Rehab raises the stakes in lottery battle

Rehab’s legal skirmish with the Government over lottery funding may seem like reckless brinkmanship on the part of an organisation so reliant on State money.

By the same token, the last thing the Government wants is a legal challenge hanging over the lottery licence as it seeks to sell off the franchise.

Rehab is the State’s largest non-profit organisation, with several prominent charities and commercial enterprises operating under the brand.

It is perhaps best known for its disability charity Rehab Care, which accounts for 20-25 per cent of its business operations.

In 2011, the group had an annual turnover of €185 million, of which €54.4 million came directly from the State.

Minister for Justice Alan Shatter’s decision to pull the plug on funding for charity lotteries has soured relations between Government and Rehab, the main beneficiary of the funding.

While Rehab’s High Court challenge against the decision is being fought largely on a technicality around ministerial procedures, some see it as the opening salvo in a war over the Government’s right to license a gaming monopoly, namely the National Lottery.

The Charitable Lotteries Scheme (CLS) was established in 1997 to compensate charity lotteries, which are subject to a weekly prize cap of €20,000, in contrast to the National Lottery which pays out millions each week in prizes.

This regulatory position means that charity lotteries are essentially prevented from competing with the National Lottery. As a result, the National Lottery operates an effective monopoly with a 98 per cent market share.

Prior to the National Lottery’s establishment in 1986, Rehab Lotteries commanded 25 per cent of the market; now it has just 1 per cent.

The remaining 1 per cent share is split between a host of smaller charities, including the Asthma Society of Ireland, Gael Linn, the Irish Cancer Society, the Polio Fellowship of Ireland, the Irish Society for the Prevention of Cruelty to Children and the Irish Lung Foundation.

Rehab is the largest beneficiary of the CLS scheme and claims it will suffer the “greatest adverse impact” from its abolition. It received €4.4 million of the €6 million available in 2012, and has received around €80 million in total since the scheme began.

In the course of the two-day case last month, its lawyers argued that ending the scheme would irrevocably damage Rehab’s core activity of helping the disabled and the disadvantaged.

They maintained the CLS was necessary as Rehab was placed in an uncompetitive position as a result of the cap on its prize fund compared to an almost unlimited fund enjoyed by the dominant player in the market, the National Lottery.

Rehab believes that if the funding has to be removed, then so should the cap on prize money – essentially that the Government can’t have it both ways.

Lawyers for Mr Shatter argued that ending the scheme was necessary given the squeeze on public finances, and that the Minister’s decision had been made in the public interest.

They also maintained the scheme was never intended to be permanent and had been subject to reviews in the past.

It was claimed that taxpayers’ money, which funds the CLS scheme to the tune of 35 per cent, was being used to prop up loss-making “zombie” lotteries.

In 2012, the Irish Cancer Society’s lottery made a surplus of €94,000 but only after a payment of €190,000 from the lottery compensation scheme.

In contrast, Rehab’s lottery made a surplus of €590,000 on its own.

Rehab is seeking a number of orders from the court including that the Minister failed to act in accordance with fair procedures by failing to afford it (Rehab) the chance to make any submission before taking the decision to phase out the scheme.

Both sides have declined to speak to The Irish Times while the judgment is outstanding.

Even if there is an adverse finding against the Minister, it is unlikely he would be compelled to rescind the decision.

Mindful of this, Rehab has opened a second legal front against the Government, and one which is potentially more injurious to the sale of the lottery franchise.

In June, it sent a “Letter of Claim” to the offices of ministers Brendan Howlin and Alan Shatter and Attorney-General Máire Whelan notifying them of the group’s intention to pursue the State for damages of €1.5 billion arising from the National Lottery’s dominant market position.

The letter stated that the manner in which the National Lottery was being operated contravened European competition law.

UK consultants Oxera estimated Rehab had suffered losses of €600 million as a result of the weekly cap on its prize fund and since the introduction of the CLS.

Rehab also said it intended to seek a further €900 million in compensation which it calculated as the likely future losses it would suffer from the sale of the new 20-year National Lottery licence.

Rehab is unlikely to move on its compensation claim prior to the result of its High Court challenge becoming clear, which is expected later in the autumn.

But just how strong a case does it have?

An expert in competition law, who wished to remain anonymous, said government-granted monopolies like the lottery “do offend against competition law”.

However, he said legal precedence suggests the courts are sympathetic to restrictive practices when it comes to gambling “as there are moral and social reasons as to why governments would want to have restrictions in place”.

If it pursues a case, Rehab would have to prove that having one national lottery licence is “disproportionate to what the Government is trying to achieve”, he said.

It would also have to show “the greater good” could be achieved without a ban on competition, maybe by tightly controlling and regulating a small field of competitors.

He said Rehab could make “an arguable case” that the recent liberalisation of gambling laws was designed more around “revenue generation” than restricting the corrosive aspects of gambling.

It would have to prove the reason for the restriction on competition is not for the social good but to maximise the public purse.

While, he said, this may be true in the context of how the next licence is structured, proving it in court would be extremely difficult.

Nonetheless, he said, from the Government’s perspective, it would not be ideal to have a legal case hanging over the next licence, especially if the aim is to maximise the licence fee.

The fact that national lotteries raise money for good causes was not relevant to competition law, he added.

Rehab could either make a complaint to the Competition Authority and/or to the European Commission, or seek an injunction in the High Court on foot of its grievances.

Some international perspective can be found in the UK. Despite racking up record sales of £6.9 billion last year, the operator there, Camelot, says it may not even bid to renew its licence if it continues to face competition from another UK rival lottery.

The rival in this case is media tycoon Richard Desmond’s Health Lottery, which manages and administers prize draws on behalf of a collection of 51 smaller “society lotteries”.

Because it is structured as a collection of community-interest companies, it circumvents the law allowing for only one single operator, a situation the Irish authorities are keen to avoid.

Since it was established in 2011, the UK’s Health Lottery has been a thorn in Camelot’s side, offering identical games, with twice-weekly televised draws.

Its games are now available in 30,000 UK outlets, some 3,000 more than Camelot.

However, unlike Camelot, which gives 28 per cent of ticket sales to good causes, the Health Lottery contributes only 20 per cent. A disgruntled Camelot claims it is losing £1 million a week to its rival.

Last year, the operator, which plans to bid for the Irish licence, failed in a legal bid to have the Health Lottery’s licence revoked on the grounds that it breached the rules meant to grant the UK national lottery monopoly status, by buying a regional network of lotteries and promoting them nationally.

In its ruling, the court said: “The question whether multiple society lotteries should be permitted is a political question, to be determined by the government or parliament.”

In a recent interview, Camelot chief executive Dianne Thompson raised the prospect of not bidding to renew its licence if the situation persisted. She said the Health Lottery undermined the “entire monopoly model” on which the national lottery was based.

“As a monopoly operator, your competition is limited but so are your profits – in Camelot’s case, it takes less than one penny in the pound in profit. This ensures that the lottery fulfils its intended purpose – to raise as much money as possible for its beneficiaries, not the people running it,” Camelot told this newspaper.

“However, in an increasingly competitive marketplace, if those protections are weakened by default or are deliberately dismantled, then the whole basis of the bidding process and the licence itself would have to be completely re-written.”

Big operators, who wish to protect their monopolies, argue that if governments open the national lottery sector to competition, spending will become fragmented across several different lotteries, making jackpots smaller.

Smaller jackpots, they say, will be less appealing to players, so fewer tickets will be sold and fewer people will play, resulting in less money being raised for lotteries’ beneficiaries.

The example typically given is that a single lottery offering a top prize of €10 million will sell more tickets than 10 lotteries offering top prizes of €1 million each – even if the prize payout level is the same.

Conversely, those seeking to muscle in on the business contend that having one operator leaves the playing public vulnerable to singular pricing structures and limited game choices.

Rehab was one of the unsuccessful bidders for the State’s first National Lottery licence back in the 1980s, and it is known to a have considered a bid when the licence was renewed in 2001. Will it finally get a stake in game?