By NATARIO McKENZIE

Tribune Business Reporter

nmckenzie@tribunemedia.net

The Asure Win web shop yesterday blamed the budget’s tax hikes for the closure of 11 sites, and termination of 50 staff, by the end of June amid warnings the sector is not “hyperprofitable”.

The domestic gaming operator, in a statement issued yesterday, said the 82 percent increase in its tax rate had forced it to take “a sobering review” of its operations to eliminate locations that are either marginal or “underperforming”.

Asure Win added that it had yesterday informed the Gaming Board, the industry regulator, of its “intention to close 11 locations nationwide at the end of June” as its increased tax burden forces it to “make some fundamental business decisions concerning the future sustainability of our operations”.

Pointing out that the closures’ impact will extend beyond its staff, the web shop chain added: “It is anticipated that these closures will result in the termination of approximately 50 employees, as well as the termination of property leases which facilitate these locations.

“The domestic gaming industry is a competitive market with high operating costs. In some instances, these locations identified were already underperforming. With the proposed tax increases in the 2018-2019 budget, a sobering review of our operational costs and structure led us to take this preemptive action.”

Asure Win warned that further closures and job losses may follow depending on a review of its business by unnamed “external auditors”, who will conduct an analysis of the increased taxation’s likely impact on its model.

“Once those assessments have been completed, the results will dictate any further action,” the web shop warned.

Asure Win’s move is likely to be seized upon by the wider domestic gaming industry and the government’s political opponents that the sector’s worst fears in relation to the budget tax hikes are already coming true within 24 hours of the 2018-2019 budget’s passage.

A consultant’s report previously commissioned by the Bahamas Gaming Operators Association (BGOA), the industry body, previously forecast that around 2,000 jobs and 192 web shop locations would be lost if the Minnis administration went through with tax hikes it branded as “expropriation” and an attempt to seize control of the sector under the guise of taxation.

Should that forecast come true, the web shop industry will lose around three-quarters of its jobs and locations based on BGOA figures. Gershan Major, the Association’s chief executive, yesterday said each of the seven licensed operators will be forced to make hard decisions concerning their business models as a result of the tax hike.

“Each licensee will have to look at their own operations and make some fundamental business decisions concerning the future sustainability of their individual operations as a result of the proposed tax increase,” he told Tribune Business, parroting Asure Win’s line.

Dionisio D’Aguilar, minister of tourism and aviation, did not return Tribune Business’s calls and messages seeking comment before press deadline last night. However, he is likely to argue that the Asure Win closures were inevitable even before the Budget’s tax increases, as technology and competition were already driving industry consolidation.

“There are three of the seven gaming houses that are either too small or have been increasingly losing market share over the past three years that, unless something dramatic occurs, I expect them to begin to close locations,” Mr D’Aguilar said in his Budget communication last week, although he did not name them.

“So, when it happens, Mr Speaker, I do not want the people to cry shame on the Government. With the advent of technology and the building of bigger and more splendid locations, the smaller players in the market are slowly losing market share.

“Mr Speaker, I expect that, in a few years, the number of locations will be significantly less than they are now as the number houses move more of their business online. Players will be able to sit at home, log on, transfer cash from their bank account into their gaming accounts, game and transfer money back from their gaming account into their bank account. Remember that just four to five years ago there were 635 locations, and now there are 363. That downward trend is expected to continue.”

Mr D’Aguilar suggested that the seven licensed web shop chains, earning a collective $50 million in annual profits, have deep enough pockets to withstand the tax increase. And the divisive issue of web shop gaming is likely to be highlighted by the Government’s supporters, and industry’s opponents, arguing that the Asure closures are nothing more than ‘good riddance’.

But the web shop industry’s consultants, Christiansen Capital Advisors, emphatically rejected as untrue perceptions that the Bahamian gaming industry is massively profitable despite an earnings before interest, depreciation, taxation and amortisation (EBITDA) margin of 26 per cent.

The consultancy, which has focused on gaming and wagering in 50 different markets, said found in a June 11, 2018 study that Bahamian web shops paid out 59 cents of every $1 dollar earned in staff payroll, marketing and operational expenses costs. The remainder was taken up by existing government taxes, fees and charitable contributions.

“There are two misconceptions regarding gambling businesses,” the Christiansen study, commissioned by the BGOA, said. “The first is that they are hyperprofitable compared to other businesses and can shoulder any tax imposed on them. The second is that demand for gambling is price inelastic. Neither is supported by evidence or the academic research.

“The bulk of gaming revenues are used to pay the salaries of Bahamian workers and support the profitable operation of other Bahamian businesses. Another significant portion goes to government in the form of taxes and fees, and for charitable causes.

“Gambling operators earn approximately 26 cents of every dollar, which is a respectable margin, but not extraordinary, and a world away from hyperprofitability.”

The report also warned that the likely first reaction of Bahamian web shop operators to any tax increases would be to cut costs through closing marginal or unprofitable locations, resulting in significant job losses.

“The combined impact of declining revenues and a higher tax rate will undoubtedly lead to downsizing and the closing of marginally performing locations,” the Christiansen study warned.

“In a first quarter 2018 performance review, the largest operator of gaming houses, Island Luck, identified 14 marginal performing locations and 26 marginally performing franchisees representing estimated gross gaming revenue of approximately $37.3 million, or 35 per cent of gross gaming revenues.

“If these new tax rates go into effect, these identified locations will almost certainly be forced to close, and as this review was conducted before these new taxes were proposed, there could be more locations forced to close as well,” Christiansen added.

“Island Luck had 54 store locations and 62 franchisees in 2017. Thus, these marginal operations constitute approximately 26 per cent of Island Luck’s stores, and 48 per cent of its franchisees.

“If we assume that other operators on the island have a similar ratio of poor performing locations and franchisees, that means that these new taxes will likely lead to the loss of 69 stores and 711 employees at 10.3 employees per store, and $13.5 million in wages and indirect employment of 114 indirect jobs and between $2.1 million in wages.”

Pierre Dupuch, the former Cabinet minister and MP, yesterday expressed concern that the Government was seemingly “targeting” the web shop industry for taxation - a move that set a dangerous precedent.

“The amount of money the institution makes is irrelevant, so long as it is legal. So to pick out any institution which it licenses to ‘stick it to them’ is wrong and leads to instability,” he warned in a statement.

“It sets a serious precedent. If you make money, and the Government decides to single you out to tax you, it is unacceptable. It may look good to some but it sets a serious and dangerous precedent. Every time the Government passes a law a precedent is created.”

Mr Dupuch also hit out at the taxation for being discriminatory, adding: “What the precedent says is that anybody who the Government perceives to be rich can be selected. They didn’t say the gambling industry because that would include the foreign-owned gambling casinos. Instead, they singled out Bahamian-owned gambling operations.

“Isn’t that interesting? To the foreign-owned gambling operations they say ‘yes sir, boss’, and to the locally owned gambling operations they say ‘let’s stick it to them’. If they can do it to gambling they can do it to the grocery store or anybody else. In an already-fragile economy this is a scary proposition.

“For example, if an investor sees an opportunity to invest under a certain tax regime in the Bahamas, and invests accordingly based on the tax regime, only to find that the Government changes it midstream, the investor could lose their investment and therefore would not invest in new businesses. I know of what I speak. It happened to me. Uncertainty, is the biggest problem to get Bahamians to invest. We make all kinds of concessions to foreign institutions, but no concessions to Bahamians.”