Nivesh Maharaj – Legal & Compliance Manager (ZMS) Hosea Malope – Chief Executive Officer (ZMS)

1. Presentation to the Portfolio Committee on Trade and Industryon the Review of the National Gambling Legislation Nivesh Maharaj – Legal & Compliance Manager (ZMS) Hosea Malope – Chief Executive Officer (ZMS) Dr Anthony Stacey (Envalution cc) on behalf of Zonke Monitoring Systems 29 January 2010

2. South African Company - Subsidiary of Mvelaphanda Group • Responded to the RFP issued by National Gambling Board in 2000 • Appointment of a National Central Electronic Monitoring System Operator • Monitor Limited Payout Machines (LPM) on behalf of the National Gambling Board • 50 000 LPMs Nationally • Appointed the CEMS operator in 2001 • Signed Service Level Contract with NGB on 14 December 2001

3. Expectations during the bid - All provinces to rollout simultaneously • 50 000 LPMs rolled out in 24 months • What Changed? • Provinces not ready to rollout, some disregarding the provisions of the SLC (KZN), Gauteng delaying rollout until 2009 – Northwest, Free State and Northern Cape yet to start • 3 phase approach introduced in National Gambling Regs (section 13) • Slow rollout due to other legislations, e.g. municipal zoning • Fixed Term Contract expiring 2015 - To date just over 10% of initial allocation operational - Rationale for the study

4. Dr Anthony Stacey (Envalution cc) on behalf of Zonke Monitoring Systems 29 January 2010

5. Conclusions from analysis of data • LPM revenue / spending trends follow “leisure” spending patterns • Although socio-demographics differ across provinces, LPM gaming behaviours patterns are consistent • Models of LPM gaming behaviour can be applied to Gauteng, Free State, North West and Northern Cape • What are the parameters of the forecast model – in particular for Gauteng?

6. Distribution of GGR: Mpumalanga 55.9% of LPMs average GGR < R 200 per day

7. Distribution of GGR: Eastern Cape 61.2% of LPMs average GGR < R 200 per day

8. Distribution of GGR: Western Cape 23.1% of LPMs average GGR < R 200 per day

9. Distribution of GGR: Limpopo 38.0% of LPMs average GGR < R 200 per day

10. Distribution of GGR: KwaZulu Natal 53.8% of LPMs average GGR < R 200 per day

11. Trends of GGR per LPM

12. Common themes among stakeholders • Site selection • Generally ROs unwilling to discuss site identification methodologies; no indication of systematic analysis of site potential • Strategic advantage for ROs will come through site selection: footfall, and good site management • Eurocentric criteria for site selection; African culture of gaming relatively unknown. • Site licensing • Co-operation of other regulatory bodies (particularly with respect to the issuing of business and liquor licenses) • Degree of strictness / leniency applied in granting site licences

13. Common themes among stakeholders • Legislative constraints • PDI / Non-PDI balance • Number of LPMs per site • Primary business requirement • R500 maximum payout • Capacity constraints • The regulators’ capacity to license sites • The ROs’ capacity to upgrade and set up LPM sites • Site owners’ expectations, and level of sophistication and education

14. GGR or LPM count • ROs strategic choice: • fewer but more profitable sites (GGR) • chasing sites (LPM count) irrespective of profitability to satisfy promises to shareholders and as a “beachhead” strategy for when the industry as a whole becomes more popular • As the industry becomes more mature, there is a churn of sites - unprofitable sites are closed and new (more profitable?) sites are opened. This does not result in a net increase in the number of machines. • Unprofitable sites have to be kept open to keep the PDI : Non-PDI ratio

15. Problem gambling • LPMs do not contribute to problem gambling, but: • the convenience and accessibility of LPMs makes them appealing and could contribute to problem gambling; • while the amounts wagered are low, even small gambling losses could contribute to hardship in poor families or communities; • LPMs are a means of introducing people to gambling and they may progress to casino gambling; but • proprietors generally get to know their regular customers and are able to recognise and address compulsive behaviour, including gambling and drinking. • Problem gambling is currently not a significant constraint in the growth and size of the LPM market.

16. Industry projection: Assumptions • The site licensing process in Gauteng will be streamlined and more efficient than to date • The legislation and regulatory framework controlling LPMs will remain unchanged, including the R500 limit, PDI ratio, etc. • The licensing of EBTs increases the uncertainty of projections as there could be either a favourable or unfavourable impact on GGRs

17. Industry projections

18. Expected provincial split: 2015

19. Conclusions • The LPM industry has not performed to expectations • Increasing the R500 payout limit in line with inflation would immediately make more sites profitable • Greater efficiencies (both within the regulators and the ROs) could speed up growth • Socio-economic and socio-political objectives would be compromised by: • relaxing the PDI: Non-PDI ratio requirements, • allowing more LPMs per site, • relaxing the primary /secondary business requirement, • allowing advertising, • allowing more informality though greater leniency with tax clearances, business licenses, liquor licences, etc.

20. Conclusions • While substantial growth is expected in the short term through the issuing of new site licences particularly in Gauteng, the long term sustainability of the LPM industry as currently structured can be questioned. • Rationalisation of the industry through mergers or acquisitions is likely. • It may be that sustainability of the industry will only be achieved through greater cooperation between regulators and ROs, and through relaxation of regulations.

21. Questions...