? CLUB KENO ACT 1993 Review National Competition Policy Rev%w of legislative restrictions on competition. August 1997 Review o the Club Keno Act 1993 f Page Number Summary of Findings and Recommendations 3 1. Context o the Review f 8 1.1. 1.2 1.3 - Why the Actisbeingreviewed Terms of Reference for the review Administrative arrangements 8 8' 9 10 2. Objectives of the Act _. \ 2.1 2.2 2.3 2.4 2.5 2.6 Background on Club Keno Market description The existing regulatory arrangements Objectives of the Act Discussion of Objectives of the Act Findings - 10 10 11 11 12 15 16 .. . 3. The restrictions on competition 3.1 3.2 3.3 3.4 3.5 3.6 The nature of the restrictions The likely effect of restrictions Findings The costs and benefits of the restrictions Additional comments Findings 16 16 17 17 20 20 4. Assessment of alternatives 21 4.1 4.2 4.3 4.4 4.5 4.6 4.j 5. Alternative option 1: Remove both restrictions Assessment of alternative option 1 Guiding premises for lessening competitive restrictions Options for lessening competitive restrictions Alternafive 2 (preferred option) Assessment of alternative 2 Findings 21 22 22 23 25 26 26 28 Recommendations Attachment 1- Consultation 29 2 Review o the Club Keno Act I993 f SUMMARY OF FINDINGS AND RECOMMENDATIONS The report reviews the Club Keno Act 1993 (the Act), as part of the program for legislative reviews for NationalCompetitionPolicycommitments. The reportwas drafted for the Minister for Gaming, in accordance with terms of reference approved by the Premier. The Act came into operation on 8 June 1993. The Act and its regulations authorise what would otherwise be an ilIegal gaming activity; outline the conduct and rules of the game; specify who may supply the game; and, specify in which locations it may be played. Findings- The Club Keno game and Objectives o the Act (see section 2) the f Club keno is a form of gaming. Players buy a ticket and select up 15 numbers (from to 1-80). In each game a random selection of numbers (from 1-80) is drawn every few minutes and posted electronically. Combinations of matching selected numbers win a prize.,Most prizes are paid out immediately, althoughthe larger ones are paid later by cheque. Currently, club keno may be played only at gaming venues. .. . Club keno is supplied in Victoria by two suppliers, acting as one through a joint venture. Government revenuefrom the game is basedon player loss and not an explicit licence fee to the suppliers. Taxes are paid into the ConsolidatedFund weekly. The broad market in which club keno is played is the gambling market. At the time that the Act cameinto effect, other legal forms gambling operating in Victoria wereof lotteries, race wagering,bingo,luckyenvelopes,raffles,andgaming on electronic gaming machines (EGMs). The temporary casino in Melbourne started operation in 1994, with the permanent casino openingin 1997. Club keno is a fairly minor gambling product within the overall market. example, For in 1995-96, Victorian per capita expenditure on club keno was $2.01, compared with $93.22 on lotteries and $366.70 on EGMs. The three main objectives of the club keno legislation are to ensure the integrity of the game through specifying conditions under which it is played; to limit the social costs in providing this type of game; and to provide for maximum and secure taxation revenues from game. the -, TWO subsidiary and transitional objectives, which have been achieved, are: ,. r' 3 Review of the Club Keno Act I993 to assist Victoria’s economic development, on the understanding that there will be (positive) flow on effects fiom the game; and I ,I . , 0 to /authorise the conditions under which an otherwise illegal form of gambling is a lawful activity. Findings: The restrictions on competition (see section 3) There are two restrictions on competition in club keno legislation. The first restriction is to limit entry to the market to the estate of the late George Adams (Tattersall’s) and to the holder of a gaming licence (TABCORP) under the Gaming and Betting Act. This restriction is a barrier to entry. The. second restriction is to prescribe that club keno may only be played at venueswherethe operators are licensed to conduct gaming. This means that playing of club kenois restricted to gaming venues. to retardmarket development and The effect of the restrictions -is likely to be innovation in club keno (because of lack of contestability). An effect of the restrictions on venues is probably to limit the growth and popularity of the game (because it has restricted availability). In terms of the Act’s objectives, the restriction that limits entry as a supplier of club keno appears to: support the objective of maintaining integrity of the game to a limited degree; possibly support the Act’s taxation objective; and supports the objective of limiting the social costs of gambling to a limited degree. .. . ‘0 The restriction on locations where club keno may be played: is unlikely to support the integrity objective of the legislation; is unlikely to support the taxation objective of the legislation; ,and possibly supports the objective to limit adverse social impacts. It does this by confining the game to areas designated for gaming. While the Act’s objectives appear to met by the restrictions, there appear to be less than conclusive reasons for the scope and extentof the restrictions. Findings -Premises for regulatory design and preferred option for achieving the Act’s objectives (See section 4) The restrictions on competition are likely to have generated significant incumbency in advantages to the present two suppliers (who operate as one a joint venture). Complete removal of both restrictions in club keno is inconsistent with achieving the objectives of the club keno legislation. There appears to be a strong case for retaining a degree of government regulation of club keno. 4 Review of the Club Keno Act 1993 Internally consistent regulatory design should be based articulated on premises consistent with the pro-competitive thrust of National Competition policy. The premises are: P Because of the intertwined natureof integrity andsocialpolicyobjectives in regulation of the gambling industry, there is a presumption that government will choose to regulate it. In club keno, as in other gambling legislation, thisregulation will set conditions for suppliers, as well as for the venues for playing. This regulation, like other forms of economic regulation should be directed to the viability of the industq rather than a comniitment to the viability of individual participants to it. In other words, .existing suppliers should not expect that new gambling products or extension of existing products will necessarily be allocated to them. The government will, of course, meet contractual agreements and obligations now in place. Licence design should avoid creating inappropriate incumbency advantages will preclude later competition. The process for gaining licences be should contestable. that < , " In principle exclusive gambling licences should be avoided, that is the licence should be granted to those who pass probity checks. Where licence exclusivity is granted,governmentis then in the role(inappropriately) of ensuring supplier viability. Making the marketcontestablewillassist in capturingelements of product and market dynamics. The government may decide that licence exclusivity, despite its shortcomings, is preferred where there are either large initial licence fees andor heavy provider capital investments (such as a casino). In these cases, licences should be contestable and time limited. In the case of club keno, neither condition (high initial fee 'andor heavy provider capital investment) applies.An exclusive licence is therefore not warranted for club keno. 0 Where there are restrictions on locations for playing club keno, designed to meet social objectives, should re-examined these be against the particular risks associated with that product. Such consideration might include the game's propensity to encourage problem gambling, the growth. rate of expenditures on the gambling product and ways of excluding minors. The preferred option for. club keno regulation is to open licences to those passing probity requirements and to widen the venues at which club keno may be played. Widening the range of venues is necessary before contestability is introduced amongst suppliers. If venues are not extended, no potential supplier would be able to enter the existing gaming venue arrangement. ,. Features of the recommended option are: 5 Review o the Club Keno Act I993 f 0 0 Club keno supply licences would be available to those who pass probity checks ., The pengissible venues for club keno might include retail outlets or alternatively hot.elS and clubs without EGM machines. Pooling of prizes (ie enhancing the game’s attractiveness) would be achieved by licensees in commercial arrangements. , The review panel judged that the three main objectives of clubkeno legislation would be met through adopting the preferred option. On balance the benefits of wider supply (subject to probity) leading to greater market innovation and a greater range of venues were seen to outweigh the risks of lessening the restrictions. It was difficult to assess the risk (if any) ofthe social costs of widening the permissible venues for club keno. The review panel could not assess the risk to the (small) tax revenue base. 6 Review o the Club Keno Act I993 f RECOMMENDATIONS From our examination of the CZub Keno Actywe conclude that the objective of the Act may be met by lessening the existingrestrictions - on competition. Based on the premises outlined above for consistent and pro-competitive regulatorydes& we therefore recommend: The permissible venues for club keno should be liberalised. Two options that the government might consider are extension of club keno operations to any club or hotel in Victoria, or, sale through retail outlets. The government should make available licences to supply club keno to those who pass the probitychecks. Any pooling should emerge through the market (ie those with strong networks and attractive games). In club keno, there should be no exclusive licences. There should be flexibility in the ‘rules of the game’ to allow for potential competitors to propose new game rules. In view of the small relativesize of club keno, and other legislative reviewsof gambling regulation to be conducted, the government may wish to combine implementation with other changes to gambling legislation. -- \ 7 Review o the Club Keno Act 1993 f 1 Context of the Review 1.1 Why the Act is being reviewed The review of this Act is one of an extensive program of legislative reviews in all portfolios. The Victorian Government has committed complete these reviews by the to year 2000. In 1995, Victoria along with all other jurisdictions, signed the National Competition Policy agreements. These committed Governments all to a consistent national approach to fostering greater economi.c efficiency and improving the overall competitiveness of the Australian economy. As part of the agreements, Governments adopted the following ‘guiding legislative principle’: l ~ Legislation should not restrict competition unless can demonstrated it be that: the benefits of the restriction to the community as a whole outweigh the costs; and the objective of the legislation can only be achieved by restricting competition. .. . j To implement this, Governments agreed to review, and where appropriate, reform all existing legislative restrictions oncompetition. Thus, application of this guiding legislative principle will help establish whether particular legislated restrictions on competition remain necessary to achieve public policy objectives. Legislative reviews will assist this through rigorous assessment of the costs and benefits of alternatives in achieving the objectives. l 1.2 Terms of reference for the review Each piece of legislation in Victoria being reviewed has approved terms of reference to guide its review. The terms of reference forthis review are: “The review of the Club Keno Act 1993 (the Act) and regulations has been commissioned by the Minister for Gaming, in accordance with the Victorian Government Timetable for the Review and Reform of Legislation That Restricts Competition, determined in accordance with National Competition Policy. I Legislation tobe reviewed * The review will examine whether legislative restrictions on competition exist i the Act and n regulations, in accordance with the Victorian Government Guidelines for the Review of Legislative Restrictions on Competition. In particular, the review will provide evidence and findings through itsreport i relation to the n following requirements: 8 Review o the Club Keno Act 1993 f Clarifi the objectives of the lepislation. The legislation makes provision for club keno in Victoria. The Act provides that participants' may conduct Club Keno games in venues already licensed (under the Gaming Machine Control Act 1991)for electronic gaming. The objective appearsto be to provide a legalmeans for playing clubkeno and thereviewwill identlfi and clarrfL the objectives. P Identifi the nature of the restrictions on comuetition. The Act defines participants as only two operators - Tattersalls and TABCOR?'. The game may only operate in venues that are already licensedfor electronic gaming machines. The review will examine andexpand on these two prima facie barriers to entry. and further examine the Act and regulations for other restrictions on competition. Assess and balance the costs and benefits of the restriction. The review will assess the costs o f identified restrictions against the benefitsjudged to be achievedfiom those restrictions. Consider alternative means of achievinn thesameresult includinn non-lezislative means. The review will seek to identrfL practicable alternatives that will meet the identified objectives. Reform options The review should specificalb address the appropriateness of modrfiing or removing the restrictions while meeting the requirements articulated in the identified objectives. . " 1.3 Administrative Arrangements The review was prepared for the Minister for Gaming in accordance with House review model contained in the Guidelines. the In- The review panel drafted the review report under supervision of the Department of the Treasury and Finance steering committee for all National Competition Policy reviews. Consultation within governmentinvolvedboththe'Taxationand Revenue Policy Division of the Department of Treasury and Finance and the Victorian Casino and Gaming Authority. There was also consultation with the two key industry stakeholders - Tattersall's and TABCORP- who were sent copies an interim report and terms of reference. of The review panel and the steering committee were also informed by an independent commissioned study on the regulatoryframeworkofthegambling industry as a whole. 9 Review o the Club Keno Act 1993 f 2 Objectives of the Club Keno Act An examination to clarify the objective of club keno legislation is the first task for this review, in accordance with the terms of reference. Prior to that, it is useful to outline the markets in which the Act operates andthe existing regulatory arrangements. After specifying the objectives of theAct,wewillgo on todiscuss the objectivesand consider why they may have arisen. This will provide a focused framework for the following sections of the legislative review - identifying and assessing the restrictions on competition, and considering alternatives that will meet the identified objectives. 2.1 Background on Club Keno Club keno is a form of gaming. Players buya ticket and select up to15 numbers (from 1-80). In each game a random selection of numbers (from 1-80) is drawn every few minutes and posted electronically. Combinations of matching selected numbers win a prize. Most prizes are paid out immediately, although the larger ones are paid later by cheque. Currently, club keno may be played only gaming venues. at Club kenois supplied in Victoria by two suppliers,acting as one through a joint venture. Government revenue from the gameis based on player loss and not an explicit licence fee to the suppliers. Taxes arepaidinto the ConsolidatedFund weekly. The Act came into operation on 8 June 1993. The Act and its regulations authorise what would otherwise be an illegal gaming activity; outline the conduct and rules of the game; and specify in which locations it may be played. The legislation gives the Victorian Casino andGamingandAuthority(VCGA)regulatoryandenforcement powers in respect of the game. The Actalso specifies the taxation regime applicable to club keno. 2.2 Market description -- The broad market in which club keno is played is the gambling market. At the time that the Act came into effect, other legal forms of gambling in Victoria were lotteries, racewagering,bingo,luckyenvelopes, raffles, andgamingonelectronicgaming machines (EGMs).Thetemporarycasino in Melbournestarted operation in June 1994, with thepermanent casino openingin 1997. It is fair to characterise 'club keno as a fairly minor gambling product within the overhll market.' For example, in 1995-96, Victorian per capita expenditure on club The focus of this legislative review is on the intervention of the Club Keno Act and regulations and their impacts on the club keno market, rather than impacts on the gambling market as awhole. If the market is too broadly defined, for instance, to include all gambling or even entertainment markets, then the analysis of government intervention becomes too diffuse. It is important to recognise that the I 10 ~ ~ ~~ -~ Review o the Club Keno Act I993 f keno was $2.01, compared with $93.22 on lotteries and $366.70 on EGMs. (Australian Gambling Statistics). The current legislation specifies that club keno is lawful only in premises which have been licensed as EGM venues. The club keno product, therefore, cannot be bought widely, like lottery tickets, but isbetter seen as a (minor) additional product at EGM venues. Recent taxation amendments implicitly acknowledge this by lowering the club keno tax rate to a similaf one aijplying to . EGMs in clubs. In terms of supply there is effectively only one provider of club keno. Tattersall’s and TABCORP, the two permitted “participants” (seeregulatoryarrangementsbelow) have formed a joint venture for club keno and thereis a common prize pool. It is noted that, in the game of club keno, ‘the size of the prize’ is of importance. Club keno requires the selection’ of a set ofpotentiallywinningnumbers by players, requiring a sufficiently large number of players to produce frequent winners.. These factors point to the advantage of scale in supplying this game and may affect the practicability of any changesto the current regulatory arrangements. 2.3 The existing regulatory arrangements This review’s focus is on the type of intervention that the government has in the operation of club keno. The main regulatory arrangements for club keno are: The game may be conducted by ‘participants’.Thesearedefined in the Act as Tattersall’s and the holder of a gaming licence (ie TABCOW).’ As noted above, run the participants have entered a commercial agreement to club keno, effectively as a single provider. Club keno may be played at ‘approved venues’ (within the meaning of the GamingMachineControl Act), that places is, where the venue operator is licensed to have EGMs. A framework,of rules of conduct and compliance is imposed (operated the Director by of Gaming and Betting) to ensurethat the gamehas integrity. Examplesare the regulation providing that the club keno system must be approved by the Director of Gaming and Betting, and the regulation providing that all results of club keno games are displayed at all approved venues. .. . 2.4 Objectives of the Act The objectives of the Act are broader thana restatement of the purpose the Act. The of Act’s stated purpose is to “make provision for the game of club keno” (section l). Yet this Act is one of nine Acts regulating the gambling industry in Victoria and should seen be within the overall context of the industry. A recent review legislative reviews are not examinations of possible anti-competitive conduct, which is covered.by The Trade PracticesAct 1974. Rather they are primarily reviews of legislated restrictions on competition and their effects. We note that there appears to have been no payment, such as a licence fee, for the operation of club keno. 11 Review of the Club Keno Act 1993 commissioned by the Department of Treasury Finance3 and identified objectives generally apparent in Victoria’s gambling legislation. These are: 0 seven controloversocialcosts provision of consumer protection on quality prevention of monopolistic exploitation of players through setting rates maximisation and security of tax revenues assistance to designated industry and causes economic development reduction of crime associated with gambling. The objectivesidentifiedabovearewideranging(andinsomecases,potentially conflicting). While all are present - at least implicitly - in club keno legislation, the Act appears to have five main objectives. These are: to authorise the conditions under which lawful activity. an otherwise illegal of form gaming is a .. . 0 0 minimum payout 0 0 0 to ensure the integrity of the game through specifying conditions under which it is played. (We include in this objective the protection of players through specifying pay out ratios.) to limit the socialcosts in providingthis type of gaming.(We include here the containment of crime objective outlined above. Club keno seems to present relatively few opportunities for criminal activity.) to assist Victoria’s economic development, on theunderstanding that there will be (positive) flow oneffects of the game to provide for maximum and secure taxation revenues from the game. 2.5 Discussion of objectives Objectives in club kenolegislationreflect the particularhistoriccircumstances in which the legislation was enacted. Act The was passeda at time when the Government was facilitating a largely new economic activity,ie gaming as part of the lawful gambling industry. In the discussion of objectives that follows, we identify those objectives whichnolongerappear to beofprimaryimportance. This helps establish the critical aspects of government intervention in markets and a preliminary A fiarnework for National competition Policy reviewsofgaming legislation. Report prepared for the Department of Treasury and Finance, May 1997. This will be referred to as ‘the Review’ in this paper. 3 12 Review of the Club Keno Act 1993 ranking of objectives. This will assist in assessment of thecosts and benefits ofthe the present structure and its alternatives. f The first identified objective, to authorise an otherwise iiiegal forhz o gambling, is best seen as a transitional objective, which has been met by the passage of the Act. It is noted that Section 5(1) of the Act authorisesthe participants to conduct cl& keno in Victoria. Without this authorisation, the conduct of club keno would be unlawful, as club keno comes within the definition of a lottery. UnlawfUl lotteries are prohibited by section 5(1) of the Lotteries Gaming and Betting Act 1966. This objective, because it is transitional, will not be further discussed in the review. The second identified objective, to ensure the integrity of the game through specifying conditions under whichitis played, has resulted in an extensive and detailed system of regulation, probity checks, inspection and monitoring designed to produce a game of integrity. This intervention appearsto arise, first because of a nonregulated market’s inability, orperceivedinability, to guarantee a fair‘product’. Consumers are guaranteed (by government’s intervention) a minimum standard of integrity. TheReview noted4 that, unlike otherentertainment industries (such as football), the government’s intervention here makes it part of the gambling industry. That is, the government is supplying gambling industry services though ensuring a ‘fair game’, in contrast to other self-regulating industries. This is because of the government’s concern to guarantee the fairness of thegame, which is susceptible to criminal exploitation. Although a market solution to guaranteeing integrity could be considered, this would require the Government tovacate the field - a solution unlikely to be acceptable to either the government or the community. A further aspect of the game integrity objective could be to aid tax collection. By having a game (and game suppliers/operators) ‘with integrity’, the administration of tax collection is simplified. The third identified objective is to limit or mitigate the social costs associated with this type o gambling. Like the previous objective, this appears to be a common f objective in all gambling legislation. In summary, these social costs are characterised as inappropriate levels of gambling expenditure and the rate of growth in gambling, resulting in adverse household impacts. Government has thus introduced gambling products over time and under restricted circumstances. A further social cost might be characterised as the potential forcriminalelementsinthegame,whetherthrough ‘laundering money’, or in providing a ‘bent’ game. Club keno, like lotteries, appears to presents few opportunities for criminals. This objective is implicit, rather than explicitly stated in the Act. The chief way of attempting to control social costsisthrough regulation of the type of venueand through regulating access to gambling. Club keno legislation does this through, in effect, having this (small) game co-exist with licensed venues for EGMs. Thus, under 4 * ~ - ” Review, op.cit. p 8 13 Review o the CIub Keno Act 1993 f the larger umbrella of regulation of EGM venues, conduct of the game is limited to approved venues and is not available elsewhere (such as lottery agents or in shopping centres). Similarly, because club keno is playedin EGM venues, access tojuveniles is effectively denied. Achieving the social objective through alternative means will be examined further in the cost benefit analysis alternatives. of In considering this objective, it is worth noting three points. First, club keno has not shown strong growth or popularity. It may be that the concern about adverse social impacts is overstated for this form of gaming. Secondly, comparable games such as instant lotteries5 and bingo appear be to much widely more available without of gambling.Lastly, it is expressedconcernoverthesocialcostsoftheseforms important to recognisethatthisActreflects the introduction of a newgame in a largely new industry where social impacts are a major concern. It may be that as the industry itself matures this objective no will longer predominate in the fidure regulatory design for club keno. The fourth identified objective, to promote economic development, appears to be an implicit and minor objectivein the clubkenolegislation. The currentlegislative arrangement, which legalises a game and then allocates it to two gambling suppliers,6 could be seen as a meansof‘filling out the productline’ for gambling industry suppliers. By contrast with, for instance, casino games, club keno games could only be describedas a trivial adjunctto the gambling-industry. Now thatclubkeno is a recognised and lawful partofgambling, the objective,totheextent that it was important, is probably largely achieved. It is difficult to envisageany further steps the Government might take in this regard. The fifth objective of club keno legislation is to provide for maximum and secure taxation revenuesfrom the game. Gambling tax revenues have, in the last five years provided a growing proportion of the State’s tax revenue base.This growth rate is not expected to continue as the gambling industry matures. This objective, in part, underlies government facilitation of gambling as an economic activity in Victoria. a This review does not focus on taxationper se as form of legislative intervention.. . Itis important to put theimportanceof this objectiveincontextfor club keno. Taxation revenues from this game are currently $3.4M, of a 1996-97 total gambling tax revenues of $1.157.4Ms. We conclude from the above discussion, club legislation that keno has three interrelated major objectives concerned with integrity of the game, containment of assist social costs and the security of taxation revenues. Two further objectives, to Victoria’s economic development and the authorisation of an otherwise illegalform of gaming, were transitionalsand have been achieved. Instant lotteries are availableat all Tattersall’s agents (ie over700 newsagencies). It is important to note that the two suppliers operate as one in club keno, through a joint venture arrangement. 7 Tattersall’s has submitted that liberalisation of venues at which club keno might be played could be part of the fulfilment of the ‘economic development’ objective. 8 Budget Papers 1997- 1998 6 5 14 Review o the Club Keno Act I993 f 2.6 Findings The three main objectives o the club keno legislation are f to ensure the integrity o the game through specibing conditions under wxich it is f played; 0 to limitthe social costs in providing this o game; and type f to provide maximum and secure taxation revenues fiom the game. for Two subsidiary and transitional objectives, which have been achieved, are: to assist Victoria’s economic development, on the understanding that there will be (positive)Jlow on effectsfi-om the game; and to authorise the conditions under which a n otherwise illegal form of gambling is a lawful activity. Club keno i a minor form o gaming in the wider gambling market. The regulatory s f arrangements include defining the suppliers (‘ParticipantsI), places where it may be played, and the rules under which it may be played .” Review of the Club Keno Act I993 3 The restrictions on competition The second stage of this review according to the terms of reference, is to identify any restrictions on competition in the Act. This is followed by an examination of the likely effects of these restrictions and an analysis of the costs and benefits of the current restrictions. 3.1 The nature of the restrictions on competition There are two identified restrictions on competition. in this legislation. Theseare restrictions on who may conduct club keno and restrictions on where the game may be played. Who may conduct club keno. Section 6 of the Act provides that club keno may only lawfully be conducted by “the participants”. Section 3 of the Act defines the participants as the trustees of the will and estate of the late George Adams (Tattersall’s) and the holder of a gaming licence under the Gaming and Betting Act 1994. TABCORP Holdings Pty Ltd (TABCORP) is the holder of the gaming licence under that Act. The effect of these provisions is that club keno may only be operated in Victoria by Tattersall’s and TABCORP, and thus the restriction is a barrier to entry. In practice the two suppliers operate as one through a joint venture agreement. .-- Where the game may be played. Section 4A allows the participants to conduct club keno in “approved venues” within the meaning of the Gaming Machine Control Act 1991. An “approved venue” is defined under that Act as premises on which a venue operator is licensed to conduct gaming. This means that the game may be conducted in licensed gaming venues, and thus the restriction is a barrier to other venues. 3.2 The likely effect of competitive restrictions It is unlikely that the clubkenorestrictions on competition are significant to the broader gambling market. We have already noted that club keno is a relatively minor game within the whole industry of gambling. The Act and regulations are aimed at a of the restrictions identified small subset of this overall market. The likely effect above are: Barrier to entry restriction. The restriction limiting suppliers to the market to two (effectively one through their joint venture) could have the effect of retarding market development and innovation in this game.Because the market isnot contestable, existing suppliers could have little incentive to improvethe game. Restriction on locations where club keno may be played. The effect of limiting the playing of club keno to venues approved for EGMs could be expected to limit the overall demand for the game of club keno. Because club keno can only be found in Review o the Club Keno Act 1993 f EGM venues, it doesnotcompetewithothergamingproducts such as lottery or bingo, or more broadly for the ‘entertainment dollar’. An effect of this restriction could be that the club keno has not been fully promoted as it is an adjunct to the gaming machines.’ 3.3. Findings P There are two restrictions on competition in club keno legislation. TheJirst restriction is to limit entry tothe market to the estate of the late George Adams (Tattersall’s) and to the holder of a gaming licence (TABCORP) under the Gaming and Betting Act. This restriction is a barrier to entry. The second restriction is to prescribe that club keno may only be played at venues where the operators are licensed to conduct gaming. This means that playing club keno isrestricted to gamingvenues. of The efSect of the restrictions is likely to be to retard market development and innovation in club keno (because of lack of contestability). An effect of the restrictions on venues is probably to limit the growth and popularity of the game (because it has restricted avaitability). 3.4 Analyse and balance the costs and benefits of the restrictions. .. . In this part of the review,according to the terms ofreference, the costs of the identified restrictions are evaluated against the benefits judged to be achieved by the existing arrangements. A principal difficulty in assessment is that the costs and benefits cannot be directly quantified. The benefits and costs identified below weresuggested in the development of the preceding section of the paper.Theyalsoreflectthe result ofexternal consultation with the two participants in club, keno. The commentsbesideeach identified cost and benefit reflect view of the review.pane1. the The review panel notes that only of the 587 gaming venues in Victoria currently have club keno 287 available. 9 17 Review o the Club Keno Act I993 f The costs and benefits of existing arrangements appear to be: ~~ ~ 1. Restriction- Benefits and Costs ~~ Comment Barrier to entry to operate club keno Benefits By having onlytwo operators, this could provide ease of collection of tax revenues generated by club keno. In fact, under the present arrangement of the duopoly acting together, there is only one taxpayer. It is argued that minimising operational costs allows extra revenue to be taken up as tax. This might aid achievement of the taxation objective of the legislation. , ~ ~~ The review panel notes that this rationale does not apply to any form of taxed other service outside the gambling area. That is, it is unusual to limit the number of suppliers to manage tax revenue collection. The restriction could be implicit acknowledgment and support for key a feature of club keno- that is its attractiveness to players is (in part) the size of the prize. By then limiting entry. to two players (who operate as one) the restriction might be thought to support the attractive features of club keno. If this restriction supports a bigger player pool, it might also be considered to aid achievement of taxation revenue. Additionally, this restriction could be thought to confer a private benefit on the two operators. Even where club keno is not profitable, the existing operators are likely to benefitfrom exclusion of contestability and my substitution that might occurifarival operator offered a more popular game of club keno. costs ‘size of the prize’ is a critical feature, to we would expect this pooling occur without legislative intervention- it would be in the interests of rival operators to pool;” or alternatively to seek to dominate competitors. The review panel notes that club keno taxes were $3.4 M in 1996-97. The effective monopoly of club keno might sct todeter market innovation and jevelopment from rival suppliers. The review panel notes that allocationo club f s keno to two participants i likely to result in ‘incumbency advantages’. This means that uotential entrants could be deterred by the existing network and software support for club keno throughEGMvenues. 18 Review o the Club Keno Act 1993 f Restriction- Benefits and Costs Comment Restriction limiting the venues where club keno may be played Benefits This limitation on playing club keno (to EGM venues) could resultin ease of putting in place controls designed tomitigate some, adverse social impacts. Thus the restriction to EGMvenues is effective in denying access to minors. Club keno, with draws for prizes every few minutes, may notbe suitable at venues frequented by minors. Further, because club keno may onlybe played at a gambling venue, (and cannotbe purchased at retail outlets) it could act toconfne opportunities to gamble at dedicated venues. A private benefit of the venue restriction could be to the EGM venueoperators, in that consumers must play club keno with them. It is dzjcicult to assess the importance o f the adverse social impacts o club keno, f except‘to note that it is a small part o total f gambling expenditure. Cosfs This restriction could retardthe ability of rival operators to innovate and develop the club keno product. Because club keno is restricted to EGM venues and it is unpopular there, there appear to be costs of additional regulatory intervention. This ‘props up’ club keno for the existing operators (eg 1997 reduction of taxation rate). Ifthe ‘size of the prize ’ is an important qualitativefeature o the game, then wider f mailability o it might encourage more f dayers. 4 further cost could be inslessening consumer :hoice in playing club keno through ,estricting its availability. The review panel notes that other rambling products such as lottery tickets and nstant lotteries are widely available in ii’ctoria. Only the sale of instant lotteries to ?~ ninors is prohibited.). 19 Review of the Club Keno Act I993 3.5 Additional comments In its analysis and consultation with industry stakeholders, the review panel noted three additional points: 0 As indicated above, therestrictionto a duopoly (acting together) in club keno, probably creates significant incumbency advantages, which, even in the absence of restrictions, may deter other entrants to the market. The extent of incumbency advantages was implicitly confirmedin the Tattersall’s submission. This drew alternative networkand the attention to the cost of buyingandrollingoutan current uniform ‘branding’ that has established the game’s identity. Both these factors may present a commercial barrier to entry, even in the absence of legal barriers. At present, the spread or penetration of club keno is determined by the rules that limit EGM venues. To the extent that EGM venues are extended in future, club keno will have broader spread, even if it still remains bound toEGM venues. Both industry stakeholders identified the restriction of club keno to EGM venues as a binding constraint. Findings .. . 0 3.6 In terms o the Act’s objectives, the restriction that limits entry as a supplier o club f f keno appears to: support the objective o maintaining integrity o the game to a limited degree; f f possibly support the Act’s taxation objective; and supports the objective o limiting the social costs of gambling to a limited degree. f 0 The restriction on locations where keno may be played: club is unlikely to support the integrity objective o the legislation; f is unlikely to support the taxation objective o the legislation; and f possibly supports the objective to limit adverse social impacts. It does this by confining the game to areas designated for gaming. While the Act’s objectives appear to met by the restrictions, there appear to be less than conclusive reasons for the scope and extent o the restrictions. The review panel f noted that the restrictions on competition are likely to have generated signlficant incumbency advantagesto the present two suppliers. 20 Review of the Club Keno Act I993 4 Assessment of Alternatives In this section, we review options forremoving or lessening the restrictions on competition together with an assessment of their benefits andcosts. The options are: ? * Remove the current restrictions on entry to operate in the club keno market: or * Change the restriction limiting club keno to EGM venues The alternative options willconsider the restrictionstogether.We note that the binding constraint is the restriction on type of venue. Even if the restriction on who may supply club keno were lessened, the EGM venue restriction means that the only practical operators are the present incumbents. 4.1 Alternative option 1. Remove both restrictions. This option proposes that there would be no restriction on whomay operate club keno or where it may be played (other than the usual restrictions on any business activity in Victoria). Consideration of this option is useful, in that it will help highlight any critical and necessary features of any level of regulatory intervention in the operation of club keno. .. . Benefits of removal o both restrictions on club keno. f It would be expected that were markets free to supply club keno where they chose, there would be an erhacement of product quality and innovation,. together with a competitive discipline on price (ie payout ratio). It would also be expected that the game could be played wherever suppliers calculated there were a sufficient cluster of passing customers. Reliance on productintegritywould be through the rivalrous behaviour and reputation of suppliers, backed by general fair trading and consumer protection laws. Costs o removal o both restrictions on club keno f f An unrestricted club kenomarketcould result in greater administrative costs in collecting taxation revenue generated by the game.To the extent that unrestricted entry fragments the market making the pool smaller and less attractive, tax revenues are likely tofall. This however, should be judged against the overall size of taxes from club keno ($3.4M in 1996-97). More significantly, the objective of maintaining the integrity of club keno will be difficult to meet through relying on generalconsumerprotectionlaw. In this, and other gambling legislation, the Government guarantees the fairness of the game. It does t h s through probity standards for operators, approval game of rules, and inspectorial functions to ensure integrity conditions are met. These functions would he market. Additionally, in a market where all difficult to do in an unrestricted conskers, however vulnerable, may play wherever keno club is offered, the objective of limiting the social costs of playing club keno might difficult to meet. be 21 ~~~~~ ~~~ ~ Review o tlze Club Keno Act 1993 f 4.2 Assessment of alternative 1. The considerations above points to the government's critical role as a regulator in the gambling industry. From a community benefit perspective, removal of all competitive restrictions do not appear to meet community expectations. As the Review" pointed out, regulatory intervention will help address community concerns because: First, it is easier to supervise and control a small number of operators. Second, while opportunities for gambling are widely available in Victoria, there are still some restrictions on supply and there is scope to wind that supply back iJ; for example, evidence comes to hand that the social costs of gambling are unsupportable. Third, a restricted number creates a licence rent, which can be taxed deliberately to secure fundslI to conduct research into problem gambling. We conclude from the examination of t h s alternative that the removal of all competitive restrictions is not consistent with achieving the objectives of club keno legislation. 4.3 Guiding premises for lessening restrictions on competition. "- Before outlining and discussing other alternatives, it is useful to outline guiding premises for deciding the level of government intervention in club keno and other gambling markets. In this way,evenwhere there is a strong case for government regulation of markets to meet objectives, they can proceed on an internally consistent and transparent way. The premises outlined belowareconsistent with the guiding legislative principle adopted for all legislative reviews under NationalCompetition Policy, namely: Legislation should not restrict competition unlessit can be demonstrated that: f as costs; and the bene$ts o the restriction to the community a whole outweigh the the objective o the legislation can only be achieved by f restricting competition. Thus the premises outlined beloware on the basis that there is a presumption in favour of competition. The premises are: 0 Because of the intertwined nature of integrity andsocialpolicy objectives in regulation of the gambling industry, there is a presumption that government will choose to regulate it. In club keno, as in other gambling legislation, this regulation will set conditions for suppliers, as well as for the venues for playing. Review op citp 129 The review panel notes that tax revenues from club keno do not, in fact, specifically fund research into problem gambling. I1 10 22 Peview of the Club Keno Act 1993 This regulation, like other forms of economic regulation should be directed to the viability of the industry, rather than a commitment to the viability of individual participants to it. In other words, existing suppliers should not expect that new gambling products or extension of existing products will necessarily be allocated to them. The government will, of course, contractual meet agreements and obligations now in place. Licence design should avoid creating inappropriate incumbency advantages that will preclude later competition. The process gaining for licences should be contestable. In principle, exclusive gambling licences should be avoided, that is the licence should be' granted to those who pass probity checks. Where licence exclusivity is granted, government is then in the role (inappropriately) of ensuring supplier viability. Making the market contestablewillassist in capturing elements of product and market dynamics. ' The government may decide that licence exclusivity, despite its shortcomings, is preferred where there are either large initial licence fees andor heavy provider In cases, licences should be capital investments (such as a casino). these contestable and time limited. In the case of club keno, neither condition (high initial fee andor heavy provider capital investment) applies. An exclusive licence is therefore not warranted for club keno. Where there are restrictions on locations for playing club keno, 'designed to meet social objectives, these should be re-examined against the particular risks associated with that product. Such consideration might include the game's propensity to encourage problem gambling, the growth rate of expenditures on the gambling product and ways of excluding minors. "- 3.4. Options for lessening competitive restrictions There are three possible other sets of alternativesfor restrictions. Each is describedin the table below: lessening competitive 23 Review o the Club Keno Act I993 f Club Keno Alternatives for regulatory restrictions r Restriction on venuefor club keno Restriction on supplier oj club keno - COMMENT " Keep restriction to gaming Allow more suppliers venues This option would b unworkable as potei suppliers would be unable to access gal venues. Not preferred. " Widen range of venues Current suppliers only Adoption of this optl widens availability, I gives it only to existil suppliers. Not preferred. " Widen range of venues Allow more suppliers This option introduce potential newsupplie to a contestable mark Preferred L Option A , which maintains the current restrictions on locations for playing club keno, but allows more suppliers, wasrejected as impractical. Because the two existing suppliers also supply all other gaming machines at gaming venues, it is unlikely that any potential competitor could enterthose arrangements. Option B, which would keep the current suppliers, but lessen the restriction on where club keno wouldbeplayed,was also rejected. This option wouldacttogive the existing incumbents a further advantage in the gambling markets, by extending their exclusive scope of action. Option C, to lessen both restrictions is discussed and adopted as the preferred option below. In consideration of this option, the further question arose - should potential suppliers compete for and exclusive licence, or should licences be available to all potential entrant who couldsatisfyprobity criteria? Following the analysis in the previous section, the review panel noted that licence exclusivity was not warranted for club keno. There might be some volatility as a more competitive market established network and game advantage.However, it appeared difficult to establish why the government might select exclusivekeno suppliers. There appears tobe little tax revenue at stake, and there is no apparent public interest in guaranteeing viability to an exclusive licensee. Further, unlike other gambling products (eg the casino), there 24 Review of the Club Keno Act I993 arenot large capital investments at stake. The preferred option therefore supports lessening both current legislative restrictions, but without licenceexclusivity. 4.5 Alternative 2. (preferred option). Lessen competitive restrictions both on operators of and places where club keno could be played. ? This option proposes that government considers a new licence design for club keno, with the aim o f injecting some competition for licences to operate club keno. Further, it proposes that this is accompanied by a widening of venues at which club keno'may be played. The review panel notes that the current two suppliers support liberalisation of venue. In particular, in this alternative: The permissible venues for club keno would be liberalised. Two options that the government might consider are extension of club keno operations to any club or hotel in Victoria, or, sale through retail outlets. Licences to supply club keno be would conditional on meeting probity requirements and would not be exclusive.. There should beflexibility in the 'rules of the game' to allow for bids to propose new game rules. The Act would be altered to remove the current restrictions and reflect the new licence and venue arrangements. Timing of implementation It is beyond the brief of this review to specify the detail of revised gaming. arrangements. Rather, in outlining this alternative,the review panel.suggests the parameters under which a less restrictive alternative might be developed. Moreover, these proposals and the review generally does not specify an implementation schedule for the government to adopt. In t h s case, implementation of any changes may be considered together with other changes to gambling legislation. Expected beneJits of alternative 2. The expected benefits revised of arrangements likely are to include: a greater incentive for club keno suppliers, through contestability, to innovate and differentiate the club keno product for the benefit of consumers. The wider availability of club keno would allow greater player choice. While the decision to widenavailable venues for playing club keno is for Government, the review panel notes that if club keno were available in all clubs and hotels, access to minorswould still be limited. In 'this alternative, the government continues to controls the probity requirement of suppliers and the conditions under which club keno is played, thus aidingthe integrity objective in legislation. ., .' : +' Expected costsof alternative proposing lesser restrictions on competition 25 Review o the Club Keno Act 1993 f Widening the supplier field (and the possibility innovations in club keno) may lead for to a volatile (or falling) tax revenue base. It is unknown how contestable a club keno market is until testedanditmayresultincompletemarketexitfrom the game. Widening the permissible venues for playing club keno might increase the adverse social costs of gambling as a whole (since it would be available). more 4.6 Assessment of alternative 2. On balance, the review panel judged that the objectives of club keno legislation could less restrictive alternative. The objective of be achieved through adopting this integrity of the game through specifying the conditions under which club keno is met existing regulatory/inspectorial functions. On the played would be through taxation objective, it appears that the proposed changes might engender some volatility in thegame and thereforein tax flows. However, to the extent that club keno would have the potential to become more popular through altered rules and through wider availability, there is increased potential for taxation flows. The objective of limiting the social costs of this type of gaming appears the hardest to assess.It is not known under the present arrangements if this objective is met. To the extent that venue restrictions may be important in limiting social costs, liberalising access only as far as clubs and hotels may assist meeting this objective. in 4.7 Findings Complete removal of both restrictions in club keno is inconsistent with achieving the objectives of the club keno legislation. There appears to be a strong case for retaining f f a degree o government regulation o club keno. Internally consistent regulatory design should be based on articulated premises consistent with the pro-competitive thrust of National Competition Policy. The premises are: Because of the intertwined nature of integrity and social policy objectives in regulation of the gambling industry, there is a presumption that government will choose to regulate it. In club keno, as in other gambling legislation, this regulation will set conditions for suppliers, as well asfor the venues for playing. This,regulation, like other forms of economic regulation should be directed to the viability of the industy, rather than a commitment to the viability of individual participants to it. In other words, existing suppliers should not expect that new gambling products or extension of existing products will necessarily be allocated to them. The government will, of course, meet contractual agreements and obligations now in place. 26 Review of the Club Keno Act 1993 0 Licence design should avoid creating inappropriate incumbency advantages that will preclude later competition. The process for gaining licences-should be contestable. 0 In principle exclusive gambling licences should be avoided, that is the licence should be granted to those who pass probity checks. Where licence exclusivify is granted,governmentis then in the role (inappropriately) o ensuring supplier f viability.Making the market contestable will assist in capturing elements of product and marketdynamics. The government may decide that licence exclusivity, despite its shortcomings, is preferred where there are either large initial licence fees andor heavy provider capital investments (such a as casino). In these cases, licences should be contestable and time limited. In the case' o club keno, neither condition (high f initial fee andor heavy provider capital investment) applies. An exclusive licence is therefore notwarranted for club keno. Where there are restrictions on locations for playing club keno, designed to meet social objectives, these should be re-examined against the particular risks associated that with product. Such consideration might include the game's propensity to encourage problem gambling, the growth rate o expenditures on f the gamblingproduct and ways o excluding minors. f 0 e --- The preferred option for club keno regulation i to open licences to those passing s probity requirements and to widen the venues at which club keno may be played. Widening therange o venues is necessary before contestability is introduced amongst f suppliers. Ifvenues are not extended, no potential supplier would be able to enter the existing gaming venue arrangement. The reviewpanel judgedthat the three main objectives o club keno'legislation would f be met through adopting the preferred option. \ On balance the benefits o wider supply (subject to probity) leading to greater market f f f innovation and a greater range o venues were seen to outweigh the risks o lessening the restrictions. It was dgfJicult to assess the risk (if any) o the social costs o f f widening the permissiblevenues-for club keno. The review panel could not assess the risk tothe (small) tax revenue base. Review ofthe Club Keno Act 1993 5 RECOMMENDATIONS From our examination of the Club Keno Act 1993, we conclude that the objective of the Act may be met by lessening the existing restrictions on competition. Considering the premises outlined in the ‘findings’ section above, we therefore recommend: 1. The permissible venues for club keno should be liberalised. Two options that the government might consider are extension of club keno operations to any club o r hotel in Victoria, or, sale through retail outlets. 2. The government should make available licences to supply club keno to those who pass the probitychecks. Any pooling should emerge through the market (ie those with strong networks and attractive games). I n clubkeno, there should be noexclusive licences. 3. There should be flexibility in the ‘rules of the game’ to allow for potential competitors to propose new game rules. 4. I n view of the small relativesize of club keno, and other legislative reviews of gambling regulation to be conducted, the government may wish to combine implementation with otherchanges to gambling legislation. Review o the Club Kexo Act I993 f ATTACHMENT 1 Consultation during the Act's review ? The review panel acknowledges assistance the given consultation: by the following during Tattersall's (Estate of the late George Adams) Tabcorp Holdings Ltd Victorian Casino and Gaming Authority \ 29