Licence Terms

1. Licence Terms 25 April 2017

2. South African Legislative Context • Objective of the National Gambling Act- • Coordination of activities relating to concurrentcompetence within the national and provincial spheres of government. • Encouragement of uniform norms and standards, which will safeguard people participating in gambling and their communities through inter alia effective regulation and fair and equitable licencing. Provincial Gambling Boards and their responsible Executive Authorities however remain autonomous to develop provincial enabling legislation. Most recent amendments to Provincial Acts have improved its alignment to the National Act – ensuring increased uniformity and consistency on definitions and qualifying criteria.

3. South African Legislative Context • On the subject of duration of licences – the National Act is not prescriptive and provincial legislation applied discretion on the nature and duration of licences under Provincial jurisdiction. • All the South African Provincial Gambling Boards (except the Eastern Cape) opted for indefinite licences – obviously subject to the licensee’s continuous compliance to the stipulated licence conditions. • The Eastern Cape Gambling Board has been issuing fixed term licences for all its categories of licences since inception of the Provincial Act. • In 2015 the Eastern Cape Provincial Act was amended to inter alia allow for improved alignment to the National Act. • The Provincial Legislature opted to retain fixed term licences – but inputs received from stakeholders resulted in a review of the preferred approach – ie fixed term vs indefinite licences

4. The Review The Review focused on the following key considerations:- • Commitments by licensees to progressively invest in infrastructural development for the duration of the licence term; • Long-term reinvestments without the benefit or option of re-licensing as a controlling instrument; • Sustainability of existing infrastructure in the event where licences are not re-issued or extended; • The determination and enforcement of additional conditions of licence with indefinite licences; • The benefits and disadvantages of fixed-term and indefinite licences; • How the duration of gambling licenses have been considered in other countries; • Policy considerations that informed the current gambling licence term dispensation in South Africa. The expected outcome of this Review was to critique the functionality of licence terms as determined and issued by the Eastern Cape Gambling Board, and to consider the effectiveness and efficiency of fixed term and indefinite licences to extract maximum value from licences issued by the Board.

5. Conclusions Commitments by licensees to progressively invest in infrastructural development for the duration of the licence term • Evidence suggests that licensees in the Eastern Cape invest only to adhere to the conditions of the licence agreement, and do not progressively invest over the duration of the licence term. • The capital investments have not been voluntary in nature, or in response to market conditions. • There also appears to be reluctance on the part of the casino operators and other business owners to invest capital expenditure into the business towards the middle/end of the licensing period. • Since the initial bids were deemed to be over-valued by the licensees, it is not considered to be commercially achievable to recover the investment costs over the limited licence period. • Licensees maintain that it is difficult to service debts or to meet the terms of loan facilities. • Hence, the driving factor that influences the allocation of expenditure is to recover the cost of the investment, rather than to finance infrastructural expansions; or to allocate resources to maintenance and refurbishment of the existing casinos.

6. Conclusions Long-term reinvestments without the benefit or option of re-licensing as controlling instrument • The Review provided evidence that casinos that have permanent (indefinite) licences continue to invest in the long-term, with decisions based on commercial considerations and not due to regulatory requirements. • Rather than promoting an investment enabling environment, the controlling instrument acts as a hindrance to long-term investment since licensees are unable to plan for the long-term. • Licensees appear to be unwilling to invest more than they have to, because they do not have the long-term assurance of a gambling licence. The destination model was successfully applied in Australia to rejuvenate deteriorated areas on the outskirts of the CBDs. Expansion is on non-gaming – with the casinos remaining as anchor.

7. Total Additional Capital Investment as a Proportion of Initial Capital Investment (Casinos)

8. Conclusions Long-term reinvestments without the benefit or option of re-licensing as controlling instrument • The position within the Eastern Cape must be considered within context. • Whilst re-investment in other Provinces were informed by commercial considerations, Eastern Cape casinos have extended their infrastructure spend to compete with other bids. • Eastern Cape licensees confirmed that current casino infrastructure is disproportionate to the size of their gaming operations – and that voluntary re-investment may have supported less CAPEX spend. • Having said that, licensees confirmed their unwillingness to take long term strategic views on capital expenditure to promote destination preference – due to restrictions on the duration of their licences. • So although re-licensing resulted in increased infrastructure – voluntary re-investment is discouraged. • The same cannot be said of the other category of licences where much less CAPEX is required to apply for a licence.

9. Conclusions Sustainability of existing infrastructure in the event where licences are not re-issued or extended • The Review shows that casino destination resorts across South Africa generate the majority of revenue from gambling, as opposed to non-gambling industries. • With over 70% of the revenue being generated by the casinos, the operations’ revenue generating abilities would be limited in the case where casino licences are not re-issued or extended. • With the reduced revenues, the cost of maintaining the same infrastructure becomes impractical and it is judged that the existing infrastructure would not be sustainable. • We were unable to separate visitors to the casino from customers of non-gaming activity and visa versa – save to compare revenue of gaming and non-gaming activities which are under the control of the licensee.

10. Advantages and Disadvantages of Fixed-Term Licences

11. Advantages and Disadvantages of Indefinite Casino Licences

12. Conclusions Benefits and disadvantages of fixed-term and indefinite casino licences • It follows that if fixed-term licences remain, a reasonable licence period needs to be found. This means that economic considerations need to be taken into account such as the GDP of the area versus the required investment. • However, even if a reasonable period is found in terms of which an adequate return on investment can be secured, fixed-term licences still hamper additional investment or re-investment to ensure the longevity of the development. • Fixed-term licences provide no additional motivation or incentive to increase the footprint or to re-invest back into the development. Thus, even with a longer fixed-term investment, the licensee will in all likelihood still not re-invest. • The Review did not find such overwhelming conclusions in respect of the other licence categories – even though a commercial nexus between the capital investment and the envisaged returns must be present

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