Saving the sacred cash cow

American rock musician Meat Loaf once declared he would do "anything for love (but I won't do that)." And the privatization-loving provincial Liberals sang the same tune when confronted with a proposal to put the government's lucrative lottery operations in private hands. Records obtained exclusively by Public Eye show well-known party supporter Lyall Knott pitched privatizing (or, as he put it, monetizing) that business between 2007 and 2008.

In a letter sent to two cabinet ministers with the subject line "Project Windfall," he stated such a move could earn the government $4 billion - money that could be used to pay down the debt.

"There is not a Public Policy reason for the State to be in the business of lottery operations," argued Mr. Knott, a lawyer specializing in public-private partnerships. In fact, according to him, it could be "desirable" for government to distance itself from that business - focusing on its regulation rather than operation.

The reason: accusations the government hadn't done enough to protect consumers from potential fraud by lottery ticket-sellers.

Mr. Knott, a partner with Vancouver law firm Clark Wilson LLP, conceded privatizing the lottery business could mean job losses at British Columbia Lottery Corp. But those losses would be small, according to the letter - which was co-authored by investment banking firm executive Tim Philpotts.

And government's earnings from that business, which netted an estimated $251.2 million in fiscal 2008/09, would increase thanks to the "innovations and creativity of the private sector."

None of those arguments, though, convinced the Campbell administration it should let Messrs. Knott and Philpotts's companies help privatize its lottery operations.

Responding to their April 22, 2007 letter, then solicitor general John Les wrote the argument government should regulate not operate gaming was "interesting."

He also conceded it was legally possible to hire a "non-government body" to "conduct and manage the lottery system on behalf of the Province."

Nevertheless, Minister Les wrote the government wasn't "prepared to consider such a change to the current model given the inherent risks and liability issues involved."

Despite being rebuffed, Mr. Knott continued trying to convince government to do just that, sending the solicitor general and then finance minister Carole Taylor a news story reporting on other governments that had leased or sold their lotteries.

But, speaking with Public Eye last week, Mr. Knott said the idea - which originated with Mr. Philpotts's company Ernst and Young Orenda Corporate Finance Inc. - "simply did not float."

***

April 22, 2007

The Hon. Carole Taylor MLA
Minister of Finance
Room 153
Parliament Buildings
Victoria, BC V8W 9E2

The Hon. John Les MLA
Minister of Public Safety & Solicitor General
Ministry of Public Safety & Solicitor General
Room 236, Parliament Buildings
Victoria, BC V8W 9E2

Dear Minister Taylor & Minister Les:

Re: Project Windfall

Introduction

Ernst & Young Orenda Corporate Finance Inc. and Clark Wilson LLP are pleased to present to you a unique opportunity for the Provincial government to realise significant value through a monetization of the lottery business of the B.C. Lottery Corporation ("BCLC"). We believe that the opportunity will crystallize the significant value of that business while reducing the exposure of the Government to non-core activities and will enable the Government to deploy the significant value into the Government's other needs and opportunities. We believe that this proposal has the potential to benefit the whole population of British Columbia.

Simply put, BCLC lottery operations are a valuable asset class with characteristics that are very attractive to many investors and operators of "infrastructure" type assets. The market for such infrastructure assets is currently such that there is a shortage of good high quality assets with a massive oversupply of funds looking to invest in the sector. As a result of this we believe that the likely value of the BCLC lottery operations would be in the range of approximately $4 billion.

Financial Impact

Today, BCLC lottery operations provide approximately $273 million per year of funding to both the Provincial government consolidated revenues as well as other charitable and 'social' measures. We believe that the monetization of the BCLC lottery operations would generate value in the range of $4 billion to the Government which could be used to defray Provincial debt which could result in annual savings of interest costs of approximately $397 million. Therefore, this opportunity is "cash positive" to the Province.

An additional benefit would be to reduce the Provincial debt-to-GDP ratio to 12.6% (ahead of the target of 14.1% by 09/10). A lower ratio may allow the Province to underwrite additional, crucial infrastructure projects and may even have the result of a reduction in borrowing costs due to rating improvement.

Regulate, Not Operate

We submit that there is not a Public Policy justification for the State to be in the "lottery operations" business.

We do see an important role for the Government as a "regulator" of the industry. This is a role played by other governments in other jurisdictions and is the role that the Government of British Columbia plays, through BCLC, with respect to casino operations.

Maintain an Ownership Interest

The Government may wish to explore the possibility of maintaining an ownership interest in the lottery operations. This would allow the Government to enjoy the growth in the business as the private sector exploits new opportunities and efficiencies.

Community Impact

The politics of gaming/lotteries is such that it may be desirable for the Government to create a "distance" between the Government and lottery operations. Indeed, recently, the Government of Ontario and the Ontario Lottery and Gaming Corporation are under fire with allegations of fraud. Similar questions have been raised about BCLC lottery operation. A more suitable role for government may be in the regulation of the lottery business...not its operations.

A change, such as the one we are proposing, would almost certainly result in a modest reduction in the payroll of the Lottery Corporation. This job loss would be relatively small and some, if not all, of the jobs would move to the private sector or into the role of Regulator.

No Change for Recipients of Lottery Funds

Under the current distribution of net income from BCLC approximately 60 percent of the net income is distributed to the Government into Consolidated Revenues with approximately $280 million being used for charitable and social measures. Under this proposal the net income, including likely interest savings, would increased to the Government and the distribution to charitable and social measures would be unaffected. Indeed, with the innovations and creativity of the private sector, it is likely that even more money would be available for distribution.

These funds have an impact across the Province so a professional communications plan could allay the fears of the recipients of lottery funds.

Conclusion

We submit that the monetization of the lottery business of BCLC is in the best interests of British Columbia. There is not a Public Policy reason for the State to be in the business of lottery operations. The public interest would be protected through an efficient and effective system of regulation. Indeed, the public may approve of Government getting out of this business.

The resulting financial impact on the books of the Province would be very positive:

* $4 billion applied to defray Provincial debt.
* Reduction of debt-to-GDP ratio allowing for additional infrastructure projects. This may also result in an improvement of British Columbia's ratings (and future reductions in borrowing costs).
* Reduce interest paid on Provincial debt.
* Maintain level of funding for recipients of lottery funds.
* Possibility of enhanced lottery revenues as a result of the innovations and efficiencies of the private sector.
* The opportunity for the Province to maintain an ongoing financial interest in the lottery business.

We would be pleased to meet with you and discuss this proposal at your convenience.

Yours truly,

ERNST & YOUNG ORENDA CORPORATE FINANCE INC.

Per: Tim Philpotts

CLARK WILSON LLP

Per: Lyall Knott

cc. Larry Blain, Partnerships British Columbia

***

July 5, 2007

Mr. Tim Philpotts
Ernst and Young Orenda Corporate Finance Inc.
Mr. Lyall Knott
Clark Wilson
PO Box 10101
700 West Georgia Street
Vancouver BC V7Y 1C7

Dear Mr. Philpotts and Mr. Knott:

I am responding to your April 22, 2007 letter addressed to the Honourable Carole Taylor, Minister of Finance, and me proposing the Province change and "monetize" the lottery operations of the British Columbia Lottery Corporation.

I appreciate the considerable thought your company has put into the proposal. Your contention that the state has a role as a gaming regulator, but should not be involved in operation of gaming, is an interesting premise.

Under the Criminal Code of Canada, only provincial governments or their agents have the authority to conduct and manage gaming on a commercial basis. Further, the Code only allows provincial governments or their agents to conduct and manage electronic gaming, such as slot machines or ticket sales through a computer system.

As an agent of the Crown, the British Columbia Lottery Corporation (the Corporation) conducts and manages most commercial gaming, including lotteries, on behalf of the Province. The Corporation contracts with private sector entities to provide lottery retail sales and services. The Corporation and its service providers are regulated by the Gaming Policy and Enforcement Branch which falls under my Ministry.

It appears that you are proposing the private sector take over the lottery responsibilities currently performed by the Corporation, including the conduct, management and operation of the lottery system. Although it is possible for the Province to designate a non-government body as an agent of the Crown to conduct and manage the lottery system on behalf of the Province, the Province is not prepared to consider such a change to the current model given the inherent risks and liability issues involved.

Thank you for writing.

Yours truly,

John Les
Solicitor General

pc: The Honourable Carole Taylor

***

November 5, 2007

The Hon. Carole Taylor MLA
Minister of Finance
Room 153
Parliament Buildings
Victoria, BC V8W 9E2

The Hon. John Les MLA
Minister of Public Safety and Solicitor General
Room 236
Parliament Buildings
Victoria, BC V8W 9E2

Dear Minister Taylor and Minister Les:

Re: Project Windfall

We refer to our letter of April 22, 2007, a copy of which is enclosed for your information.

We enclose herewith a brief summary of those American States that are proposing to lease or sell their lotteries to commercial operators. We pass this on to you for your information.

Yours truly,

CLARK WILSON LLP

Lyalll D Knott, QC

LDK/lmf

Encl.

cc: Tim Philpotts

***

With the Compliments of
Lyall D. Knott, Q.C.

Please see the attached Article from BBC News.

RECEIVED
MINISTER OF PUBLIC SAFETY
AND SOLICITOR GENERAL

FEB 12 2008

Leave a comment

Copyright © 2004 - Public Eye Mediaworks. Reproductions of any portion of this Website are permitted only with the expressed permission of Public Eye Mediaworks.
Canadian Web Hosting graciously provided by dotcanuck Web Services. Layout and graphics courtesy of Art Department Design.