Supplementary written evidence submitted by National Casino Industry Forum (NCIF)

(GA 100)

Additional Evidence Submission

During the oral evidence session which my NCiF colleagues attended your Committee members raised a couple of points that we promised to answer. The NCiF response is contained herewith.


The issue of taxation is immensely complicated. There is no consolidated research focused on tax rates. Another problem is in comparing like with like; a lot of countries have different approaches to taxing casinos than that used in the UK, some have a Gross Gaming Yield (GGY) base with other fixed cost bands attached dependent on other factors and some use very different ways of calculating GGY. For example, German casinos are taxed at an apparently punitive rate of between 45% and 80%. However online gambling is illegal and German operators are state-run. This means a very different competitive environment exists for German casinos than that in the UK; also there is an element of supernormal profit from the effective monopoly that suggests a higher tax rate is appropriate. There is a similar picture in other Germanic countries such as Austria and Switzerland.

The approach in the US varies across states. Most have a gross gaming revenue base with rates that are on average between 20 and 30% although Nevada has a rate of 6.75%. Colorado, Illinois, Indiana and Iowa have graduated rates with a max ranging from 20% to 50% (and with admission taxes in some instances on top); New Jersey has an 8% rate plus an investment alternative obligation graduated across different rates. Again though, this in a place where the scale of geography of the United States means the casinos (other than the clusters in Nevada and other high roller destinations) are not necessarily competing with each other, and where online gambling is illegal.

Macau has introduced a GGY based tax of 35% with additional fixed charges of up to 2% and 3% for "social and economic purposes".

Our concern is that as well as being subject to one of the highest tax rates in the world, the UK casino industry has its products and pricing mechanisms strictly but poorly controlled (the current review is 3 years late and is set to take more than 18 months) and is increasingly disadvantaged in its ability to compete with a mature domestic gambling market and the on-line market that this neither controlled in terms of product or price, nor subject to UK taxes.

The Profitability of Gaming Machines

The profitability of gaming machines is again a complex area. In the United States slot machines can contribute around 70% of a casino’s revenue. However, in the UK the situation is very different, in most high end, London casinos, the machine’s stakes and prizes are considered not to have any commercial value and therefore gaming machines are simply not even offered. Where machines are offered, they contribute on average around 10% of revenue.

Determining relative profitability, in relation to other generators of gaming revenue, i.e. table games is very difficult, depending on complex calculations around floor space, staff numbers, varying levels of taxation, machine cost, depreciation etc. However, to help the committee, we estimate that on the basis of 20 machines occupying an equivalent space as four mixed gaming tables in a similar operating environment with a similar customer base, there is almost parity on profitability.

Another proxy that could be used is to equate gaming machine revenues to "between 10-15%" of a casino’s total revenues [gaming and ancillary].

NCiF is concerned that our key messages regarding providing a modern innovative industry and meeting some of the Chancellors asks around the ‘growth agenda’ are being stifled and failing to be acknowledged by DCMS.

The NCiF has demonstrated the following through the Ernst and Young report:

1. Current (casino) machine entitlements are not keeping pace with customer demand.

2. Less than 1% of all gaming machines in the UK are in the most controlled environment i.e. casinos.

3. The sector is not intending to replace table games with machines.

4. Machine entitlements (numbers, stakes and prizes) within UK casinos are amongst the lowest in the wider casino world.

5. Ireland is on the verge of asking for a 10:1 machine table ratio possibly capping tables at 15.

6. UK casinos are safe, fully supervised, well regulated and the most appropriate environments for socially responsible, leisure machine gambling.

7. Social policy is driving unmet customer demand for safe, leisure machine gambling, into less well supervised environments and into online environments where little to no supervision exists and where there are no common machine standards, stakes or prize limits.

Local Authority Casino Network (LACN)

We listened carefully to the evidence of the Local Authority Casino Network (LACN), the group representing the 16 areas that have been given the power (by virtue of the 2005 Act process) to issue new Large or Small licences. Some of the evidence the witnesses gave was verifiably inaccurate and we have sought briefly to correct the errors. I hope you will find this useful.

Casino Development

A witness from the LACN said all but one of the 16 local authorities they represented had got through to Stage 2, or the Competition Stage of the licensing process and witnesses indicated a satisfactory level of interest in the process. This was an inaccurate misrepresentation of progress. The latest verified information is that 7 of the sixteen new licensing authorities have yet to set a date for the commencement of Stage 1 of the process.

Since September 2007, when the Act passed into law, only one Large casino has opened in Newham, one further Large licence has been granted in Solihull and a single open ended ‘Provisional Statement has been issued in Hull for which there was no competition. No date has yet been identified for the opening of the Hull casino the earliest date cannot be envisaged before 2014. No Small casino licences have been granted and one in Scarborough is currently subject to a legal challenge. The process has been pushed back ’indefinitely’ by a number of authorities. Meanwhile, the existing industry is expected to wait the outcome of this process before the Minister will consider any of its proposals.

The LACN stated in their written submission at Para 30 that;

" in no case has an authority determined not to proceed with its casino project.’’

We understand this is incorrect as the position in Dumfries and Galloway has stated that a public referendum would be required before the process could continue.

Para 31(2) of the LACN submission refers to 3 further cases where Stage 2 was in process – of these Solihull was subsequently granted without competition to the one remaining applicant; Middlesbrough has still not closed the date for lodging Stage 2 applications as there is believed to now be only one applicant; and Great Yarmouth has extended the licence process to a total of 18 months so there will be no award until the spring. The indication the LACN clearly intended to give in July last year was that a further 3 licences would be awarded in 2011 (making it 6 of the 16) but there are still only 3.

Para 31(5) is also misleading as this refers to another 7 commencing the process within 6 months, – none have, with only Luton and Leeds about to commence Stage 1 six months later. Swansea and Wolverhampton show no sign of being anywhere near launching the process. Southampton is on record as saying the economic climate is not suitable to progress and Torbay and East Lindsey are reviewing whether to proceed at all.

At paragraph 55 of their written evidence the LACN state that the number of operating casinos has only increased in recent years as a result of the opening of small electronic casinos. This is also incorrect. During the period between April 2007 and March 2010 there had been a considerable number of closures and between April 2007 and March 2011 a total of 10 full-scale new additional casino licences opened. The number of operating casinos further increased in 2010/11 was as a result of several electronic casinos opening to replace small uneconomic casinos that had closed as a result of the increases in gaming duty. A further 4 new additional casino licences granted under the 1968 Act are currently being fitted out and will be opening within the next 12 months with the Hippodrome London to open in the spring 2012.

Casino Network submissions on impact of Portability

The LACN at Para 56 states;

"the current picture of no fewer than 40 dormant casino licences demonstrates that casino operators took advantage of a window of opportunity afforded to them by government in the final days of the Gaming Act 1968 regime to bank licences which they had little or no immediate intention of using and for which there was no or inadequate local demand."

The argument advanced by the LACN may have some substance in relation to new entrants to the industry but in relation to the established operators only 6 of the licences obtained under the 1968 Act (5 of which were granted before the guillotine on applications was announced) have not as yet been implemented, almost in every case as a result of the 1968 Act licence having been granted in areas that were subsequently negatively impacted by the award to the local authority of the ability to grant another, and more valuable, licences, under the 2005 Act. However, 9 of the licences granted under the 1968 Act in other areas (including the 4 mentioned above) are currently in the course of development as full-scale casinos.

In the following paragraphs of their written evidence the LACN suggest that existing operators would wish to use the proposals on portability to move licences to areas that form the wider catchment areas for the 16 new licences. NCIF’s members argue for very sound economic reasons in contradiction to the LACN opinion, that, it is the position whereby 10 of the 16 areas chosen by the last Secretary of State overlap with existing casino areas that gives rise to a strong case for allowing the unused licences to be moved away from the areas of the new 2005 Act licences, providing those "new casino" areas a greater chance to provide the regeneration benefits that will accrue from what is likely to be a reduced number of 2005 Act licences that will be developed. The fact that it is in the overlapping geographical areas that unimplemented licences have not been developed or are not currently operated provides cogent evidence that the LACN is flawed in its conclusions.

In paragraph 62 the LACN made the following statement;

"The Network is seriously concerned that permitting operators to move existing licences across boundaries will not only compete with 2005 Act casinos, but will provide a major disincentive to such operators to compete for the new licences, where to win the licence they will need to promise to provide benefits to the area of the licensing authority. Furthermore, the Network is concerned that the prospect of competition from portable licences will reduce the amount of benefit which competitors are prepared to offer in order to win the 2005 Act licensing competition. Even if operators decide not to compete with the 2005 Act licences with substantial casinos, they may decide to operate low-cost, low-staff, highly mechanised e-casinos, producing little benefit for the area but reducing the potential profitability of 2005 Act casinos, and therefore the benefits which competitors can offer for those licences."

One of our main arguments is that the selection of 10 of the 16 being in existing areas means that there are considerable numbers of casinos that will not be able to compete against the new style casinos - so to suggest that existing operators will all want to move into the new casino areas has no economic or commercial foundation – indeed exactly half of the unimplemented 68 licences are in or immediately border one of the new casino areas – so if there is any evidence that the opposite is true we have it from the existing industry not developing its existing licences in those areas.

Taking this and Para 61 of the LACN’s written submission into account demonstrates their lack of comprehension of the Portability issue.

NCiF questions why 16 local authorities are permitted to prevent and effectively put a strangle hold on other Local Authorities, many that previously expressed an interest in having a casino (during the 2005 CAP process) and which still may wish to benefit from the re-generative elements i.e. jobs, revenue and construction which those 30 existing licences could provide.

The Stake and Prize Triennial Review

NCiF would like to draw to the Committee’s attention that at the time NCiF gave evidence to the Committee, no announcement had been made regarding a stake and prize review. In December the Minister announced a long overdue review. However, the anticipated time scale is 18 months. The industry will do all it can to speed up the process by responding promptly with data. However, we are astounded that a simple increase in the stakes and prizes on slot machines is a 19 stage process expected to involve four government departments and the European Union. This compares very unfavourably with the previous 5 stage process, which took between six and 9 months. It is also inconsistent with both the process the Commission undertook to review its fee structure and the Treasury’s process for increasing machine gaming duty. By the time the review will have been concluded it will be approaching 8 years since the casino industry had a pricing review.

There is a total imbalance in the business equation with the cost side – represented by fees and taxes – increasing, whilst the revenue side – stakes and prizes, is anchored by bureaucracy and political inertia.

January 2012

Prepared 27th January 2012