Public Lottery Licence Extension

Bilateral negotiations considered alongside other options

DTF, in consultation with relevant agencies, progressed options for the approach to the next licence throughout 2024. This followed government approval on 12 December 2023 that DTF undertake a confidential assessment of reform options.

Informed by ongoing research and analysis, advice provided to Ministers and the government during 2024 showed bilateral negotiations were considered alongside a competitive process. Some advice indicated that bilateral engagement was most likely to maximise value to the state.

However, nothing has come to our attention to suggest that the government or agencies were not committed to a structured process to fully consider available options, consistent with the government decision, before deciding to pursue a bilateral approach with the incumbent.

Rationale for bilateral discussions

DTF engaged a specialist commercial adviser in February 2024 to assist in the development and implementation of options for the negotiation strategy.

Informed by insights into other lottery processes and market soundings with potential operators, the commercial adviser identified several reasons why the incumbent was likely to place a higher value on the licence:

• Structural constraints on effective competition: The government does not control access to national lottery bloc arrangements, which are critical to offering high-value products. Market soundings indicated bidder interest depended on securing bloc access, making strong competition uncertain.
• Strength of incumbency: TLC’s existing position in national bloc arrangements, established products and customer base reduce its commercial risk and operating costs relative to potential new entrants.
• Limited credibility of a competitive ‘fallback': Without guaranteed bloc access, a competitive tender would be unlikely to generate strong participation or meaningful price tension.
• Ability to negotiate value through licence settings: Bilateral engagement allowed direct negotiation of factors such as licence term and risk allocation that were expected to affect the premium TLC would pay.

Government approval of strategy

Informed by agency advice, in November 2024 the government approved an engagement and negotiation strategy for the next lottery licence, including bilateral discussions with the incumbent if a reserve price threshold was met. The approval noted that the Treasurer and the Minister would agree on the reserve price threshold. A report setting out the substantive findings from industry analysis was attached to the approval briefing.

We saw nothing that gave us cause for concern that this industry analysis was not sound in terms of providing a credible basis for adopting a bilateral approach.

Analysis of bidding dynamics

The government's decision to continue bilateral negotiations depended on whether TLC's proposals exceeded reserve price thresholds. The testing of the assumptions used to inform those thresholds was therefore important for demonstrating that the decision benchmark was robust.

DTF's commercial adviser undertook modelling to estimate premiums that may be paid by different types of operators over different licence terms and lottery tax rates. The modelling was informed by other gambling licensing processes, market soundings, and the adviser's industry insights. The modelling informed the reserve prices used to assess TLC’s proposals during a bid clarification process.

The adviser considered that in a competitive process, TLC would likely bid only high enough to exceed the next best alternative rather than bid its full valuation of the licence.

The commercial adviser considered that in a bilateral process this dynamic is absent, and TLC may be willing to pay a higher premium if it could directly negotiate licence terms with the government.

Different reserve prices were set for different licence terms and lottery tax rates. They were set above the range of values the commercial adviser considered likely to be achievable through a competitive process, providing a benchmark against which agencies could assess TLC's proposals.

The thresholds were intended to ensure that a bilateral outcome would only proceed where it was expected to deliver greater value than the likely outcomes of a competitive process.

Consideration of licence term

Advice provided to agencies showed a longer licence term was expected to support a higher upfront premium by providing greater certainty and more time for an operator to realise returns on investment. The advice also noted that a longer licence term transfers the risk of structural shifts from retail to online sales to the licence holder, citing lessons from the Victorian wagering and betting licence, where market changes reduced the value of a state-based licence over time.

The commercial adviser also noted that a longer licence term would delay the next opportunity to test the market and reduce future policy flexibility. A longer licence term would also require legislative amendment (with extensions permissible for up to one year at the time of the advice).

The adviser therefore recommended assessing licence duration alongside broader policy objectives and testing different term scenarios through market engagement and price discovery. These were reflected in the reserve price framework summarised above.

The adviser also recommended that where the state is unable to maximise value with TLC, a shorter 10-, 15- or 20-year licence could be considered to reduce the incumbency and cost of capital advantage held by TLC, and to encourage greater competition from potential new entrants.

Consideration of lower lottery tax rates

The lottery tax rate is a key driver of licence value. The commercial adviser modelled the effect of different lottery taxes on expected licence premiums. Under the modelling, higher lottery tax rates reduced the value of the licence to an operator, while lower lottery tax rates increased value by increasing the cash flows available to the licensee.

This analysis informed reserve prices for the lower lottery tax rate options considered by the government.

These reserve price thresholds provided the benchmark against which the government assessed whether lower lottery tax rate options represented sufficient value relative to maintaining the current lottery tax rate.

A standard discounted cash flow approach was applied

The commercial adviser's valuation of premiums across different bidder types was based on discounted cash flow modelling. The discounted cash flow model used a standard valuation approach: forecast cash flows were generated for each bidder type over a licence period and then discounted using a weighted average cost of capital to estimate present value.

General basis for assumptions

The reserve price framework relied on a number of assumptions.

The key financial assumptions made were stated by the adviser to be 'illustrative only' of how a licensee might approach the next licence. The adviser developed these assumptions based on its insights into gambling licensing processes across various jurisdictions, and the observed bidding behaviour of incumbent licensees versus potential new entrants.

Where assumptions materially influence outcomes, it is important that they are tested against alternative evidence when possible to do so, and subject to sensitivity analysis so decision-makers can understand their potential impacts. However, for some cost assumptions used in the modelling, we did not see evidence that these practices were applied.

For finance, operating and capital costs, we did not see evidence that sensitivity analysis was undertaken which would have helped decision-makers understand the potential impact of alternative assumptions. For finance costs, we also did not see evidence that the assumptions used in modelling were checked against alternative market-based approaches and data.

As a result, the robustness of the reserve price thresholds was less clearly demonstrated than it could have been.

DTF's testing of advice

Government decisions about the negotiation strategy relied heavily on advice provided by the commercial adviser engaged by DTF. We would expect to see robust testing of advice provided by external consultants to agencies, particularly for transactions involving a significant public asset such as the public lottery licence.

DTF said the commercial adviser's work was assessed in a range of ways including:

• DTF and DJCS staff participating in market soundings with adviser staff, providing agencies with direct insight into the adviser’s market analysis
• collaboration with the adviser on the reserve price framework and valuation model, including testing assumptions and recommending changes
• involvement in the options and scenario analysis used to inform consideration of the MAC policy
• regular meetings with the adviser, supported by working group and project team forums involving agency staff, to discuss progress, analysis and findings.

These indicate a process of ongoing engagement between DTF and the commercial adviser. We have not seen direct evidence of DTF's testing of key assumptions and recommendations.

TLC's baseline proposal

From late October 2024, DTF led a clarification process to obtain further information on TLC's proposals. This was intended to inform assessments against the reserve price framework and the government's negotiation approach.

DTF requested that TLC provide premium payments under a baseline proposal with different licence terms and lottery tax settings. This 'baseline proposal' was one that required minimum changes to licence settings. It also sought a TLC-preferred proposal with additional changes to licence settings valued by TLC.

TLC's response (November 2024) was the first documented evidence of specific premium amounts being proposed to the government. It set out a baseline proposal, and a TLC preferred proposal incorporating alternative licence settings and a higher premium. This included a proposal for an adverse event mechanism intended to compensate TLC should the government make changes to tax settings.

Approval of reserve price framework

The Treasurer approved the reserve price framework on 27 November 2024. The government received TLC's response to DTF's clarification letter including proposed premium amounts the following day.

An assessment plan was developed to consider TLC's clarification response

DTF and its commercial adviser developed an assessment plan before receiving TLC's clarification response. The plan set out a structured and clearly defined methodology for assessing TLC’s proposal, including assessment steps, roles and responsibilities, and reporting requirements.

The plan set out the following objectives:

• maximising the value of the licence, both in terms of upfront licence premium and ongoing lottery tax revenue
• generating an early premium payment for the next licence
• minimising disruption for players and agents
• providing broader community benefits and service enhancements for agents and players.

The plan required the assessment team to evaluate proposals against pre-determined criteria, including whether proposed changes to licence terms are acceptable, whether the licence premium meets or exceeds reserve prices, and whether it could meet the state's objectives. The reserve price framework included scenarios under licence terms of 20, 30 and 40 years, and current and reduced lottery tax settings.

Summary of assessment

An assessment report was prepared in accordance with the assessment plan. This documented the findings and recommendations arising from the evaluation of TLC's clarification response.

The report assessed TLC's baseline proposal against the reserve price framework and other criteria.

The baseline proposal for a 40-year term under current lottery tax settings exceeded the relevant reserve price threshold. The assessment team concluded that the TLC baseline proposal had the potential to meet the state's objectives for a licence with a 40-year term and recommended progressing to bilateral discussions with TLC on that basis.

In April 2025, the government approved the commencement of a relicensing process based on bilateral discussions with the incumbent, while retaining an option to revert to an open competitive process. The accompanying briefing noted the following risks:

• Exceeding value for money expectations for the state can be more challenging under circumstances where there is an incumbent operator. It flagged the development of strategies to mitigate this risk.
• Potential agreement with TLC would be subject to the outcome of proposed legislative amendments including licence term.

In May 2025 the Minister invited TLC to participate in a bilateral relicensing process. The invitation noted that the state would retain the option of reverting to an open competitive approach should negotiations fail to deliver outcomes that met the state's objectives.

A framework for bilateral negotiations

Agencies established mechanisms intended to promote competitive discipline within a bilateral relicensing process. These included reserve prices, defined assessment criteria, a structured negotiation plan, preservation of a fallback competitive process, confidentiality arrangements and probity oversight.

Together, these provided a framework for assessing proposals, negotiating licence terms and managing the risk that the absence of competition would weaken the state's negotiating position. We saw no evidence that gave us cause for concern that these mechanisms were not followed.

Key elements of bilateral engagement and negotiation plan

The key elements of the negotiation strategy and approach were set out in a bilateral engagement and negotiation plan (dated 19 May 2025). The plan established negotiation parameters, governance arrangements, strategic risks and non-negotiable requirements.

The plan set out 4 primary objectives. These were to:

• maximise the premium paid by TLC for any extended licence period
• protect the lottery tax stream generated by the licence
• ensure the integrity of the lottery products is maintained
• further promote responsible gambling and harm minimisation in the licence framework.

The plan also outlined a set of guiding principles to ensure the state could achieve the primary objectives.

The plan also outlined the state's 'non-negotiable' items that would cause a proposal to be immediately disqualified from consideration. Non-negotiables include any proposal that, on a full assessment, has the potential to:

• increase costs to the state (of regulation, operations or in budgetary terms)
• negatively impact the integrity of lottery products
• increase the level of harm from playing lotteries.

TLC response to the EOI

The select EOI was issued to TLC on 27 May 2025. TLC responded to the EOI on 11 July 2025.

On 12 September 2025, following initial policy analysis and other assessments, TLC was requested to further refine and clarify its EOI response through a bid clarification letter. TLC responded to the bid clarification letter on 19 September 2025.

Baseline proposal

Consistent with the EOI invitation, TLC submitted 4 baseline licence extension proposals. The 40-year proposal was TLC's preferred option and was the only option assessed by agencies as meeting their value maximisation expectations. It was the only bid by TLC that met the state's reserve price threshold.

These premiums were unchanged from TLC's November 2024 commercial clarification proposals, which had informed the government's decision to proceed to bilateral negotiations.

Value-add proposals

TLC's proposal responding to the select EOI included possible value-add items. TLC proposed 4 monetary items. If these were accepted by the state, TLC would place a higher premium on the licence. TLC proposed 2 non-monetary items, for which it would not offer a higher premium.

Challenge and refinement of TLC proposals

Agencies did not accept TLC's July 2025 submission without clarification, testing and analysis. During the EOI process:

• 4 rounds of clarification questions were issued (27 questions in total)
• agencies met with TLC
• a formal bid clarification letter was issued in September 2025 seeking refinement and clarification of TLC's proposal
• TLC provided further responses which informed subsequent recommendations.

Agencies did not accept all proposals advanced by TLC, including some value-add items that would have increased the premium.

Summary

The final premium paid by TLC for the new licence was $1.145 billion. The licence premium comprises 2 main components:

• a base premium amount for the 40-year licence, accounting for the significant majority of the premium
• a further premium, the significant majority of which reflects the inclusion of a 40-year MAC arrangement.

A MAC arrangement is a contractual mechanism that allocates risk between parties if specified events occur after an agreement is signed. In the context of the lottery licence, changes to lottery tax rates could affect the profitability of the licence holder and therefore the value of the licence.

The MAC arrangement was TLC's main value-add proposal. Under the mechanism proposed by TLC, the government would pay TLC compensation if it chose to raise the lottery tax during the licence term, with compensation capped at the total upfront premium paid for the licence. That is, the government could still choose to raise the lottery tax rate but would need to compensate TLC.

Agencies negotiated TLC’s proposed MAC arrangement by accepting the central taxation protection, while narrowing the circumstances in which compensation could be triggered.

The MAC arrangement resulted in a material increase to the premium TLC paid for the licence.

We have chosen not to identify the value TLC placed on the MAC in this report. This is because it may reveal information relevant to TLC’s negotiating parameters and assessments of value in the context of any future negotiations with other jurisdictions. We considered disclosure of this information in the context of our obligations under section 62 and section 64 of the Audit Act 1994.

Trade-offs

The principal benefit to the state of the MAC arrangement was a significant increase to the upfront premium TLC was willing to pay. Other jurisdictions have MAC-like mechanisms.

Agencies – with input from the commercial adviser – assessed the MAC arrangement as a trade-off between a higher upfront premium and reduced future tax flexibility.

Advice prepared by the commercial adviser and agencies that informed government decisions noted Victoria already has the highest lottery tax rate in Australia at 79.4 per cent, compared with 65 per cent in New South Wales and 48.9 per cent in South Australia. Victoria's tax rate has not materially changed since 1970.

Modelling indicated that licence value was highly sensitive to lottery tax settings. A one percentage point increase in the lottery tax rate was estimated to increase annual tax receipts by approximately $9 million but reduce licence value by approximately $180 million (noting we have not been provided with the modelling underpinning this estimate).

Agencies assessed that providing tax certainty increased TLC's willingness to pay an upfront premium.

Agencies considered that the MAC arrangement did not remove the state's ability to change lottery tax settings. Rather, it altered the financial consequences of doing so by potentially requiring compensation to be paid to the licensee where specified changes occurred. Adviser modelling assessed the potential net financial impact of such scenarios to inform government decision-making.

EOI evaluation and negotiation outcome report

Consistent with the plan, an evaluation report was prepared which set out the negotiation team's findings on the approval of the licence extension. The report recommended the licence be extended for a 40-year term because:

• the potential for genuine competition for the next licence is unlikely to emerge over the medium term
• the premium value for the proposed 40-year term represents the best value for money of the licensing proposals
• there is a risk that the strategic value of the Victorian licence may reduce over time
• a 40-year licence extension provides greater certainty for retail agents and the likely preservation of the retail channel over the longer term
• a 40-year licence extension would transfer the long-term commercial and operating risks to TLC
• Victoria would continue to benefit from the national scale of TLC.

The report was attached to a March 2026 briefing seeking government endorsement of the Minister's in-principle decision to extend the licence. The report set out the rationale for the findings noted above, with supporting analysis (including for the MAC arrangement).

Evidence of compliance

It is VGCCC's role to ensure the ongoing compliance of TLC with legislative regulations. VGCCC monitors TLC by inspections, complaint investigations and audits. Where breaches are identified, VGCCC provides penalties or corrective directions.

For example, in its 2024 audit of TLC, VGCCC identified areas of non-compliance relating to the integrity and security of IT systems and software. As directed by VGCCC, TLC appointed an independent expert to identify the root causes of the issues and provide an assessment and recommendations for remediation. In April 2025, TLC reported that these issues had either been resolved or were 'on track' to be resolved. VGCCC reported receiving regular status updates from TLC, with validation of remediation scheduled to commence from October 2026.

Before TLC was invited to apply for the licence extension, DJCS and DTF considered TLC's compliance record. DJCS reported that TLC had 'demonstrated a strong commitment to regulatory compliance, consumer protection and harm minimisation in its operations in Victoria'.

We found no evidence that gave us cause for concern that TLC’s regulatory and compliance track record was not considered in the licence process.

Valuation models and negotiation mechanisms cannot fully replicate the market testing provided by competition

For an exclusive licence over a 40-year term with unchanged tax settings, the commercial adviser estimated a theoretical value for the licence of around $1.372 billion. This compares to the final premium of $1.145 billion. However, caution is required in comparing the final premium directly with the modelled value. As with any forward-looking valuation, the modelled value is subject to inherent uncertainty and is sensitive to a range of assumptions, including discount rates. The outcome may also reflect the strong incumbency advantages held by TLC.

The mechanisms adopted by agencies were intended to replicate aspects of competitive tension and support a disciplined bilateral negotiation process. We saw evidence that agencies actively assessed and negotiated proposals advanced by TLC. However, those mechanisms could not replicate the price discovery benefits of a competitive process.

As a result, while agencies sought to maximise value within a bilateral framework, it is not possible to know with certainty whether a higher premium could have been achieved under an alternative approach.

Steering committee and working group roles

There is documented evidence of ongoing engagement between key agencies during the pre-EOI stage (November 2023 to May 2025) and the select EOI process (May 2025 to May 2026).

A 2-tier agency governance model was followed, comprising the Gambling Licensing Program (GLP) Steering Committee and a project working group.

The GLP Steering Committee met on matters related to the licence from early 2024. It provided senior oversight and strategic direction for the project. The committee included representatives from DJCS, DTF and DPC who met regularly to review progress, endorse key frameworks and consider strategic issues across a number of licensing projects.

The project working group operated as the primary delivery and coordination body, comprising officers from DJCS and DTF alongside the external project advisers engaged by agencies. It met regularly to coordinate analysis and develop key documentation.

Probity plan

We confirmed with DTF and DJCS that the applicable probity framework was the GLP probity plan, which members of the GLP Steering Committee approved by 21 March 2024. The plan incorporates recognised Victorian Government probity standards, including the Victorian Government Purchasing Board procurement policies.

It is structured around core probity principles, including integrity and impartiality, accountability, consistency and transparency of decision-making, management of conflicts of interest, and the security and confidentiality of information.

The plan sets out expected behaviours, governance roles and responsibilities, and key controls to support these principles, including requirements for conflict-of-interest declarations, maintenance of registers, defined evaluation processes and controlled access to sensitive information.

The project team determined this probity plan to be fit for purpose for the public lottery licensing process project. This probity plan was used as the probity framework for the entire project including market soundings.

Probity adviser

In November 2023, DJCS engaged a probity adviser for the public lottery licensing process. DTF also engaged a probity adviser in July 2024 to provide advice in relation to the licence. After project responsibility returned to DJCS at the EOI stage in May 2025, the DTF-appointed adviser continued as the probity adviser for the project.

The Independent Review Panel considered there should have been greater clarity regarding the respective roles of the 2 probity advisers. It also considered there should have been a clearer description of the role to be performed by the probity adviser throughout the authorisation and licensing process.

Market soundings

Agency staff and their advisers conducting market soundings did not complete conflict-of-interest declarations prior to the soundings. DJCS reported that agency staff completed the conflict-of-interest declarations in November 2024, following the outcomes of the market sounding process and ahead of the confidential assessment report that was received after that in late 2024.

Nevertheless, based on the material we reviewed, we did not identify any matters that gave us cause for concern about the conduct of the market soundings.

Documents were provided to us indicating the type of information to be disclosed to participants in the soundings and the questions to be asked, indicating controls were in place to ensure equity in approach. The probity plan was in place to guide the conduct of personnel during the market soundings. A summary of market sounding feedback provided by each entity was also prepared by agencies, against the questions asked during the interviews with participants.

Conflict-of-interest registers and declarations

All public sector employees are subject to the Victorian Government's Code of Conduct for Victorian Public Sector Employees, which sets out conflict of interest and confidentiality obligations.

DJCS and DTF provided conflict-of-interest registers and declarations. We identified minor recording discrepancies in the DJCS register. However, we saw no evidence to indicate that these affected the coverage or monitoring of conflicts of interest.

Protection of reserve price

DTF applied additional controls to protect the integrity of the reserve price framework. Any disclosure of reserve prices had the potential to undermine the integrity of the process, and the value captured by the government.

Controls included a separate password for all materials including and related to the reserve price threshold. Both the password and file storage of these materials were secured and locked down to a small number of individuals. As well, conflict-of-interest declarations confirmed an individual’s obligation to adhere to the confidentiality requirements of the project.

Probity adviser reports

Two reports were prepared by the probity adviser.

The first report (dated 3 February 2026) covers up to the select EOI process and its evaluation. The adviser found that the process was conducted in accordance with established probity principles, with no material probity risks, non-compliance or unresolved issues identified.

Its observations indicate that core probity controls – such as predefined evaluation criteria, documented governance arrangements, secure handling of information, and conflict-of-interest processes – were established and followed in practice. The report also records one managed conflict of interest, which was addressed through agreed controls and documented in a register.

The second report (dated 14 May 2026) provides a supplementary assessment for the invitation to apply stage, and reaches a similar conclusion that no material probity risks, non-compliance or unresolved issues were identified.

Nothing came to our attention that would indicate the probity adviser’s conclusions were unreasonable.

The second report by the probity adviser was completed after the government executed the licence extension. DJCS advised that the 'main' probity report had been provided to the Minister at an earlier decision stage, prior to the conclusion of the EOI process. This informed the Minister's in-principle decision to agree to extend the lottery licence on 24 February 2026. Agencies also advised that they had met frequently with the probity adviser throughout the process and no probity concerns had been raised. Notwithstanding this, completing the report earlier would have strengthened the contemporaneous documentation of probity oversight.

Independent Review Panel letter of comfort and final report

The Independent Review Panel sent a letter to the Minister on 11 February 2026, advising that within the limits of its jurisdiction, on the material available to it to date, and considering relevant matters required under the Act, the Independent Review Panel has concluded there is no basis for an adverse report. This informed the Minister's in-principle decision to agree to extend the lottery licence in February 2026.

In accordance with legislative requirements, the Independent Review Panel's full report is provided after the granting of a licence extension.

Meeting with the Treasurer

Relevant agencies and TLC advised us that the only meeting they were aware of that took place between TLC and ministers or their staff to discuss the licence extension was in December 2023, when the Treasurer and agency staff met with TLC representatives.

Some aspects could have been managed more effectively

Nothing came to our attention that gave us cause for concern about the integrity of the licensing process. Governance arrangements were established, a probity framework was in place, and neither the probity adviser nor the Independent Review Panel identified material probity concerns.

However, aspects of implementation could have been stronger. Responsibility for probity oversight was not always clearly articulated as responsibilities transitioned between agencies, and the final probity adviser report was completed after the government had finalised its decision.

While we identified no evidence that these matters affected the outcomes of the process, stronger arrangements would have strengthened assurance over the process.

Australian Stock Exchange announcement

The extension of the licence was first publicly disclosed through a TLC announcement to the Australian Stock Exchange on 5 May 2026.

Rationale for not disclosing process

DTF and DJCS advised that maintaining confidentiality throughout the licensing process was critical to preserving competitive tension and protecting the state’s commercial position.

Documentation showed agencies considered that disclosing negotiations could trigger legal or regulatory disclosure obligations, including obligations under stock exchange listing rules. TLC, as a listed entity, may have been required to disclose material developments in negotiations to the Australian Stock Exchange if they became public or sufficiently advanced.

DJCS stated that confidentiality of bilateral discussions with TLC supported the following outcomes:

• confidence on TLC's part that its engagement with the government would not be shared with competitors or referenced in conversations and any other government dealings (this ensured the government could secure a maximum value proposal from TLC, including the potential strategic value of the licence to TLC as the incumbent)
• confidence on the government's part that the bilateral engagement process would not produce counterproductive, unsolicited or potentially disruptive input that could derail negotiations ahead of an open and competitive process, should the bilateral process fail and thus, a competitive process be required
• a level of probity and compliance expected by oversight bodies, such as the Independent Review Panel, regarding a pre-open market bilateral engagement process, as is usual for exceptionally high-value gambling licensing processes.

These considerations provide a credible basis for maintaining confidentiality throughout negotiations. But confidentiality also reduced transparency over key decisions, including the basis for the government’s decision to adopt a bilateral strategy. As a result, Parliament and the community have had limited visibility about the process and the reasons it was adopted.

It is important for agencies to actively consider how to balance transparency objectives with confidentiality requirements from the early stages of major commercial transactions. This includes identifying:

• what information could be disclosed
• when disclosure could occur
• how key decisions and their rationale could be explained to Parliament and the public.