May 2016 REPORT on the DURATION of LICENCES ISSUED

May 2016

REPORT ON THE DURATION OF LICENCES ISSUED IN TERMS OF THE EASTERN CAPE GAMBLING AND BETTING ACT 5 OF 1997

The ECGBB appointed consultants to perform the following activities and to prepare a detailed report that considers the appropriateness of issuing fixed term licences to licensees in terms of the Eastern Cape Gambling Act, 1997 (Act 5 of 1997 (EC)). 1. Consider the developmental impact of different categories of fixed term licences issued in terms of the Eastern Cape Gambling Act, 1997 by, inter alia, unpacking –  Commitments by licensees to progressively invest in infrastructural development for the duration of the licence term;  Long-term reinvestments without the benefit or option of re-licensing as a controlling instrument;  Sustainability of existing infrastructure in the event where licences are not re-issued or extended;  The determination and enforcement of additional conditions of licence with permanent licences. 2. Reflect on the benefits and disadvantages of fixed-term and permanent licences with accompanying recommendations; 3. Research and report on how the duration of gambling licenses have been considered in other developed and developing countries; 4. Research and report on policy considerations that informed the current gambling licence term dispensation in South Africa; and 5. Conduct interviews with existing licence holders and with the national gambling regulator. The expected outcome of this brief is to critique the functionality of licence terms as determined and issued by the ECGBB. The brief is furthermore to consider the effectiveness and efficiency of fixed term and indefinite licences to extract maximum value from licences issued by the Board.

Methodology

The approach and methodology adopted towards preparing this report included the following:

Board Members: Adv N Mayosi (Chairperson); O Mtati (Deputy Chairperson); P White; M Vena; P Voges; RM Zwane (Chief Executive Officer) N Mtakati; A Ntsonkota; N Tom; P White; RM Zwane (Chief Executive Officer)

Desktop Research

During the desktop research, write-ups and articles published on the duration of gambling licences in other countries were studied.

In consultation with the ECGBB management team, specific countries were identified to compare with the South African position regarding the duration of gambling licences.

The identified countries were selected according to their comparability with the South African regulatory regime on gambling; or on socio-economic comparisons with South Africa in its role and status as a developmental state.

The duration of casino licences was investigated and compared across the international spectrum together with a review of the regulatory bodies and the legislation relevant to casino licences. The number of casinos was also observed in addition to the level of exclusivity in terms of the issuing of licences. Where possible, an assessment of the regulatory environment was made in order to gauge whether investment in casinos was encouraged or discouraged in particular areas.

All provincial gambling Acts in South Africa were considered in order to compare the extent to which the duration of gambling licences vary and to establish whether policy considerations informed such positions. The National Gambling Act was also considered so as to determine how it may inform the provincial approach to gambling licences; and the local economic impact of gambling was considered in the Eastern Cape, as well as across South Africa.

The following sources and/or reports were considered to determine the policy framework that informed the duration of gambling licences in South Africa –

 2002 Amendment Bill – ECGBB;  2015 Amendment Act – White Paper – ECGBB;  National State Law Advisors policy forum – position papers;  Presidential Review Committee of SOEs: Green Paper on the Role of State-Owned Entities in the Developmental State. Executive Summary 2012;  Republic of South Africa: Constitution of the Republic of South Africa 1996, as amended - Act No 108 of 1996;  Republic of South Africa-National Planning Commission: National Development Plan 2030, November 2011;  Republic of South Africa-Department of Trade and Industry: Industrial Policy Action Plan IPAP-2014/15-2016/17, DTI 2014;  Republic of South Africa Green Paper, op cit 2012;

 National Development Plan: Chapter 13: Building a Capable and Developmental State;  Eastern Cape Planning Commission (2014): Eastern Cape Vision 2030 Provincial Development Plan; and  Department of Trade and Industry: National Gambling Policy, Invitation for the Public to Comment on the National Gambling Policy May, 2015.

Questionnaire

After completing the desktop research, detailed questionnaires were compiled to obtain information from the following institutions:

 National Gambling Board;  Gauteng Gambling Board;  Eastern Cape Gambling Board;  KZN Gambling Board;  Western Cape Gambling Board;  Department of Economic Development, Environmental Affairs and Tourism;  Chief State Law Advisor (Eastern Cape);  Existing Eastern Cape licensees.

Interviews

Interviews/written engagements were conducted with the following respondents in compliance with activity 1.5 in the brief:

 Department of Economic Development, Environmental Affairs and Tourism;  Management of the Eastern Cape Gambling Board;  Management of the Gauteng Gambling Board;  Management of the KZN Gambling Board;  Chief State Law Advisor (Eastern Cape);  Former manager and acting Chief Executive Officer of the Eastern Cape Gambling Board;  Tsogo Sun;  Sun International;  Marshalls World of Sport;  Bingo Association of South Africa;

 Casino Association of South Africa;

The desktop research, the outcomes of the interviews and the contents of written submissions were developed into the following report with key findings and corresponding recommendations.

Abbreviations used in this Report

AGA American Gaming Association BASA Bingo Association of South Africa BEE Black Economic Empowerment CBD Central Business District CSI Corporate Social Investment DEDEAT Department, Economic Development, Environmental Affairs and Tourism ECGBB Eastern Cape Gambling and Betting Board ECPDP Eastern Cape Provincial Development Plan GDP Gross Domestic Product GGR Gross Gambling Revenue GRC Gambling Review Commission IPAP Industrial Policy Action Plan LPM Limited Pay-out machine NDP National Development Plan NGB National Gambling Board NGPC National Gambling Policy Council NRGP National Responsible Gambling Programme PDI Previously Disadvantaged Individual PLA Provincial Licensing Authority RFP Request for Proposal SADC Southern African Development Community SMME Small, Medium and Micro-sized Enterprises SOE State Owned Enterprise

Contents

The Brief ...... 1 Methodology ...... 1 Desktop Research ...... 2 Questionnaire ...... 3 Interviews ...... 3 Abbreviations used in this Report ...... 5 Chapter 1: Gambling in the Eastern Cape...... 9 Socio-Economic Impact ...... 10 Eastern Cape Gambling and Betting Board ...... 13 Current Casino Licences ...... 14 Chapter 2: Gambling Industry in South Africa ...... 17 Overview ...... 17 2.1 Casino Industry ...... 20 Review of Legalisation across Provinces ...... 22 Details of Casino Licences across Provinces ...... 26 2.2 Limited Payout Machines (LPM) Industry ...... 29 Details of LPM Operators and Licences across the Provinces ...... 31 2.3 Sports betting (including Horseracing) Industry ...... 32 2.4 Bingo Industry ...... 35 Chapter 3: Gambling Licences – The position in other Countries ...... 37 Casino Industry Literature Review ...... 37 United States of America ...... 37 Australia ...... 41 Europe ...... 44 SADC...... 44 Other Gambling Industries Literature Review ...... 46 LPMs ...... 46 Sports Betting ...... 46

Bingo Industry ...... 47 Chapter 4: Discussion on the Duration of Casino Licences in the Eastern Cape ...... 47 Impact on the Return on Investments ...... 48 Employment Considerations ...... 51 Attracting Re-investment ...... 51 New entrants/investor interest ...... 56 Resources required in re-issuing licences ...... 56 Sustainability of infrastructure ...... 57 Uniformity of National Policy ...... 59 Chapter 5: ECGBB and National Policy ...... 59 Casinos as a tool for economic development – international experience ...... 60 Policy Considerations ...... 65 The Developmental State ...... 68 Developmental State and the Casino Industry ...... 79 Chapter 6: Discussion of the Duration of Licences in other Gambling Industries in the Eastern Cape ...... 82 Other Gambling Industries ...... 82 Limited Pay-out Machines (LPMs) ...... 83 Bingo ...... 87 Bookmakers ...... 91 Chapter 7: Conclusions...... 92 Casino Licences ...... 92 Commitments by licensees to progressively invest in infrastructural development for the duration of the licence term ...... 92 Long-term reinvestments without the benefit or option of re-licensing as controlling instrument .. 93 Sustainability of existing infrastructure in the event where licences are not re-issued or extended ...... 93 Determination and enforcement of additional conditions of licence with permanent licences ...... 93 Benefits and disadvantages of fixed-term and permanent licences ...... 94 Duration of gambling licences in other developed and developing countries ...... 96

Policy considerations that informed the current gambling licence term dispensation in South Africa ...... 96 Conclusions on other types of licences ...... 97 LPMs ...... 97 Betting ...... 97 Bingo ...... 98

Chapter 1: Gambling in the Eastern Cape

Casino gambling is the main form of gambling in the Eastern Cape and accounted for 77% of the total Gross Gambling Revenue (GGR) during the 2014/15 financial year. Limited Pay-Out Machines (LPMs) and Horseracing and Bingo comprised the balance of GGR and accounted for 14%, 10% and 7% of GGR, respectively.

Figure 1: Distribution of Gambling Activities by GGR1

The bingo industry experienced the most significant increase in gross gambling revenue, experiencing 164% increase (from R43 million in 2013/14 to R113.4 million in 2014/15). The LPM sector grew at rate of 26%, compared to the slower growth in the casino and sports betting sectors, which grew at 2% and 4% respectively2.

1 Eastern Cape Gambling and Betting Board Annual Report 2013/14 p20-22 2 ECGBB Annual Report 2014/15

Figure 2: Change in Gambling GGR from 2013/14 to 2014/15 financial year

There are four casinos in operation in the Eastern Cape, with the fifth licence yet to be issued. Table 1 details the location and ownership of the casinos.

Table 1: Details of Casinos based in the Eastern Cape3

Name of Resort Location Casino Operator Management Company The Boardwalk Casino Sun International Port Elizabeth Emfuleni Resorts & Entertainment World Management Ltd Tsogo Sun Casino Hemingways Casino East London Tsogo Sun Emonti Management Company Lukhanji Leisure (Pty) Gold Reef Management Queens Casino Queenstown Ltd (Pty) Ltd4 Transkei Sun Sun International Wild Coast Sun Bizana International Management Ltd

3 Casino Association Of South Africa (CASA) The 2012 Survey of Casino Entertainment in South Africa 4 Company owned and controlled by the Tsogo Sun Group

Socio-Economic Impact

The ECGBB 2014/15 Annual Report indicated that the GGR generated in the Eastern Cape totalled R1.7 billion which represented a 12.5% year-on-year growth in gambling. This means that the total gambling and betting taxes, fees and interest collected by the ECGBB in the 2014/15 financial year totalled R144.3 million, an increase from R124.9 million in 2013/14 and 114.9 million in 2012/13.

Casino taxes totalled R98.1million in 2014/15, and represented an increase of R2.8million from the previous financial year. In fact, revenue from casino taxes comprised 70% of the total Provincial gambling tax revenue, followed by taxes from LPMs which amounted to 17% of gambling revenue. The revenue generated from gambling taxes is significant for the Eastern Cape Provincial Government Revenue Fund and accounted for around 11% of Provincial own revenue, and 0.2% of total Provincial receipts, as indicated in Figure 3.

Figure 3: Gambling Taxes Contribution to Provincial Fiscus5

5 National Treasury Provincial Budgeted Revenue and Expenditure, 2014 - Annexure A Table A7 Actual and Budgeted Receipts and Table B1: Specification of receipts, Eastern Cape 2015

The gambling industry also makes a significant contribution to employment in the Province and the casinos alone generated almost 3,000 jobs in 20126 as indicated in Table 2.

Table 2: Number of employees at Eastern Cape casinos7

Number of Casino Employees The Boardwalk 799 Queens 233 Hemingways 599 Wild Coast 447 Total direct 2078 jobs

The wider socio-economic effect of the gambling industry8 considers the broader employment impact and identifies three types of jobs:

(i) Jobs in the provincial construction industry where the construction and on-going maintenance of the casino complexes have sustained jobs in the industry; (ii) Jobs due to the ongoing operation of the industry; and (iii) Indirect jobs which result from the expenditure multipliers arising from construction and operations. Using the broader definition of employment, the gambling industry contributes towards just over 12,000 jobs in the Eastern Cape, with the majority of jobs coming from the casino industry.

6 Includes permanent, casual and outsourced employees 7 CASA Survey, 2012 p13 8 Eastern Cape Gambling and Betting Board, The Socio-Economic Impact of Legalized Gambling in the Eastern Cape Province 2009, p113.

Figure 4: Direct and Indirect Jobs from the Gambling Industry in the Eastern Cape9

Bingo was only introduced into the Province in the 2013/14 financial year and is, therefore, not included in the above analysis. However, it is estimated that each Bingo venue creates 70 direct employment opportunities10. The six licences issued in the 2013/14 financial year therefore probably generated around 420 direct new jobs.

Eastern Cape Gambling and Betting Board

The Eastern Cape Gambling and Betting Board (ECGBB) is the Provincial Gambling Regulatory Authority which is responsible for issuing licences, monitoring compliance with licence conditions and legislation and combatting illegal gambling as outlined in the National Gambling Act, 2004.

Objectives and Strategic Goals

The 2013/14 Annual Report11 of the ECGBB indicates the following strategic goals which may have a bearing on the term and duration of licences that are governed in terms of the Act:  Goal 2 – Institutionalising an international regulatory system.  Goal 3 – Oversight arrangements and socio economic development commitments –

9 Ibid 10 ECGBB Annual Report 2013/14 p.11 11 ECGBB Annual Report 2013/14 p.16

“To establish sound institutional oversight arrangements and systems to administer socio- economic development commitments that arise from licence conditions.”  Goal 5 – Revenue collection for the provincial fiscus and socio-economic benefits – “To optimise revenue collection for the socio-economic benefit of underprivileged communities”

The Eastern Cape Gambling and Betting Act 5 of 1997

The Eastern Cape Gambling and Betting Act, prescribes different types or categories of licences that are governed in terms of the Act. Table 3 summarises the term of licence of the categories of licences issued in terms of the Act.

Table 3: Period of licences issued in terms of the Eastern Cape Gambling and Betting Act

Category of Licence Relevant Section Prescribed Term The period of validity of a casino licence Casino licence Section 45(3) shall be such period, not shorter than 5 (five) years, as the board may determine A bookmaker licence shall, subject to the Bookmakers licence Section 54(2) provisions of section 39(16) and 79, be valid for 5 (five) years

Other licences Section 33(7) Subject to discretion of the Board

The Eastern Cape Gambling and Betting Act is currently being amended, with the amendment Act awaiting the date of promulgation to come into operation. Most notable is the amendment to Section 45(3) which proposes to substitute the ECGBB minimum of 5 (five) years discretion with a prescriptive period of 20 years.

Current Casino Licences

All the casino licences in the Eastern Cape are fixed-term licences, as indicated in Table 4. The Boardwalk and Hemingways Casino licences are issued for 15 years; while Queens and Wild Coast Sun Casinos have licences for 10 years.

Table 4: Eastern Cape Casino Licence Terms and Conditions

Name of Licence Licence Conditions Casino Terms The Licence 1 Licence 1 Boardwalk 10 year  Development in accordance with a development plan and specifications Casino & licence: submitted in the licence application (15.759 ha development) Entertainme  Licensee required, on an annual basis, to submit to ECGBB for approval a

Name of Licence Licence Conditions Casino Terms nt World 26 March maintenance plan for the ongoing capital maintenance costs of the 2001 to 2 development for the duration of the licence October 2010 Licence 2  Completion of Casino Development Programme which includes upgrading, Licence 2 refurbishing and expansion of the casino resort and development and 15 year construction of a new hotel on the property licence  Project Development Programme informs milestones for the development to be completed within a prescribed development period being 24 months 3 October calculated from January 2011 2010 to 2  Licensee is required to commit no less than R1 billion towards the Casino October 2025 Development Project Licence 1  Development in accordance with a development plan and specifications Licence 1 submitted in the licence application 10 year  Licensee required, on an annual basis, to submit to ECGBB for approval a licence maintenance plan for the ongoing capital maintenance costs of the

development for the duration of the licence September Licence 2 2001 to September  Completion of Casino Development Programme which includes – o Expansion of casino floor, creating a new self-contained salon privé area 2011 with lounge, smoking casino, non-smoking casino and restrooms Hemingways o Expansion of the casino floor with the creation of a smoking casino Casino Licence 2 section 15 year o licence A casino complex including restaurants and a sports bar, cinemas, shops and crèche o 26 Parkade development with 107 parking bays o September An extensively landscaped area with eco-friendly planting o A 667m² conference facility 2011 to 25 o A 41-bedroom hotel extension with views of the sea September o 2026 4-star rating for the hotel  Licensee is required to commit no less than R400m towards the Casino Development Project Licence 1 Licence 1 10 year  In accordance with a development plan and specifications submitted in the Queens licence licence application Casino  Licensee required, on an annual basis, to submit to ECGBB for approval a 21 December maintenance plan for the ongoing capital maintenance costs of the 2007 development for the duration of the licence Licence 1 (From 1981) New Licence Licence 2 issued  Completion of Casino Development Programme which includes – Wild Coast September o Upgrading, refurbishment and expansion of the casino and resort; and Sun 2009 o Development and construction of a new waterpark 10 year licence  Licensee is required to commit no less than R340m towards the Casino Development Project

Previous research regarding licence duration

Research conducted by DEDEAT12revealed that previous casino licence periods in the Eastern Cape, which averaged 10 (ten) years, were unfavourable for sustainable socio-economic, developmental and economic reasons.

The research found that when considering the required investment by the licensee to meet the conditions of licence, a ten-year licence allows for only a marginally profitable operation, depending on the location of the casino. According to the report, such a state of affairs often resulted in licensees structuring their institutional arrangements in such a manner that the broad- based community empowerment component benefited little from shareholding arrangements in the management company entrusted to operate the casino. In addition, the trusts established by the licensees to contribute to socio-economic and developmental benefits, were not sufficiently funded to make a sustainable difference in areas surrounding casinos.

Licensees were furthermore reluctant to invest more than the minimum requirements stipulated in the RFP/licence conditions as their return on investment was restricted to a shorter period with inevitable risks.

During the development of the Amendment Act, DEDEAT, as custodian of the enabling legislation, held the view that the current discretionary mandate of the Board, in respect of the period of casino licence, is problematic, as it provided prospective applicants with no certainty in respect of the total duration of a future licence. The Department held the view that a stipulated total period of licence would provide the necessary clarity on this matter. Current applicants are, therefore, informed by previous periods for which casino licences are being issued in the Province. As a result, their development proposals are premised on a return on investment on such a benchmark period.

The position of DEDEAT manifested in the following submission, which introduced the Amendment Act in the Eastern Cape Provincial Legislature.

“The purpose of this section (29) is to amend section 45 of the Principal Act to extend the period of validity of a casino licence to a period determined by the Board but the period must be at least 20 years and the Board may extend this period if there are delays in issuing a new casino licence. In addition this section determines the ceiling of a lump sum pay-out to be no more than 5 percent of the total project costs”.

12 White Paper introducing the Eastern Cape Gambling Amendment Act

Chapter 2: Gambling Industry in South Africa

Overview Legalised gambling is a relatively new industry in South Africa and has been operational since the first national gambling-related laws were promulgated during the 1990s. The legislation has been amended and updated several times since then and historical reviews of the gambling industry development since 1996 have been well documented elsewhere. The current legislation that regulates the industry is the National Gambling Act No. 7 of 2004.

The gambling industry, especially the gambling operations of the casinos in South Africa, is well established and generates a significant amount of GGR, which results in substantial tax revenue for the State.

According to reports published by PWC13 and the National Gambling Board14, the total GGR for all gambling industries in the 2012/13 financial year was R21.8 billion, which represents a 4% increase over the amount recorded in 2012/13. However, 2012/13 saw a 13.6% increase from 2011/12, which generated revenue of R20.9 billion. Figure 5 shows the projected trends in GGR that predict an average 6% year-on-year increase over the next four years.

Figure 5: National Gross Gambling Revenue15

Forecast

13 PWC Third Annual Edition November 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 South Africa • Nigeria • Kenya 14 National Gambling Board: Annual Report (2014) 15 PWC Third Annual Edition November 2014 p.16

According to the National Gambling Board16, gambling taxes amounted to R2,237 million for the 2013/14 financial year; an increase from R2,098 million (6.2% increase) in the previous year.

Hence, as is the case in the Eastern Cape, the national casino industry generates the largest proportion of revenue, which constitutes 80% of the total GGR, followed by sports betting17, which generates 12%; as is reflected in Table 5.

Table 5: Percentage contribution to GGR by gambling sector18

Gambling Industry % GGR19

Casino 80%

Sports betting 12%

LPM 6%

Bingo 2%

The dominance of Casino gambling across all Provinces is further indicated in Figure 6, which shows that Gauteng leads the industry with almost R7bn in GGR. The LPM sector is largest in the Western Cape (R551million), followed by KwaZulu-Natal (R404million), while Gauteng also dominates the Sports Betting sector (R1.2bn). Sports gambling consists of horse racing and betting on sporting events. Currently, horse racing is the dominant category, comprising 65% of the total in 2013, but that share is down from 88% in 2009.Bingo gambling is only played in four of the nine Provinces as of 2014. Previously only available in Gauteng, bingo was introduced in Mpumalanga in 2012 and in the North West and Eastern Cape in the latter part of 201320. Bingo licences have also been issued in KwaZulu- Natal.

Although bingo is currently the smallest gambling sector, it was the fastest growing category in 2013 with a 59% increase; and bingo is expected to continue to grow more rapidly over the next five years. PWC predicts that as bingo continues to expand and become available in other provinces, it will compete with LPMs and casinos and will lead to slower growth for these components of the industry21.

16 National Gambling Board Annual Report 2014 p.30 17 Sports betting includes horse betting 18 PWC Third Annual Edition November 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 South Africa • Nigeria • Kenya p.14 19 Five year average from 2009 to 2013 20 PWC Third Annual Edition November 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 South Africa • Nigeria • Kenya p.28 21 Ibid p 29

Figure 6: GGR by gambling sector per Province22

Figure 7 confirms the dominance of Gauteng where the gambling sector generates 42% of national GGR, followed by KwaZulu-Natal and the Western Cape which generate 19% and 16% respectively. The Northern Cape and the Free State have the smallest gambling industries, contributing only 1% and 2% of the total GGR respectively; while the Eastern Cape generates 7% of the national GGR.

22 PWC Third Annual Edition November 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 South Africa • Nigeria • Kenya p.21

Figure 7: Percentage contribution to national GGR by Provinces23

2.1 Casino Industry

The National Gambling Board reported that in 2014/15 the casino industry contributed around R1.79 billion towards tax revenue in the form of casino taxes and levies. The industry also supported over 64,000 jobs, according to CASA. Table 6 indicates the revenue and taxes generated by the casino industry between 2009 and 2013.

Table 6: Revenue and Taxes generated by the Casino Industry in R million24

Casino Industry 2009 2010 2011 2012 2013

Revenue 13 726 14 043 14 855 16 404 16 498

Taxes & Levies 1 263 1 318 1 405 1 579 1 640

The casino industry is also an important source of Provincial government own funds as is shown in Figure 8. The Western Cape, followed by Gauteng and KwaZulu-Natal, receives the highest proportion of revenue from the casino taxes, constituting around 16% of the Provincial own receipts in the 2013/14 financial year.

23 National Gambling Board Annual Report 2014 p.30 24 PWC Third Annual Edition November p 22

Figure 8: Casino Taxes as Percentage of Total Own Provincial Receipts25

It is clear that gambling, and specifically casino gambling, has become a substantial part of the South African economic fabric. Casinos are destination venues that attract patrons from far afield, contrasting with the convenience nature of other gaming venues that largely attract local patrons.

The review of the South African gambling industry that was completed in August 2010, reported that “on the whole, the casino industry in South Africa is very well run and compares favourably with casinos anywhere else in the world. The approach taken by the South African government to encourage limited forms of casino-based “destination gambling”, rather than to allow for the proliferation of small and medium-sized gambling clubs throughout the country, appears to have worked well.”

CASA reported that by the end of 2012, members of CASA had invested more than R20 billion in casino-related infrastructure development in the form of world-class entertainment facilities that incorporate more than 7 000 hotel rooms; road upgrades; convention centres; tourist attractions; theme parks; sports facilities; restaurants and eventing facilities; in addition to theatres, museums and the development of new cinema complexes.

The licences for casinos were issued on condition that they made extensive capital investments, not just in the construction of the destination venue in which the casinos operated, but also in community infrastructure in the areas from which patrons were drawn. Examples of this expenditure include the construction of the Cape Town International Convention Centre and the Roggebaai canal.

25 National Treasury Provincial Budgeted Revenue and Expenditure- 2014 Annexure A Table A7 Actual and Budgeted Receipts

The 2010 Review Report states that casinos believe that this capital expenditure has contributed to the upgrading of the areas in which they operate, as well as to the development of the tourist industry in each Province. Land values have escalated and many new developments, unrelated to the casinos, have occurred as a result.

CASA members have generated more than 100 000 direct and indirect employment opportunities; and, based on economic multipliers, have also contributed over R50 billion to GDP. They have invested over R80 million per year in corporate social investment (CSI) and established an internationally recognised responsible gambling programme with a budget of more than R10 million per year.

The Provincial Gambling Boards are responsible for monitoring compliance with the various expenditure commitments contained in the casino licences.

Each casino group has its own CSI policy. According to the 2010 Report, casinos and LPM licence holders have complained that Provincial Gambling Boards exceed their mandate in overseeing CSI expenditure, instead of simply ensuring that the policy is compliant with licence obligations and in line with provincial and national policies. CSI spend can be dictated in conditions of licence and should not affect whether licences are issued for a prescribed or indefinite term.

Review of Legalisation across Provinces

The following legislation is applicable to the gambling industry in South Africa: • National Lotteries Act, 1997 • National Gambling Act, 2004 • Gambling and Betting Act, 1997 (Eastern Cape) • Free State Gambling and Racing Act, 1996 • Gauteng Gambling Act, 1995 • KwaZulu-Natal Gambling Act, 1996 • Mpumalanga Gambling Act, 1995 • The North West Casino, Gambling and Betting Act, 1994 • Northern Cape Gambling and Racing Act, 1996 • Northern Province Gambling Act, 1996 • Western Cape Gambling and Racing Law, 1996

Table 7 details the gambling legislation that is applicable to the duration of casino licences.

Table 7: Details of Gambling Legislation Relevant to Casino Licence durations

Provincial Details of Gambling Legislation Legislation Section 40(1) – a licence other than a temporary licence shall, subject to the provisions of this Act and the conditions under which it is granted, be issued for a period of 12 months and shall, subject to compliance with the provisions of this Act, be renewed annually by the Board on production of the licence for the preceding year and on payment of the licence and investigation fees as set out in the schedule to the Act Western Cape Gambling and Section 40(3) – the onus shall be upon the licence holder to apply for renewal of his Racing Law or her licence by making written application to the Board for such renewal no less than three calendar months prior to the date of expiry of the licence NOTE – This implies that the Board shall not exercise any discretion – and that the licence shall be renewed every year on application by the licensee – and subject to him or her paying the licence renewal fees and producing the existing licence to the Board

Section 44(1) – any licence granted under section 24(4) shall, subject to being renewed, be valid from the date of issue thereof until the date on which – (a) The holder thereof abandons it in writing; Mpumalanga (b) It is revoked by the Board under Section 33A Gambling Act Section 24(4) refers to the issuing of all licences under the jurisdiction of the Board Section 33A deals with the suspension or revocation of licences under circumstances where the licence holder either became disqualified (to hold the licence) or failed to comply with the conditions of the licence

The same as Mpumalanga

Free State Section 52(1) – Any licence granted under section 24(4) shall, subject to being Gambling and renewed, be valid as from the date of the issue thereof until the date on which – Racing Act (a) The holder thereof abandons the licence in writing; (b) It is revoked by the Board under section 39

Section 32(3) – a licence issued in terms of this Act shall, subject to Section 37 be valid indefinitely Section 37 – The board may, after investigation, subject to subsection (3), by a Gauteng disciplinary committee in terms of subsection (2) - Gambling Act (a) Suspend a licence for a specified time, revoke a licence or impose any sentence it deems necessary, including a suspended sentence; (b) impose on the holder of a licence a fine not exceeding R10 000 000 (ten million rands) or such higher amount as may be prescribed, or suspend for a specified time

Provincial Details of Gambling Legislation Legislation or revoke a licence if the holder of the licence has failed to comply with or has contravened any term or condition of the licence or a provision of this Act

Section 49(1) – any licence granted under section 24(4)(b) shall, subject to being renewed, be valid as from the date of the issue thereof until the date on which - (a) The holder thereof abandons it in writing; Northern Province Casino (b) It is revoked by the Board under section 36 and Gaming Act Section 24(4)(b) refers to the Board having the right to refuse or grant the application after considering the application Section 36 refers the suspension or revocation of the licences

Section 35(1) – a licence shall, subject to the provisions of this Act and the conditions under which it was granted, remain in force until the date of renewal or in the case of a temporary licence the date of expiry (2) it shall be the responsibility of the licensee to apply to the Board for the renewal of a licence at least 60 days prior to the date on which the licence becomes renewable and to pay the prescribed licence fee KwaZulu Natal Gambling Act (3) if a licensee fails to renew his or her licence by the date of renewal, the licence shall lapse and the licensee shall – (a) cease operating the activities authorised by the licence; and (b) if he or she so wishes, apply to the Board for a new licence in accordance with the provisions of section 26 in which event all the provisions in this Act relating to an application for a licence shall apply mutatis mutandis (i.e. Competitive process)

Section 37(1) – a licence referred to in section 36(2)(a) or (b) must, subject to section 31(2), be renewed by the licensee no later than the last day of March in any year – (a) On application and in the form determined by the Board; (b) On production of the licence for the preceding year; and (c) On payment of the investigating costs determined by the Board and the Northern Cape prescribed renewal fee Gambling Act Section 36(2) (a) and (b) refers to permanent and temporary licences and Section 31(2) – At least once every year after the issuance of a licence, the Board – (a) Must review the commitments considered in terms of subsection (1)(a) [these refer to economic and social development commitments], and the achievement of the licensee in relation to those commitments; and (b) May impose further or different reasonable and justifiable conditions on the licence to the extent necessary to address the matters referred to in

Provincial Details of Gambling Legislation Legislation subsection (a)

There has been very little policy debate and no policy has been constructed around the issuing of licence terms. As shown above, the terminology used is that the Provinces can apply their discretion which, in practice, is to issue permanent licences, all except Eastern Cape.

Section 45 of the National Gambling Act

This section enables the Minister to prescribe the total maximum number of casino licences26 granted in the country, and in each province. However, before regulating the number, the following needs to be considered:

(a) The number and geographic distribution of‐ (i) Existing licenced casinos and interactive providers operating within the Republic, and the duration of the licences under which they operate; and (ii) Additional casino licences available in terms of the maximum numbers then in force; and (b) Whether it is desirable to alter the maximum numbers of casino licences, in the Republic as a whole, or within any particular province or provinces, in order to‐ (i) address the incidence and social consequences of compulsive and addictive gambling; (ii) promote black economic empowerment; or (iii) promote‐ (a) new entrants to the gambling industry; (b) job creation within the gambling industry; (c) diversity of ownership within the gambling industry; (d) efficiency of operation of the gambling industry; or (e) competition within the gambling industry.

A limit of 41 casinos27 has been set in legislation, and 37 licences have been granted of which 36 are operational. The Eastern Cape, Limpopo and Mpumalanga Gambling Boards still need to allocate the final licence allocated for their respective provinces. The allocation across provinces was based on the ratio of roughly one casino per one million people.28

26 Note that the Minister proposed to increase the maximum number of casino licences to 41 in October 2015 27 Government Gazette Notice 39344 dated 30 October 2015 28 Gambling Review Commission 2010 p.32

Details of Casino Licences across Provinces

Table 8 shows all the operating casinos according to each Province, other that the Eastern Cape and the licence details thereof. As indicated below, all casinos in South Africa, with the exception of the Eastern Cape, issue permanent casino licences.

Table 8: Details of Casinos in the Provinces, excepting the Eastern Cape29

Casino per Date Casino Management Licence Location Province Opened Operator Company Details Free State Permanent Naledi Hotel & May Sun Sun Bloemfontein Casino Casino 1989 International International 1989 Sun Sun Permanent Windmill Casino & Sept International International Bloemfontein Casino Entertainment Centre 2005 Management Management 2005 Ltd Ltd Goldfields Casino and Gold Reef Permanent Goldfields Casino & Dec Welkom Entertainment Management Casino Entertainment Centre 2003 Centre (Pty) (Pty) Ltd* 2007 Ltd Peermont Permanent Nov Peermont Frontier Inn & Casino Bethlehem Global (Pty) Casino 2006 Global (Pty) Ltd Ltd 2006 Gauteng

Tsogo Sun Permanent Nov Tsogo Sun Casino Montecasino Fourways Casino 2000 Casinos Management Company 2000 Akani Egoli Permanent Gold Reef City Nov Akani Egoli Gold Reef City Management Casino Casino 1998 (Pty) Ltd (Pty) Ltd* 2000 Emerald Permanent Emerald Resort& Dec London Clubs Vanderbijlpark Safari Resort Casino Casino 1999 International (Pty) Ltd 2001

29 Casino Association Of South Africa (CASA) Casino Survey 2012; National Gambling Board Statistics 2013; Casino World Directory 2015 www.worldcasinodirectory.com;

Casino per Date Casino Management Licence Location Province Opened Operator Company Details Emperors Palace Peermont Permanent Nov Peermont Hotel Casino Kempton Park Global (Pty) Casino 1998 Global (Pty) Ltd Convention Resort Ltd 2000 Carnival City Casino Afrisun Permanent Dec Sun & Entertainment Brakpan Gauteng (Pty) Casino 1998 International World Ltd 1999 Sun Permanent Morula Casino & Aug Sun International Casino Menlyn Maine Hotel 2014 International Management Relocated Ltd Licence Silverstar Permanent Dec No management Silverstar Casino West Rand Casino (Pty) Casino 2007 Company* Ltd 2009 KwaZulu Natal Tsogo Sun Permanent Suncoast Casino & Nov Tsogo Sun Casino Village Green Casino Entertainment World 2002 KZN (Pty) Ltd Management 2002 Company Sibaya Casino & Permanent Dec Afrisun KZN Sun Entertainment Umhlanga Casino 2004 (Pty) Ltd International Kingdom 2006 Peermont Umfolozi Hotel Peermont Permanent Aug Global Casino & Convention Empangeni Global (KZN) Casino 2006 Management Resort (Pty) Ltd KZN (Pty) Ltd 2012 Tsogo Sun Tsogo Sun Permanent Blackrock Casino July Casino Newcastle Newcastle Casino 2009 Management (Pty) Ltd Company 2006 Akani Akani Msunduzi Permanent PMB Sept Golden Horse Casino Msunduzi Management Casino 2001 (Pty) Ltd (Pty) Ltd* 2001 Mpumalanga Tsogo Sun Tsogo Sun Permanent March Casino The Ridge Casino Witbank Casinos (Pty) Casino 1998 Management Ltd Company 2002 Oct Peermont Peermont Permanent Graceland Hotel, Secunda Casino & Country 1997 Global Global (Pty) Ltd Casino

Casino per Date Casino Management Licence Location Province Opened Operator Company Details Club (Pty) Ltd 1998

Tsogo Sun Tsogo Sun Permanent Oct Casino Emnotweni Casino Nelspruit Casinos (Pty) Casino 1997 Management Ltd 1999 Company Limpopo Meropa Casino Permanent Meropa Casino & March Sun Polokwane Resort Manco Casino Entertainment World 2002 International (Pty) Ltd 2002 Peermont Thaba Moshate Hotel Permanent April Global Peermont Casino & Convention Burgersfort Casino Tubatse (Pty) Global (Pty) Ltd Resort 2015 Ltd 2015 Peermont Peermont Global Permanent Khoroni Hotel Casino Oct Global Thohoyandou Management Casino & Convention Resort 2006 (Limpopo) (NW&L) (Pty) (Pty) Ltd 1995 Ltd Northern Cape Permanent March Teemane Sun Flamingo Casino Kimberley Casino 2002 (Pty) Ltd International 2002

Desert Palace Hotel Desert Northern Cape Permanent June Palace Hotel Casino Resort Upington Casino 2000 Resort (Pty) Consultants (Pty) Ltd Ltd Kairo (Pty) Ltd 2005 SPV Licensee April Leitlho SPV April 2015 Grand Oasis Casino Kuruman 2015 Licensee Casino not operational North West Peermont Mmabatho Palms Peermont Global Hotel Dec Global (North Permanent Mmabatho Management Casino & Convention 1978 West) (Pty) Casino 1978 (NW&L) (Pty) Resort Ltd Ltd

Dec Sun Sun Permanent Sun City Pilanesberg 1979 International International Casino Management

Casino per Date Casino Management Licence Location Province Opened Operator Company Details Ltd

Peermont Peermont Global Rio Hotel Casino & Sept Global (North Permanent Klerksdorp Management Convention Resort 2004 West) (Pty) Casino 2004 (NW&L) (Pty) Ltd Ltd Carousel Casino & Nov Sun Sun Permanent Hammanskraal Entertainment World 1991 International International Casino Western Cape Grand West Casino Sun & Entertainment Dec Sun West International Permanent Goodwood World 2000 International Management Casino 2000 Ltd Garden Gold Reef Garden Route Dec Permanent Mossel Bay Route Casino Management Casino 2002 Casino 2002 (Pty) Ltd (Pty) Ltd* Sun Worcester Golden Valley Nov International Permanent Worcester Casino(Pty) Casino 2006 Management Casino: 2006 Ltd Ltd Century Tsogo Sun Caledon Casino, Oct Casinos Casino Permanent Overberg Hotel and Spa 2000 Caledon (Pty) Management Casino: 2000 Ltd Company West Coast Gold Reef Nov Permanent Mykonos Casino West Coast Leisure (Pty) Management 2000 Casino: 2000 Ltd (Pty) Ltd* Note – a “permanent casino” refers to an indefinite licence issued in terms of the relevant provincial legislation * Companies owned and controlled by the Tsogo Sun Group

2.2 Limited Payout Machines (LPM) Industry

There are three main categories of players in the LPM industry, namely route operators, site operators and a Central Electronic Monitoring System (CEMS) operator. A Route operator30 is a company registered in terms of the Companies Act (1973) and is licensed to own and operate

30 Government Gazette Government Notice No. R 1425. Department of Trade and Industry National Gambling Act, 1996. Regulations on Limited Payout Machines. 21 December 2000

LPMs, is responsible for their maintenance and responsible for the collection of money and paying the Provincial taxes and levies in respect to any LPM under its licence. A site operator is entitled to keep the LPMs (which are owed by the Route operators) on his premise and make them available to be played by the public. CEMS is a centralised LPM monitoring and evaluation system operated on a contract basis by Zonke Monitoring Systems, located in Johannesburg. The 2014/15 financial year saw a growth in the LPM sector. The table below shows a 10% growth in the number of operational LMP route operators within the 2014/15 financial year. The growth of operational site operations and installed LMPs showed a slower, but positive growth, at 2% and 5% respectively.

Table 9: Growth in LMPs in 2014/15 (nationally)31

Indicator Q1 Q4 % growth Operational LMP route operators 10 11 10% Operational LPM site operators 2,031 2,071 2% Installed LPMs 9,744 10,279 5%

The total national GGR grew 19.6%, increasing from R1.74 billion in 2013/14 to R2.1 billion in 2014/15. The sector contributed R262 million towards tax revenue, which constitutes 10.6% of total gambling tax revenue. LPM’s have the highest tax rate compared to all other gambling sectors.

The graph below shows the Western Cape and KwaZulu Natal’s dominance in the LPM industry, followed by Gauteng and the Eastern Cape. The Northern Cape is yet to roll out any LPMs.

31 National Gambling Board Annual Report 2014/15 p.33

Figure 9: LPM tax levied & collected by PLAs per provinces in 2014/15

Northern Cape

North West

Free State

Mpumalanga

Limpopo

Eastern Cape

Gauteng

KZN

Western Cape

0 10 20 30 40 50 60 70 80 R millions

Details of LPM Operators and Licences across the Provinces

Active LPM operators are Vukani Gaming, Grand Parade Investments, Safika Group, Zico and Goldrush Gaming. An important feature of the LPM industry is the growing concentration of ownership, with two groups together holding 9 of the 13 route operator licences (70%) that are currently active. The regulations on LPMs anticipated a roll-out of 50 000 LPMs in South Africa, with a maximum number of LPMs allowed in each Province.

Table 10: Maximum LPMs per province32

Eastern Cape 6,000 Free State 4,000 Gauteng 10,000 KwaZulu Natal 9,000 Mpumalanga 4,000 Northern Cape 2,000 Limpopo 3,000

32 Government Gazette Government Notice No. R 1425. Department of Trade and Industry National Gambling Act, 1996. Regulations on Limited Payout Machines. 21 December 2000

North West 3,000 Western Cape 9,000

This was to occur over two phases, the first being 25 000 machines. On 20 June 2003, the first LPM site was established and operated in Mpumalanga, and to date some 6 156 machines (or ¼ of the first phase target) are operating in eight of the nine provinces in South Africa33.

The provincial gambling regulatory authorities, working within national guidelines, determine their own specific licensing criteria with the issuing of route operator licences. In all provinces, except for the Eastern Cape, licences are issued for an indefinite period. According to one route operator, a period of at least 15 years is needed to allow the route and site operators to recuperate their costs and made a decent profit34.

2.3 Sports betting (including Horseracing) Industry

Early in the last decade, the horseracing industry evolved from a plethora of jockey clubs into the establishment of two national totalisator operators, namely Phumelela and Gold Circle. Together they own a corporate bookmaking operation known as Betting World. A total of several hundred private bookmakers make up the balance of the betting industry today. Phumelela is responsible for seven racecourses, which are mainly inland, whereas Gold Circle has a presence in the Western Cape and KwaZulu Natal. Currently there are an estimated 400 total outlets around the country and 200 bookmakers35.

According to the National Gambling Board, sports betting is predominantly done by bookmakers, which constitute an estimated 85% of total sports betting GGR.

The National Gambling Board reported that in 2014/15 the Betting Industry contributed 13.8% of total taxes and levies totalling R34 million. The GGR for the corresponding financial year totalled R3.4 billion. The graph shows the historical growth in GGR for the total sports betting industry and an annual average growth rate of around 8% is predicted over the next four years.

33 www.NGB.co.za 34 Vukani presentation to GRC 35 www.NGB.co.za

Figure 10: Gross Gambling Revenue for Total Sports Betting (Bookmakers & Totalisators)36

6000 forecast 5000

4000

3000 Rmillion 2000

1000

0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

The National Gambling Board has witnessed a significant shift in patterns of horseracing over the years. Noticeable, there is more inclination by punters to take bets on sports rather than horseracing. Sports betting has been increasing at an average of 54% per annum since 2009 as shown by the graph below. The increase in sports betting shops and online wagering is driving this component and it is anticipated that sports betting will overtake horse racing within 5 years.

36 NGB Annual Report 2014/15 and PWC

Figure 11: Graph showing split between GGR generated from horse racing and sports betting37*

4000

3500

3000

2500

2000

1500

1000

500

0 2009 2010 2011 2012 2013 2014

horse racing sports betting

* Eastern Cape Statistics for sports betting is included in the horse racing statistics

Gauteng dominates the sports betting industry, and contributes 49% of the total GGR, followed by KwaZulu Natal and the Western Cape. Although the Northern Cape generates the least revenue, it experienced the highest annual growth, increasing 58% from 2013/14 financial year. The North West experienced the largest decline in 2014/15 at 26%.

37 National Gambling Board Statistics 2014/15 and PWC Third Annual Edition November

Table 11: GGR for total sports betting across provinces (201314 and 2014/15)38

Province 2013/14 2014/15 % Change Gauteng 1 242 1 700 37% KZN 681 713 5% Western 325 392 21% Cape Limpopo 131 180 38% Eastern Cape 164 170 4% Mpumalanga 87 129 48% Free State 85 83 -2% North West 108 79 -26% Northern 11 17 58% Cape

2.4 Bingo Industry

The bingo industry is the smallest gambling industry, contributing just 2% of the national gambling GGR. However, it has experienced the greatest growth and it is predicted to continuing growing at 19% compounded annual increase to 201839.

The National Gambling Board reported that in 2014/15 the Bingo Industry contributed 3.3% of total taxes and levies totalling R8.8 million. The GGR for the corresponding financial year totalled R1.17 billion, a 53% increase from 2013/14.

Table 12: GGR of the Bingo Industry 2009 to 2014 (million)40

2009 2010 2011 2012 2013 2014 GGR (R million) 197 196 235 437 732 1 117 % change -1% 20% 86% 68% 53%

38 National Gambling Board Statistics 2014/15 39 PWC Third Annual Edition November 40 PWC Third Annual Edition November and National Gambling Board Annual Report 2014/15

Figure 12: GGR of Bingo industry

There are only 5 provinces where bingo is available, namely Gauteng, Eastern Cape, Mpumalanga, North West and KwaZulu Natal. Gauteng generates 81% of the bingo revenue, followed by the Eastern Cape which generates 10%.

Figure 13: GGR by Provinces 2012/13 to 2014/1541

1,200

1,000

800

600

400

200

- 2012/13 2013/14 2014/15

GT EC MP NW KZN

41 National Gambling Board Statistics 2014/15

The table below shows the bingo performance for the 2014/15 financial year. Bingo outlets increased 44% from the first quarter, and bingo positions gained 18%.

Table 13: Bingo Sector Performance – South Africa 2014/1542

Annual Bingo Indicators Q 1 Q2 Q3 Q4 Growth % Operational bingo operators across Provinces 4 4 4 4 0%

Operational bingo outlets 18 21 25 26 44%

Operational bingo positions 4 557 5 369 6 414 5 369 18%

Chapter 3: Gambling Licences – The position in other Countries

Casino Industry Literature Review

A review of casino licences across the international spectrum reveals that there are substantial variations in the licence term granted across, and even within, countries. In the United States of America, licence terms differ from the issuing of indefinite casino licences in Nevada to biannual renewals in California. However, casino licences are generally extended for a period of between one to four years in the United States. In Europe, it is found that casino licences are usually issued for a period of between 10 and 20 years; while, in Australia, long-term licences are issued for periods longer than 50 years.

United States of America

Each of the US states has the authority to regulate legalised gambling and to decide upon the form or extent of gambling and the scope and intensity of the regulations43. As such, the regulations and duration of casino licences varies widely across states as shown in Table 14. For example, Indiana requires annual renewals, with re-investigation every three years, while Colorado issues licences for two years. Michigan and Washington require annual renewal, in comparison to Missouri and Louisiana which grant four- and five-year licences. New Jersey and Nevada have abandoned licence re-investigations and renewals altogether and issue indefinite licences.

42 National Gambling Board Annual Report 2014/15 43 Belletire, M. Legislating and regulating casino gaming: A view from State regulators. Developed at the request of the Regulation, Enforcement and Internet Subcommittee of the National Gambling Impact Study Commission, 1999, p.1

Every state, except Nevada, which operates close to a free market, has placed limits on either the number or the location of casino licences. In New Jersey, casino licensing is restricted to Atlantic City; in Colorado, it is limited to three towns and in various states it is limited only to waterways. Analysts suggest that the greater the limitations, the greater the likelihood of creating monopoly- like conditions, since the exclusivity of licences can have implications for regulations.

Table 14: Licence Legalisation for a Selection of States in the USA

Number of State Regulatory Body Legislation Casino License Period Licences A licence shall be renewed Bureau of Gambling biennially, and application for Currently 58 tribal Control and the Gambling renewal of a gambling licence California44 casinos in Gambling Control Control Act shall be filed no later than 120 operation Commission days prior to the expiration of the current licence. Term of Licence: 2 years. Colorado Department Colorado Renewed upon filing and of Revenue and Limited Gaming Currently 40 approval of application, which Colorado45 Colorado Limited Act with casinos operate in must be received by Division at Gaming Control Constitutional Colorado. least 120 days prior to expiration Commission Amendment date. Riverboat Currently 10 Term of license is any period up Gambling Act casinos operating, to 4 years. Additional restrictions Illinois46 Illinois Gaming Board (230 ILCS 10) limited to and conditions may be imposed (1990) waterways on the renewed licence.

Following the initial five-year Indiana Gaming Riverboat 12 riverboat casino license period, Riverboat Indiana47 Commission Gambling Act licences issued Owner's Licences are renewed annually pursuant to statute. Currently 17 Initial licence usually given for operating casinos: up to three years (to allow for Iowa Racing and Pari-Mutuel 7 are riverboats, 7 the construction and give it time Iowa48 Gaming Commission Wagering Act are land-based, to ensure it is operational). After and 3 are racetrack the initial three-year licence, the casinos. licences are renewed annually.

44 California Gambling Control Commission, http://www.cgcc.ca.gov/, 2015 (accessed April 2015) 45 State of Colorado, ‘Colorado Department of Revenue’ https://www.colorado.gov/pacific/enforcement/node/38571, 2015 (accessed April 2015) 46 Illinois Gaming Board, https://www.igb.illinois.gov/ (accessed April 2015) 47 Indiana Casino Licensees and Operating Agent, http://www.in.gov/igc/files/owners.pdf, 2015 (accessed 16 September 2015) 48 Iowa Racing and Gaming Commission, http://www.state.ia.us/irgc/ (accessed April 2015)

Number of State Regulatory Body Legislation Casino License Period Licences Kansas Kansas Racing and Expanded Currently one non- A Gaming Supplier Certification Gaming Commission, Lottery Act Kansas49 tribal casino and six is valid for a period of no longer and the Kansas State (2007) and the tribal casinos. than two years from its issuance Gaming Agency Tribal Gaming Oversight Act. Louisiana Gaming Control Currently there are All riverboat casino licences are Act; Louisiana 13 riverboats in issued for a period of five Louisiana Gaming Riverboat operation, 3 land- years51. Louisiana has one land- Louisiana50 Control Board Economic based Indian based casino which is required Development casinos and 4 to renew their licence every 20 and Gaming racetrack casinos. years. Control Act Michigan Authorisation of up A casino licence is issued for a Michigan Gaming Gaming Control to 3 licences one-year period, after which Michigan52 Control Board and Revenue commercial casinos licences may be renewed Act in Detroit annually if requirements met Licence term: up to 3 years. After review and verification 30 dockside and Mississippi procedures and payment of Mississippi Gaming land-based casinos Mississippi53 Gaming Control fees, the licence can be Commission currently in Act renewed for up to 3 years. No operation more than 2 continuances may be granted for each licence. Licence term of 4 years, with licence renewal thereafter if Missouri Code compliant with all gaming laws Missouri Gaming Currently 12 Missouri54 of State and regulations. The Commission riverboat casinos Regulations commission may reopen the investigation of a licensee at any time.

49 Kansas Racing and Gaming Commission http://www.krgc.ks.gov/ (accessed April 2015) 50 Department of Public Safety & Corrections, Public Safety Services, ‘Louisiana Gaming Control Board,’ http://lgcb.dps.louisiana.gov/, 2010 (accessed April 2015) 51 Louisiana State Legislature http://www.legis.la.gov/Legis/Law.aspx?p=y&d=85068 52 State of Michigan, ‘Michigan Gaming Control Board,’ http://www.michigan.gov/mgcb/0,4620,7-120-57144_57145-245366--,00.html, 2015 (accessed April 2015) 53 The Mississippi Gaming Commission, http://www.msgamingcommission.com/, 2015 (accessed April 2015) 54 Missouri Gaming Commission http://www.mgc.dps.mo.gov/ (accessed April 2015)

Number of State Regulatory Body Legislation Casino License Period Licences Permanent licences do not have Nevada In 1931, Nevada to be renewed. Once Gaming Control was the first state establishments are licenced Nevada Gaming Nevada55 Act and to legalise they are required to pay fees in Control Board Ancillary commercial casino order to be in good standing and Statutes gaming. continue their gaming operations. A casino licence, once issued, is held with no expiration date. The NJ Casino retention of a casino licence New Jersey Casino Control Act and shall be subject to the New Jersey56 Unknown Control Commission Comm-ission submission every five years Regulations thereafter, or within such lesser periods as the Division may direct. A licence is valid for one year or Washington State Gambling Act less. The licence becomes void Washington57 Unknown Gambling Commission (1973) if the business is sold, except under special circumstances.

A White Paper published in the American Gaming Association58, recommends that licence terms should be indeterminate as in the case of Nevada and New Jersey, or extended for at least five years. The reasoning behind this lies in the extent to which resources are devoted to the licensing process, both for the licensing applicant and the licensing body. The licensing procedure requires detailed financial and personal information, interviews and background investigations, all of which need to be gathered, checked, assembled and submitted in the prescribed format. Even once the casino licence has been issued, the casino operates under close scrutiny since every casino licensee has an ongoing obligation to maintain its suitability for licensing. The regulators monitor the financial results and tax payments, and review the auditing practises and results regularly. Any changes in management need to be reported and regulators also monitor surveillance and security activities.

Accordingly, if there is sound reason to revoke a licence, the regulator will not wait until the end of a licence term, but will act promptly against the licensee. This is the main reason why non- renewals have been very rare throughout the history of legalised gambling in America.

55 Nevada Gaming Control Board, http://gaming.nv.gov/ ,2015 (accessed April 2015) 56 State of New Jersey Casino Control Commission, NJ Casino Control Act & Commission Regulations, http://www.nj.gov/casinos/actreg/reg/ 2015 (accessed April 2015) 57 Washington State Gambling Commission, http://www.wsgc.wa.gov/, 2015 (accessed April 2015) 58 D Stewart, White Paper Improving Gaming Regulation: 10 Recommendations for Streamlining Processes While Maintaining Integrity, American Gambling Association, Washington DC, 2011, p. 2.

The American Gaming Association (AGA), therefore, argues that by requiring full re-licensing after a pre-determined period, the regulators and licensees undergo an empty exercise that wastes significant resources. The AGA, therefore, advocates the issuing of licences without specific terms.

Australia

Similar to the United States, the regulation of Australian casinos is specific to state and territory governments. Each jurisdiction has a regulatory authority responsible and specific legislation relating to their casinos as indicated in Table 15.

Table 15: Information on Casino Licences and Legislation for a Selection of States in Australia

Legislation for Regulatory Duration of State Casinos Casinos Authorities licence

Jupiters Townsville Queensland Gaming Hotel and Casino Casino Control Act Commission; Queensland59 Jupiters Casino Varied 1982 Queensland Office of Gambling Regulation Treasury Casino The Reef Hotel Casino

Victorian Commission Casino Control Act Crown Melbourne Victoria60 for Gambling 57 years 1991 Casino (opened in Regulation 1994)

Casino Control Act Crown Perth Casino 1984 Gaming and Wagering Western (previously known as Casino (Burswood Commission of 75 years Australia61 Burswood Island Agreement) Western Australia Entertainment Complex Act 1985 opened 1985)

Casino Liquor and New South Casino Control Act Gaming Control 99 years Wales62 1992 The Star City Authority

59 The Allen Consulting Group Casinos and the Australian Economy Report to the Australasian Casino Association April 2009 p52 60 Ibid 61 Ibid 62 Australian Gambling, New South Wales Casinos http://www.australiangambling.com.au/casinos/new-south-wales/, 2014 (accessed August, 2015)

Legislation for Regulatory Duration of State Casinos Casinos Authorities licence Office of the Liquor and Gambling South Casino Act of Commissioner; 86 years Australia63 1997 Skycity Adelaide Independent Gambling Authority

The Australian casino industry was established in 1973 with the opening of Wrest Point Hobart in Tasmania. The industry currently comprises 13 casinos, owned by six companies, with many being integrated entertainment complexes, featuring restaurants, conference facilities, theatres and hotels. The number of casinos in Australia has remained unchanged since 1999.

The States in Australia issue casino licences for extended periods, longer than 50 years. Many of the States have only one casino, with licensees holding exclusivity agreements.

The Crown Melbourne Casino64 is the only casino in the State of Victoria and the licence, which was granted in 1993, is valid until 2050. The agreement was varied on 20th October 2014 to extend the duration of the licence by 17 years, from 2033 to 2050. Although initially it was a 40 year licence, it is now valid for 57 years. Crown Melbourne Limited was granted the licence under Section 142 of the Casino Control Act 199165.

There is also only one casino in New South Wales, The Star City in Sydney, which opened in 1994 after being granted a 99-year casino licence. The Star City holds exclusivity rights until 2019 and is currently seeking an extension beyond this until 2034. Echo Entertainment proposes further investment of $1.1billion should it be granted full exclusivity66.

In South Australia, Skycity Adelaide which opened in 1999 is also the only casino in South Australia. Not only does the term of the casino licence67 only expire in 2085 in accordance with the Approved Licensing Agreement, but there is also an exclusivity agreement in place that has been extended to 2035.

63 Government of South Australia, Department of Treasury and Finance - South Australian Gambling Policy – Adelaide Casino Agreements Fact Sheet 2014 64 Victorian Commission for Gambling and Liquor Regulation, Casino operator and licence review, http://www.vcglr.vic.gov.au/home/laws+and+regulations/compliance+and+enforcement/casino+operator+and+licence+review, 2015 (accessed 4th August, 2015) 65 “This licence ceases to have effect on 18 November 2050, unless sooner cancelled or surrendered under the Casino Control Act,“ Casino Control Act 1991 (Victoria) 66 Unsolicited Proposal Echo Entertainment Group Development of the Star Assessment Report July 2013 67 Department of South Australia, Department of Treasury and Finance. South Australian Gambling Policy – Adelaide Casino Agreements Fact Sheet 2014

There is only one casino in Western Australia, the Crown Perth, which has a licence valid until 206068.

The casino industry plays an important role in Australia and it used as a catalyst to attract investment and expand the tourism sector. Casinos are a key provider of tourism infrastructure, including hotels, restaurants and conference facilities that raise the Australian profile as a tourism destination. This infrastructure also supports major international events such as the Australian Grand Prix, the Spring Racing Carnival and the Hopman Cup (tennis).

Very sizeable capital works projects are being undertaken throughout the Australian casino industry. In 2007/08, casinos spent A$321.5 million on capital works.69 Furthermore, Crown Limited invested around A$2.2 billion in the improvement and expansion of their Melbourne and Perth facilities between 2007 and 2013. Echo Entertainment Group, which owns The Star Casino, Jupiters Gold Coast and the Treasury Casino, invested A$860million, A$350million and A$260million on refurbishment, upgrades and expansion respectively70.

All these casinos have long-term licences that extend to 2050 at the earliest. The question left begging is whether such capital investment is informed by the conditions of licence determined by the Australian regulatory authorities, and whether the re-issuing of licences may be deemed an essential catalyst to “encourage” further capital investment to existing casinos.

A report71 commissioned by the Australasian Casino Association states that in order to attract home city, state, interstate and international customers, casinos must provide world-class gaming and non-gaming facilities. As a result, successful bidders for casino licences across Australia were typically required to offer not just world-class gaming facilities, but also an extensive range of world-class non-gaming facilities. Such non-gaming facilities include hotels, restaurants, bars, nightclubs, theatres and much more. Consequently, much of the ongoing capital investment by Australian casinos is aimed not at expanding capacity, but rather at renewing and enhancing existing facilities to ensure world-class facilities are provided on an ongoing basis.

The report goes on to explain that many of the parent companies monitor their investments to ensure that adequate returns are made. They are sensitive to the regulatory and taxation environment since changes to the regulatory or taxation circumstances may make previously sound Australian investments no longer attractive. Hence, ongoing investment in Australian casino infrastructure is dependent upon Australia maintaining an attractive operating and regulatory environment.

68 Crown Resorts, Crown Perth, http://www.crownresorts.com.au/our-resorts/crown-perth, 2013 (accessed September, 2015) 69 The Allen Consulting Group, Casinos and the Australian Economy Report 2009,p44 70 The Allen Consulting Group, Crown Sydney Proposal An Economic Benefit Assessment August 2012 Report to Crown Limited p39 71 The Allen Consulting Group, Casinos and the Australian Economy 2009, p46

Europe

The duration of casino licences also vary across the countries in Western Europe72. On the one hand, in the Netherlands, casinos licences are issued for an indefinite time period, with plans to privatise the industry. By contrast, there is strong government regulation in France where a government advisory panel hosts monthly sittings in order to analyse the renewal or extension of licences which are all granted on a temporary basis. In Austria, casino licences are issued for 15 years and in Spain, the average licence is granted for approximately ten years, although in certain regions it can last for 30 years. Casinos Austria Group (the former sole concessionaire for casinos, which has retained control of 12 out of 15 of the country’s casino operating licences) is the second largest tax payer in Austria.

In Eastern Europe, casino licences are generally issued for either 10 or 20 years as shown in Table 16. Table 16: Casino licence Durations in Eastern Europe73

Country Licence Duration Number of casinos 57 casinos (decline from Estonia 20 years 171 in 2008) 20 years (with possible 10 Hungary 3 casinos year extensions) Poland 6 years 43 casinos 9 casinos (down from 22 Romania 5 years due to closures) Serbia 10 years 2 casinos

Slovakia 10 years 8 casinos 10 years (with possible 5 Slovenia 9 casinos (3 closures) year extensions)

SADC

A review of casino licences in some of the SADC countries shows that casino licences are generally issued for limited periods of between 5 and 10 years, with Tanzania only issuing licences on a 12 monthly basis, as shown in Table 17.

72 European Casino Industry (ECA) Report 2013, prepared by Gambling Compliance 73 European Casino Industry (ECA) Report 2013, prepared by Gambling Compliance

Table 17: Details of Casino Licences in a Selection of SADC Countries

Licence Relevant section of legislation Country Legislation Duration

8 (5) Subject to the provisions of this Act, a Laws of licence shall be valid for 10 years Botswana, commencing on the date of the grant of Botswana 10 years Chapter 19:01 the licence but may be renewed on such Casino74 terms and conditions as the Board may deem fit.

Chapter 10:26; 33 (2) A licence shall be valid for such Zimbabwe 10 years Lotteries And period, not exceeding ten years, as the Gaming Act75 Board may fix when issuing it.

12.(1) subject to this Order, 10 years a) An authorization shall be valid for a (renewal 2 years Casino Order, Lesotho 76 period of 10 years from the date of the before 1989 commencement of the applicant’s casino expiration) business.

The Casino 3 (3) A casino licence shall remain in Zambia 5 years (Amendment) Act, force for such period, not exceeding five Chapter 15777 years, as is specified in the casino licence.

The Gaming Act, 20 (1) Subject to subsections (2), (3) and Chapter 41, (4), every licence issued under this Act Tanzania 1 year revised edition shall expire after twelve months from the 200878 date of issue.

74 Laws of Botswana, Chapter 19:01 Casino http://www.mti.gov.bw/webfm_send/265 (accessed 18th September, 2015) 75 Chapter 10:26; Lotteries And Gaming Act http://www.parlzim.gov.zw/attachments/article/96/LOTTERIES_AND_GAMING_ACT_10_26.pdf (accessed 19th September, 2015) 76 Lesotho Trade Portal, Casino Order 1989 http://www.lesothotradeportal.org.ls/index.php?r=site/display&id=56#9 (accessed 19th September, 2015) 77 Zambia Lii, Casino (Amendment) Act, Cap 157 http://www.zambialii.org/zm/legislation/consolidated-act/157 (accessed 18th September, 2015) 78 The United Republic of Tanzania, The Gaming Act Chapter 41 Revised Edition http://www.mof.go.tz/mofdocs/revenue/The%20Gaming%20Act.pdf (accessed 18th September, 2015)

Other Gambling Industries Literature Review

LPMs

Looking at the EU, there is variability as to the regulations surrounding LPMs, or “machine gambling outside of casinos,” as they are referred to. Certain EU members, such as France and Greece, prohibit this type of gambling altogether, while others place limits as to the number of gambling machines per location. Belgium is only allowed 180 gambling halls, Slovenia 40 game rooms and Spain is limited to 6057 machines on the Baleares. There are also certain types of machines prohibited, for example in the UK no high turnover machines are allowed, and only approved machines can be operated, imported or sold. The approval needs to be done every five years.

The duration of licences79 for machine gambling operators is also limited in time in some of the member EU countries –  Austria (2-10 years)  Belgium (5-9 years)  Denmark (5 years)  Finland (5 years)

Sports Betting

Across the EU, almost all member states maintain licensing requirements for betting operators, and some also limit the number of operators (Luxembourg, the Netherlands, and Slovenia). In Denmark, Finland, Italy, the Netherlands and Sweden, a single licence is issued for sports betting, while in Cyprus, Finland, the Netherlands, Spain and Sweden, a single licence is issued for horse race betting80.

The duration of licences is limited in time in some of the member countries –  Denmark (5 years)  Estonia (5-10 years)  Finland (5 years)

79 Swiss Institute of Comparative Law, 2006. Study of Gambling Services in the Internal Market of the European Union. European Commission

80 Swiss Institute of Comparative Law, 2006. Study of Gambling Services in the Internal Market of the European Union. European Commission

 Netherlands (the Dutch Minister must stipulate the period for which the licence remains valid).

Bingo Industry

In the EU, most member states impose licensing regulations upon bingo operators. In some member countries, there are specific legal requirements as to the type of legal entity that is entitled to offer bingo services (for example in Denmark and Cyprus only organisations or committees are allowed), while other member countries, such as Spain and Sweden, there are nationality requirements to ensure that only domestic companies can organise bingos. In the UK, Spain, Poland (among others), the law also imposes residence or domicile requirements on the operators, or their agents81. There is, however, no discussion as to the duration of the licences.

Chapter 4: Discussion on the Duration of Casino Licences in the Eastern Cape

The ECGBB initially issued casino licences for ten years, thereafter extending it to fifteen years; and now, the amended Act provides for future licence terms of 20 years. However, prior to the 2015 Amendment, it was stipulated that the licences were to be issued for a period of no less than five years, with the term determinable at the discretion of the Board. While there has been substantial legal debate as to whether “no less than five years” may imply “indefinite”, the legal opinion sought by the ECGBB concluded that this was not the case.

The Amendment to the Act in 2015 attempted to address the issue regarding the limited returns on investment that were realised due to the shorter licence terms. The issue now is to discuss the impact of twenty-year casino licences compared to that of indefinite licences.

Although this is predominantly an economic argument, it is not limited to the mere profitability of the individual companies, since the consequences of maximising company returns has a wider socio-economic impact due to the fact that it contributes significantly to the Provincial coffers. Furthermore, the profitability of individual companies encourages further investment and expansion, which enables economic activity and job creation. Therefore, it is in the Board’s interest to discourage the stagnation of casino performance. It is also necessary to consider the further consequences that limited licence terms have on BEE shareholders and employment in addition to CSI commitments. The resources needed for the re- licensing process need to be considered, especially in light of the fact that all licences have been re-issued to existing licensees.

81 Swiss Institute of Comparative Law, 2006. Study of Gambling Services in the Internal Market of the European Union. European Commission

The discussion below shows that casinos situated outside of the Eastern Cape continue to reinvest into existing infrastructure, without any regulatory controls. On the other hand, casinos in the Eastern Cape are hesitant to spend resources on maintenance and refurbishment, nor to commit to any expansions, due to the uncertainty of the future licences. The impact that the fixed-term licences have on long-term planning and sustainable investments needs to be unpacked.

In the absence of a clear policy to guide the setting of the licence terms, one turns to the principles of the regulatory framework that promotes uniformity across Provinces. Given that all remaining Provinces have chosen to issue indefinite casino licences, it begs the question as to why the Eastern Cape has chosen to apply an alternative approach.

Impact on the Return on Investments

Existing licensees argue that the use of fixed term licences does not allow for sufficient time to generate an acceptable return on the required capital investment. This means that casinos in the Eastern Cape are not making satisfactory returns since they have to pay off capital debt within shorter periods, aggravated by the fact that the initial capital investments are considered to be higher than market values.

Tsogo Sun

According to Tsogo Sun, it is simply not commercially achievable to fully recover casino-related investments over the limited period of the casino licences, or to generate value-enhancing returns to the empowerment partners in these operations.

Sun International

According to Sun International, the biggest challenge with the Wild Coast Sun is that a significant component of its facilities and assets are far bigger than the market justifies and, as a result, merely staying up to date on replacement and refurbishment expenditure is proving to be a major challenge.

The Wild Coast Sun has re-invested capital expenditure of over R500million since the commencement of the current licence tenure (awarded in 2009), of which R420million has been spent on the re-development project. The Wild Coast Sun still continues to expend substantial capital on maintaining its facilities to ensure that it holds its competitive position. Sun International explained that any reduction or restriction on the casino licence period, which is currently issued for 10 years, will adversely impact on its ability to obtain the intended return on the investment made.

Initial bids overvalued

Both Sun International and Tsogo Sun claim that the initial capital investments for the casinos were larger than the market potential. According to Tsogo Sun, it was the Board’s intention to flagship

projects for the benefit of the Province as a whole that resulted in enhanced levels of investments being required from all the bidders for these projects. Tsogo Sun explained that the respective commercial feasibilities conducted at the time indicated that these projects ought to have been more limited in order to generate the then desired levels of returns. However, these initial capital investments were not voluntary in nature, but rather a prerequisite set by the regulating body.

This means that in the run-out of the term of its casino licences, the licensees will be disinclined to introduce any further investment, to finance any expansions or enhancements of a capital nature, or to conduct asset replacements.

Sun International concurred that, due to the initial re-bid, a significant investment has gone into properties such as the Boardwalk and the Wild Coast Sun, which is well above what would have been spent on a greenfield licence. The challenge now faced is that these properties have low operating margins and the ongoing investment needed to maintain and refurbish them is significant.

That said, Sun International explained that since they already have existing infrastructure on which considerable investment has been made during the past licence tenures, they are faced with the situation of either committing to the required re-investment expenditure in order to secure the licence renewal, or risk losing the infrastructure investment already made.

Wider Impact

The poor financial returns experienced by the casinos has a wider economic impact since tax revenue from casinos is a significant source of provincial own-revenue. It is, therefore, in the interest of the Province to create profit-maximising casinos and it is apparent that this is not the case, since casinos are disinclined to invest further and are struggling to make decent returns.

Currently, the casinos in the Eastern Cape contribute around R4million82 towards Corporate Social Responsibility projects. Over the past ten years, Sun International has invested an average of R2 million per annum towards CSI projects. While the majority (71%) of the Wild Coast Sun funding goes towards Community Development projects, the Boardwalk has focused most of its funding (62%) towards Health and Welfare projects.

The uncertainty regarding the re-issuing of licence terms will impact on the financial security and the continuity of these community projects.

82 Queens and Hemingways casinos, CASA 2012, p36 and Sun International Casinos, data received

Black Economic Empowerment

In reviewing the direction of casino tourism in South Africa, Rogerson83 notes that casino gambling is often considered as a catalyst in the development of a tourism industry, providing new revenues, employment and visitors. The review concludes that “the role of casinos as a focal point for domestic tourism has decreased in post-apartheid South Africa and casinos are now recognised as vehicles for Black Economic Empowerment (BEE) within South Africa’s tourism economy.”84

The licensees demonstrated that fixed-term licences adversely affect BEE partners due to the poor returns obtained. Sun International explained that by extending the licensing period indefinitely, greater cash flow to the empowerment partners would be available since currently the greatest part of the licence period is spent repaying loans. The Eastern Cape empowerment partners have realised lower returns compared to those in other provinces owing to the limitations inherent in the existing duration of the casino operator licences and the significant new investments made in order to secure the licence for a second term.

Tsogo Sun agreed that the empowerment components of the ownership of the casino resorts and the BEE contributors among their service providers and other SMMEs have been compromised due to the uncertainty regarding the continuation of the operations after the expiry of the licence periods. The uncertainty renders it impractical, or even impossible, to establish goals, contracts and any other arrangements beyond the run-out of the licences. This leads to the destruction, rather than the enhancement, of value for the PDI sectors, which were always intended to benefit from the new casino dispensation in the country.

An argument for continuing with fixed-term licences is that this will potentially broaden the net to incorporate more BEE partners when licences are re-issued. However, this argument becomes null and void if the current BEE partners do not fully benefit from the partnership; and it would make sense to focus on ensuring that it becomes a financially favourable arrangement before trying to extend the net to new beneficiaries.

In Summary

The above discussion shows how the fixed licence terms, together with the high initial investments, have negative impacts on the returns of the companies’ shareholders and the BEE partners. Not only has there been a limited time to pay off the capital expenditure due to the fixed term licences, but the initial investments exceeded to the market potential adding additional strain to the financial performance and capital repayments. The companies’ have explained that this has adversely impacted their ability to achieve favourable economic returns. Hence, due to the poor returns, it is questionable whether the licensees will be in a position to commit to further capital investment

83 Rogerson, 2004:161 in D Van Lill D, Van Lill: Transformational Change in the SA Gambling and Lotteries Sector. 2007 84 Rogerson, 2004:178 in D Van Lill - Transformational Change in the SA Gambling and Lotteries Sector 2007, p. 67

should the conditions for the re-bid require this, since even maintenance and refurbishment is proving to be a challenge.

Employment Considerations

Tsogo Sun maintained that the four casino resorts in the Province provide employment to more than 4,000 people, inclusive of their service providers’ personnel. The uncertainty about their employment future after the expiry of the terms of the four casino licences will unavoidably lead to demotivation and consequently, reduced efficiency and productivity levels towards the end of the licence periods. Sun International agreed that the uncertainty of on-going employment will lead to negative or low staff morale, particularly towards the end of the licensing period. One cannot simply assume that the future licence holder will continue with the existing employees.

Sun International listed the detrimental impact on employment as one of the main disadvantages of fixed- term licences. Employment benefits and opportunities will not only be limited to the licence period, but fixed term contracts will prevail instead of permanent employment. Employees may seek permanent employment in other provinces where permanent casino licences are available.

Attracting Re-investment

An important element of fixed-term licences for the Board is that they can continue to enforce further capital re-investment into existing infrastructure. By using the licence terms as a controlling instrument, the Board is able to extend the development and impose conditions for future developments.

However, it should be asked whether this interference is, in fact, necessary; and whether or not it would continue to re-invest for reasons of self-interest. Both Tsogo Sun and Sun International explained that re-investment in existing infrastructure is in the casino’s best interest because, due the nature of their business, they compete with other leisure industries (including malls) for cash spending on leisure items and it is, therefore, essential for the development to remain attractive, , to draw foot traffic and to remain competitive.

Tsogo Sun and Sun International revealed that casinos outside of the Eastern Cape have continued to re-invest and expand in new capital infrastructure due to market considerations and good economic returns, and not regulatory pre-requisites.

Further analysis below shows this additional capital expenditure as a proportion of the initial capex. The casinos in Free State have, on average, reinvested 162% of the initial capital investment since the inception of the casinos. This is driven by the Windmill’s capital investment of R358 million, which is 244% of the initial investment made in 2005 (average of 22% per annum since inception).

The Western Cape has committed an average of 70% in the form of expansionary capital investments. This figure is driven largely by Golden Valley’s R431 million investment, a 177% capital re-investment and 16% per annum since inception in 2006.

Limpopo, Mpumalanga, Northern Cape and KwaZulu-Natal average around 60% of the initial capital investments. Although Gauteng as a province has disbursed the highest capital expenditure, a total of R4.3 billion, the proportion to its initial capital investment is 29%, since the initial investment was R13.6 billion.

The North West experiences the lowest capital re-investment percentage and this is largely due to R15.3 billion initial investment85by Sun City, which was the highest casino investment in the country. Figure 14 shows the total capital investment as a proportion of the initial capital investment.

Figure 14: Total Additional Capital Investment as a Proportion of Initial Capital Investment (2015 prices)86

85 2015 prices: R1 618 942 spent between 1979 and 1992 86 Data supplied by Sun International and Tsogo Sun

Table 18 shows further detail of the above analysis which proves that casinos continue to re-invest and expand their infrastructure in the absence of regulatory compliance conditions.

Table 18: Initial and Additional Capital Investments by Casinos - 2015 prices87

Additional Initial Capex Casinos per Province Capex % (R million) (R million) Gauteng Montecasino 3 415 1 514 44% Silverstar Casino 1 736 587 34% Gold Reef City Casino 2 927 630 22% Carnival 2 113 1 096 52% Carousel 2 188 302 14% Morula 1 283 244 19% Mpumalanga The Ridge Casino 486 271 56% Emnotweni 405 231 57% Western Cape Garden Route 288 24 8% Mykonos Casino 153 15 10% Caledon Casino 334 1588 4% Grand West 2 585 1 864 72% Golden Valley 244 431 177% Table Bay 674 154 23% KwaZulu Natal Blackrock 151 42 28% Suncoast Casino 3 243 1 80089 56% Golden Horse Casino 299 35 12% Sibaya 1 474 721 49% Limpopo Meropa 357 234 66%

87 Data supplied by Sun International and Tsogo Sun, figures represent real 2015 prices 88 R15million (in today’s prices) is planned for 2015/16 and has not yet been spent. 89 R1.8 billion (in today’s prices) is planned for 2015/16 and has not yet been spent (On 20 November 2015 it has been announced that this amount shall increase to R3.5b).

Additional Initial Capex Casinos per Province Capex % (R million) (R million) Free State Windmill 147 358 244% Naledi 81 10 12% North West Sun City 15 373 2 486 16% Northern Cape Flamingo 233 143 61%

Discouraging Investment

An overriding concern regarding fixed licences is that they discourage investment by impairing long-term planning. Capital is only spent to secure the licence and this is not informed by market factors.

It appears that under a fixed-term licence, developers only build the required infrastructure to satisfy the regulator and, for this reason, maintenance and expenditure on new equipment is reduced to a bare minimum, especially during the final three years of a licence term. Sun International explained that operators are disinclined to refurbish properties and upgrade equipment when they are uncertain as to whether they will have to spend additional capital during the next bid process.

The ECGBB confirmed that the Eastern Cape casinos have not made any substantial expansions and the only significant capital invested occurs after the re-issuing of licences (for example, the Boardwalk hotel, conference centre, cigar bar) in order to meet the licence conditions.

The issuing of indefinite licences creates a certainty about the future for licensees, allowing for a more constructive approach to issues of expansion, further investment and other value-adding contributors, which all require long-term commitments. It also enables the licensee to better align loan funding and repayment to the long-term performance of the casino, as opposed to when the licences are issued for a fixed term. Tsogo Sun explained that developers usually take medium- to long-term views on further infrastructure investment to remain competitive and attractive as destinations of choice.

The Boardwalk is currently considering the feasibility of a significant development in the form of a large retail mall at the casino property. Even if the project is financially viable, the Boardwalk cannot commit to it without certainty of long-term assurance and this illustrates the negative impact that fixed-term licences have on future planning and development.

On the other hand, Montecasino is currently expanding infrastructure in the form of additional office blocks, which would not be considered without the assurance of an indefinite licence.

A commercial investment is generally informed by multiple factors such as area, inflation, currency variations, and cost of capital, among others. Generally, banks and financial institutions treat capex loan funding from two perspectives: straight loan funding over a fixed term depending on the nature of the development; or equity capital where banks subscribe to shares in the development in order to generate a return on investment. Generally, with property deals, security of tenure must be for a minimum of 30 years for those kinds of transactions and, therefore, fixed licence terms impact the type of loan funding available to casinos.

Table 19 shows that Hemingways Casino and the Boardwalk have invested 94% and 201% of the initial investment, respectively, due to the re-issuing of the licence. However, these capital investments are as a result of the re-licensing conditions and should not be deemed as voluntary re-investments, or driven by market forces. The casinos are in financial distress because they are required to commit to unrealistic capital expenditure to re-tender.

Table 19: Initial and Additional Capital Expenditure for Casinos in the Eastern Cape (2015 prices)

Date of Additional Voluntary Initial Capex initial Capex Reinvestment % (R million) investment (R million) Hemingways 2001 450 422 0 94% Casino Queens Casino 2007 145 0 0 0%

The Boardwalk 2010 970 1 947 0 201%

Wild Coast Sun 2009 3 741 1 140 0 30%

In Summary

Fixed licence terms negatively affect companies’ ability to plan in the long-term and hinder their willingness to invest in further developments. Even if the new twenty-year licence allows for a better return on investment, the fixed term still provides for no additional motivation or incentive to increase the footprint or re-investment of the licensee. This is shown by the unwillingness of existing licensees to invest in any further expansions and how they limit their refurbishment expenses to a bare necessity.

The uncertainty as to whether the existing casino licences will be re-issued upon the expiry of their terms and the commercial imperative of recovering the cost of the investment in these projects within that period become determining factors in the allocation of funds during the remaining term of the casino licence.

On the other hand, casinos outside of the Eastern Cape continue to invest in further expansion and this is driven by economic logic rather than regulatory requirements. On average, casinos have reinvested 33% of the initial capital investment since inception90. A major benefit of the indefinite licences is that investment is driven by commercial imperatives and provides room for innovation, entrepreneurship and investment.

New entrants/investor interest

In the view of Tsogo Sun, it is no coincidence that the occupation of the five casino licences on offer in the Province has been limited to the two new licences in the major metropolitan centres of Port Elizabeth and East London, one licence in respect of the pre-existing Wild Coast Sun and one small casino in Queenstown.

This is attributable, in part, to the commercial consideration that a limited licence term is insufficient to allow for reasonable returns on the required capital investment, particularly in the case of economically less active locations.

A further issue is whether any new incumbents could even compete with existing licensees since the latter already own the developed infrastructure. To date, three casino licences in the Eastern Cape have, in terms of the existing licensing regime, been terminated. In all three cases, the current licensee has been successful in obtaining the “new” licence.

The future of Queens Casino makes an interesting discussion. The challenges that the current licensee faces will be the same for any new operator due to the market considerations of not enough foot traffic and a limited turnover. If, for example, Queens Casino loses the licence, the new licensee will then be required to develop a casino and related infrastructure; and as with Queens Casino, there will not be enough time to recover the capital investment and the vicious cycle will continue. However, should Queens be issued another licence, it adds to the reality that every licence issued in the Eastern Cape has been and will continue to be re-issued to the original licensee.

Resources required in re-issuing licences

Following on from the previous discussion that shows how every licence has been re-issued to the original licensee to date, one should ask what resources are required in the re-licencing process.

Reviewing the ‘maximum new investment’ commitments made by Tsogo Sun for the Hemingways Casinos, it reveals that additional costs related to the bidding process and the allocation of licences were included. Firstly, these costs have no economic benefit to the region and should not be considered in the ‘new investment’ component. The actual economic value should be premised on

90 Inception of Tsogo Sun’s casinos and over the past 10 years for the Sun International casinos

infrastructural improvements and non-gaming development which will lead to the generation of jobs and provide a basis for increased economic activity.

Sustainability of infrastructure

Casinos are a critical catalyst for development and enabling non-gaming investments and it is well- known that casinos constitute an anchor in a precinct development. Tsogo Sun and Sun International believe that the foot traffic that casinos bring is essential in maintaining the non- gaming infrastructure, such as hotels and malls.

While it is not possible to show any causal link, it is clear from Table 20 that casinos in the Eastern Cape attract seven times more visitors than the sum of all visitors91 at the non-gaming attractions and almost one and a half times more revenue than the sum of all non-gaming attractions. In addition, casinos employ almost double the number of employees than the non-gaming sector.

Table 20: Comparison of the Gaming versus the Non-Gaming Sectors92

Revenue Visitors Employees (R million) (‘000) Gaming 1 000 2 993 6 327 Casinos Non-gaming 709 1 529 899 Theatres 506 1 45 Restaurants 81 476 - Fast Food Outlets 16 72 - Cinemas 21 63 494 Entertainment areas 30 214 116 Retail outlets 24 78 - Hotels 26 87 224 Conference facilities 3 5 11 Sporting Events 2 533 9 Ratio: Gaming vs Non- 1.41 1.96 7.03 gaming

Sun International also provided the breakdown of revenue generated from gambling versus non- gambling entities at their various casinos across South Africa. Table 22 shows that 90.6% of revenue is generated by the gaming sector at the Boardwalk, and that gaming contributes 74.9% to revenue at the Wild Coast Casino.

91 Not all the information is captured by CASA 2012 92 CASA, The 2012 Survey of Casino Entertainment in South Africa, p13

Table 21 reveals that gaming is the leading revenue contributor at casino developments, except at Sun City where the non-gaming revenue outstrips gaming. The Sun City example is similar to casino-based destination resorts such as Las Vegas93, where the increase in competition led to them becoming more innovative and diversifying and focusing on offering a well-rounded menu of entertainment options.

Since the mid-1990s, more than 50% of revenues have been generated from non-gaming functions94.

Table 21: Sun International Breakdown of Gaming versus Non-Gaming Revenue at Casinos

Non- Gaming Casinos gaming (%) (%) Grand West 98.3 1.7 Sibaya 96.4 3.6 Carnival City 96.6 3.4 Sun City 40.6 59.4 Boardwalk 90.6 9.4 Wild Coast 74.9 25.1 Carousel 94.7 5.3 Meropa 97.1 2.9 Windmill 98.7 1.3 Morula 94.5 5.5 Flamingo 97.2 2.8 Worcester 92.5 7.5 Naledi 90.2 9.8

Given these statistics, it is reasonable to recognise casinos as the pre-eminent development that is responsible for attracting foot-traffic to the Eastern Cape resorts.

Sun International expressed concern that the initial re-bid has provided the Province with significantly larger casino projects relative to the market potential and a second round of re-bids would run the risk of creating ‘white elephants.’ This is because casino operators would have to bid

93 S Bolton, Casinos May Look To Expand Non-Gaming In 2015, Market Realist. December 19 2014 http://marketrealist.com/2014/12/casinos-may- look-expand-non-gaming-2015/ 94 L Bryant and D Walker, Profitability and the return on investment from casino amenities, UNLV Caesars Hospitality Research Center Grant, 2010 p.4 Available at http://digitalscholarship.unlv.edu/hhrcg/1

with new additional projects that would add very little to the economic potential of the overall project, thereby not justifying the investment.

Uniformity of National Policy

The regulatory framework for gambling that has been adopted for South Africa was largely influenced by recommendations of the Wiehahn Commission, with some minor adjustments pursuant to a 2002 policy review and legislative change.

One of the main principles or objectives in the 1995 Wiehahn Commission report is: “The uniformity and harmonisation of policy and legislation at all levels of government and across provinces, through minimum norms and standards, cooperation and coordination.”95

The Gambling Review (2010) identifies the inability to ensure proper uniformity, consistency and accountability as a distinct weakness in the current framework. The laws at national and provincial level are not always harmonised and there is a lack of uniformity in the application of the legal framework across Provinces.

Given that there is no overriding national policy to guide the determination of licence term durations, it is important to turn to the national regulatory framework for guidance on the matter. Moreover, since all eight remaining Provinces issue licences that are indefinite in duration96, one must question the apparent reluctance of the ECGBB to conform to national uniformity.

Chapter 5: ECGBB and National Policy

The gambling industry in South Africa operates in a closely regulated environment in the overall context of a democratic state. The industry is regulated at the national level by the National Gambling Act, 2004 Act No. 7 of 2004 administered by the National Gambling Board of South Africa which is a Section 3A Public Entity listed in the Public Finance Management Act (PFMA). At the provincial level, the industry is regulated through Provincial Gambling Acts which are administered by boards established in terms of each provincial act.

The principal functions of the gambling acts and boards are concerned with regulating the industry and any specific socio-economic mandate generally tends to be a secondary consideration.

Proposed new legislation in the Eastern Cape, drafted by the Eastern Cape Gambling and Betting Board (ECGBB) but not yet promulgated, seeks to expand the socio-economic powers of the board, particularly in terms of extending the casino licence period of validity in order to promote the

95 Gambling Review Commission, 2010 p9 96 Subject only to annual renewals which are dependent on administrative procedures, such as the payment of licence renewal fees

establishment of favourable and sustainable socio-economic, developmental and economic enterprises.

In a review of the gambling industry operating environment it is essential to consider the extent to which the policy context of the South African democratic state reflects the principles of a developmental state and the extent to which the industry, which is essentially a regulated industry, is able to contribute towards the sustainable socio-economic development of South Africa and its people.

This is an important consideration since the ECGBB is a designated organ of state and cannot regulate the gambling industry without aligning its objectives to national policy.

Hence, this chapter first evaluates the impact of casino gambling as an economic development strategy by reviewing international literature; and thereafter, the chapter reviews the gambling policy in South Africa before assessing the extent to which South Africa is a developmental state by examining the national development environment. The chapter then discusses how this affects the casino gambling industry and the duration casino licences.

Casinos as a tool for economic development – international experience

It is often reported that the casino gambling industry generates significant economic benefits and is therefore often considered as a tool for economic development. However, while there are many proponents who believe that it is the “most significant phenomenon affecting the tourism in the country97” and that it “has the ability to change a community’s business climate98,” there are other studies which report it to be a “repeated failure of national urban policy99” or a “highly regressive industrial policy100.”

In 2013, casino gambling was a $160 billion industry globally101; however, when the contribution of hotel rooms, food, drinks and entertainments are included, the economic value of the industry increases to $272 billion.

Market reports102 suggest that the driving factors behind the casino and gambling industry are location; regional and macro-economic economies; and specific design and operational

97 (Dimanche and Speyrer, 1996) in A Rose, The Regional Economic Impacts of Casino Gambling: Assessment of the Literature and Establishment of a Research Agenda, 1998 p1 98 Ibid 99 Perniciario 1995 in A Rose, The Regional Economic Impacts of Casino Gambling: Assessment of the Literature and Establishment of a Research Agenda, 1998 p1 100 Goodman, 1995 in A Rose, The Regional Economic Impacts of Casino Gambling: Assessment of the Literature and Establishment of a Research Agenda, 1998 p1 101The Motley Fool, Casinos and Gaming Industry: Investing Essentials, http://www.fool.com/investing/general/2014/08/05/casinos-and-gaming- industry-investing-essentials.aspx and Statista, Global casino gaming revenue from 2006 to 2015, http://www.statista.com/statistics/271577/global- casino-gaming-market-revenue/ (accessed 31st July, 2015)

procedures. Location denotes the regulated market and the market opportunity, while the economy influences the overall gaming opportunity. The design and operations of the site are what makes it distinct from other competition.

Most economic benefit studies have taken place in the United States and a review of the literature reveals that there are certain factors that affect the intensity and geographic spread of the economic spill-over effects of the casino gambling industry.

In a review of 68 US States where casinos were introduced between 1989 and 1993, it was determined that casino gambling was a successful strategy for those States that were in financial trouble or where the local economy was stagnant. The review concluded that casino gambling was a beneficial strategy to grow the economy and further suggested that the average resident prospered as a result.

According to Eadington, areas where casinos are able to “attract a high proportion of their customers from outside the region will be able to generate considerably greater incremental local economic benefits, compared to those jurisdictions whose casinos cater predominantly to local clientele103.”

Since the casino industry is inter-connected with tourism, it is suggested that, ceteris paribus, the more urbanised a community is, the less likely it is to benefit from casino development. This is because in large urban areas, especially those that do not ordinarily attract many tourists, it is far more likely that customers will be drawn locally. Although this notion may be valid in the United States, it is questionable whether any similar perceptions could be applied in the South African context.

Eadington104 also suggests that the ratio of benefits to costs steadily declines in the context of various forms of casino gambling as indicated below:  Destination resort casinos located away from population centres;  Casinos in rural (non-urban) locales within reach of population centres;  Casinos in urban or suburban locations in metropolitan areas;  Casino-style gaming permitted in a wide range of neighbourhood locations;  Gambling at home.

However, Eadington105 explains that the benefits do not accrue to everyone. Economic growth often does not translate into tangible benefits for local area residents; and development is sometimes described as an “island” or “economy within economy.” In worst case scenarios, it has

102 Marketrealist, Why the casino industry has huge growth potential, 5 September 2014 http://marketrealist.com/2014/09/why-casino-industry-has- huge-growth-potential/ (accessed 31st July 2015) 103 W Eadington, The economics of casino gambling, The Journal of Economic Perspectives, Vol. 13, No. 3 (Summer, 1999), pp. 173-192 p188 104 W Eadington, The Spread of Casinos and their role in Tourism Development p12 105 Rephann, T, Dalton, M, Stair, A and Isserman, A: Casino Gambling as an Economic Development Strategy, p4

been reported that casinos may drive out local establishments and the local businesses are vulnerable to competition. Many displace businesses and residences by driving up local costs of real estate and rents.106

Studies have also suggested that casino gambling generally provides economic benefits through increased employment opportunities107;and that economic benefits that are generated by casino operations are more obvious in rural areas where they often lead to greater business development opportunities and higher wages108. However, other studies indicate that many of the newly created jobs often require skilled labour which often results in the employment of people from elsewhere.

Urban Regeneration

Australia relies on investment from the casino industry not only as a means to boost tourism to an area, but also as a catalyst for urban regeneration.

Australia has recognised the economic contribution that casino developments have brought through urban regeneration. For example, a number of casinos have been located in previously run-down urban industrial areas and such developments have revitalised wide ranging urban regeneration. Significant examples include Star City and Crown in Melbourne, which are both located on former industrial sites close to their respective CBDs in Sydney and Melbourne. Furthermore, the site of the Burswood Entertainment Complex was originally a rubbish tip on the outskirts of the Perth CBD109.

Crown Melbourne110 is an example of the extent of urban regeneration initiated by casino development. Dilapidated factories and warehouses were replaced by the casino, followed by a number of landmark projects undertaken in the Southbank precinct. Today the Southbank precinct accommodates numerous new buildings, thousands of office workers and a number of high-rise apartment developments. There are also a large number of restaurants and entertainment facilities clustered close to Crown Melbourne, including the Melbourne Aquarium, Melbourne Recital Centre and the Melbourne Convention Centre.

Star City111 is also located on a former industrial site and the development of the casino acted as an effective catalyst for much development in the inner-city neighbourhood of Pyrmont, west of the Sydney CBD. Two of Australia’s casinos, Conrad Treasury Casino and Skycity Adelaide, are located in historic government buildings, which prior to being redeveloped as casinos, were in a considerably run-down condition.

106 Ibid, p5 107 ST Wu and YS Chen, 2015: The social, economic and environmental impacts of casino gambling on the residents of Macau and Singapore - Tourism Management 48, 285-298 p287 108 Ibid 109 The Allen Consulting Group: Casinos and the Australian Economy. Melbourne, 2009 p41 110 Ibid, p41-42 111 Ibid, p43

European Union’s efforts to attract investment through integrated casinos Similar examples are evident in several the indebted Eurozone countries that actively use the casino industry as a mechanism to boost stagnant economies.112

Such countries have turned to the casino industry to provide a much needed boost to tourism and employment. This has resulted in Integrated Casino Resorts that have proved to be highly successful in attracting visitors and hotel lodgings. As a result, Spain, Cyprus and Slovenia are actively pursuing investment from major international casino firms. Governments in all three countries have reportedly taken steps to redraft their gambling laws to offer incentives for the super casinos. The State of Catalonia in Spain recently reduced the casino tax rate from 55% to a mere 10%. Southern Cyprus has held a long-standing ban on casinos in stark contrast to the northern part of the island occupied by Turkey, but a new government elected in 2013 decided to allow casinos as part of a wider economic stimulus plan.

The Southern Cyprus government is confident that casino-resort developments will attract half a million tourists, largely from Europe and the Middle East, and will generate an additional 3,000 jobs. The initiative was approved in July 2013 with the intention of fast-tracking the international licensing procedure to finish within 12 months. According to reports, the chosen casino operator will be awarded a casino license lasting up to 30 years, together with a 15-year exclusivity agreement113.

Slovenia has also accelerated plans to generate investment for large-scale casino projects as a mechanism to attract an influx of foreign capital. A new draft bill, set to replace 1995 Act, would liberalise ownership restrictions for land-based casinos to allow greater percentages of foreign ownership, although larger shares would need to be approved by the Finance Ministry. Slovenia has long tried to entice tourists across the border from neighbouring Italy, but current rules have limited foreign ownership of casinos to 49 percent. The proposed bill, announced by the Finance Ministry in September 2013, would allow construction of large casinos to be regulated separately.

Concluding thoughts

It is clear that tourism and the number of visitors is a critical factor for using casino gambling as a successful economic tool for development; although it is uncertain whether such an economic argument carries the same weight across all geographic areas.

Interestingly, the Eastern Cape attracted close to 305,000 international visitors, which is 3% of the total 10.6 million foreign tourists that visited the country in 2014. The distribution of visitor destinations within South Africa is indicated in Figure 15.

112 European Casino Industry (ECA) Report 2013, prepared by Gambling Compliance p14 and p15 113 Vegas Master, 2014: First License for Southern Cyprus Casino to be Approved by August 2015http://www.vegasmaster.com/first-license-for- southern-cyprus-casino-license-to-be-approved-by-august-2015-05082014/ (accessed 15th September, 2015)

Figure 15: International Arrivals per Province 2014114

However, an analysis of the domestic tourism market shows that the Eastern Cape receives a significant share of national domestic visitors with 1.68 million day trips (8.4%) and 3.4 million overnight trips (11.6%) in 2013; as is indicated in Figure 16.

114 2014 Annual Tourism Report

Figure 16: Domestic tourism patterns115

Further analysis is needed to show the tourist patterns within the Eastern Cape Province itself. Questions regarding whether cities such as East London could ever be a destination choice for casinos need to be considered. It is worth considering how casino licences might be utilised as a strategy for economic development in a localised environment and whether it could be used in Municipal Integrated Development Plans (IDPs) to focus on areas of economic development, to establish development corridors, to invest in government infrastructure and to create business areas.

Policy Considerations

The gambling policy review published by the DTI in 2015116 indicates that gambling in South Africa has evolved substantially over the past 20 years. The review stems from an appraisal of the status of gambling in South Africa since the 1996 legalisation and is intended to improve and strengthen the current legislative framework.

The review refers to several relevant policy proposals which are deemed relevant to this discussion; viz., regulatory structures and framework, casinos, social impact minimisation, additional new forms of gambling and the economic and employment benefits in the gambling sector.

115 Statistics South Africa, Domestic Tourism Survey 2013 116 Department of Trade and Industry: National Gambling Policy, Invitation for the Public to Comment on the National Gambling Policy May, 2015

Regulatory Structures and Framework

The regulatory framework considers the effectiveness of the National Gambling Policy Council (NGPC) and the role of the National Gambling Board (NGB) and makes proposals to empower the Council regarding administrative procedures and to strengthen the NGB as a strategic trading entity of the DTI for regulating gambling. Although this will entail adjustments to the NGB to form a National Gambling Commission or Regulator headed by a suitable executive, the new NGB will continue to conduct oversight and to assist with monitoring coherence and policy coordination, to conduct research, to develop and implement education and awareness, to develop and implement measures to combat illegal gambling, to effectively operate the Central Electronic Monitoring System and to administer programmes that deal with problem gambling.

Casinos

The draft National Gambling Policy proposes to augment casino regulation to introduce a requirement for different entrances for gambling venues in cases were there have been subsequent developments. The draft policy further suggests that provinces should take due cognisance of policy implications when considering any request to relocate a casino venue from one area to another. Additionally, the draft policy also proposes that, notwithstanding the limitation of the overall number of casino licences to 40, the Minister should, after due deliberation, be authorised to allocate additional licences where this would contribute towards the resolution of problems or conflicts. It should be noted here that the draft policy makes no reference to the period of duration for casino licences. It should be noted that, in October 2015, the DTI Minister formally proposed to increase the total number of casino licences in South Africa to 41117.

Social Impact Minimisation

The Gambling Review Commission pointed out that problem gambling remains a challenge in South Africa and the policy suggests that the National Responsible Gambling Programme (NRGP) should be included in the legislation to ensure that it derives its powers from the legislation. Further, it is proposed that the contribution to national responsible gambling imperatives by the industry should continue through the NRGP to be administered by the new NGB. While funds will be paid directly into the coffers of the NRGP, the NGB should have direct control over the NRGP and will direct and monitor its activities to widen the reach and impact of the programme.

New Forms of Gambling

The draft policy proposes that, at this stage, no new forms of gambling should be allowed and that improved controls should be implemented to address issues arising from currently legalised modes of gambling in South Africa. Towards these ends, the policy proposes that improved provisions

117 Department of Trade and Industry National Gambling Act, 2004 - Notice Regarding the Maximum Number of Casino Licences that may be granted throughout the Republic, Government Notice No 1031, 30 October 2015

should be included in the legislation to deal effectively with illegal gambling. While the capacity to regulate online gambling is inadequate, the draft policy suggests that this can be improved to prevent illegal operations through the prohibition of illegal winnings and associated amendments to prohibit banks and other financial institutions from transferring, paying or facilitating payment of illegal winnings to persons in South Africa.

Economic and Employment Benefits

The gambling industry renders significant contributions towards the national economy in terms of revenue generated; value added taxes paid and employment generated. While the contributions by each of the nine provinces vary quite significantly, there is no doubt that the industry constitutes a critical aspect of the national economic structure and that it will continue to increase in terms of revenue generated, taxes paid and employment generated.

The National Gambling Policy Review document is still in draft form and seeks to define the policy proposals that are intended to revise, consolidate and improve the gambling landscape in South Africa. The proposals arise partly from the Gambling Review Commission (GRC) Report118, various reports from Parliament on the GRC report, interest-group engagements, benchmarks and study- trips. In due course, the gambling policy proposals will be subjected to further consultations at relevant forums and at public meetings.

Given that gambling is a function of concurrent legislative jurisdiction between national and provincial spheres of government, the proposals will be finalised after consultation through the NGPC in accordance with the functions of the Council indicated in the National Gambling Act No. 7 of 2004, in order to ensure policy and legislative alignment between the provincial and national spheres of government.

It should be noted here that the NGPC represents a critical aspect of the Constitutional commitment to co-operative governance referred to above as part of the assessment of South Africa as a developmental state.

The NGPC is a statutory consultative entity established in terms of Chapter 4 of the National Gambling Act in order to facilitate consultation between the National and Provincial Governments regarding national gambling policy, promoting uniform laws, and gambling norms and standards. The Council is also mandated to manage the monitoring of gambling and to deal with the resolution of disputes that may arise among provincial gambling regulators. Importantly, the NGPC may make findings related to failure by a provincial licensing authority to comply with the National Gambling Act and might also direct the Provincial Licensing Authority to enter into an agreement with the NGB regarding the steps to be taken by the Provincial Licensing Authority to ensure compliance with the Act.

118 DTI: Gambling Review Commission Report, 2010

It should be further noted that the NGPC has not been particularly effective in resolving disputes or in reaching consensus and congruence on policy matters; especially where there is a conflict of objectives, usually between national and provincial government119. In this regard, the Gambling Review Commission indicated that it might be necessary to re-visit the structure and workings of the NGPC.

Impact on Casino Operations

The evolution of national gambling policy and anticipated future developments, refinements and amendments to such policy have had, and will continue to have, significant effects on casino operations.

Existing and emerging national gambling policy is administered and managed by the National Gambling Board (NGB) which is a juristic person established by the National Gambling Act of 2004; and which is registered as a Schedule 3A Public Entity in terms of the PFMA of 1999.

In this regard, the mandate of the NGB is to exercise oversight over gambling in the Republic of South Africa by, amongst other considerations, evaluating the issuing of national licences by the Provincial Licensing Authorities (PLAs) and evaluating compliance monitoring of licensees by the PLAs.

It is evident, therefore, that the formulation, implementation and amendment of gambling policy will have a significant, and probably increasing, effect on casino operations in the provinces. This means that PLAs like the ECGBB120 must keep abreast of policy and associated developments at the national level through participation in consultative arrangements with the NGB and other PLAs, particularly in terms of conditions that might be required by the NGB in relation to changes that could emerge regarding ECGBB responsibilities for adequate assessment and evaluation of casino licence conditions, whether these concern new applications or renewals of existing licences.

Such considerations may have direct or indirect effects on the duration of casino licences and the conditions associated with regular licence reviews and how these are conducted by the ECGBB.

The Developmental State

The concept of a developmental state is variously defined and generally refers to a state where government is closely involved in macro- and micro-economic planning and implementation designed to grow the economy as decisively and speedily as possible. In general, successful developmental states are able to advance their economies more rapidly than regulatory states in which economies are generally managed by regulation.

119 DTI: Gambling Review Commission Report, 2010 120 The name of the ECGBB will be changed to the Eastern Cape Gambling Board (ECGB)

Four principal responsibilities commonly characterise a developmental state121:

1. To formulate cohesive and focussed goals and objectives for national growth and development, together with appropriate policies designed to achieve such goals; 2. To co-ordinate, mobilise and allocate financial and human resources for investments associated with identified and defined policies; 3. To monitor and evaluate progress towards achieving policy goals and objectives; and 4. To adjust resource mobilisation and allocation in response to progress made towards existing objectives, to changes in objectives, and to external effects.

The role of South Africa as a developmental state should be assessed in the light of the extent to which the country meets the definitional requirements of a developmental state in terms of the characteristics that are indicated above.

Several aspects of the national development environment contribute towards such an assessment; viz., the Constitution of the Republic of South Africa , the National Development Plan , the Industrial Policy Action Plan and the Green Paper on the role of State-Owned Entities in the Developmental State.

The Constitution

The Constitution articulates several inalienable national characteristics related to the development environment in South Africa; especially in following:

The Bill of Rights (Chapter 2) represents the foundation of democracy in South Africa and affirms the democratic values of equality and freedom which the state is obliged to respect, protect, promote and fulfil. In this regard, the Bill of Rights applies to all laws and commits the legislature, the judiciary and all organs of state, including public entities and state-owned enterprises.

The commitment to Co-operative Government (in Chapter 3) obligates all spheres of government to ensure effective, transparent, accountable and coherent governance; and to exercise their powers and to perform their functions in ways that do not interfere with the geographical, functional or institutional integrity of other spheres of government.

The obligation to Public Administration (in Chapter 10) requires that democratic values and principles secured in the Constitution must be observed and that the efficient, economic and effective use of national resources must be promoted. Specifically, public administration must be development-oriented, must provide services impartially and equitably, and must ensure sound human resource management and career development practices that maximise human potential.

121 Stephen Gelb: A South African Developmental State: What is possible? September 2006, Cape Town

These basic principles apply to every sphere of government, to all organs of state and to all public enterprises.

The assignment of functional areas of concurrent national and provincial legislative competence (Schedule 4) and functional areas of exclusive provincial legislative competence (Schedule 5) include the allocation of critical responsibilities such as industrial promotion, provincial public enterprises, regional planning and development, trade, urban and rural development, provincial planning; as well as casinos, racing, gambling and wagering.

It is evident that the Constitution provides a sound basis for promoting and realising the essential principles of a Developmental State in South Africa without being prescriptive about how this should be accomplished.

Developmental State Green Paper122

South African aspirations towards growing a Developmental State recently resulted in the formulation of a framework for adjusting State-Owned Entities (SOEs), such that they are required to make a substantial contribution towards equitable growth, sustainable development, social and economic transformation and effective service delivery.

The framework of minimum requirements contained in the Developmental State Green Paper (2012), resulted in a series of 31 comprehensive recommendations123 which are designed to guide South Africa towards wide-ranging reforms in the SOE environment in order to deal with current and future challenges facing the nation. In addition to addresses the weaknesses that SOEs currently face, the framework concentrates on the role of SOEs in a Developmental State.

Some of the principles include the separation of roles by Government; the formulation of a strategy for SOEs; creation of an enabling environment; and ensuring adequate performance evaluation and monitoring of SOEs.

The State must have the necessary capacities to implement these reforms including visioning and strategy-setting, appropriate human capital and structures, in addition to efficient and electronic oversight systems to enabling monitoring and evaluation of SOEs.

While SOEs are not regarded as a definitive solution for resolving the many challenges that face South Africa, they are an additional strategic instrument for the State to apply towards transformation, growth, development, service delivery and investment-led employment generation.

In this regard, it is evident that SOEs can make a significant contribution towards the realisation of South Africa as a Developmental State.

122 Republic of South Africa Green Paper op cit 2012 123 Presidential Review Committee of SOEs: Green Paper on the Role of State-Owned Entities in the Developmental State. Executive Summary 2012, Table 26: Presidential Review Committee Recommendations Implementation Plan

However, it must be emphasised that effective and sustainable change will not occur in the SOE environment, and the objectives of the Developmental State will not be realised, in the absence of dynamic vision, committed leadership and a properly constructed enabling legal environment.

National Development Plan (NDP)

While a Developmental State must be capable, such a capable state does not materialise by decree, neither can it be legislated or waved into existence by declarations. It has to be carefully constructed, institution by institution, and a capable state must be sustained, nurtured and revitalised over time. A capable state requires dynamic leadership, sound policies, skilled managers and workers, clear lines of accountability, appropriate systems, and consistent and fair application of rules.

In order to build a capable and developmental state124, the National Development Plan requires collaboration among all sections of society as well as effective leadership by government. In a society with deep social and economic divisions, neither social nor economic transformation is possible without a capable and developmental state because the state provides the institutions and infrastructure that enable the economy and society to function.

Therefore, critical interventions are required to build a state capable of realising the NDP vision for 2030. Towards this end, the principal objectives of a capable and developmental state include the following:

 To secure a state that is capable of playing a developmental and transformative role;  To establish and maintain a public service immersed in the development agenda but insulated from undue political interference;  To ensure that personnel at all levels have the authority, experience, competence and support they need to do their jobs;  To ensure that relationships between national, provincial and local government are improved through pro-active approaches to managing the inter-governmental system; and  To establish and maintain clear governance structures and stable, dynamic and committed leadership to enable state-owned enterprises (SOEs) to achieve their developmental potential.

South Africa has made significant progress in building the structures of a democratic state and fragmented apartheid governance structures have been consolidated into a system designed to serve developmental objectives. In addition, the composition of the public service and local government has been transformed to better represent the entire population, and democratic principles have laid the basis for greater accountability of the state to its citizens.

124 National Development Plan: Chapter 13: Building a Capable and Developmental State

Moreover, crucial roles have been established for Parliament and the Chapter 9 institutions125 that support the Constitutional Democracy in exercising oversight, holding government to account and enabling public participation.

Despite these advances, significant development challenges have emerged due to capacity inconsistencies that have resulted in erratic and inconsistent performance in local, provincial and national government. These shortcomings are caused by a complex set of factors, including tensions in the political-administrative interface, administrative leadership instability, skills deficits, erosion of accountability and authority, poor organisational design and low personnel morale.

Inevitably, the weaknesses in capacity and performance are most evident and serious in historically disadvantaged areas, especially in the previous homeland regions, where state intervention is most needed to improve the quality of life of the people.

Since 1994, there have been several attempts to design and implement appropriate socio- economic development planning but with little success. Frequent and erratic policy changes and perspectives created instability in organisational structures and policy approaches that further strained limited capacity.

These prior development initiatives included the following:  The Reconstruction and Development Programme (RDP), launched in 1994  The Growth, Employment and Redistribution (GEAR) policy was formulated in 1995  The Accelerated and Shared Growth Initiative for South Africa (AsgiSA) was launched in 2004

The pursuit of hastily contrived solutions to development planning tended to divert attention from more fundamental priorities and serious shortcomings in skills and professionalism severely affected all elements of the public service.

The National Development Plan represents a vigorous revision of the pursuit of sustainable socio- economic development and economic growth, based on a longer-term period for realisation by 2030.

In order to address the challenges of poverty and inequality, the NDP places emphasis on the transformative and developmental role of the state in terms of ensuring that state institutions are well-managed and effectively coordinated with skilled public servants who are committed to the public good and capable of delivering consistently high quality services and prioritising national developmental objectives.

125 This refers to Chapter 9 of the Constitution and the institutions include the Public Protector, the Human Rights Commission, the Auditor-General, the Broadcasting Authority and the Electoral Commission

The NDP promotes the principle of a Developmental State that is capable of driving national development. Towards this end, the NDP indicates that the most important step to achieve a developmental state lies in building state capacity; but only on the clear understanding that not all capable states are necessarily developmental. Hence, the emphasis must be on the importance of building a capable and developmental state within a vibrant democratic system.

The NDP indicates that a Developmental State brings about rapid and sustainable transformation in the economic and social conditions of a country through active, intensive and effective intervention in the structural causes of economic or social underdevelopment. In this regard, Developmental States are pro-active and do not produce a multitude of regulations and legislation, but constantly strive to improve the quality of what they do by building their own capacity and learning from experience. Developmental States also recognise the importance of building constructive relations with all sectors of society, while ensuring insulation from being overtaken by sectional interests.

It is evident, therefore, that a robust democracy is not only compatible with building a capable developmental state; it is an essential prerequisite for the kind of Developmental State needed to address poverty and inequality.

In terms of implementation imperatives, the NDP emphasises that South Africa must focus on building a capable Developmental State although it is noted that international experience shows that this cannot be a short-term exercise and that specific procedures must be strengthened over time.

Areas where targeted action is particularly important include the following:  Stabilise the political-administrative interface through the development of a professional public service that serves government while retaining sufficient autonomy to be protected from political patronage. This requires a clearer separation between the roles of the political principal and the administrative head.  Ensure that the public service and local government administration become careers of choice by building a skilled public service at senior and lower levels. At senior levels, recruitment and management should be based on experience and expertise, while at junior levels the focus should be on developing the skills, knowledge and expertise necessary for committed public service workers in the future.  Develop appropriate technical and specialist professional skills; and strengthen the role of the state in ensuring that such specialist technical skills are produced to fulfil core state functions. This includes formulating appropriate career paths for technical specialists.  Improve principles of delegation, accountability and oversight through promoting more consistent divisions of labour and responsibility supported by effective oversight systems. Ensure that citizens can hold public servants and politicians accountable, especially for the quality of service delivery.

 Improve inter-departmental coordination by adopting approaches to inter-departmental relations that are less hierarchical so that issues can be resolved between officials through routine day- to-day interactions. This also includes providing support for national and provincial cluster systems in the resolution of strategic issues.  Adopt a pro-active approach to improving interaction and dealings among the national, provincial and local spheres of government. National government must understand that there are wide variations in capacity, particularly at municipal level, and to devolve greater responsibilities where capacity exists, while building capacity in other areas. Where capacity is more limited, particularly in many rural areas, municipalities should be allowed to focus on their core functions and not be burdened with too many additional responsibilities.  The local government sphere must be strengthened by developing a constructive enabling framework for local government and providing active support and oversight by the national and provincial government spheres. In this regard, a more long-term perspective should be taken to developing skills together with consistent inculcation of a professional ethos and commitment to public service.  The governance relationships and responsibilities of SOEs must be clarified; particularly as far as the major SOEs are concerned where clear public-interest mandates and straightforward governance structures are essential to enable them to balance and reconcile economic and social objectives. Arising from the above, it is noted that in many Organisation for Economic Cooperation and Development (OECD) countries126 Public Service Commissions fulfil an advisory and oversight role, which ensures that norms and standards are followed without the Commissions being involved in selection processes. In other cases, such as in the USA, the Public Service Commission plays a more active role and is also responsible for appeals; while in much of South Asia, Commissions have direct responsibility for recruitment.

In South Africa, the Public Service Commission is assigned an advisory and oversight role, which includes promoting the values of the public service and investigating breaches of procedure. To fulfil this role, the Public Service Commission must be a robust defender of a public service based on merit and must have a stronger oversight role.

The importance of SOEs in realising socio-economic development potential is South Africa, which is of articulated in the Developmental State Green Paper, is further reinforced and entrenched in the National Development Plan.

The NDP indicates that SOEs are central to advancing national objectives through providing economic and social infrastructure. If this is done in an equitable and cost-effective way, SOEs can contribute to both economic growth and to overcoming spatial inequalities. While considerable

126 The OECD consists of 14 countries, including Australia, France, Germany, Japan and the United Kingdom

attention has been given to the transformation of SOEs, less attention has been given to the transformative or developmental role that SOEs can play.

Taking a long-term view, the NDP emphasises that by 2030 South Africa must be served by efficient, financially sound and well-governed SOEs that address the country’s developmental objectives in areas where neither the executive arms of government nor private enterprise are able to do so effectively. These SOEs must deliver quality and reliable service at a cost that enables South Africa to be globally competitive. To live up to these expectations, SOEs will require clear public-interest mandates, which are consistently enforced.

To improve the performance of SOEs, their tasks need to be simplified and rationalised. When enterprises with limited capacity and resources are required to address too many different priorities at once they are likely to fail, particularly when they have to work through complex or unpredictable governance structures. Instead, SOEs need a stable and straightforward governance structure that allows them to focus on long-term objectives. The challenge is to develop better ways of working so that the multiple and competing priorities that are recognised in formal documents can be prioritised effectively.

Three broad sets of reforms are proposed in the NDP to ensure that sustainable improvements are brought about in the performance of SOEs:  SOEs must have clear mandates. Each SOE needs a well-defined and transparent mandate that sets out its role and how its activities serve the public interest.  SOEs must have clear and straightforward governance structures that are able to clearly identify and manage the government’s roles in policy-making, ownership of utility assets, and the regulation of prices and quality of utility services.  SOEs must deal with capacity constraints and a long-term strategy must be formulated to develop policy and technical expertise that SOEs need to carry out their mandate.

The NDP stresses that by 2030, South Africa must have moved towards a Developmental State that is capable, professional and responsive to the needs of its citizens. Progress must be pursued most rapidly in those areas where state capacity is at its weakest and the Plan sets out proposals to realise opportunities, to address major problems and to place South Africa on an appropriate path for building state capacity to promote the objectives of diminishing poverty and reducing inequality.

The implementation of the NDP proposals depends heavily on the commitment to drive them forward and on the willingness to tackle problems as they arise. This requires a willingness to learn from experience and build on what works. This means initiating policies on a small-scale, developing an understanding of the obstacles to effective implementation, and then scaling-up where measures prove effective.

Eastern Cape Provincial Development Plan

It should be noted further that the Eastern Cape Province has also formulated a Provincial Development Plan127 (ECPDP) as a parallel policy instrument that extends the NDP to the provincial level. The ECPDP seeks to reinforce and expand on the NDP vision in the context of the Eastern Cape, emphasising those areas that are unique to the province. The ECPDP also adopts a 2030 target date and also places considerable emphasis on the principles of the Developmental State and the role of State-Owned Enterprises in building positive interactions between human, economic and institutional development towards the following ends:  Economic development contributes to human development through increased household incomes and greater fiscal resources for public services;  Economic development contributes to institutional development through increased fiscal resources for public institutions, parastatals, non-government organisations, private-sector partners and service providers to development programmes and projects;  Human development is a prerequisite for institutional development by providing well- educated and ethical institutional leadership and employees;  Human development contributes to economic development through a well-educated, creative, healthy and productive workforce;  Institutional development and the creation of a Capable and Developmental State are crucial for driving rapid and equitable economic development;  Institutional development contributes to human development through better use of public resources, for example, better health and education. Given the extent of spatial inequality in the Eastern Cape, the ECPDP places a substantial emphasis on spatial development, particularly spatial planning, which affects the conceptual framework of the ECPDP in terms of location, access, connectivity and mobility. Spatial and land- use legislation, planning, policy and incentives affect the location of public services, amenities and the investment of public resources. The implementation of the ECPDP must ensure that the interaction between people, development and ecosystems is well articulated and understood.

The Industrial Policy Action Plan (IPAP)

The Industrial Policy Action Plan (IPAP) was launched in 2007 and focuses on strategic sectors in order to boost national industrial capacity and to generate over two million employment opportunities by 2020. The IPAP has been through several iterations in terms of policy guidelines that require regular reviews, updates, adjustments and innovative planning.

127 Eastern Cape Planning Commission (2014): Eastern Cape Vision 2030 Provincial Development Plan

The IPAP 2013/14-2015/16 represented the fifth review of the national industrial policy context and associated implementation plans and was based on the insights articulated for South African development reflected in the National Development Plan (NDP). The IPAP is located in the framework provided by the programmatic approach of the New Growth Path (NGP) and the National Industrial Policy Framework (NIPF) adopted by Government in 2007.

The principal goal of the IPAP in the policy context is to prevent industrial decline and to support growth, innovation and diversification in the manufacturing sector. The concurrence of international evidence and opinion indicates that manufacturing is the principal driver of growth and employment in all economies that have achieved high gross domestic product (GDP) and employment growth; which means that manufacturing generates significant employment opportunities, directly as well as indirectly, in a range of primary and service sector activities.

The IPAP 2015/16 – 2017/18, launched in May 2015128, emphasised that the successive IPAP reviews since 2007 have consistently been based on an understanding that successful re- industrialisation requires a focused national industrial effort founded on:  The imperative for strong policy coherence and programme alignment across all government departments and their SOEs, entities and agencies, with decreasing reliance on regulatory compliance and a much stronger emphasis on coordinated economic impact, and  The need to ensure that government, business and labour interests work together to secure and strengthen their joint efforts.

It is evident, therefore, that the IPAP 2015 is based on the sound foundation that industrial policy works most effectively when it is thoroughly researched and designed through participatory consultation; and is adequately resourced and subjected to on-going robust monitoring and impact assessment to ensure continuous improvements to policy design and implementation.

Hence, the relevance of manufacturing industry and associated industrial policy to the NDP, the ECPDP and the principles of the Developmental State is clear.

Conclusion

In view of the above discussion, especially the significance of the NDP and the Eastern Cape equivalent contained in the ECPDP, and the IPAP review mechanism, the four principal responsibilities that commonly characterise a developmental state129 can be subjected to a critical assessment in order to arrive at a conclusion regarding the status of South Africa as a Developmental State.

128 Media statement by Minister of Trade and Industry May 7 2015 129 Steven Gelb, 2006: Ibid

1. In terms of formulating cohesive and focused goals and objectives for national growth and development, together with appropriate policies designed to achieve such goals, it seems clear that the Constitution, the NDP and the IPAP reviews indicate that South Africa fits the model of a developmental state; except that doubts may arise regarding the political will and determination to actually undertake the requirements. 2. The requirement for co-ordination, mobilisation and allocation of financial and human resources for investments associated with identified and defined policies also appear to be satisfied by the NDP; which again suggests that South Africa has some of the critical attributes of a developmental state. 3. As far as monitoring and evaluating progress towards achieving policy goals and objectives is concerned, the rigorous IPAP review mechanisms suggest that South Africa meets the requirements of a developmental state. 4. The capacity and commitment to adjust resource mobilisation and allocation in response to progress made towards existing objectives, to changes in objectives, and to external effects are all adequately dealt with in the NDP, the IPAP and the Green Paper on the role of State-Owned Entities in the Developmental State. In this regard, South Africa also appears to meet the requirements for a developmental state.

Taking into consideration the outcomes indicated above and the caveats referred to regarding the consistency of the will and capacity of the government to actually realise the potential for a developmental state, it should be concluded that South Africa is probably an emerging developmental state that appears to be on the right track towards securing that end.

Consequently, the importance of the time horizons specified in the NDP, the ECPDP and the IPAP becomes relevant. In fact, the IPAP perspective is probably the most realistic in this context because it provides for an on-going planning cycle that is subjected to a rigorous review every three years.

It has been suggested that a developmental state is not possible under democratic conditions and that there are many states which are procedurally democratic, but lack a sufficiently well-developed democratic political culture or democratic substance.

In many instances, especially in Africa, it is often difficult for such limited democracies to avoid being taken over by political elites whether this takes place in the context of one-party domination or multi-party politics. This perspective holds that the aims of a democratic developmental state are potentially contradictory and difficult to achieve130.

On the other hand, it has also been shown that democracy is not only compatible with growth and poverty reduction, but may be crucial to both. Establishing and maintaining a successful

130 Gumede, W. 2009: Delivering the Democratic Developmental State in South Africa. DBSA Development Planning Division Working Paper Series No.9, Midrand

developmental state means getting the nature and relationship between various social institutions right; whilst, at the same time, managing conflicts within and between institutions through social compacts or through national consensus131.

In this regard, it has also been argued that developmental states can successfully manage the balance between economic growth and social development while building democratic institutions at the same time; and that a case can be made for development and democracy to co-exist. In this view, development is a process of the removing major sources of poverty, domination, poor economic opportunities and social deprivation, as well as neglect of public facilities and services and intolerance132.

Finally, measured in terms of the appropriate vision, commitment, policies pursued, institutions established and respected, and the quality of democracy, the successful establishment, delivery and maintenance of a Democratic Developmental State is still, at best, work in progress.

For South Africa, however, avoiding the challenge to build a democratic developmental state is not an option; the continued stability of the country may ultimately depend on the vigour, honesty and will with which such a goal is pursued and secured133.

Developmental State and the Casino Industry

It would appear likely that the trend towards a developmental state in South Africa might well have an effect on the gambling industry at the national and provincial levels, particularly if it reaches a condition of effective fruition. This means that the progress towards and the realisation of a Developmental State in South Africa would have an effect on the economic impact of gambling as well as on the social impact of gambling; probably with positive, neutral and negative consequences. This context, however, is concerned only with effects on the casino industry.

Casino compliance with specific licence conditions tends to be monitored on an issue-specific and fragmented basis and there are seldom any overall evaluations of the broader social and economic impact of casinos on the communities in which they are located; nor of the effectiveness of harm minimisation strategies or long-term compliance with a wide range of licence and regulatory requirements134. This is deemed to be somewhat difficult in a context where most casino licences have been granted for an indefinite period.

In order to minimise the probable negative consequences of such licence terms, the GRC recommended that such licences should be subjected to comprehensive licence-condition and compliance reviews every five years, as is the case in the Australian state of New South Wales.

131 Heller, P (199): The Labour of Development: Workers and the Transformation of Capitalism in Kerala, India. Cornell University Press, Ithaca, NY 132 Sen, Amartya, 1999: The Possibility of Social Choice. American Economic Review 89(3) 133 Gumede, W. 2009: op cit 134 DTI: Gambling Review Commission Report, 2010

Such reviews might consider, at least, the casino licensing conditions, the socio-economic impact of the casino, the B-BBEE compliance and the implementation of measures to protect the vulnerable and to minimise the social harm of gambling.

The Commission noted that, in Australia, consistent failure to meet licence requirements or to rectify areas of concern, could result in the revocation of a licence; and, hence, recommended that such a principle should be adopted in South Africa.

It is further noted that, in terms of the National Gambling Act of 2004, the overall total number of casino licences and the distribution of such licences among the nine provinces must be based on initiatives to promote:  Black economic empowerment;  New entrants into the gambling industry;  Employment generation in the gambling industry;  Diversity of ownership in the gambling industry;  Efficiency of operation of the gambling industry; or  Competition in the gambling industry

The extent to which the above criteria are equivalent to those that are indicated as being characteristics of a Developmental State is evident; viz., diversification, opportunity, economic growth, empowerment, efficiency, effectiveness and equality.

Moreover, it should be further noted that the overall impact of the gambling sector and gambling policy since 1996 was based on the aims and objectives of national gambling policy which are as follows:  To protect society from the impulsive gambling by limiting gambling opportunities;  To protect players and the integrity of the industry by imposing strict controls and supervision in the industry;  To ensure uniformity and alignment of policy and legislation at all levels of government and across provinces through instituting clear norms and standards;  To promote and facilitate inter-governmental co-operation and co-ordination;  To generate revenue and taxes for provincial governments;  To promote economic empowerment of historically disadvantaged people;  To promote economic growth, development and employment.

Most of these objectives are similar to those indicated earlier regarding the nature, intent and progress towards a developmental state. In order to secure the essence of these objectives, therefore, the gambling industry would, most certainly, be impacted upon by the conditions that define a Developmental State.

Finally, it is instructive to return to the four principal responsibilities that commonly characterise a Developmental State that were outlined earlier135.

These responsibilities are shown in Table 22 together with their probable impact on casino licensing mandates.

Table 22: Developmental State Core Responsibilities and Casino Licence Mandates

Core Responsibilities of a Implications for ECGBB Casino Developmental State Licensing Mandates Casino licencing procedures and conditions To formulate cohesive and focussed goals and require the ECGBB to ensure that due objectives for national growth and development, consideration is accorded to the extent to which together with appropriate policies designed to licenced casino operations contribute towards achieve such goals provincial and national socio-economic development The ECGBB is obliged to ensure that casino To co-ordinate, mobilise and allocate financial licensees undertake activities related to the and human resources for investments socio-economic development of the province associated with identified and defined policies through investment in people and infrastructure The ECGBB must undertake robust and regular To monitor and evaluate progress towards monitoring and evaluation of casino licensee achieving policy goals and objectives performance and compliance with national and provincial policy goals and objectives To adjust resource mobilisation and allocation in The ECGBB must ensure that overall casino response to progress made towards existing monitoring outcomes are applied towards objectives, to changes in objectives, and to improving socio-economic circumstances in the external effects casino operating environment Additional responsibility and implications The ECGBB is obliged to ensure that overall To ensure that national economic development casino and general gambling activities parameters form the basis for gambling contribute towards provincial economic stability operations throughout the country through and growth in the context of national goals, appropriate NGB/SOE oversight obligations norms and standards

Given the longer-term perspectives associated with national socio-economic development instruments and the progress of the nation towards a Developmental State, it appears that a longer-term validity period for casino licences would facilitate the prospects for securing such a desired state, on the one hand; and would assist the ECGBB in delivering on its mandate in terms of the National Gambling Act and the Eastern Cape Gambling and Betting Act, on the other hand.

135 Stephen Gelb: A South African Developmental State: What is possible? September 2006, Cape Town

Such longer-term licence duration would also serve as an incentive for further investment in non- casino infrastructure, entertainment facilities and hotel accommodation by licensees. In many cases, such additional investment is unlikely to be considered by licensees in view of limitations on their return on investment.

The variability evident in the duration of South African casino licences, as well in most international gambling jurisdictions, raises questions regarding how such validity periods are determined. Instances where the duration of casino licences range from five years to ten years, and also extend to 20 or 30 or more years are common in the domestic and foreign casino regulating environment and licence durations in perpetuity are also not uncommon. In the absence of consistently clear explanations and motivations regarding casino licence validity periods, it appears that, in most cases, the decisions are probably arbitrary.

The duration of casino licences is indirectly linked to the number of casino licences that are permitted in each of the Provinces in South Africa, which was set at an overall total of 40 casino licences nationally which are shared among the nine Provinces such that allocations range from 6 licences (Gauteng) to 3 licences (Northern Cape)136.

A hypothetical issue arises in this context concerning whether entrance to a particular provincial casino market is blocked to any future new applicants once the allocated number of licences have been issued as permanent licences, with virtually automatic renewal based on fixed-term performance and compliance evaluation. Where the number of casino licences is fixed in law, it would appear that no further licences could be issued except through default by an existing licence holder.

Chapter 6: Discussion of the Duration of Licences in other Gambling Industries in the Eastern Cape

Other Gambling Industries All Other Gambling Industries refers to Limited Pay-out Machines (LPMs), Bingo and Betting (which includes Horseracing and Bookmakers137 which account for 28% of all gambling revenue, with sports betting making up the majority (14%), followed by LPMs (9%), while Bingo constitutes the lowest contributor (5%).

Figure 17 shows the Eastern Cape GGR from other gambling sectors compared to the national picture for the 2014/15 financial year.

136 Limitations on the total number of casino licences and the number allocated to each province were adjusted in the National Gambling Act No 7 of 2004 through the conditional repeal of the National Gambling Act No. 33 of 1996 137 Consists of Totalisator Taxes and Sports Betting

Figure 17: Comparison of National and Eastern Cape GGR from Other Gambling Industries in 2013/14138

* Sports betting includes totalisator and bookmakers

The contribution of the other Gambling Industries to the Provincial fiscus is shown in Table 23.

Table 23: Contribution of Other Gambling Industries in the Eastern Cape139

Other Gambling GGR Taxes % taxed Industry LPM 239.8m 23.8m 10% 10% -totalisator Racing 169.8m 7.7m 6% - bookmakers Bingo 113.4m 11.4m 7%

Limited Pay-out Machines (LPMs)

According to the 2010 Report140, LPMs are intended to promote business development and as the Regulations stipulate that a high percentage (usually around 60%) has to be located in formally

138 PWC Third Annual Addition November 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 p14 139 Eastern Cape Gambling and Betting Board, Annual Report 2014/15

PDI areas. LPMs typically have low barriers to entry thereby creating favourable conditions to facilitate PDI ownership and control.

Vukani, the largest route operator, has bought pubs on behalf of identified PDI entrepreneurs as a means of satisfying the 60% requirement141. Vukani provides assistance to the PDIs, who in return, pay them back. According to the 2010 Report, the LPMs are intended only to supplement the primary business of the site operators and in doing so, contribute to the sustainability of small, particularly PDI-owned, businesses.

As mentioned in Chapter 2, the Regulations anticipated a rollout of 50 000 machines across the country, but to date only around 42%142 of the initial 25,000 LPMs have been installed in eight of the nine provinces. For the most part, this is due to lengthy delays in the issuing of licences by the provincial regulatory authorities.

Route operator licensees in the Eastern Cape can acquire a licence for a period of fifteen years, compared to Gauteng, where permanent licences are issued. According to Vukani, a period of at least 15 years is needed to allow route and site operators to recover their costs and make a reasonable profit143.

The delays in issuing licences have resulted in substantial economic losses for route operators and this has led to strained relations between the route operators and the Provincial licensing authorities, who also face capacity constraints. For example, Vukani reported that their LPMs only became operational in Mpumalanga 56 months after the licences were initially awarded due to a dispute over the central monitoring system. This delay apparently cost Vukani a reported R207 million in lost revenue.

The 2010 Report listed the following “regulatory problems” alleged by route operators –  Some Provinces still require public hearings before any site licence can be awarded;  Different Provinces charge different amounts per site licence; and  It is time consuming and expensive to have to liaise with all the different municipalities within a metro or district when making applications for site licences.

140 Gambling Review Commission - Review of the South African gambling industry and its regulation. Report submitted to the Minister of Trade and Industry, 2010 p57 141 The two 60% requirements include –  Relating machines in the hands of PDIs; and  Relating machines in the metros. 142 According to the Zonke Monitoring Systems website, 10 566 LPMs have been installed to date (2015/08/20), while 10 263 are active in the Eastern Cape http://www.zonkems.co.za/devices/ 143 Vukani presentation in the 2010 Review of the South African gambling industry and its regulation - Report submitted to the Minister of Trade and Industry

Summary of Findings

On 17 February 2015 the ECGBB communicated a notice to all licensees in which the industry was invited to submit representations regarding the duration of gambling licences.

The deadline for representations was 31 March 2015, and inputs were received from:

1. V Slots Eastern Cape

The key inputs from the above licensee are summarised below according to the main issues raised.

Lack of alignment across Route and Site Operators (LPMs)

V-Slots highlighted the importance of licence alignment specifically regarding route and site operators and illustrated this necessity with the following example:

Vukani Gaming Eastern Cape (Pty) Ltd (Vukani) is the holder of a Route Operator Licence that was originally issued by the Board on 5 October 2004 for a seven-year period of validity. Prior to the expiry of the original licence on 7 April 2012, during June 2011, the Board issued a further Request for Proposal document in respect of route and site operator licences in the Province. Vukani submitted a detailed bid for a further Route Operator Licence, which was ultimately successful. Vukani’s current (second) Route Operator Licence was issued during 2012 and is valid for fifteen years.

The Site Operator Licence issued by the Board pursuant to the original RFP was also valid for a period of seven years. The implication of this was that, at the time that Vukani applied for a further Route Operator Licence, there were several Site Operator Licences which would remain valid after Vukani’s Route Operator Licence had expired. Moreover, these site operators were faced with the potential challenge of being stranded without a licenced route operator in the event that Vukani’s second application for a Route Operator Licence was unsuccessful, despite holding valid licences issued by the Board in respect of their premises. According to V-Slots, the Board included the following stipulation in the 2011 RFP –

“As the current Site Operator Licences were issued for a period of 7 years, most will remain valid beyond the licence period (7 April 2012) of the remaining Route Operator (i.e. Vukani). Should the remaining Route Operator be a successful applicant, it will be entitled to retain all operational sites licenced to it. Should the remaining Route Operator not be a successful applicant, all site licensees will be entitled to apply to the Board to transfer their sites to a successful applicant of their choice, and the Board will issue directives in such event”.

According to V-Slots, the above requirement demonstrates the unworkability of fixed-term Route Operator and Site Operator Licences, particularly when the nature of the LPM model is taken into account. Since a site operator cannot function without being served by a properly licenced route operator, it follows that the holders of valid Site Operator Licences are invariably exposed to potential risk if their route operator loses its licence.

V-Slots claimed that new route operators who are seeking to enter the market are at a disadvantage because of the fixed licence terms. This is because route operators have to reach profitability as quickly as possible, after which they are obliged to cease trading under their licence due to the expiry of the licence term. Similarly, the site owners’ businesses are boosted temporarily by the introduction of LPMs, but also have to cease gambling operations when the licence expires.

V-Slots, therefore, believes that fixed licences compromise the prospects of projects and discourage any long-term benefits for the shareholders.

Lack of alignment across same category of licence

V-Slots in the Eastern Cape voiced concern at the fact that Section 33(7) does not does not require the Board, when determining the period of validity of a licence, to ensure that the same period of validity is determined in respect of all licences in the same category. The Board can, therefore, issue more than one licence of the same type for different periods. Hence, the Section lends itself to the possibility of discriminatory treatment between holders of the same category of licence.

Slow Rollout Process

V-Slots highlighted the fact that the licensing and rollout process in the LPM sector is relatively slow, due to the involvement of a number of bodies in the site selection, approval and licencing process. The slower the rollout, the longer it takes for a business to become profitable, and this decreases the prospects of a good return to shareholders, given that the licence term is limited.

Counter-productive towards economic objectives

V-Slots explained that the promotion of sustainable economic development at site level is one of the cornerstones of the LPM industry. Seen from this perspective, V-Slots believed that placing a limitation on the lifespan of the Site Operator Licence, would have counter-productive results.

Therefore, V-Slots concluded that, in the context of the LPM industry, there are no identifiable benefits generated by limiting the lifespan of either route or site operator licences. The LPM industry is built on the development and ongoing management of symbiotic commercial relationships between the route operator, on the one hand, and site operators, on the other. Limiting the period of validity of either licence type would serve only to undermine the sustainability and longevity of such relationships and to lessen, or ultimately terminate, the economic development of smaller businesses which were intended to be fostered by the licensing and regulation of the LPM sector from the outset.

Bingo

On 17 February 2015 the ECGBB communicated a notice to all licensees in which the industry was invited to submit representations regarding the duration of gambling licences.

The deadline for representations was 31 March 2015, and inputs were received from:

1. Galaxy Bingo Gaming and Entertainment on behalf of -  Galaxy Bingo Port Elizabeth (Pty) Ltd  Galaxy Bingo East London (Pty) Ltd  EC Gaming Uitenhage (Pty) Ltd  Galaxy Bingo King Williams Town (Pty) Ltd  Galaxy Bingo Mthatha (Pty) Ltd 2. Bingo Association of South Africa (BASA)

Local and International Gambling Licences

According to a study conducted by BASA regarding the duration of licences, both locally and internationally, gambling-related licences in other provincial gambling jurisdictions in South Africa are not limited to a term. Instead, as both BASA and V Slots revealed, licences are renewable on an annual basis subject to the payment of prescribed renewal fees and ongoing compliance with all applicable legislation and other regulatory compliances, such as licence conditions. According to BASA, this is also the case in most of the major gambling jurisdictions in the world.

BASA explained that although it is common practise, both locally and internationally, for regulators to grant national or state lottery licences to a single operator for a certain period of time only, this is because the lottery licence is almost always an exclusive licence and no other operator is allowed to operate a lottery in that country or state during this exclusivity period. However, BASA explained that no licences issued by the ECGBB are exclusive and the operators in the Eastern Cape Province all compete with each other for a share of the total gambling market.

Economic Considerations

Profitability and limited financial returns to shareholders

BASA explained that while members are committed to operate viable bingo operations in the long- term, the current fixed-term licences place limitations on the prospects for a sound financial return to all shareholders; including BEE partners.

BASA claimed that certain bingo sites take longer to reach profitability and, depending on financials, some sites will be required to cease operations before any profits are made or soon after profitability is reached, due to the expiry of the licence.

Bingo is new in the Province and the first site opened only in December 2013, after which sites were opened in East London and Port Elizabeth in March/April 2014. As a result, there is no historical financial evidence to show financial returns or historical cash flows. However, using the bid proposal documents from the bingo operators, Galaxy and Goldrush, it is possible to review the estimated and anticipated financial considerations.

Financial predictions received in the bid documents reveal the estimated capital investment and the estimated projected financial returns of the proposed bingo operations. Over the 15 year licence duration, significant financial returns are expected to accrue to shareholders and PDI shareholders.

In one proposal for an Eastern Cape based operation, Goldrush predicted that the operation would become self-funding within the first year, and that shareholder funds will be fully repaid in the second: after which dividends would be declared at the end of the second year. A ‘conservative’ assumption of 8% growth per annum was used in the calculation and this shows that businesses are expected to be profitable and the licence duration does not appear to be a hindrance. It is presumed that the prospects for satisfactory financial returns are the motivation behind the plans to expand bingo terminals in the Eastern Cape; which is evident from the licence applications for bingo terminals in Grahamstown, Graaff Reinet, Uitenhage and King William’s Town.

In a Galaxy proposal, the average GGR was assumed to be 20% for year two, 10% for years three and four, and a constant 6% per annum for the remaining years. The anticipated trends in profit after tax, therefore, appear to be satisfactory and increasing over time.

Hinders re-investment

BASA maintains that current and future investments are hindered by fixed-term licences because when a licensee has five years left to operate under an existing licence and has no guarantee that this term will be extended, the licensee will not re-invest or expand in the business during this time.

Hence, BASA argues that fixed-term licences have a negative impact on potential job creation since, without new investment projects, no temporary or additional permanent jobs will be generated and ultimately the local Eastern Cape economy does not benefit.

In conclusion BASA stated that the current licensing regime in the Eastern Cape Province is not conducive to re-investment in the Province and severely restricts the ability of the bingo industry to continuously re-invest in their operations in the long-term. BASA concluded that the ultimate aim of the ECGBB should be to manage the gambling industry in the Province in such a way that the income from gaming taxes, fees and levies is maximised. This, in turn, will ensure that the Eastern Cape community benefits directly from the gambling operations in the Province.

Reviewing the same bid documents as above, the proposed initial capital investments for bingo sites from Goldrush are shown in Table 24, which indicates that, on average, the proposed capital investment is 87% greater than the required minimum investment.

Table 24: Proposed capital investment144 for Bingo Sites145

Proposed Bingo % over RFP Site Uitenhage 110%

Graaff Reinet 20%

Grahamstown 116%

King Williams Town 100%

Average 87%

From Table 24 it is evident that that since the capital investments are well above the RFP requirements, the investments are driven by market conditions and not by the regulatory environment.

Capital expenditure for improvements and modernisation in a Galaxy bid is estimated at 12% of the initial capital cost and represents the expenditure that is likely to take place between year eight and eleven. Other direct investment, excluding the electronic equipment, is estimated at 34% of the initial capital cost per annum. In a Goldrush bid, the proposed new investment146 is equivalent to 31% of the initial capital investment per annum over the 15 year duration.

The bingo equipment constitutes a significant expense and comprises 61% of the total capital cost; however, the electronic equipment is a movable asset and is less affected by licence duration.

Potential job losses

BASA explained that during the licence period the bingo operators are continuously training and mentoring their staff (often to management level) at a significant cost to their company. In the event

144 Excluding bingo equipment 145 Eastern Cape Gambling and Betting Board Proposal for Bingo Licence in response to the RFP May 2014 submitted by Kerliglo (Pty) Ltd Goldrush Bingo and Entertainment for King Williams Town, Uitenhage, Graaff Reinet and Grahamstown 146 This is not purely capital investment, but also includes advertising and marketing, bid costs, maintenance costs, training costs, CSI contributions and salaries and travel

of a licence lapsing or not being renewed, skilled staff face the possibility of losing their jobs at the end of the licence period.

As such, BASA recommended that the ECGBB should issue permanent gambling licences, subject to annual renewals, continuous suitability of the licensee and upon payment of the prescribed renewal fees. BASA believed that the recommended system is tried and tested in the industry and is the only way to ensure that operators and their shareholders continue to invest and to operate the businesses in the long-term and to ensure job security.

Using conditions in licencing to ensure continuous investment

BASA recognised the concern of the ECGBB which may lack the leverage required to ensure ongoing, sustainable investment by licensees if the licensing regime is changed.

However, BASA stated that since the commitments made by licensees form part of the licence conditions attached to the existing licence, these are binding and must be implemented by licensees. Even if the current regime is changed to permanent licences, the ECGBB, in terms of its powers and functions, can ensure compliance through the imposition of appropriate licence conditions. Any licensee who opts to contravene any of the licence conditions runs the risk of incurring serious sanctions from the regulator, including suspension or even permanent cancellation of the licence. BASA could, therefore, see no reason for the Board to be concerned.

BASA continued by explaining that Section 33 of the Eastern Cape Gambling and Betting Act stipulates that the Board can impose any additional condition(s) on a licence that it deems appropriate. Hence, BASA stated that it would not be opposed to additional periodical re- investment requirements being introduced by the ECGBB to ensure continuous investment in the Province. It was suggested by BASA that these requirements could form part of the conditions attached to each licence, but should first be negotiated between the Board and licensees. V-Slots would also be open to the prospect of the Board imposing conditions on the licence in question.

However, V-Slots required that this should follow a process of consultation with the affected licence holders because there needs to be an agreement on the levels of new investment necessary.

The licensees believed that this approach would effectively enable the ECGBB to extract new and sustainable investments from the licensees on an ongoing basis, but without using the re-licensing process as a controlling instrument.

However, BASA noted that no other province in South Africa regulates reinvestment as part of a licensee’s licence conditions, even though licences are issued permanently. Since bingo developments are commercial operations, experience has shown that if operators do not continuously re-invest in their businesses, revenues deteriorate over time. BASA believed that it is, therefore, in the bingo operators’ own interest to maintain and continuously improve their venues.

Benefits to the greater community

The bingo applicants in the Eastern Cape have committed significant CSI contributions. For example, Table 25 reveals the commitments made by Galaxy in a bid for an Eastern Cape bingo terminal, which has a strong focus on the promotion of tourism.

Table 25: Benefits to the Community147

1.5% of GGR CSI R20 million once-off project R6.5 million projected contribution 3% of Net Profit before Tax to focus on Sports, Arts and tourism Culture R20 million once-off project R4.6 million projected for tourism 1% of Net Profit before Tax Tourism Projected contribution R1.5 million

The bingo operations are also expected to yield significant returns to the Provincial and National Government in the form of gaming levies and tax revenues, which is in line with the development goals of the Province.

Bookmakers

On 17 February 2015 the ECGBB communicated a notice to all licensees in which the industry was invited to submit representations regarding the duration of gambling licences.

The deadline for representations was 31 March 2015, and inputs were received from:

1. Marshalls World of Sport Eastern Cape (Pty) Ltd148

Lack of alignment across all types of other gambling industries

According to Marshalls World of Sport and Entertainment, the ECGBB advised licensees to strive for the ‘ideal integrated one-stop betting shop’ that offers bingo, LPMs and sports betting. However, Marshalls believes that such an ideal becomes difficult when different licence periods are

147 Application for a Category A Bingo Licence in the Eastern Cape submitted by Galaxy Bingo Mthatha (Pty) Ltd 148 Under signature of Greg Murrell dated 30 March 2015

in effect. For example, if the primary licence is a bookmaker licence valid for five years, then a LPM site licence valid for 15 years as a secondary licence becomes anomalous.

Premises considerations

Marshalls World of Sport claimed that the major effect of the five-year limitation on a bookmaker licence is that it becomes impossible to negotiate leases for new premises once the first two years have passed.

Increasing efficiency of systems

Marshalls World of Sport stated that whilst there is no mechanism for the renewal of a bookmaker licence in the Eastern Cape legislation, other Provinces have an automatic renewal system for bookmaker licences, conditional upon the payment of an annual fee. Marshalls noted that prior to the implementation of the Eastern Cape Gambling and Betting Act, the Horse Racing and Betting Ordinance, 1968 (No 34 of 1968) of the Cape Province governed the Eastern Cape. Throughout its tenure, this ordinance allowed for the automatic annual renewal of a bookmaker licence upon payment of the prescribed fee.

Chapter 7: Conclusions

The report has addressed the issues outlined in the brief.

Casino Licences Commitments by licensees to progressively invest in infrastructural development for the duration of the licence term. Evidence suggests that licensees in the Eastern Cape invest only to adhere to the conditions of the licence agreement, and do not progressively invest over the duration of the licence term. The capital investments have not been voluntary in nature, or in response to market conditions. For example, Sun International explains that the Boardwalk is considering expanding its development, and investing in a large retail mall. However, the fixed- term licence is a limiting factor in their decision, and even if it is commercially feasible, they will not invest without certainty of a licence term.

There is also some reluctance on the part of the casino operators and other business owners to invest capital expenditure into the business towards the middle/end of the licensing period.

Furthermore, since the initial bids were deemed to be over-valued by the licensees, they express that it is not commercially achievable to recover the investment costs over the limited licence period. Licensees maintain that they are struggling to service their debt or meet the terms of the loan facility. Therefore, the driving factor that directs the allocation of spend is to recover the cost of the investment, rather than to finance infrastructural expansions.

There has also been minimum expenditure on maintenance and refurbishment of the existing casinos. The Wild Coast Sun, for example, boasts facilities and assets that are far bigger than what the market justifies, and as a result, merely staying up to date on the replacement and refurbishment costs is a challenge.

Long-term reinvestments without the benefit or option of re-licensing as controlling instrument

The report has provided evidence that casinos that have permanent licences continue to invest in the long-term, with decisions based on commercial considerations and not due to regulatory requirements. It is in the casinos’ best interest to continue to invest and expand and to remain a destination venue of choice and therefore incentives are aligned when permanent licences are in place.

Rather than promoting an investment enabling environment, the controlling instrument acts as a hindrance to long-term investment, since licensees are unable to plan for the long-term. Licensees are unwilling to invest more than they have to, as they do not have the long-term assurance of a gambling licence.

Sustainability of existing infrastructure in the event where licences are not re-issued or extended

The report has shown that casino destination resorts across South Africa generate the majority of revenue from gambling, as opposed to non-gambling industries. With over 80% of the revenue being generated by the casinos, the operations’ revenue generating abilities would be limited in the case where casino licences are not re-issued or extended. With the reduced revenues, the cost of maintaining the same infrastructure becomes impractical and it is judged that the existing infrastructure would not be sustainable.

Determination and enforcement of additional conditions of licence with permanent licences

The licensees have indicated that they would be open to further discussions regarding additional licence conditions, should permanent licences be issued. The licensees believe that should the bid commitments be revised or amended to cater for the new licensing regime, these matters should be negotiated between each licensee and the Board.

They also made it clear that an extension or increase of the licensing period for casino operators should not be accompanied by any blanket commitments on the part of the casino operators with regard to capital or infrastructure investment, given the significant investments already made.

Similarly, they ask that an increase of the licensing period should not be premised on the operators’ acceptance of revised licence conditions as a quid pro quo for such an extension of licensing periods. The licensees all have individual circumstances relating to their development, operations, shareholding and CSI commitments and any proposals need to be approached on an individual basis, not by way of a general policy or requirement.

Benefits and disadvantages of fixed-term and permanent licences

The predominant disadvantage for fixed-term licences is that they discourage long-term capital investments. The capex investment decisions are based on securing the licence, rather than as a response to market considerations. On the other hand, the main advantage of a fixed-term licence is that the licence can be directed for a specific purpose.

For example, the gambling licence might be used as a means to attract local investment, aligned to a municipal Spatial Development Plan, where strategic growth points have been identified that need a significant capital injection. However, the detrimental impact of moving away from the existing infrastructure and the unintended consequence of creating white elephants needs to be borne in mind. Advantages and disadvantages of fixed-term casino licences are summarised in Table 26.

Table 26: Summary of advantages and disadvantages of fixed-term casino licences

Advantages of fixed-term Disadvantages of fixed-term Ability to take stock and reconsider what the licence Discourages investment, no additional or voluntary can be used for capital is spent Can ensure that there is continuous alignment with Limits innovation and entrepreneurship National Policy * Prevents business imperatives and incentives from Enable new entry for PDI shareholders driving capital investment Curbs employment benefits: permanent employment is not possible and loss of employment at the end of a licence is probable Minimum expenditure on maintenance and refurbishment, especially during the latter years of the licence

No long-term planning is undertaken

Potential to create white elephants if licences are not renewed Driving factor directing capital expenditure is to pay

off capital debt within fixed licence term period

Advantages of fixed-term Disadvantages of fixed-term * Such an objective can also be achieved under indefinite licences when considering Section 53(2) of the National Gambling Act149

Table 27 identifies the important advantages and disadvantages of permanent casino licences. While the principal disadvantage of permanent licences is that they create perpetual ownership and do not allow for any new entrants to enter the market, there has been no diversity of ownership under fixed-term licences either. It is argued that it is, in fact, very difficult to enter the market and new entrants are unable to compete with the high capital infrastructure investment requirements.

The main benefit of indefinite licences is that businesses can operate in line with commercial interests. Businesses can make long-term decisions and invest in long-term infrastructure developments.

Table 27: Advantages and disadvantages of permanent casino licences

Advantages of permanent licence Disadvantages of permanent licence Optimises revenue collection through the taxes and Create perpetual ownership of licences and thus the levies paid to provincial coffers, since there is everlasting entitlement reserved for a few incentive to maximise profit in the long-term

Provides certainty for shareholders and BEE partners No new entries *

Investments are made with a long-term perspective, thus ensuring sustainable investments CSI initiatives are sustainable. Ability to play a more meaningful role in the communities Exclusivity gives the casino operators assurances that their investments are safe and that the returns are forthcoming Permanent employment and long-term employee benefits can be realised.

149 At least once every year after the issue of a licence other than an employment licence, the provincial licensing authority or the board that issued that licence‐ a) must review the commitments considered in terms of subsection (1) (a) and the achievements of the licensee in relation to those commitments; and b) may impose further or different reasonable and justifiable conditions on the licence to the extent necessary to address the matters referred to in subsection (1) (a) and (b). Subsection (1) (a) Must consider the commitments, if any, made by the applicant or proposed transferee in relation to‐ (i) black economic empowerment; or (ii) combating the incidence of addictive and compulsive gambling; (b) must consider the potential socio‐economic impact on the community of the proposed licence

Advantages of permanent licence Disadvantages of permanent licence Casino operators are able to ride the waves of the economic climate Attract further investment, using it as a real catalyst for further investments

* However, there have been no new entrants under fixed-term licences either and it is unlikely that new entrants will be able to enter the market at all since they have to compete with existing infrastructure

It follows that if fixed-term licences remain, a reasonable licence period needs to be found. This means that economic considerations need to be taken into account such as the GDP of the area versus the required investment.

However, even if a reasonable period is found in terms of which an adequate return on investment can be secured, fixed-term licences still hamper additional investment or re-investment to ensure the longevity of the development. Fixed-term licences provide no additional motivation or incentive to increase the footprint or to re-invest back into the development. Thus, even with a longer fixed- term investment, the licensee will in all likelihood still not re-invest.

Duration of gambling licences in other developed and developing countries

A detailed summary of the literature shows that the duration of licence terms varies across, and even within, countries. There is no clear explanation as to how countries decide on the term of a licence period, but it is shown that countries that use casino developments as a catalyst for further investment or as a means to boost tourism generally have a more enabling regulatory environment.

For example, casino developments in Australia have proved to be a significant catalyst for development and urban regeneration and contribute towards attracting tourism. It is, therefore, not surprising that casino licences in Australia extend well beyond 50 years. In recent years, certain countries in the EU are also changing legislation to encourage casino developments as a means of boosting tourism and employment and to improve stagnating economies.

Policy considerations that informed the current gambling licence term dispensation in South Africa

There is no local policy on the issuing of licence terms. The provincial legislation enables Provinces to apply their discretion, which in practice is to issue indefinite licences, all except Eastern Cape.

In light of the ECGBB objectives reflected in the Annual Report, together with South African progress towards becoming a developmental state, it is necessary to decide whether fixed or permanent licence terms enable a greater socio-economic impact for the Province. It is noted that indefinite licence terms enable a better business environment in which companies can maximise profits and encourages and promotes further investment. This, in turn, enables economic activity and job creation. Furthermore, increased business performance increases the potential revenue for the Province; which, in turn, can ensure that this is directed towards socio-economic developmental goals.

Conclusions on other types of licences LPMs

In the light of South Africa becoming a developmental state, the roll out of LPMs plays an important role due to its ability to promote business development. It is therefore important to ensure that businesses are able to achieve economic viability and ensure small businesses have time to prosper. The relationship between the route and site operator is important in the commercial sense, and therefore it is necessary to streamline it and ensure that licences do not hinder the smooth-running of the businesses. Even if the duration of the licence is not changed, it is suggested that there is alignment between the different players involved.

V-Slots mentioned that the law allows for the possibility of issuing different licence durations for the same category of licence. It worries that this will lead to discriminatory treatment between licence holders of the same category licence.

Literature shows that the slot machines face regulations across Europe and about half of the member EU countries need licences in order to operate a machine. For those countries who impose a licence duration, it appears that the average licence duration is around 5 years.

Betting

The impact of fixed-term licences impacts the ability to negotiate leases for premises, according to Marshalls World of Sport. They also suggested that the Eastern Cape should introduce electronic renewal system for bookmaker licences, conditional upon payment of an annual fee. This would improve the efficiency of the overall system.

Similarly to LPMs, countries in the EU generally impose a 5 year licence duration.

Bingo

The licensees claim that the fixed term licences limit the economic viability of the business. BASA maintains that the fixed licences are not conducive to re-investment and long term planning, and this ultimately affects the Eastern Cape’s coffers from not achieving the maximum tax potential.

However, according to proposal150 for new bingo terminals in the Eastern Cape, the projected trends in profit after tax appear to be satisfactory and increasing over time.

Long-term reinvestments without the benefit or option of re-licensing as a controlling instrument

Comparative studies in other countries and a review of licensees in other Provinces revealed that long-term investment and reinvestment will be informed by economic and commercial considerations. Progressive reinvestment requires a balancing act between prevalent market conditions and the need to maintain an attractive and preferred destination for the licensee’s customers and potential customers. Re-licensing as controlling instrument has been widely criticised by licensees with specific reference to profitability and the risk of creation derelict infrastructure.

The findings contained in this report conclude that reinvestment will be more sustainably achieved if informed by market and economic considerations, and that the conditions for an indefinite licence may be structured to enable future capital investment subject to stipulated eventualities or conditions.

The determination and enforcement of additional conditions of licence with permanent licences

Whether regulation applies to fixed-term or indefinite licences, the licensee is expected and required to comply with the recorded conditions of licence. Failure to comply with those conditions may result in the licence being suspended and/or terminated. With indefinite licences there is a greater responsibility on the Board to formulate and oversee those conditions, not only to adhere to financial, institutional and socio-economic commitments, but also to ensure that the licence is progressively aligned to the strategic and statutory mandates of the Board.

150 Specific to Goldrush only

Reflect on the benefits and disadvantages of fixed-term and permanent licences with accompanying recommendations

The identified advantages of fixed-term licences as contained in Table 25 may be accommodated with indefinite licences through the structuring of conditions of licence that may, inter alia, allow for new (additional) PDI shareholder participation, as well as alignment to National Policy as may be determined from time to time.

References

Australian Gambling, 2014. New South Wales Casinos [Online] Available from: http://www.australiangambling.com.au/casinos/new-south-wales/ [accessed August, 2015]

Belletire, M.1999. Legislating and regulating casino gaming: A view from State regulators. Developed at the request of the Regulation, Enforcement and Internet Subcommittee of the National Gambling Impact Study Commission.

Bolton, S., 2014. Market Realist, Casinos May Look To Expand Non-Gaming In 2015 [Online] Available from: http://marketrealist.com/2014/12/casinos-may-look-expand-non-gaming-2015/ (accessed 28th August 2015)

Bryant, L and Walker, D., 2010. Profitability and the return on investment from casino amenities, University of Nevada Las Vegas Caesars Hospitality Research Center Grant

California Gambling Control Commission, 2015 [Online] Available from: http://www.cgcc.ca.gov/ [accessed April 2015]

Casino Association of South Africa (CASA), 2012. The 2012 Survey of Casino Entertainment in South Africa

Casino Control Act 1991 (Victoria)

Casino World Directory 2015 web address: www.worldcasinodirectory.com [accessed May 2015]

Chapter 10:26; Lotteries And Gaming Act [Online] Available from: http://www.parlzim.gov.zw/attachments/article/96/LOTTERIES_AND_GAMING_ACT_10_26.pdf [accessed 19th September, 2015]

Correspondence with Mr Zwane (CEO), Mr Jaxa (Manager – Compliance and Licencing) and Mr Renene – Legal and Compliance

Crown Resorts, 2013 Crown Perth [Online] Available from: http://www.crownresorts.com.au/our- resorts/crown-perth [accessed September, 2015]

Department of National Treasury, 2014. Provincial Budgeted Revenue and Expenditure Annexure A Table A7 Actual and Budgeted Receipts

Department of Public Safety & Corrections, Public Safety Services, 2010. Louisiana Gaming Control Board [Online] Available from: http://lgcb.dps.louisiana.gov/ [accessed April 2015]

Department of South Australia, Department of Treasury and Finance, 2014. South Australian Gambling Policy – Adelaide Casino Agreements Fact Sheet

Dimanche and Speyrer 1996 in Rose, A., 1998. The Regional Economic Impacts of Casino Gambling, Assessment of the Literature and Establishment of a Research Agenda

Eadington, W, no date. The Spread of Casinos and their role in Tourism Development

Eadington, W, 1999. The economics of casino gambling Eadington, The Journal of Economic Perspectives, Vol. 13, No.3: 173-192

100

Eastern Cape Gambling and Betting Board, Annual Report 2013/14

Eastern Cape Gambling and Betting Board, Annual Report 2014/15

ECA, Gambling Compliance and Herzfeld Consulting, 2013 European Casino Industry (ECA) Report 2013, European Casino Association,

Gambling Review Commission, 2010. Review of the South African gambling industry and its regulation, Department of Trade and Industry

Gelb, S: A South African Developmental State: What is possible? September 2006, Cape Town

Goodman, 1995 in in Rose, A., 1998. The Regional Economic Impacts of Casino Gambling, Assessment of the Literature and Establishment of a Research Agenda

Government Gazette Government Notice No. R 1425. Department of Trade and Industry National Gambling Act, 1996. Regulations on Limited Payout Machines. 21 December 2000

Gumede, W., 2009. Delivering the Democratic Developmental State in South Africa. DBSA Development Planning Division Working Paper Series No.9, Midrand

Heller, P., 1999. The Labour of Development: Workers and the Transformation of Capitalism in Kerala, India. Cornell University Press, Ithaca, NY

Iowa Racing and Gaming Commission [Online] Available from: http://www.state.ia.us/irgc/ [accessed April 2015]

Illinois Gaming Board [Online] Available from: https://www.igb.illinois.gov/ [accessed April 2015]

Interview with Edward Lalumbe (COO of the GGB) and Thabang (Head of Licencing) dated Tuesday 15th September 2015

Interview and written correspondence from Jan de Lange, National Gaming Compliance Manager Tsogo Sun

Interview and written correspondence from Mr Tristan Kaatze, Director – Casino Operations

Kansas Racing and Gaming Commission [Online] Available from: http://www.krgc.ks.gov/ [accessed April 2015]

Laws of Botswana, Chapter 19:01 Casino [Online] Available from: http://www.mti.gov.bw/webfm_send/265 [accessed 18th September, 2015]

Lesotho Trade Portal, Casino Order 1989 [Online] Available from: http://www.lesothotradeportal.org.ls/index.php?r=site/display&id=56#9 [accessed 19th September, 2015]

Louisiana State Legislature [Online] Available from: http://www.legis.la.gov/Legis/Law.aspx?p=y&d=85068 [accessed April 2015]

Market Realist, Why the casino industry has huge growth potential, 2014. [Online] Available from: http://marketrealist.com/2014/09/why-casino-industry-has-huge-growth-potential/ [accessed 31st July 2015]

101

Missouri Gaming Commission [Online] Available from: http://www.mgc.dps.mo.gov/ [accessed April 2015]

National Gambling Board, 2014. Annual Report 2013/2014

National Gambling Board, 2014. Annual Report 2014/2015

National Gambling Board Statistics 2013

National Gambling Board Statistics 2014/15

Nevada Gaming Control Board, 2015 [Online] Available from: http://gaming.nv.gov/ [accessed April 2015]

Perniciario 1995 in Rose, A., 1998. The Regional Economic Impacts of Casino Gambling, Assessment of the Literature and Establishment of a Research Agenda

Presidential Review Committee of SOEs: Green Paper on the Role of State-Owned Entities in the Developmental State. Executive Summary 2012, Table 26: Presidential Review Committee Recommendations Implementation Plan

PricewaterhouseCoopers Inc (ed). 2014 Raising the stakes in Africa Gambling outlook: 2014 – 2018 South Africa • Nigeria • Kenya Third Annual Edition, November 2014

Rephann, T, Dalton, M, Stair, A and Isserman, A., no date. Casino Gambling as an Economic Development Strategy. Research was supported by grants from the National Science Foundation (NSF), the Allegany County, Maryland, Chamber of Commerce, and the Allegany County Blue Ribbon Task Force on Gaming.

Sen, Amartya: 1999. The Possibility of Social Choice. American Economic Review 89, 3

South Africa Tourism. 2014 Annual Tourism Report

State of Colorado, 2015. Colorado Department of Revenue [Online] Available from: https://www.colorado.gov/pacific/enforcement/node/38571 [accessed April 2015]

State of Indiana, 2015. Indiana Casino Licensees and Operating Agent [Online] Available from: http://www.in.gov/igc/files/owners.pdf [accessed 16 September 2015]

State of Michigan, 2015. Michigan Gaming Control Board [Online] Available from: http://www.michigan.gov/mgcb/0,4620,7-120-57144_57145-245366--,00.html [accessed April 2015]

State of New Jersey Casino Control Commission, 2015. NJ Casino Control Act & Commission Regulations [Online] Available from: http://www.nj.gov/casinos/actreg/reg/ [accessed April 2015]

Statistics South Africa, Domestic Tourism Survey 2013

Statista, no date. Global casino gaming revenue from 2006 to 2015, [Online] Available from: http://www.statista.com/statistics/271577/global-casino-gaming-market-revenue/ [accessed October, 2015]

Stewart, D. 2011. Improving Gaming Regulation: 10 Recommendations for Streamlining Processes While Maintaining Integrity. American Gambling Association White Paper

102

Swiss Institute of Comparative Law, 2006. Study of Gambling Services in the Internal Market of the European Union. European Commission

The Allen Consulting Group, 2009. Casinos and the Australian Economy. Melbourne

The Allen Consulting Group, 2012, Crown Sydney Proposal: An Economic Benefit Assessment Report to Crown Limited

The Mississippi Gaming Commission, 2015 [Online] Available from: http://www.msgamingcommission.com/ [accessed April 2015]

The Motley Fool, Casinos and Gaming Industry: Investing Essentials, http://www.fool.com/investing/general/2014/08/05/casinos-and-gaming-industry-investing-essentials.aspx [31st July, 2015]

The United Republic of Tanzania, The Gaming Act Chapter 41 Revised Edition [Online] Available from: http://www.mof.go.tz/mofdocs/revenue/The%20Gaming%20Act.pdf [accessed 18th September, 2015]

Unsolicited Proposal Echo Entertainment Group Development of the Star Assessment Report July 2013

Van Lill, D., 2007, Transformational Change in the SA Gambling and Lotteries Sector, Acta Commercii

Van Vuuren M, Standish, B, Boting, A, Swing, B, Powell, L and Kim Larsen, 2009. The Socio-Economic Impact of Legalized Gambling in the Eastern Cape Province, Eastern Cape Gambling and Betting Board

Victorian Commission for Gambling and Liquor Regulation, 2015 Casino operator and licence review [Online] Available from: http://www.vcglr.vic.gov.au/home/laws+and+regulations/compliance+and+enforcement/casino+operator+and +licence+review [accessed 4th August, 2015]

Vegas Master, 2014. First License for Southern Cyprus Casino to be Approved by August 2015 [Online] Available from: http://www.vegasmaster.com/first-license-for-southern-cyprus-casino-license-to-be-approved- by-august-2015-05082014/ [accessed 15th September, 2015]

Washington State Gambling Commission, 2015. [Online] Available from: http://www.wsgc.wa.gov/ [accessed April 2015]

Wu, S and Chen, Y., 2015, The social, economic and environmental impacts of casino gambling on the residents of Macau and Singapore ,Tourism Management 48, 285-298

Yav and Associates, 2015, Gambling Business in the Democratic Republic of Congo, 2015 [Online] Available from: http://www.hg.org/article.asp?id=21717 [accessed 18th September 2015]

Zambia Lii, Casino (Amendment) Act, Cap 157 [Online] Available from: http://www.zambialii.org/zm/legislation/consolidated-act/157 [accessed 18th September, 2015]

Zonke Monitoring Systems [Online] Available from: http://www.zonkems.co.za/devices/ (accessed August 2015)

103

104

105