Victorian pokies plan to cost regional hotels more

Victoria’s brave new pokies world begins this month. August marks the start of the long-awaited regime in which individual clubs and hotels, rather than the likes of Tatts Group and Tabcorp, will own the electronic gaming machines (EGM).

The sale process was widely criticised for trading EGM entitlements for one-quarter of what they could have fetched and possibly resulting in regional venues paying more to operate machines.

“Compared with metro areas, on average, venues in regional municipalities paid more for rights to a lower revenue stream,” Ferrier Hodgson director Colin Gill, who advised banks and venues on the auction process, says. “For example, the average price for a metropolitan hotel entitlement was about 28 per cent of 2011 revenue, compared with an average cost of about 50 per cent [of revenue] for a regional venue.”

One reason was that entitlements to EGMs sold in regional areas cost the same as those sold in metropolitan areas, even though the average revenue per machine in metro areas last year was greater. The average in metropolitan hotels was $134,463, while in regional hotels it was $99,676. In addition, regional caps and density limits restricted supply in regional areas, resulting in venues competing against each other.

The industry paid $980 million for the state’s 27,300 allocated EGM entitlements – one-quarter of what the Victorian Attorney-General estimated they would have been prepared to pay.

This was about a quarter of the $3.7 billion to $4.5 billion the Auditor-General estimated the operators would have been prepared to pay.

A pre-auction sale process - intended to give venues some certainty over the number of machines they would have in the new system - was a success. Venues were allowed to buy entitlements for up to 40 machines at a price based on their historic gaming revenues. The average price of entitlements sold in the auction was $42,014. Due to a poorly structured auction that did little to stimulate competitive bidding, however, almost three-quarters of the entitlements sold at auction went for the reserve price of just $5500.

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