SOUTH AFRICA’S CASINO INDUSTRY TEN YEARS ON ACHIEVEMENTS, ISSUES AND CHALLENGES A PRESENTATION BY MR DEREK AURET Lake Tahoe, Nevada 30 May 2006 ACHIEVEMENTS, ISSUES AND CHALLENGES A PRESENTATION BY MR DEREK AURET Lake Tahoe, Nevada 30 May 2006

Introduction Landmark decision to legalize gambling in 1996 through National Gambling Act Highlighted that gambling was a leisure activity that was considered to be desirable by a significant percentage of the population of South Africa Government consciously decided that South Africans should enjoy the right to choose whether or not they wished to participate in this form of entertainment Act thus recognised the maturity of the individual in South African society to decide for him/herself and to provide freedom of choice and to eliminate widespread illegal gambling and its harmful consequences Landmark decision to legalize gambling in 1996 through National Gambling Act Highlighted that gambling was a leisure activity that was considered to be desirable by a significant percentage of the population of South Africa Government consciously decided that South Africans should enjoy the right to choose whether or not they wished to participate in this form of entertainment Act thus recognised the maturity of the individual in South African society to decide for him/herself and to provide freedom of choice and to eliminate widespread illegal gambling and its harmful consequences

The South African Gambling Industry Prior To 1996 Prior to 1996: a substantial illegal industry – Widespread: up to illegal machines in all urban areas – Easy access to all & no age restrictions – Not regulated – Public not protected – Payout percentages manipulated – Winnings often not paid – Often associated with criminal elements (drugs, loan sharks, money laundering, protection rackets) – No taxes – No responsible gambling programmes – Almost totally controlled by whites: no empowerment in equity, management, procurement, etc 17 self-regulated rural resort casinos Prior to 1996: a substantial illegal industry – Widespread: up to illegal machines in all urban areas – Easy access to all & no age restrictions – Not regulated – Public not protected – Payout percentages manipulated – Winnings often not paid – Often associated with criminal elements (drugs, loan sharks, money laundering, protection rackets) – No taxes – No responsible gambling programmes – Almost totally controlled by whites: no empowerment in equity, management, procurement, etc 17 self-regulated rural resort casinos

The New Dispensation After 1996 The Process whereby the new industry was established: Two government commissions, extensive consultation and thorough process National Gambling Bill 1996: US/Canada/Australia model of “must see” entertainment destinations – Subsequent Provincial legislation (nine different laws) and new Act in 2004 Comprehensive regulatory framework – Created a successful and well regulated casino industry – Rigid probity standards and consumer protection Supply of gaming, out of control with previous government, now fixed and contained Highly competitive licensing process Delivered significant non-gaming infrastructure and meaningful public benefit projects: – Two world class convention centres and associated facilities – Tourist attractions, eg Apartheid Museum, bird and wildlife centres, sports facilities – Hotels – Other physical infrastructure, such as roads, which has acted as a catalyst for other new investment The Process whereby the new industry was established: Two government commissions, extensive consultation and thorough process National Gambling Bill 1996: US/Canada/Australia model of “must see” entertainment destinations – Subsequent Provincial legislation (nine different laws) and new Act in 2004 Comprehensive regulatory framework – Created a successful and well regulated casino industry – Rigid probity standards and consumer protection Supply of gaming, out of control with previous government, now fixed and contained Highly competitive licensing process Delivered significant non-gaming infrastructure and meaningful public benefit projects: – Two world class convention centres and associated facilities – Tourist attractions, eg Apartheid Museum, bird and wildlife centres, sports facilities – Hotels – Other physical infrastructure, such as roads, which has acted as a catalyst for other new investment

New Dispensation: Social Priorities Nearly R90-million p.a. in community social investment RFP’s and subsequent regulations determined comprehensive response (National Responsible Gambling Programme - NRGP) to the issue of problem gambling: – NRGP established as a public/private sector partnership of government regulators and industry with R10-million budget p.a. – Internationally recognized as among the best in the world Stability and accountability Casinos are subject to tight controls in terms of player protection, the exclusion of – minors, probity standards and other compliance measures, including industry’s – substantial funding of the National Responsible Gambling Programme Nearly R90-million p.a. in community social investment RFP’s and subsequent regulations determined comprehensive response (National Responsible Gambling Programme - NRGP) to the issue of problem gambling: – NRGP established as a public/private sector partnership of government regulators and industry with R10-million budget p.a. – Internationally recognized as among the best in the world Stability and accountability Casinos are subject to tight controls in terms of player protection, the exclusion of – minors, probity standards and other compliance measures, including industry’s – substantial funding of the National Responsible Gambling Programme

SOUTH AFRICA’S GAMBLING INDUSTRY A mature industry Principal gambling activities are lottery, slots, scratch cards and horses in that order National gross gaming revenue has grown from $1.5-billion (2003) to $1.93-billion in 2006 on the back of a bouyant local economy 50 % of South Africans never gamble 1.7 % of household income spent on gambling Gambling industry represents 1 % of SA’s GDP 80.6 % of South Africans approve of the industry, with 19.4 % opposed to gambling A mature industry Principal gambling activities are lottery, slots, scratch cards and horses in that order National gross gaming revenue has grown from $1.5-billion (2003) to $1.93-billion in 2006 on the back of a bouyant local economy 50 % of South Africans never gamble 1.7 % of household income spent on gambling Gambling industry represents 1 % of SA’s GDP 80.6 % of South Africans approve of the industry, with 19.4 % opposed to gambling

SOUTH AFRICA’S CASINO SECTOR 33 Casinos in nine provinces Accounts for over 80 % of GGR in the gambling industry, with casino GGR nearly doubling in past four years $2.5-billion invested since direct and indirect new jobs $450-billion paid to government in 2005 in various forms of tax Has funded millions of dollars in public interest infrastructure, including two international convention centres, new hotel rooms, wellness centres, eco-tourism facilities, golf resorts, etc Exceptional returns for shareholders 33 Casinos in nine provinces Accounts for over 80 % of GGR in the gambling industry, with casino GGR nearly doubling in past four years $2.5-billion invested since direct and indirect new jobs $450-billion paid to government in 2005 in various forms of tax Has funded millions of dollars in public interest infrastructure, including two international convention centres, new hotel rooms, wellness centres, eco-tourism facilities, golf resorts, etc Exceptional returns for shareholders

Who Benefits?

SOCIAL ISSUES Problem Gambling in SA: 2001, 2003, : 5800 sampled; 221 problem gamblers in total sample, giving a problem gambler prevalence rate of 4.2% 2003: 5816 sampled; 270 problem gamblers = 6.2% prevalence rate 2005: 3000 samples; only 144 problem gamblers = 4.8% prevalence rate Conclusion: problem gambling levels have declined 2001: 5800 sampled; 221 problem gamblers in total sample, giving a problem gambler prevalence rate of 4.2% 2003: 5816 sampled; 270 problem gamblers = 6.2% prevalence rate 2005: 3000 samples; only 144 problem gamblers = 4.8% prevalence rate Conclusion: problem gambling levels have declined

SOCIAL ISSUES The Lottery Story in SA Lottery remains the safest form of gambling, but: By international standards an abnormally large number of problem gamblers are lottery-only players: 2001=17.6% of problem gamblers; 2003 = 32.2; 2005= 25.7% Increase in problem gambling between 2001 and 2003 wholly due to lottery % of problem gamblers lottery-only players in 2001 in SA = 1,7% compared with 0.1% in UK in 1999 Explanations: proximity, cheapness, attractiveness to the poor and less educated; regulatory weakness – not Uthingo, not the fact that the lottery does contribute to the NRGP! Lottery remains the safest form of gambling, but: By international standards an abnormally large number of problem gamblers are lottery-only players: 2001=17.6% of problem gamblers; 2003 = 32.2; 2005= 25.7% Increase in problem gambling between 2001 and 2003 wholly due to lottery % of problem gamblers lottery-only players in 2001 in SA = 1,7% compared with 0.1% in UK in 1999 Explanations: proximity, cheapness, attractiveness to the poor and less educated; regulatory weakness – not Uthingo, not the fact that the lottery does contribute to the NRGP!

SOCIAL ISSUES Increasing Availability and Increasing the Prevalence of Problem Gambling SA seems to show that increases in problem gambling are not primarily related to increases in the availability of commercial gambling opportunities and that PG rates may come down after extensions of gambling opportunities. This surprising conclusion supported by: Shaffer: Survey of Surveys. 1% and 5% Nevada New Zealand Rachel Vollberg and 4 states in USA All the evidence suggests that they key to stable or reduced numbers is ensuring that the public understands the dangers of gambling and how to avoid them SA seems to show that increases in problem gambling are not primarily related to increases in the availability of commercial gambling opportunities and that PG rates may come down after extensions of gambling opportunities. This surprising conclusion supported by: Shaffer: Survey of Surveys. 1% and 5% Nevada New Zealand Rachel Vollberg and 4 states in USA All the evidence suggests that they key to stable or reduced numbers is ensuring that the public understands the dangers of gambling and how to avoid them

SOCIAL ISSUES Poverty and Problem Gambling Survey of 1000 people living in areas designated as exceptionally deprived 78.7% play lottery regularly; 19.5% play scratch cards; 8.4% play fafi; 4.9% play slots (but where?) i.e. the poor gamble more than the average, mostly on the lottery 6.9% problem gamblers, i.e. more than 40% higher than national average of 4.8; 6.1% of lottery only gamblers are problem gamblers; 9.6% are any form of non-lottery gambling usually together with lottery gambling Full-blown gambling addicts constitute 0.52 % (NGB Research 2006) Survey of 1000 people living in areas designated as exceptionally deprived 78.7% play lottery regularly; 19.5% play scratch cards; 8.4% play fafi; 4.9% play slots (but where?) i.e. the poor gamble more than the average, mostly on the lottery 6.9% problem gamblers, i.e. more than 40% higher than national average of 4.8; 6.1% of lottery only gamblers are problem gamblers; 9.6% are any form of non-lottery gambling usually together with lottery gambling Full-blown gambling addicts constitute 0.52 % (NGB Research 2006)

SOCIAL ISSUES Transformation Strict protocols to advance black economic empowerment 60 % of voting control in casino sector held by previously disadvantaged shareholders, and also 38 % effective economic interest Requirements in respect of recruiting, procurement, etc Strict protocols to advance black economic empowerment 60 % of voting control in casino sector held by previously disadvantaged shareholders, and also 38 % effective economic interest Requirements in respect of recruiting, procurement, etc

LESSONS FROM THE SOUTH AFRICAN EXPERIENCE Industry can only flourish where it has a constructive partnership with government in a mutually beneficial policy framework Policy based on achieving equilibrium between government’s need for economic development and its role as a social guardian Matrix has emerged in SA of mutual obligations and legitimate expectations that has delivered a regime that mixes state control and self control Achievement of stable and consistent operating environment which has strongly encouraged investment and resulted in a sustainable industry Industry can only flourish where it has a constructive partnership with government in a mutually beneficial policy framework Policy based on achieving equilibrium between government’s need for economic development and its role as a social guardian Matrix has emerged in SA of mutual obligations and legitimate expectations that has delivered a regime that mixes state control and self control Achievement of stable and consistent operating environment which has strongly encouraged investment and resulted in a sustainable industry

CHALLENGES FOR GOVERNMENTS Heavily-regulated and capital-intensive industry like the casino sector is especially vulnerable to populist politics: profitability depends on political climate Government should ensure lowest possible costs of doing business (realistic tax levels, low fees and regulatory costs) and guarantee security against unexpected and harmful changes of the rules Resisting temptation to over-tax Introduction post-facto of “racinos”, widespread VLTs/LPMs, real-touch bingo machines which undermine investments in casinos and alienate public opinion Necessity for empirical evidence in policy formulation Consistency and certainty in the trading environment Heavily-regulated and capital-intensive industry like the casino sector is especially vulnerable to populist politics: profitability depends on political climate Government should ensure lowest possible costs of doing business (realistic tax levels, low fees and regulatory costs) and guarantee security against unexpected and harmful changes of the rules Resisting temptation to over-tax Introduction post-facto of “racinos”, widespread VLTs/LPMs, real-touch bingo machines which undermine investments in casinos and alienate public opinion Necessity for empirical evidence in policy formulation Consistency and certainty in the trading environment

CHALLENGES FOR INDUSTRY Must be seen to serve the public interest Must be reliable, accountable and reputable partner for government Must be responsible corporate citizen, especially regarding sensitive social issues Must anticipate policy changes and constructively contribute to public debate Must demonstrate its contribution to socio-economic development Must be seen to serve the public interest Must be reliable, accountable and reputable partner for government Must be responsible corporate citizen, especially regarding sensitive social issues Must anticipate policy changes and constructively contribute to public debate Must demonstrate its contribution to socio-economic development

The Future Time for more perspective on the casino industry Champion commercial and socio-economic relevance More consultation between government and industry and understanding of stakeholder’s position Champion people’s rights in a free society Only through consultation, research and regular interaction between all stakeholders that the industry will be able to continue to present gambling for what it ought be: a form of entertainment that can be enjoyed by all Therefore: go forward in partnership together to advance government’s political objectives while maintaining a healthy, contributory industry Time for more perspective on the casino industry Champion commercial and socio-economic relevance More consultation between government and industry and understanding of stakeholder’s position Champion people’s rights in a free society Only through consultation, research and regular interaction between all stakeholders that the industry will be able to continue to present gambling for what it ought be: a form of entertainment that can be enjoyed by all Therefore: go forward in partnership together to advance government’s political objectives while maintaining a healthy, contributory industry