AUSTRALIAN HOTELS ASSOCIATION (VICTORIA ABN

Transcription

1 A"A... AUSTRALIAN HOTELS ASSOCIATION (VICTORIA ABN Friday 26 February The Australian Hotels Association (Victoria) is pleased to respond to the Victorian Government's Issues Paper - "Review of Gaining Machine Arrangements" December The overarching objective of AHA (Vic) is to effective Iy contribute to the establishment and maintenance of an economic and social environment that fosters the business success of Victorian pubs and hotels. The on-going strategic objectives of AHA (Vic) are to:. Protect, promote and advance the interests and rights of members;. Up hold and promote the quality, integrity and reputation of the hotel industry;. Provide timely, effective, relevant and value adding services to members, and. Develop and maintain value-adding partnerships with key industry stakeholders to the benefit of members and such partners. Within the diverse Victorian hospitality industry, AHA (Vic) membership incorporates CBD, metropolitan, regional and rural pubs and hotels, accommodation hotels, resorts and similar business. ^ I Peter Burnett AM President AHA (Victoria) Brian Kearney Chief Executive Officer AHA (Victoria) Advice. Support. Network. Infl ence LITTLE COLLINS STREET. MELBOURNE VICTORIA PO Box 18067, I I I BOURKE STREET. MELBOURNE VICTORIA 8003 TEL! FACSIMILE:

2 CONTENTS PAGE 1. Summary of Australian Hotels Association (Victoria) Response The Victorian Venue-Based Gaming Environment Responses to Consultation Paper Questions... 7 Question 1: Do you think that the venue operator model is meeting its three objectives and why? How do you think the venue operator model could better achieve its objectives?... 7 Question 2: Do you think the current distribution limits are appropriate? If not, what changes would you suggest and why? You can comment on any or all of the distribution limits identified Question 3: Are the ownership restrictions appropriate? If not, should they be increased or decreased, and why? Question 4: Should different ownership restrictions apply to hotel entitlements and club entitlements and, if so, why? Question 5: What mechanism should be used by the government to obtain its share of the value of gaming machine entitlements, for example, taxation, premium payments or other mechanisms? Question 6: Does the progressive tax structure provide for a fair distribution of the revenue from gaming machines? Question 7: Should tax bands or rates in the progressive tax structure be varies, and if so, how and why? Question 8: Is there an alternative tax structure that should be considered? Question 9: Should the tax differential for clubs and hotels be maintained and, if so, why? Question 10: Should changes be made to the way clubs are required to demonstrate their community benefit? Question 11: Should any future gaming entitlements be issued for a 10-year term, a shorter or longer fixed-term or in perpetuity and why? Question 12: What type of allocation process would be appropriate to allocate any new gaming machine entitlements and why? Question 13: How should the price of any new gaming entitlements be determined and why? Question 14: Should the price of any new gaming machine entitlements be paid by way of a premium payment, be factored into the tax rate or via another payment option and why? Question 15: If the premium payments are required, what are the preferred terms for those payments and why? Question 16: Are there any improvements that could be made to the transfer market? Question 17: Should the State extract a share of any increased value entitlements through the transfer market and, if so, how? Question 18: Do you have any suggestions to improve the regulatory framework for gaming machines? Page 2 of 31

3 1. Summary of Australian Hotels Association (Victoria) Response AHA (Vic) s detailed response to the Consultation Paper related to the Victorian Government s Review of Gaming Arrangements December 2015 strongly contends that the best interests of the Victorian Government, the community and gaming venue operators will be met by: 1. Existing gaming machine entitlement holders being afforded priority in acquiring an equivalent number of entitlements to be deployed at their current approved venue for the post-2022 period; 2. The post-2022 gaming machine entitlement period being in perpetuity or a minimum of 30 years to at least 2052; 3. Victorian Government gaming taxation rates remaining at the February 2016 rate, with certainty on such rates and any related levies at current prevailing rates being given for the term of the entitlements; 4. The aggregate valuation of the post-2022 entitlements to be based on an independent and objective net present value / discounted cash flow methodology; 5. The Government committing to a bona fide negotiation on the price to be paid for the entitlements having regard to the valuation per the net present value / discounted cash flow methodology and market uncertainties not otherwise included in that valuation, including regulatory risk, market behaviours, technological developments etc; 6. The Government adopting a flexible approach to funding options to be available to those acquiring post-2022 entitlements, including a term payment arrangement, facilitation of a securitisation-based funding scheme, up front payments (including appropriate discounts etc) and an option for entitlement holders to opt into a varied taxation regime based on the State s recovery of the premium payment; Page 3 of 31

4 7. Current Ministerial Directions governing distribution of the entitlements be addressed as follows: b) The approved limit of 27,372 entitlements applying to gaming venues be replaced by a formula providing that the number of approved entitlements be linked to the Victoria population 18 years and older (5.9 entitlements per 1,000 adults 18 years age and older at 30 June 2015); c) An additional tranche of entitlements be released to be directed to facilitating greenfield hotel and club developments in outer metropolitan and provincial residential communities and new entrants; d) The 50 / 50 spilt of available entitlements between hotels and clubs be maintained in principle, whilst having sufficient flexibility and tolerance to accommodate arrangements whereby clubs may choose to sell or lease entitlements surplus to their requirements to hotel venue operators; e) The requirement that a minimum of 20% of gaming entitlements be deployed beyond the Melbourne Statistical Division be maintained whilst having sufficient flexibility and tolerance to accommodate the progressive expansion of the Division and its impact on existing gaming venues within any expansion area; f) One hundred and five (105) gaming entitlements remain the maximum permitted to be deployed in a hotel or club venue, and g) The 35% limit of entitlement holding by an entity should be maintained. 8. In regard to the methodology for the distribution of the post-2022 aggregate final price across existing and prospective gaming entitlement holders, AHA (Vic) is of the view that it is premature of the Government to consider or determine the distribution process at this time. Key inputs to be resolved prior to evaluating and determining the equitable and optimum approach for the distribution of the aggregate price across venues include: The entitlement allocation process i.e. market-driven or administrative; Parties eligible to participate in the entitlement allocation process; The aggregate entitlement valuation process and its outcome; Page 4 of 31

5 The negotiated aggregate price to be paid for the post-2022 entitlement, and The term over which the post-2022 entitlements will be permitted to operate. Deliberations by Government on determining the methodology by which the final negotiated aggregate price for post-2022 gaming entitlements is to be distributed across gaming entitlement holders should not occur until the above key inputs have been resolved and advised to relevant industry associations and gaming venue operators and inviting their input. Page 5 of 31

6 2. The Victorian Venue-Based Gaming Environment At 31 December 2015 venue-based gaming in Victoria is delivered through 505 licenced clubs and hotels across Victoria operating up to 27,372 electronic gaming machines (EGMs) At 31 December 2015 two hundred and sixty-three (263) hotels, being approximately 18% of total Victorian hotels, were offering gaming services through 13,516 EGMs. With the current net machine expenditure growth rate at or below CPI and increasing competition being experienced from other forms of gambling which are significantly less restricted in advertising, promotion and availability impacting on gaming marketshare and participation, AHA (Vic) is of the view that it is appropriate that the Victorian Government commits itself to initiatives which encourage and facilitate responsible innovation and growth within the Victorian gaming industry. In releasing the Terms of Reference and the related Consultation Paper in respect of the Gaming Arrangements Review, the Victorian Government has identified a potential platform to responsibly advance the gaming industry into a safe, sustainable and innovative future which delivers appropriate returns to the Victorian Government, the community and gaming venue operators. Page 6 of 31

7 3. Responses to Consultation Paper Questions Question 1: Do you think that the venue operator model is meeting its three objectives and why? How do you think the venue operator model could better achieve its objectives? In opting to shift from the previous Tabcorp/Tattersalls gaming operator model from August 2012 the then Government emulated the venue operator arrangements operating in other Australian gaming jurisdictions. As detailed in the Consultation Paper, the introduction of the venue operator model seeks to deliver: 1. A venue-based model that ensures that the financial benefits of gaming are fairly and more broadly distributed to the Victorian community; 2. Continued high standards of probity through a strengthened Victorian Commission for Gambling and Liquor Regulation (VCGLR) and an independent monitoring system to ensure the integrity and transparency of gaming venues, and 3. Opportunities for venue operators to better respond to consumer demands and choice. AHA (Vic) is of the view that the stated objectives sought to be achieved through the adoption of the venue operator model are being met. This outcome is particularly evidenced through gaming venue operators now conducting their business in the context of their own business expectations and aspirations through directly responding to and servicing their local community. Whilst the operator model managed and delivered through Tatts Pokies and Tabcorp established and maintained best practice responsible gaming in Victoria and achieved an effective distribution of gaming machines across the State, the model was underpinned by, and to an extent driven by, the corporate and financial objectives of the duopoly operators. Page 7 of 31

8 The homogeneous and centrally controlled nature of the Tatts Pokies and Tabaret brands militated against the development of individual and localised gaming venue initiatives and offerings in response to local community demands. The advent of the venue owner model has allowed venue operators to acquire, deploy and operate gaming machines in the context of their own business plans and in response to their assessment of the expectations and demands of the local communities in which they conduct business. The gaming offer within Victoria s hotels in the post-2012 period is increasingly better balanced within the overall beverage, food, gambling, entertainment, accommodation etc offerings of gaming hotels. The 2010 gaming entitlement auction process facilitated new entrants and the subsequent expansion of Victoria s gaming industry. Melbourne s newer and outer residential communities have particularly benefitted from a number of recent hotel investments that have brought quality and accessible hotel-based hospitality and services to them. Such multi-million dollar investments would not have been feasible without access to revenues delivered through gaming machines and the opportunity for venue owners to explore and develop such investments of their own volition. The security and integrity of, and community confidence in, gaming industry regulation and control by the VCGLR is fundamental to the sustainability of gaming in Victoria. The strengthening of the VCGLR and the re-commitment to the highest standards of probity, transparency and integrity has been a priority of the Andrews Government. Page 8 of 31

9 Question 2: Do you think the current distribution limits are appropriate? If not, what changes would you suggest and why? You can comment on any or all of the distribution limits identified. The distribution of gaming machines across Victoria is subject to a range of Government-imposed limits and caps. The limits and caps subject to review through the Gaming Machine Arrangement Review are: The maximum number of 27,372 gaming machines permitted to be deployed across Victorian hotel and club venues; 50% of gaming machines (13686) available to be deployed in hotels, with 50% available for licenced clubs; No less than 20% of gaming machines are required to be located in geographic areas outside the Melbourne Statistical Division; A maximum of 105 gaming machines are permitted per venue, and A maximum of 35% of gaming entitlements are permitted to be held by a hotel entity and its associates, with any licensed club only permitted to hold 420 gaming entitlements. THE MAXIMUM PERMISSIBLE NUMBER OF GAMING MACHINES AVAILABLE TO BE DEPLOYED ACROSS VICTORIA On 20 December 1995 a limit of 27,500 was set as the maximum permissible number of gaming machines in venues. In 2014 the limit was reduced to 27,372. An analysis of the gaming machine limit compared to the Victorian population 18 years of age and over for the period identifies that the density of gaming machines has declined over the period from 8.1 gaming machines to 5.9 gaming machines per one thousand Victorian adults 18 years of age and older. Page 9 of 31

10 Table: 1 Victorian venue EGM cap per 1000 adults 18 plus Year EGM Cap Adults 18+ (mill) EGMs per 1,000 Adults /06/ ,500 3, /06/ ,500 3, /06/ ,500 3, /06/ ,500 4, /06/ ,372 4, Source: Queensland Department of Treasury and Trade (2015) With the number of operational gaming machines typically being below the 27,372 limit, available data identifies that at 30 June 2015 the number of operational gaming machines at venues in Victoria was 5.7 per one thousand adults 18 years of age and older. Table: 2 Estimated operational EGMs per 1000 adults 18 years of age and older across Australia ACT NSW QLD SA NT TAS VIC AHA (Vic) proposes that the current 27,372 gaming machine limit in hotel and club venues be varied by: Replacing the existing 27,372 gaming machine limit with a variable limit based on the current 5.9 gaming machines per 1000 adults 18 years of age and over, and Issuing an additional tranche of gaming machines entitlements to be allocated based on specific criteria and terms and conditions determined by the Government. AHA (Vic) proposes that that the tranche of gaming machine entitlements be directed to greenfield developments and to facilitate new entrants. The new and ever-expanding outer residential communities of Melbourne and major provincial cities demand quality and diverse hospitality offerings. Page 10 of 31

11 Victorian hotel developers have responded to this demand through new hotel investments in areas including Mernda, Point Cook, Craigieburn, Caroline Springs etc, with such greenfield site hotel developments typically costing $20 30 million per property to construct. Investments of this order require significant, sustainable and diversified revenue streams to justify the capital expenditure, including extensive food and beverage offerings, entertainment, gambling, accommodation and up to sixty gaming machines. Whilst recent greenfield site developments have utilised gaming machine entitlements acquired through the 2010 auction of entitlements, the existing 27,372 limit is now severely retarding access to entitlements through the Transfer Pool to allow continuing new hotel developments. Of Victoria s approx licensed hotels (pubs) eligible to seek approval to gaming conduct pursuant to the Gaming Regulations Act at 31 December 2015, two hundred and sixty-three (18%) are approved to provide gaming services at their venue. Whilst a significant proportion of non-gaming hotel operators do not wish to include gaming in the mix of services offered to the community, it is apparent that there are a number of operators who would introduce gaming if the opportunity was available within their financial capacity. The barriers to entry to Victoria s gaming industry are significant, including: Limited availability of gaming machine entitlements, Restrictive regional and municipal caps, The cost and complexity of an application to the VCGLR to obtain gaming premises approval, and The cost of delivering a gaming service at the required level to meet community expectations. Page 11 of 31

12 Access to the 2010 gaming entitlements auction was open to any party holding a venue operators licence issued by VCGLR at the time. The on-going Transfer Pool provides an opportunity, albeit limited, for new entrants to acquire the necessary entitlements to establish a new gaming business. The most accessible means of entering the venue-based gaming business in 2016 is through the purchase on the market of an existing hotel with gaming. The limited availability of gaming machines entitlements sees gaming hotels tightly held, with gaming hotel sales based on relatively high multiples of earnings. To the extent that the Government seeks to actively facilitate new entrants to the hotel-based Victorian gaming market, the only viable option is to approve the grant of an additional tranche of entitlements dedicated to new entrants. However, the effective utilisation of such additional entitlements would, unless the Government determines otherwise, continue to be subject to high costs and barriers to entry posed by regional and municipal caps and the application process. 50% OF GAMING MACHINE ENTITLEMENTS TO BE ALLOCATED TO HOTELS, WITH 50% TO LICENSED CLUBS The current requirement that 50% of the gaming machine limit be allocated to licensed clubs and 50% to hotels was established in 1992 upon the introduction of gaming into Victoria. Whilst the requirement was initially reasonable to ensure a measured, controlled and diverse roll-out of the Victorian gaming industry, by 2016 the relevance of such a restriction is questionable. Page 12 of 31

13 At 30 June 2016 the distribution of operational gaming machines in venues in Victoria is as per table 3. Table: 3 Distribution of gaming machines in Victoria at 31 December 2015 Max permissible Operational EGMs Hotels (98.7%) Licensed Clubs (92.5%) Whilst there is always a level of non-operational gaming machines (entitlements) due to developments in progress etc, it is apparent that there is a significant number of club-based entitlements that are not being used, are unallocated or have been forfeited to the Government. These un-utilised gaming machine entitlements deprive the Victorian Government of revenue and are a lost opportunity in regards to hospitality services to the community. The 50 /50 rule prevents such entitlements being redirected from the licensed club sector to the hotel sector. Such redirection could be equitably and reasonably achieved through Government-sanctioned arrangements between the relevant licensed club entitlement holders and hotel operators wishing to utilise the entitlements. Options range from outright sale of the entitlements through to an entitlement leasing arrangement on mutually agreeable terms. The 50 / 50 rule artificially restricts market forces to the disadvantage of the Government and the community, whilst also preventing licensed clubs which are holding valuable but unused entitlement assets from accessing a fair value for them. Whilst maintained in principle, the 50/50 should have sufficient flexibility and tolerances to allow greenfield site developments and allow licensed clubs to obtain value for under-utilised or unwanted gaming machine entitlements. Page 13 of 31

14 NO LESS THAN 20% OF GAMING MACHINES ARE REQUIRED TO BE LOCATED OUTSIDE THE MELBOURNE STATISTICAL DIVISION. The requirement that no less than 20% of gaming machines are required to be located outside the Melbourne Statistical Division was introduced in 1992 to ensure a reasonable distribution of gaming machines across Victoria. At January 2016 approximately 28% of gaming machines are located outside the Melbourne Statistical Division. With gaming entitlements now held by gaming venue operators rather than Tabcorp and Tattersall ( ), market forces are maintaining a reasonable distribution of gaming machines across Victoria. The application of the so-called 80 / 20 rule is subject to the boundaries prescribed from time to time through the Melbourne Statistical Division. The rapidly expanding Melbourne metropolitan area provides no certainty as to that boundary in coming years e.g Mornington area, outer western and northern Melbourne etc., with any consequential adjustments to the boundary potentially having a significant impact on attempts to maintain the 80 / 20 Ministerial Direction. AHA (Vic) supports the policy intention of the 80 / 20 rule in seeking to ensure that the benefits of gaming are available to all Victorians. However, regard needs to be had to the potential impact of the growth of the Melbourne Statistical District in maintaining the ratio. Page 14 of 31

15 A MAXIMUM OF 105 GAMING MACHINES PER VENUE At 30 June 2015 the distribution of gaming machines across licensed club and hotel venues is per table 4. Table: 4 Distribution of gaming machines across hotel and licenced clubs venues (31 December 2015) No. of EGMs Hotels (Venues) EGM (count) Clubs (Venues) EGM (count) TOTAL Source: Victorian Commission for Gambling and Liquor Regulation Having regard to the current distribution level, AHA (Vic) is of the view that change is neither needed nor warranted in respect of the current maximum of 105 gaming machines per venue. AHA (Vic) does not support any proposal that licensed clubs or hotels be permitted to increase operating gaming machines beyond the existing 105 maximum entitlement. The creation of super clubs or so-called destination venues will disrupt the Victorian venue-based gaming market, with mini casinos based on the large scale NSW club gaming venues anticipated to significantly negatively impact on small and mid-range hotels and licensed clubs. Having regard to Table 4, it is evident that the Victorian venue-based gaming model has delivered a responsible and market responsive range of gaming hotels and clubs. The concept of super clubs or destination venues runs counter to the objective of achieving fairly and broadly distributed gaming venues across Victoria. Page 15 of 31

16 Question 3: Are the ownership restrictions appropriate? If not, should they be increased or decreased, and why? Question 4: Should different ownership restrictions apply to hotel entitlements and club entitlements and, if so, why? Ministerial Directions on ownership restrictions provide that no entity or its associates can hold more than 35% of hotel-based gaming machine entitlements. No licensed club can hold more than 420 gaming machine entitlements. The then Government determined that the implementation of the ownership restrictions would ensure that there was a relatively wide distribution of gaming machines across hotel owners and ownership groups of hotels and similarly with licensed clubs. The 35% rule necessitated Victoria s major hotel group relinquishing approx. one thousand gaming machines prior to implementation of the owner operator regime from August With the distribution of entitlements through the auction now complete, the only available means of acquiring further entitlements for venues is through purchasing an existing gaming venue on the market or by competitively accessing the limited number of entitlements becoming through the Transfer Pool. On balance, AHA (Vic) is of the view that the existing 35% limit of entitlement holdings by an entity should be maintained in the interests of continuing to ensure a diverse distribution of gaming machine entitlements across hotel owners and ownership groups. Page 16 of 31

17 Question 5: What mechanism should be used by the government to obtain its share of the value of gaming machine entitlements, for example, taxation, premium payments or other mechanisms? Direct financial benefit to the Victorian Government through the operation of gaming entitlements during 2012/22 is through the premium payments made by venue operators to acquire entitlements at the 2010 auction & pre-auction club offer and through on-going taxes on net machine expenditure. In considering options for the payment structure in the post-2022 period, AHA (Vic) supports a regime to acquire and operate entitlements that provides for: Premium payments based upon venues obtaining the rights to hold entitlements issued by the State to conduct gaming at an approved venues(s), and A progressive gaming taxation structure based on net machine expenditure. Question 6: Does the progressive tax structure provide for a fair distribution of the revenue from gaming machines? Question 7: Should tax bands or rates in the progressive tax structure be varies, and if so, how and why? Question 8: Is there an alternative tax structure that should be considered? The existing progressive tax regime delivers a range of outcomes which provide for a fair distribution of revenue from gaming machines. Smaller gaming clubs with an average monthly net gaming expenditure of up to $2,666 per machine pay no State gaming tax which assists them in successfully operating in their communities. Page 17 of 31

18 The progressive tax regime, with the highest rate for hotels being 62.53% (clubs 54.20%), provides the Government with a proportionally greater share of revenue from the higher performing venues. AHA (Vic) is of the view that the existing taxation regime and rates provide for a fair distribution of revenue from gaming and that they should not be varied over the term of the post-2022 entitlements. A key issue from venue operators perspective is the stability and certainty of the gaming taxation rates going forward. The then Government in May 2014 significantly increased the prevailing taxation rates to redress what it viewed as a shortfall in its returns in comparison to its pre-2012 percentage share of net machine expenditure. It is estimated that the rate increase will result in the Government receiving an additional approx. $1 billion in gaming taxation receipts up to The level of investment required to acquire and operate post-2022 entitlements and each venues on-going share of net machine expenditure will be key inputs to a range of critical business decisions by venue operators. Certainty or otherwise in respect of the on-going gaming taxation regime will significantly influence the price that venue operators are willing to pay through premium payments. AHA (Vic) notes that in the August 2014 the Victorian Government afforded certainty to Crown Resorts Ltd. in respect of gaming tax rates through providing that, in conjunction with the extension of their Casino Licence to 2050, compensation would be payable by the State to Crown Resorts Ltd if, without their consent, the State increases the prevailing rates of casino tax and/ or imposes any new tax or levies except where they apply generally to Victorian businesses. Page 18 of 31

19 Such compensation is also payable by the State if the Government proceeds without Crown Resorts Ltd. consent to: Change the exemption in regard to smoking within VIP areas of the Melbourne Casino complex; Reduce any maximum bet limits; Amend any arrangement in regard to operation and availability of ATMs; Introduce any form of mandatory pre-commitment, and/or Restrict or amend the current manner in which Crown s loyalty scheme operates. AHA (Vic) views equivalent undertakings to hotels and licenced clubs as essential if gaming entitlement holders are to confidently invest in the venue-based gaming business and if the State is to optimise the premium that venue operators are willing to pay for post-2022 entitlements. Question 9: Should the tax differential for clubs and hotels be maintained and, if so, why? Question 10: Should changes be made to the way clubs are required to demonstrate their community benefit? Hotel gaming venues pay 8.33% of net machine expenditure in addition to the tax rates applying to licensed clubs, with those funds directed to the Community Support Fund (CSF). In 2014/15 the CSF received $96.5 million in revenue from hotel-based gaming machines a 3.5% increase over funds received in 2013/14. CSF expenditure by portfolio in 2014/15 is detailed at Table 5, with total CSF expenditure being $109.5 million. Page 19 of 31

20 Table 5: CSF expenditure by portfolio The rationale for the tax differential between hotels and clubs is that clubs are not corporate or equivalent entities deriving profits for owners and shareholders, but rather are members of the community with a common interest joining together to pursue that interest. Schedule 1 of the Liquor Control Reform Act 1998 details the terms and conditions required to be included in the rules of a club holding a Club Liquor Licence, including that no person is to receive a greater profit, benefit or advantage from the club that that to which any other member is entitled. Clubs are required to demonstrate through their annual Community Benefit Statement that at least 8.3% of net gaming expenditure has been expended on community benefits as defined from time to time by the Government. AHA (Vic) recognises the role of clubs in the community and the purpose of the 8.33% differential tax on hotels which is hypothecated to the Community Support Fund. Page 20 of 31

21 Question 11: Should any future gaming entitlements be issued for a 10-year term, a shorter or longer fixed-term or in perpetuity and why? From the gaming venue operator perspective there is an imperative to build business certainty, security and sustainability into Victoria s venue-based gaming industry. Victoria is the only Australian mainland jurisdiction where the gaming entitlement/licence term is less than in perpetuity. Victorian liquor licences are similarly issued in perpetuity, with on-going licensing subject to compliance with the Liquor Control Reform Act 1998, including payment of an annual risk-based licensing fee by the licensee. The rationale for successive Victorian Governments to date adopting a restrictive term-based entitlement/licensing approach to venue-based gaming i.e and 2012/22, is not apparent. The rationale for the then Government in limiting the 2012/22 owner operator model to a 10 year term is not stated in public documents detailing the changes. It can only be surmised to be as a consequence of uncertainty by the then Government as to the viability of the owner operator model, notwithstanding its application across Australia at the time, or providing a future Government with an opportunity to re-negotiate the terms for the licensing of gaming in the future. To the extent that there is safety related to issuing entitlements in perpetuity, decisions of successive Victorian State Governments sees Victoria already well exceeding national benchmarks for safe and responsible gaming, including a total ban on ATMs at gaming venues from 1 July 2012 and the introduction of voluntary pre-commitment from December 2015, in conjunction with the extensive array of problem-gambling directed initiatives implemented over recent years. Page 21 of 31

22 With both the conduct of gaming and the operation of the licensed businesses being subject to the rigorous and demanding controls of both the Gambling Regulation Act 2003 and the Liquor Control Reform Act 1998, and under the supervision of the Victorian Commission for Gaming and Liquor Regulation, there are checks and balances in place to ensure on-going compliance with the law and the delivery of responsible gaming. In considering options for the length of time over which post-2022 Gaming Machine Entitlements will be issued, the Government puts forward four (4) alternatives: A shorter term period (5 to 10 years) A 10 year term A longer term (20 to 40 years) In perpetuity AHA (Vic) strongly contends that the term of the post-2022 Gaming Machine Entitlements should be in perpetuity or at least for a minimum of 30 years to An in perpetuity or a minimum 30 year post-2022 entitlement would stimulate the Victorian gaming hotel sales market and attract significant new investment, including current venue operators refurbishing existing premises and/or developing new properties. New South Wales and Queensland operators who are currently deterred from seeking to enter the Victorian market as a consequence of the currently very limited life of entitlements to 2022 could also be expected to consider entering the market. Licensing of 30 years to 2052 will effectively align the term of venue-based gaming to the current licence of Crown Casino which runs until A post-2022 entitlement term of only 10 years will simply serve to perpetuate the current level of risk aversion, uncertainty and lack of confidence in the Victorian gaming sector by financial institutions, developers and investors. Page 22 of 31

23 AHA (Vic) recognises that the Government may choose to grant post-2022 entitlements by less than in perpetuity in order to: Maintain the option to further review the gaming model in future years in response to potential consumer and industry needs, demands and behaviours, emerging technological developments, prevailing Government policies etc., and/or Provide an opportunity at a future date to extract further premium income from the allocation of gaming machine entitlements. AHA (Vic) proposes that post-2022 gaming machine entitlements be granted in perpetuity or of a minimum 30 years to Question 12: What type of allocation process would be appropriate to allocate any new gaming machine entitlements and why? The Consultation Paper details the specific objectives sought to be achieved by the Government through the post-2022 gaming machine entitlement allocation process i.e.: The capture of appropriate value for the State; The implementation of a fair and transparent process, and that In economic terms the allocation should be effective and efficient The options available to determine the allocation of gaming machine entitlements are: A market-driven competitive process, or A government-determined administrative process. Page 23 of 31

24 The market-driven competitive auction process utilised in the 2010 allocation of entitlements drew particular criticism from the Victorian Auditor-General (VAGO) in respect of the aggregate of funds received by the Government for the 2012/22 term. It is always a risk in a competitive market-driven auction process that either the seller s or the buyer s expectations may not be met. In assessing the 2010 auction and its outcomes, VAGO adopted an alternative administrative valuation process utilising a net present value/discounted (NPV/DCF) cash flow methodology. Whilst the NPV/DCF methodology assists in determining an aggregate value for the entitlements, unlike an auction it does not actually allocate the entitlements to approved operators and venues. In considering an administrative entitlement allocation process, regard should be had to: Existing entitlement holders seeking to acquire an equivalent number of post entitlements, and Hotel or club venue operators who wish to enter the gaming market. Existing entitlement holders should have the first option on acquiring their current gaming machine entitlements for post-2022 operation at their current approved venue. Gaming machine entitlements for the period 2012/22 are currently licensed to: Entities who successfully bid for them at the 2010 auction process; Entities who have acquired entitlements through the purchase of gaming hotel leaseholds or freehold/leaseholds, and / or Entities who have acquired entitlements through the Entitlement Transfer Pool. Page 24 of 31

25 The acquisition and deployment of entitlements is subject to the Gambling Regulation Act and Regulations and an extensive range of Ministerial Directions. In considering the allocation of gaming machine entitlements post-2022, AHA (Vic) is of the view that the current holders of entitlements should have the first priority to acquire an equivalent number of entitlements to operate post-2022 at their currently approved venue on an opt-in basis. In giving effect to that priority, current entitlement holders could choose to acquire the equivalent number of entitlements currently approved for their use, a lesser number or opt not to continue with gaming. To the extent that a surplus of unallocated entitlements results, such entitlements should be prioritised amongst new entrants and those seeking to top up existing holdings. Options other than affording existing entitlement holders priority in acquiring and equivalent number of post-2022 entitlements include: All current entitlement holders being able to apply for up to 105 entitlements, Any party holding a venue operators licence being able to apply for up to 105 entitlements, or Any party holding a venue operators licence and a relevant premises approval being able to apply for up to 105 entitlements. To introduce the potential for currently non-approved entities to bid for post-2022 entitlements in direct competition with those that are currently licensed to operate will significantly disrupt the Victorian gaming industry. Opportunities for speculation and market manipulation would result. Further market dysfunction would occur if the opportunity was provided for freehold owners to seek to secure their interests by potentially out-bidding their existing tenant and triggering a default of the venue lease to their advantage. Page 25 of 31

26 Allowing any entity holding a venue operator s licence or a venue operator s licence and a premises approval to bid for gaming machines entitlements held up to 2022 by another entity will create market confusion and uncertainty and serve the interests of neither the Victorian Government, the community nor the maintenance of the stable gaming industry. AHA (Vic) proposes that existing gaming machine entitlement holders be afforded priority in acquiring an equivalent number of entitlements for the post-2022 period. Question 13: How should the price of any new gaming entitlements be determined and why? Based on learnings from the 2010 Gaming Machine Entitlement Auction and the earlier Pre-auction Club offer, AHA (Vic) is of the view that the allocation model for post-2022 entitlements should be based on: A clear understanding of the objectives of both the Government and gaming venue operators; The utilisation of a simple, sound and transparent process devoid of the complexity of the 2010 process; The settlement of terms and conditions for the proposed post-2022 entitlements that reasonably balance the respective interests of the community and gaming venue operators, and The application of an allocation process that delivers appropriate value for both the Government and gaming venue operators. In 2010 the then Government implemented a complex market-driven competitive allocation model for all hotel-based gaming entitlements and the majority of clubbased entitlements, with the balance of the club entitlements allocated through an administration allocation model i.e. the pre-auction club offer. Page 26 of 31

27 The view of AHA (Vic) is that in order to avoid the controversy, uncertainty and the potential for unfulfilled expectations on either the Government s or gaming machine entitlement holder s part, the adoption of an administrative allocation model is the appropriate option to value entitlements beyond To the extent that the application of the model delivers fair-value to both the Government and gaming venue operators, it will have satisfied the principle objectives of the process. AHA (Vic) proposes an administrative valuation model based on a net present value/discounted cash flow methodology to determine the aggregate value of gaming machine entitlement based on average input variables. AHA (Vic) proposes that the Government appoint independent accountants to assess and determine the values of the various inputs to be included in the net present value / discounted cash flow calculation derived from gaming machine operations for the period and projections for the future. Upon the determination of the aggregate value, a negotiation to settle the aggregate price willing to be paid by those seeking post-2022 entitlement will be required. Whilst the NPV / DCF methodology will have regard to a range of quantifiable uncertainties through the weighted average cost of capital assessment, there are a range of qualitative factors which unless effectively addressed will write-down the initially determined value e.g. regulatory risk, consumer behaviours, emerging competition, technological developments etc. Page 27 of 31

28 Other relevant data to consider in the determination of aggregate price includes: The reported participation rate in respect of the playing of EGMs has declined from 21.46% (2008) to 15.22% (2014); Participation rates in other forms of gambling are increasing, including lotto (47.50%), raffles and sweeps etc (43.44%), wagering (20.11%), sportsbetting (5.11%) and keno (2.97%); Participation in gaming in Victoria 2008 / 2014 is declining across key age ranges; years down 8.23% years down 5.33% years down 9.33% Gaming expenditure in Victoria as a percentage of household disposable income has declined from 2.14% (2002) to 1.06% (2014) Gaming share of total Victorian gambling expenditure has declined from 64.8% (2001) to 54.8% (2014) In regard to the methodology for the distribution of the post-2022 aggregate final price across existing and prospective gaming entitlement holders, AHA (Vic) is of the view that it is premature of the Government to consider or determine the distribution process at this time. Key inputs to be resolved prior to evaluating and determining the equitable and optimum approach for the distribution of the aggregate price across venues include: The entitlement allocation process i.e. market-driven or administrative; Parties eligible to participate in the entitlement allocation process; The aggregate entitlement valuation process and its outcome; The negotiated aggregate price to be paid for the post-2022 entitlement, and The term over which the post-2022 entitlements will be permitted to operate. Page 28 of 31

29 Deliberations by Government on determining the methodology by which the final negotiated aggregate price for post-2022 gaming entitlements is to be distributed across gaming entitlement holders should not occur until the above key inputs have been resolved and advised to relevant industry associations and gaming venue operators and inviting their further input. Question 14: Should the price of any new gaming machine entitlements be paid by way of a premium payment, be factored into the tax rate or via another payment option and why? Question 15: If the premium payments are required, what are the preferred terms for those payments and why? The 2012/22 pricing of gaming machine entitlements is by way of a premium payment determined through the 2010 auction and the payment of on-going State gaming taxes. To settle the premium liability, term payments up to 2016 at no interest were required to be made by entitlement holders to the Government. Hardship provisions were also introduced by the Government to assist entitlement holders experiencing difficulties in meeting their payment schedule. Options available to settle the price to be paid for post-2022 entitlements include: A premium payment and on-going payment of State gaming taxes at current taxation rates equivalent to the 2010 concept, or The adjustment of State gaming taxes to include the premium payment. Whilst a number of entitlement holders may prefer a Government term payment scheme or an increase in State gaming taxes to amortise the full premium liability over the term of the post-2022 licence, larger holders may choose to finance the premium payment thus providing the potential for an up-front premium payment to the Government. Page 29 of 31

30 AHA (Vic) proposes that the Government adopts a flexible approach to options to be available to those acquiring post-2022 entitlements, including up-front payments, term payment arrangements, facilitation of a securitisation-based funding scheme and an option to opt into a new taxation regime which includes the State s recovery of the premium payment. Question 16: Are there any improvements that could be made to the transfer market? AHA (Vic) is of the view that the current Entitlement Transfer Pool is operating efficiently. However, the relatively limited number of entitlements becoming available through the pool militates against achievement the policy expection that the pool will be source of entitlements particularly for intending new entrants and the development of greenfield sites. An increase in available post-2022 gaming machine entitlements as per the AHA (Vic) submission will markedly improve the effectiveness of the Transfer Pool. Question 17: Should the State extract a share of any increased value entitlements through the transfer market and, if so, how? The purpose of the Entitlement Transfer Pool is to provide for the trade of entitlements between eligible parties to facilitate new entrants or top-ups. Such trade is further facilitated through the Government adopting a hands-off approach in respect of the underlying commercial transactions. To the extent that other Australian gaming jurisdictions apply taxes to equivalent Transfer Pool trades or actively seek to reduce the number of available gaming machines through withdrawing say one of every three entitlements placed in a pool, such actions are based on a policy intention of reducing the number of available gaming entitlements in the State or Territory. Page 30 of 31

31 With the Consultation Paper not contemplating a reduction in available Gaming Machine Entitlements, and with such a reduction not being appropriate having regard to the Victorian harm minimisation regime which far exceeds Productivity Commission and national benchmarks, AHA (Vic) is of the view that the imposition of taxes on Transfer Pool trades or the implementation of an active entitlement reduction strategy is not warranted. Such an approach would severely retard the efficient and effective operation of the Pool. Question 18: Do you have any suggestions to improve the regulatory framework for gaming machines? The distribution of gaming machines across Victoria is significantly restricted through the regional and municipal caps applying across local government areas. With it being AHA (Vic) s understanding that deliberations on the underlying policy intention and application of such caps are expressly excluded from consideration through the Review of Gaming Machine Arrangements, no specific proposals are made in these matters through this response. However, if any such submissions from other parties result in the extension of the terms of reference to include such matters, AHA (Vic) seeks the opportunity to submit a supplementary response. Page 31 of 31