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Special Report: Ontario Lottery and Gaming Corporation's Office of the Auditor General of Ontario Ontario Lottery and Gaming Corporation’s Modernization Plan Special Report April 2014 Office of the Auditor General of Ontario To the Honourable Speaker of the Legislative Assembly I am pleased to transmit my Special Report on the Ontario Lottery and Gaming Corporation’s Modernization Plan, as requested by the Standing Committee on Public Accounts under Section 17 of the Auditor General Act. Bonnie Lysyk Auditor General April 2014 © 2014, Queen’s Printer for Ontario Ce document est également disponible en français. Cover photograph credits: ISBN 978-1-4606-3760-9 (Print) left: © iStockphoto.com/webphotographeer ISBN 978-1-4606-3761-6 (PDF) bottom: © iStockphoto.com/Serega Table of Contents 1.0 Reflections 5 2.0 Background 6 2.1 Gambling Industry Overview 6 2.2 The Modernization Plan 10 2.3 Status of Modernization Plan 11 3.0 Review Objective and Scope 11 4.0 Summary 15 5.0 Detailed Observations 19 5.1 Consultations With Municipalities On New Casinos 19 5.2 Tendering, Contracting and Planning Processes 20 5.2.1 Timelines for Procurements and Launches of Modernization Plan Initiatives 22 Gaming Facilities 23 Electronic Bingo Centres 23 Internet Gaming 24 Lottery Network 24 5.2.2 Use of Fairness Monitor and Fairness Adviser 25 5.3 Hosting Fees for Gaming Facilities 26 5.3.1 Hosting Fees Before Modernization 26 5.3.2 Making Hosting Fees Consistent: The First Formula (2012) 27 Toronto’s Resistance to the Formula 28 5.3.3 Making Hosting Fees Consistent: The Second Formula (2013) 28 5.4 Modernization Plan Revenue Projections and Assessments of Economic Impact 29 5.4.1 Projection: $4.624 Billion in Cumulative Net Profit to the Province Over Six Years 31 OLG Original Financial Projection 31 Our Assessment of OLG’s Original Projection 31 Our Assessment of OLG’s Revised Projection as of March 31, 2014 33 Additional Assumptions Specific to the GTA Casino 33 Savings to the Province From Cancelling the Slots At Racetracks Program 35 4 Special Report 5.4.2 Modernization Plan Projection: $475 Million to Charities From Electronic Bingo Initiatives Over Eight Years 37 5.4.3 Modernization Plan Projection: Private-sector Capital Investment in Gaming Industry of $3 Billion by the Year Ending March 31, 2018 39 5.4.4 Modernization Plan Economic Forecast: 2,300 Net New Lottery and Gaming Industry Jobs by March 31, 2018 40 5.4.5 Modernization Plan Economic Forecast: 4,000 New Service-sector Jobs by March 31, 2018 41 5.5 Mental Health and Addiction Matters 41 5.5.1 Facts About Problem Gambling 42 5.5.2 OLG’s Responsible Gambling Programming 42 5.5.3 Steps Taken Since November 2005 to Prevent Problem Gambling and Steps Planned to March 31, 2018 43 5.5.4 Responsible Gambling in the Horse-racing Sector 45 5.6 Cancellation of the Slots At Racetracks Program 45 5.6.1 The Introduction of the Slots At Racetracks Program 48 5.6.2 Questions Over the Use of Slots At Racetracks Program Funds 49 5.6.3 The Decision to Cancel the Program 51 Recommendations Arising From OLG’s Strategic Business Review 52 Controversy Over Use of Program Funding at Woodbine Racetrack 52 Recommendations Arising From the Commission on the Reform of Ontario’s Public Services (Commission) 52 Subsequent Developments 53 5.6.4 Relative Impacts on Communities of Cancelling Slots At Racetracks Program Funding 55 Appendix 1—OLG’s Relationships and Activities with Key Players, 2012 58 Appendix 2—Key Players in Ontario’s Gambling Industry 59 Appendix 3—The Horse-racing Industry in North America, 2012 60 Appendix 4—Breakdown of Gambling Industry Overseen by OLG as of March 2012 61 Appendix 5—Chronology of Ontario’s Gambling Industry 62 Appendix 6—Chronology of Key Events Relating to the Modernization Plan Up to March 2014 64 Special Report Ontario Lottery and Gaming Corporation’s Modernization Plan and the horse-racing industry in Ontario since 1.0 Reflections it was launched in 1998. If OLG, working with racetrack operators, had confirmed how reporting and monitoring was to be handled at A considerable amount of information and detail the time the Slots At Racetracks Program was is contained in this report addressing the seven- launched, the abrupt decision to cancel the part motion passed by the Standing Committee on Slots At Racetracks Program without transi- Public Accounts requesting my Office to review the tion funding and the subsequent government Ontario Lottery and Gaming Corporation (OLG) decision to provide new transition and support with respect to the specific issues in Figure 2. In funding might have been handled differently. our Summary (Section 4.0), we highlight some The importance of consultation with stake- of our key specific conclusions and observations. • holders that are significantly impacted by Reflecting on this report, I’d like to highlight four decisions. Although OLG had a termination- high-level “takeaways” from our work: with-notice clause in its agreements with The importance of realistic timelines and • racetrack operators that it could contractually financial projections in publicly com- exercise, the abrupt cancellation of the Slots municated information. The Modernization At Racetracks Program caught the horse- Plan anticipated that OLG could complete racing industry by surprise. Exercising the significant downsizing, restructuring and pri- termination clause subsequently led to sig- vatization within 18 months without sufficient nificant pressures on the government to reach upfront consultation with municipalities and alternative arrangements, which it ultimately other key stakeholders, whose cooperation did. As well, the success of OLG’s Moderniza- and agreement would be critical to meeting its tion Plan depended heavily on the location of modernization initiatives. This was unrealistic. gaming facilities in several large municipal- The importance of Ministries and Crown • ities. However, non-acceptance of OLG’s plans agencies clarifying and conducting the by some large municipalities, including those monitoring activities required of them in the Greater Toronto Area, has resulted in a under agreements with third parties, and significant reduction to revenue projections in the importance of third parties also clarify- the Modernization Plan. ing, acknowledging and co-operating in The importance of stability in leadership providing information requested under • and governance for a Crown agency. Since such agreements. The Slots At Racetracks its inception in 1975, OLG has demonstrated Program has provided benefits to both OLG 5 6 Special Report success in providing significant revenues to Appendix 1 shows OLG’s relationships with the province of Ontario. However by 2010, other key players in Ontario’s gaming indus- the government and OLG management deter- try, and Appendix 2 provides details on their mined that the organization needed to make responsibilities. substantial changes and operational improve- Even before OLG was tasked with conducting ments to sustain and enhance revenues. Since and managing gaming facilities, horse racing 2005, OLG has gone through a series of Board had a long history in Ontario. The Criminal Code and executive management changes, including was amended in 1886 to permit betting between the appointment of five different Board chairs individuals on horse races, and the Ontario Racing and seven Chief Executive Officers. As well, Commission (ORC) was created in 1950 to regulate OLG has reported to four different Ministries the horse-racing industry. The Slots At Racetracks since 2005 and is now reporting to its fifth Program was launched in 1998, and by 2006 each of Minister. In the absence of a long-term gaming the 17 racetracks in Ontario had OLG slot machines strategy for the province that also included at their racetrack facilities and shared the slots rev- horse racing, the development of the Modern- enue generated with the provincial government. ization Plan was needed to address OLG’s stag- Ontario has been home to a world-class horse- nant and declining profits. Hindsight is always racing and horse-breeding industry, and as Appen- 20/20, but one wonders if stable leadership dix 3 indicates, in 2012 this industry generated the and governance could have benefited OLG and third-highest horse-race betting revenues in North the gaming industry in Ontario. America. This industry is labour-intensive—in 2012 it employed an estimated 32,000 to 55,000 people full-time and part-time, making horse racing one of the largest agricultural sectors in the province. 3 2.0 Background The amount bet on horse races in Ontario declined by 25% during the past decade, from 2.1 Gambling Industry Overview1 $1.244 billion in 2002 to $935 million in 2012. In 2012, the industry derived its income from two Under the Canadian Criminal Code, a provincial primary sources: a commission of $130 million on government is permitted to conduct and manage the $935 million betting revenue, divided about gambling in its province in accordance with the equally between racetrack operators and horse laws enacted in that province. In Ontario, gambling people4; and a 20% share of revenues from slots at is conducted and managed in accordance with the racetracks, about $347.3 million.5 Ontario Lottery and Gaming Corporation Act, 1999 By 2012, the gambling industry overseen by and the Gaming Control Act. Charities are allowed OLG consisted of the gambling components out- to conduct gaming for charitable purposes if lined in Appendix 4. authorized by the provincial government. The fed- Across Canada, there were over 35,000 gam- eral government has responsibility for pari-mutuel ing venues, including horse racing, lotteries and betting on horse racing.2 1. This overview generally describes the gambling industry before OLG introduced the Modernization Plan in March 2012. 2. In pari-mutuel betting, bets are placed together in a pool, taxes and the house take are removed, and payoff odds are calculated by sharing the remainder of the pool among all winning bets.
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