#1Government of Western Australia Department of Treasury Future of the Western Australian TAB Consultation Forums 9 - 27 July 2018#2Today's Agenda 1 Background to Consultation Process 2 Key Objectives 3 The Case for Selling the TAB 4 Key Consultation Issues . . Racing Industry Funding Model Alternatives Proposed Contractual Model • "No Worse Off" Funding Level • Contractual Protections for the Racing Industry • Contract Term • Simulated Racing Racing Infrastructure Fund • Transaction and Implementation Process . Post-Implementation Review 5 Making a Submission 6 Discussion / Q&A Consultation Forums | Future of the Western Australian TAB Treasury Treasury Investec Investec/Treasury Treasury 1#3Background • The potential sale of the TAB has been a matter of public discussion for over four years The Government recognises the importance of resolving this uncertainty and achieving long term sustainability of the racing industry in a fast changing environment The Government has consistently emphasised that it would only proceed with a sale of the TAB if it is in the interest of the racing industry and the State Treasury appointed Investec Australia Limited to advise on the feasibility of a potential sale, as well as developing a proposed post-sale operating and governance framework Treasury and RWWA are tasked with consulting with the racing industry and other stakeholders to identify the priority issues, with a view to refining the proposed framework and building consensus for the proposed pathway forward Consultation Forums | Future of the Western Australian TAB 2#4Overview of Consultation Process Two stage consultation process Approach to Consultation Stage 2: Public Consultation Timetable Timing Discussion Paper Release 29 June 2018 • Two stage process: Stage 1: Direct Consultation (with the RWWA Board and its three racing code-specific sub committees) Stage 2: Public Consultation (via the release of the Discussion Paper and targeted forums) Stage 1 was conducted from February to April 2018 with the three code sub committee chairs indicating support for the continued consultation process Currently in Stage 2 following the release of the Discussion Paper Milestone Forums Consultation Forums | Future of the Western Australian TAB 9 July 27 July 2018 Submissions Due 6 August 2018 Final Report on Consultations to Government September/October 2018 3#5Key Objectives The proposed framework has been developed in the context of the following key objectives 1 Support an independently sustainable and competitive racing industry The transaction should enable the racing industry to be independently sustainable and competitive with minimal residual risks for the State • The industry should expect to receive at least the equivalent level of funding from the TAB - the "no worse off" principle 2 Optimise value for both the State and the racing industry . Transaction should realise optimal value, with the sales proceeds to be shared between the State and the racing industry 3 Ensure the integrity of racing and wagering activities in WA are maintained Wagering licence and regulatory framework must provide appropriate oversight of wagering activities in Western Australia Racing integrity and governance arrangements must ensure proper oversight and management of all racing codes Conduct a fair and robust process • Transaction process should meet appropriate probity and accountability standards Consultation Forums | Future of the Western Australian TAB 4#6The Case for Selling the TAB The TAB has served WA racing industry well for many years under public ownership. However, the TAB is the last remaining standalone, State owned TAB in a rapidly changing and increasingly competitive wagering market Key Challenges Rationale/Considerations 1 Intense competition from larger, domestic and international corporate wagering operators with strong economies of scale Larger scale private operator may be better placed to address these challenges over the longer term 2 Customer preferences shifting from TAB's traditional strengths with trend to online, fixed odds and sports Mitigate many risks associated with being a smaller regional operator vs national larger scale operators More reliable revenue stream for the racing industry 3 Reduced scale relative to competitors that can constrain the TAB's investment in marketing and technology Reduced control over wagering activities Consultation Forums | Future of the Western Australian TAB 5#7Competitive Challenges for TAB Customer preferences are shifting away from TAB's traditional strengths... National Turnover Trends - By Product, Event and Channel 100% 90% 90% 84% 80% 68% 70% 60% 50% 40% 30% 20% 10% FY07 FY08 FY09 FY10 -Pari-mutuel % (vs Fixed Odds) Source: Australian Racing Board Factbook Consultation Forums | Future of the Western Australian TAB Racing to Sports 71% Retail to Online Pari-mutuel / Totalisator to Fixed Odds 50% 32% FY14 FY15 FY16 FY11 FY12 FY13 -Racing % (vs Sports) -Retail % (vs Online) 6#8Competitive Challenges for TAB (cont.) ... in an increasingly competitive wagering market dominated by much bigger players Competitor Brand and Technology Spend $300m ■FY14 FY15 FY16 $250m $200m $150m $100m $50m 18 22 22 23 23 ГШША RACING AND WAGERING WESTERN AUSTRALIA 132 128 104 91 258 203 195 190 183 170 146 121 31 97 40 127 200 170 0 Tabcorp sportsbet William HILL CrownBet Ladbrokes plc .com.au TattsGroup I Tabcorp acquired Tatts (Dec-17) PADDYPOWER. betfair I CrownBet acquired William Hill (Mar-18) Source: Various Annual Reports. Based on sum of Australian marketing costs and global technology investment. Consultation Forums | Future of the Western Australian TAB 7#9Racing Industry Funding Model Alternatives 1 Separation Model 2 Contractual Model 3 Joint Venture Model 4 Integrated Ownership Model Economic Structure Govt Funding Licence Tax Racing industry TAB Racing Product Govt Govt Licence Tax Licence Racing Racing industry Product TAB Racing Product/ Product Fee + Profit Share Joint Venture Product Fee Racing industry Govt Established by Act Tax Wagering Services/ Profit Share Racing industry 100% beneficial ownership Profits TAB TAB Jurisdictions Tasmania . NT • ACT Racing Industry Funding • Direct Government Funding • Key Racing Industry Considerations No dependence on TAB for industry funding * Minimal nexus between racing product and TAB revenues/ potential misalignment of interests * Racing industry has limited input on TAB's operations × Racing industry funding subject to Government's annual budget decisions (typically rev share + fixed payment) Queensland • SA Product fee (fixed + variable) Funding arrangements, obligations and responsibilities of each party are contracted and clear Removes or mitigates exposure to operating and capital cost risks * Racing industry has limited input on TAB's operations * Funding structures need to be set at appropriate levels as racing industry is dependent on the Operator Victoria NSW (quasi-JV) Product fee (fixed + variable) Profit share Greater alignment of interest between Operator and Racing Industry (in theory) ✓ Each party has an influence or control on key issues affecting the other party × Complexity of decision-making through JV committees × Potential for disagreement on key issues × Racing industry exposed to operating cost and capex risk WA • New Zealand • Profit share Racing industry / government controls TAB and makes all decisions that affect funding × Racing industry retains full exposure to all operating risks (i.e. revenue, cost and capex) Consultation Forums | Future of the Western Australian TAB 8#10Proposed Contractual Model The contractual model provides greater certainty for both parties and removes the racing industry's exposure to the operator's operating costs and capital expenditure Illustrative Contractual Model State PRA Grants licence pursuant to enabling legislation Racing Program Operator Racing Distribution PRA ProductCo Agreement RDA product fee set as a percentage of gross margin Key Terms of Racing Distribution Agreement (RDA) Funding Arrangements Racing Program Management and Governance • • • Obligation on the operator to pay the RDA Product Fee to the Racing Industry RDA product fee to be set as a percentage of gross margin (or gross wagering revenue) generated from the TAB Obligation on both parties to agree an annual racing program Obligation on the Racing Industry to optimise the racing calendar for wagering, while allowing for some country / picnic racing Obligation on the operator to offer wagering on all races on the calendar Operator responsible for the day-to-day operations of TAB and has full operational flexibility Operator to consult with Racing Industry on certain matters or decisions Contracts Bidder entity PRA entity Contractual Protections Consultation Forums | Future of the Western Australian TAB • Operator to regularly report to the Racing Industry Obligations on the operator to provide certain protections to the Racing Industry (e.g. minimum funding guarantee, act in the best interests of TAB, no licence arbitrage) 9#11"No Worse Off" Funding Level The "no worse off" principle requires that the racing industry can expect to receive at least the equivalent amount of funding from the TAB as it would if the TAB remained in public ownership 1 2 3 Direct Funding Indirect Funding + Net PRA Costs RWWA Funding + Separation Costs No Worse Off Funding Funding sustainably generated from the TAB operations without drawdown on cash reserves Funding not generated from TAB but channelled through RWWA Costs of running the principle racing authority (or PRA) (net of PRA income) Total funding provided by RWWA to the racing industry Costs from separating the wagering operations from racing Setting "No Worse Off" Funding Level Calculation of the "no worse off" funding level will occur in consultation with RWWA This will occur upon commencement of the sale process, as it needs to take into account the most up-to-date information and likely view on future TAB performance Setting the RDA Product Fee • The private TAB operator would pay the RDA product fee to the racing industry to achieve the "no worse off" funding level The RDA product fee will be set at a percentage of gross margin to achieve this outcome Funding may vary year on year subject to performance of the wagering market over time Consultation Forums | Future of the Western Australian TAB 10#12Contractual Protections for the Racing Industry As a condition of the wagering licence, the new TAB operator would enter into a Racing Distribution Agreement (RDA) with RWWA, which will include a number of contractual protections for the racing industry Funding guarantee period Obligation to act in the 2 best interests of the TAB 3 Obligation to prevent licence arbitrage Guarantee on the minimum level of funding provided by the TAB operator to the racing industry for the initial years of the arrangement Racing industry representatives consulted to date have expressed a view that this should be for three years set at the equivalent level of funding as if the TAB remained in public ownership Positive contractual obligation for the operator to ‘act in the best interests of the TAB', thus maximising funding flowing to the racing industry Contractual mechanisms to prevent the operator from “transferring" customers (and revenue) to other jurisdictions Consultation Forums | Future of the Western Australian TAB 11#13Contract Term The Government proposes setting the same term for the funding arrangements, licence, retail exclusivity and operation of an off-course totalisator Licence Term in Other Jurisdictions 15 yrs 20 yrs. NSW 12 yrs VIC 12 yrs 15 yrs 15 yrs SA QLD ACT 30 yrs 15 yrs 20 yrs NT 20 yrs 15 yrs TAS 50 yrs 50 yrs 50 yrs 99 yrs 99 yrs 99 yrs Comments • As part of the initial phase of consultation, racing industry representatives expressed support for a term of 25 years, or longer if this can result in higher sales proceeds A term of 25 to 30 years appears to be sufficient to align the interests of the operator to invest in and operate the TAB for the long-term growth and prosperity of the three racing codes in Western Australia A significantly shorter term may dis-incentivise an operator from investing in the business, which may then limit returns generated for the racing industry A significantly longer term may not necessarily result in materially higher sales proceeds due to the time value of money (i.e. the diminishing value of future returns due to discounting) and the uncertainty of the operating environment beyond 30 years ■Exclusivity ■Licence term Exclusivity extension Consultation Forums | Future of the Western Australian TAB 12 12#14Simulated Racing In order to help meet the interests of both the State and racing industry, the Government has agreed to consider the inclusion of 'virtual' or 'simulated' racing products as part of the Western Australian wagering licence What is simulated racing? • Common feature in other States' wagering licences: For example, Trackside is a simulated racing product that is authorised under the wagering licences issued to Tabcorp in NSW, Victoria and ACT Designed to complement live racing at TAB outlets and are predominately provided during periods between live races Intended to be ancillary to live race betting, with mandatory minimum periods between simulated races In Western Australia, currently offered only by Crown Resorts at the Burswood Casino under the Burswood Casino Agreement Amendments will be required to allow the TAB operator to include simulated racing products at TAB outlets • Licence conditions on simulated racing products Restricted to simulated thoroughbred, harness and greyhound racing - the simulated races would be restricted to representations of the three racing codes Restricted to retail outlets - e.g. TAB outlets and pub-TABS and not offered online Regulated time interval between simulated races - regulations would be imposed on the time interval between simulated races to ensure they are only provided as ancillary products For example, in Victoria, simulated races are required to be a minimum of 20 seconds long and must be separated by a minimum of 3 minutes Regulated hours of operation - the hours of operations will be aligned to the standard trading hours for retail outlets Consultation Forums | Future of the Western Australian TAB 13 13#15Racing Infrastructure Fund The Government has listened to the industry and has agreed to establish a racing infrastructure fund equal to the amount of 35 percent of the net sale proceeds from the sale of the TAB Rationale for the Fund 1 Recognises that the racing industry is the key beneficiary of the TAB under current legislation. An infrastructure fund remunerates the industry for changing these arrangements 2 Assists in ensuring race tracks are of sufficient quality and condition to meet the racing industry's commitments to supply quality racing products under the RDA • • Administrative details for how infrastructure requirements are assessed, funding requests considered and expenditure prioritised, would be developed in consultation with RWWA Expenditure from the infrastructure fund will be subject to business case assessments to ensure the money is well spent and provides maximum benefit to the three racing codes 3 Aligns the interests of the State and racing industry to optimise sales proceeds Consultation Forums | Future of the Western Australian TAB 14#16Transaction and Implementation Process Subject to the enactment of legislation and approval by Government, it is proposed that the transaction would follow a standard three staged open market process 1 Enabling Legislation 2 Transaction Process 3 Project Governance 4 Ongoing Consultation • Current legislative framework does not include a licensing framework for a privately operated TAB Legislative change is required before any sale process can commence to establish a new wagering licence regime, amend the existing regulatory framework, and provide the authority to undertake the transaction Standard three staged open market process: - Request for Expressions of Interest (to seek interest in the TAB from potential bidders); Request for Indicative Offers (to seek initial offers from bidders against the State's key commercial terms, including the proposed RDA product fee mechanism); and Request for Binding Offers (to seek final binding offers from bidders on the basis of a draft Racing Distribution Agreement) Steering Committee will be established and RWWA Board will nominate two representatives Treasury would be responsible for the management of the process, working closely with RWWA Representatives of RWWA will form part of the project team throughout the transaction process If a sale process proceeds, RWWA would be responsible for keeping the racing industry informed of the process through the Code Sub-Committees The Government's project team, including advisers, would present to the RWWA Board and Code Sub Committees on the progression of the transaction and key issues RWWA responsible for ongoing communication with staff and TAB Agents Consultation Forums | Future of the Western Australian TAB 15#17Post-Implementation Review To assist with a smooth transition, the Government is supportive of maintaining RWWA as the tri-code PRA for racing, with a review to be conducted within 3 years of a sale • . . The Government is supportive of maintaining RWWA as the tri-code PRA for racing: Supports strategic coordination between the three codes Less costly than having separate racing authorities Preferred by potential operators of the TAB The Government proposes that RWWA be maintained as the tri-code PRA immediately after any sale to assist with a smooth transition to the new arrangements Within three years of a sale, there would be a review of: the outcomes of the new TAB arrangements; and the PRA structure and functions The Government is of the view that a review would be best completed three years post a sale so that at least two full years of performance data would be available before the review is completed Consultation Forums | Future of the Western Australian TAB 16#18Making a Submission Treasury invites written submissions on the Discussion Paper. Submissions are due by 2:00pm (Perth time) on 6 August 2018. Early submissions are welcomed. Submission Instructions Stage 2: Public Consultation Timetable . Electronic copies of submissions are preferred and should be emailed to [email protected]. • Currently in Stage 2 following the release of the Discussion Paper • Alternatively, submissions can be sent to: Attn: Commercial Advisory Department of Treasury Locked Bag 11 • Following forums and submissions, Treasury will provide its Final Report to Government in September/October 2018 Milestone Timing Discussion Paper Release 29 June 2018 Cloisters Square WA 6850 Submissions will be available for public review at: www.treasury.wa.gov.au/Economic-Policy/TAB-Consultation/ All enquiries may be directed to: Forums Commercial Advisory Department of Treasury (08) 6551 2777 [email protected] Consultation Forums | Future of the Western Australian TAB Submissions Due Final Report on Consultations to Government 9 July 27 July 2018 6 August 2018 September/October 2018 17#19Discussion / Q&A Consultation Forums | Future of the Western Australian TAB#20Disclaimer O State of Western Australia The information, representations and statements contained in this publication are provided for discussion and general information purposes only. Views expressed in this publication are not necessarily the final views of the Western Australian Government and are not to be interpreted as final government policy. The State of Western Australia, the Treasurer, the Department of Treasury, and their respective officers, employees and agents: a) make no representation or warranty as to the accuracy, reliability, completeness or currency of the information, representations or statements in this publication (including, but not limited to, information which has been provided by third parties); and b) shall not be liable, in negligence or otherwise, to any person for any loss, liability or damage arising out of any act or failure to act by any person in using or relying on any information, representation or statement contained in this publication. Consultation Forums | Future of the Western Australian TAB 19