Limits on Venue Expenses
Thursday, 22 April 2004
HOSPITALITY ASSOCIATION OF NEW ZEALAND Submission
in response to the Department of Internal Affairs' Consultation Document
Limits on Venue Expenses
The Hospitality Association represents 1,012 venue operators operating gaming machines for an estimated 230 trusts. The matter of venue expenses is therefore very important to the Association's membership.
The Association believes that the Gambling Act now explicitly provides for venue operators to be remunerated for actual, reasonable and necessary expenses, and unlike the Gaming and Lotteries Act allows venue operators to be fairly recompensed for the risks and opportunity costs involved in providing a fund-raising site to a charitable trust or society.
The Association does not accept the limits suggested in this discussion paper in either option 1 or option 2. For those sites which are generating the majority of the revenue for the community, the options proposed by the Department do not adequately recompense the venue operator for either direct costs or the risk or opportunity cost component.
The Association believes that a variation in option 2 could work provided the per machine per week limit was lifted to $250 and that an open dispensation applied above that level subject to DIA approval.
This proposal limits the administrative involvement of the DIA but recognises that the legislation provides for actual, reasonable and necessary expenses to apply in each and every case. The Association continues to be willing to work with the DIA in structuring a dispensation regime which is consistent, fair and transparent.
Key Problems posed by the Department
The Department has identified three key problems which the Department believes this policy is necessary to address.
The first is:
"The fact that a significantly increased share of the returns from gambling is being retained by venue operators as expenses and the likelihood that this trend will continue with current policy settings"
This statement is making a clear value judgement about the level of venue expenses and remuneration. There is no doubt that with the changing regime for venue expenses that the share has gone up but equally the level of contribution to the community has also gone up significantly. It can be argued that earlier the share was insufficient to facilitate venue operators putting the time and effort into fund-raising, and that as the share has increased venue operators have been more inclined to put the work into fund-raising with the consequent increased output for the community. The increased share by venue operators is not therefore of its own right necessarily bad or wrong, rather it more accurately reflects the work required and the returns required to effect a high level of fund-raising on key sites. Similarly, the Association contends that were this ratio to reduce then it will have an adverse effect on the funds raised for the community.
The second key problem is:
"The difficulty of reconciling the large variations in expenses with any definition of actual, reasonable and necessary costs even for highly patronised up-market venues in CBD locations"
The difficulty with reconciling variations in expenses lies in historical arrangements reflected under the constraints of the Gaming and Lotteries Act. The Gaming and Lotteries Act did not permit reimbursement for factors such as risk, opportunity cost, and so on. As a consequence, those components have in effect been built into various other cost components as a means of attempting to justify in actual terms 'the venue expenses claimed'. So while there is a difficulty in reconciling the variations it is historical and of little moment if going forward venue expenses policies can accurately reflect the need to recognise the risk and opportunity cost factors as necessary costs.
The Association is very happy to work with the Department in developing transparent mechanisms or formulae where exemptions would apply that can reflect the necessary costs to have a site perform at a high level in terms of raising funds for the community.
The third key problem is:
"The Gambling Act requirement for the Department to be satisfied that expenses are being minimised, including the need to minimise the extent of incentive payments to attract and retain high value venues and limit the extent of profit that can be earned from operating machine venues"
The Association accepts that this is a key problem for the Department. The problem is the two options proposed by the Department effectively remove any incentive at all for a site to perform well in terms of raising funds for the community and will significantly adversely impact on funds raised for the community. A better way to look at this issue is to look for efficiency of fund raising. The question is whether the raising of funds for the community is cost effective. The cost of fund raising via gaming machines is more cost effective than either Lotto or Racing. This issue would most appropriately have been dealt with by a commission and it is regrettable that the policy-makers did not accept this pragmatic sensible solution.
The Association believes the only way this can be addressed, which is fair to all parties, is for a dispensation regime to be developed which allows the risks and opportunity costs to be recognised for those high performing sites in a transparent manner. Again, the Association believes that in lifting the proposed fixed limit to $250 per machine per week and having the dispensations applying to amounts over that, it provides a control but also minimises the number of sites that the Department has to address. This proposal will allow the Department to be satisfied that expenses are being minimised because they will ultimately determine whether dispensation is granted or not and clearly will only do so as long as they are confident that the dispensation is warranted in terms of achieving the high level of fund-raising from specific sites. Again, the Association is happy to work with the Department in order to develop transparent formulas and processes to achieve win/win outcomes.
The Association's suggested maximum without an exemption of $250 recognises that within the system there are inherent safeguards to ensure there is balance and expenses are minimised. The proposed increase in the required return to authorised purpose in itself creates a restraint on what societies can afford to pay venue operators. In addition, venue operators are facing increased risks and requirements associated with harm minimisation and fines for non-performance.
Questions for Discussion
(a) Which option do you think is the best and why?
The Association supports a variation on option 2 with the per week per machine limit being raised to $250 and the Department having the opportunity for an open-ended dispensation above $250 where a society and venue can establish that the dispensation is justified in terms of actual, reasonable and necessary expenses. The Association believes that this option is the most appropriate as it minimises the administrative expenses for the Department of Internal Affairs but allows venue operators to be fairly recompensed in relation to all the factors associated with operating high performing sites.
(b) Is there a better alternative in your view that achieves the purposes of
the Gambling Act? If so, how would it operate and how would it achieve
the purposes of the Act?
The Association's preferred option is suggested above.
(c) How do the options perform against the objectives of the Gambling Act
Achieving the objectives of the Act is a matter of balance between harm minimisation, minimisation of costs and optimising the return to the community. The proposals of the Department will result in a significant reduction in the funds available to the community because high performing sites will simply reduce their hours of operation and as a consequence reduce the funds that are available from that site to the community. Expenses do need to be limited but not limited in such a way that it compromises the funds raised for the community. With regard to harm minimisation, the Association believes that those issues are dealt with under other provisions of the Act including local gaming venue policies and the new responsibilities of the Ministry of Health and other specific measures within the Act.
(d) What is the likely impact of the proposed venue expense limits on;
venue operators, gaming machine operators and returns to the
The impact of the proposal as is will certainly see venue operators operating in high performing sites reduce their hours to contain costs for which they will no longer be reimbursed. Some sites will also look to other activities for those sites which provide greater earning capacity. The consequences of these actions will be to significantly reduce the funds available to the community. As has previously been discussed, as the proportion of revenue to venues has increased so too has the level of return to the community in absolute terms. In other words, even with increased costs, fund raising is very efficient.
The Association believes that applying either option 1 or option 2 will see this trend absolutely reversed as high performing sites minimise their costs and look to maximising return from the sites through other activities.
(e) What effect do you think the proposed limits would have on the range
of service levels?
As above, venue operators will limit their activity to that for which they are being compensated and this is likely to have an impact on the service available to gaming patrons, the quality of reporting and their enthusiasm for undertaking the activities required by their society and the Department.
(f) How would venue operators and gaming machine operators respond to
this proposed policy over time?
This question has been answered above and can be summed up by lower activity, less fund-raising and less funds available to the community.
(g) What unforeseen consequences might the various options have?
One of the unforeseen consequences might be an even greater distortion of the gaming market between clubs and bars. Bars are raising funds for the community at large while clubs are raising funds for club members. If the availability of machines in bars is reduced and the times which they operate are reduced, it may encourage patrons who wish to continue to play machines to become involved in a club which could increase the funds available to club members at the expense of funds raised for the community at large.
(h) How do you explain the trends in venue operator expenses over the
last few years?
The Association has previously discussed this issue and repeats that the venue expenses of the past are a reflection of a different regime. What can be said is that where operators are able to be recompensed for the actual, reasonable and necessary costs of operating a venue then the return to the community will dramatically increase. Historical data reflects the inadequacies of the Gaming and Lotteries Act rather than providing good empirical data for future policy-making.
(i) How fair do you think the policy proposals are for venue operators,
gaming machine operators and the community?
None of the above stakeholders will be satisfied with options 1 and 2, both of which will result in reduced returns to all the three stakeholders named. As venue operators limit their activity, the viability of societies will be threatened and the funds available to the community will reduce significantly.
(j) What effect do you think these proposals will have on certainty for venue
operators and gaming machine operators?
These proposals provide the certainty of mediocrity by lowering expectations, output and returns to a low common denominator. Certainty is welcomed but not when it is perceived to be unfair and unreasonable. The consequences of the certainty in this proposal will stifle the capacity for fund-raising.
(k) How do you think the proposals will affect the amount of money that goes
to the community?
Over time the Association believes that these proposals will significantly reduce the funds available to communities, perhaps by as much as 50%.
(l) How do you think the proposals will affect the growth of gambling?
The proposal will certainly reduce the incidence of gambling with gaming machines in commercial venues. It is unknown whether the limitation of opportunities to gamble in commercial venues will be replaced by a shift to club sites and/or other gambling opportunities.
(m) Are the limits the right amount? If not, what should be the amounts
This answer has been previously answered with the Association's suggestions of a per week per machine limit of $250 with an open-ended exemption above that.
(n) Are there any other important issues that should be addressed?
The Association has very real concerns that much of the implementation of the Gambling Act appears to be happening in isolation with the integrated impact not being considered. The increase in the proposed return to authorised purpose, the consequences of new gaming host responsibility requirements, the problem gambling levy, the introduction of electronic monitoring, and other provisions of the Bill, will all impact on each other. Regulatory proposals such as lowering the reel speed of machines will reduce the viability level of all sites and the consequences of the smoking ban commencing 10 December 2004 is likely to be significant.
The Association believes that some care needs to be taken by the Department to look at the big picture in terms of the outcomes of individual policy initiatives.
The Association appreciates the opportunity to make this submission and welcomes the opportunity for further dialogue with the Department of Internal Affairs to ensure that venue operators can be remunerated fairly in a transparent auditable manner, and that the community can continue to benefit from funds raised at our members' premises.
Bruce H Robertson
22 April 2004
To : GCR Link Project Communications Co-ordinator
Department of Internal Affairs
46 Waring Taylor Street