Returned & Services League of Australia. (Victorian Branch) Inc.

Transcription

1 Returned & Services League of Australia. (Victorian Branch) Inc. Submission in response to: Gaming Machine Arrangements Review Consultation Paper February 2016

2 Contents Objectives of the venue operator model... 3 Question Distribution of gaming machines... 4 Question Ownership restrictions... 4 Question Question Revenue distribution... 5 Question Question Question Question Question Question Term of entitlements... 7 Question Allocation of entitlements... 8 Question Entitlement price... 9 Question Question Payment terms for entitlements Question Transfer market Question Question Other issues Question Final Comments

3 Submission as to the Issues raised in the Consultation Paper Objectives of the venue operator model Question 1 Do you think that the venue operator model is meeting the three objectives listed above and why? How do you think the venue operator model could better achieve its objectives? The Victorian Branch of the Returned & Services League of Australia (RSL Victoria) agrees that certain aspects of all three stated objectives have been met but the degree to which each objective s full potential has been realized has been compromised by the high cost of transition to the new model and the environment within which the model operates. In relation to the first objective, that being the financial benefits of gaming are fairly and more broadly distributed, clubs have been impaired in realizing the full potential of this outcome due to several key factors. The nature of the club entity itself is a fundamental contributor to this as a club exists for the specific purposes within its constitution; its primary focus is not the commercial outcome but fulfillment of the objects and as a not-for-profit entity there is no allowable distribution of profits. Trading surpluses are directed towards the objects of the organization and without the driver of standard commercial returns very little, if any, is left in terms of net surplus for accumulation as capital reserve. The net effect of this during transition was that clubs in general were less able to bear the cost of transition to the new model because those required capital reserves didn t exist. This element of organizational focus is the central principle of what makes a club unique and is a prime reason that RSL Victoria advocates for greater differentiation between hotels and clubs within the regulatory framework. Secondly, additional costs associated with participation in the industry have restricted objective 1 being met in full. Regulatory costs have increased since the model s introduction with tax rates being increased in 2014 and the introduction of pre-commitment costs, which have been significant not only by way of their ongoing operational costs but in the required capital outlay which was on average several thousand dollars per machine. These unbudgeted costs have impacted on venue operators. Regulatory certainty during the new term would negate this and create a greater and more stable benefit for all. The restriction within the role of independent monitoring to one provider as opposed to several has most likely reduced the impetus for innovation within that area of industry services. Competition brings differentiation by cost, by innovation and speed to market as providers seek to maximize their share of market participants. The high cost to transition to the new model may have also diminished the ability for venue operators to efficiently respond to consumer demand and choice. The high and variable cost of entitlement acquisition, the high cost and uncertain outcomes inherent in obtaining approvals required to operate gaming machines (including any additional gaming machines for existing operators) and the high cost of Gaming machine acquisition in the first instance at the time of transition have all contributed to a compromised outcome in relation to objective 3. These effects were felt strongly by clubs whose costs of transition per entitlement were proportionally much higher than hotels when referencing average income generated per machine, this was further aggravated by the conduct and outcomes of the entitlement auction itself and PACO offer. 3

4 Distribution of gaming machines 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. RSL Victoria fully supports the 50/50 distribution of entitlements between the hotel and club sector. In relation to the venue limit, that being no venue can operate greater than 105 gaming machines, it is the view of RSL Victoria that an adjustment in this cap as it applies to clubs would significantly improve the ongoing longevity of club gaming within Victoria and also the presently unutilized club entitlements. RSL Victoria proposes an increase in the allowable venue limit to 180 operable gaming machines in clubs. Several notable advantages in support of an ongoing and viable gaming industry are apparent under this higher club cap model; A greater benefit in terms of dollars spent within the community from clubs in support of club and community objects Harm minimization benefits to the community as gaming machines in clubs generate, on average, lower net machine revenues per day. A further harm minimization benefit as these new larger clubs would most likely be the result of a consolidation of gaming venues through club amalgamations. Whilst acknowledging that amalgamations are the most likely catalyst RSL Victoria would not propose to specifically limit the creation of these larger clubs to amalgamated entities as it may be appropriate for certain existing clubs with the capacity to do so to take additional entitlements also. Increased competition for club entitlements within the club sector which could be reasonably expected to be a driver of entitlement price and therefore a positive return to the State. Ownership restrictions Question 3 Are the ownership restrictions appropriate? If not, should they be increased or decreased, and why? RSL Victoria proposes that the current ownership restrictions be removed as they artificially restrict and distort the entitlement market. By limiting ownership competitive tension within the entitlement acquisition market is decreased, leading to lower entitlement prices. 4

5 Question 4 Should different ownership restrictions apply to hotel entitlements and club entitlements and, if so, why? Consistent with RSL Victoria s position in relation to ownership restrictions generally it is the view of RSL Victoria that no different rules should apply to hotels and clubs in this space. Revenue distribution 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? The answer as to the most appropriate method used by government to obtain its share of gaming entitlement worth is largely dependent on other factors within the model applied, specifically term length, price, and payment terms. What is apparent is that premium payments that are heavily weighted to the front of the entitlement period or large upfront payments would not be generally acceptable to most clubs and would indeed make some club operations unviable thereby deterring new entrants and ongoing participation by current operators. More appropriate methods would see the cost apportioned over the full length of the term if for a fixed period. A royalty based, or taxation model, may be more appropriate for clubs for longer entitlement terms and indeed entitlements in perpetuity. Question 6 Does the progressive tax structure provide for a fair distribution of the revenue from gaming machines? Conceptually the progressive tax structure is sound. It correctly captures the government s share of gaming machine revenue in a targeted manner that relieves the tax burden on those venues not making substantial revenue from their gaming machines whilst appropriately capturing a higher proportional share of income generated by those more profitable gaming machines. Question 7 Should the tax bands or rates in the progressive tax structure be varied and, if so, how and why? RSL Victoria notes that if any changes to the tax bands and or rates in the progressive tax structure are to be implemented there exists little if any capacity to absorb tax burden at the lower end of the scale and if there are to be changes they should be directed at those gaming machines generating higher revenues. This point is particularly relevant for the smaller operators engaged 5

6 with third party providers. These providers fill an important role in enabling these smaller venues to participate on a competitive level but also represent a significant fixed cost to the venue ongoing. RSL Victoria would oppose any variation to the progressive tax rate structure that would seek to increase the current government overall share of total gaming expenditure. Further to the above it must be noted that regulatory certainty, including taxation, is of keen interest to RSL Victoria and the industry as a whole. Certainty around the taxation model and its application under the new entitlement term significantly de-risks decision making and has impacts on numerous functions important to operating a gaming venue including but not limited to strategic planning and also importantly the attitude of financiers and access to capital on competitive terms. Question 8 Is there an alternative tax structure that should be considered? RSL Victoria maintains that the current tax arrangements are conceptually sound although there may be scope as previously mentioned to improve the system to provide greater equity and further to that changes that could improve function. In terms of function and consistent with principles of red tape reduction and smaller government RSL Victoria would support the adjustment in tax to incorporate the costs of regulating industry thereby eliminating the VCGLR supervision charge. RSL Victoria would suggest investigation of the viability of separate tax regimes for regional venues as opposed to metropolitan venues. The rationale being that economic activity is more fragile regionally and the services provided in those areas by clubs are more integral to the community given in many cases the more limited access and availability to services generally. RSL Victoria further reinforces previously made points surrounding the importance of regulatory certainty within the tax cost model that venue operators will be subjected to under a new entitlement term. Question 9 Should the tax differential for clubs and hotels be maintained and, if so, why? RSL Victoria remains strongly of the view that the tax differential that exists between clubs and hotels should at the very least be maintained at its current rate. RSL Victoria is further developing a view that a very good argument exists for the differential to be increased in recognition of the contribution clubs make to the community through the work they provide in respect to supporting their objects, be they charitable and welfare driven or more broadly sporting and community in nature. RSL Victoria proposes this could be achieved by way of increasing the differential itself or via an increase in the tax free threshold afforded to clubs within the progressive tax structure. Examination of current gaming expenditure reveals that clubs generate approximately 33% of total industry gaming expenditure across the State annually. This has remained historically consistent since the early 2000 s. 6

7 Examination of the consolidated information contained within the annual Community Benefits Statement reveal that clubs then direct approximately 33% of that net gaming revenue back into the communities in which they operate. This figure is far in excess of the 8.33% required to be justified and again figures in excess of 30% have been historically consistent from RSL Victoria believes a review of the current tax benefit afforded to clubs is required with due consideration being given to the actual value provided to the community by clubs. Question 10 Should changes be made to the way clubs are required to demonstrate their community benefit? Community Benefit Statements (CBS) were introduced when the then gaming regulator had to rely on the status of the venue operator as clubs & hotels as determined by a different regulator (The Director of Liquor Licensing). Now that both gaming and liquor are consolidated under a single regulator, the VCGLR, the original need for requiring a CBS no longer exits. Even so, since the introduction in reporting of community benefits clubs have consistently justified a net value back to the community in excess of the required 8.33%. RSL Victoria would assert that given the intrinsic nature of the club business model, being not for profit and in the case of the RSL a charity, that ongoing annual justification is simply an administrative process that adds little or no value to real community outcomes and CBS s should be abolished. Significantly since the inception of the Australian Charities and Not-for-Profit Commission (ACNC) whose function is to improve public understanding of the work of charities and the not-for-profit sector generally, not-for-profits and charities have annual reporting obligations that include, amongst others, details of financial activities, volunteers activities etc. RSL Victoria believes that this reporting could appropriately replace the CBS and give confidence to the community that the proceeds derived from club gaming are being appropriately directed towards the community providing valuable charitable, welfare and sporting services. Term of entitlements Question 11 Should any future gaming machine entitlements (GME) be issued for a 10-year term, a shorter or longer fixed term or in perpetuity and why? It is the view of RSL Victoria that a 10 year rolling entitlement term, whereby a venue operator annually renews their right, would be the preferred term length. Payment options for this type of term may be a discounted initial upfront payment per GME or an ongoing royalty based payment. It is RSL Victoria s view that a term structured such as this would be particularly suited to club operators. Any fixed term offer would only see the current issues around access to capital, planning risk and investment risk deferred until a date closer to the end of the new entitlement period. This critical 7

8 threshold, as evidenced by the current model, could reasonably be estimated to be breached and have practical impacts 7-8 years out from the expiration date of any new entitlements. RSL Victoria has a clear understanding that a rolling 10 year entitlement term, as proposed, would provide sufficient comfort for financiers and relieve concerns around lending to club gaming operators. Other options for a fixed term length may be 30 years as the longer period de-risks future cash flows to a large degree and allows for greater certainty in business planning. RSL Victoria notes that different terms and payment options may be appropriately provided to the different sectors within the industry in recognition of their different operating models. Allocation of entitlements Question 12 What type of allocation process would be appropriate to allocate any new gaming machine entitlements and why? An administrative process which offers to the incumbent a right of first refusal over the same number of entitlements currently held would be the preference of the RSL network. This would allow for the incumbent to have a degree of certainty around their ability to maintain their operation at current levels as it is an easily understood allocation method that eliminates the possibility of collusion or market manipulation through market dominance. It would allow for a degree of certainty in the price as any pricing formula would be known well in advance of the offer being put to the venue operators. RSL Victoria notes that the allocation process may be a two tiered process. Firstly, current operators would be given the options to take up rights over the entitlements they currently hold. This would be based on an administrative process. Secondly those entitlements not taken up by current operators would be added to any entitlements not being utilized to form a pool of entitlements to be offered to new market entrants and those venue operators seeking additional entitlements via the transfer market with the State listing those entitlements as the Vendor. The risks under this model, which would need to be addressed in the design and application phase, include: not allowing for a change in variables used to determine the value of the entitlements between the time of the valuation/commitment and entitlement use (e.g. change in rate of GST, sovereign risk issues, obsolescence) Not allowing for significant diversity in the valuation model given the significant diversity which exists between active club gaming venues (e.g. scale, location, operational diversity, viability). A second option of relevance to the club market, in which there presently exists a number of unused entitlements, would be to offer, as part of the initial administrative process, the current operators not only access to the number of entitlements they presently operate but an allocation 8

9 over that figure, for example currently held plus 10%. This could potentially maximize take up of club entitlements but would be very much dependent on club operators having confidence in bringing those additional entitlements to operation. Confidence in this regard would be improved by changes to the approval process around small increases in gaming machine numbers at premises; this concept is expanded upon further in addressing questions later in the submission. RSL Victoria further notes there could be a separate process for different market segments. Entitlement price Question 13 How should the price of any new gaming machine entitlements be determined and why? Noting that entitlement valuations and the entitlement price paid may not necessarily be one and the same figure due to risk, market participant capacity, and variation in payment terms etc. RSL Victoria notes the following. The valuation methodology used in the VAGO report is supported by RSL Victoria and it is felt that the model accurately captures most of a clubs cost structures. That being a net present value based on discounted cash flow. It is felt however that a number of assumptions and inputs used are not reflective of industry practices. In addressing the above RSL Victoria proposes that the club sector and its associated cost structures should be separately calculated as distinct from hotels. This allows for the valuation model to capture the additional operating costs clubs have in terms of fulfilling their purpose. The RSL Sub Branches that operate gaming are charitable welfare organizations and a large portion of any operational profits must be expended on veteran and community welfare programs before the calculation of a trading profit. Similarly sporting and community clubs bear the cost of upkeep for sporting grounds and facilities that would otherwise be the responsibility of local councils and the State to maintain. These expenses would not be considered viable if the organization was seeking normal return on investment, but they form the core of what clubs seek to add to the Community as a whole and cannot be disregarded. RSL Victoria maintains that operating costs for clubs are well above the 12% used in the VAGO model. A prime factor in determining the relevance of any valuation obtained using this methodology is the application of an appropriate discount rate within the calculation. Given there exists such a diverse range of venue operators, all with individual attitudes towards risk, all with businesses of differing scale, differing capital and debt structures and different organizational focus; it is then crucial that within the valuation model great care and consideration is given when calculating and applying an appropriate discount rate. The VAGO model, which ultimately valued the current 10 year entitlement term at $4.1 billion, was based around what RSL Victoria believes to be, a number of flawed assumptions including an average discount rate of 15.5% for clubs. 9

10 Factors impacting on a clubs WACC include; Location metro/regional Governance & Control composition of volunteer committees Size number of EGMs in operation Organizational Focus clubs do not seek return on investment in the traditional manner Business model leased EGMs vs. outright ownership EGMs Asset Base leased vs. freehold premises Legislative risks to gaming revenue adjustments to state gaming tax rates, gst Gaming Expenditure trends declining in real terms As previously stated the VAGO report assessed the range of WACC for clubs to be 13-18% leading to an average WACC of 15.5%. It is the position of RSL Victoria that the application of a single average to represent the cost of capital within the club sector is inappropriate and does not truly reflect the risk experienced by club operators. It is the view of RSL Victoria that 15.5% as an average across the club network is too low resulting in an overstatement of the value of club entitlements. RSL Victoria believes a WACC within the ranges of 15%-25% would be more indicative of where the true WACC for clubs actually lies, with an average value by proportion closer to 20%. In order to obtain an appropriate average, RSL Victoria proposes, that venues should be characterized as either being a club or hotel, large or small (by number of EGMs) and be allocated to a region being either metropolitan or regional. Each subset could then be assessed in terms of their cost of capital with a figure for each proportionally contributing to the venue type total for either the club or hotel as applicable. Other assumptions within the original VAGO valuation that need to be addressed include; venue refurbishment which was originally stated at $30,000 per venue per annum. RSL Victoria contends this should be closer to $300,000 per venue per annum; this figure allows for a $1,500,000 venue refurbishment every 5 years and is consistent with recent historical spending rates within the RSL network. tax rates which require updating to reflect those that came into effect on the 1 May gaming revenue growth rate assumptions should be more in line with recent actuals, at a modeled rate in the region of 1.5%, as opposed to the 3.6% originally used. the model should make an allowance for a possible increase in Federal GST which may occur within the short to medium term and certainly within the scope of a new entitlement term. This risk could be captured within the discount rate. pre-commitment costs should be a new addition to the list of venue expenses. RSL Victoria has conducted preliminary modeling based upon the above set of updated inputs and assumptions, utilizing the same methodology as the VAGO report and for varying terms being 10, 15 and 25 years. The results of which indicate the average value of a club entitlement beyond the current 10 year term is far below the average price obtained as the result of the allocation processes completed in

11 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 be via another payment option? Please explain why. RSL Victoria understands that the vast majority of clubs would not be in a position to make a significant upfront payment and as such a deferred payment scheme would be most appropriate, or alternatively a system in which a venue operator could nominate which option is applicable to them. If a venue was to nominate an upfront payment a further discount should be provided as an incentive. The structure of any proposed deferred payment structure is critical as it directly impacts on venue cash flows. As evidenced under the current arrangement where the 10 Year entitlement term is paid to the State via 20 quarterly installments of 5%, club cash flows in particular are fragile and the burden of the current schedule has seen a number of clubs close and a large number apply for relief under the financial hardship provisions as provided for by the State. Noting again that valuation and price are two separate, but inter-related variables. It is the view of RSL Victoria that once a valuation is determined then the acceptable return (price) on that valuation could be captured by the State via a royalty based model. It is the position of RSL Victoria that this would be a most suitable option for clubs, a model whereby the entitlements are paid over a period representative of the term or ongoing if a 10 year rolling term is adopted, and are determined by reference to gaming revenues beyond Payment terms for entitlements Question 15 If premium payments are required, what are the preferred terms for those payments and why? If premium payments are required they should be distributed evenly over the full length of the term. RSL Victoria asserts that any payments for new entitlements should not be due and payable until after the expiration of the current entitlement period ending in August As previously mentioned the current payment terms have been difficult for clubs to comply with, recognition of this is evidenced by the States introduction of an automatic extension of 6 months available to club operators, which did provide broad relief. That being the case there have still been many clubs who have subsequently lodged applications for recognition of financial hardship and been provided extensions out to More accommodating premium payment terms serve to lessen the cash flow burden on clubs already fragile business model creating a more sustainable club industry long term. 11

12 Transfer market Question 16 Are there any improvements that could be made to the transfer market? Purely as a mechanism to facilitate the transfer of entitlements between willing parties the transfer market operates appropriately. The compounding factors, particularly relevant to clubs who traditionally have a more conservative tolerance to risk, are the barriers to entry generally once entitlements are obtained. The high degree of uncertainty associated with and the high cost, in both fiscal and temporal terms, of obtaining the required premises approvals and planning permits are often viewed as barriers too high to hurdle. The above, along with the conservative risk profile associated with club governance, combine in contributing to the depressed activity seen in the club transfer market and in part to the number of presently unallocated club entitlements. This same situation in not observed in the hotel market which operates freely, reflecting the entrepreneurial and commercial nature of that business model which is in stark contrast to that of clubs who are community focused and do not seek commercial returns in the normally accepted manner or pursue entrepreneurial opportunities as readily. RSL Victoria maintains the view that the transfer market is the appropriate place for the State to re-introduce forfeited and/or unused and/or newly created additional entitlements to the market place. The State would list those entitlements for sale on the transfer market acting as the Vendor. This would increase overall transparency particularly in respect to those forfeited entitlements currently being held and create efficiencies in getting them back into circulation. Question 17 Should the State extract a share of any increased value of entitlements through the transfer market and, if so, how? RSL Victoria contends that there is no requirement, and indeed impractical in administration, for the State to pursue a share in any proceeds of sale from the transfer market. Already venue operators bear the costs of administrative fees to process transfers in ownership/geographical location etc., significant taxes are paid ongoing and the State captures a full share of the value of the entitlement at the time of allocation. The transfer market operates as a free market should where buyer meets seller and it is the belief of RSL Victoria that further intervention in the market by imposition of additional costs would stymie activity. 12

13 Other issues Question 18 Do you have any suggestions to improve the regulatory framework for gaming machines? There are a number of change initiatives that RSL Victoria endorse as being required to improve efficiency and the operation of the gaming industry in Victoria generally. These include: Simplification of the process for amending a venue operator s licence to increase the number of EGMs when that increase is a small top up (for example an increase of 10% or fewer). RSL Victoria contends that it is not realistic to expect the Commission or local government to be able to conclude that the net economic and social impact of a small top up will be detrimental to the well-being of the community. Simplification could be achieved by abolishing the "no net detriment" test and removing involvement of local government from the Commission's assessment process. Section of the Gambling Regulation Act should be clarified to confirm that the approval of the Commission is only required for modifications to the boundary of a gaming machine area and not to the location of gaming machines within an already approved area. There is no regulatory risk if gaming machines are moved within an approved gaming machine area without the Commission's approval. The application of the Associated Individual status as being related to the specific individual and not the specific venue operator License. This would in effect give portability to the status which in some cases is required as persons involved in club Committees do at times transfer between clubs. The authorized gaming visitor and sign-in provisions be removed (including the provisions detailing the 5-10km rule), allowing any person not a member to enter and enjoy club facilities and the services offered. A club may maintain the sign-in requirements should they wish. Final Comments RSL Victoria welcomes the timing and nature of the review into Gaming Machine Arrangements post the current entitlement term and commends the State on its broad engagement on this matter. RSL Victoria would like to note the complexity and interrelated nature of many of the areas on which feedback has been sought. Clearly decisions related to entitlement term are interrelated with amongst others, entitlement price, payment terms, and allocation method. Once these matters are determined the practical application of these decisions are then clearly related to the regulatory environment more broadly and venue operators ability to work within that framework to bring the entitlements to operation in an efficient and timely manner. As such, the feedback provided by RSL Victoria within this submission on any one matter cannot be considered in isolation 13

14 of all other matters raised and instead should be viewed contemplating the content of the entire submission. That being said it is apparent within the issues the State has sought to gain feedback on as part of this Consultation Paper there are those that RSL Victoria would stress as key to a fair and equitable policy outcome. The key issues are as follows: There is further opportunity to appropriately separate clubs and hotels within the regulatory framework and that this recognition is warranted based on value to the community and difference in business models. Practical examples apply to taxation and increasing the number of allowable gaming machines in clubs to 180. Any allocation method should be administrative in design and provide certainty to the incumbent operators, whilst accommodating new entrants should any wish to participate. The payment terms should accommodate those venues willing to make upfront payments but also provide those lacking this capacity access to a deferred payment scheme. Any deferred payment scheme needs to be structured so that it does not place undue stress on venue operator s cash flows and as such should be distributed over the full length of the term. Further any deferred payment scheme or upfront payment should be structured so as to commence not before the expiration of the current entitlement term. The valuation and price should reflect the true worth of the entitlement with the pricing formula being sophisticated enough to accommodate venues of various size, location and venue type. The term should allow enough flexibility to allow venue operators to match their extension term to their business needs. Sufficient length of time is required to alleviate the concerns of financiers and allow for those charged with decision making to master plan the development of the business and make the necessary capital investments required to keep the business competitive. It is RSL Victoria s position that a rolling 10 year term renewed annually would be the most beneficial outcome for clubs. That effort should be made to streamline, in terms of cost, time and procedure, the process for obtaining approvals for small gaming machine increases for existing operators. As always the Victorian Branch of the Returned & Services League of Australia remains committed to a responsible and sustainable gaming industry in Victoria and values the opportunity to provide feedback in this instance. RSL Victoria is happy to expand on any of the themes raised within its submission and looks forward to further participation within the review process as required. 14