Breaking up a duopoly: Am I missing something?

http://www.aimhigher.ac.uk/resources/gambling300.jpgI don’t know the ins and outs of gambling in Victoria. But I was amazed at the article by Stephen Mayne in Crikey! Victorian Premier John Brumby has acted to break the duopoly that holds licences to host poker machines in Victoria. Clubs will be able to bid for licences as well. I believe the decision does not increase the number of machines, but just allows greater competition for the right to host them.

Now presuming that Brumby has legal advice that he can do this, that is that after a period in which the duopoly was guaranteed by government, this guarantee has now come to an end, then it seems that Brumby is doing the right thing. Naturally Tabcorp isn’t too impressed as they just lost around 2.7 billion dollars as measured by stock market valuations.

Mayne takes the companies’ side and argues that they should get compensation. For what exactly? For not enjoying the duopoly in perpetuity? This, according to Tabcorp and Stephen Mayne raises sovereign risk issues. Perhaps it does. Perhaps the Government clearly implied that the duopoly would remain for those snouts that were already in its trough. But it would want to be pretty strong kind of implication – together with some contract like offer, substantial consideration and acceptance for me to be too sympathetic.

And if we’re to argue this from the morality or the efficiency implications of property rights, all I can say is that that is one good reason why monopoly rights are not (generally) property and if this makes it harder for governments to ‘bank’ promises of monopoly rights by selling them for higher prices, well and good.

Like I said in the headline, should I be disappointed in Stephen Mayne or am I missing something? Mayne’s post is below the fold.

Is Victorian Premier John Brumby wreaking revenge on Tabcorp for the severe damage he suffered at the time it was floated back in August 1994?

The Kennett Government slammed through the Tabcorp float with indecent haste after being poorly advised by Mike Tilley, the current CEO of Challenger Financial Group which has caused more losses than any other stock for Opes Prime customers.

Opposition leader Brumby was famously blamed by Jeff Kennett, Tilley and The AFRs then Chanticleer columnist Ivor Ries for single-handedly destroying the float by raising the prospect of introducing competitors to Tabcorps gambling licences.

The government was hoping to float Tabcorp for $2.70 a share but was instead forced to settle for the $2.25, the bottom of the range.

Fast forward 14 years and John Brumby has managed to wipe $2.86 a share or $1.5 billion from the value of Tabcorp in one morning.

In percentage terms Tabcorps 20% hit a $7.54 billion company is now only worth $6 billion was overshadowed by Tattersalls which this morning opened 25% lower, slashing its market cap by $1.2 billion from $4.63 billion to $3.45 billion.

Woolworths and colourful billionaire Bruce Mathieson are clearly the biggest winners because they already control more than 35% of Victorias poker machines. Woolies shares rose 31c yesterday and a further 52c to $30.76 this morning a total rise of 83c which added 2.8% or exactly $1 billion to its market cap whilst the broader market slipped 1.7%.

Whilst the move to a system similar to the rest of the country is not that surprising, the refusal to pay out $1.2 billion in compensation to the duopolists is the biggest shock from yesterdays announcement.

Never before has a government decision wiped out $2.7 billion of sharemarket value and Brumby is already being slammed by the likes of Business Spectators Stephen Bartholomeusz for immoral behaviour.

Brumby is clearly banking on the lack of sympathy for the duopoly. After all, even after todays plunge, Tabcorp investors have still enjoyed returns of more than 700% including a big dividend flow. Tattersalls never paid for its pokies licence in the first place a Kirner Government special which was arguably the most incompetent commercial act by a state government in the last 30 years making it Australias second biggest millionaires factory after Macquarie Group.

I reckon this is just a negotiating ploy and the duopolists will eventually settle for something like a discounted wagering licence fee.

That said, the union-controlled Labor Party has always carried some fears for business and this brazen rejection of compensation raises the spectre of sovereign risk. If Labor can do this to Victorias gaming duopoly, why should other major licensed businesses such as media companies, banks and telcos not expect the same?

For instance, given Laura Tingle has today revealed that Treasurer Wayne Swan used Glenn Milne to do a hatchet job on RBA governor Glenn Stevens, the banks themselves have plenty to fear.

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Niall
13 years ago

Why indeed. Of course, there’s the so-called ‘market forces’ to be considered, isn’t there.

Joshua Gans
13 years ago

You are not missing anything. No way should they get compensation.

melaleuca
13 years ago

I remember when calicivirus was released on mainland Oz- a tad earlier than initially planned as it so happened- the rabbit shooters demanded compensation. TabCorp and Tattersalls, like the rabbit shooters, should be advised to shove their heads up a dead bears bum- but politely of course.

More work for the lawyers
More work for the lawyers
13 years ago

The 1994 TABCORP prospectus (issued by the State of Victoria) says:

The wagering and gaming licenses are for terms of eighteen years. TABCORP is entitled on expiry (other than by cancellation) of the initial licences to participate in a tender for new licences. TABCORP is entitled, whether or not it is the successful tenderer, to receive an amount equal to the lesser of the sum paid for the new licences and a benchmark sum. The benchmark sum will not be greater than 115% or less than 85% of the amount paid by TABCORP for the initial licences.

The (complicated) compensation formula is given in the “Additional Information” section.

According to commentary (in Fairfax BusinessDay), Brumby is getting around this by technically not issuing new licences, thus the lesser sum being zero. Whether or not this holds up in court…

Patrick
Patrick
13 years ago

I am not sure it is so clear-cut, even though I am absolutely in agreement that Brumby made the right decision (and highlighted what a cock Bracks was).

As I understand it they claim to be contractually entitled to compensation in the case of their licence being cancelled, but I have also seen it suggested that the compensation was in fact payable on expiry, to be presumably set-off against the new licence. So I am far from sure that they are really not entitled to anything.

That said, I don’t feel very sorry for them and won’t be very upset if they don’t get anything. In particular the circumstances under which the licences were procured were less than compelling (wasn’t Kirner just faboulously inept?).

If Labor can do this to Victorias gaming duopoly, why should other major licensed businesses such as media companies, banks and telcos not expect the same?

I am not entirely sure how this would translate to banks. There is already a lot of freedom to set up a bank. Actually I am not sure how this would translate to any of those areas expect perhaps media – I can only guess that by ‘this’ you mean arbitrarily infringe property rights – but I am not sure that Brumby has infringed property rights.

Patrick
Patrick
13 years ago

NB: I would not be surprised if they end being sued for misleading disclosure in a PDS. Arguably too much time has elapsed but that is an equally plausible explanation at my current (minimal) level of knowledge.

Richard Green
Richard Green
13 years ago

Mayne has long taken a strangely mercantilist tone in Crikey and elsewhere. A vibe that the greatestgoals is the accumulation of finance (contrasted with productive capital), and those with accumulated assets deserve the most protection, rather than those engaged in productive activity.
He has long criticisms of Australian policy makers for not accumulating foreign reserves like South Korea, but doesn’t mention any reasons such as a capacity to dirty float, accumulating reserves is an end unto itself. Governments are a success for accumlating surpluses for the same reason.

It’s vaguely annoying, but more bizarre than anything else. Does he pine for the days of the East India Company and corn laws? Has he yet to hear of the radical young thinker Adam Smith?

The man isn’t a even a capitalist it seems!

Fred Argy
Fred Argy
13 years ago

“More work for the lawyers”, do you know if the original prospectus listed as one of the investment “risks” the possibility of non-issue of licences, effectively revoking the duopoly? If not, the prospectus was misleading. If yes, the case for compensation is lessened.

That aside, I agree with Nicholas about sovereign risk. Governments must be seen to be honest, whatever the legal position. Was it widely expected among investors that the licences would either be renewed or compensation paid? If so, Brumby may have done the wrong thing.

I am no legal man so I am only speculating.

Tim Quilty
Tim Quilty
13 years ago

Maybe your victorian Labor is a different kettle of fish, but if I saw NSW Labor doing this, I’d be pretty sure it was all about shaking out donations for the party for the next election (and for various and sundry MPs and other party figures retirement funds). Just saying.

jc
jc
13 years ago

I agree Tim. This isn’t any sort of reform as they’re still handing out licenes so it’s not as though they have changed much. So hailing it as a reform isn’t reflecting reality.

Patrick
Patrick
13 years ago

It is still a reform, in that it enables them to implement new arrangements which distribute a greater portion of the windfall to the public purse.

I find pokies a conundrum – I can’t see how banning them would really work let alone be certain that it is desirable, but I can’t help but find them, and their impact on certain people, repugnant. Amazingly, my conclusion is that they should be highly regulated as to density, overall number, lighting, display of the time, etc.

Fred, I take your point – unfortunately some governments do stupid things, such as Kirner’s circus. There has to be a case for deemed assumption of sovereign risk when you know you are taking them for a ride – as I see it, Kirner & Co were smart enough to keep breathing, so most likely, albeit probably unprovable, they got a kickback for that massive gift.

I don’t see this as being, eg, Venezuela.

Also I note that if the government is exploiting a technicality, then complaining about sovereign risk is a bit rich. I’m sure both gaming cos have exploited a technicality or two in their time.

NPOV
NPOV
13 years ago

Not that I’m advocating it, but banning pokies clearly does work, as far as abolishing their presence goes. I’ve never seen any in the U.S. other than Vegas (which more than makes up for their absense elsewhere).
Of course people will and do find plenty of other avenues to waste their money on. I suspect it’s because poker machines are such a publicly visible and obvious method of throwing money away in a semi-addictive state that they cause so much concern. But others are surely just as addicted to, say, online gaming/gambling sites, or tattslotto etc., where the nature of the action isn’t so much in the public eye.

Patrick
Patrick
13 years ago

Except that I understand Melbourne to have actually had illegal gambling venues which included pokies up until the early 1990s when the attraction disappeared.

But others are surely just as addicted to, say, online gaming/gambling sites, or tattslotto etc., where the nature of the action isnt so much in the public eye.

I can distinguish all of them, personally. Tattslotto is probably on the borderline but I have actually never heard of anyone being more compulsive than buying weekly tickets. Gambling in all forms can be addictive but the real issue with Pokies is both the inherently addictive nature (for some people) and that absent either an addiction or other pre-existing mental weakness it is inexplicable behaviour. You are certain to lose, in effect you are paying for the entertainment factor.

I personally would much rather tolerate smoking and drinking and pan pokies, subject to my caveat and conclusion above.

Chris Lloyd
Chris Lloyd
13 years ago

Why would a government enter into such a contract? Which government was it?

The best reform for pokies would not be to ban then, but to limit the game value to 5 cents. Poor sad people still get to see blinking lights, but don’t lose their house.

Patrick
Patrick
13 years ago

Why would a government enter into such a contract?

as I see it, Kirner & Co were smart enough to keep breathing, so most likely, albeit probably unprovable, they got a kickback for that massive gift

Which government was it?

See above.

derrida derider
derrida derider
13 years ago

Telstra just lost a High Court case where they claimed that a policy change that reduced their monopoly power represented appropriation of their property without just compensation (which is, of course, constitutionally prohibited). And Telstra could point to substantial investment that the policy change made unprofitable.

Regardless of the morality (and like others I find it had to be sympathetic to the duopoly) I don’t think they’ll have a legal leg to stand on. But then IANAL.

Tom N.
Tom N.
13 years ago

LEGAISED STEALING

Amusingly, a Tatts executive was quoted in The Age as saying that the abolition of the Tatts/Tabcorp duopoly will allow organised crime into the gaming industry. This guy needs to look in the mirror.

hc
hc
13 years ago

The Kirner government gave away huge amounts of public money in what must rank as one of the silliest decisions in recent history.

Many ex-pollies and ex ALP hacks are involved in promoting gambling in Victoria. David White worked for Tattersalls and, in the press, was claimed to boast he had the party in his hands.

I assume Brumby wanted to cut these links because the scandal, if all came out, could destroy the party in Victoria – as it should.

The message – don’t trust Labor with anything commercial. Too stupid for belief.

You are only ‘speculating’ Fred A. A devoted Labor man for sure but, by Christ, a bureaucrat by heart and a sticker for ‘correct’ procedure even given the huge amounts of wealth transferred by Labor to this repugnant duopoly.

I do worry.

Patrick
Patrick
13 years ago

It is hard. There is simply no rational explanation available on the facts, hence my speculation.

To quote John Cain on four corners:

JONATHAN HOLMES: The NSW clubs had had poker machines since the 1950s. By the time John Cain Jr took office in 1982, the pressure was building to introduce them to Victoria too. But Cain was adamantly opposed.

JOHN CAIN: In the last six or seven years of my Government or the time I was in office, the barbarians were banging at the gate. By the time, three weeks after I’d left, they weren’t just through the gates, they were pissing on the furniture. I mean, it really…they were powerful. They were determined and they were effective

.

And apparently Kirner was defective. AFAIK it can only be presumed that she was so desparate for the money-stream they suggested that she simply didn’t realise what enormous value she was giving away maybe she was too dumb to realise that just because she was securing part of an income stream didnt mean that the rest of it wasnt worth paying for. Then again I was young at the time.

PS DD: Telstra sued the Cth. Nothing prevents the State government from appropriating your property.

Kymbos
Kymbos
13 years ago

This decision itself is about getting more money for the sale of gaming licences, and removing an unnecessary group from the gaming machine licence structure. ‘Operators’ do not exist in other jurisdictions, and perform a redundant role. Elsewhere, monitoring is undertaken by independant parties that provide a service for fees, not profit.

That said, the simple fact is that change to problem gambling on gaming machines was never going to occur while the duopoly was in charge. The removal of the duopoly removes a powerful block to the introduction of responsible gambling initiatives which can make a real difference. It’s not a greatly improved outcome for responsible gambling in and of itself, but it’s a necessary prerequisite.

As long as they announce the responsible gambling framework prior to auction of the licences (and the framework is a good one), it is good policy. Otherwise, it’s just more money in coffers.

Nevertheless, Mayne’s perspective is baffling. Is he just being contrary?

wilful
wilful
13 years ago

If Parliamentary Counsel put their minds to it (and there are some decent minds in there) they should be able to draft legislation that ensures any claims for ‘compensation’ by the duopoly are guaranteed to fail. Leaving only the so-called ‘sovereign risk’ issue. But really, does anyone actually think that some multinational company is going to not set up shop here, or move it’s HQ interstate, because Brumby is a wild and irrational man who does this sort of stuff all the time? I don’t think so.

As for gambling, I’ve always thought that a bit of voluntary taxation for the idiots who think it’s fun is alright by me. But the science of addiction shows that it’s not alright and the Government has a strong role in regulating this evil.

It basically comes down to having an industry at a level that minimises social harm by regulating it so it is just above where illegal gambling can flourish. With the complications of online gambling it’s also a matter of capturing as much of the revenue for Victorians (as compared to Russians) as possible.

Patrick
Patrick
13 years ago

It basically comes down to having an industry at a level that minimises social harm by regulating it so it is just above where illegal gambling can flourish.

Amazingly, this is broadly my own position :).

There isn’t much for the parliamentary counsel to do – they could just draft an Act excluding the payment of any compensation to Tatts and Tabcorp by any part of the Victorian Government, for example.

Tom S
Tom S
13 years ago

derrida derider:
Telstra just lost a High Court case where they claimed that a policy change that reduced their monopoly power represented appropriation of their property without just compensation (which is, of course, constitutionally prohibited).

If my memories of constitutional law serve me correctly this is only a Federal Constitutional law prohibition. State Constitutions are not limited by any such provision.

Dave Bath
13 years ago

Brumby (and Bracks) never did anything that didn’t advantage Crown – even exempting casino pokies from new controls.