Price controversy fuels argument against sale

If there’s going to be a controversy connected with this process, it’s likely to revolve around the price.

Since Minister for Public Expenditure and Reform Brendan Howlin unveiled plans to seek an upfront payment for the lottery licence, it's been widely speculated that the Government stands to make about €400 million from the sale, with some commentators even suggesting €600 million.

For obvious reasons, Mr Howlin has been cautious not to fuel speculation either way.

However, it seems the €400-€600 million forecasts stem from erroneous comparisons with lottery auctions in other jurisdictions, where the licence terms offered were considerably longer in duration, in some cases up to 40 years.

According to insiders, the Government is more likely to earn €200-€300 million from the sale, which amounts to about one year’s funding for good causes.

Critics will seize upon this to say the Government is surrendering a valuable monopoly concession for a fraction of the money it will generate over the next 20 years.

Revenue stream
Under the new licensing arrangements, the business is expected to make the next operator about €18-€20 million a year after prize payouts, good causes and costs, which include a fixed retailers' commission.

If the annual €2.5 million operator's fee, currently paid to An Post, is thrown back in the mix, the winning bidder is likely to enjoy a revenue stream of €410-€440 million over the lifetime of the licence. This is even before the anticipated bounce in digital sales is factored into the mix.

Based on the assumption that prospective buyers will look to pay about 10 times the annual earnings of the franchise, the exchequer can expect €200-€300 million upfront from the sale.

Mr Howlin will defend the plan on the grounds he was obliged to renew the licence, and that extracting a chunk of heretofore untapped capital from the market will help fund a vital piece of state infrastructure, namely the children’s hospital.

'Grab the cash'
The Government eschewed the option of a longer licence term, or as one observer put it, adopting "a naked grab the cash and screw the consequences" approach.

Instead it made a choice to offer a shorter licence, structured around a fixed income stream for good causes, while incentivising the operator to grow the business for good causes.

Mr Howlin believes revenue for good causes can be grown from €225 million now to €300 million within five years, on the back of more relaxed rules governing online sales, under the new Lottery Act.

The 20-year duration also gives the State the option to review the arrangements after two10-year cycles.

Nonetheless, convincing the public that the existing formula, which has already raised €4 billion for good causes, has passed its sell-by date, and that paying a private operator big money to take the business to the next level is the answer, may be a hard sell.