There’s an 800-pound gorilla lurking in virtually every provincial legislature in Canada and most elected officials don’t know what to do with it. Further, they’re puzzled by how what was once a cute little chimp turned into this behemoth called “government-owned gaming.”
When the federal criminal code was amended over 30 years ago to permit “lottery schemes” that were conducted and managed by governments, ambitions were modest. Maybe there would be enough profit to defray the costs of the Montreal Olympics or build community recreation centers or support the arts and culture. Governments created Crown Corporations (companies owned and operated by the government) to run their offline and online lotteries.
On the surface these entities looked like other commercial enterprises with the “shareholder” being the responsible government as represented by a designated Minister. Governments came to like the revenues and the patronage opportunities (audit, legal and advertising contracts, community events distributorships, etc). Relatively low-key affairs with modest investment requirements, these organizations employed a few hundred and provided discretionary revenues.
The scene today is completely different. Canadian gaming now creates and sustains over 250,000 jobs with an estimated $28.9 billion in annual gross economic output. In 2006 the industry generated revenues of $15.3 billion.
Crucial Revenues
Gambling revenues have grown so much that no longer could they be used for discretionary purposes. Instead they are applied to health care and other essential services.
And therein lies the first of the foundation stones for the inherent conflicts that affect gaming in Canada. As governments came to rely on gaming, there was a greater push for growth leading to VLTs, casinos and racinos. As the Crown Corporations grew, they looked to become more effective and efficient. Purchasing transparency superseded patronage. In effect, they became, or tried to become, less “crown” and more
“corporation.”
By virtue of their size, the impact of the Crown Corporations was magnified (a gorilla doesn’t tiptoe) and with that came an ever-increasing political sensitivity. (By way of illustration, Ontario Lottery & Gaming Corporation is comfortably within the ranks of the 100 largest Canadian companies but operates only in Ontario while the 50 or 60 larger firms have national and international activity.)
Viewed through the political lens, reducing staffing, for example, is not a matter of operational efficiency but instead a political problem with associated potential vote loss and negative media. Similarly, anti-gambling organizations focus their efforts where they will be most effective-on the political owners of Canadian gaming. Gaming stakeholders lobby for ever-increasing pieces of the gaming pie and business decisions become political decisions, often couched in terms of “public policy.”
These realities could be lost in the astonishing revenue growth that has occurred; however, with revenue flat or even declining, the conflicting goals of the commercial and the political become more apparent.
The Gorilla Attempts to Balance
Ross McLeod, chairman and CEO of Great Canadian Gaming, says, “public-private sector partnerships will be the way to go with government continuing to have control over policy.”
The challenge is finding the optimum business model that does not offend the Criminal Code requirement that government “conduct and manage” the activity.
For governments, every gaming decision has the potential to foster multiple-personality disorder as it looks at issues and opportunities from the perspective of owner, regulator, public policy trustee and political partisan. For example, with the shift to destination gaming, huge amounts of capital are required to build and refresh sites. As returns decrease, governments have a more difficult time-politically-supporting the use of finite resources to build restaurants and hotels rather than schools and hospitals.
Another case in point: One province tightly controls access to player data and prohibits casino operators from developing unique player cards, despite their proven effectiveness as customer management tools. The reason: government concern over privacy and data confidentiality.
The complex prism through which issues are viewed by governments will affect Canadian gaming as it seeks to address significant matters over the next few years, including:
? The internet and the enforcement of illegal wagering and whether to enter the field in a meaningful way. Canadian Gaming Association President Bill Rutsey observes that the “online industry is looking for regulation and the bricks-and-mortar side is looking for a level playing field.
Unfortunately, governments and their policing agencies are either paralyzed or have their heads in the sand on this issue.”
? The proposed legalization of head-to-head sports betting to curtail underground bookmaking. The current prohibition remains one of the last vestiges of control exercised by the federal government over gaming.
? Sourcing significant capital to sustain the industry while balancing the cost of that capital and associated control issues. McLeod points out that the size of Canada requires a thoughtful distribution of facilities. He supports British Columbia’s conversion of bingo halls into “community gaming centers” and sees them as an important alternative to neighborhood VLTs. Any expansion will further the need for capital and expose the government to criticisms of “expanding” gaming.
? Pressures on financial performance with costs rising and essentially flat revenues. An important part of addressing this issue is having the shareholder articulate financial expectations that are reasonable and consistent with their political risk tolerance and good public policy. It also requires an understanding of some unique fundamentals of gaming such as the inability to raise “prices” on lottery tickets or blackjack bets by consumer price index increments.
? Continued efforts to resolve tensions with First Nations that seek a greater role in gaming. In some provinces a rapprochement has been achieved by supporting some aboriginal casinos. Ontario recently concluded a revenue sharing agreement that will provide all 133 First Nations with a percentage of Ontario Lottery & Gaming Corporation’s gross revenue.
? Lottery-the dependable cash cow of gaming-needs to find a successor to the Big Lotto segment occupied by “6/49” and “Super 7” and to continue with measures taken to strengthen Crown Corporations’ reputations battered over allegations that retailers had won a disproportionate number of prizes.
? And perhaps most importantly, developing and adhering to practical goals and strategies for the sector that balance the inherent conflicts. As McLeod, a pioneer in Canadian gaming, notes, gaming policy has historically been “ad hoc.” And that cannot continue if the industry is to continue to succeed and generate the desired economic benefits for its ultimate shareholders.
Backlash Against Gaming
Responsible gambling in particular represents a potential political overreaction to trump considered public policy. Anti-gaming sentiments are by no means unique to Canada. However, in Canada this opposition is lent a special emphasis, first by the more socially conscious nature of the Canadian population, and the fact that provincial governments “conduct and manage” gaming.
The backlash has manifested itself across the country and shows no signs of abating. While VLTs have been the lightning rod, other forms of gaming will be just as exposed as opponents gather momentum with each success. For example, in the last two years the following has occurred:
? Loto Quebec was forced to cancel plans to relocate Casino de Montreal due to local opponents. Gaming opponents turned to the courts to force Loto Quebec to turn over data related to suicides.
? The Ontario Problem Gambling Research Center (funded by the Ontario government) spends millions of dollars year after year funding studies that examine hypotheses advanced by researchers. The output of the center provides regular and frequent fodder for the media to criticize gaming. A form of self-immolation.
? In 2004, Loto Quebec announced a plan to reduce the number of problem gamblers by removing and repositioning a number of VLTs. This plan was stalled by gaming opponents in the courts. In December 2007 the courts gave the green light to Loto Quebec to move forward with the removal of a further 1,000 VLTs from bars by 2009. So far a total of 1,500 have been removed. Most of the units will be moved to new gaming rooms that will be set up in Montreal, Trois-Rivieres and Quebec City; the rest will be eliminated entirely with a resulting net reduction of 730 VLTs.
? New Brunswick has been pressured to develop a responsible gambling strategy plan which cuts in half the number of places allowed to have VLTs. Overall, it will phase out 650 of the 2,650 VLTs now in the province.
? Ontario just released new slot standards that are giving suppliers headaches. And the impetus for those standards? Gaming opponents.
? In Nova Scotia, there are renewed calls for removal of all video lottery terminals from the province and a demand for even greater resources to fight addiction.
? Nova Scotia has awarded a five-year contract for an “informed player choice system.” The system allows players to track how much money they spend and to set limits for themselves and block out days they would not be allowed to play.
? Also in Nova Scotia, the government has produced and is airing a series of emotional and evocative ads about the impacts of problem gambling.
? In Newfoundland and Labrador, play at video lottery terminals will be slowed and programmed to work for fewer hours each day. In addition, 105 VLTs will be eliminated.
? In Alberta, the government has proposed marginal reductions in the numbers of machines, but this has been met with calls for a complete ban on VLTs. Yet Alberta also lifted a moratorium on new casinos and expansions and has approved the development of a number of First Nations casinos and limited expansions at existing properties.
? In British Columbia, the province has focused on the development of “community gaming centers,” essentially mini-casinos. This development has been criticized by gaming opponents as contradicting the government’s 2001 election promise to halt the expansion of gaming.
? The federal government is also getting into the debate by threatening to impose new measures to halt internet gaming sites based on a native reserve in Quebec and banning VLTs.
Rutsey says that, “We continue to see essentially groundless allegations raised by anti-gaming groups being taken seriously by government and not effectively refuted.” As a result, the impact of those criticisms is, by default, magnified.
The Canadian Gaming Association has attempted to blunt these criticisms by commissioning a study highlighting the economic contributions the industry has made; however, this study was criticized as ignoring the social costs of gaming.
British Columbia commissioned a study on the socio-economic impacts of casinos in Langley and Vancouver, and the addition of slot machines at Fraser Downs Racetrack in Surrey. The study found no increase in the number of problem gamblers, or link between the casinos and increased crime, and noted that crime rates in Surrey and Langley townships are actually down. It found no links to local suicide rates or bankruptcies. On the other hand, the communities in which the casinos were located realized significant financial benefits, and minimal infrastructure costs.
The substance of this debate will be familiar to U.S. readers, but it is the special relationship between government and gaming in Canada that makes the debate more virulent, with much greater potential to limit the industry’s growth and development.
Future Gaming Development
We see little potential for developing major new casino properties in Canada. Howard Moscoe, the city licensing chair, has called for the development of a Toronto casino.
“I’m willing to sit down with the provincial government and work out a plan for a casino for Toronto,” he says.
Although a number of peripheral casinos and racinos already serve this market, there remains a significant untapped market potential. Now that the revenue sharing agreement with First Nations will no longer require the “protection” of Casino Rama, profits from which will no longer go to First Nations, there is more flexibility to devise schemes to develop this market further.
However, whether the provincial government will wish to engage in a potentially lengthy and acrimonious effort to develop a major Toronto casino remains to be seen. And whether it is prepared to make an investment of $1 billion dollars-or compensate someone else to make it-is debatable.
On a smaller scale, New Brunswick has issued an RFP due in mid-March 2008, for a destination casino resort concept, with the option of supplementing proposals with an enhanced amenity package. While the structure is technically a government ownership model, the private applicant is afforded a 20-year concession and is responsible for all capital investment.
In Manitoba, the province and the Assembly of Manitoba Chiefs jointly issued a request for proposals for two studies: a feasibility study to assess the establishment of a First Nations Gaming Corporation(s); and a market study to determine opportunities for new casino development.
In Alberta three relatively small First Nations casinos opened in the last 12 months, while in British Columbia growth is focusing on the expansion of existing casinos and the development of “community gaming centers.”
It would seem that continued opposition in Canada to gaming expansion, coupled with the schizophrenic nature of government goals, will likely focus future growth primarily on existing properties, with an emphasis on the development of ancillary amenities, accompanied by only limited growth in gaming supply. Meanwhile, smaller First Nations casinos will likely continue to be developed in several Canadian provinces.
Up in Smoke
Smoking bans, much like the U.S., are now in place in Canadian casinos. Smoking bans are now in place in all Canadian provinces with the exception of British Columbia. By March, however, of this year British Columbia was expected to join the other provinces by enacting a smoking ban. The lone exceptions will be First Nations casinos in Alberta, Saskatchewan, and Manitoba.
The industry has learned to live with this by developing outdoor smoking areas and by marketing programs that laud “clean air.” Research by The Innovation Group suggests that smoking bans are likely to result in an initial 12 percent to 22 percent decline in revenues in the first year after a smoking ban.
In subsequent years, this revenue shortfall is recovered and casino revenues return to a normal growth pattern. The degree of impact is largely governed by access to alternative casinos that permit smoking.
In Ontario, for example, the impact from the smoking ban, although difficult to quantify given its coincidence with other factors, has been most significant at border casinos such as at Casino Windsor and the Niagara casinos, where there is direct competition from U.S. casinos that permit smoking. Monthly revenues at Casino Windsor, for example, fell 21 percent immediately after the smoking ban was put in place. However, in subsequent months revenues began to rebound until other factors related to border controls and the U.S. dollar exchange rate began to assert an impact.
Overall, however, the industry in Canada, not engaged in border competition, has weathered the advent of smoking bans with a manageable impact on gaming revenues.
Paul Girvan is managing director of the Innovation Group and has been in the gaming industry for over 10 years. Girvan has conducted numerous studies of Canadian gaming recently focusing on Ontario and British Columbia. The author wishes to thank Tom Zitt and Amanda Allbritton of the Innovation Group for their contribuitions to this article.
