Sovereign risk refers to the possibility that government can change legislation so that they can seize property without any possibility of adequate compensation.
Tony Harris in today’s AFR (subscription required) argues that no issue of sovereign risk arises because Tabcorp and Tattersall’s gaming licences were not renewed by the Victorian Government.
Gaming licences have a finite life. Those applying to Tabcorp and Tattersalls expire in 2012. This expiry date is cited in Tabcorp’s annual reports.
Non-renewal is not an instance of sovereign risk.
Victoria’s gaming law provides that if a new licence is issued the holder of the former licence is entitled to a payment equal to the value of the former licence (Tabcorp claims its licence is worth something less than $600 million) or the premium paid by the new licensee whichever is the lessor. Depending on the new arrangement the compensation might be nothing or a small amount – there is no implication it will be $600 million.
If the companies dislike this ruling they can sue but I don’t think their chances are good – a letter from then Treasurer Allan Stockdale in 1995 to the companies states clearly that the companies must expect changes in the way the industry is run. Quote: ‘I must, however, make it clear that the statement of principles in this letter does not bind this government or future governments, and, of course that the Victorian Parliament has the power at any time to amend existing legislation or pass new legislation affecting your operations or the terms on which those operations are conducted’.
The market value of Tattersalls and Tabcorp declined by $1.3 billion and $1.8 billion respectively after the government announcement. To quote Harris: ‘Shareholders of Tabcorp, and probably Tatts, were mugged by unwarranted expectations, not by sovereign risk or lack of information’.
The view of commentators such as Stephen Bartholomeusz that the government’s decision not to award compensation is ‘immoral’ seem misplaced. On issues of morality I think it is reasonable to ask why Joan Kirner gave such a huge profit entitlement to two private companies in the first place and why Labor politicians and party hacks have been feeding off the gaming industry ever sense. One could also ask why investors in these companies came to adopt the view that the companies were entitled to compensation were licences not renewed. (112)