None of your business, but I am from lotusland.
The House Always Wins
Alberta's highest-grossing corporation isn't in the oilpatch, or even the private sector. It's the Crown agency that oversees the gambling and liquor industries
Vol. 9 Issue 9 - September 2005
By Will Gibson
The outside of Boomtown Casino looks about as glamorous as a nursing home, located in a standard-issue strip mall in Fort McMurray's unremarkable downtown core. Walking inside, however, visitors are engulfed by a jarring wave of computer-generated noise emanating from 206 slot machines. And most who pass through the doors submit to the jackhammering siren songs to pump coins into the machines.
That cacophony is about to get louder as the Boomtown expands into the space next door by year's end, growing to 23,000 square feet and up to 399 slot machines. Even the city's Bolivian-style hyperinflation - which has pushed commercial rents about 50% higher than Calgary's - cannot dampen the enthusiasm of Elston Noren, chief operating officer of the Boomtown's owner, Gamehost Income Fund. "We've spent five years at the present location and we needed this," said Noren, whose Red Deer-based trust also owns the simi-lar-sized Great Northern Casino in Grande Prairie and a 40% stake in the Deerfoot Inn & Casino, slated to open in southeast Calgary in November.
Noren's bullish cheer is matched by Game-host unitholders, who saw the company increase its revenues in the first quarter of 2005 to $7 million from $6 million during the same period in 2004. But as much as they have profited from Gamehost, their earnings are a mere pittance compared to the Alberta Gaming and Liquor Commission's take.
The commission acts as a silent partner of Gamehost and every other private business that operates in the gambling and liquor industries in Alberta. It sets the rules for retailers. In exchange, it receives a slice of the action from its private-sector partners that would be the envy of Tony Soprano. For fiscal 2004, the commission grossed $19.8 billion in revenues from its monopolies. In fact that astonishing figure represents more than 10% of the province's gross domestic product. (For the purposes of the Venture 100 list, prize money returned to customers is subtracted from the total, leaving just over $3 billion in net revenues.) What's more, the commission turned over $1.7 billion to its owner, the Alberta government, about $500 million more than the government garnered from crude oil royalties in the same year.
Posting those kinds of numbers normally sees CEOs singing paeans of self-praise in the business pages or doling out advice in a book. That sort of attention would horrify commission CEO and board chair Norman Peterson, whose low public profile is more in keeping with the senior government mandarin that he considers himself to be. Added to his bureaucratic instinct towards media wariness, the chartered accountant's reluctance to brag up the commission's success stems, in part, due to the moral baggage carried by its products.
The vast majority of the revenues, about $18.3 billion, come from gambling. And most of that money, about $17.8 billion, comes from quarters and loonies plugged into 7,582 slot machines and 5,992 video lottery terminals scattered around the province. Which, in most news stories, are portrayed as the magnet used by the commission to extract cash from desperate addicts' pockets. That might be why Peterson looks beyond the numbers to judge success. "In our various surveys with Albertans, they want assurances that these entertainment options are delivered in a socially responsible way," says Peterson, promoted to the commission's top job in 2001 after nine years of working with it and one of its forerunners, the Alberta Liquor Control Board. "We have more than three million stakeholders to listen to, so we're probably even more widely held than most of the companies on the Venture100 list."
Peterson, who helped oversee the privatization of Alberta's liquor industry in the early 1990s before the government merged its gaming and liquor regulators into a stand-alone commission in 1996, sees himself as a partner to the private-sector retailers that sell liquor and operate games of chance. Indeed, the commission serves as an example of the Klein mantra of separation of business and state compared to other provinces which, in varying degrees, own and operate their own liquor stores and casinos. "We do what government is supposed to do and let the private sector do what they are supposed to do. That's proven to be a very successful partnership," said Peterson, whose agency employs just 700 people - roughly the same total as the mammoth Casino Rama resort near Orillia, Ontario. "In the liquor industry, we now have a thriving network of 1,000 retail outlets who sell 13,000 products, far greater than before privatization."
The numbers in a recent Canada West Foundation study on gambling trends confirm that Alberta's public-private model works more efficiently than in other provinces. The study, released in June 2005, stated Alberta gamblers lost more on games of chance than anywhere else in Canada, an average of $887 per adult resident in 2003/04. As a result, it estimated the commission rakes in $474 in gambling revenue per adult, almost twice as much as the national average of $262. The commission receives 70% of revenues from the province's 6,958 slot machines in casinos. The operators evenly split the remainder with not-for-profits, which obtain a license to raise money from them. The commission does not get a cut from the table games, where charities take between 25% and 50% of the earnings depending on the market.
The high revenues combined with a low overhead pushed the commission's profit margin to 70.7% in 2003/04, more than 20% higher than the national average. Given that the commission does not risk any capital investment and slot machines come with a pre-programmed profit for the house, it occupies a rare no-lose position in the gambling industry. "It is an idiot-proof position," said one commission employee, who requested anonymity.
Keeping the returns for charities high is the commission's rationale for its approach to granting licenses for new facilities or expanding existing ones. Right now, 16 casinos operate in the province, including five each in the Edmonton and Calgary regions. In 2003/04, not-for-profit groups raised $133 million at casinos, which adds up to a lot of bake sales. The province has approved five new facilities in the past year while the Tsuu T'ina First Nation are in the final stage of the commission's eight-step application process on its proposed $30-million casino development on the southwestern fringe of Calgary.
The Canada West numbers show more Albertans are spending more money on games of chance. When Peterson began his tenure at the helm of the commission in 2001, it put $1.4 billion into the government coffers on sales of $14.9 billion, of which $13.2 billion came from VLTs and slots.
Having the Alberta government as a partner doesn't bother Bruce McPherson, whose Gold Dust Casino sits in the same windswept industrial park in St. Albert as the commission's headquarters. McPherson, who started in the industry as a blackjack dealer in the mid-1970s, believes the commission has managed the industry with a prudent hand and a long-term vision that benefits the private sector operators and not-for-profits that raise money at the casinos. "I think they've managed expansion very well, although we are close to the saturation point in terms of the number of facilities," said McPherson, who will spend up to $10 million to expand his 17,000-square-foot casino to 40,000 square feet by year's end. "The structure works well because they've kept the interest of the charities in mind."
Fulsome praise from McPherson and Noren about their public-sector partner does not impress gambling research specialist Garry Smith of the University of Alberta. The commission rarely says no when industry requests changes, something that Smith sees stemming from its blurred lines between its roles of partner and regulator. "There is a conflict of interest there," Smith asserts.
Accusations that the commission is too cosy with the industries that it is supposed to regulate are bolstered by some former commission executives' taking jobs in private industry. These include former chief operating officer Roy Bricker, who moved straight from the agency to the executive suite of Casino ABS, the province's largest casino operator, in 2000. The issue was raised last September, when the commission gave a tax break to Calgary-based brewer Big Rock, whose president Bob King also served as chair of the Alberta Liquor Control Board and as onetime deputy minister to Steve West, who was Premier Ralph Klein's chief of staff at the time.
The decision - which allowed Big Rock and Calgary-based Mountain Crest Liquors Ltd. to continue to grow while paying a reduced tax on their first 20 million litres of beer sold in the province - angered larger brewers Molson and Labatt, which pay more than twice as much tax on their suds sold in Alberta. Other connections between Big Rock and the conservative government, such as the brewery's $15,000 maximum allowable donation to the Tories in the past two years and once employing the premier's daughter Tersea Klein in the role of communications director, provided plenty of fodder for Opposition parties to question both the commission's partiality and its putative arms-length relationship with the government.
"The commission seems to be getting further and further integrated with the industries that they are supposed to be keeping an eye on," says Brian Mason, leader of Alberta's New Democrats. "How does a government-appoin-ted political body suppose to regulate an industry that it makes money from? In my view, it prevents them from acting appropriately."
Such criticism evokes laughter from McPherson, who has felt the watchdog's teeth on recent background checks into his finan-ces. "Basically, you have to drop your pants financially. It is very, very intrusive," he said. "But I understand the need for it because the integrity of this industry is paramount. And any businessman that gets into this industry has to be squeaky-clean."
And if there is an irony that in a province that celebrates free enterprise, a government agency generates more revenues than many oil companies, McPherson sees a bonus. "The government does make a lot of money, but if they didn't, you and I would pay a lot more in taxes," he says.
See now you been lying about where all those revenues are coming from, its not oil, its gambling.
