Not everything in Greece is as straightforward as it appearsBy Andrew Tottenham, Managing Director, Tottenham & CoNovember 7, 2018 at 2:00 amThe publication of the RFP for the new casino license in the Hellinikon project in Athens has been delayed. It was supposed to have been issued last month, but the delay is not surprising given the complexity of this RFP. The timetable always did seem ambitious to me.You may remember that Lamda Developments won the original RFP to develop the entire site of the old Athens airport, which had been used for the 2004 Summer Olympics. Part of Lamda’s submission included a casino, but under EU procurement rules it is not possible for the Government to simply grant Lamda a license. Had the original RFP included the offer of a license that would have been different; however, no license was on offer.After Lamda won the original RFP, they then stated they wanted a casino on the site before they would proceed. Lamda agreed to pay €947 million up front for the rights to develop the site but said they would not pay unless a casino license was issued. The EU and the IMF wanted Greece to find more sources of revenue and put pressure on the Government to resolve the impasse so that Lamda would release the funds. Ultimately, the Greek Government relented and agreed to hold a public tender for the casino. But it is far from clear how a lease arrangement – between Lamda and the winner of the casino RFP – would actually work.Potential bidders will want to know roughly what the lease arrangements will be before submitting a response to the tender. Winning the license will, no doubt, come with performance guarantees and the operator will be in a weak negotiating position to determine the final rent for the land. What happens if the winning operator is not able to reach agreement with Lamda? On the other hand, the operator will not want to accept a take-it-or-leave-it offer for the rent. The current rumours are an annual rental of over €20 million for a thirty year lease.Something that could be muddying the waters is what is going on with the casino in Loutraki, a tale that says a lot about doing business in Greece. The Loutraki casino used to be the highest grossing casino in Europe, with annual gaming revenues of €230 million at its peak. The financial crisis hit Greece hard; Loutraki casino revenues tumbled, with last year’s GGR being just north of €50 million. The drop in revenues left the company unable to pay its bills; by the end of 2016 it had racked up €143 million of debts. The biggest debtors are Piraeus Bank and, not surprisingly, the Greek tax authorities. The company went through a court-sanctioned reorganisation process, called a 106B, which haircut the debt, reducing it to around €80 million with a 15 year, interest-free payment schedule.Earlier this year the casino company successfully sued the government for overpayment of gaming taxes. It argued that the tax rate of 35% of GGR should not apply to Casino Loutraki because this rate was, according to the original law, only supposed to be for casinos in large conurbations. The casinos outside of such extended urban areas, such as those on the Greek Islands, have a rate of 22% applied to them. The intent of the differing tax rates was to give casinos in less populated areas a lower rate so that they could be profitable despite lower visitation and revenue. Loutraki is 80kms south of Athens in a coastal town; it is easy to argue that it is not in a densely populated area, although annual revenues of €230 million might suggest otherwise. Casino Loutraki won their case in the Corinth Regional Court. If the Government appeals to a higher (national) court it might not be so easy for Casino Loutraki to win. I hear the casino is currently only paying the gaming tax at the lower rate of 22% and doubt it has been accruing an amount on its balance sheet to prepare for losing in a higher court.One of the peculiar things about the original license for Loutraki was that the ownership of the casino would transfer to the municipality over the period of the license. In order to attract new investment, or a buyer, the owners of the casino wanted to convert it to a SA, a limited liability company with share capital. As part of the reorganisation this conversion was agreed to, and also that the municipality would forfeit its rights to ownership. This conversion and the forfeit of the municipality’s rights was made part of the 106B agreement. There was, as there always is, a sting in the tail – according to the law, in order to be a SA company owning a casino license the shareholders must put in a minimum of $1 million in equity. Needless to say, this equity injection has not been made and now the municipality is arguing that a critical part of the 106B agreement has not been fulfilled. The shareholders of the casino are now challenging the validity of this amount in the courts. Obviously, without a viable buyer or investor the current shareholders are unwilling to part with any more money.While all this has been going on the company has not been keeping their promises. Staff are not being paid on time and a recent press article reported that the company owes an additional €22 million in IKA (Social Security) payments, a debt which is increasing at about €1 million per month. Clearly, the company is flouting the 106B agreement.In Greece, a law passed earlier this year requires all casinos to apply for a new license. New license holders will benefit from the new tax regime, a regressive gaming tax system that reduces in bands from 20% of annual GGR to 8% for any amount above €500 million. The application process for a new license has not been defined, though I hear that something will be published soon. (It would not be unusual for this to sneak through parliament when many legislators have headed home, something that I have seen happen elsewhere in the world more than once.)I imagine that the Greek Government, wanting to minimize criticism, will want to include clauses in the rules for the new licenses about applicants demonstrating that they are “fit and proper” to hold a license, and that the balance sheet will be able to withstand a “stress test”. If this is the case, given the current state of their balance sheet, Loutraki is doomed without a significant investment of capital.On top of this, the current Mayor of Loutraki and two former Mayors, along with eight senior executives of the casino (some no longer working there), have been charged with fraud relating to the original accounting treatment of the original investment. When the license was issued there were certain investment and development conditions attached; according to the press the actual investment fell short of that required.You have to ask why the Greek Government allows the casino in Loutraki to continue operating. Certainly, the Government wants to portray itself as modern and transparent, where the rule of law is paramount, to give investors comfort that a €1 billion plus investment in the largest integrated casino resort in Europe will be safe. But it is acting like a banana republic, dragging its feet in taking action to close a business that even after a significant debt haircut continues to rack up more debt every day, not to mention abusing the court-sanctioned agreements over the repayments of its previous debts.The Government’s action, or inaction, by allowing a failing business to continue, is ultimately promoting unfair competition. It remains to be seen whether any of the potential bidders for the Hellinikon IR decide to not bid because of this, or to at least raise the subject with the Government. If it was me, I would.