KGB Interrogation: John Brumby

Premier John Brumby does not believe that Tatts Group and Tabcorp are entitled to compensation in exchange for ending their cosy duopoly over the Victorian gaming machine industry. Furthermore, the government is prepared to go to court to argue its case.

Alan Kohler: Premier John Brumby, welcome to the interrogation. Premier, aren’t you just using a technicality to wriggle out of a moral and legal obligation that was contained in the prospectus for Tabcorp, which in turn increased the price that the Government got for Tabcorp?

Premier John Brumby: Oh well if you’re making an assertion there about sovereign risk and legal technicality, I don’t accept that. Tabcorp had a license which ran through until 2012. It’s been a successful license for them. They’ve been a profitable company. Their issue prices was $2.25 a share. Their current price is around five times that amount and if my memory is correct they pay something like $5 in dividends since the issue of the original capital but the license was always going to expire in 2012. It has never been and was never a license in perpetuity. It was always due to expire in 2012.

You’re asking a view about potential compensation. The Government has a well formed view, formed by the Cabinet in its entirety that there is no entitlement to compensation and we’ve formed that view on the basis of information provided to the Government so there is no sovereign risk issue. The license was always going to expire in 2012. No one has changed the rules of that license along the way. We have a view about the applicability of compensation. The company may well have a different view and as I said yesterday, this is a matter which may well end up being tested in the courts.

Stephen Bartholomeusz: Premier, Steve Bartholomeusz here. Are you arguing that because there won’t be a license issued but rather a tender for entitlements, that the clause in the prospectus doesn’t apply?

JB: Well I’m not going into the detail but the Government has formed a view. We’ve been looking at the issue of industry structure for the best part of three years now starting with the Kirby review. By the way around half of the submissions to the Kirby review proposed a different industry structure going forward. That is, some form of structure built around venues, not operators and we’ve formed a view on the basis of a range of information provided to Government that there is no entitlement to compensation.

Now we could have announced yesterday that we would be legislating to remove any entitlement to compensation. We choose not to do that because I respect that there may be a difference of view on this matter held by the companies. If they wish to test that difference of view, they are entitled to do so through the courts. That’s not unusual. There are many circumstances where a Government has a view about a commercial matter. A commercial operator may not share that view and the matter is tested in the courts and it may well be, as I said yesterday that this is a matter which is tested in the courts.

AK: Is it in fact your sort of preference for political reasons that this gets tested in the court rather than you just coming out and being seen to give these companies $1.2 billion?

JB: Well it’s not.. the decision we made yesterday and the process going forward doesn’t have anything to do with political reasons. We made the decision yesterday after what has been years of consultation and in terms of the Gaming Review Committee of Cabinet which examined these matters, and that is myself, the Minister for Gaming, the Minister for Racing and the Treasurer, we spent literally hundreds of hours working through what we believe to be the best structure for the industry going forward. Now I know these things are difficult as Tony Robinson said yesterday we didn’t take lightly the decision to break up the duopoly but a license is a license.

Licenses aren’t awarded in perpetuity or they weren’t in this case. It was a license through to 2012 and looking at the industry going forward we took the view that the best thing for the people of Victoria was to move to a venue based model which I believe will give more control of venues to local communities. It will provide more choice, certainly far more competition than is the case at the moment. It’s a much more competitive model, and I believe we’ll get better outcomes in terms of problem gambling... so we didn’t take it lightly. Politics hasn’t been a consideration at any stage along the way. What’s been a consideration is the best public policy in terms of the people of Victoria.

SB: Premier, can I read you something that Deutsche Bank’s gaming analysts put out this morning. They said "we believe this is an regressive step for the state in relation to gaming efficiency, taxation revenue, entitlement receipts and harm minimisation/responsible gambling and it will likely result in a significant transfer of value from the gaming operators to the venue operators with some value also being destroyed.” Have you got a response to that.

JB: Oh I think you’ll get a range of views about the structure of the industry so you know, Steven whenever you make change you get a range of views. Had the Government come down and announced that we were just going to continue with a duopoly ad infinitum I think we could have got a range of views. Certainly we would have got Tatts and Tabcorp saying that was fantastic but I think we would have got just about everybody else the community saying it was completely unacceptable. So you’re going to get a range of views.

I see on the back page of the Financial Review today Chanticleer’s piece, there’s a range of views expressed there. One referring to work done by Morgan Stanley in 2005 which basically concluded that everywhere around the world the modus operandi of this industry now was venue based, not operator based. They predicted back then that there would be a change and they also predicted that there would be no compensation as a result and they formed that view on the basis of legal advice I understand they got back in 2005. I haven’t seen the Morgan Stanley work, so you are going to get a range of views but let me just go to the issues raised by Deutsche Bank. First one Steven was?

SB: It says ‘we believe this is a regressive step for the State in relation to gaming efficiency’ was the first one.

JB: Well I think there would be very few people share that view.

AK: They expect the daily win to decline by 10 to 15 percent.

JB: Well that’s just rubbish. With all due respect to Deutsche, the player loss is 13 per cent. That’s remaining unchanged. It’s just a nonsense to assert that so player loss remains unchanged. The aggregate tax take of the Government I said yesterday will remain around the same in real terms. Could be a little bit higher, could be a little bit lower but in aggregate will be around the same. So player loss is unchanged at 13 per cent. Aggregate tax take from the Government will be around the same.

I did say yesterday Community Support Fund or its successor may be the same, it may be a little higher and we’ll reserve our right on that and in terms of the tax arrangements, I foreshadowed yesterday that there will be a progressive tax rate introduced on machines. That is there will be a slightly lower rate for the lower earning machines and a slightly higher rate for the very profitable and high turnover machines. But the aggregate isn’t going to change. I think it’s important to understand at the moment as you guys do, that of the player loss, that’s split in very broad terms 3 ways and the operators are getting around a third, the venues are getting around a third and the Government gets around a third. In the future there’s no operator so that third is redistributed and some of that may come back through Community Support Fund. Some of that will transfer to venues. Some of that will be absorbed of course by the higher costs which venues will face because at the moment those costs are met by Tatts and TAB.

As for the efficiency of the industry, again most commentators would say that if you’ve got a middle man, like the operators, right for their time in terms of getting the industry structure set up, right for their time in terms of probity issues, right for their time in seeing a new industry established... but going forward as we’ve seen in Queensland and New South Wales, this industry runs very well based around a venue model. So that’s the one we’re moving to and there’s no basis for saying that there’s any difference at all in efficiency. If anything the industry will be more efficient not less efficient.

RG: John, Robert Gottliebsen, you’re fighting a host of people from teachers to farmers over water pipes, and you know them all. Do you think your Government has a similarity to the Kennett and Stockdale years where you determine what you believe is in the best interests of the community and then you simply do it, irrespective of the political backlash?

JB: Well Robert I’ve always been guided by what I think is the best public policy and the best outcomes for the State and you’ve always got to look at those things in the medium term and you know, I wouldn’t expect that we’re fighting a whole range of people at the moment. We’re going through an enterprise bargaining agreement (EBA) with teachers. If you look at the history of this, 2001 we had an EBA with teachers. Teachers went on strike. 2004 we had an EBA, teachers went on strike. We’ve got an EBA now 2008 and surprise surprise, teachers are going on strike but…

RG: There’s a whole lot of protestors John. Without naming them there’s the dredge, there’s the desalination…

RB: ...what I will say, what I will say about education Robert is that I mean we’ll get... we’ll get through the EBA negotiations but what I will say on education is that we do want to make significant changes to our education system. You will have seen some of those in the Press. Introducing things like the UK scheme, Teachers First where you get the best graduates out of university and get them into schools. Giving our Principals more responsibility and more authority to run our schools, putting in place incentives to get some of the better teachers into our poorly performing schools so we’ve got a pretty good education system in Victoria but the tail of performance is too long and I want to lift that and we will do that whether it’s popular or whether it’s not.

On channel deepening, that project is the right project for the State and we’re putting in place the most stringent environmental safeguards that have ever been put in place so yes, I’ve supported that project 100 per cent. It may not be popular in the short term to do that but it’s the right project for our State. It’s absolutely crucial to the State’s future and ditto desal. The reality is Robert, as you know, desal is becoming more and more common around the world as Governments look to secure a source of water which is climate proof and that’s what we’re doing with the desal plant. We believe it's right for the State and if it’s unpopular in the short term well that may well be a cost of getting the medium and longer term policy right.

RG: That stance eventually brought Kennett down. Do you think that there’s a risk that the same thing might happen to you?

JB: Well it’s up to the voters to decide but I think Robert in all of these things people expect their Governments to make decisions. I think if we were making decisions without listening or without consulting then we would be doing the wrong thing but if you take channel deepening, as you know channel deepening was a 4 year process. I objected strenuously to The Age’s coverage of that because after four years they suddenly decided oh they had a few concerns. Well it’s a pity they didn’t express them four years ago when the project was first announced so we went through a long process on channel deepening.

We’ve gone through a long discussion about water. We’ve gone through a long discussion about gaming. I know not everybody will agree with the decision on gaming but we started this the best part of 3 years ago with the Kirby Review. There’s been widespread public consultation and we made a decision which I believe.. the Cabinet believes, is the right decision but it’s been made on the back of consultation and you know, if there’s… I think a difference I think between my Government and the Kennett Government well we are in the business of being decisive but we’re also in the business of listening to the community.

RG: Just changing the subject. How will carbon containment change Australian cities and what do you think is the timeframe. What are you looking at it in terms of our big cities in this new era.

JB: Well I think… the key point I’ve made about this issue Robert and I made it at the climate change forum, climate change summit we had at Parliament House on Friday is the world is moving whether people accept climate change or whether they don’t, the world is moving to address these issues and so is business. So for us in Victoria, we need to be on the front foot and we’ve got to try and turn this into a climate of economic opportunity and I believe we can do that through renewables. Through new technologies, encouraging things like hybrid vehicle manufacture in our State.

Encouraging new environmental technologies particularly in relation to water and new technologies in relation to coal of which the most prospective and most significant for our State is carbon capture storage and as you are aware, we’ve just started this, what is the biggest experiment trial in the southern hemisphere in south west Victoria where we’re putting 100,000 tonnes underground with the CO2 consortium and we put $6 million into that so I’m a big believer in carbon capture storage. Realistically you’re looking at probably close to the middle of next decade before that becomes a reality in terms of actually getting carbon underground. I hope we can move more rapidly on hybrid vehicles and I think you will see significant new investment going into particularly solar in the years ahead.

If you do all of those things, you will see significant reductions of carbon begin to occur by as early as the middle of next decade and that will be I think a good thing environmentally and I think in economic terms if we can get the right mix of renewables, the right mix of transport technologies, the right mix of carbon capture storage this will also mean more aggregate investment in our State not less.

AK: If we could drag the conversation back to pokies for a minute Premier, how are you going to make sure that you don’t end up with three big players, with a third each of the venues and the machines instead of having a duopoly?

JB: Well I think you’re ignoring.. for a start you’re ignoring half of the machines. At the moment, of the 27,500 machines, Tatts have half and Tabcorp have half and in the future you’ve got all of the machines in the clubs so there’ll be literally hundreds of owners of those machines in the clubs. Then you come to the hotels where we put an ownership limit of 35 per cent and in reality I think in that area is there are going to be a range of venue owners who will compete, who want to have machines post 2012. I said yesterday, saying it’s possible you could have as few as three owners in the pubs because that ignores the fact that you’ve still got dozens if not hundreds of owners in the clubs. The reality is you’re going to see, I think, spirited competition and while there’ll be some significant players I think you’re going to see dozens of owners of venues in the pub area and I think that’s a good thing.

AK: And what do you expect to get for each license when you start auctioning them?

JB: Oh you can’t predict that now because we haven’t concluded the final arrangements or indeed the tax arrangements and until you do that, obviously you can’t make predictions about the licenses or about the value of a machine.

AK: Are you going to try and get more than the $200,000 that they get in other states.

JB: Well again I don’t think you can make predictions on that. It will depend very much on the final arrangements, the regulatory arrangements and the tax arrangements. As I said there will be… we will move towards a progressive tax arrangement and people will take that into account and as you would well appreciate, there’s obviously a trade off between the tax arrangements going forward and the premium which somebody would be prepared to pay for a machine at auction time and you can’t make predictions I think until those things are settled.

We’ve also of course announced tougher responsible gaming measures so the ATM decision, the precommitment machines and the maximum bet so these will have a small but nevertheless measurable impact on revenue going forward as well. Can I just make one other point too about the companies, Tatts and Tabcorp, at the end of the day they’ll make their judgements about what they compete for in the future and what they don’t and it’s up to their boards and the CEO’s to make public statements about how their companies are positioned but it would be wrong to say that there aren’t opportunities for their companies going forward. There’ll be a separate stand alone Keno license and that’s not the case at the moment and Keno will present I think more opportunities though of a more modest nature in the future. When I say more modest than gaming machines, obviously but a larger Keno operation than is presently the case.

Secondly there’s the wagering license and obviously Tabcorp, Tatts and others will compete for that. Then of course I think there will be clubs in particular who will be seeking what I describe as monitoring services and it may well be that Tatts and/or Tabcorp are well placed to provide those services and then of course there’s the more general question as to whether Tatts and/or Tabcorp want to be in the business of owning some pubs, some venues and then bidding directly for machines, so while the opportunities obviously are less for those businesses in the future, it’s also true to say that there will still be significant opportunities for those companies.

Can I also make a point too, I’ve seen speculation in the press about Bruce Mathieson and Woolworths. There’s no grandfathering of provisions so while it’s true that they own pubs, it doesn’t automatically mean that the machines in those pubs transfer over in 2012. They will have to bid for machines in exactly the same way as anybody else bids for machines. So while it is true they do own pubs and it is true that they’re well positioned in the present industry there’s no grandfathering of their entitlement going forward. They will have to bid for machines in exactly the same way as anybody else. At the same time you may also see a raft of smaller operators as well also bidding aggressively for machines.

SB: You referred a moment ago to the amount of detail that needs to be thrashed out in relation to gaming and I suppose the same would apply to wagering, how long will it be until the precise detail of the new arrangements is made clear?

JB: The Minister announced yesterday that there will be an 8 to 12 week period of consultation. There’s quite a bit of work to do for example with the racing industry. We’ve made a commitment to the racing industry that their future is secure and that the terms for them in the future will be, and I quote, ‘no less favourable than presently’ so we’ve got to do quite a bit of work with them because the present arrangements are quite complex. There’ll be legislation introduced during this session which sets out the broad principles of the new arrangements and there’ll be a further Bill in spring which puts in place the finer details so all of those arrangements will be finalised by the end of the year. Through 2009 there’ll then be further refinement and EOIs (expressions of interest) and then of course there’ll be actual bidding taking place I think early 2010.

AK: We’ll have to leave you there. Premier John Brumby, thanks very much for your time.

JB: Thank you gentlemen.

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