Lottery licence auction might be a gamble
What sort of money is the Government targeting from the sale of the national lottery licence and is it likely to get it?
Those two questions are unlikely to be answered in advance of Minister for Public Expenditure Brendan Howlin’s much-anticipated licence auction later this year.
Nevertheless, media speculation has been uniformly of the opinion that the Government is seeking to raise in the region of €400 million.
Official soundings have done little to dampen this speculation. This would make the sale one of the most lucrative State auctions on record.
The Government is on record as saying it has earmarked €200 million from the proceeds for the proposed children’s hospital.
Mr Howlin has been careful to avoid getting tied down by loose speculation about the lottery’s value, insisting that awarding the licence for a longer term, in this case 20 years, presents a real opportunity for the State to generate funds.
In theory, such a stable revenue-generating asset – it took in €761 million in revenue in 2011 – should attract good money from the marketplace, even in this financial climate.
Some observers, however, believe the Government is unlikely to secure anything close to its target under the proposed terms.
The key issue for potential bidders is Mr Howlin’s decision to ring-fence 30.5 per cent of lottery income for good causes as part of the tender.
While popular with the public and recipients of lottery funding, Mr Howlin’s pledge last April, so early in the process, surprised many. It suggested, among other things, he was banking on the relatively untapped potential of internet sales, currently less than 3 per cent, to woo investors.
When asked by The Irish Times, one expert who has worked on a number of state lottery auctions in Europe and North America valued the licence at just €100 million if the good cause fund was kept at 30.5 per cent.
If borne out, it would surely render the auction a pointless exercise, not least because the business already generates €230 million annually for the State.
His rationale was that while there was a good opportunity to grow internet sales, after the operator paid the prize payout ratio, the good causes and the retailers’ commission and invested in building an online platform, there would not be much money left over to fund a large upfront payment.
The only way to create earnings under the Government’s proposed revenue share structure was to reduce costs, he suggested.
“It’s very hard to create value by incentivising the operator only to reduce costs,” he said. He proffered the example of Queensland in Australia which recently privatised their lottery. Prior to the process, 30 per cent of revenue went to good causes.
However, to extract AU$500 million (€400 million) from the marketplace, the state was forced to scale back good causes to 25 per cent to create what, he called, an “earnings base” of 5 per cent for the next incumbent.
“What happened in that situation is that the Government got half a billion upfront and the operator bought the licence, spent a considerable amount of money investing in the licence, dramatically grew sales and within three years, the Government was collecting more in duty than it had previously – so instead of getting 30 per cent of a small number it was getting 25 per cent of a much larger number.”
Mr Howlin has scheduled the licence competition to begin in the second quarter of this year with the publication of tender. It remains to be seen if it will achieve the desired result.