Liberalization of the Lottery Market in Brazil *
In Brazil, until 1941, games involving betting were not regulated by the State. That year, with the publication of the Law on Criminal Misdemeanors (Decree-Law No. 3,688, of 1941), the exploitation or realization of any “gambling game” that was not authorized by the government became a misdemeanor. In other words, as of 1941, the government started to have the legal and exclusive competence to authorize the realization of a “gambling” or “game of chance”, as it is often referred to.
In the aforementioned Decree-Law of 1941, the “game of chance” was legally defined as: a) the game in which the gain and loss depend exclusively or mainly on luck; b) bets on horse racing outside the racecourse or where they are authorized; c) bets on any other sports competition.
In 1946, through Decree-Law No. 9,215, gambling was prohibited, with the exception of Lotteries, revoking any authorization granted by federal, state or municipal authorities. As a result, about 70 gambling houses, including casinos, were closed. Among the justifications for such a prohibition are the moral and religious tradition of the Brazilian people, as well as possible harmful abuses to good customs.
In turn, through Decree-Law No. 50,954, of July 14, 1961, the administration of the federal lotteries was transferred exclusively to Caixa Econômica Federal (CAIXA). In other words, before 1961, private concessionaires operated or operated federal lotteries, and from 1961 onwards, CAIXA had a monopoly on federal lotteries.
Thus, since 1946, the only game with a bet, or game of chance, legalized in Brazil is the lottery and this started to be operated exclusively by CAIXA at the national level, starting in 1961. It is worth mentioning that, worldwide including the developed lottery, it is understood as a “game of chance” with a social purpose, materialized in the allocation of part of its revenues to some governmental area. Such destination is a way to compensate society for any negative externalities.
In order to have a better understanding of what a lottery means from an economic point of view, it is important to understand that, by legal construction, the amount of revenues of a lottery (R) is divided into three parts composed of one: i) percentage “X” intended for the government; ii) “y” percentage, to the operator (company responsible for the management or lottery operation) that manages the lottery; iii) “z” percentage, to the bettors' payout, so that: R = x + y + z = 100%.
Given that the government gets an “x” percentage of revenues, it naturally becomes a “partner” in any lottery. Thus, the performance of lottery products is directly of interest to the government. In fact, the greater the amount of lottery revenue (R), the greater the amount of resources destined to finance some government social area (x).
The management of the Ministry of Finance in the period 2016-2018 understood how strategic this “partner” is. In addition, it inferred that the lotteries operated exclusively by Caixa historically account for 0.2% of GDP (R$ 16.7 billion -US$3.05bn- in 2019), with a distribution of 0.08% of GDP (R$ 6.5 billion -US$1.2bn- in 2019) for the government, without showing any structural growth over time.
When comparing the national lottery collection with that of other countries, it is worth mentioning that the amounts collected with the federal lotteries are much lower than the world average. In several countries, with a moral and religious standard similar to Brazil, the lottery collection reaches 1% of GDP (R$ 73 billion -USD13.3bn- in 2019). In other words, there is great potential for growth in the lottery market in Brazil.
Consequently, the reason for this paralysis in sales was diagnosed, in order to take steps to improve the performance of lottery collection, even contributing to the fiscal adjustment then underway. There were three problems diagnosed: i) confused legal framework; ii) sector based on a state monopoly; iii) absence of two lottery modalities, considering the four existing ones, according to the World Lottery Association (WLA), the main world association for lottery regulation.
In fact, according to the WLA, there are four lottery modalities: i) Numerical Prognostics - whose products the bettor tries to predict which numbers will be drawn (ex: Dia de Sorte, Quina, Lotofácil, Lotomania, Dupla Sena, Timemania); ii) Instantaneous - shows, immediately, by scratching a coupon in a virtual or physical medium, whether or not the bettor was awarded a prize; iii) Sports betting “pari-mutuel”; and iv) Fixed-odds sports betting.
Sports betting are those in which the bettor tries to predict the outcome of sports games, existing in the "pari-mutuel" (eg Loteca and Lotogol) and "fixed-odds" formats (fixed quotas, as translated in Brazil). In this format, when placing the bet, the bettor already knows the prize which he will be entitled to for each real effectively bet; in that, the bettor's gain is known only when the sporting events are over.
In Brazil, therefore, only two modalities are operationalized: Numerical Prognosis and Sports Betting in the “pari-mutuel” format.
In view of this scenario, in 2017, after a few months of diagnosis, due to the importance of prospecting greater revenue from lotteries, in view of the expansion of resources (greater budget revenue) for government areas, the Ministry of Finance (MF) prescribed the following remedies to combat the problems diagnosed in the lottery market: structuring its legal framework, opening to competition and implementing the two missing lottery modalities.
In relation to the legal framework, the MF articulated with the interested government areas (Public Security, Sports and Culture) the edition of Provisional Measure 846 (PM 846), published on August 1, 2018 and approved by the National Congress at the end of November of that year, becoming Law 13.756, on December 12, 2018. This Law standardized the distribution of resources in a single legal framework, previously diffused and spread across fifteen legal norms.
By unifying the legislation, in addition to increasing the payout of all lottery modalities, aligning them to the averages observed in developed countries, Law 13.756 / 2018 solved a deficiency in the legal framework, which had a nominal totaling that varied from 104.5 % up to 115% in the distribution of the collection of lotteries. It was necessary to make a rule of three to reach 100% of the resources effectively distributed.
In addition, the spread of legislation obscured the notion of trade-off for parliamentarians and society as a whole, as it was possible to allocate resources to some area of the government without realizing that the portion allocated to the other would be decreasing. In addition, the confusion of legislation led to frequent payout reductions, with negative consequences for the lottery's attractiveness.
Regarding the prescription for opening to competition, we opted for the concession to the private initiative of the Instant lottery modality, whose bets are placed through a ticket with covered fields that, once scratched, the bettor can win a cash prize, in physical products like cars and computers, or even a combination of both. This modality existed in Brazil until 2015, but was discontinued, nationwide; therefore, there is no type of operation of this service at the federal level.
This discontinuation occurred as determined by the Federal Comptroller General, who pointed out that there was an inadequate legal instrument for its operation. At the same time, Federal Law No. 13,155 / 2015 authorized the federal executive branch to establish the Public Service for Exclusive Instant Lottery (Lotex).
The instant lottery mode is the second most important in the world lottery market, accounting, on average, for 25% of that sector. In Portugal, this modality reached half of the lottery market. There is no doubt that the instantaneous modality is one of the most important in the world and the Brazilian government, when opting for its concession to the private initiative, held in October 2019, was guided in the hope of similar success in Brazil. There were three reasons for this expectation on the part of the Brazilian government.
First, the modeling for Lotex's operation is in line with the best international lottery operating practices. By the way, what is observed in the main global markets is that the role of the State in the lottery business is limited, in general, to regulation. In the operation, when present, it acts in two ways: i) contract manager (outsourcing all links in the lottery operation's value chain); or ii) granting power for the private initiative, which was the option chosen by the federal government, in the case of the Lotex concession. Brazil has never operated the instant lottery mode in either of these two ways.
Second, the provision of this public service will be at the expense and risk of the concessionaire Estrela Instantânea (consortium formed by the two largest lottery companies in the world), with the absence of any subsidy or intervention by the Union in the management of the business, directly or through its state-owned companies. In other words, the referred consortium is fully responsible for making Lotex's exploration viable. It is also important to highlight that the Union will be a partner in this success, since it will receive 16.7% of the ticket sales value, in addition to the collection of taxes on the concessionaire Estrela Instantânea (completely private) and income tax on the biggest prizes.
Third, before 2015, when there was an instant lottery operation in the national territory, the value of ticket sales that returned in the form of prizes for the bettor, the so-called payout, was less than 40% of the total value of sales, sold in about 13 thousand lottery units. In the new legal framework, the payout became 65%, which means bigger and / or more frequent prizes, and the sale can be made at other points of sale, physical and virtual, reaching more than 65 thousand points sales, distributed throughout the national territory. This put Lotex in line with the payout and instant lottery marketing channel observed in developed countries.
Given the above characteristics and the entry into the Brazilian market of two operators who have worked with this service in different countries for decades, there is no way to look at previous experiences of instant lottery in Brazil to project the future of this lottery in the country. Therefore, Lotex is a completely new project, a greenfield operation in the technical language of the investment plan, which, due to COVID-19, should start operating at the threshold of 2021, generating approximately 15,000 direct jobs and contributing to the recovery of Brazilian economy after COVID -19.
It is also worth noting that the entry into operation of Lotex will mean the beginning of the liberalization of the national lottery market, after almost 60 years of CAIXA's monopoly, since there is competition between the four lottery modalities, as widely evidenced in international literature, the example of Clotfelter & Cook, 1989, also representing an increase of more than R$ 1 billion (us$182m) in the annual budget of the Ministry of Public Security.
There is no doubt that, from the point of view of the Union's public interest and transparency, the concession of Lotex at auction for a period of 15 years, similar to that observed in other countries, was the best way for the modernization and growth of lotteries in Brazil and it will benefit significantly not only the investment in public security, but also in sport and culture.
The subsequent step towards the complete liberalization of the national lottery market is the regulation of sports betting in fixed-odds, which will complete the set of four lottery modalities in operation in Brazil, according to the WLA concept. It is also worth mentioning that Law 13.756, of 2018, which legalized such bets in Brazil, has already provided for authorization in a competitive market structure, ruling out any possibility that CAIXA (or any other public entity) requires exclusivity for its operation.
The regulation of such bets will further expand competition in the lottery market, since there is competition between lottery modalities. According to the deadline stipulated in Law 13.756, of 2018, the Ministry of Economy will have until 2022 to regulate it. It is reiterated: with this regulation, together with the two lottery modalities operated by Caixa and with the entry into operation of Lotex, the lottery market will be complete (with all four modalities in operation) and completely liberalized.
With these achievements made by the Ministries of Finance and Economy in the last four years, it is estimated that, in the near future, in the basic scenario, the lottery sector will jump from 0.2% of GDP to approximately 0.5% of GDP and the share of lotteries destined for government areas jumps from 0.08% of GDP to 0.12% of GDP - in a competitive environment, with revenue growth, modernization, innovation and job creation.
It is expected that, with the implementation of a competitive and modern lottery market, it will be relatively easy for society to accept the legalization of the casino and other types of gambling modalities, increasing the level of employment and income of Brazilians. Finally, the full liberalization of the national lottery market is a necessary and fundamental step, for the liberalization of the gambling market to take place (as a whole), as seen in European countries and in dozens of American states.
Finally, it should be noted that the basis for a broad and competitive national lottery market was structured, but it will only be consolidated if regulation is strengthened, with the attraction of technicians provided with public spirit and integrated into some public career, enabling technical regulation, agile and modern.
Source: *Alexandre Manoel Angelo da Silva, economist at Ipea, former national lottery secretary of the Ministries of Finance and Economy. Article published on the Fernand Braudel Institute of World Economics website
