Title: ENVIRONMENT, COMMUNICATION, INFORMATION TECHNOLOGY AND THE ARTS: Interactive Gambling (Moratorium) Bill 2000:

Discussion Date: 25 August 2000

Committee: ENVIRONMENT, COMMUNICATION, INFORMATION TECHNOLOGY AND THE ARTS

Reference: Interactive Gambling (Moratorium) Bill 2000

Place: Canberra Questioner: CHAIR; Bishop, Sen Mark; Lundy, Sen Kate

Responder: Mr Jones; Mrs Pafumi; Mr Appleby; Mr Bridge

Page: 1

Proof: YES

Database: Committees Considering Bills Source: Senate

CHAIR —I welcome the representatives of GOCORP, Lasseters, and ecorp/PBL to the table. The committee has before it your submissions, in the case of GOCORP, submission No. 16; in the case of Lasseters, submission No. 11; and in the case of PBL, submission No. 9. Do you wish to make any alterations or additions to your submissions? If not, would you like to make an opening statement? We might as well begin with PBL.

Mr Jones —PBL Gaming Management is a wholly owned subsidiary of PBL. It is the current intention that PBL and ecorp would have a joint venture in the online gaming area. PBL Gaming Management obtained a licence on 15 May in Tasmania after about 2½ years of preparation. We are within about six months of going live, or we were, and we intend to start operating at that point in time, moratoriums permitting. PBL has spent in the order of $12 million to date, and that expenditure is still occurring at a fairly significant monthly spend rate.

Obviously, that is a significant investment for our organisation which we would hopefully be able to do something positive with.

The comments already made today have covered just about all the ground that there is to cover. However, there are probably a few comments that I would just like to amplify. Concerning the regulatory environment in Australia, whilst some of the differences are often talked about, when you look at the method of operating in each of the states' jurisdictions—and this applies more to the Internet online gambling than wagering—then the entirety of the regulations, the method of actually licensing, and the approval process, pretty well make each jurisdiction very similar. It is not as simple as looking at the regulations in one state and saying, `They look a little bit different to the other', and assuming that they are different. With the exception of the tax rate, there is certainly great similarity in all the jurisdictions.

We also would support Lasseters as having probably—certainly when it was introduced it represented probably by a big margin—the most advanced player protection controls in the world. And I think the Senate select committee when it visited that site all confirmed that and, in fact, Reverend Costello also confirmed how impressed he was with the controls that Lasseters had in place for player protection. I think there may have been some misunderstanding when it was thought that all those controls may not apply in other jurisdictions but certainly, as I said, the similarities are such that they will apply in all jurisdictions.

With PBL Gaming, we have looked at the existing controls. We also looked very closely at the Netbets report and went to particular extremes, I think, to introduce a much higher standard of player protection than the previous benchmarks had been. We are very much focused on having a site that is entertaining. We have introduced a range of controls that players can put into place such as time limits, reminders, forced breaks, maximum number of bets, maximum number of losses on a day, a week, a month, and a whole range of other controls which we think quite specifically address the area of the Netbets report, and hopefully we will get a chance to use it.

I guess specifically on the bill, we naturally oppose it. We believe that it goes way beyond what the intention is of protecting the interests of Australians. We think that there are plenty of safeguards. I may not have mentioned that PBL have publicly stated that we will not be taking bets from Australians nor any other jurisdiction where they have prohibited online gaming, and for us, we sort of interpret that to read the United States as well. But different companies will form their own opinion on that.

So we do not believe that it is necessary to have a moratorium to restrict the access to those sites. We think that if there does need to be a moratorium then the intention of the government can easily be met by just restricting that to non-Australians and let us target the overseas jurisdictions. Again, we think that the period of nine months is a long time and we do not believe that if there is a need for a moratorium that it should be extended out until May of next year. Thank you.

Mrs Pafumi —Thank you to Wayne for his comments in regard to Lasseters and we would certainly support many of his comments in regard to the high standard of regulation that has been established in Australia. In my opening remarks I would not like to repeat our submission, but I would just like to emphasise some of the key concerns that we have in regard to commercial assumptions that have been made particularly in the explanatory memorandum. There seems to be an impression that existing Australian operators who were operational online prior to the 19 May would not be impacted by the proposed moratorium. This, in fact, is false. While Lasseters had been operating for over a year before that date, there are still some serious results that might arise from a moratorium being put in place. The most significant of these is our inability to effectively compete internationally, and I think it is important to stress that the online industry is a global industry. We have talked a lot today about impacts on Australia and we understand the concern of the government in that regard. But the online gaming industry is no longer an industry in its infancy. Industry estimates that there will be 34 million people across the world spending about $US1.5 billion on online gaming this year. Those are not statistics of a new industry; it is very much an established and emerging and growing industry.

By preventing existing operators such as Lasseters from extending its export services through the very broad definition of new gambling services, you are effectively stopping companies like Lasseters from continuing to compete internationally and building on the good, solid base it has made in that market. The introduction of new services and capabilities is critical within the information technology industry, where rapid advances in technology can change the Internet and e-commerce dramatically within the one-year period that is being discussed for the moratorium. It is a highly competitive industry, as I said, and the ability for Lasseters to expand its export services—and that includes the introduction of new games and the extension of services such as translating the games into foreign languages as new markets emerge—is critical to maintain our international competitiveness. However, those developments would be severely impacted by the definition that is proposed within this bill. We are also concerned about a statement in the explanatory memorandum of the bill that says that:

... industry should be able to generate at least the same amount of revenue as it did at the date the moratorium takes effect.

This simply ignores the essential business objective for growth in revenue and returns. For example, it took Lasseters Online 10 months to achieve 35,000 customers and $50 million in turnover, but it took only five months to double that result, so the pace of growth online is rapid. Any suggestion that we should be able to stay the same as we were a year ago severely impacts on our ability to make returns to shareholders and invest in continual business growth. Similarly, the expectation that we would be able to carry forward the costs of investment in the establishment of Internet gaming services fails to recognise the high costs involved, including interest costs for moneys borrowed. For example, we have approximately $3 million worth of work in progress on upgrades to our site which were proposed to be launched later this year, and they include new gaming services as defined under the proposed bill, but the cost of carrying forward that amount of money without any return to our business is high. So we are very concerned about the commercial implications of some of the phrasing of this bill and we would be pleased to speak with you about that further.

We are also concerned about some issues raised this morning in regard to the consistent application of the bill across gambling forms. I refer to the Productivity Commission, which reported on the source of problems for gamblers in counselling. It found that gaming machines were the primary source, with 68.9 per cent of problem gamblers reporting that method. Racing accounted for 15.6 per cent; casino table games, five per cent; lottery games, 3.7 per cent; bingo, 2.7 per cent; and other kinds, 4.1 per cent. So while the source of problem gambling in society is heavily skewed towards gaming machines, other forms of gambling must take some responsibility for problem gambling in society. We believe firmly that if you are part of the problem, you should be part of the solution. For that reason we believe that regulation with respect to interactive gambling should be consistent across all forms of gaming. Thank you.

Mr Appleby —Firstly, thank you very much for the opportunity to present our views to you today. We have heard many speakers today discussing the differences between wagering and gaming. This bill, however, and the government's concern as well as GOCORP's concern, revolves around the consumer. I am here to talk about GOCORP's view about this bill, how it impacts the consumer and also about how it impacts GOCORP and GOCORP's shareholders. Let me first put the industry and, more importantly, GOCORP in perspective. To do so I will read a few paragraphs from my submission, but I can assure you that I am not going to read the complete submission. GOCORP was established to capitalise on the opportunity provided by the regulatory approach to Internet gaming embraced by Australian state governments. Realising the competitive advantage a First World government licence would confer, and the inevitability of industry regulation, our principals began a dialogue with Australian state governments in 1996. GOCORP applied for its licence in Queensland in October 1998 and was granted our licence on 3 June 1999 after meeting the highest levels of probity, e-commerce security, business systems compliance and the financial requirements demanded by the legislation and regulations.

To date, GOCORP has raised over $42 million from the Australian public, and after an 18-month project and final approvals from the Queensland government's regulators, GOCORP commenced its business operations on 16 May, at that time employing over 80 staff. Since that time, GOCORP has spent 100 per cent of its marketing efforts offshore and based its marketing emphasis on the consumer protection aspects of Australian legislation.

It should be noted that the objective of the legislation is quite clear on its face as it is called the Interactive Gambling (Player Protection) Act 1998. This contains a considerable number of player protection mechanisms, many that have been referred to in previous submissions, which have been implemented also by GOCORP on its site. As an e-commerce company, and as a responsible provider, our value proposition to the world revolves around the consumer protection aspects of Australian legislation. Therefore, our view has been, and remains, that the stronger the protections for the consumer here in Australia, the more attractive Australia is, and Australian operators are, to the consumer as a whole.

That being the case, GOCORP took a number of steps to actually augment the consumer protection mechanisms that were mandated under the Queensland legislation and under the regulations to ensure the protection of consumers' interests. We, in fact, made a number of recommendations during our project to the Queensland government as to how the government may enhance the specific technical requirements for security for the consumer. And subsequent to that, GOCORP implemented a policy of responsible service of gambling which was in addition to those aspects that are required under the act. GOCORP has entered into a partnership with a consulting firm that allows us to offer 24 x 7 counselling services around the world in-country, in the local language, together with detailed training of all of our operators to allow them to identify problem or potential problem gamblers and address them directly to counselling services.

It is this whole issue of consumer protection that is important to GOCORP. When I was giving consideration to our submission today I thought, `What is the best way to exemplify the consumer protection aspects of the legislation?' I think the best comparison is what it would take to establish an Internet gaming operation in an unregulated jurisdiction. It would cost an organisation like GOCORP somewhere between $1 million and $3 million to establish a business of this nature offshore. GOCORP has spent well in excess of $20 million to take its business to an operational state. The question you might ask is; what is the delta? What has caused that? The delta almost exclusively is in additional products, processes, technology and operational aspects of our business that are focused purely on consumer protection. That is our issue with this bill.

The issue that the government appears to have is one of concern over the consumer. GOCORP shares that same concern. Our issue with this bill is that it takes away the only consumer protections that exist in cyberspace today, and we struggle to understand where the government is coming from.

Right now, as the moratorium is proposed and as has been discussed in a number of submissions and during a number of questions, it is clear that the government's intention is to move towards a ban. That is really talking about stripping away from the consumer the only protections that exist today, exacerbating the existing or potential problem with gambling and putting potential problem gamblers in the hands of operators and jurisdictions that have none of these consumer protection mechanisms in place and that could potentially prey upon those very issues that are of concern to us here in Australia.

It is amazing for us to read in the paper on a regular basis the fact that the government's concern is that there will be a casino in every lounge room. The fact of the matter is that we have already received submissions today that show there are already 800 casinos on everybody's lounge room and that the vast bulk of those offer no consumer protections whatsoever. Our issue with this bill is that it strips those consumer protections away. We have also given consideration to some of the other suggestions that have been made—for example, to offer this only to international players or to have the moratorium in place for a limited period of time. If you have the view that the moratorium in fact strips away consumer protections, why offer that to people from overseas and not to Australians, why give those consumer protections to overseas players and not to Australian players? That does not make sense to us. Why have the moratorium in place for a couple of months when we do not believe the moratorium addresses the needs of the consumer at all?

So GOCORP's view is and remains that the moratorium is unnecessary. GOCORP's view is that what Australia brings to the table is its global reputation as a strong regulator and protector of consumers. We submit that the best way for the consumers' interests to be protected is for the federal government to work in conjunction with the states and industry to form a strong, consistent national approach to consumer protection to ensure that Australia is able to, firstly, protect the interests of Australian players and, secondly, protect the interests of players on an international basis.

We have talked extensively about the impact on the consumer. It is worth noting the impact on GOCORP. GOCORP is a listed Australian public company that has, as I noted earlier, raised well over $42 million from the Australian public. It has been well quoted in the media and by financial analysts that the government's involvement in discussion of a moratorium and a potential ban has had a significant impact already on GOCORP shareholders by way of a reduction in its share price.

Other impacts on our business are very similar to those that have been discussed with regard to Lasseters. The ability for us to compete on a global basis, the ability for us to compete with these unregulated jurisdictions and the ability for us to evolve our products and services are unnecessarily hampered by this proposed moratorium and ban. What we have also found in the development of this burgeoning global industry is an enormous amount of interest from global banking organisations, telecommunications organisations, media organisations and entertainment organisations.

We were already in discussion with some major global parties. GOCORP has already formed a partnership with Ericssons but was in the process of forming a number of other partnerships with organisations that were going to see the development of this industry and the development of technologies here in Australia that could be taken to the globe. This moratorium is having a direct impact on those business opportunities and on the development of this exciting e-commerce sector. GOCORP submits that the moratorium bill should be defeated and that the state governments, the federal government and industry should work together to ensure a strong, consistent platform for consumer protection. Thank you.

Senator MARK BISHOP —We have covered most of the issues this morning, but when were your companies contacted by the government concerning the content of the bill; when did you have the opportunity to have input?

Mr Bridge —Lasseters were not consulted. We received information by press release.

Mr Jones —It was the same for ecorp.

Mr Appleby —Despite repeated requests to have some involvement, GOCORP were not made aware of any of the developments.

Senator MARK BISHOP —You made repeated requests for involvement, did you?

Mr Appleby —That is correct.

Senator MARK BISHOP —To whom did you make those requests?

Mr Appleby —To Senator Alston's office.

Senator MARK BISHOP —So you directly contacted Senator Alston's office and were given no opportunity for input?

Mr Appleby —We had some dialogue with them but no opportunity to input into the moratorium and certainly no dialogue with Senator Alston.

Senator MARK BISHOP —What do you mean by `dialogue'?

Mr Appleby —More with regard to where the government was coming from with regard to a ban, not with regard to the content of the moratorium bill.

Senator MARK BISHOP —Did the other companies have dialogue with Senator Alston's office?

Mr Bridge —We have met with Annabelle Herd and on two occasions with the ACA. But we have no information whatsoever from her. We just virtually read the press releases. And such was our frustration that the ACA went to the Prime Minister's department and spoke with Arthur Sinodinos in an effort to try to get access to Senator Newman and Senator Alston.

Mrs Pafumi —I just add that, in addition to those attempts, we have had ongoing discussions with the officers of NOIE who had approached us earlier in the year to participate in the ministerial council initiative. And following the press release from Senator Alston in late July in regard to the intention to introduce the legislation last week, we did write a letter to NOIE responding to the terms of reference that were outlined there for the legislation that was then being drafted. We have reason to believe that some comments that we made in that letter have been incorporated within the explanatory memorandum as some of the concepts are familiar to those.

Senator MARK BISHOP —So Lasseters has had some input into the drafting of the bill?

Mrs Pafumi —We have had ongoing discussions with NOIE. We have not spoken, as Mr Bridge said, directly to Senator Alston, other than through his adviser, but we did proactively seek to contribute to the drafting of the bill by providing a letter outlining our response to the terms of the legislation as they were described by Senator Alston in a press release in July.

Senator MARK BISHOP —All right then, perhaps I should rephrase the question. Did either of the other companies have any input into NOIE in respect to the drafting of the bill?

Mr Appleby —In respect to the drafting of the bill, no.

Senator MARK BISHOP —Mr Jones?

Mr Jones —No.

Senator MARK BISHOP —A common theme of all three companies was that 100 per cent or very close to 100 per cent of your interactive business is either for offshore markets or proposed for offshore markets. Is that correct?

Mr Appleby —That is correct.

Senator MARK BISHOP —What will be the impact of clause 5(c)(ii) in the bill, because I presume all of your management functions are centred somewhere in Australia?

Mr Bridge —That is correct for Lasseters.

Senator MARK BISHOP —If the bill is passed in its current form, what will be the impact on your companies, one by one? Mr Jones?

Mr Jones —Clearly we would have to look very closely and see if there are any other opportunities to relocate in some manner offshore, but the bill is quite specific. So it does not leave much room to have a sensible operation offshore.

Mr Bridge —In regard to Lasseters, we would also have to look at going offshore if this ban was implemented. The difficulty we have there is that we have a land based operation in Alice Springs which is the base for our operation. That land based casino in many ways gives us credibility on the net and some of the better practices that we utilise on the net have been developed in practices in land based operations.

Mr Appleby —GOCORP, too, would have to consider its options but I would like to comment, as a gentleman did earlier, that we really do not understand if the issue is concerned about Australians. If an Australian company has a business offshore that focuses 100 per cent on offshore consumers, I do not understand what the purpose of capturing that particular organisation or that opportunity in this legislation would serve.

Senator MARK BISHOP —No, I do not think any of us understand that, Mr Appleby. We might ask NOIE that in due course.

Senator LUNDY —In terms of the actual scope of the bill in extending itself beyond that of online gambling services, are there any aspects of your existing businesses that that also affects, not just your various ambitions or existing services in the online gaming area?

Mr Bridge —Our existing business has got a large research and development component in it. As we mentioned in our opening address, we have literally $3 million worth of development on hold that we cannot implement over the coming months. The difficulty about that is the way the Internet changes, and the computer industry is changing. Many of the things that we have got developed now, and will not be able to introduce until 20 May next year, will no longer be leading edge technology, they will be superseded by new things. Much of our investment will be wasted.

Senator LUNDY —Are any of you sitting here thinking that the moratorium will end in May and that you will be able to offer these types of online gaming services? What is your expectation, given the strong public statements from the Prime Minister about an intention to ban it?

Mr Bridge —This is an ongoing inquiry. It amazes us that the two recent inquiries—the Productivity Commission report and the Netbets report—both recommended managed liberalisation and introduction of online gaming. The wisest people in the land have looked at it and said that that is the way to go, yet the government now is coming up with an entirely different view and is proposing to ban it. We are getting very mixed messages from the federal government.

Mr Appleby —I must say it makes it very confusing for a business that is trying to move forward, and for the investor community, to try to have some confidence in investing in the business as it goes forward. If the Prime Minister has expressed a preference for a ban and that ultimately is the result, then these businesses have no alternative other than to take their investment and move offshore. This has to cause serious concern not only for the gaming sector but also for the e-commerce sector in general, the fact that the government can legislate retrospectively with regard to investments that have already been made, and been made in good faith under existing legislation. It is a major concern for our investors. Our investors are already raising questions as to what compensation they, and we, may be able to seek from state or federal governments with regard to this particular legislation and the impact that it has on our business.

Senator LUNDY —A number of witnesses today have mentioned their pursuit of legal advice about what potential retribution might be available to them if this bill is passed, or even if it is not, because of what they have been enduring. Can you given an indication as to where you are at in the pursuance of that advice, particularly with respect to those of you that are listed, and the impact with respect to your shareholders' expectations?

Mr Appleby —Our discussions with our legal advisers are ongoing. The government appears to be moving down a path of legislation by press release. We are here talking about something that Mr Howard has a preference for, but there is no draft legislation with regard to a ban. Therefore, how could a legal opinion be formed? The same thing applies to the moratorium legislation that is before parliament. We do not know what form that legislation will ultimately take, or even if it will be passed. So how to have a definitive view at this point in time, as our legal advisers quite rightly point out to us, is a little bit difficult. But they have certainly made it clear to us that what is being done here is having a negative impact on our investors, investors who invested in good faith at a time when our business activities were perfectly legal in this country and, as such, they will seek recourse.

Senator LUNDY —I just want to clarify something with respect to Lasseters. My understanding is that you had a pre-existing online casino gaming service that was operating prior to 19 May. So, under the moratorium you can continue that. We heard earlier that you would be restricting geographic accessibility to that service to south of the Northern Territory. Can you clarify who is able to access your online gaming facilities and what you have been able to do to try to manage that?

Mrs Pafumi —Under the regulations set by the Northern Territory government and the licence conditions that we operate under, we have been permitted to offer online gaming for cash gaming to residents within the physical licence territory for the Lasseters land based casino, which is a jurisdiction covering the southern region of the Northern Territory. While our land based casino is authorised to offer cash gaming services to that region, our online gaming service is able to do the same. Essentially, this stems from the basic premise that we have taken from the beginning of the development of the online casino, and that is to apply the same conditions and values for how we operate the land based casino and simply transfer them into the virtual world. We operate our virtual casino under the same conditions and in the same style as we do the land based casino—that is how it works.

Senator LUNDY —Does that mean international tourists cannot use your casino facilities?

Mrs Pafumi —They cannot use the online facilities.

Senator LUNDY —No, but can they use your land based facilities?

Mrs Pafumi —Yes.

Mr Bridge —Yes.

Senator LUNDY —They can fly from Sydney, Melbourne or Canberra and use them physically?

Mrs Pafumi —That is right.

Senator LUNDY —So it is actually not restricted to the residents of the south of the Northern Territory?

Mrs Pafumi —No.

Senator LUNDY —But you are able to effect control over your virtual service by actively restricting it to residents?

Mrs Pafumi —When a player registers with Lasseters Online we require proof of identity before we accept that registration. That comes in a variety of forms. If they are registering for cash gaming, we need proof of their identity and their age; if they are playing with a credit card, we need proof of ownership of that credit card; we need details of their registered address and so on. There are various requirements.

Senator LUNDY —You do ask for the address?

Mrs Pafumi —We do ask for their address. It is basically through asking for that address and verifying, through various other forms, that that is their address that we know where they are based. I should explain that the physical licence territory is a competitive condition applied to all land based casinos across Australia—they have the licence to operate those forms of games within that licence area. So it is more a restriction from a competitive situation with other land based casinos rather than a restriction for the type of player.

Senator LUNDY —That is right, but you are telling me that your licence conditions for your virtual service do, in fact, restrict the type of player.

Mrs Pafumi —Yes.

Senator LUNDY —So it is an additional level of control you have over your virtual offering. That is an interesting point because it demonstrates a far higher level of regulation and control over who can actually use your service in a virtual environment, whereas your licence conditions, expressed same, with your land based casino mean you can attract not only national but also international players by virtue of them moving themselves physically to be there to do that.

Mrs Pafumi —That is true.

Senator LUNDY —There would seem to be an inconsistency there, in terms of the more onerous restrictions in your virtual licence. For example, if you flew into that region, so you were physically there, you would still not be able to access those virtual services because you do not live there.

Mrs Pafumi —That is right. It is indicative of the level of regulation that is possible with online gaming: it is a far higher level of restrictions than is currently possible within physical gaming venues—and that is recognising that Australia is regarded as having one of the highest levels of probity and regulation within its physical venues compared to anywhere across the world.

Senator LUNDY —Does your licence also have a separate provision that allows you to offer services in an international market?

Mrs Pafumi —Yes.

Senator LUNDY —You can do that as well?

Mrs Pafumi —Yes.

Senator LUNDY —But it is under a separate licence condition?

Mr Bridge —That is correct. The licence condition says that we can take bets from people from our own jurisdiction and internationally.

Senator LUNDY —But nowhere else in Australia?

Mr Bridge —No, the minister has requested and we have agreed not to take bets from other residents of Australia for a number of reasons, including the provision of a source tax and some exclusivity arrangements that other casinos may have in their jurisdictions.

Senator LUNDY —I understand that it is a key issue in the negotiations between the states and revenues derived. To clarify this, if I were an international visitor and I flew into Alice Springs and wanted to register as a player on your international virtual service, I could in fact do that, provided I could demonstrate I was not a resident of Australia?

Mrs Pafumi —Yes, that is right. A visitor to Alice Springs could register with their home address from an international jurisdiction.

Senator LUNDY —I just wanted to clarify those terms and conditions. I think it makes a good point, thank you.

CHAIR —I have a question about your credit and money that is available. We have heard about debit accounts. You were talking about use of credit cards. Do you not use the debit account system, so that they have to deposit a certain amount of money or do you just go to the extent of the credit card limit as the money available?

Mrs Pafumi —Essentially, a credit card is one method for people to use to deposit funds, to open a playing account with Lasseters. Some people can also use cheques, wire transfers, cash, whatever is their preference. Essentially, if they are using a credit card, the amounts that they deposit within their playing account is limited in a number of ways. Lasseters already has a restricted deposit level per month of $500. So, people registering with Lasseters can only initially deposit a maximum of $500 per month to their playing account. Whether that deposit is approved is checked by a real-time credit card check that we have arranged through the National Australia Bank, so their credit limit, if you like, is automatically reviewed. We can also check that their credit card is not being used fraudulently before that transaction is authorised. Thereafter, the players play with the deposits that they make to the playing account plus any accumulated winnings that they make on top of that. If they win on a game, that amount of winnings is automatically debited to their playing account. Players are not allowed to run their playing accounts into a loss situation, so they can only ever play with the funds available in that account.

CHAIR —Thank you for that. There being no further questions, we thank you for appearing today.