State privatizations are quite common nowadays and fundamentally reflect the State’s inability to efficiently manage the operational complexities of its assets, the urgent requirement for short term funding and the fear of asset depreciation in a deregulated market.
While many European States have recently deregulated their Gaming & Lotteries market (or are in the process of doing so), the uncertain economic climate and the consequent fear of fiscal debt have brought about discussions in favour of the privatization of their State Lottery operation.
Traditionally governments have perceived their State Lotteries as a financial source to subsidise predominantly social welfare projects: education, sports, health, arts, culture, etc. However in more recent times, evolving Player preferences combined with the negative impact Commercial Gaming Operators have had on the Lotteries’ performance are adding additional pressure on an already stretched fiscal budget.
Ironically the emergence of Commercial Gaming Operators has come about as a result of the challenges faced by many States in establishing a new Gaming regulatory framework (particularly its Interactive component), while also complying with Lottery constitutional and EU guidelines.
In unregulated markets, Commercial Gaming companies have managed to establish a substantial presence by leveraging their competitive advantages – they are able to enter a market remotely via their interactive platforms, are not forced to comply with regulatory guidelines and consequently are able to introduce a full suite of Gaming products that appeal to all segments of the market’s Player base, utilize advanced e-commerce and social media tools to localize/personalize their services and more critically, do not pay taxes to the State.
Lottery Privatizations could also represent concerns related to the risk of asset depreciation in a deregulated market?
On the other hand, State Lotteries have: an established market presence through their traditional Land Based distribution network, have developed over the years Brand Integrity and Consumer Trust, operate within a Responsible Gaming framework, contribute substantial revenue to the State and welfare projects, possess market know-how and the resources to develop a competitive offering; yet are disadvantaged in the absence of a regulatory structure that establishes an even-playing-field.
So why privatize?
A Lottery Privatization potentially creates a number of distinct gains for the State:
- In the short-term, it provides a financial windfall that can be utilized to offset fiscal debt;
- The “privatization model” usually dictates the leasing of the operational license over a set period of time rather than its once-off sale;
- “New investment” naturally introduces to the State Lottery value added operational efficiencies and new gaming segments which further enhances the asset’s value;
- It paves the way for a structured Gaming Market Deregulation via which, new operational license can be issued;
- The new market structure creates greater on-going revenue streams since Gaming companies are required to localize and subsequent company tax revenues are realized;
- It creates an environment in which a Gaming Tax can be introduced.
Historically, many State lotteries were founded to respond to extraordinary cases of human suffering – to provide relief for victims of war, epidemics, natural disasters, etc.
More recently Lottery Operations at large, have proudly maintained their social contribution character by providing employment to thousands of families and playing a vital role in financially supporting many welfare projects.
The question consequently arises.
Within the process of Privatizing a Lottery, how will the State assure that the financial gains continue to reach social welfare causes and that the character of this Social Institution is not potentially sacrificed merely to rectify the State’s inefficiencies?