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Introduction
The Hospitality Association represents the majority of non-club gaming site operators and as such is pleased to have input into the discussion on the DIA's policies with respect to site payments.
Philosophical position
The Association has previously argued that the tidiest, most efficient, most accountable and most transparent approach would be the partial commercialisation of gaming with simple requirements for the operators of non-casino gaming machines to pay a fixed percentage to the community in the form of grants, a fixed percentage to the Government in the form of tax, with the balance being available at their discretion for the operational costs.
The Association 's second preference is for site operators to be remunerated on a percentage or commission basis in the same way that other fund-raising site operators are, such as Lotto retailers and TAB agents.
The Association strongly believes that either of the former suggestions are sensible and pragmatic, and would remove significant confrontation and confusion. However, it is understood that to date the Government have made a clear and positive policy decision that commission payments are not acceptable. If in fact that decision continues to hold, then the regime reverts to actual, reasonable and necessary expenses on each and every site, with each site being considered on its merits.
Judge Durie in his decision in support of Pub Charity Inc's claim has made it clear that the previous step process was a quasi commission and therefore illegal.
If actual, reasonable and necessary expenses must therefore be calculable and arguable, on a case by case basis, based on this philosophy, the current $150 cap does not reflect in every occasion actual, reasonable and necessary expenses.
Cost of fund-raising
Media comments, and indeed commentary from the Department of Internal Affairs, has consistently been suggesting that the operation and administration of gaming machines is too expensive. This perception is at best incorrect, and at worst, mischievous. Gaming machines outside casinos are of the big three community fund-raisers, the most cost-effective, have the lowest percentage administration costs, and pay out the largest percentage to the player. The Association has done a comparative analysis of Lotto, gaming machines and the TAB. This analysis has converted the data from all three forms of fund-raising into a like for like basis, as a percentage of turn-over less wins. On this basis, the administration costs of gaming machines are a maximum of 33% which compares with an indicative administration cost for Lotto of 36.2% and the TAB at 43.36%. In addition, the return to player for gaming machines is in excess of 90% while racing is only 80% and Lotto even less at 55%.
Assumptions
The department has specified a number of assumptions on which it has suggested options need to be considered for establishing a regime for site payments. The Association believes that two of these assumptions have the potential to be in conflict. In the absence of a commission, the Association supports absolutely that expenses may only be paid to site operators that reflect actual, reasonable and necessary expenses. The Association believes this is in direct conflict with any set limits on payments made to societies. Payments made to any particular site are either actual, reasonable and necessary or they are not.
Secondly, the statement that "actual, reasonable and necessary payments will not include any form of payment related to the 'value of the site to the society' or other payment that approximates profit or commercial return" is again direct contradiction of the need for societies to pay necessary expenses to secure that site, and entirely ignore the absolutely legitimate opportunity cost forgone to a site operator through the location of gaming machines on their site.
Options
The Association believes the department has no option but to revert to a no specific limits regime. Site remuneration is either actual, reasonable and necessary or it is not. It cannot be calculated by a specific arbitrary fee. Any set fee is a contradiction of actual, reasonable and necessary and contravenes natural justice.
One would expect however that as part of the Department of Internal Affairs' audits that where actual, reasonable and necessary expenses are at the higher level, then they would be subject to greater and more frequent departmental scrutiny and be tested against actual, reasonable and necessary criteria. It may well be that the department have a clearly established threshold at which that greater level of scrutiny will apply.
Each of the other options canvassed by the department have the potential to be arbitrary and distort actual, reasonable and necessary expenses.
As to the per machine per week approach, the Association believes that this is a helpful calculation which allows a widely understood and transparent mechanism to measure actual, reasonable and necessary expenses. In principle, the Association wouldn't have a problem if it was decided to simply require the cost claimed to be stated in plain terms. We do not believe this adds anything to the transparency of gaming machine expenses.
Reasonable and necessary costs
It is the Association's understanding that the actual, reasonable and necessary costs as discussed in the department's discussion paper, are all the costs which societies have previously been required to calculate and apply on a site by site basis. As is noted, there will be differences between societies and sites. The Association expects that societies should continue to calculate actual, reasonable and necessary expenses on a site by site, society by society basis. It may well be that societies develop their own formulas to reflect those actual, reasonable and necessary expenses in line with their particular operational basis. This will obviously reflect that some societies require their site operators to do more work than others.
Site rental/floor rental
The Association strongly disagrees with the assumptions in the department's discussion paper and their interpretation of the recent High Court decision. The High Court made absolutely no determination on the opportunity cost component associated with the space occupied by gaming machines. It is entirely reasonable that the site operator is remunerated to whatever level necessary to have that site operator forego the use of the space occupied by gaming machines for other purposes. The department assumes in their commentary that the space occupied by gaming machines would, if the gaming machines were not there, be not occupied and not generating income. That is simply not correct. That space has its own opportunity cost for other purposes whether it be allowing greater bar patronage, sub letting, dining, or other entertainment options.
Assessment of costs
The assessment of costs proposed by the department is reasonable and is, as the Association understands, how most societies are currently operating. That is, a society obtains current and complete documentation for a site operator to support the claims made, and the department has the powers at any time to audit these costs. It is expected that these costs would be under review by the societies on an on-going basis, and that the basis of these reviews would be reflected in the site agreement between the operator and the society.
Conclusion
The Association believes the department are trying to over-complicate what is fundamentally a simple and straight-forward matter.
1. Site operators are entitled to actual, reasonable and necessary expenses.
2. Actual, reasonable and necessary expenses will vary from site to site.
3. Actual, reasonable and necessary expenses must include any opportunity cost for the space occupied by gaming machines.
4. The department has on-going and absolute powers to audit actual, reasonable and necessary expenses.
5. On a comparative basis to the other major fund-raisers, the administration costs of gaming machines make this sector the most cost-effective major fund-raiser with the best pay-out to patrons.
Bruce H Robertson
Chief Executive
Hospitality Association of NZ
PO Box 503
Wellington
Phone: 04 385 1369
nsc@hanz.org.nz
www.hanz.org.nz
20 June 2003
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