Bad times for gambling in Bavaria By Andrew Tottenham, Managing Director, Tottenham & Co June 29, 2018 at 2:30 am Results released recently by the Bavarian State Lottery Corporation, owner of Bayerische Spielbanken, which operates the nine casinos in Bavaria, show that only three – Feuchtwangen, Garmisch-Partenkirchen and Bad Wiessee – are profitable. That profit totals around €8.3 million. Bad Wiessee accounted for the bulk of the amount, with a profit of €6.2 million. Unfortunately, the profits from these three are not enough to wipe out the losses from the other six: Bad Füssing, Bad Kissingen, Bad Kötzting, Bad Reichenhall, Bad Steben, and Lindau. Those losses came in at a total of €11.3 million. Bavarian casinos have a long history of losing money. After years of losses, they managed to earn a small profit of €150,000 in 2016, but fell right back into losing a year later. The 2016 profit was the product of an exceptional item: the court-mandated repayment by the Bavarian state of €4.7 million in fees paid to the government in the previous eight years. Without this repayment, the accounts would have been covered in red again. Annually in June, when the casino accounts are released, there are newspaper headlines talking loudly about the crisis in the Bavarian casinos and what must be done. Since 2006, German casino revenues have been in free fall, thanks largely to competition from slot machine arcades. Until recently, the arcades opened all over Germany with little or no control over location or number. In 2006, gross gaming revenue for all casinos in Germany peaked at €960 million. By 2016, it had dropped to €597 million. In the same period, revenues from gaming machines in arcades and bars grew from €3.4 billion to €6.9 billion. There are also casinos on almost every crossing point on the Czech side of the border with Bavaria. These casinos enjoy a lower tax rate and more flexible regulations. All, target the German market. Each year about this time, predictably, the politicians wade into the debate. Some argue that the loss-making casinos should be closed; others stump for a package privatisation deal. Finance Minister Albert Furacker believes that it’s the State´s responsibility to operate the casinos as a package, under the assumption they provide some 600 jobs and help reduce illegal gambling. I´m not altogether sure a small casino in Bad Kötzting does very much to reduce illegal gambling. Bad Kötzting is not far from the Czech Border and, in my mind, the casino was opened to stop Germans going across the border to gamble. Given the success of the Czech casinos on that border crossing, this is something that Bayerische Spielbanken have failed to do, spectacularly. The main problem with Bayerische Spielbanken is that it is state owned and operated. This means that it is managed not as a commercial enterprise, but on a political basis, as the Finance Minister´s statement suggests. Political considerations are at the forefront of decision making. In Germany, 35 of the country’s 66 casinos are operated by State owned companies. In recent years, revenues have declined due to a cocktail of smoking bans, AML processes, and financial crises, but the decline stems mainly from increased competition from other land-based gambling. And as revenues have declined, costs have not done so. One report suggests that revenues have declined by 38 percent, but costs by only 7 percent. Furthermore, some state-operated casinos in Germany have personnel costs that eat up more than 70 percent of post gaming tax revenue, although, admittedly, Germany’s eye-wateringly high gaming tax rates may have something to do with that. The four casinos in Italy are also owned by the municipalities, and most of these casinos also lose money on an annual basis. The casino in Campione, an Italian enclave surrounded on all sides by Switzerland, is owned by the municipality and has been losing money for some time. Efforts to return the casino to profitability have so far proved unsuccessful. It has failed to pay the taxes which it owes to the municipality, and in January the taxes owed reached €25 million, with a further €25 million owed to banks and other creditors. With the casino offering no credible plan outlining how to pay down its debts, the Como prosecutor asked that the casino be put into bankruptcy, which quickly resulted in a plan to lay off one third of the almost 500 employees. CEO Carlo Pagan was charged with embezzlement and false accounting relating to non-payment of gaming taxes to the municipality, although he has since been cleared on appeal. The knock-on effect has been that without the gaming taxes being paid, the Campione municipality, once the richest in Italy, has also been unable to pay its debts. A commissioner has been appointed to try to sort things out. An attempt to privatise the operations of Casino di Venezia, which operates the casinos in Venice, was made a few years ago. The municipality was unhappy that it had to continue to bail out the loss-making casinos. A public tender ensued, but the concessions needed to get the municipal council and union to approve the sale made the business unviable. Despite many expressions of interest, no one showed up to bid for the company after receiving the tender package containing the conditions of sale. State operated casinos usually fail because, when operating conditions change for the worse, hard decisions are not made. The largest component of any casino´s cost after gaming taxes is the personnel. It’s the unpleasant reality that, when revenues decline, jobs must be reduced. If the casino is owned by the state, region or municipality, these decisions are usually deferred in the hopes that things will get better. The politicians who have responsibility for the casino, to use a Dutch expression, do not want to saw the legs off their own chair. Employees are voters, as are their mothers, fathers, brothers, sisters, aunts and uncles. But by not reducing operating costs, they are doing their constituents and their employees a disservice in the long run. Reducing surplus personnel and other costs will allow the casino to weather the storm and, ideally, emerge in a stronger financial position when things inevitably improve. This allows the business to be in a condition to reinvest in the product, grow the business, and rehire when necessary, rather than wallow along enmired in debt. Politicians are concerned about saving jobs and controlling illegal gambling. But when casinos don´t pay their taxes, or get bailed out by the state, it means gamblers are getting a service that costs more than they pay for it. I wonder if it’s really the role of the tax payer to subsidise gamblers.