Ontario’s big gaming gamble

Revitalizing Ontario’s aging gambling operations is supposed to create jobs, modernize facilities, and pump billions of dollars into the provincial economy, based on a 2012 plan that creates a new ownership model and invites the private sector to share the risk.

Yet the transformation of a gaming sector that contributes some $2 billion a year to Ontario’s coffers is only just getting off the ground, with last year’s award of the first of seven management and modernization “bundles” to a consortium majority owned by British Columbia-based Great Canadian Gaming Corp. The slower than expected pace reflects changes in the Ontario government and at the helm of provincially owned Ontario Lottery and Gaming Corp., as well as what lawyers see as miscalculations about the likely public support for elements of a new business model that initially envisaged such things as scrapping a slot machine bonanza for horse racing and building a glitzy, new casino in downtown Toronto.

“When it’s all said and done, every single facility across Ontario — we’re looking at 29 facilities — will be operated by the private sector, and the model will be such that the OLG will stay on top of the pyramid in terms of being the operating mind. But new contracts will be issued and the model will be slightly different from what it was in the past,” says Ilkim Hincer, co-chairman of the gaming industry group at Osler Hoskin & Harcourt LLP. “The development risk and the development cost will be transitioned to the private sector.”

The proposed changes were first discussed in 2010 and detailed in an OLG review from March 2012 called “Modernizing Lottery and Gaming in Ontario.” The report said the OLG would retain “control and accountability” of gaming while private sector players would look after day-to-day operations, including staffing, and would pay to expand, improve, and maintain casinos and other facilities. That continued controlling role for the OLG meets the terms of s. 207 (1) (a) of the Criminal Code of Canada in that only the OLG (as an agent of the province) may conduct and manage gaming in Ontario.

“In 2017, OLG is a modern, sustainable organization,” the report predicted. “There are some 2,300 net new lottery and gaming industry jobs and an estimated 4,000 service sector jobs; about $3 billion has been invested in private capital in Ontario; and OLG has increased net profit to the Province by an additional $1.3 billion annually — all while upholding responsible gambling standards.”

Hincer, who joined Oslers after a career that included stints as general counsel for the firm that operates Ontario’s Casino Rama and for Trilliant Canada Gaming, says there are many reasons why the OLG plan has progressed only slowly, and it is too early to say if the ambitious forecasts for jobs, profits, and investment will be realized. The proposed new rules for slot machines at race tracks prompted a backlash from the horse-racing sector, while the departure of Ontario’s then-premier Dalton McGuinty forced some rethinking of the overall proposals. Hincer notes that the forecasted  $1.3 billion in additional net profit has already been revised down, reflecting changes to those race track slot machine proposals, while investment could end up at $2 billion rather than $3 billion.

“I think perhaps OLG might have been overly optimistic in its initial business case analysis on what this might look like,” Hincer says. “I think we are at an interesting phase where things will pick up. There’s a lot of capital market interest here. There is a lot of activity. When it’s all said and done, with 29 facilities being run more efficiently, it will absolutely lead to more net profit to this province.”

The OLG says the forecasts in the 2012 report were based on the information available at the time and were never a guarantee.

“Modernization has evolved, although the business objectives remain the same,” spokesman Tony Bitonti said in response to questions submitted by e-mail. “Our procurement process is projected to end later than initially scheduled, with modernization being fully implemented in 2018-19 — one year later than planned.”

He gave no figure for current expectations for private sector investment, but added: “At a time when governments across Canada, and globally, are facing deficits, it makes sense to look to the private sector to make these types of capital investments. Once modernization is fully implemented, OLG’s dividend to the province will increase and remain sustainable.”

Bob Bauer, senior partner in the commercial real estate, infrastructure, and corporate/commercial practices at Davies Ward Phillips & Vineberg LLP, sees parallels between the promise to involve the private sector in Ontario gaming and the public-private partnership model that Ontario and other provinces have used for major infrastructure projects. The model allows private firms, or a consortium of firms, to bid to build a facility, and the winner often gets an operating/maintenance contract that could run for several decades. In the gaming model, the successful bidder will effectively own the facility for the term of the decades-long lease, and also pay to keep the facilities up to date.

“The pure [PPP] model is not to have any ownership interest in the hands of the private sector,” Bauer says. “The risk is shifting, but it’s shifting even further. It’s putting ownership in the hands of the private sector . . . . The new operator is going to acquire the assets, the land, and whatever structures are there, and have to fund the capital expenses of building whatever they are going to build.”

The successful tender is followed by a period of perhaps 20 years with a “fixed rent formula” to Ontario. “The risks have increased because they’ve taken on the risk of building these things, owning them, worrying about budgets and overruns,” Bauer adds.

The initial OLG document included plans for a gaming facility in the Greater Toronto Area, describing it as a way to meet unmet demand and to increase municipal revenues, and investors’ hopes initially centred on a Toronto casino. But Toronto City Council rejected that idea by 40 votes to four in a 2013 vote.
Then-mayor Rob Ford had been a strong lobbyist for the proposal, which he said would create jobs.

“I think the OLG was a bit overaggressive in relation to the zoning issue and the attitude of the Toronto City Council and it took a little while for that to play out,” says Michael Lipton, a partner at Dickinson Wright with experience in compliance, governance, and due diligence within the gaming sector. “It’s only now it’s somewhat resolved, although for the Greater Toronto area rather than for downtown Toronto.”

In the already allocated eastern Ontario bundle, Great Canadian’s Ontario Gaming East LP unit gets the right to operate existing eastern Ontario facilities for 20 years and to build and operate a new facility, in Quinte or in Belleville. The firm will provide guaranteed annual payments to the OLG, which remains in overall control.

Yet observers see neither a huge need to rush to complete the gambling sector transformation nor the remotest chance that Ontario will become a Las Vegas of the north, with the huge concentration of casino and non-gambling operations that Sin City has to offer.

“Vegas is a heavy concentration of very glitzy iconic casinos that offer not only gaming but other similar and equally important types of entertainment,” says Lipton. “Ontario wants gaming to be part of the fabric of the province, not to have it stand out in the same way as in Vegas.”

He says simultaneous rollouts of contracts for different bundles could cause problems. “It’s important that you budget the time frame when these things occur so that you can ensure that it is operating in the most efficient and reasonable way. If you take too much on, then I think it’s going to gum up the process for others. Go slow, but make sure it’s at a reasonable pace, that you are doing all the right things; you are protecting the public, making sure that investors have a reasonable rate of return. If you rush it, mistakes will occur, and that’s when it gets problematical because you could have lawsuits and they will go on for some time.”

Don Bourgeois, a principal of advisory group Gaming & Regulation Group Inc., says the OLG modernization is shifting Ontario toward a model that is more consistent with what’s happening in the rest of Canada, although each province is keeping its own unique features.

“Ontario is one of the larger gaming markets in North America and, from that perspective, will always be of interest to both Canadian and non-Canadian gaming companies,” he says, forecasting interest from several operators in each of the remaining Ontario bundles. “The private sector tends to be more responsive to consumer preferences than does the public sector. My expectation is, therefore, that the public will be a beneficiary of the change to a more private sector operational model.”