Brian Gaynor: Enjoy the dream but beware the fallout

Gambling is in the spotlight as the Big Wednesday Lotto hits a record $30 million next week.

Where do we gamble, how much do we lose and where does this money go, particularly the net takings of the New Zealand Lotteries Commission?

The first table (Gambling in NZ) shows the net losses from gambling in 1984, 1994 and the last five years. These figures, which are compiled by the Department of Internal Affairs, are after the payment of prizes.

Total gambling losses increased from $191 million in 1984 to a peak of $2.04 billion in 2004. They were slightly lower at $2.03 billion last year.

Losses have risen from 0.5 per cent of GDP in 1984 to a high of 1.5 per cent in 2004 and represented 1.1 per cent of GDP last year.

By comparison gambling losses in Australia were 1.7 per cent of GDP in 2005, the latest figures available from the Australian Bureau of Statistics.

Gaming machines are the biggest source of losses on both sides of the Tasman representing 56 per cent of total net takings in Australia and 46 per cent in New Zealand.

Casinos are second in Australia, racing third and lotteries fourth. Third and fourth places are reversed in New Zealand with racing bringing up the rear.

Racing and the TAB have lost substantial ground in New Zealand over the past quarter of a century with net taking going from 80 per cent of the total net takings in 1984 to 13 per cent last year.

In terms of gross turnover the four areas are ranked as follows in New Zealand:

* Gaming machines had gross turnover of $10.1 billion in 2008 and a payout ratio of 91 per cent.

* Racing had gross revenue of $1.5 billion and a prize/revenue ratio of 82 per cent. Sports betting, which is included in this figure, has grown from just $4.8 million in 1996 to $137.9 million.

* Lotteries had gross turnover of $778 million in 2008 with a payout of only 55 per cent.

No gross revenue figures are available for New Zealand casinos, the first of which began operating in 1995.

Gaming machines are the major concern as far as problem gambling is concerned as a New Zealand survey, called "1999 National Prevalence Survey", concluded that 18.9 per cent of those who played non-casino gaming machines, once a week or more, were pathological or problem gamblers.

The good news is that the number of gaming machines outside casinos has dropped from a peak of over 25,220 in June 2003 to 19,740 at the end of March. There are 2,826 gaming machines in the country's six casinos.

The second table (NZ Lotteries Commission) is a profile of the revenue and prize payout of the New Zealand Lotteries Commission. The Commission was established in 1987 and operates as a crown entity under the Gambling Act 2003.

It has four directors, chairman John Goulter, deputy chairman Laura Humphreys, Chris Curley and John Wright. Goulter and Curley are former Auckland International Airport executives, Humphreys has a background in advertising and pet food and Wright is a former Alliance Party MP.

One of the Commission's statutory functions under the Gambling Act is to maximise profits and distribute these earnings to the community through the New Zealand Lottery Grants Board. It also has to minimise any problem gambling and under-age gambling associated with its products.

This is a difficult line to tread.

The commission's biggest revenue earner is the Saturday night Lotto, Lotto Strike and Powerball draw. This generated revenue in excess of $500 million per annum in the mid-2000s but Big Wednesday was introduced when Saturday's draw began to lose its appeal.

In the June 2008 year the Saturday night draw represented 67.3 per cent of revenue, Big Wednesday 15.2 per cent, Instant Kiwi 14.3 per cent and Keno the remaining 3.2 per cent.

The commission also generated additional revenue from interest, the recovery of terminal maintenance costs and other items.

For every $1 of revenue around 55c is spent on prizes, 7c on operating costs, 7c on retail commissions, 10c on taxes and the remaining 21c is distributed to the NZ Lottery Grant Board.

In hard number terms the organisation paid commissions of $54.4 million to about 1000 retailers in the June 2008 year, lottery duties took $42.8 million, $27.8 million was spent on advertising and promotion and $26.8 million went into a prize reserve account.

But the most important item was the $156.8 million distributed to the NZ Lottery Grant Board.

The major recipients of Grant Board money last year were:

* Sport and Recreation New Zealand (Sparc) received $38.4 million. This mainly went to the major sporting organisations with Rowing New Zealand, BikeNZ and Yachting New Zealand the top three beneficiaries.

* Creative New Zealand received $27.7 million. This was distributed to a wide range of cultural activities including theatre, visual arts, dance and music.

* Community facilities $13 million.

* New Zealand Film Commission $13 million

* Environment and heritage $9.1 million

* Outdoor safety $8.3 million.

NZ Lotteries plays an important role in the community, particularly in this recession, because its grants are funded from current revenue whereas many other agencies fund their grants from investment portfolios that have been devastated by the collapse of financial markets.

For example, the ASB Community Trust, which sold its interest in ASB Bank to Commonwealth Bank of Australia, has deferred granting until September at the earliest because the value of its endowment fund slumped by $156 million, from $967 million to $811 million, between March 2008 and February 2009.

NZ Lotteries' strong position is a plus for its beneficiaries, including Sparc, Creative New Zealand and the film commission, in this environment because they would be facing a bleak year if an investment portfolio was their main source of funding.

But there is a fine line between the positive and negative aspects of gambling.

Next week's $30 million prize, and the $16.3 million won on May 23, have encouraged individuals to spend up big on lotto. This diverts spending from other activities.

In the June 2008 year $15 million was spent each week on NZ Lotteries' products and this will be substantially higher next week.

Retailers are reporting that customers are diverting spending on basic items, including food, to buy Lotto tickets.

A big increase in NZ Lotteries revenue must have a negative impact on other gambling activities because the total net gambling spend has flattened out.

The New Zealand racing industry, which received $127.5 million from racing and sports betting in the June 2008 year, won't be too happy with the big Lotto jackpots and the amount of discretionary money these attract.

The message for Lotto fans is to enjoy the dreams of a $30 million prize and the realisation that at least 20c of every $1 spent on Big Wednesday tickets will go to sports, cultural and community projects.

But it is just as well that these prizes are capped at $30 million because escalating jackpots have a negative impact on the retail sector, other gambling activities and their beneficiaries.

Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management.