"We expect to have the sports betting's regulatory decree out by the end of the year"

The panel discussion titled "Update on Brazil: delays, decisions and race for market share", part of the SBC Digital Summit which is taking place across April 27-May 1, was moderated by Christian Tirabassi who is a Senior Partner at Ficom. 

"As an advisory boutique focused on the global betting & gaming industry, we are seeing a number of international operators who have been trying to find ways to get into this market,"  Tirabassi began. “They are trying to close some deals to have a presence there in order to be ready when the market is finally regulated."

Neil Montgomery, Founding and Managing Partner at Montgomery & Associados, provided an update on the development of the new regulatory framework: "Brazil has been a true soap opera,” he began. “Things have started and stopped for many years.”

The main breakthrough, Montgomery explained, happened at the end of 2018 during the last government before Bolsonaro, with the approval of a  statute that legalized sports betting in Brazil. Pursuant to the country’s law, this federal law needs to be regulated by a presidential decree, the draft of which the Ministry of Economy is currently working on.

The Ministry of Economy has already organized three rounds of public consultation to hear the industry, lawmakers, and other stakeholders’ comments on the draft regulations. The last round was held at the beginning of March just before the global COVID-19 crisis really burst.

Until this draft, the government was talking about a business model that was supported by a type of license called "authorization" where there would an unlimited number of licenses available. However, Montgomery explains, in this latest draft of the decree, there has been a shift that really impacted the industry a lot: a "concession business model." 

"This is a more complex set of proceedings because it involves a limited number of licenses being made available,” Montgomery said. "SECAP — an agency of the Ministry of Economy that leads Brazilian public policy development for the agriculture, energy and lottery sectors— was talking about maybe 30, but this number could change."

The expectation is to have the Decree out by the end of the year or the beginning of next year. "Hopefully the regulations will be ready in time for the Ministry of Economy to make their presentation at next year’s ICE in London," Montgomery said.

A main controversial issue which the 2018 law entails is taxation, which many believe is too high (3% of the turnover) as compared to other countries, and some believe downplays the attractiveness of the Brazilian market.

"The Ministry of Economy tried to reduce it to 1%, but, unfortunately, since the decree is an administrative norm, it cannot override federal law," Montgomery went on explaining. "Any changes to the tax rate require Congressional involvement and that is going to take time, so I think 3% is the rate that will prevail for the time being."

However, according to Andre Gelfi (CEO, Suaposta), the fact that the Ministry of Economy has involved certain stakeholders in the regulatory process could have a very positive impact and turn that around.

"They are going to engage legal and financial advisors from the BNDES —the Brazilian Development Bank— and the Secretaria Especial de Fazenda, who are going to be onboarded to further study and put together the regulations," Gelfi explained. "If there is something that they conclude in their studies that relates to changing the tax rate to whichever percentage they think is more convenient in order to have a market that thrives and maximizes value, I think that is likely to happen," he explained.

Suaposta operates horse racing, which is the single vertical that has been fully licensed in the country. Last year, Sweden-based Betsson acquired a 75% majority shareholding in the company.

Addressing COVID-19’s impact on his business and the industry, Gelfi commented: "Although we are offering half the amount of races we were offering before, we managed to keep on track with our budget and plans for the year, and to stay afloat despite the global crisis."

"We have sports coming up in the following months and I think that the market is going to go back, it is absolutely inconceivable not to see football coming back in the second semester here, in Brazil for obvious reasons," he added.

As explained by Arthur Silva, the CEO of Sportsbet.io, football accounts for 95% of the business in Brazil. Sportsbet.io joined the Brazilian market in 2014 and has signed partnership deals with Premier League teams such as Watford, and most recently Flamengo, the biggest team in the country.

"Unlike Andre who relies mainly on horse racing, a big part of our business is damaged because of COVID-19," Silva said. "Our primary source of revenue relies on sporting events and acquisition also relies a lot on this in Brazil."

Despite this, he believes there could be a bright side to this crisis: "The economy shrink will lead to a big loss in terms of tax collection; these technical bodies that Andre mentioned are aware that, so in my opinion, the crisis will push the project forward."

"The industry has also found out that they cannot rely only on sports betting," he added. "Maybe operators will now pay more attention to the potential in Brazilian casino and live dealer products."

However, Montgomery believes other types of games currently find themselves in a more difficult situation, as the government seems to be focused on the legalization of only sports betting at the moment. "This is a great opportunity that the government is missing out on because this environment provided by the COVID-19 is ideal for the legalization of all types of gaming as it would generate more revenue, more taxes, and more jobs to the country."

In addition to criticizing the proposed 3% tax rate, Silva also mentioned that the draft decree establishes a maximum margin for businesses: "If you start bringing laws that are not that liberal, you kill the competition effect; if all have to run under the same margin it means I cannot consolidate my product targeting a specific audience."

In that sense, Montgomery highlighted the recent appointment of a new head of SECAP, Nelson Leitão Paes. "He seems to be quite liberal and pro-gaming, so I think this is a positive step."

Silva also draw the panel’s attention on the potential threat posed by the black market in Brazil: "If you don't create a good atmosphere for a regulated market to grow,  you’ll be opening a back door for the black market and that is really dangerous." he said. "In my opinion, the decree does not solve this problem, and  Brazil is not known by a country with a big tradition in enforcing the law."

Echoing Silva’s comments, Tirabassi added: "If you do not regulate in a sustainable way, in terms of rules and tax burden and if the regulated offer is not competitive with the offshore offer, you create a misalignment in terms of competition between the legally regulated offer and the illegal one."

In that sense, Montgomery agreed with Silva: "The government has been quite lenient so far in enforcing existing legislation, but once the new legislation is rolled out, I am sure they will enforce it against those who are not licensed."

"BNDES has now a very liberal approach as well," Gelfi added.

The law as it stands today, Montgomery explained, mentions that operators will only be licensed if they are Brazilian companies. This means that foreign operators interested in coming to Brazil need to start incorporating holding companies or subsidiaries in Brazil to be ready when the regulations are indeed laid down. They would need to do that in advance, Montgomery said, because there is potentially going to be a six-month hiatus between the enactment of the regulation and the beginning of operations in the market. "I know that many foreign operators are waiting to see what the rules of the game are first before taking that initial step, but the quicker they come to Brazil and set up, which can be a time-consuming process, the better."

According to Silva, some pressure can be expected from Brazilian football clubs in trying to make the new law a reality, as the football entertainment industry, which is quite strong in Brazil, has suffered a lot from this crisis. "Most of the clubs are buried in debt and in danger of shutting down if football is not back in the next month, so I think the first sector to harvest the benefits from the betting industry is the football industry," he explained. "They expect foreign operators to come and invest in them."

"Many international groups are closely monitoring the regulatory process,” Tirabassi added. "They look to establish an operation that focuses on Brazil, knows the market, has the right payment solution, and understands the product; these investors will definitely bring resources, jobs, and all the benefits that large marketing sponsorship investors that do sports betting operations are used to."