James Boyce Saturday, April 19
Community concern over this pokies contract has increased considerably since 2003 as the truth has slowly come out. The fact that the Government secretly negotiated away the most valuable (and potentially costly) public licence available in Tasmania without any opportunity for community input and without any research or modelling, and then in cohorts with the Company, bullied and misled the Parliament to ensure that its deal received no scrutiny or amendment, has done much to harm confidence in the democratic institutions of this state. Only a full and open inquiry can restore community confidence. And if the deal is such a good one for Tasmania, as the Government has assured us, what harm can there be in obtaining the figures to measure this?
Mr Jim Wilkinson
Chair Public Accounts Committee
Parliament of Tasmania
15 April 2008
Dear Mr Wilkinson,
I AM WRITING to you as Chair of the Public Accounts Committee in relation to the Committee’s forthcoming inquiry into the Tasmanian Government’s 2003 monopoly poker machine contract with the Federal Group (a trading arm of Sydney based Mulawa Holdings, a private company fully owned by five members of the Farrell family).
This contract concerns the most valuable (and the most potentially costly) public licence available in Tasmania. The widespread community concern about the contract has emerged directly from the Public Accounts Committee failure to adequately scrutinize the deal in 2003. The PAC recommended the legislation be passed without amendment even though it was “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.”
One exchange recorded between the then Chair of the PAC, Tony Fletcher, and the Secretary of Treasury (and then Chair of the ‘independent’ Tasmanian Gaming Commission), Don Challen, should be sufficient to illustrate the lack of information available to the PAC:
“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.”
It is a remarkable fact that the Government was unable to provide the PAC with any measure to assess the financial outcome achieved. Not even an interstate taxation comparison was done. It was not that providing such measures was difficult, time consuming or costly. The gaming analyst at Citigroup, Jenny Owen (who estimated the market value of the licence at $130 million, of which the Government had, through increased tax levels, recouped $30 million), explained to me at the time that such modeling could be done in a matter of hours. As for an interstate taxation comparison Mr Challen even went as far as to explain in some detail how this could be done (perhaps expecting that the PAC would take the logical next step and request the Government to do so?).
Given how basic the neglect, it is clear that the Government did not want Treasury to undertake the necessary work, presumably believing that it would expose the truth of what gaming analysts were saying – this was a financially costly deal (ABN Amro put the revenue foregone at over $150 million. A local financial sector analyst estimated it at over $200 million).
The Government’s failure to provide the PAC with any measure of the financial quality of the pokies contract in 2003, makes it odd that the PAC would recommend that the legislation be passed by Parliament.
This recommendation can only be understood in the context of the threats and promises made to Parliament by the Government and the Federal Group (who acted in unison to conduct a large PR campaign that distorted and limited public and parliamentary debate). Both the threats and the promises made have now been proved to be without foundation.
First, the threat. The statement was regularly made by the Federal Group (including to the PAC) that if this deal was amended or delayed then Tasmania would be flooded with an extra 1500 poker machines. This extraordinary and highly irresponsible claim was fully supported by the Tasmanian Government. Given that both Federal and the Government had made it clear during the just completed 2002 election campaign (when no possibility of a new poker machine contract was raised) that the poker machine market was now ‘mature’ and numbers were unlikely to increase further (thus diffusing this as an election issue), this seemed a ludicrous threat. The truth that the Tasmanian poker machine market was indeed saturated was also confirmed by the fact that in the previous two years slightly more clubs and pubs had actually handed their licences back then were issued with new ones.
Mr Farrell explained to the PAC, however, that he would be forced to change his ‘business model’ without the new contract. While his testimony on this matter to the PAC is inconsistent and contradictory, his argument clearly depended on the premise that there was no possibility of Federal ever losing its licence even though the current contract was due to expire in 2008. It was only with such an assumption that it made any sense for Federal to threaten to purchase new poker machines and to put them into every Tasmanian hotel or club that would take them, given the reality that there was no legal right to operate them beyond 2008.
This was a remarkable assumption to make given that the licence involved few fixed investments (which are largely borne by the hotels), and how easy it would be to transfer what is essentially an IT operation (Tattersalls, Tabcorp, TOTE Tasmanian and probably many other companies are likely to have lined up to compete in a tender process).
All the Government or Parliament had to do to counter Mr Farrell’s irresponsible threat was to explain to the Federal Group that a proper transparent process would be conducted before 2008 to decide the new licence holder beyond this date (responsible public policy would have also ensured that prior to this time a social and economic study to determine the appropriate number of poker machines and the necessary regulatory environment would also have been undertaken, especially given that Parliament had ensured that the funds for this research had been hypothecated in the Gaming Control Act of 2003 through the Community Support Levy and that millions of dollars of CSL funds remained unspent).
Furthermore if proper process had been publicly committed to, the Federal Group would have rightly recognised that a sudden change in their ‘business model’ would not only have been economically risky but greatly reduced the likelihood of them being considered fit to continue to hold such a socially and politically sensitive public licence.
The only outside scrutiny the deal has ever received was from the National Competition Council in 2004. Their report confirmed how empty the threats made to Parliament were:
The Council notes that the annual reports of the Tasmanian Gaming Commission show that in 2001-02 and 2002-03, more gaming machine licences were surrendered than new licences issued. This suggests that the gaming machine market had reached saturation point, at least under current licensing requirements.
In the event that it did not gain an extension of exclusivity, Federal Hotels foreshadowed changes to its business model (presumably a relaxation of the conditions imposed on new licensed venues) in order to expand gaming machine numbers. However, if Federal Hotels faced the prospect of losing exclusivity in 2008, expansion of machine numbers would be a strategy of doubtful merit, as it would result in the company owning a large number of near new gaming machines without certainty about the right to operate them in future… it is difficult for Tasmania to demonstrate that its current arrangements maximise government revenue from the gaming machine licences on issue.
The Council thus assesses Tasmania as not having complied with its CPA obligations in relation to the areas subject to the deed…
It was not only baseless threats, but also false promises, which led to the PAC recommending that the pokies contract be passed into law despite it not having the information needed to make a judgement on the financial quality of the deed.
These promises related to a specific development at Coles Bay that the PAC was told would generate 180 direct jobs. In Tasmanian terms this was an enormous development, and inevitably influenced Parliament. Mr Farrell made it quite clear to the Committee that if the legislation was delayed or amended only a smaller development would go ahead (perhaps similar to the one that has now occurred anyway?).
Given that it was these baseless threats and promises which led to the PAC not seeking the information it needed to make a judgement on the financial quality of the deed in 2003, it is clear that the PAC must now collect the information required to make a proper assessment.
I urge the Committee to now do what it failed to do in 2003 and simply collect the information needed to do its job.
A restrictive terms of reference for the current inquiry that does not consider the fundamental question at stake canl not fulfil the legally defined function of the PAC to “consider and report to Parliament on… the management, administration or use of public sector finances”.
I also ask that the PAC properly consider the sovereign risk issue in relation to this contract. There is no other contract between the Tasmanian Government and a private operator that involves such risk-free low-cost generation of guaranteed profit. This licence (in which virtually all investment costs and risks are borne by other parties) is literally a licence to print money. Other businesses recognise that this contract is distinctive, and it is quite wrong to suggest (as the Government regularly does) that amending it would undermine investor confidence. Indeed there is considerable evidence that the massive public subsidy now flowing to the Federal Group is the real factor undermining investor confidence in Tasmania as it ensures that there is no level playing field. The fact that so many small businesses have had to go through so much hardship in the name of removing all hidden public subsidies and fulfilling the requirements of National Competition policy, is also causing considerable business resentment. Why should the rules be different for this one large private company?
When considering the question of sovereign risk, the PAC should review the Victorian Governments decision a few years ago to increase the taxation levels paid by the two licence holders in that state through a hospital and charities levy. Both licence holders made loud public protests about the sovereign risk issue. However they found no support in the rest of the business community which applauded the government’s action in unilaterally amending the existing contract to reduce the level of public subsidy and increase the public funds available to hard pressed health and community services.
Community concern over this pokies contract has increased considerably since 2003 as the truth has slowly come out. The fact that the Government secretly negotiated away the most valuable (and potentially costly) public licence available in Tasmania without any opportunity for community input and without any research or modelling, and then in cohorts with the Company, bullied and misled the Parliament to ensure that its deal received no scrutiny or amendment, has done much to harm confidence in the democratic institutions of this state.
Only a full and open inquiry can restore community confidence. And if the deal is such a good one for Tasmania, as the Government has assured us, what harm can there be in obtaining the figures to measure this?
When I sought support for a reply to the full page advertisement recently placed by Mr Farrell in all of Tasmania’s daily newspapers (which attacked MPs for asking questions about the contract) , I was overwhelmed with support. One email sent out resulted in nearly fifty people making pledges to ensure that a reply could be quickly placed in the Mercury.
This concern reflects the fact that the Tasmanian people have been deliberately deprived of any opportunity to have a say on the pokies contract. Having been consistently told since the publicly anti pokies ALP was elected to Government in1998 that there would be opportunities for community input once the current deed had expired, negotiations for a new deed (which locked the people out of any say on the issue for another 20 years) secretly began immediately after an election campaign in which an extension to the contract was never raised. The fact that poll after poll has shown that well over 80 per cent of the community are opposed to current policy in this area is the obvious reason why the Government has sought to stymie and prevent public and parliamentary debate.
The community have the right to be informed of the PAC’s deliberations, which along with the social and economic research soon to be released, can provide the basis for reform of policy in this critical area. While it is not of immediate relevance to the PAC Inquiry, the now well established research finding that over fifty per cent of poker machine profits come from people with a poker machine addiction, provides the back ground for the widespread concern about this issue. Even the governments own research (which has relied on phone surveys to establish problem gambling levels) has found that the number of Tasmanians who have a pokies addiction or have a family member in this predicament, has grown by over 300 per cent since 1996. The hundred million dollars plus public subsidy of Mulawa Holdings – which is fully owned by five siblings comprising what has become according to BRW one of the top twenty or so richest families in Australia (and remember this $100 million is on top of large profits, which are much greater again) – is predominantly being transferred from low income Tasmanian poker machine addicts whose children and family are suffering enormous hardship as a result.
Given the legitimate and important level of public interest I will be sending all those who supported or funded the recent Mercury ad a copy of this letter, and will also be posting it on the Tasmanian Times web site. I hope that you will welcome such efforts to increase involvement in the PAC inquiry, and the belated opportunity for public input that it represents (the only people other than MPs or Treasury officials allowed to present evidence to the PAC in non written form in 2003 were Federal management). Your reply will be similarly distributed (without comment or amendment). Most people simply do not have the time to document their concerns, but as I have discovered this is no measure of the importance they place on the issue.
Given that my time is also limited I would finally ask that this letter also be considered as a formal submission to the Inquiry.
I look forward to the PAC finally doing what has never yet been done – scrutinize the processes used to finalize the pokies contract and the quality of the financial outcomes reached, and make specific recommendations to Parliament for amending it for the common good.