Companies ready to roll the dice with video lottery

The government's attempt to boost budget revenue by legalizing video lottery machines will fail due to excessive taxation, gaming industry insiders said. The 45% tax on revenue proposed in the government's gambling law amendments, due for a vote in the Sejm this month, will not allow lottery operators and gaming services firms to recoup their investments. State-owned lottery operators Polski Monopol Loteryjny (PML) and Totalizator Sportowy are waiting for the government to expand the range of legal gambling activities and are preparing to launch networks of video lottery machines, anticipating a leap in revenue. But industry officials said the government's attempt to maximize budget revenue from the new machines would stifle the initiative, which is part of the "Entrepreneurship First" package of laws designed to help stimulate the economy. Investment in video lotteries is a capital-intensive, volume-based business that could generate more revenue with lower rates, industry sources said. "(Video lottery) will be the largest gaming product in this country by a significant factor once it takes off," said Peter MacKenzie, president of Poland-based gaming services firm Polish Gaming Services (PGS). "Instead of taxing it at a high rate like a casino, it should be taxed at a lower rate - but the revenue generated by that taxation will be higher because it will be done on a volume basis."

Fast-growing market The new amendment, like other elements of the government's Entrepreneurship First program, must be passed or rejected by the Sejm within a month of its approval by the cabinet. If the amendment legalizes video lottery machines nationwide, PGS wants to finance and establish its own network, which will be operated by PML. PGS plans to phase in 35,000 terminals at a cost of $200 million, with the first phase aimed at delivering 7,500 terminals within 18 months. Financing for the project will come from Holland-based Greenbrook Global Partners (GGP), an investment group that sets up video lottery operations in Central Europe. It also owns PGS. "The biggest concern for us is that since we are going to be financing the whole project for the benefit of the Polish government, we need an environment where we can give a return to our investors and the risk reward makes some sense," MacKenzie said. "I'd like to see maximum net machine revenue tax at 30% … 45% won't do." The government set the tax level at 45% because of the similarity of video lotteries to traditional gambling machines, which are also taxed at this level. According to the Finance Ministry, tax revenue forecasts for video lottery machines are not available because of uncertainty over the potential popularity of the games. PGS estimates that each terminal will yield $24,000 in annual revenue, generating more than $500 million in total revenue after five years and contributing $300 million to the budget. Although PGS's business plan is based on conservative estimates, the Polish video lottery market may have significantly greater capacity, McKenzie said. "The business plan and the projections for video lottery here in Poland … shows that if you were to go to the industry worldwide standard, the amount of video lottery terminals that we proposed would probably quadruple," MacKenzie said.

Competition ready Totalizator Sportowy, PML's principal competitor, is awaiting of the amendment's final form before announcing its strategy for launching a video lottery network, said Paweł Burdzy, spokesman for Totalizator Sportowy. "We are technically prepared for video lottery but the legislators will have to decide whether video lotteries will be a state monopoly … a lot depends on the level of taxes," Burdzy said. "If the need arises we will be able to construct a (video lottery) network within the next year and a half to two years." Totalilzator Sportowy plans to invest zł. 600 million ($150 million) in a network of 16,500 video lottery terminals by 2005, mushrooming to 30,200 machines by 2012.