Submission to the Portfolio Committee on Trade and Industry By the South African National Bookmakers’ Association On the Final Report of the Gambling Review Commission
.
A. INTRODUCTION
The South African National Bookmakers’ Association, a voluntary association not for gain, which represents the collective interests of licensed bookmakers throughout South Africa, is pleased to present to the Portfolio Committee on Trade and Industry its submissions in relation to the Final Report of the Gambling Review Commission (“GRC”).
The aim of this document is to provide the Portfolio Committee with succinct information in relation to –
(i) the nature and dynamics of the horseracing industry in South Africa;
(ii) from an operational perspective, the nature of the business conducted by the various licensed industry stakeholders;
(iii) the operational challenges facing licensed bookmakers, and
(iv) the extent to which the findings and recommendations of the GRC regarding the horseracing and betting industry are based on accurate perceptions regarding the manner of operation of the industry and accordingly whether they may be feasibly implemented.
B. THE HORSERACING AND BETTING INDUSTRY
It should be noted that, of the 188-page Final Report of the GRC, only four pages are devoted to a description and assessment of this industry. Taking into account the limited focus, it is understandable that only scant and superficial references are made to the manner in which the industry is structured. We respectfully submit that a far more comprehensive understanding of the nature and dynamics of the horseracing industry is essential to equip policy makers to take informed decisions regarding its future.
As a starting point, it is critical to note that the sole raison d’être of horseracing, both in South Africa and internationally, is betting on the outcomes of the races run. Without betting on these events, no horseracing would be staged. This distinguishes the sport of horseracing from other sports on which betting may incidentally be struck, in that these sports do not depend for their very existence on betting.
Essentially, the horseracing industry in South Africa is divided into two components, in terms of the betting products available. Patrons may place bets on horseracing either on the totalisator or with licensed bookmakers, or both. There are certain fundamental features of the industry as a whole which must be noted in order to gain a proper understanding of the issues facing the bookmaking industry.
Over several decades, the issue of the extent to which the horseracing industry is funded, and who should bear the financial responsibility for its ongoing administration, has been the subject of ongoing controversy and debate. In order to lay this debate to rest, it is necessary to provide a brief, factual answer to the question as to exactly how horseracing is financed.
The answer is simple and clear. Horseracing is directly funded by its betting patrons, and not by the holder of any totalisator licence. Every rand which is wagered by patrons on totalisator bets is placed into a pool, depending upon the type of bet taken. There is a separate totalisator pool for each distinct bet type (e.g. “win”, “place”, “swinger”, “trifecta” and “jackpot”, amongst others). For the purposes of example, all bets placed by patrons on any horse competing in a race to win that race outright, will be allocated to the “win” pool by the totalisator operator. Once the race has been run and the result has become known, the amount in the “win” pool is divided proportionately between the patrons who correctly selected the winning horse. However, before this occurs, the totalisator operator first deducts a certain percentage of the total amount in the “win” pool, which may in certain cases be less than, but may not be more than, 25%. This deduction is referred to as a “take-out”. The take-out is effected in respect of each and every bet type or pool on which betting is offered, on each and every race. The totalisator operator uses the take-out to fund the administrative costs of running, or staging the event of, horseracing, including stakes on races and the payment of all applicable taxes (including provincial betting taxes and VAT).
Accordingly, it is clear that the totalisator operator does not itself either wholly or substantially fund the sport of horseracing, or even the tax obligations of the totalisator, but that this funding comes directly from betting patrons. In addition, it should be noted that the take-out realised by the totalisator operator applies to the total or gross pool amassed by all patrons betting into that pool, irrespective of whether these bets are ultimately winning or losing bets. Therefore all totalisator betting patrons contribute towards the funding of horseracing, whether they win or lose. Only after the take-out has been performed, will the holders of winning tickets share in what remains of the pool (“the net pool”). To simplify by way of example: if, when a particular race is closed for betting, the total amount in the “win” pool (contributed by 100 betting patrons, each wagering R1,00 on different horses to win that race) is R100, and, after the race has been run, it transpires that only three patrons have correctly selected Horse X to win the race, the totalisator operator will deduct (the take-out of) R25,00 from the total or gross pool, leaving a net pool (available for distribution) of R75,00. As there are three winning tickets only, the net pool of R75,00 will be divided between the three winning ticket holders, with each receiving R25,00 by way of winnings (referred to as a dividend). The take-out of R25,00, provided by winning and losing patrons alike, will be used by the totalisator operator to fund the administration of the sport of racing, as well as being applied to the payment of all taxes due. Taking into account that there are numerous different individual betting types, or pools, in respect of each race, that there are multiple races per race meeting, and that the amounts wagered by patrons in respect of each pool will be appreciably in excess of the R100 used in the example above, it will be recognised that the individual amounts “taken out” in respect of each pool collectively constitute a substantial amount of money emanating from the public, which is applied to fund the administration of the sport.
To summarise, therefore, from the perspective of the totalisator, the sport of horseracing is directly funded (in part, as will be shown below) by both winning and losing totalisator betting patrons, to the extent of (a maximum of) 25% of all amounts wagered on the totalisator.
Unlike the totalisator, a licensed bookmaker, on the other hand, does not engage in pool betting, and winning amounts are not proportionately divided between the holders of winning tickets. Each bet laid by a bookmaker stands in its own right as a separate potential liability on the part of the bookmaker, without reference to other bets laid by that bookmaker. The business of a bookmaker laying bets on horseracing is therefore focused on balancing its book, by making sure that it has taken an even spread of betting on horses in a race and potentially locking in a small margin of profit, as will be explained in greater detail below.
Once the race has been run and the result has become known, the bookmaker must pay the holders of winning tickets the amounts due to them, with reference to the odds at which the bet was struck. In respect of each winning ticket in relation to horseracing, the bookmaker is required to retain 6% of the amount won by the patron, of which half (or 3%) is paid over to the relevant provincial fiscus and the remaining half (or 3%) is ultimately paid over to the totalisator operator as an additional contribution to the funding of the sport of horseracing. The additional 3% which, by operation of law, finds its way to the totalisator operator is therefore money which also emanates from the betting public, but more specifically only patrons who have placed winning bets with the bookmaker.
It is therefore clear that the sport of horseracing is funded primarily from two principal public sources, namely –
(i) all persons who have placed bets (whether winning or losing bets) on the totalisator (to the extent of a maximum of 25%), and
(ii) all persons who have placed winning bets with bookmakers (to the extent of 3% of the amount won in each case).
In either case, however, it is neither the licensed totalisator nor the licensed bookmaker which funds the sport, but the relevant betting patrons. It is worth noting, however, that the amount realised (by way of the take-out) by the totalisator is not only an appreciable percentage in itself, but also pertains to all betting turnover taken as a whole, and therefore proceeds off a far larger base, whereas the amount contributed by the betting public via bets with licensed bookmakers emanates from winning bets only.
C. DEFINING OPERATIONAL FEATURES OF EACH MODEL
As will be apparent from the discussion under Section B above, there are certain material differences, from an operational perspective, between the nature of the business of a totalisator, on the one hand, and a bookmaker, on the other.
RISK:
The most significant of the above differences is the fact that the totalisator operator is not exposed to any risk of any nature regarding its licensed operations. Put differently, it cannot make a loss on any betting transactions to which it is a party. This is a function of the fact that all bets are placed into pools in respect of each bet type, and patrons effectively compete with one another for the net pool (after deduction of the take-out).
In contrast, the business of the licensed bookmaker is by its very nature entirely and exclusively defined and driven by risk. For the purposes of example, in the context of a horse race, the bookmaker must formulate odds in respect of all horses taking part in the particular race. The odds – or prices – fixed in respect of each horse reflects a certain percentage (based on a risk assessment in respect of the likelihood of that horse to win), with all the percentages ideally adding up to 100%. Making – or balancing – a book involves taking a fair spread of money on each horse in proportion with the odds set, so that if the book is perfectly balanced, the bookmaker neither wins nor loses. Each percentage point over 100% represents a theoretical profit for the bookmaker, relative to the turnover traded in respect of the race. As such, bookmakers strive to lay as many bets as possible on different horses participating in the same race with a view to locking in a small margin (of profit). Invariably, in this process, bookmakers are obliged to assume certain corresponding liabilities on events, which means that in many cases, depending upon the outcome, profits are significantly eroded, if not entirely sacrificed.
Accordingly, high betting turnovers can easily be generated without any assurances of profit on the part of the bookmaker. Indeed, in some cases, the bookmaker may make a loss. Typically, however, the profit margins attained by bookmakers can be expected to average between 6% and 8%, so that risks are high and returns are modest, at best.
TYPES OF BETS OFFERED:
It is inherent in the totalisator model that it offers only totalisator – or pool – betting, as described above.
Traditionally, the totalisator offered betting only on horseracing, while the business of a bookmaker has historically been accepted as permitting the bookmaker to lay bets on horseracing as well as any other lawful contingency.
However, in recent years this has changed dramatically. Currently, the totalisator offers a variety of totalisator bets on other sporting events, such as soccer and rugby, which bear no relationship to horseracing. Although questions have arisen regarding whether the creation of totalisator pools in respect of sports other than horseracing does not amount to the creation of “sports pools”, which would be unlawful in terms of the Lotteries Act, Act 57 of 1997 , and have again been raised by the GRC in its Report , and although the availability of this type of betting on the totalisator impinges upon the traditional betting domain of licensed bookmakers, licensed bookmakers have not actively opposed these developments to date.
In terms of the National Gambling Act, Act 7 of 2004, as amended, licensed bookmakers are permitted to lay and place fixed odds and open bets on any lawful contingencies , including horseracing and sporting events. In this context, a “fixed odds bet”, as implied by its name, is defined in the National Gambling Act as follows:
“’fixed-odds bet’ means a bet on one or more contingencies in which odds are agreed at the time the bet is placed”
while, in the same Act, an “open bet” is defined as follows:
“’open bet’ means-
(a) a bet, other than a totalisator bet, taken by a bookmaker on one or more contingencies, in which no fixed-odds are agreed at the time the bet is placed; or
(b) a bet in respect of which the payout is determined after the outcome of the contingency on which such a bet is struck became known, with reference to dividends generated by a totalisator”
A bookmaker may therefore by law lay (i.e. accept) bets, with the exception of pool (or totalisator) bets in respect of which either fixed odds are agreed to at the time that the bet is laid, or in respect of which the odds are not fixed, or the odds are determined, after the conclusion of the event, with reference to dividends declared by the totalisator.
For the sake of completeness, it is recorded that there has been significant opposition to the open bet from the totalisator over several decades. The argument of the totalisator in this regard has been that bookmakers do not contribute to the administration or funding of the sport of horseracing, which is the sole responsibility of the totalisator operator, but rather feed off the horseracing industry, inasmuch as they are able to use the intellectual property of the totalisator, in the form of totalisator dividends, as a basis for the calculation of odds to be offered to bookmaking patrons. It is argued by the totalisator that this undermines the viability of racing, because patrons who would otherwise have placed bets on the totalisator instead place these bets with bookmakers, on the expectation of being paid the same dividend as that declared by the totalisator.
This is not the case, however. As has been demonstrated in Section B above, the totalisator operator does not itself fund the administration of the horseracing industry. As has been shown, the administration of the industry is funded primarily by the betting public, in the form of the (maximum) take-out of 25% of betting turnover realised by the totalisator operator on all totalisator bets struck, and by way of the 3% tax on winning bets taken with bookmakers. In effect, therefore, the funding of the sport of horseracing, whether in respect of betting on the totalisator or through bookmakers, comes from precisely the same source, namely the betting public. Accordingly, there is no factual basis for the contention that the bookmaking industry makes its living off the back of a sport which is financed by the totalisator.
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 (by way of the enactment of the relevant provisions of the National Gambling Act referred to above) and has been tested and upheld by the highest Courts in the country .Both the Supreme Court of Appeal and the Constitutional Court (the latter 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.
Although the question of the open bet has therefore conclusively been disposed of, the attack on this bet type has continued unabated and is anticipated to continue. It should be noted that no evidence has been produced to illustrate the alleged egregious effect of the open bet on the sport of horseracing. In addition, many bookmakers regularly take back the open bets which they have laid to patrons with the totalisator itself, meaning that they place similar bets on the totalisator to cover their potential liabilities to patrons as a result of open bets struck with patrons. In this way, the amounts which the totalisator alleges would have been wagered with it, but have been lost as a result of the open bet, ultimately find their way back into the relevant totalisator pools. In addition, the totalisator derives the benefit of the 3% of the winning amount of all winning open bets.
As previously mentioned, bookmakers also offer betting on sporting events. In respect of these bets, bookmakers pay taxes at a rate of 6.5% on all profits generated. Recently, the totalisator has entered this market, which was traditionally the preserve of licensed bookmakers, and thereby also negatively impacting upon the competitiveness of the bookmaking offering.
REVENUES AND TAXES:
The National Gambling Board of South Africa has provided the following statistics in relation to the turnovers, net win figures and taxes paid by the two industry sectors during the 2010/2011 fiscal year:
From the above, it is clear 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, their net win is 25.48% less than that of the totalisator. The reason for this apparent anomaly is inherent in the two different operational models: the bookmaker business is a high risk business with high turnovers and low profit margins, generating significant taxes, while the totalisator business, particularly in the context of horseracing, is a no-risk business which delivers a significant net win to the totalisator, but markedly less taxes to the fiscus. 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 15.6%, in the case of the bookmaking industry the taxes generated in respect of betting on horseracing amount to 33.7% of turnover generated by betting on horseracing. The contribution of the high-risk businesses of licensed bookmakers to the horseracing industry in South Africa is therefore indisputably an enormous one, and a revenue source which should be protected and preserved, rather than jeopardised.
D. OPERATIONAL CHALLENGES FACING BOOKMAKERS
The licensed bookmaking industry faces a number of challenges on a variety of levels. To the extent that numerous bookmakers in the country are one or two-person operations engaged in a high-risk/low return business, it is difficult for individual bookmakers to transform their businesses in the same manner as can be expected from larger businesses with greater levels of profitability. As has been mentioned, notwithstanding the fact that a bookmaker may generate high betting turnovers, profits are typically low. These risk-driven businesses are therefore not attractive to investors seeking to make profits.
The bulk of betting turnover generated by bookmakers is in respect of betting on horseracing. Therefore, it is demonstrably in the interests of licensed bookmakers to promote the wellbeing of the horseracing industry.
The future of horseracing in this country is directly threatened by the proposed withholding tax of 15% in respect of gambling winnings in excess of R25 000, particularly in view of the fact that winning bets on horseracing are already subject to a withholding tax. The betting industry is a very competitive one, in which patrons can be expected to seek out those betting providers which offer the greatest potential return. There is a plethora 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. Betting on horseracing (and the horseracing industry as a whole) is likely to implode if the proposed withholding tax is introduced. The sport of horseracing, which employs thousands of people in various capacities, has shown a gradual decline over the past years, with a corresponding reduction in profits. As job creation is at the very forefront of the government agenda, the sacrifice of these employment opportunities would be entirely at odds with national policy. This depletion in job opportunities is certain to occur as patrons migrate their business to betting providers which are not subject to a withholding tax and which therefore offer the potential of larger winnings in respect of the same bet. A decline in betting turnovers will mean decreased sustainability and a corresponding drop in stakes, which in turn will further discourage both participation in the industry through breeding and horse ownership and 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. The horseracing industry depends directly for its survival on sustained betting by the public on the totalisator and with licensed bookmakers. The average member of the betting public therefore typically invests modest amounts in the hope of sharing in a large pool, by way of a totalisator dividend. The imposition of a 15% withholding tax on winning amounts exceeding R25 000 will significantly erode the potential dividends payable on the totalisator, rendering this form of betting less attractive to the public. If the betting public no longer supports the totalisator, the horseracing industry will no longer be viable, and will inevitably face closure.
To the extent that most licensed bookmakers in South Africa engage predominantly in betting on horseracing, the collapse of the horseracing industry can be expected to lead directly to the demise of licensed bookmaking operations.
Finally, the proposed licensing of person-to-person betting exchanges, as advocated by the GRC, poses a direct threat to the integrity of horseracing in this country, and therefore also to the sustainability of bookmaking operations. This aspect will be discussed in further detail in Section E below.
E. RECOMMENDATIONS OF THE GRC
Although the GRC has made very few recommendations which pertain to the bookmaking industry per se, two of the suggestions contained in its Report are set to have lasting implications for the licensed bookmaking industry in South Africa, if they are implemented.
BOOKMAKING AND B-BBEE:
The first of these pertains to the manner in which compliance with the Codes of Good Practice on B-BBEE is to be measured in the context of licensed bookmaking operations. The GRC has recognised the concerns raised by bookmakers in this regard, with due regard to the operational constraints inherent in the bookmaking model, remarking as follows:
“The concern is well placed. A one-person business cannot be expected to transform its ownership, management, employment equity, preferential procurement policies, skills development policies, enterprise development policies, and socio-economic development policies (the seven pillars of B-BBEE) in the same way that larger corporate structures can. Indeed, the Codes make this provision in recognition of this limitation.
The Commission believes that an alternative to annual turnover be devised to determine B-BBEE liabilities.”
The above remarks are welcomed by the bookmaking industry, which looks forward to interacting with the relevant national government structures in order to craft a model which will promote transformation in the industry in a manner which recognises its defining operational features.
PERSON TO PERSON BETTING EXCHANGES:
The second recommendation of the GRC which requires attention is its proposal that person-to-person betting exchanges should be brought into the regulatory framework.
For the purposes of evaluating this recommendation, it is important to understand what a person-to-person (“P2P”) betting exchange is and how it operates, against the backdrop of the clear objectives of both South African and international laws relating to gambling.
Taking into account the risk-based nature of wagering, legal systems throughout the world have traditionally regarded it as imperative that the person who accepts another’s money in a wager should be found to be fit and proper to do so. The underlying reason for this approach is to protect the honesty and integrity of the industry and public confidence in its legitimacy, as well as to ensure fair play towards the public. Accordingly, in South Africa, as in most reputable jurisdictions throughout the world, no person may lay (as opposed to placing) a bet otherwise than under the authority of a bookmaker licence.
The licensing process which the law insists upon creates an ongoing regulatory relationship between the regulator and the licence holder, in terms of which the licence may be issued subject to particular conditions and licensed activities are regularly audited and monitored. Ongoing compliance by the licence holder is a function of the value the licence represents for the licensee, together with the power of the regulator to suspend or revoke the licence on good cause. Constant supervision by the regulator ensures that this relationship is preserved and (depending upon the sophistication of the regulatory regime) that the integrity of the industry and the betting product is upheld.
As previously explained, in traditional bookmaking, the bookmaker carries the risk inherent in the wagering transaction and must, effectively ‘make’ or balance its book. Notwithstanding the fact that betting exchanges have been licensed as bookmakers in certain other countries, they are not bookmakers, in that they do not assume or carry any risk. They are not parties to any betting transaction, but are rather betting brokers, in the sense that they merely facilitate matching transactions between ordinary members of the public, against payment of a commission in respect of each transaction.
Pared down to its essentials, 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 against that outcome at the same odds. It should be stressed that 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 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. As will be recognised, it is not difficult to engineer losing outcomes in horseracing – all that is needed is the cooperation of a stable hand or groom, a trainer, an owner or a jockey. Considering that there may be up to 20 horses in a race, it becomes exponentially easier to secure losing outcomes, especially narrow ones, without eliciting too much suspicion. This goes to the heart of the integrity of horseracing. People betting against a horse to win may therefore stand to gain huge amounts from securing that outcome, which opens up the industry to malfeasance.
In addition, despite the fact that the P2P betting exchange may be licensed, this does not provide any assurances from a day-to-day regulatory perspective, as the P2P betting exchange has no interest in the outcome of any of the transactions between the parties. While the P2P betting exchange can monitor and report upon transactions, it cannot, ceteris paribus, prevent them from taking place. It cannot proactively monitor suspicious transactions in the same manner as a traditional bookmaker can.
What is of far greater significance, however, is the fact that the P2P betting exchange operator effectively facilitates betting transactions between two anonymous parties, both of whom are unlicensed. The P2P model therefore transforms each and every member of the public into a bookmaker, but without any safeguard regarding the personal probity of any such person. For this purpose, it should be borne in mind that, in respect of every wager taken, are individuals staking money on directly opposite outcomes. In each case, at least one of these parties is playing the role of the bookmaker, who ordinarily would have been required to submit to probity investigations and licensing as a means of upholding the integrity and trustworthiness of the industry.
Where, in the traditional bookmaking model, customers were permitted to bet only on winning outcomes, in the betting exchange model they are now empowered to bet on losing ones. The person betting on a losing outcome accordingly has a direct financial incentive to ensure that this outcome materialises.
As previously stated, engineering a losing outcome in horseracing, especially by a narrow margin, will not inevitably awaken suspicion, adding to the vulnerability of the sport for corrupt practices in this context. In addition, whatever suspicion might arise would have to be dealt with on an ex post facto basis, rendering the control exercised over the integrity of the industry reactive rather than proactive in nature and potentially occasioning greater expense and resource allocation in keeping dishonesty at bay.
All sectors of the licensed horseracing and betting industry in South Africa have 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.
It should also be noted that the above opposition to the implementation of the P2P betting exchange model is not limited to role players in the South African horseracing industry. 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 articulated 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 sustained reflection on the matter before any decision to introduce betting exchanges is taken.
F. CONCLUSION
While the GRC has attempted to give detailed attention to the various sectors of the gambling industry in South Africa for the purposes of making informed recommendations to policy-makers on a national level, it would appear that the time constraints attached to the execution of its mandate may have limited its ability to focus, in sufficient detail, on the various components of the horseracing and betting industry and the manner in which they function. It is hoped that this document has provided greater insight into the manner in which this industry sector operates, and the challenges which need to be addressed in the context of policy formulation, with a view to ensuring thoughtful, thorough, and informed policy-making regarding its future operations, within a framework designed to secure its ongoing integrity and sustainability.
The Association is keen to make a constructive contribution to this process, and respectfully places itself at the disposal of the Portfolio Committee to provide any information, clarification or assistance which may be required for this purpose.
