The Brazilian state of Paraiba (population c. 4m, GDP per capita c. 50% of the national average) has begun the process of licensing sportsbetting independently of the Federal government. A decree has been approved which grants the state lottery regulator licensing power.
Paraiba’s decision to progress an independent legislative path reflects the lack of progress at the federal level, despite federal law potentially requiring ‘only’ a Presidential signature to be enacted.
Paraiba's decision is likely to be bad news for the domestically regulated Brazilian gambling market, in our view. Perhaps tellingly, Paraiba’s taste for opposing federal rule it disapproves of is stitched into its state flag with the word ‘nego’, meaning ‘deny', which commemorates the state premier's revolutionary opposition to the elected republican presidential candidate in 1930; the red of the flag stands for the blood of the state premier, who was assassinated the same year, and the black for mourning. Latin America does politics somewhat differently to other parts of the world, even now - outcomes can be difficult to predict and dangerous to rely upon.
Paraiba’s decision may yet prove largely irrelevant: a state-by-state licensing regime co-exists with a federal model in Spain and is being adopted for online table games in Germany. A dual licensing model might be confusing and sub-optimal, but it is not necessarily strategically challenging. The key to whether Paraiba’s decision is strategically challenging depends upon evolving motives. There are three likely motives: timing, taxes, and control.
We flagged in a previous WP that the delay in signing the existing Federal sports betting decree might require more than simply a quick admin fix by the new President. First, the signing of a legally timed-out bill might be challenged by parties interested in seeing its failure or reform; Pariba might now be one such party.
Second, the incoming administration intends to be a lot more thoughtful than the one it replaced and the data-driven and outcomes-led approach of the new Minister for Sport, the former athlete Ana Moser, is a prime example of the shift. While Moser has said little about gambling specifically, she has spoken out about the previous government’s failure to think about what their policies were designed to achieve and what unintended consequences they may have.
This refreshingly competent approach to legislation creates good law in the end, but it does not simply reach for pen for the sake of doing ‘something’ as politicians the world over are wont to do. If the government of the relatively poor province of Paraiba has knowledge or expectation of a major Federal rethink, getting state legislation in early makes sense.
Timing motives may therefore point to a dual-track, approach, a spoiling action on Federal legislation, or an opportunistic response to a longer Federal delay than most commentators are currently expecting (people following the UK market know that ‘in the coming weeks’ has lost all common-sense meaning and might refer to any point up to an including the end of days).
If the timing motive points to a relatively open outcome, taxes are more narrow. All federal government systems create a fiscal tension between local/regional and national interests. Paraiba is a partly tourist-driven economy which is likely to see material intangible benefits from controlling the taxes generated within its borders.
Paraiba can tax instead of or as well as any proposed federal system. This either creates a much higher cost base or a conflict of access. For example, in the dual-track examples of Spain and Germany, the problem is solved by making the federal licenses online-only in Spain and carving up the online licenses by product in Germany.
A product compromise is not possible in Brazil given the dangerously uncertain status of gaming, but local licenses to gain retail access will be very important in a consumer economy which is still 35% cash-based or even higher in poorer states like Paraiba.
Local licences for local corporate banking will also be a potentially critical market share driver since offshore restrictions are unlikely to be solved just with a federal gambling licence (locally licensed offshore gambling companies face acute banking problems globally, but especially in emerging markets). Paraiba’s move therefore potentially points to a more expensive Brazilian operating model than has hitherto been factored in.
Finally, Paraiba is clearly exerting a degree of control and state control is usually catching: other states are unlikely to simply let the federal government decide if the Paraiba model gains traction. As we have seen in the USA and Argentina, a state-by-state model creates far more operating problems than a national model which only a very small handful of operators have the scale and capability to overcome (NB, at the cost line far more than in revenue terms).
If Paraiba’s decision to regulate sportsbetting independently creates similar moves by other states, then the TAM potential for the Brazilian market fragments while the cost of servicing the market increases far more than just the value of additional state taxes.
Paraiba’s decision might therefore reshape a c. US$3bn+ emerging market upon which many operators have pinned their hopes to be a value trap for nearly all concerned. One of the major problems with the last twenty years of secular online gambling growth and regulatory-catch up is that it made finding new areas of profitable growth look easy.
The world is now far more complex and dangerous for operators who take a sweeping and optimistic view of market potential, as the regional government of a poor state containing less than half the population of New York or London has just potentially demonstrated.
Paul Leyland
Winning Post - Regulus Partners
