Issues Paper Licence Review

Office of Gaming and Racing 7 September 2004

Issues Paper – Lotteries Licence Review

Purpose

The Government invites submissions from all interested parties on the future arrangements for the provision of public arrangements in , and this paper is intended to facilitate those submissions.

In particular, the Government is seeking responses to the questions raised under the various headings in this Issues Paper, and prefers that submissions have a strong evidence base.

The intention is that all submissions will be publicly available on the gambling licences review website. However, where clearly marked, commercial-in-confidence information or other information of genuinely confidential nature will not be placed on the website. In the event that a person or organisation claims confidentiality for their submission and the review team considers that the submission in question is not commercial-in-confidence or genuinely confidential, we will discuss this with the person or organisation claiming confidentiality. If agreement cannot be reached, the person or organisation may either withdraw the submission or have it released publicly.

This document is not an invitation to apply for a lottery licence.

Responses

Responses to this issues paper must be received by the Office of Gaming and Racing by COB Tuesday 19 October 2004. The Issues Paper is also available electronically at www.justice.vic.gov.au (follow the links through the Gaming and Racing section to the Gambling Licences Review) and submissions can be lodged electronically using that website.

Alternatively, written responses to this issues paper, preferably accompanied by an electronic copy on floppy disk or CD-ROM, can be addressed to

Lotteries Licence Review Office of Gaming and Racing Department of Justice PO Box 18055 Collins St East VIC 8003 Australia

The review team may be contacted concerning the review process or submissions. Telephone enquiries regarding the review should be made to Garth Lampe, telephone (03) 9651 4926. Telephone enquiries regarding submissions should be made to David Davies, telephone (03) 9651 4902. The review team’s fax number is (03) 9651 4900.

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Scope

The Minister for Gaming announced in July 2004 that there would be a review of Victoria’s major gambling licences commencing with the future structure of the lotteries licences in Victoria. The Minister indicated that all stakeholders, including the community, would be provided with the opportunity to contribute to the review. Details of the overall approach to the review of gambling licences can be found on the Department of Justice website at www.justice.vic.gov.au.

This Issues Paper deals solely with the public lotteries licence review. A separate Issues Paper will be prepared for the review of electronic gaming machine, wagering and Club Keno licences, which will commence in late 2005.

The lotteries licence review is focussed on the structure, licensing and regulatory arrangements for the post-June 2007 public lotteries licence(s) and does not include a review of existing or new lottery products that might be licensed in the post-2007 arrangements.

The full Terms of Reference for the Lotteries Licence Review are set out on pages 13- 15. In particular, in considering the future lotteries licence arrangements, the review will have regard to: • the Government’s statement of principles to guide future gambling policy and legislative development; • trends and developments in the gambling sector; • the economic, social and community benefits and costs of the current and alternative licensing arrangements; • the transition and other issues involved in the implementation of new or revised licensing arrangements; and • the Government’s obligations in relation to national competition policy.

Your response to this Issues Paper will assist the Department of Justice to review and provide advice on the public lotteries licence arrangements post-June 2007, the broad regulatory and financial arrangements for the proposed licensing arrangements, and the approach to their implementation.

The review covers public lottery licences that have been or could be issued under Part 3 of Chapter 5 of the Gambling Regulation Act 2003. It excludes all other forms of lottery gambling, including trade promotions, charitable gaming, and club keno.

The anticipated timetable for the announcement and implementation of the future lotteries licensing structure is: • announcement of the post-2007 structure in early 2005; • lottery licence(s) awarding process during 2005; • licence(s) agreements finalised early in 2006.

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A Note on Definitions

In this Issues Paper, the terms “lottery licence” and “lotteries licences” are used in a generic fashion to cover a range of possible licensing outcomes, including single and multiple product licences. It does not imply that the future licence(s) to conduct public lotteries will be a licence or licences to offer a range of lottery products, nor does it imply that the future licence or licences will be for single products.

Background

There are currently two public lotteries licences issued in Victoria. The first, issued to the trustees of the will and estate of the late George Adams (“Tattersall’s”), is an exclusive licence to conduct a number of public lotteries detailed in the licence.1 This licence, issued on 1 July 2001, expires on 30 June 2007.

Tattersall’s has held an exclusive licence to conduct public lotteries in Victoria since 1954.

A second licence, to conduct the footy tipping competition, is held by Footy Consortium Pty Ltd, a Tattersall’s subsidiary.2 This licence, issued on 14 December 2000, expires on 13 December 2007.

As noted above, this review covers the structure, licensing and regulatory arrangements for the public lotteries licence(s) and does not cover a review of existing or new lottery products that might be licensed in the post-2007 arrangements.

The Government has endorsed the following six principles to guide future gambling policy and legislative development: • developing and reinforcing the Government’s commitment to responsible gambling through measures that assist and protect problem gamblers and those at risk of becoming problem gamblers, their families and the wider community; • developing and maintaining the State’s commitment to the highest standards of probity for gambling service providers; • accepting gambling is a valid activity for many Victorians who are entitled to expect ongoing high standards of service, transparency and accountability from the gambling sector; • ensuring that the legitimate financial benefits of gambling (both private and public) are transparent, appropriately recognisable and fairly distributed to the Victorian community; • that to the extent possible consistent with the other principles, gaming service providers operate in a competitive environment; and

1 This licence can be found at http://www.ogr.vic.gov.au/domino/web_notes/ogr/OGRImages.nsf/Images/Tattersall_Lottery/$File/Tatt ersall_Lottery.pdf .

2 This licence can be found at http://www.ogr.vic.gov.au/domino/web_notes/ogr/OGRImages.nsf/Images/Footy_Tipping/$File/Footy_ Tipping.pdf

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• establishing proper consultative processes to ensure that appropriate information is given to, and input is received from, the wide variety of persons interested in gambling including stakeholders, affected parties and, to the widest extent possible, the broader Victorian community.

The Future of the Victorian Lotteries Market

While total real lottery spending (outlays less returns to players) in Australia overall has been increasing in recent years, real per capita spending on lotteries and spending as a percentage of household disposable income (HDI) has been decreasing.

The following graph shows the trends in real lotteries expenditure over the past 25 years for all lotteries products combined:3

Changes in real lotteries expenditure from 1977-78

$600 NSW

$500

VIC NSW lion) $400 Victoria mil $ ( QLD e

r SA u $300 WA ndit WA ACT $200 NT eal expe

R SA

$100

$0

6 0 4 6 8 0 2 78 79 80 81 82 -83 84 85 8 -87 88 -89 9 -91 92 -93 9 -95 9 -97 9 -99 0 -01 0 -03

1977- 1978- 1979- 1980- 1981- 1982 1983- 1984- 1985- 1986 1987- 1988 1989- 1990 1991- 1992 1993- 1994 1995- 1996 1997- 1998 1999- 2000 2001- 2002 Financial year

Spending on lotteries has increased in real terms in NSW, Queensland and in the last decade. While spending in Victoria increased in the 1980s, it declined in the 1990s and has since remained relatively stable

However, the data for spending per head shows that individual spending on lotteries in Australia overall is decreasing. The trends in the various state and territory jurisdictions vary, but in the last five years, spending has either been steady or has declined in all states except , which has shown an increase. The following graph illustrates this:

3 See Australian Gambling Statistics 2004, Tasmanian Gaming Commission, 2004.

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Real per capita spending on all forms of lotteries from 1977-78 to 2002-03

$160 VIC WA $140 QLD

year $120 NT NSW Victoria ng per $100 i Queensland SA $80 WA a spend NSW Tasmania $60 ACT r capit

e NT $40 Real p $20

$0

3 78 79 80 81 82 83 84 -85 86 87 88 89 90 91 92 9 94 95 96 97 98 99 00 -01 02 03 9- 78- 94- 983- 999- 1977- 19 1979- 1980- 1981- 1982- 1 1984 1985- 1986- 1987- 1988- 198 1990- 1991- 1992- 1993- 19 1995- 1996- 1997- 1998- 1 2000 2001- 2002- Financial year

All jurisdictions showed a downwards trend over the past five years in spending when total lotteries spending is expressed as a proportion of household disposable income, as shown in the graph below.

Total lotteries spending as percentage of HDI from 1977-78 to 2002-03

0.60% WA

0.50% QLD

I 0.40% NSW D NT Victoria

H VIC SA Queensland of SA % 0.30% s

a WA Tasmania nd ACT

Spe 0.20% NT NSW

0.10%

0.00%

2 9 5 6 2 3 -78 79 80 81 -85 86 87 88 92 93 94 99 00 01 7 8- 9- 0- 1-8 2-83 3-84 4 5- 6- 7- 8-8 9-90 0-91 1- 2- 3- 4-9 5-9 6-97 7-98 8- 9- 0- 1-0 2-0 8 8 8 8 9 9 0 0 97 98 99 00 197 197 1 19 19 198 198 198 198 1 19 19 198 199 199 199 1 19 19 199 199 199 199 2 20 20 Financial year

The 2002 Access Economics study of lotteries participation using the ABS Household Expenditure Survey data throws further light on this decline.4 The Access Economics report indicated a significant fall in the participation rate in Victoria for the two-week

4 Access Economics (2002) Technical Report No. 1: Gambling and the 1998-99 Household Expenditure Survey, pp. 26-27. Available at http://www.accesseconomics.com.au.

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HES reference period between the 1994 and 1999 surveys (from 27.0% to 22.2%).5 This fall in the participation rate occurred at all age levels, and mainly among those with lower incomes. The Access Economics analysis also showed that younger people have about half the participation rate of older people (about half that of over-40s), and equivalently lower spend. There were two other negative correlations across the population: those with more financial assets and those with better education were less likely to participate in lotteries.

Information on lotteries participation in Victoria is also available from the regular surveys of community gambling patterns and perceptions conducted by the former Victorian Casino and Gaming Authority and the 2003 Victorian Longitudinal Community Attitudes Survey conducted by the Gambling Research Panel (GRP).6 The Report of the Seventh Survey of Community Gambling Patterns and Perceptions commissioned by the Victorian Casino and Gaming Authority in 1999 suggested the percentage of adult Victorians who had participated in lotto gambling activities in the past twelve months had declined from 66% to 51% between May 1992 and October 1999. The 2003 survey commissioned by the GRP estimated the participation was 60.5%. More Victorians participate in lotto/lottery games than any other gambling activity surveyed in that research.

Questions

What is the future for the lotteries market given recent trends and the high current levels of participation?

Is there demand for new categories of lottery products?

Is there potential for future growth in the lottery market, through new and/or existing products or other new arrangements?

Harm Minimisation

Lotteries are generally not regarded as a significant cause of problem gambling. The Productivity Commission, in its 1999 report, concluded that some forms of gambling, such as lotteries and scratchies, in their current forms, currently present low risks for problem gambling.7

However, the future lotteries licence structure will need to be consistent with the Government’s guiding principles of a commitment to responsible gambling and accepting that gambling is a valid activity.

5 The HES survey is conducted over a 12-month period, but as each household in the survey was sampled for only a two-week period, the figures for participation rates in the HES survey data are significantly lower that the annual participation rate for purchases of lotteries products. 6 2003 Victorian Longitudinal Community Attitudes Survey. GRP Report No. 6, Centre for Gambling Research, Australian National University, May 2004. Available at: www.grp.vic.gov.au/ 7 At page 6.53 of Australia’s Gambling Industries, Productivity Commission, 1999.

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Questions

Would any expansion of the market for lottery products lead to a change to the low- risk rating that lotteries currently enjoy?

Would increased spending on lotteries displace spending on other forms of gambling that are associated with a greater level of harm, or merely add to the overall level of expenditure on gambling?

Are there aspects of future lotteries licensing structure or regulatory arrangements that would mitigate or support Victoria’s commitment to responsible gambling?

Number and Exclusivity of Lotteries Licences

Since the original licence was granted to Tattersall’s in 1954, the lotteries licence in Victoria has been an exclusive licence held by Tattersall’s. With the exception of the open competitive tender conducted in the early 1980s, where Tattersall’s submitted the winning bid, the lotteries licence has been the subject of periodic extension, with the most recent being in 2000 where the licence was extended from June 2004 to June 2007.

Victoria’s obligations under National Competition Policy will be a significant factor in the review. The key guiding National Competition Policy principle is that legislation should not restrict competition unless it can be demonstrated that the benefits of the restriction to the community as a whole and that the objectives of the legislation can only be achieved by restricting competition.8

The National Competition Council (NCC) has stated that restrictions applied primarily for reasons other than harm minimisation, consumer protection and probity should be removed unless there is a public interest case to support their retention.9

Much of the debate around competition in the lotteries market centres on the question of whether lotteries are a natural monopoly.

This arises from the argument that pool size is a key factor in the commercial success of lotteries. In Australia, the United States, and Europe, jurisdictions have combined together to pool lotteries prize money (termed “blocs”) so that each lottery provider can offer substantially larger prizes than it could without the pooling arrangements.

The National Competition Policy review of Victoria’s lotteries legislation argued that the existence of these lotteries blocs means that it would be viable to have multiple lotteries providers within Victoria that competed with products that were part of a common pool; the pooling arrangements overcome the problem that multiple providers would be unable to offer prizes large enough to attract customers, although the review also noted the possible impact of the Trade Practices Act 1974 on such arrangements.

8 See the NCC website at http://www.ncc.gov.au. 9 The NCC’s paper on regulating gambling activity sets this out http://www.ncc.gov.au/pdf/LEGa- 001.pdf.

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The United Kingdom introduced competition into its lotteries licensing process by inviting bids for a single National Lotteries operator licence covering technical, retailing and marketing infrastructure (a “section 5 licence” under the UK legislation) as well as a number of licences to promote specific games within the National Lottery (a “section 6 licence” under the UK legislation). There can be only one operator licence, and while there can be more than one provider of lottery games, these licences can only be granted with the approval of the operator. So while there is the possibility of competition between products under these arrangements, there is no capacity for competition between two or more providers of the same specific product.10

Victoria’s Gambling Regulation Act 2003 enables the issue of an unspecified number of licences and therefore allows multiple licences for a variety of lotteries products, a separate licence for each product, and more than one licence being issued for each product. These provisions (and those in the preceding legislation, the Public Lotteries Act 2000) arose from the recommendations in the 1998 National Competition Policy review of Victoria’s lotteries legislation (the then Tattersall Consultations Act 1958). This review11 proposed that the Government competitively tenders the lottery licences on the following basis: • a maximum of two operator licences per product category (the products are lotto, instant lottery (i.e. scratch tickets), and others); • the licence term to be between 5 and 10 years; • bidders be required to submit bids for exclusive and non-exclusive licences; • bidders to tender on the basis of a licence fee and/or a tax rate (although the report also states that the question of inviting bidding on a tax rate would need to be decided by Government); and • new products to be granted an exclusive licence to reward innovation.

Under this recommendation, an exclusive licence would be issued if the Government’s revenue interest was clearly disadvantaged, but in the case of doubt, preference should be given to more than one operator.

While this is one option for future licensing structures, others are possible. One alternative would be an open licensing approach, where all licence applicants that satisfy the requirements in 5.3.4 of the Gambling Regulation Act 2003 could be issued with lotteries licences.

Licences for community and charitable gaming activities in Victoria (which are not public lotteries, and are conducted under Chapter 8 of the Gambling Regulation Act 2003) are given on the basis that licence applicants that satisfy the regulatory requirements may be issued with licences.

There might be a range of possible requirements in any bidding process. Examples include:

10 At present, the UK National Lotteries provider, Camelot plc, holds the section 5 licence and all section 6 licences. Further information on the UK lottery licensing structure is available at http://www.culture.gov.uk. 11 Review of the Tattersall Consultations Act 1958.

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• the amount and timing of a premium payment to the State for a lottery licence; • for a licence to operate instant lotteries, the mechanisms put in place to control underage gambling.

Questions

What are the costs and benefits to Victoria of an exclusive lotteries licence? What are the costs and benefits to Victoria of non-exclusive lotteries licences? What is the trade-off between the two?

If lotteries are a natural monopoly, is there any justification for awarding exclusive licences?

Do exclusivity arrangements assist harm minimisation?

Do exclusivity arrangements assist probity management and regulatory arrangements generally?

Do the lottery bloc arrangements overcome any fragmentation of the pool size that might arise if more than one lottery operator was licensed in Victoria?

For products not covered by blocs, would multiple lottery operators cause further fragmentation of the market and decrease the attractiveness to purchasers of the lottery products involved?

What licence application method (tendering vs. open licensing) produces the best overall outcome?

Given that an open licensing approach has been adopted for community and charitable gaming, are there sound public policy reasons why it should not be extended to public lotteries generally?

What, if any, would be the implications for probity management and regulatory arrangements of adopting non-exclusive or open licensing approaches?

Licences for Providers and Specific Lottery Products

As noted previously, the 1998 national competition policy review of Victoria’s lotteries legislation proposed that the Government competitively tenders the lottery licences by product category, with the products being lotto, instant lotteries, and others.

The most popular lottery product by far is lotto games, having 92% of the Victorian market according to the Australian Gaming Statistics.12 Of the lotto games, Saturday Tattslotto and have the bulk of the market share.13

12 Australian Gambling Statistics 2004, Tasmanian Gaming Commission, 2004.

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Questions

If Victoria does award more than one lotteries licence, are their arguments for these licences to be operator licences (where each operator offers multiple products) or product licences (where each product is licensed)?

If multiple product licences are issued, should there be more than one licence for a given product (such as lotto), or should there be only one licence awarded per product?

Do lottery licensees who develop and market new products require an exclusive license and a longer period in which to recoup their development costs, or is their position sufficiently protected through intellectual property law?

What if any are the implications for probity management and the efficiency of the regulatory arrangements of adopting a multiple licence approach?

Licence Conditions and Eligibility and Distribution System

The current lotteries licence was issued by the Minister for Gaming in July 2001. The licensee (Tattersall’s) is subject to a number of conditions, including requirements to: • maintain its head office and associated infrastructure in Victoria during the term of the licence; • use local manufacturers and products (as far as possible) in the conduct of the public lotteries; and • limit the amounts of commission paid to agents to those approved by the Minister for Gaming.

The current legislative arrangements for gambling licences in Victoria also place restrictions on the eligibility to hold licences. For example, Chapter 4 of the Gambling Regulation Act 2003 restricts the directors of the holder of the gaming and wagering licences from being directors of a holder of a public lotteries licence.14

Lotteries products are currently available in Victoria through more than 900 agents and the internet (lotteries other than instant lotteries may be sold through the internet in Australia and are not restricted by the operation of s. 8D of the Commonwealth Interactive Gambling Act 2001). Agents have franchise agreements with Tattersall’s. While a lottery licensee may not offer credit to ticket purchasers,15 there are no restrictions on retailers providing credit for lottery purchases.

13 Tattersall’s annual report, 2002-03. Note however that the data in this report covers Tattersall’s sales in Victoria, Tasmania, the ACT, and a number of Pacific Island countries and is not necessarily representative of the Victorian market. 14 Section 4.3.28, Gambling Regulation Act 2003. 15 Section 5.2.9, Gambling Regulation Act 2003.

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The UK Department of Culture, which is responsible for UK lotteries policy, has proposed having more flexible licensing arrangements to enable future licence bidding to be more competitive. It has also proposed that the nexus between lottery agents and the UK lottery licensee be amended so that the distribution network would be available to new entrants to the market.

The appropriate term for the licence(s) also warrants examination. The 1998 National Competition Policy review of Victoria’s lotteries legislation proposed that licences be for five to ten years.

Questions

What elements of the current licence conditions and licence restrictions or other elements should apply post-2007?

Should the current licence conditions and licence restrictions be strengthened or relaxed?

Is it reasonable to require the lotteries provider to be locally-based and as far as possible use local manufacturers and products?

Should the government regulate the amount of commission paid to agents? If the lotteries licences were for particular products, would a wider distribution network be possible?

What are the benefits and costs of ensuring that the existing distribution system would be available to any potential lottery provider?

What is the appropriate term for the post-2007 lotteries licence(s)?

Regulatory Arrangements

The term “public lottery” is defined in Victorian legislation as a lottery or other game or competition of chance, or partly of chance and partly of skill, in which people pay money to enter with the possibility of obtaining a prize, including a lottery, game or competition that involves a scheme of pari-mutual betting.

There may be future lottery games proposed that may also be regarded as falling under the definition of approved betting competitions, which may be conducted under the wagering licence issued under Chapter 4 of the Gambling Regulation Act 2003.

Questions

Is there a need for a clearer demarcation between public lotteries and other pari- mutual gambling products?

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Lotteries licence review

Terms of reference

Background

The Government has requested that the Secretary, Department of Justice to lead a Review of the Electronic Gaming Machine, Wagering and Lotteries Licences.

This Review will be conducted in two stages commencing with the lotteries licence review in July 2004 and the EGM and wagering review in late 2005.

The Government released overall terms of reference for the Review on 13 July 2004 along with Fact Sheets on the background to and aspects of the Review including Review Timetable, Public and Stakeholder Consultation and Governance and Probity.

Tasks

Having regard to the: • Government’s statement of principles to guide future gambling policy and legislative development • trends and developments in the gambling sector; • the economic, social and community benefits and costs of the current and alternative licensing arrangements; • the transition and other issues involved in the implementation of new or revised licensing arrangements; and • Government’s obligations in relation to national competition policy. the Steering Committee is requested to:

• review and provide advice on the lotteries licence arrangements post-June 2007, the broad financial and regulatory arrangements for the proposed licensing arrangements and the approach to implementation; and • establish and oversee the process for the awarding of the lottery licence(s) to apply post-June 2007.

In assessing the benefits and cost of the current and alternative licensing arrangements, and associated regulatory framework, the Steering Committee will give foremost consideration to the Government’s principles for guiding policy and legislative development (see attached). In particular, the Committee will advise on how these principles can be translated into the future licence structures and associated arrangements.

Timetable and Consultation

The following broad timetable has been announced for the lotteries licence review:

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• review and consultation in the second half of 2004; • announcement of the post-2007 structure in early 2005; • licence(s) awarding process during 2005; and • licence(s) agreements in early 2006.

The Government has indicated that information and consultation processes will be established to enable interested parties to put their views including the release of an Issues Paper and public submissions.

Probity Arrangements

In undertaking the lotteries licence review, the Steering Committee is to be advised by an independent probity auditor.

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Government’s Statement of Principles to Guide Future Policy and Legislative Development

The Government has endorsed the following six principles to guide future gambling policy and legislative development: • Developing and reinforcing the Government's commitment to responsible gambling through measures that assist and protect problem gamblers and those at risk of becoming problem gamblers, their families and the wider community; • Developing and maintaining the State’s commitment to the highest standards of probity for gambling service providers; • Accepting gambling is a valid activity for many Victorians who are entitled to expect ongoing high standards of service, transparency and accountability from the gambling sector; • Ensuring that the legitimate financial benefits of gambling (both private and public) are transparent, appropriately recognisable and fairly distributed to the Victorian Community; • That to the extent possible consistent with the other principles, gaming service providers operate in a competitive environment; and • Establishing proper consultative processes to ensure that appropriate information is given to, and input is received from, the wide variety of persons interested in gambling including stakeholders, affected parties and, to the widest extent possible, the broader Victorian community.

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