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Part 10: Review of the New Zealand Lotteries Commission’s “Instant Kiwi” game

Central government: Results of the 2004-05 audits.

Introduction

10.1
The Auditor-General decided to investigate issues raised by a taxpayer about a game of chance called Instant Kiwi and run by the New Zealand Lotteries Commission (the Lotteries Commission). The taxpayer asserted that Instant Kiwi players were being deliberately disadvantaged by the way the games are administered by the Lotteries Commission.

The New Zealand Lotteries Commission

10.2
The Lotteries Commission is a Crown entity. It was established in 1987 and is responsible for promoting and conducting lotteries to generate profits for the benefit of all New Zealand communities. Community funding is distributed by a separate organisation called the New Zealand Lottery Grants Board.

10.3
The Lotteries Commission’s products include Lotto, Powerball, Keno, and Instant Kiwi, and are sold through more than 600 retail outlets throughout New Zealand. The Department of Internal Affairs administers the regulations that govern these games.

Instant Kiwi

10.4
Instant Kiwi is a ticket-based game that was introduced in September 1989. There are 12 different ticket streams on sale at any time, and about 60 new games are released each year. Tickets for Instant Kiwi games are in the form of a “scratch-to-win” card.

10.5
Prizes range from $2 to a maximum of $50,000 every year for 10 years, depending on the game being played. On average, between 2 and 3 players each week win $10,000 or more. There is a choice of $1, $2, $3, $4, $5, and $6 ticket prices. The prizes are printed on the tickets under strict security. Prizes are randomly distributed to ensure that no-one can detect where prizes are until a ticket is purchased and the latex covering is scratched off the prize area.

10.6
The Instant Kiwi game is a significant earner for the Lotteries Commission, with sales in 2004-05 of $105 million and prizes payable of $60 million.

Relevant legislation

10.7
The principal legislation that the Lotteries Commission operates under is the Gambling Act 2003. Operation of the Instant Kiwi game is regulated by the Instant Kiwi (Instant Game) Rules 1992 (the Rules).

10.8
In addition, the Lotteries Commission has internal policies and procedures that control how the games are managed and administered. These include a scheme of delegated operating authorities that is ratified by the Lotteries Commission on an annual basis.

How we conducted our review

10.9
Our review involved:

  • detailed analysis of operational performance of games and prizes;
  • discussion with senior officers;
  • reviewing governing legislation, including the Rules;
  • reviewing management arrangements, including policies and procedures;
  • understanding and documenting systems and procedures;
  • evaluating controls and testing compliance;
  • testing the completeness and accuracy of the games summary to the prime record; and
  • visiting selected Lotto retailer outlets.

10.10
The review was a limited scope inquiry and, accordingly, may not have identified all the matters that a more extensive investigation would.

Withdrawal of games

10.11
In considering whether the public has been disadvantaged by the way that the Instant Kiwi game is operated, we focused on the practice of withdrawing games before all tickets are sold. Under the Rules, the Lotteries Commission is permitted to close a game at any time before all tickets are sold. The question is whether this option is being fairly exercised.

10.12
Decisions to withdraw games are based on a recommendation by the Instant Kiwi product team for authorisation by the Chief Financial Officer (CFO) under delegated authority. The tickets are never completely sold out. Therefore, a game is closed and the remaining tickets cancelled when:

  • all the top prizes for that game have been claimed;
  • the warehouse ticket stock for that game is, or is about to be, exhausted; or
  • a marketing decision is made based on a judgement about potential remaining sales on the existing game balanced with the cost of withdrawing unsold tickets, as compared to the revenues from the introduction of a replacement game.

10.13
The Instant Kiwi product team monitors the performance of current Instant Kiwi games and completes a template model that summarises the costs of withdrawing an active game. This takes into account the wastage cost of tickets in stock and in trade, and expected sales up to the proposed date of withdrawal.

10.14
We tested a sample of game withdrawals and found documentation to confirm that the proper authority was exercised by the authorising officer – in these cases, the CFO.

10.15
The Lotteries Commission has a policy of stopping the sale of tickets in a game after all the top prizes have been claimed. This policy will tend to advantage the game-playing public in that the actual odds of winning a top prize will have exceeded the game design odds. However, in our review of the game summaries of 89 games closed between 2003 and 2005 inclusive, only 12 were withdrawn on the basis that all top prizes had been claimed.

10.16
The other games we examined were apparently closed for marketing reasons, based on either warehouse stock exhaustion or sales performance, with one or more top prizes remaining.

Duration of games and percentage of tickets sold

10.17
There is no fixed period for a game to remain on sale. The duration of the game will depend on its popularity as indicated by the rate of sales. It is in this context that the marketing decision is made on when to stop the game.

10.18
We analysed the duration of games closed during the years 2003 to 2005. The typical duration ranged from 60 to 100 days. At the extremes, the shortest duration was 39 days and the longest was 195 days.

10.19
There is also no minimum percentage of tickets that must be sold before the game is withdrawn. Accordingly, there was a wide variation in ticket sales for the 2003 to 2005 closed games. Ticket sales typically fall in the 60% to 85% range, though sales for individual games have been as low as 33% and as high as 99%.

10.20
One of the main issues we considered was whether withdrawing the game before all tickets are sold is detrimental to the public. While the Lotteries Commission may argue that games are being withdrawn because they are not selling, there is the risk, particularly given the Lotteries Commission’s incentive to maximise profit, that games are withdrawn from sale when the potential revenue from unsold tickets is less than the outstanding prize liability.

10.21
There would clearly be a commercial advantage in withdrawing the game when the outstanding prize liability exceeds the potential revenue from unsold tickets. However, from our review of operating procedures and the information used to support the case for withdrawing a game, there is no evidence that this measure is used to influence (or even inform) the decision.

10.22
In 14 cases out of the total of 89 closed games in the sample period 2003 to 2005, the prize liability on unsold tickets exceeded the potential future revenues on these games (that is, a negative value).

10.23
The total negative value of these 14 cases was $812,621, compared with an overall positive value (where potential future revenues exceed the prize liability on unsold tickets) of $22.4 million across the other 75 cases. Accordingly, we can conclude that there is no evidence either procedurally or empirically that there is bias in terms of potential prize payout versus potential revenue when deciding to withdraw games.

Our findings

10.24
In our view, there is no intention to disadvantage the public through the early withdrawal of games – either before all major prizes have been claimed or when the remaining prizes exceed potential revenues from unsold tickets.

10.25
We found the majority of games were closed as a result of either ticket stock exhaustion or other marketing decisions.

10.26
The number of major prizes remaining should be explicitly taken into account when deciding to withdraw a game. The Lotteries Commission’s policy to withdraw a game when all major prizes have been claimed will tend to advantage the public. Equally, there may be merit in deferring the withdrawal of a game when more than one top prize still remains to be claimed.

10.27
There are internal controls over the withdrawal of games and proper delegated authority was exercised. Nevertheless, there is scope for the Lotteries Commission to improve the transparency of the decision to withdraw games by defining policy and operating procedures, including criteria for judgement, and by recording the basis for the decision.

Game integrity

Game design

10.28
A design specification is prepared for each new Instant Kiwi game. In accordance with the Rules, each game design must be approved by the Auditor-General and the Department of Internal Affairs before the game can be released by the Lotteries Commission. The game design review confirms, among other things, that the design payout percentage and prize construction meets the legislative requirements.

Prize pool structure

10.29
Each game normally comprises a number of separate prize pools. The prize pools are structured in accordance with a defined multiple prize construction to give a specified number of winning tickets and, therefore, winning chances for each prize value.

10.30
The prize pool structure proves at the design stage that the required payout percentage will be achieved if all tickets in a given pool are sold. It also details the number of top prizes and the chances of winning those prizes.

10.31
The odds of winning a major prize, or indeed any prize, are determined at the outset of the game in accordance with the game design specification.

10.32
In theory, closing the game before all the ticket stock is sold makes no difference to the chances of winning. However, because Instant Kiwi is a game of chance and the prize pool is predetermined, in practice the opportunity to win future prizes is influenced by the pattern of prizes already won. This could be an advantage or disadvantage depending on when the game is closed and at what stage of the game the top prizes are claimed.

Our findings

10.33
The important question is whether the game design is affected by the performance of the game in practice. The only way to ensure that the prize pool as constructed in design is delivered to the playing public is by selling the entire ticket stock.

10.34
Although there are measures built into the ticket sequencing and multiple prize pools within a game to ensure an even distribution of prize opportunities, Instant Kiwi remains a game of chance. Therefore, the observed odds in play at any point may be different from the design intentions. The default position is that the difference between actual and expected prizes to achieve the design payout percentage is transferred to the Prize Reserve Fund (see paragraphs 10.43 to 10.54).

Payout percentages and unclaimed prizes

10.35
Applying the design payout prize percentage for each game to the actual sales will indicate the expected prize total for those sales. This expected prize total can be compared to the actual cash prize payout.

10.36
Comparing the actual prizes paid to gross sales turnover between 2003 and 2005 indicates actual prize payout percentages range from 42% to 72%.

10.37
In overall terms, the actual prizes paid as a percentage of sales were remarkably consistent for the 3 years – 52.5% in 2003, 52.7% in 2004, and 52.7% in 2005. But, at the level of individual games, the actual prize percentages were below the payout percentage specified in the game design in almost every case.

10.38
The overall scale of these differences is considerable. Instant Kiwi ticket sales on closed games examined for the period 2003 to 2005 totalled $183.9 million. The expected prize total on these sales based on game design payout percentages is $103.5 million. However, the total actual prizes paid out on these games was $96.7 million – being some $6.8 million, or 6.5%, less than that predicted.

10.39
Figure 10.1 provides a summary, although it should be noted that prizes may be claimed for 12 months after a game has closed. Additional claims on the 2005 games would reduce the margin of difference.

Figure 10.1
Expected versus actual prize totals for Instant Kiwi

Year ended 30 June 2003 2004 2005* Total
Expected prize pool based on ticket sales $40.6m $32.4m $30.5m $103.5m
Total actual prizes paid $38.1m $30.6m $28.0m $96.7m
Difference between expected and actual $2.5m $1.8m $2.5m $6.8m
Difference as percentage of expected prize 6.2% 5.6% 8.2% 6.6%

* Figures have been updated to September 2005.

10.40
A comparison with other products within the Lotteries Commission range shows that Instant Kiwi has the highest percentage of unclaimed prizes in proportion to gross sales, as demonstrated in Figure 10.2.

Figure 10.2
Comparison of unclaimed prizes for New Zealand Lotteries Commission products in 2004-05*


Lotto Powerball Strike Keno Instant Kiwi

($m) (%) ($m) (%) ($m) (%) ($m) (%) ($m) (%)
Gross sales 312.9
122.2
66.8
23.2
105.3
Prizes payable 162.7 52% 63.5 52% 36.7 55% 14.2 61% 59.7 57%
Unclaimed prizes 4.7 2% 1.7 1% 1.2 2% 0.2 1% 3.1 3%

* The figures are extracted from the Lotteries Commission’s 2004-05 financial statements. Some caution is required when interpreting these numbers as the unclaimed prize totals relate to amounts transferred to the Prize Reserve Fund 12 months after game closure. Therefore, they are more a function of turnover in the prior year than the current year.

10.41
The long-run average of unclaimed prizes on Instant Kiwi amounts to 1.5% of sales (see paragraph 10.52). The Lotteries Commission asserts that the value of unclaimed prizes for all product ranges also amounts to 1.5% of sales for the same period. Nevertheless, during the last 3 years, the unclaimed prize rate on Instant Kiwi, at 2.6% of sales, has been slightly higher than the long-run average.

10.42
The reasons for the apparent shortfalls in the actual prizes paid over those expected in Instant Kiwi are not entirely clear. The game design’s complexity will affect the level of unclaimed prizes. In the case of some Instant Kiwi games, it is conceivable that game players are simply not aware that they have won and therefore discard the ticket without claiming the prize.

Prize Reserve Fund

10.43
Rule 13(1)(b) provides that the Lotteries Commission shall pay into the Prize Reserve Fund “any prize money from any game remaining unclaimed on the expiry of 12 months after the close of that game”.

10.44
We identified an ambiguity in the Rules relating to the Prize Reserve Fund. The issue is how the “prize money remaining unclaimed” is measured.

10.45
Twelve months after each game is closed, the “prize money remaining unclaimed” is transferred to the Prize Reserve Fund. The “prize money remaining unclaimed” is measured by the Lotteries Commission as the difference between the expected prize liability (the design prize payout percentage applied to actual sales) and actual prizes claimed. In other words, the measure of “prize money remaining unclaimed” is based on actual ticket sales rather than the total prize pool.

10.46
The prize pool as defined under Rule 10 is determined by the Lotteries Commission, but must meet a minimum 56% of notional turnover assuming that all tickets are sold. In terms of game design, we are satisfied that the prize pools are structured to meet this minimum prize percentage. The game design specifies the total prize pool in percentage and cash values assuming all tickets are sold.

10.47
The “prize money remaining unclaimed” could be taken for the purposes of Rule 13(1)(b) to represent the prizes remaining in the entire prize pool after deducting prizes paid on actual ticket sales. In other words, the actual prize payout would be based on actual ticket sales but the prize pool would be that fixed in the game design assuming all tickets are sold. Using this measure of “prizes remaining unclaimed” the transfers to the Prize Reserve Fund would be substantially increased, as in the majority of closed games more than 20% of tickets remained unsold.

10.48
This issue has been discussed with the Lotteries Commission. It acknowledges the point as being open to interpretation, but asserts that its operational practice in this regard has been consistently applied since Instant Kiwi began. The Lotteries Commission’s approach is based on the interpretation of Rule 13(1)(b) that prize money remaining unclaimed means that prizes must have been won rather than simply forming part of the total prize pool. The Lotteries Commission has since proposed an amendment to Rule 13(1)(b) to the Department of Internal Affairs to make clear that “prize money remaining unclaimed” applies only to prize money expected to be paid in respect of Instant Kiwi tickets that have been sold.

10.49
The combined balance of the Prize Reserve Fund across all game brands at 30 June 2005 was $11 million. The balance in the Prize Reserve Fund at 30 June 2005 in respect of Instant Kiwi was $30.6 million.

10.50
The Rules also provide that the Prize Reserve Fund may be used to supplement any of the prize pools. In practice, the Prize Reserve Fund is predominantly used to top up the jackpot prizes on Lotto, Powerball, and Strike, particularly in the week after a big payout when the jackpot may otherwise fall short of target.

10.51
Although there have been special prizes to be won through the Instant Kiwi game from time to time, such as cars or scooters, the opportunity to use the Prize Reserve Fund to supplement Instant Kiwi is more limited. The positive balance in the Prize Reserve Fund in respect of Instant Kiwi of $30.6 million compared to a negative balance of $33.4 million in respect of Lotto and Strike demonstrates that Instant Kiwi is a net contributor to other prize pools.

Our findings

10.52
The scale of unclaimed prizes in the Instant Kiwi range is significant both in terms of value and percentage of ticket sales. An analysis of the Prize Reserve Fund for Instant Kiwi reveals total unclaimed prizes of $27 million since it began. Sales of Instant Kiwi during this period total some $1,780 million. Therefore, the long-run unclaimed prize percentage is 1.5% of sales. More recently, the unclaimed prize rate has been higher than the long-run average, which may warrant some further research.

10.53
These unclaimed prizes in the Prize Reserve Fund are applied to supplement the main Lotto prize pool, rather than being recycled into the Instant Kiwi pool. This is permitted under legislation.

10.54
We have identified an ambiguity in the Rules governing transfers to the Prize Reserve Fund for which the Lotteries Commission is seeking an appropriate amendment.

Availability of information on games and remaining prizes

10.55
When a new game is launched, each retailer receives a game summary and promotional material. Retailers are also provided with information regarding the sales and remaining prizes of individual games.

10.56
In addition, the retail lottery terminals can, on request, print a prize summary for each Instant Kiwi game on sale. The printout for each selected game shows the prizes claimed and remaining for each prize denomination. These printouts were readily made available to us on casual enquiry at retail outlets.

10.57
While the availability of this information is not publicly advertised, it could be used by a discerning player to assess prize availability and therefore make a more informed choice about which ticket to buy.

Our findings

10.58
Information about the key features of games in play is made available to the public at retail outlets. In addition, summary information is available from Lotto terminals to the enquiring public on the numbers of prizes claimed and remaining on any game.

Conclusions

10.59
We conclude that there is no evidence to uphold the assertion that Instant Kiwi players are being deliberately disadvantaged by the way the games are administered by the Lotteries Commission.

10.60
The legislative requirements as set out in the Rules are being observed.

10.61
However, our review identified a number of areas worth reporting, and scope to improve procedures and practice to remove any perception that Instant Kiwi game players have been disadvantaged.

10.62
Our findings have been discussed with the Lotteries Commission’s management. The Lotteries Commission has welcomed the review and has responded positively to the issues raised about securing continuous improvement in both product design and operating arrangements.

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Report details

CoverCentral government: Results of the 2004/05 audits

ISBN 0-478-18152-3