Provincial bookmakers associations submission to portfolio c ommittee on trade industry
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PROVINCIAL BOOKMAKERS’ ASSOCIATIONS Submission to Portfolio C ommittee on Trade & Industry. on THE FINAL REPORT OF THE GAMBLING REVIEW COMMISSION CAPE TOWN 28 October 2011. PROVINCIAL BOOKMAKERS’ ASSOCIATIONS Submission to Portfolio C ommittee on Trade & Industry. INTRODUCTION:

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Provincial bookmakers associations submission to portfolio c ommittee on trade industry

PROVINCIAL BOOKMAKERS’ ASSOCIATIONSSubmission to Portfolio Committee on Trade & Industry

on

THE FINAL REPORT OF THE GAMBLING REVIEW COMMISSION

CAPE TOWN

28 October 2011


Provincial bookmakers associations submission to portfolio c ommittee on trade industry1

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 bettingon 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:


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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), it’s 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]


Provincial bookmakers associations submission to portfolio c ommittee on trade industry9

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 Phumelela’s 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:


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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 Phumelela’s 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 B’s 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 alwaysbe 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.


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PROVINCIAL BOOKMAKERS' ASSOCIATIONSSubmission to Portfolio Committee on Trade & Industry

Thank you.

Questions?


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