Under the current regulatory regime, societies reimburse bars and pubs that host gaming machines for their ‘actual, reasonable and necessary costs’ (ARN) of providing Class 4 (C4) gambling. Venue costs for each society are capped at 16 per cent of total gaming machine proceeds (GMP), excluding GST.
This regime has been considered overly complex and problematic for societies and venues for some time. Changes to the Gambling Act in October 2015 opened the way for a new venue payment system.
The Department convened a focus group last September to work on, and agree to, a new venue payment regime for C4 gambling.
The focus group included representatives from all stakeholders in the C4 sector, including the C4 Working Group (societies); Hospitality NZ (venue operators); problem gambling service providers (Salvation Army and Problem Gambling Foundation); a representative of the Māori voice for problem gamblers (Hapai).
The focus group met four times between September and December 2015.
Findings and recommendations
Industry members of the focus group unanimously agreed that a new payments regime be:
commission-based, calculated on a flat percentage of 1.28 per cent of weekly turnover per venue
A commission-based system calculated on turnover was considered to be the most simple and accurate way of determining how busy each venue is and to fairly compensate the venue operators for that work.
The flat percentage rate of 1.28 per cent is equivalent to 16 per cent of GMP (excl. GST) which is what the current system allows overall for venue payments. The focus group agreed to accept the pool of funding limit of 16 per cent GMP because, all other things being equal, the cost of venue payments under any new regime should not directly affect the current rate of return to the community in order to maximise community benefits.
An uncapped regime was preferred because a capped or tiered system was considered to re-introduce complexity and reduce transparency.
The group prefers a mandatory payment so that societies are required to pay their venues the amount specified, rather than have the discretion to pay them less.
It was also suggested that venue payment commission rates should be reviewed every three years and the movement in the CPI should be taken into account.
The problem gambling service providers were opposed to a commission-based payment scheme without real and effective measures to mitigate the potential impact of such a scheme because:
it gives venues opportunities, should they wish, to maximise returns for their economic advantage, fundamentally changing the focus from raising money for community purposes and disincentivising good host responsibility, and
host responsibility could become a tick-box exercise to meet minimum statutory requirements in an environment where harm minimisation practices are already less than satisfactory (although practices do vary across the sector).
Problem gambling service providers specifically recommended that if a commission-based system was introduced:
a fixed proportion of each commission payment be ring-fenced for harm prevention and minimisation activities as a minimum and be conducted by appropriately qualified people.
As agreed by all focus group members, other harm minimisation commitments could include:
transferring the Department’s staffing resource from approving ARN and venue payments (which would no longer be required under a commission-based payment) to harm prevention work
developing best practice guidelines on the percentage of funds/staffing that venues should commit to harm minimisation (if a mandated percentage of funds for this purpose is not progressed as per the recommendation proposed by the problem gambling service providers, as above)
when determining which societies are eligible for a three-year licence, the extent to which harm minimisation features in their venues could be one of the criteria for being considered a good candidate for this high trust/low compliance approach
a ‘three strikes and you are out’ policy be adopted for venue operators that do not fulfil their harm prevention and minimisation obligations and
more interaction between societies, venue operators and problem gambling services providers (perhaps regular quarterly meetings of the same focus group members).
The Department agreed to consider these recommendations and put them to the Minister of Internal Affairs for him to discuss with his colleagues.
With respect to transition and implementation issues, the focus group members agreed that:
development, enhancement and maintenance (DEM) costs:
should remain as a venue cost
societies would no longer pay for capital expenses in venues under the new system
all capital expenditure incurred at the venue would be covered by venues (apart from the addition of air-conditioning units and capital items already accepted by the Department as legitimate society costs)
venues could decide whether they treat maintenance as operating expenses (netted against income through tax requirements) or capital expenditure (with depreciation claimed), and
current repayments from venues to societies of historical capital costs (which societies had paid upfront and currently recoup through weekly payments) would cease immediately with the new system. These historic costs would need to be fully reimbursed before the new regulations take effect.
smoothing of payments:
no smoothing of venue payments will be necessary under a turnover-based commission payments system, and
payments will be made weekly by societies to venues following banking.
Limit D could continue to apply for a transition period (via a new Gazette notice applying to societies) but only until the end of the society’s financial year following the date of transition to the new system, and
the aim is to ensure that at all times the total venues costs for a society remain within the current Limit D throughout the transition.
The Department will take these points into account in the design of the new regime. Furthermore, the Department agreed to consider a recommendation from societies that their financial years be aligned to a common date, but advised that this will not be undertaken at this time as part of the design of the venue payment regime.
Expected benefits of the recommended regime
The industry representatives on the focus group considered that the new system will be simpler, fairer and less ambiguous.
As the new payment system will no longer be influenced by the number of machines or opening hours, there will be no impact on the reimbursement amount if a publican chooses not to be open or has fewer machines in operation.
Societies and operators will therefore have more flexibility and freedom to make decisions that make sense for their individual businesses and circumstances.
While a commission-based system may mean that some operators receive less money than at present, savings can be made in other areas, especially with variable costs such as operating hours, machine numbers and labour hours.
Over time the sector will be more efficient and effective than before.
The time otherwise spent on venue cost management could now be spent on providing appropriate and high-quality harm minimisation practices at venues.
Checking and validating societies’ venue costs by the Department should become a much easier exercise, because all societies would be paying venue operators on the same basis without the need for detailed cost schedules. Litigation costs are also expected to reduce.
The Department will brief the Minister of Internal Affairs on the focus group’s recommendation, plus any alternatives that have been considered, this month.
The Minister will need to consider this advice before taking proposals to Cabinet (at this stage this is scheduled for March 2016).
The new regime is expected to be in place between August and October 2016, before the old system expires on 21 October 2016.