alternative approaches to Exclusivity; is skewed towards a ‘fait accompli’ (namely achievement of Exclusivity) : and thus lacking in stimulating community consultation and direction for the Cabinet’s deliberations; is even worse designed to obfuscate and prevent community feedback to The Cabinet on the implications of alternative approaches other than one based upon Exclusivity; contains numerous self contradictions, for each possible position Cabinet may have on Exclusivity; & lacks any shred of “an evidence based approach” for either the merit of Exclusivity or any other proposed changes : but it requests such from respondents.

e.

f.

g.

h.

Our response is strongly evidence based.

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The 2 Key Questions Posed by The Consultation Paper The brief answers to 2 key questions posed at section 1.3 on page 4 of The Consultation Paper are differently answered under differing scenarios regarding Exclusivity, and in fact highlight the contradictions and the problem. (a) If competition remains encouraged (ie if Exclusivity is NOT invoked) Question 1 : Largely yes – the reform package can pass this test with minor modifications. Question 2 : Largely yes – the reform package can pass this test with minor modifications. The entire ‘motherhood’ nature of the reform package only makes sense if competition remains. The most glaring example is set out in section 10.3 on page 22 where the new proposed objects of the Lotteries Act are set out. Incongruously these objects include:• • “….flexible….”; “facilitates innovation and growth for the benefit of the entire community”

Without competition, both the former and the latter are impossible under an economic straightjacket of any time frame with today’s fast moving technology and ever changing political environment let alone :30 years or more”. Without competition, the latter in particular also fails the NSW Government revenue spectacularly. It has not been realised that the holders of rights to other new emerging games now and in the future may not be prepared to supply them to the then owners of NSW Lotteries under any circumstances : the NSW community may thus be denied not only the revenue but also innovation and growth for the benefit of the entire community. Without competition, the reform package miserably fails its own primary objects and descends into ever compounding contradictions thereafter.

(b) If Exclusivity is invoked Question 1 : No – the reform package fails this test. Question 2 : No – the reform package fails this test. If Exclusivity is invoked, many of the recommendations of The Consultation Paper become a self contradicting nonsense diametrically opposed to the goals of its ‘motherhood’ statements and verbose window dressing (eg see discussion of the proposed “objects” of the new Lotteries Act above). IF Exclusivity is invoked, many of the new recommendations would be of little use, and probably not worth the legislative effort. The entire reform package has been written as if competition will remain, but assumes Exclusivity is invoked. Beyond these succinct statements we do not propose to consider any further the reform package under the scenario of Exclusivity being invoked, as we will not be being licensed under NSW jurisdiction.

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However we note that the people of New South Wales deserve better than the reversion to 1970’s thinking that would be enacted if the reform package were enacted with Exclusivity. If Exclusivity is invoked the reform package within The Consultation Paper will have succeeded with Cabinet’s blessing in driving our business (and those of many others over the next “30 years or more” to other jurisdictions, forever losing all the benefits of job creation, investment and the ongoing revenue enhancement for the NSW Government, but not stopping the sale of ours or anyone else’s product in New South Wales. For what benefit would the Government want to hobble competition and innovation and new business growth for either the Government or the people of NSW ? It would appear that neither the lessons of the Cross City Tunnel debacle nor the Betfair case will have been learnt by the NSW Government. In the Cross City Tunnel example the Government secured what they thought would be a short term financial plus, at the cost of sound near, medium and long term planning for the consequences of the citizens of NSW. So too here we see a myopic bureaucracy attempting to lead the NSW Government down its short-sighted path. In the case of Betfair, after seeking to establish in New South Wales, it eventually went to another jurisdiction for licensing and immediately started selling its product into NSW. Rather than embracing innovation and growth, NSW has been exporting capital and jobs to another jurisdiction ever since. The reform package with Exclusivity would be unimaginably short-sighted, indefensible and antiinvestment and innovation : all the sadder that it would be inflicted upon the citizens of New South Wales in light of these experiences during the worst recession New South Wales has experienced since the Great Depression.

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WHY EXCLUSIVITY ? In discussions with Government representatives it has been made perfectly clear to us that the perceived need for exclusivity is being seen exclusively through the prism of the sole desire to maximise the potential value of The Sale (ie of NSW Lotteries) at the expense of other financial considerations for the Government. Assuming The Sale were to proceed we note the following: • • • • • • • • it will almost certainly be a keenly contested auction; there are said to be numerous bidders; some are foreigners whose currencies are very strong against the Australian dollar tit comprises every lottery product currently on sale in NSW; the products in The Sale have had 20-30 years of brand development and huge sums of money spent on them; the products are well known and well patronised; the products produce strong cashflows; & why not sell a 99 year licence over the products (rather than 30 years) - that’s a straight commercial matter ?

So why go the extra step and limit competition ? There is no quantifiable benefit nor analysis to support such a step. Undertaking The Sale on the grounds of exclusivity would :• • • shred the decade long bi-partsian political and societal support for encouraging innovation, investment, capital formation and job creation; deny New South Wales emerging revenues from unknown products and businesses; ignore the other obligations of Government in only seeing a bigger issue through a narrow prism of The Sale .

THE SOLUTION – MODIFIED EXCLUSIVITY 1. 2. Retain potential competition for both new operators and new products; but instead Offer (say) a 99 year licence to the existing products of NSW lotteries - ie offer a more long term exclusive licence to the existing suite of products operated by NSW Lotteries.

NEW OPERATORS ARE IN THE FINANCIAL INTERESTS OF THE NSW GOVERNMENT Because the moment after the proceeds of The Sale is banked, the only interest of the NSW Government will be maximising duty revenue and minimising social harm. And there isn’t a product manager in the world who will work hard and push a product’s sales hard if he thinks he has no competing operator or products – they become lazy and then the NSW Gov’t duty stream will be adversely affected. This is basic humanity being ignored and proven many times (see the Soviet Union, China and even Australia’s own recent past).

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ARE THERE EXAMPLES IN AUSTRALIA OF NUMEROUS OPERATORS IN A GAMING MARKET ? Yes - NUMEROUS. (a) Keno

Today NSW (and most other State Governments benefit handsomely through duty revenues flowing from the introduction of Keno in the 1990’s. The separate existence of Keno (a draw lottery/bingo game) is only briefly mentioned in The Consultation Paper. It is acknowledged as being owned by private enterprise separate from NSW Lotteries products. Strangely The Consultation Paper never then asks the rhetorical question :“ imagine if NSW would have the policy on Exclusivity in the 1990’s that we are proposing now?” The answer would be simply that NSW would not have enjoyed, and would not still be enjoying the very substantial duty revenues which have and will accrue to the NSW Government from Keno. (b) Bookmakers

For some many decades bookmakers have operated alongside TAB’s (even when TAB’s were Government owned monopolies). The NSW Government has also benefited from the existence of bookmakers for some time, and will continue to so do. A policy of Exclusivity in the horse racing industry would have denied NSW substantial revenues and job creation had bookmakers not been allowed to exist.

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WHAT IS THE GOVT’S INTEREST IN THE LOTTERIES SECTOR ? There are two broad interests : harm minimisation and financial. As demonstrated below the overwhelming interest of the NSW Government clearly lies in the value of its duty revenues from lottery products and its appropriate management going forward. (b) Financial

Currently the Gov’t has 2 financial interests in lotteries :(i) (ii) The Sale Ongoing Duty Stream TOTAL * ** per newspaper reports NPV of 30 June 08 Duty adjusted for inflation using 15 year Aust Gov’t bond yield $0.60 bn * $6.25 bn ** $6.85 bn 8.8% 91.2% 100.0%

(b) Harm Minimisation In relation to harm minimisation we agree with The Consultation Paper at page 30 where it states :“ Current harm minimisation obligations also seem to be operating well, and appear to be appropriate in the context of the less serious impact of lotteries on problem gamblers” but only in relation to lotto products, pools and the lucky lottery products. The reason is that such products are ‘slow play’ / low addiction products more synonymous with entertainment and are not sold in environments with alcohol or altered mood lighting. See Attachment 1) However, we do not concur in relation to the future for Instant Scratchie products which are the poker machines of the lottery industry and are set to cause significant increasing undetected social harm.

(c)

Conclusion

With no harm minimisation issues and the overwhelming value of lotteries to the NSW Gov’t being in its duty revenues The Sale is a tiny consideration for the Government – the ongoing duty stream from NSW Lotteries products and new products is where NSW will financially benefit into the future. However, alarmingly, the ill conceived assumed policy of Exclusivity per The Consultation Paper, if implemented, would put at serious risk the value of the major interest of the government (ie the duty stream) in many ways.

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DO LOTTERIES COMPETE WITH OTHER PRODUCTS IN THEGAMING SECTOR ? Lottery products in NO WAY compete with other products in the more broadly defined gaming sector. Lottery products are not substitute products for horse racing, poker machines or casinos. They exist as a separate sub-market with no competition other than from each other. Fortunately the NSW Gov’t has already decided the various products in the broader gaming market do not compete with lottery products in particular and have vastly different characteristics. This was agreed by the Carr Labor Government in the late 90’s when it entered into various Competition Policy Statements and Agreements of the time. Please refer to Attachment 1. The gaming sector can clearly be seen to be highly differentiated between hard gaming products (eg Casinos, poker machines at one extreme) and soft gaming products at the other extreme (lotteries and lottos). As can be seen from Attachment 1: • • • • • lottery products have a different purpose : they are slow play products versus fast play/high addiction products found such as poker machines/casino products; they are sold through entirely detail outlets; lotteries are not sold with alcohol; lotteries are not sold in environments with altered lighting; & lotteries sales are not manipulated by electronic cerebral stimulation.

THE PROPOSED REFORMS AND EXCLUSIVITY MAKES THINGS WORSE FOR THE GOVERNMENT’S MAJOR INTEREST THAN THE PRESENT SITUATION Currently, NSW Lotteries as a SOC will be most reluctant to let any product die as it has some semblance of an obligation to consider the Government’s duty stream implications. Once The Sale has settled the new owner is only interested in maximising its profits (but not having to work too hard either). Thus a situation could EASILY SOON emerge whereby the operator wishes to maximise their profits by letting some products be withdrawn, even though the Government will receive less duty from the decision. The operator can merely let the product wither and withdraw resources from its development to achieve the same result as withdrawing the product from the market. Without another operator being possible for “30 years or more” :• • the Government won’t have an alternative even though it will still own the product; the Government won’t be receiving any new duty from other operators or their products to offset declines in the duty flowing from the products exclusively licensed by it through The Sale.

The proposal in The Consultation Paper is seriously flawed, commercially facile and naïve.

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TAKEN TOGETHER THE SALE AND THE CONSULTATION PAPER PROPOSE CONTINUATION OF A MONOPLOY MODEL The Monopoly model has been a total failure for NSW in every respect. Its proposed continuation is defies any logic. (a) The Sale – expected price NSW has a population approximately 70% greater than Queensland’s. Yet The Sale is expected to receive almost identical sale proceeds as did Queensland in 2007, suggesting approximately $400m of value destruction for NSW through the Monopoly model. The performance of management has been appalling (due to lack of competition) and this has caused the value destruction.

(b) New product Innovation / Growth Lotto and the Pools were started by Messrs Packer, Murdoch and Sangster before they reverted to the NSW Gov’t. The track record of innovation and new products has been largely non-existent under the Monopoly model. Instant Scratchies came from overseas.

(c) The Monopoly Model has failed NSW in maintaining its duty revenues…very badly The poor performance of management (due to lack of competition) has caused the value destruction in the Government’s duty revenues.

NSW Real Gov't Duty - (Sept 08 $)
$335.00 $330.00 $325.00 $320.00 $315.00 A$M's $310.00 $305.00 $300.00 $295.00 $290.00 $285.00 2004 2005 2006 Year Ended 30 June 2007 2008

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ATTACHMENT 1

Full Loss to Player G5 Draw Lottery Draw Lottery Lottos Srcatchies Online Betting TAB’S Amusement Arcades Races – Horses/Dog s Casinos Pokies NO YES YES YES YES YES YES YES YES YES

Fast Play / At least Provoca Electronic Single Altered High Daily tive Alcohol Cerebral Purpose Lighting Stimulation Retail Sites Addiction Games Adverts NO NO NO YES YES YES YES YES YES YES NO NO NO YES YES YES YES YES YES YES NO NO NO NO NO NO NO YES YES YES NO NO NO NO NO YES Pubs & Clubs NO YES YES YES NO NO NO NO NO NO YES NO YES YES NO NO NO NO YES NO YES NO YES YES NO NO NO NO YES YES TAB Shops YES YES YES YES

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