PROVINCIAL BOOKMAKERS

1
PROVINCIAL BOOKMAKERS ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry
on THE FINAL REPORT OF THE GAMBLING REVIEW
COMMISSION CAPE TOWN 28 October 2011
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PROVINCIAL BOOKMAKERS ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• INTRODUCTION
• The KwaZulu-Natal, Gauteng and Western Cape
  Bookmakers Associations, which are voluntary
  associations not for gain representing the
  interests of licensed bookmakers in their
  respective provinces, have chosen to make a joint
  submission to the Committee, and will
  collectively be referred to as PBA for the
  purposes of this presentation.
• PBA is grateful for the opportunity to make a
  presentation to the Portfolio Committee on the
  Final Report of the Gambling Review Commission
  (GRC).
• PBA appreciates that the mandate of the GRC was
  particularly broad, and that, given the
  timeframes in which it was required to execute
  this mandate, it would not have been possible for
  the GRC to gain an in-depth understanding of the
  horseracing and betting sector, as only one of
  the numerous sectors, both legal and informal, to
  which it was required to give attention.
• The GRC was thus able only to give scant
  attention to this sector in its Report.
• Recently, a concerted campaign has been waged in
  various media, including platforms controlled by
  racing operators, to discredit and undermine the
  bookmaking sector, fuelled by unfounded
  allegations that its contributions to the sport
  of horseracing are negligible and
  disproportionate.
• The aim of this presentation is to provide the
  Committee with accurate information regarding the
  manner of operation of this industry and the
  issues facing it, so as to remove any confusion
  regarding the vital contribution made by
  bookmakers to the horseracing and betting sector
  and to assist the Committee in its critical
  policy-making function.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• THE HORSERACING INDUSTRY
• Horseracing in South Africa dates back well over
  200 years.
• Horseracing faces growing competition from other
  gambling industry sectors.
• Unlike the vast majority of other sports on which
  betting is commonly offered, horseracing exists
  for the sole purpose of betting on the outcomes
  of races. The sport provides a platform to enable
  owners to compete for the stakes offered in
  respect of racing, which are generated by
  betting. Without betting, therefore, horseracing
  as a commercial activity would cease to exist.
• Betting on horseracing takes two forms patrons
  may bet on the totalisator or with licensed
  bookmakers, or both.
• The sport of horseracing is financed primarily by
  the betting public, rather than by totalisator
  operators or licensed bookmakers. This will be
  explained in fuller detail later in this
  presentation.
• There are material differences between the manner
  in which a totalisator operates and the business
  of a licensed bookmaker. Understanding these key
  differences is crucial to the policy-making
  function.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• HOW HORSERACING IS FUNDED
• The money which sustains the sport of horseracing
  is provided primarily by the betting public in
  the following manner
• In respect of totalisator betting each rand
  wagered by patrons is placed into a pool (e.g.
  win, place, swinger, trifecta, jackpot). Once the
  race has been run and the result is known, the
  totalisator operator deducts (a maximum of) 25
  from the total or gross pool wagered. These
  deductions are used by it to fund the sport of
  horseracing, as well as provincial betting taxes
  and VAT. The remainder (net pool) is paid out
  proportionately as winnings amongst the holders
  of winning tickets.
• On its website, Phumelela provides the following
  breakdown for the post-race distribution of every
  R100 wagered by patrons

RETURNED TO PATRONS (by way of winnings) R76.00
PROVINCIAL TAX R 2.00
VAT R 2.80
STAKES R 6.00
STAGING RACE MEETINGS, BETTING OPERATIONS HEAD OFFICE EXPENSES R11.20
PRODUCT ROYALTIES R 1.50
PROFIT R 0.50
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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• From the above, it is evident that the betting
  public, and not the totalisator operator, funds
  the costs of the sport of horseracing. It should
  be noted that this money represents an average of
  24 of each and every bet taken by patrons on the
  totalisator, irrespective of whether it is a
  winning or a losing bet.
• From the perspective of bookmaking operations,
  bookmakers do not engage in pool betting. Each
  bet represents a potential liability in its own
  right. Bookmakers lay bets on several horses and
  attempt to spread their risk. Once the race has
  been run and the result is known, the bookmaker
  must pay the holders of winning tickets. In
  respect of each and every winning ticket in
  relation to horseracing, the bookmaker retains 6
  of the winning amount, of which half (or 3) goes
  to the provincial fiscus and the remaining half
  (or 3) is paid over to the totalisator operator,
  as a contribution towards the funding of the
  sport of horseracing.
• Therefore, the sport of horseracing is primarily
  funded from
• all persons who have placed bets (whether winning
  or losing bets) on the totalisator (to the extent
  of a maximum of 25 of betting turnover), and
• all persons who have placed winning bets with
  bookmakers (to the extent of 3 of the amount won
  in each case).

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• It is also clear that the totalisator operator
  takes no risk by virtue of its betting
  operations, i.e. it cannot make a loss on any
  betting transaction. It is the public that
  generates the betting pools, and also the public
  that funds the distributable pool to winners, as
  well as the administrative costs of horseracing.
  And, of course, it is also the public that pays
  the taxes.
• The business of licensed bookmakers, on the other
  hand, is entirely dominated and defined by risk.
  Bookmakers strive to lay as many bets as possible
  on different horses participating in the same
  race, and in the process are obliged to assume
  certain corresponding liabilities, so that, in
  many cases, profits may be significantly eroded
  or even entirely sacrificed.
• Therefore, there is, in most cases, no
  correlation between the levels of betting
  turnovers generated by bookmakers, which may be
  high, and profits generated.
• Typically, the profit margins attained by
  bookmakers range between 6 and 8.
• While the totalisator traditionally accepted
  betting only on horseracing, in recent years this
  has changed dramatically, so that the totalisator
  currently competes directly with bookmakers by
  offering betting on a variety of other sporting
  events. Bookmakers have not formally objected to
  this trend to date, despite the persistent
  objections of the totalisator to the open bet,
  which will be discussed below.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• Bookmakers are legally entitled to offer fixed
  odds and open bets in terms of the National
  Gambling Act. The open bet is a bet in respect
  of which the odds are not set at the time that
  the bet is struck, but in respect of which the
  bookmaker agrees to pay the same dividend as that
  declared by the totalisator, in the event that
  the bet is a winning one.
• The totalisator has for many years campaigned
  vigorously against the open bet, on the basis
  that, in offering it, bookmakers are feeding off
  the intellectual property of the totalisator. The
  argument of the totalisator is that
• Bookmakers return less to the sport of
  horseracing (by way of funding) than the
  totalisator does, and
• If the open bets taken by the public with
  bookmakers were instead placed with the
  totalisator, more money would be returned to the
  sport of horseracing. In this way, totalisator
  operators such as Phumelela publicly encourage
  the betting public, as well as other industry
  stakeholders, such as owners, not to take open
  bets with licensed bookmakers.
• In much the same way, Phumelela uses its website
  as a means of discouraging industry stakeholders
  from taking even fixed odds bets with licensed
  bookmakers.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• There are however fundamental flaws in these
  arguments.
• As has already been demonstrated, neither racing
  operators nor licensed bookmakers fund the
  industry per se. The bulk of the funding for the
  sport of horseracing, including the funding of
  the National Horseracing Authority, which polices
  the sport of horseracing (and which Phumelela now
  suggests should be carried to a greater extent by
  bookmakers), emanates from the betting public. It
  is therefore inaccurate (and disingenuous) to
  allege that totalisator operators fund the
  industry to a greater degree than licensed
  bookmakers do, or that the contributions made by
  bookmakers should be increased.
• The arguments raised by totalisator operators
  also ignore the fact that the open bet is
  completely legal. The National Gambling Act
  expressly provides that licensed bookmakers may
  offer the open bet.
• In addition, the issue of whether bookmakers may
  lawfully offer the open bet has been fully
  canvassed with all appropriate decision-making
  authorities on a number of previous occasions,
  has been assented to by the National Parliament
  itself and has been tested and upheld by the
  highest Courts in the country. Both the Supreme
  Court of Appeal and, more recently, the
  Constitutional Court (unanimously) found that
  there was no legal basis for the arguments
  (advanced by the totalisator) that the use of the
  open bet by bookmakers amounted to unfair or
  unlawful competition with the totalisator. The
  issue raised has therefore been conclusively
  disposed of.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• Despite the well-established legality of the open
  bet, Phumelela continues to use every means at
  its disposal to discourage the betting public
  from betting with bookmakers. On its website, it
  openly does so in the following terms
• Assuming that fixed-odds betting turnover in
  Phumelela territory is R1.4 billion (50 of the
  tote betting turnover), its easy to calculate
  what would happen if that money was wagered on
  the tote instead. Horseracing would get some R280
  million annually, instead of the R38 million it
  receives from fixed-odds betting currently, and
  stakes at Phumelela racecourses would rocket by
  some R80 million- a 50 increase!
• What is even more damaging for horseracing
  currently is that many bookmakers are laying the
  open bet. Given the average return of R76 for
  every R100 wagered on the tote, a bookmaker
  retains R24 of every R100 in open bets. Of the
  R76 left over, R71.44 is returned to punters with
  R2.28 for provincial tax and R2.28 to
  horseracing, which would get R17.72 more if the
  R100 had been wagered on the tote.
• The message is clear owners seeking higher
  prize money and those who love the sport need to
  think twice before betting fixed odds or taking
  open bets with fixed-odds operators.
• Source http//www.phumelela.com/BetTABBackRacing
  /tabid/67/Default.aspx

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• PBA submits that the conduct of Phumelela in
  openly inciting the public not to engage in a
  lawful betting activity which is competitive to
  its own offering is unconscionable, if not
  unlawful, and directly undermines established
  governmental policy.
• Effectively Phumelelas approach advocates the
  demise of the bookmaking industry, by suggesting
  that the public should place neither fixed-odds
  bets nor open bets with bookmakers.
• This approach is also contradictory, in that
  through its own subsidiary, Betting World,
  Phumelela itself has a 20 footprint in the
  bookmaking market, and, based on the
  announcements of its 2011 results, is looking to
  grow and expand this presence in the market. The
  dramatic loss in betting revenues to bookmakers
  which it advocates would therefore have a
  substantial negative impact on Phumelela itself.
• Furthermore, the ongoing campaign against the
  open bet also disregards the fact that
• The betting public has a democratic right to
  choose between lawful betting options
• Bookmakers do not openly promote the open bet
• The costs of horseracing are subject to the
  direct, overall control of the racing operator,
  and
• Inasmuch as racing operators now offer betting on
  sports other than horseracing, they expect to be
  able to trespass on the traditional territory of
  bookmakers with impunity, but continue to object
  when bookmakers offer a form of betting which
  they regard as being their property, despite
  the fact that the Constitutional Court itself has
  rejected this argument outright.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• THE REAL PICTURE
• The National Gambling Board (NGB) has provided
  the following official statistics in relation to
  the turnovers, net win figures and taxes paid by
  the totalisator and bookmaking sectors during the
  2010/2011 fiscal year

BOOKMAKERS BOOKMAKERS BOOKMAKERS TOTALISATOR TOTALISATOR TOTALISATOR COMBINED
HORSERACING (R 000 000) HORSERACING (R 000 000) HORSERACING (R 000 000) HORSERACING (R 000 000) HORSERACING (R 000 000) HORSERACING (R 000 000) (R 000 000)
Turnover 4,028 45.90 Turnover 4,748 54.10 8,776
Net win 419 26.45 Net win 1,167 73.55 1,586
Taxes 136 64.30 Taxes 75 35.70  
SPORTS BETTING (R 000 000) SPORTS BETTING (R 000 000) SPORTS BETTING (R 000 000) SPORTSBETTING (R 000 000) SPORTSBETTING (R 000 000) SPORTSBETTING (R 000 000)  
Turnover 3,570 94.70 Turnover 199 5.30 3,769
Net win 298 87.57 Net win 42 12.43 341
Taxes 13 81.78 Taxes 2.9 18.22  
BOOKMAKER TOTALS (R 000 000) BOOKMAKER TOTALS (R 000 000) BOOKMAKER TOTALS (R 000 000) TOTALISATOR TOTALS (R 000 000) TOTALISATOR TOTALS (R 000 000) TOTALISATOR TOTALS (R 000 000) COMBINED
Turnover 7,598 60.56 Turnover 4,948 39.44 12,546
Net win 718 37.26 Net win 1,209 62.74 1,927
Taxes 149 65.53 Taxes 78 34.47 228
3 to totalisator 68.3          
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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• It is clear from the data provided by the NGB
  that licensed bookmaker operations generate
  21.12 more in betting turnover than the
  totalisator, and contribute 65.53 of the total
  taxes paid in respect of betting, on horseracing
  and on sportsbetting combined.
• Despite this, the net win position of bookmakers
  is 25.48 less than that of the totalisator. The
  reason for this is that the bookmaker business is
  a high risk business with high turnovers and low
  profit margins, generating significant taxes,
  while the totalisator business is a no-risk
  business which delivers a significant net win to
  the totalisator, but markedly less taxes to the
  fiscus. It should be noted that, by Phumelelas
  own admission, for every R100 wagered on the
  totalisator, an average of only R2.00 is returned
  to the fiscus by way of betting taxes. From this
  perspective, the Phumelela lobby can be seen for
  what it is a concerted drive to augment profits
  for its shareholders at the expense of the
  superior betting tax revenue generated by the
  bookmaking industry.
• If the public were to abandon fixed-odds and open
  betting, as advocated by Phumelela, and instead
  place these bets with the totalisator, more
  (public) money would certainly be available to
  fund the sport of horseracing, to the benefit of
  the stakeholders of racing operators, but the
  betting taxes generated (on horseracing alone)
  would plummet by an estimated minimum of 45.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• Whereas the profits made by bookmakers are just
  over 10 of the net win figure, in the case of
  the totalisator, profits account for more than
  25 of the net win figure.
• While the percentage of tax to turnover in the
  case of totalisator betting on horseracing is a
  mere 15.6, in the case of the bookmaking
  industry the taxes generated in respect of
  betting on horseracing amount to 33.7 of the
  turnover generated by betting on horseracing.
• The contribution of licensed bookmaker operations
  to the horseracing industry and to the fiscus
  in South Africa is therefore indisputably an
  enormous one.
• Moreover, the bookmaking industry has never
  benefited from the range of previous tax breaks
  repeatedly extended to racing operators over the
  past decades. Unlike the totalisator, its
  operations are not subsidised to any extent by
  government.
• The call for the playing fields to be levelled,
  inter alia by the imposition of higher taxes in
  respect of bookmaker operations not only ignores
  the vast operational differences (particularly as
  to risk) between the totalisator model and the
  bookmaking model, but would drive away the
  betting public to the marked detriment of the
  sport of horseracing.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• GENERIC CHALLENGES FACING THE HORSERACNG
  INDUSTRY
• The proposed withholding tax of 15 on all
  gambling winnings of or above the threshold of
  R25 000 is a major threat to the industry and the
  sport.
• There are a huge number of offshore online
  betting providers which would enable patrons to
  place bets on horseracing in South Africa without
  being subject to a withholding tax of any kind.
  The betting industry is extremely competitive,
  and patrons will inevitably seek out providers
  offering the greatest potential return on any
  amount staked. A withholding tax by its very
  nature depletes the return to patrons.
• Horseracing, which employs thousands of people,
  has shown a gradual decline over the past years,
  with a corresponding reduction in profits. As
  patrons migrate their custom to betting providers
  which are not subject to a withholding tax,
  betting turnovers will drop further, leading to a
  corresponding drop in stakes, which in turn will
  further discourage participation in the industry,
  through breeding and ownership and by way of
  betting by the public. As the industry becomes
  increasingly less sustainable, the primary
  operational expenses, in the form of jobs, will
  be the first to be cut. As job creation is at the
  forefront of the government agenda, the
  implementation of a withholding tax would
  ultimately prove to be entirely at odds with
  national policy.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• RECOMMENDATIONS OF THE GRC
• We welcome the recommendation of the GRC that,
  from the perspective of B-BBEE compliance, it is
  necessary to develop an evaluation or measurement
  tool which recognises the challenges faced by
  bookmakers in the context of complying with the
  Codes of Good Practice, given the nature of the
  business conducted by them and the fact that
  notwithstanding high turnovers, profit margins
  are consistently low.
• We look forward to interacting with the relevant
  decision-makers to craft an appropriate strategy
  regarding B-BBEE compliance for bookmakers, which
  will include appropriate provision for CSI
  contributions by this industry sector.
• The GRC has further recommended that licensed
  bookmakers should contribute to the funding of
  the other sports on which bookmakers lay bets, on
  the basis that it is unequitable that (a
  portion of) the taxes derived from betting with
  bookmakers are selectively channelled to the
  totalisator alone.
• We disagree with this recommendation. It is
  pointed out, in this regard, as previously
  mentioned, that the sport of horseracing exists
  solely for the purpose of betting, and that this
  is not the case in relation to the other sporting
  codes on which betting is offered by licensed
  bookmakers, which are sustainable in their own
  right and do not in themselves owe their very
  existence to betting. There is therefore no
  persuasive rationale for the funding of these
  sports by betting operators, and no call for any
  such funding has previously been made.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• The most concerning of the recommendations made
  by the GRC is however, its firm proposal that
  person-to-person betting exchanges should be
  brought into the regulatory framework.
• South African gambling legislation is (quite
  rightly) predicated on acceptance of the policy
  proposition that, in order to ensure a publicly
  acceptable and credible gambling industry, at
  least one of the parties to any gambling or
  betting transaction should be licensed. Licensing
  implies by its very nature that the suitability
  and integrity of one of the parties to every such
  transaction has been positively established.
• In person-to-person (P2P) betting exchanges,
  NEITHER of the parties to ANY betting transaction
  is licensed.
• P2P betting exchanges merely match opposing
  bets on the same event and at the same odds
  between ordinary members of the public, against
  payment of a commission to the P2P betting
  exchange. These entities therefore simply provide
  a platform for persons wishing to bet, and are
  not themselves parties to such bets.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• In essence, P2P betting means that if Player A
  wants to bet R20, at odds of 20 to 1, that Horse
  X will win the third race at Kenilworth, Player A
  will only have a bet if the P2P betting exchange
  identifies another person, say Player B, who
  wishes to bet at the same odds against that
  outcome.
• Therefore, the P2P betting exchange is not a
  party to the wager, but merely provides the
  platform for the matching of two parties with
  directly opposing view regarding the result of
  the event on which the betting is to be struck.
• Player A therefore bets, not against the P2P
  betting exchange, but against Player B. Player
  Bs bet is accordingly that, Horse X will NOT win
  the third race at Kenilworth on the day in
  question, and Player B will therefore win only
  if Horse X does NOT win. Therefore, in each and
  every case, one of the players will always be
  betting on the non-materialisation of the result.
  If, in each and every case, there are people
  betting on losing outcomes, this incentivises
  cheating and manipulation.
• International examples of cheating in sports on
  which betting is struck abound.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• The P2P model therefore conflicts fundamentally
  with the core premise on which the gambling and
  betting industries have been legalised in this
  country (and internationally) namely that the
  licensing process provides the essential
  assurances that the industry will be honestly
  operated. This can be achieved only if at least
  one party to every betting transaction has been
  probed and found to be fit and proper to
  participate in the industry.
• This is not possible in the context of P2P
  betting exchanges.
• Although the Final Report of the GRC suggests
  that certain forms of betting exchanges are
  already licensed in South Africa, it is important
  to recognise that the existing licensed model is
  not a P2P exchange, because in terms of that
  model, bets may be struck only as between
  bookmakers and other bookmakers, on the one hand,
  or bookmakers and members of the public, on the
  other. In the current model, therefore, at least
  one party to every betting transaction is
  licensed.
• The P2P betting exchange potentially transforms
  each and every member of the public into an
  unlicensed bookmaker.
• Betting on losing outcomes induces cheating,
  inasmuch as persons betting on these outcomes
  have a clear financial incentive to ensure that
  the (losing) outcome materialises. This is
  particularly dangerous (and deceptively simple to
  achieve) in the context of horseracing.
• P2P exchanges by their very nature can also be
  expected to bring about the proliferation of a
  host of unlicensed persons endeavouring to make
  their living by acting as bookmakers.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• ALL SECTORS of the licensed horseracing and
  betting industry in South Africa have
  consistently registered their vehement opposition
  to the legalisation of P2P betting exchanges in
  this country. Traditional bookmakers, the
  National Horseracing Authority (NHRA) (formerly
  the Jockey Club of Southern Africa) and both
  currently licensed totalisator operators (Gold
  Circle and Phumelela) are united in their stance
  in this regard.
• The Asian Racing Federation, which represents all
  horseracing controlling bodies in Asia and
  Arabia, as well as the NHRA in South Africa and
  the national controlling bodies in Australia and
  New Zealand, as well as the International
  Federation of Horseracing Authorities (which
  represents the global racing industry) have
  similarly expressed their unqualified opposition
  to the proposed legalisation of P2P betting
  exchanges, for reasons which are similar to those
  given herein. It is suggested that the confluence
  of views on the subject by the overwhelming
  majority of first level horseracing countries
  throughout the world should give pause for
  careful and sustained reflection on the matter
  before any decision to introduce betting
  exchanges is taken.

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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• CONCLUSION
• The licensed bookmaking industry has the
  interests of the sport of horseracing at heart,
  recognising that the promotion of these interests
  is fundamental to the survival of ALL industry
  stakeholders, and not merely its own.
• The Gambling Review Commission has itself
  suggested that
• What is required is a more complete review of
  the horseracing sector, particularly the
  integration of the ownership of the tracks and
  the tote, as well as the competitive challenges
  of the future, and an appropriate industry and
  regulatory structure should be researched and
  developed.
• The licensed bookmaking sector firmly agrees with
  the proposition that a more comprehensive review
  of the sector is called for, thanks the
  Commission for the opportunity to present its
  views on the current state of the industry and
  looks forward to making a constructive
  contribution to any further review process in the
  future.
• It is hoped that this presentation has succeeded
  in providing the Committee with a clearer picture
  of the horseracing and betting industry, the
  challenges facing it, and the operations of its
  various stakeholders, and as such, will assist
  the Committee in reaching informed conclusions
  regarding the way forward.

21
PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to
Portfolio Committee on Trade Industry

• Thank you.
• Questions?