Juha-Pekka Valkama, The Finnish Slot Machine Association

1 Judgment of the EC Court of Justice
There is a monopoly system in Finland in slot machine operations under which exclusive right is given to the Slot Machine Association, which is commonly known as ”RAY” according to the abbreviated form of its Finnish name. Founded in 1938, the purpose of RAY's gaming activities is to procure funds to support the work of voluntary health and welfare organizations.

In a judgement 21 September 1999, the European Court of Justice stated that RAY's exclusive right to operate slot machines in Finland is not in contravention of EU legislation and does not violate the freedom to supply services. The Community provisions relating to freedom to provide services do not preclude national legislation which grants to a single public body exclusive rights to operate slot machines, in view of the public interest objectives which justify it.

The Court's view is that the Finnish legislation involves no discrimination on grounds of nationality, inasmuch as it applies without distinction to all economic operators, whether they are established in Finland or in another Member State. The Court also considers that it is for each Member State to assess whether it is necessary to adopt regulations imposing a code of conduct on the economic operators concerned or, alternatively, to grant an exclusive operating right to a licensed public body. Whichever option is chosen, it must, if it is to comply with Community law, be proportionate to the aim pursued.

The Court considers that the restriction on freedom to provide services, which is designed to limit the risk to the social order inherent in gambling, is justified, since it is intended to protect consumers. The Court found that the solution adopted in Finland, to grant to a single public body exclusive rights to operate slots and to place a strict limit on the lucrative nature of that activity, is not disproportionate to the objectives pursued. Limited authorisation of such games on an exclusive basis has the advantage of confining the desire to gamble and the exploitation of gambling within controlled channels, of preventing the risk of fraud or crime in the context of such exploitation, and of using the resulting profits for public interest purpose falls within the ambit of those objectives.

In addition to the Court, the European Commission also has taken a favourable stand on the monopoly of RAY. In autumn 1996 the Commission’s Directorate General IV made a statement as an ansewer to a complaint against the Finnish government and RAY regarding RAY´s monopoly. The Commission states: ”Establishing a State monopoly for a type of gambling seems to be a legitimate way of controlling, and using for the public benefit, habits which need not be suppresessed, but which cause harm if they are exploited by unscrupulous operators, and therefore the establishment and existence of the monopoly seems justified and does not seem disproportionate to the objective sought.”

2 The Finnish gaming market
Gaming is very popular in Finland, and virtually all of the most common forms of play are available from lotto to casino games and from slot machines to betting. Finland has only 5,2 million inhabitants, but in terms of per capita the sums collected from money games are one of the highest in Europe. In sports betting games (pools and odds betting) and in slot machines Finland is number one in Europe and in lottery games Finland holds the third place.

The purpose of all forms of gaming in Finland, as laid down in the Gaming Act, is to procure funds for charity or other ideological purposes. Different types of gaming are divided between three operators, each with a monopoly in their respective field.

RAY's gaming operations are restricted to Finland and consist of 15 300 slot machines in 9000 locations: restaurants, bars, service stations, kiosks and shops; 46 gaming arcades with about 1500 slots and 50 low-stake casino table games; 300 low-stake casino table games in restaurants; and one middle size international casino in Helsinki. In year 2000 RAY's gross revenue of gaming operations would be about 560 million euros. Slot machines account over 90% of it. RAY also has its own electronics plant which makes slot machines. RAY has a staff of around 1700 of whom half are part-time croupiers.

3 Monopoly and tax models as means to get money for the public good

In Finland slot machine operation is a monopoly of charity and in Sweden a monopoly of state; although in Sweden the business just started some years ago and is so far small. In other European Union countries where slot machine operation in single sites is allowed, it is in the hands of private companies and the interests of society are defended by separate watchdogs.

Our position is that competition in the gaming market does not benefit the society as a whole in the same way as does a monopoly. In addition to the advantages of confining the desire to gamble within controlled channels there are the economic advantages, that are the main object of this presentation. For purely tax technical reasons we get more money for public good with the mono-poly system than with any tax model. In addition comes the economic benefit of large clientele.

RAY pays the government a modest 3% in gaming tax. However, all the profits go to the charity. In taxation countries the state taxes gaming operations by imposing a fixed and/or relative tax. In addition there are some license fees. The figure enclosed shows some results for selected coun-tries. The figures shown are based on articles published in various journals, on annual reports etc.

In the monopoly system we have in Finland, over 70% of the slot machine gross revenue can be used for public good. In countries relying on the tax model the share is half, even in the best of cases. As the comparative gross revenue of slot machine operation in Finland is the highest in Europe, though the machines are comparatively rather few, the sums collected from slot machine operations for the public good in terms of per capita are superior in Europe.

4 An estimation about fixed and relative tax models
The basic problem of taxation is the special feature of slot machine business: the same machine with nearly the same operation costs can in a good site make tenfold or even much more compared to another site.

In the figure You can see RAY´s takings of single site slot machines sorted by takings. The best earning 10% of machines make more than 4400 euros a month; the best earning 20% more than 3400 euros a month and so on. The distribution of takings is the consequence of many different objects we have to notice in our marketing. So the distribution is maybe somewhat different to what could be the case without the monopoly. Still it is not presumable that this difference is very outstanding.

Operation costs of a RAY slot machine are about 130 euros a month fixed costs plus 22% of gross revenue variable costs. Fixed costs include all kinds of fixed expenses and depreciations. Variable costs consist from 17% space rental, 2% variable operation expenses and 3% gaming tax. So the break-even point of a slot machine to RAY is about 170 euros a month. From the amount under 170 euros, 3% goes to the gaming tax and from the amount over 170 euros altogether about 81% goes to the public good.

You can see from the figure, that the high revenue machines make huge sums for the charity. But also the comparatively low revenue machines make fairly good money to the public good.

In the upper figure slot machine money flows are considered from a point of view of 10% groups. If we look at all 15 000 machines we get the figure below. In the figure the whole coloured area indicates the gross revenue. The operation costs´ proportion is rather small. The green area, space rental, is clearly larger than it. The absolutely largest black area indicates the amount of money which RAY allocates to the public good.

In tax systems the situation is different. Whatever the tax model is, the best earning machines make big profits to operators or site owners. And because of the tax, the break-even point is much higher than in the monopoly system. So taxation serves to limit accessibility and assortment. But at the same time there are too many uniform machines, from the economic point of view, in good places competing with each other with little or no extra value to players. We will now look up different tax models in more detail, first the fixed tax model.

On the basis of RAY’s slot machine takings and costs we can preliminarily calculate that in the pure fixed tax model the maximal amount of money for the public good will be gained if the tax is about 1700 euros a month. But we must take into account, that with this tax level more than half of the existing machines are under the break-even point. So when the worst earning machines will be removed, a part of their revenue will transfer to the remaining machines. Still, as slot machine playing in single sites is much an impulse purchase, a big part of playing will be lost.

Now if we make an estimation that when a machine will be removed, half of its takings will transfer to other machines, while the other half will be lost, we can estimate money flows in the final situation after machine removes and money transfers. You can see the result from the figure.

The estimated optimal fixed tax would would be about 1900 euros a month. Then the break-even point is round 2500 euros a month. In the estimated final situation about 44% of current slots would make over 2500 euros.

In the estimated fixed tax model the whole slot machine revenue would be about 87% of the current revenue. The sum allocated to the public good, the black area, would be about 43% of it. So the sum allocated to public good will be only half of the sum RAY now collects. The operator profit or extra space rental is as much as one third of the whole gross revenue of the estimated business. So the fixed tax model is a very good model to the private operators and site owners.

Fixed tax is used as a main taxation form for slot machines for instance in Spain. The fixed tax of a slot machine in Spain forms a somewhat similar proportion of the average taking as the estimated optimal fixed tax in the estimation based on the Finnish situation.

With the same presumptions as above it can be estimated that in pure relative tax model the opti-mal tax should be 69% of taking. About two thirds of the current machines would make over the break-even point. The sum allocated to the public good would be about 13% smaller than the sum RAY now collects with the monopoly model. This 13% is somewhat more than RAY´s all own slot machine expenses, excluding space rental. So even though it could be partly true what is sometimes said, that a monopoly is less effective than competition of private companies, it has margin to be it: even if monopoly´s own operation costs would be twice as high as the costs of private operators, monopoly is still the best way to get money to the public good.

Despite the fact, that after the monopoly model the pure relative tax model is the optimal taxation model from the point of view of maximizing the sum for the public good, nearly all taxation countries use some kind of combination of fixed and relative tax. We suppose, that the main reasons to use fixed tax are, that authorities get easily at least some tax money from the operation without troublesome inspecting of slot machine counters. Also the risk of tax frauds is smaller.

5 Playing on slot machines and public opinion
Taxation technical superiority is not the only big economic advantage the monopoly model has. Another one lies in the factor of popular support and acceptance. In a situation where the profits are channelled in full to the charitable purposes, far larger numbers can accept the operation and therefore far larger numbers are involved in playing than in a situation where the profits are taxed and entered into the state budget and where private businesses reap the profits. These arguments have been tested in studies that RAY has commissioned in interesting countries.

RAY has done interview studies in Germany, Great Britain, Spain, Netherlands and Finland to measure the public opinion on slot machine operations and the clientele of slot machines in the EU countries that have remarkable slot machine operation. A corresponding study has been carried out also in Norway and in Australia: in Norway to get in the comparison all the important slot machine countries in the European Economic Area; and in Australia to examine the situation in the country, where slot machine gross revenue per capita is the highest in the world.

The general attitudes towards slot machine operations were measured with the question: "Do you think that the number of slot machines in our country is suitable or should their number be changed?" To measure the number of people who play on slot machines, the respondents were asked to say when they had last played. With this question form we think we can avoid suppresion of playing as much as possible.

The studies are conducted as a face-to-face study with about one thousand interviewees. We do a study in each interesting country at least every five years, but in the very intresting cases of Norway and of course Finland we do them more often. The time of each study and the research agency used are: Norway 1995, -97 and -99 Scanfact; Germany -96 GfK Marktforschung; Great Britain -96 RSGB; The Netherlands 1994 and -99 Intomart; Spain 1995 Emer GfK and 2000 Alef Millward Brown; Australia 1998 Frank Small Association; Finland 1995-99 Taloustutkimus.

The proportion of people who would want to see the number of slot machines reduced in their country is fairly low only in Finland. In the other countries those who would want to reduce the number have a majority, in Spain and Germany an overwhelming majority.

During recent years the results in Norway and the Netherlands have changed rapidly. In Norway the social acceptance is nowadays much poorer than earlier. The difference finds an explanation, among others, in the fact that today the operation of slot machines in Norway is admitted to nearly everyone who just pays 35% of gross revenue to some accepted purpose, when earlier the operation was in the hands of charity organizations. This has had many unpleasent consequences.

In the Netherlands the social acceptance is nowadays better than earlier, because among other things the number of slot machines is only about half of what it was five years ago. Also those famous ”peak machines” are not allowed in the Netherlands any more. In Spain the situation has not changed very much during recent years. The difference between the results of 1995 and 2000 maybe find explanation in the fact that the research agency has changed and therefore there are much less don´t know -answers in the year 2000 study.

Among Finns aged 15-74, last year 24 per cent had played a slot machine during the week preceding the study. This figure reflects the proportion of regular players who are the main source of slot machine revenue. In all 52 per cent of Finns had played a slot machine during the year preceding the study. The figure shows the corresponding data for all countries.

The results demonstrate, that in Finland we have much more regular players than there are in any other country. Even in Australia where slot machine gross revenue per capita is over twice as high as in Finland, the proportion of regular players is only half of the Finnish level. In Norway the proportion of players is nowadays much smaller than only some years ago. Maybe the reason to this is that the social acceptance of slot machines is nowadays much poorer than earlier.

6 In conclusion
I hope that I have been able to shed light on the question of the economic advantages of the monopoly model in slot machine operation and to demonstrate, that despite its somewhat bad name, a monopoly can in some situations be well justified. In consequence of all the advantages mentioned it is not surprising that the clear majority, over 70% of people in Finland are in favour of our current system. And that the Court and the Commission ended up taking the same view.