James Boyce

This is the deal, remember, that transfers at least $100 million of public money to the five Farrell siblings who are the full owners of the private company, Mulawa Holdings. Despite Government spin, this deal, along with the pathetic code of industry self regulation , CAN be changed. The sky will not fall in if the Government reviews the number of poker machines allowed in Tasmania, properly regulates the industry and charges a full market licence for the privileged licence holder.

TASMANIAN TIMES readers are encouraged to send submissions of any length to the social and economic impact of gambling in Tasmania.

This was the study conceded as part of the deal to get the Betfair legislation through the upper house, which the Government was happy to go along with after years of resistance because it now believes that its deal with the Farrell family is safe and locked in until 2023 after secretly negotiating to extend the Farrell’s monopoly control of poker machines in the months following the 2002 election.

This is the deal, remember, that transfers at least $100 million of public money to the five Farrell siblings who are the full owners of the private company, Mulawa Holdings.

Despite Government spin, this deal, along with the pathetic code of industry self regulation , CAN be changed. The sky will not fall in if the Government reviews the number of poker machines allowed in Tasmania, properly regulates the industry and charges a full market licence for the privileged licence holder.

Victoria changed its licence arrangments mid term and the cries of sovereign risk were just as loud, only no other business, strangely enough, showed any sympathy for the gambling industry protests about having their public subsidy reduced.

We have thousands of problem gamblers, we receive a puny taxation return compared with the value of the licence, AND other businesses are faced with unfair competition from a company receiving scores of millions every year in public handouts.

This CAN be changed but will require public pressure. It is another manifestation of the way government does business with a few favoured businesses. It is part of the same struggle for democracy as the pulp mill fiasco. Please consider a submission to this inquiry no matter how short.

But how????

The Government has not advertized the process anywhere except for one public notice in the press. It is not on the government web site, including the public notices, nor on the Tasmanian Gaming Commission or Gambling Support Bureau website.

Can I suggest people ring the supposedly independent body charged under the 1993 Gaming Control Act with conducting gambling research in Tasmania – the Tasmanian Gaming Commission – and ask why this is so and what we are meant to do with our views.

You will find the TGC in the Department of Treasury and Finance, and that their phone number, office, managment and staff are all Treasury officers.

But never mind, take the Government’s word for it, the TGC exists as Parliament required as the condition for allowing pokies into hotels in the first place. The research is being done, the safeguards are in place, only believe …

And any doubters might like to look again at this article reprinted from the TT archives:

A mate’s deal: The cost of the Tasmanian Government’s special relationship with Federal Hotels

http://www.oldtt.pixelkey.biz/jurassic/boycefederal.html

On 16 July last year there appeared an extraordinary news item in the Mercury that revealed that as a result of the deal between the State Government and one of its closest business supporters, Federal Hotels, Tasmanian taxpayers would be more than a hundred million dollars worse off. The paper reported that according to a senior analyst at one of the world’s largest financial services organisations, Citigroup:

“Federal Hotels should pay the State government $130 million for its exclusive 15-year pokies deal in Tasmania … Another alternative would be to raise their gaming tax rate by 13% to 48%, the Sydney-based analyst said. Citigroup director equity research Jenny Owen estimated Federal would make $157 million net after-tax cash flows over the life of the 15-year deal. Ms Owen said the new deal was likely to furnish $79 million more for Federal than if the 1993 deed had continued until 2008”.

Ms Owen’s analysis was deliberately conservative. It is very likely that if what Rene Hidding called “the biggest public licence going in this state” had been sold by open tender, an even higher price, (as well as a much tougher regulatory environment), could have been achieved. As the Mercury article pointed out, “In Victoria, TabCorp and Tattersalls are expected to pay up to $3 billion for control of Victoria’s 27 500 pokies for a 10 year extension.” A similar outcome here for a 15 year licence for the 2500 pokies in pubs and clubs could easily have fetched over $300 million.

Instead of such hard cash, directly transferable into smaller class sizes, more nurses, shorter dental waiting lists, and much needed public housing, Federal Hotels ‘payment’ for a 15 year pokies monopoly from 2008 was to be largely ‘in kind’, with taxes only increasing by $2 million a year from the generous 1993 arrangements. First, Federal agreed to proceed with their already public plans to replace the Coles Bay caravan park (and its long term tenants) with a new resort. Second, they were to maintain table gaming at the casino (with taxes virtually eliminated on this form of gaming as an added incentive). And third, Federal agreed to capping the total number of machines at 3680, some 287 above the current level (one for every 84 people of gambling age, one of the highest of any region in the world. Even Victoria ‘only’ has one machine for every 101 adults). However, so obviously profitable and self serving were the first two ‘concessions’, even to the Legislative Council, that the Government spin machine was by last July putting all its emphasis on the importance of the new cap to get the deal through Parliament.

We were told (and still are today) that without the cap, Federal would rollout another 1500 machines before the current monopoly agreement with them expired in 2008. Never mind that they were on record during the last State election campaign that the Tasmanian market had now reached maturity and was unable to absorb many more machines. Never mind that in both 2001-2 and 2002-3 more hotels and clubs had actually handed their licence back then been granted new ones. The alternative to the new deal was still 1500 machines, because without it Federal would be obliged to flood the market, “to protect their competitive position” prior to the possibility of new players entering the market.

The Government’s whole credibility, and hundreds of millions of taxpayers dollars, rested then on this one claim. It seemed fortunate therefore, that the very same day that the Mercury article appeared, Federal Hotels Managing Director, Greg Farrell, and Treasury boss (and ‘independent’ Tasmanian Gaming Commission chair) Don Challen were to appear before Parliament’s Public Accounts Committee as part of an investigation into the deal.

The PAC Report makes painful reading. Look for yourself and see what democracy in this state has sunk to. The Report is little more than a series of dot points which summarise the views of the only people allowed as witness’s to the Committee (other than MPs), Mr Farrell and Mr Challen. If this is our elected representatives idea of accountability, then something has gone horribly wrong. There is no research, no analysis, no judgment, and no scrutiny. Oddly, the Report even makes explicit that it has no opinion on the primary question involved, whether this was a good financial deal for Tasmania; concluding that “It is unable to determine from the submissions whether or not the increased financial return to the state flowing from the renegotiated Deed meets the test of quality.” Yet , rather than insisting on the information required to make that judgement, the PAC lamely recommended that “The Legislative Council pass the Gaming Control Amendment Bill 2003”, which was, shortly after, duly done.

(The Citigroup analysis was referred to only once during hearings, Mr Farrell saying it was “totally irrelevant; it is like comparing apples and oranges”. Hansard records the committee members input on this matter as “laughter”)

The PAC report and recommendation is even more appalling given the fact that at least one member of the Committee understood the central issue. Unfortunately Rene Hidding was replaced on the Committee before the final report was done and his rigorous questioning of Federal boss, Greg Farrell and Treasury Secretary Don Challen, seem to have been largely ignored in preparing it. However the Hansard record survives to shed significant light on the corruption of public policy making that resulted from the Government’s ‘special relationship’ with a large corporation. The testimony of Farrell and Challen provides the most concrete evidence to yet emerge about how the close relationship between the Tasmanian Government and a few large companies have undermined conventional policy processes and the direct financial cost of this. Corruption is not only about bribes or large donations to political parties with the expectation of particular policy outcomes. It is far more insidious than that. It is about who has access to our political leaders, how their policy assumptions and positions have been formulated, and how rigorous are the checks and balances in place. In this case the close relationship with Federal meant that the Government’s chief negotiator, Don Challen, was in a weak position from the outset. The State Governments closeness to Federal Hotels directly led to the most valuable licence in this state being sold at a price hundreds of millions below its market value.

Hidding’s questioning of Farrell and Challen made three critical points. First, the cap achieved was simply the exact number of poker machines sought by Federal. Second, no one in Government knew or seemed interested in how much money had been lost by abandoning a competitive bidding process for the licence to run poker machines after the expiry of the current contract in 2008. And third, and most critically, the argument on which the Governments only effective defence of the deal rested, the achievement of a cap, was itself based on the assumption that Federal would automatically have had its licence extended. Hidding’s questioning exposed that this assumption was simply part of ‘how things were’ for both sides.

These three points deserve more detailed attention.

1. The level of the cap

Hidding’s early questions cleared up the charade that the cap was anything other than the exact number of poker machines desired by Federal Hotels. Farrell admitted to him, “We see very little opportunity in Tasmania. We believe that under this cap the number of venues in this state is about the appropriate number and that does provide the opportunity, if there are outstanding opportunities, for new venues.” Farrell acknowledged that he had been saying for a number of years that “between 105 and 110 venues” was about right for Tasmania and he agreed that the market was now “in balance”.

Farrell made much of the point that, while this was the current market reality, if there had been no deal, Federal’s business model would have eventually changed, and they would have placed 1500 more poker machines in all the hotels that sought them, regardless of profitability or impact on the viability of neighbouring operators, to protect themselves from competition post 2008. Analysis of this critical point will be considered later.

It is only fair to point out now, however, that despite how frequently his political masters repeated this threat from Federal as if it was a likelihood confirmed by the Government’s own market research, Don Challen, to his credit, did not endorse it. His honest reply was that “we don’t know” the number of poker machines that would be installed if there was no change to the current deed, but that it was ‘significantly above the number of machines that are in the market place at the moment’. The obvious point that the new cap level was also set ‘significantly above” the current number was, unfortunately, not raised with him.

2. The value of the licence

Given that almost all the investment costs and risks associated with the introduction of poker machines are borne by the individual clubs and pubs, the monopoly rights to run poker machines in Tasmania is not like any other business enterprise. It is literally a license to print money. The holder of this contract need imagine no scenario where a loss could be made, there is no risk (except a change in Government policy) to be managed. It is any company’s dream: a predictable, recession proof, risk free, and large profit flow. Even the one significant up front investment cost, the purchase price of the machine, is guaranteed to be returned by the club or hotel that rents it regardless of performance. Such guaranteed profit forecasts do wonders for relations with bankers. In Federal’s case it has opened up the ANZ’s credit lines to such an extent that the company has been able to take over numerous established iconic Tasmanian tourist businesses, and through their wholly owned subsidiary Vantage Hotels, buy up pubs all over the state, without the inconvenience and scrutiny of having to go to the stock exchange. No wonder any company would be expected to pay a high price in an open market to win such privileges.

Hidding recognised how much risk free profits were to be had under this new deal. “I have calculated that the rights to do that (run Network Gaming) and to run the two casinos, in gross profit terms pre-tax, are well in excess of $1 billion – you can work that out from the taxation numbers.”

Hidding could also have worked it out from Federals own ballooning profits. While as a private family company, (the 123rd biggest in Australia) owned fully by the Farrell siblings, the amount of publicly available financial information is limited, $50 paid to IBIS World, reveals that the family holding company , Mulawa Holding’s, net profit before tax increased in the three years from 1999-2000 to 2002-3 from $18 million to $38 million (with turnover up nearly a hundred million dollars) as the pokies profits kicked in. (Pokies came into pubs and clubs from 1 January 1997, but their staggered introduction meant it was a couple of years before the big profits flowed.)

Remarkably the Hansard record shows that Hidding was the only member of the PAC who showed much interest in finding out how much money this licence was worth, or concern that the only source of information available to the Committee on this matter was Federal Hotels: “the biggest public licence going in this state is the gaming licence. It is worth a lot of money and at this point the people have got to take your (Mr Farrell’s) word … that if you allow others in around the table to contest the right to run network gaming, they wouldn’t get a cent more”. Other members of the PAC were it seemed, however, quite happy to take Federal’s word. The fact that Treasury had done no estimates, no policy analysis, no market research of their own of what the licence was likely to fetch in the market place, was accepted with little question.

Only Hidding asked Challen direct for Treasury’s calculation of the “the raw market model of going to the market and getting full value” , that is the “financial cost “ of the Government’s ”policy position”. Challen confirmed that Treasury hadn’t “quantified it in the rigorous terms that you asked the question” Indeed his answer made it clear they hadn’t quantified it at all: “We modelled what their business would like under the status quo and we modelled what their business would like if they had competitors in the market. … My objective was to try to take out at least 50% of that difference … and I got fairly close to that.” All modelling that was done, therefore, was on the basis of Federal continuing to have a licence beyond 2008. The critical question of what a monopoly licence would have been worth in the open market was not considered.

This was not the end of the basic financial omissions however. Challen could not even provide any information on how Tasmanian tax rates compared with those interstate. Treasury had not developed any measure of “the tax takes between the different states” as since “we didn’t negotiate from a blank sheet of paper I didn’t think it was terribly helpful to do that. …”

This was a surprise even to the low key Chair, Tony Fletcher, who was simply seeking some figures to confirm his support for the proposed Bill that was already on the public record.

“Chair – I don’t have the backing of Treasury and I don’t have you’re skill and training but I want to make a judgement as to whether you achieved a good result or not.

Mr Challen – yes, I understand that.

Chair – How do I do that? If you cannot provide me with something to measure against, am I take to take your word as the sole decision maker in relation to this matter?

Mr Challen – I am not sure how I can help you with that Mr Fletcher.”

3. The logic of the Government defence of the deal

Hidding’s biggest contribution in the PAC hearings was to recognise that the argument for the central claim on which the defence of the deal rested, that the only alternative was another 1500 machines under the current agreement, was based on an indefensible assumption about Federal having a licence for life to operate poker machines in Tasmania.

Federal’s expressed need to ‘protect their competitive position’ leading up to 2008 by placing poker machines with who ever would have them, regardless of profitability, obviously only made any sense if competition was coming. Yet as a frustrated Hidding repeatedly emphasised, “no one was talking about competition – its about who to run the existing licence.”

Under sustained questioning from Hidding on this issue, Farrell went round in circles with nothing essentially to say except that they considered the possibility of not having their licence automatically renewed “extraordinarily remote” and irrelevant to the current deal, because it was all to do with the cap:

“Mr Hidding: – Can’t they just agree not to give it to you? Could they sit down for instance in 2008 with Tabcorp, Tattersalls, whoever …

Mr Farrell – Sorry, I missed it. The point there really though, Rene, is that at this point in time the government had no influence between now and 2008 on how the company conducts its affairs in relation to rolling out gaming machines … The cap is the issue and the cap was the overriding objective of the Government … This whole issue revolves around the Government’s intention to introduce a socially responsible cap on gaming machines.”

Challen, although not prepared to concede that Federal effectively had a “licence for life”, admitted that the negotiations were conducted under this assumption:

Mr Challen – “Legally they don’t (have a ‘licence for life’). I don’t think that there is any legal question that their present licence will terminate on 30 December 2008 if it is not renewed … That is the legal position. But in terms of the way the current Government and previous governments have approached these matters, this was obviously an issue that we considered in our approach to the negotiations with Federal Hotels, when you have an incumbent operator … and there is a view on the part of governments and I think it would be shared broadly in the community that this operator has fulfilled their obligations … that they are a good corporate citizen, that they are reinvesting their profits into the Tasmanian economy, I ask you whether it would be real life to allow those licences just to come to an end and wave them goodbye”
….

Mr Hidding – “It would appear from their responses this morning that they (Federal) see that not as not a real life thing and you don’t see it as a real life thing. How were the negotiations then in any way commercial negotiations? If both negotiators know that there is no possibility of , for instance, Tabcorp Victoria actually competing for the network gaming business-

Mr Challen … I think they are truly commercial negotiators in the way that many negotiations go in the commercial world where both parties really want to do the deal but both of them know that if they are not sensible the deal might not occur.”

An incredulous Hidding again reminded the Treasury boss that “We are talking here about a pair of licences that grant the ability for an organisation to produce a gross profit over $1 billion over the period of the contract. I think it is in order of that -” Challen replied “I don’t know, I haven’t done that sum.”

Hidding then asked the question which surely was the central one for the PAC and the Parliament – “How can the Tasmanian people have confidence in knowing that the dollar value extracted for them – and it is the prime licence of our public licences available – was the right amount?”

Challen bought some time, acknowledging ”that is a fair question”. His subsequent carefully chosen words confirmed that he was in a very limited position as a negotiator, because of where the Government was coming from. The negotiations were conducted in the context of two key restraints: Federal’s ‘real life ‘ permanent licence and the Governments challenge to get them to agree to an immediate cap given this fact. Challen’s view was that:

the outcome was quite acceptable given that I was given some riding instructions form the outset. … the starting point of my instructions from the Treasurer was that he wanted to achieve a cap … that meant that the timing of these negotiations was essentially initiated by the Government, and , to a degree, that constrained outcomes. The only alternative … is to actually go to the market … It is a traditional model that we are all very familiar with, but for a number of reasons the Government didn’t wish to go down that route so we came at the negotiations in another way.

Everything, it was clear, resolved around getting a cap in place, and the difficulty of achieving this was in turn determined by the indefensible assumption that in real life Federal had a licence for life.

As Hidding pointed out, the licence to run the poker machines is not like the casino licence, which because of the high fixed investment involved, is difficult to end. In the case of network gaming, there is no logical reason why another operator could not be chosen. The right to place poker machines in clubs and pubs is easily transferable, and involves little in the way of fixed investments, which are largely borne by the pubs themselves. There would be nothing anti business or anti Federal to put this licence up for tender. It was always clear that the monopoly went for 11 years, and this was a very profitable concession to have had. Federal would have had a very good return on their investment and any company could be expected to have been grateful for it and the right to tender again.

It seems that our Government and Federal Hotels need to be reminded of a very simple principle: any party to a profitable government contract should be expected to uphold whatever the contract specifies, and there is no extra financial reward for doing so. Nor does making very profitable investments in Tasmanian tourism, (almost all of which were takeovers), then buy you the rights to a profitable public licence. The issue involved in the post 2008 tender was about achieving the best price in the context of any regulatory changes the Government decided on, not assessing Federals corporate citizenship. To simply assume the relationship between the two parties was such that normal government guidelines that apply to small business and even community organisations, and that are written and enforced by Treasury, didn’t apply in this case, was scandalous. The taken for granted assumption that Federal could never lose their pokies licence has literally cost us all hundreds of millions of dollars.

Moreover, if the assumed position had instead been that normal tendering processes would apply for the pokies licence post 2008, all the logic of the claim that there would be another 1500 machines under the current deed collapses. Given that Federal would be assumed to have no right to operate any machines after 2008, there would have been an obvious market incentive not to expand further until future licence arrangements were clarified. Far from protecting any competitive position, installing 1500 new machines would have been potential money down the drain as after 2008 Federal may have been the owner of near new poker machines with nowhere to operate them.

In other words, to achieve the vaunted cap, the Government didn’t need to do anything more than make transparent and explicit that standard public policy processes would apply leading up to the tender for the monopoly rights to operate poker machines in Tasmania after 2008.

If they wanted to go beyond this in a responsible way, Premier Bracks in Victoria could have provided them with the example of how to do so. He has announced that there will be full public inquiry well before the current licences expire in 2012, which will establish the optimum number of poker machines, (balancing all the economic and social costs and benefits involved), and sets the appropriate regulatory environment. The right to operate poker machines under these more stringent regulations will then go to tender.

There would be nothing ‘radical’ or ‘anti pokies’ or ‘anti Federal’ about putting the monopoly licence out to tender after a full regulatory review. It is just sensible and responsible public policy making that seeks to maximise the taxation return, and minimise the social and economic costs from the most valuable, and most potentially harmful, licence the government has in its control.

Checks and Balances on gambling policy in Tasmania

This sort of responsible policy development process was in fact what the Legislative Council sought to guarantee in Tasmania under the compromises the Groom Government negotiated with the Council in December 1993 to get the Gaming Control Act (that brought in pub pokies) though in the first place. The Council insisted on the establishment of the Tasmanian Gaming Commission that was to be separate from Government. A core proscribed function of the TGC was to provide “independent policy advise” to Government on the basis of its own independent research. The TGC would, through its legally mandated administration of the Community Support Levy ( a percentage of pokies turnover) have the money to do this research without the danger of political interference, as research was one of the proscribed areas of Levy expenditure under the Act.

All up, they seemed to be powerful safeguards and if they had been implemented would have prevented the costly blunders of last year. We are now paying the price for the fact that there are no policy checks and balances on gambling policy in Tasmania. The Gaming Commission has never been established. It is simply a Government shelf company, with no staff, offices or even phone number of its own. It does not exist apart from two commissioners whose role is to attend a monthly meeting. It is in fact a division of the Department of Treasury and Finance, the same department charged with providing the Government’s policy advise on gambling. All the TGC’s management and senior staff are Treasury managers. (And if anyone wants to verify this quite simply for themselves, all they need to do is ring up the TGC and ask, and keep asking, to speak to someone who is from the TGC and not Treasury. It is an impossible request for them to process).

Given this reality, it is hardly surprising that the ‘independent’ policy advise and Treasury’s policy advise to Government are always the same. Moreover, responsibility for research and the administration of the community support levy has been handed over to the Department of Health and Human Services, so that almost no research has occurred and the long standing call for a full social and economic impact study has been publicly vetoed from the highest levels of government. And this despite over two million dollars of community support levy funds, accumulating year after year in a Treasury trust account, remaining unspent last financial year.

The result was that as the Government had its meetings with Mr Farrell to discuss a new contract, they had no information on the economic and social costs of poker machines, or even on the most basic statistic of all, how many problem gamblers there were in Tasmania. Not even the most simple phone poll had been done on this elementary issue since 2000. It all meant that the Government could have no idea what the optimum level of poker machines was for Tasmania. Lucky Federal hotels was able to give them the answer.

Regulatory environment

Nor despite the Government’s repeatedly expressed full public confidence in the current regulatory environment (‘the best in Australia’) can they have any idea whether it is working effectively or not. Tasmania has largely chosen to go down the path of industry self regulation, but the voluntary code is not monitored for compliance. More seriously, self regulation was meant to be a trial, subject to evaluation, according to the report on which it is based, “between July and December 1998.” The TGC has never moved to have this evaluation done. It is seen as a matter for Federal Hotels. Indeed any regulatory action that may impact on turnover and help prevent problem gambling, (such as restricted opening hours, slower game speeds, better player information, betting limits, bans on cash access etc etc etc), rather than just patching up the human victims, is seen in the same vein.

As remarkable as it seems, the TGC operates on a consensus model when it comes to regulatory change. Only changes accepted by the industry through the Gambling Industry Group, [that somehow, like DHHS gambling bureaucrats, manages to be funded and supported by the Community Support Levy], are implemented. Needless to say, change is slow. After an exhaustive review process that went on for much of a year, the only recommendation accepted by industry from the hundreds that came out of the largest and most comprehensive study into problem gambling ever done in Australia, that of the Productivity Commission, was to have clocks on the walls of gambling venues. At least in this they were ahead of the initial TGC response, who believed no change at all was needed.

So gambling policy in Tasmania is not driven by taxation as is often assumed. Indeed the taxation return is, given the value of the licence, pitifully low. Nor is it driven by minimising the harm to problem gamblers through a tough regulatory environment. Such matters are largely left to the industry.

The Tasmanian Government has pulled off the worst of both worlds, a low tax return and little regulation. None of us know how much money has been lost, how many urgent social, health, educational issues could have been addressed if standard government tendering guidelines had been followed. Nor do any of us know how many human victims there have been from the proliferation of poker machines and how much harm could have been prevented with tough regulation, because the research has not been done.

And despite the one day of questioning, not even Mr Hidding or the media, have shown any subsequent interest in finding out. Mr Farrell, it seems, has just too many mates for that.

James Boyce is a Tasmanian writer and social policy consultant