BLACK ECONOMIC EMPOWERMENT IN THE CASINO INDUSTRY: FACTS AND PERSPECTIVES 

NATIONAL GAMBLING BOARD BIENNIAL CONFERENCE: CAPE TOWN , 21 APRIL 2006  

Mr Programme Director

I wish to thank you for the opportunity of being able to participate in this important debate regarding Black Economic Empowerment in the casino industry. Indeed this is the first time that the industry has had the opportunity of publicly addressing an issue that occupies a position high on its list of priorities.

It is not appropriate to deal in this forum with the provisions of the Broad-Based Black Empowerment Act, No. 53 of 2003, nor with the content of the Codes of Good Practice themselves. Since I understand the matter is apparently the subject of some considerable debate within the regulatory community, I must accept that regulators have studied the provisions of both these important guiding documents in detail and are fully conversant with their content, intent and spirit. I shall thus confine myself to briefly discussing the position of the casino industry in this regard.

Before doing so, let me however point out that while the Codes are clearly aimed at achieving measurable goals for industry sectors in general in respect of broad-based BEE, they are silent with regard to those sectors of the economy, in this case the casino industry, where legally binding BEE frameworks already exist that a) contain all the elements of the Codes of Good Practice, b) are the product of conditions set in this regard by "organs of state", c) are regularly monitored by them (in fact a scorecard), and d) pre-date the Broad-Based Black Empowerment Act by a number of years. It is furthermore a fact that the casino industry is the only sector of the South African economy (with the possible exception of the telecommunications industry) where a framework for Broad-Based Black Economic Empowerment was created, strictly applied and monitored before the promulgation of the 2003 Act.

Let me then describe the de jure situation that exists in the casino industry in respect of BEE and establish the status of the BEE achievements of the industry and their relationship to the provisions that have only now come into existence.

BACKGROUND

The licensing process that commenced following the legalization of gambling in 1996 in respect of every casino operation in South Africa was based on a competitive bid process in which the various protagonists for casino operators' licenses had to present to the Provincial Licensing Authority's (PLAs) detailed plans and proposals for their projects.

From the outset it was recognised by the various provincial authorities that the establishment of the casino gaming industry presented an opportunity to advance Black Economic Empowerment, a policy objective that government had accorded high priority. This objective is also explicitly recognised in the National Gambling Act.

Moreover, the prescience of the provincial authorities, as contained in the various Request for Proposals, dictated that contenders for gambling operators' licenses were required to deal with the full range of elements relating to BEE that are now set out in the Codes of Good Practice, in their bid proposals, i.e.:

• ownership
• management
• employment equity
• skills transfer and development
• preferential procurement, and,
• enterprise development

As has already been indicated, the requirements in respect of BEE and which contain all the elements of BEE mentioned above were substantially weighted and carefully scrutinized and adjudicated upon by the PLAs. It should also be borne in mind that the awarding of licenses took place on a competitive bid basis, and PLAs thus had to be meticulous in their scrutiny and adjudication of the various bids.

It should be highlighted that the requirements that are referred to were included in the bid proposals and subsequent legally binding conditions of license that came into force upon the awarding of the various operators' licenses, that in the most cases date back to 1997 when the first casino was opened, more than 5 years prior to the 2003 Act.

All BEE undertakings of successful bidders for casino operators' licenses were subsequently entrenched in the conditions of license that attach to each such license issued throughout the country. Moreover the regulatory authorities regularly and strictly audit and enforce the provisions of these contracts. It is also apposite to note that to date there has been not one serious transgression by any casino operator in South Africa of either compliance requirements or of its conditions of license.

ACHIEVING BEE IN THE CASINO INDUSTRY

At the time of the bid processes for casino operators' licenses, BEE was a relatively new concept. A number of challenges presented itself to contenders for licenses. There was no blueprint to indicate how BEE should be achieved, nor how the inclusion of BEE partners in the various projects should be structured, particularly in respect of funding in respect of equity ownership. And although the requirement for the inclusion of significant BEE participation in projects was common to all provinces, there were substantial differences in provincial legislation and requirements in this regard. Nevertheless the prescribed requirements of PLAs in this regard were rigorously adhered to throughout.

In most instances the various operators established Special Purpose Vehicles (SPVs) to facilitate BEE participation. But, also in this respect, there was no uniformity in the mechanisms that were created, or in the funding of the BEE participation. Thus operators facilitated the inclusion of BEE entities in many different ways: in some cases operators fully funded shareholding or it was facilitated through operator intervention with financial institutions, or shares were offered at substantial discounts to empowerment partners, or provision was made for different classes of shares (mainly preferential shares) for such entities. The only certainty in the equation was the inclusion of BEE partners who bore no risk whatsoever in terms of their shareholding whatsoever.

It should be clear from the above that as far as the establishment of the industry is concerned, many special circumstances applied that were in most respects favourable to BEE shareholders. Also in respect of other elements of Black Economic Empowerment such as management, employment equity, skills transfer and development, preferential procurement, and enterprise development, contenders for operators' licenses included in their bid commitments specific provisions to accommodate these requirements. These were also subsequently, upon of the awarding of a licence, included in the licence conditions.

The industry thus from its inception in the late 1990's, accepted the imperative of a real and meaningful commitment to the achievement of Black Economic Empowerment in respect of every category that today forms part of what has become known as "industry charters" or that has latterly been codified in the Codes of Good Practice. There is no gainsaying the fact that the casino industry was a pioneer in the development of this important component that has become part of South African economic reality.

ACHIEVEMENTS OF THE CASINO INDUSTRY

What then has the industry achieved in the relatively short time since the legalisation of gambling in South Africa made its establishment possible?

Apart from the investment and job creation achievements of the industry, it has substantially advanced transformation in the tourism and leisure industry. On average, previously disadvantaged shareholders (the industry's BEE partners) hold 60% of voting control in the casino industry, and a 38% effective economic interest. As I have already pointed out, the authorities regularly audit fulfillment of the industry's black economic empowerment obligations in respect of shareholding recruiting, procurement and outsourcing.

You will thus be aware that as far as a "scorecard " for the industry is concerned, 33 such "scorecards" in fact already exist and are regularly monitored and audited by the PLA's. The casino sector has therefore already been subjected to formidable requirements, and has responded with vigour and commitment.

Moreover the scientific analysis of BEE in South Africa amongst the top 200 listed companies in South Africa conducted by Empowerdex for the Financial Mail in February 2006 found that Sun International ranked third overall and that two of the other listed companies that are members of CASA namely Gold Reef Casinos and Peermont Global, received rankings well within this number.

In addition, Tsogo Sun in 2004 received the Impumelelo Award (a dti award) as "Top Empowerment Company of the Year" and its Managing Director was designated as Top Business Personality of the Year. It again received this award in 2005 in the "Leisure, Entertainment and Hotels" category.

CONSTRAINTS FACING THE INDUSTRY AND ITS BEE PARTNERS

The casino industry has delivered pioneering advances in respect of Black Economic Empowerment and continues to strive to build on the success that it has achieved in this regard. In most cases the industry has involved its empowerment partners without any encumbrance or risk to the partner involved or at a substantial discount to the entity concerned.

This has created substantial value to all shareholders, including BEE partners. However, a number of factors inhibit the further enhancement of the already impressive BEE participation.

1. The funding of initial BEE shareholding was based on the relatively conservative valuation placed on the projections for future growth. This meant that BEE shares could be funded at a relatively low cost to the overall and projected value of the operation concerned, and there was a substantial funding premium due as a result of a lack of a financial track record for the industry and the relatively high risk perceived by banking and other financial institutions. In order to minimize the risk to BEE partners, operators were forced to accommodate these costs in their financial models, with a concomitant cost to its shareholders. In addition, and in the case of certain licensees, empowerment partners received so-called success fees, which were immediate payments made at the stage when licenses were granted, in recognition of their contribution in obtaining the licenses.

2. Development, construction and establishment costs of all casinos in South Africa in most instances occasioned high gearing ratios. The high cost of borrowing has resulted in the deferring of dividends over the short term. However the position is being ameliorated as these costs are being reduced. Nevertheless, some operators have, in deference to their BEE shareholders, funded dividend payments from capital accounts, at some cost to the companies and shareholders involved. From a value added statement for the casino industry compiled by PriceWaterhouseCoopers and which was recently widely disseminated in the media, it is clear that whereas 7.13% of income is utilised for the servicing of debt, only 6.32% is available for distribution amongst shareholders.

3. BEE partners have, through their shareholding, gained significant growth in the value of the companies concerned. However, in most cases the value attached to such shareholding cannot be realized since they are not able freely to trade in such shares, as is the case in any other economic sector. This is as a result of constraints which PLAs seek to enforce regarding the maintenance of BEE percentages shareholdings and the resultant effect on the tradability of these shares. This purported "lock-in" will not achieve the objective that government apparently seeks (that of real empowerment and entrepreneurial advancement) and also does not apply to any other economic sector. Thus BEE stakeholders are effectively disempowered since they may be unable to utilise potential gains, unavailable to them for the reasons mentioned above, to participate in other lucrative commercial transactions.

4. The success of the casino industry since its inception has meant that share value has increased substantially. The industry has taken note of and accepts that government intends that for the BEE process to be sustainable, it "must adhere to sound economic principles". These principles are enunciated in the Codes, but the industry must perforce point out that, in contrast to considerations that may have applied during its inception, such basic economic principles as "willing buyer, willing seller", fair market prices and others, should also be considered applicable to the casino sector as it does in any other sector of the South African economy. Thus the increase in BEE shareholding in existing casino companies is severely encumbered by the following:

• the increase in share value over the past six or more years which would make the purchase of shares considerably more expensive,
• the fact that selling shares at a discount to prospective BEE partners would result in a dilution of the shareholding of current BEE shareholders, an immediate decrease in the profitability of the company concerned and would probably, in the case of listed companies, transgress the rules of the Stock Exchange,
• the lack of access by BEE partners to funding for shareholding. In this regard the high cost of borrowing by financial institutions as a result in higher share prices, the prohibition of access to funding in casinos through for example the Industrial Development Corporation and the Public Investment Corporation, and the fact that there are conditions that prevent BEE shares from being freely negotiable in the open market, all militate against the objectives that would be set by the imposition of a "charter" for the industry.

5. A generic charter for the casino industry would affect the existing rights of 8 different operators and 33 casinos and their BEE partners in respect of the legally binding conditions of license. Similarly the Codes of Good Practice seek to codify principles and practices that already exist in respect of the entire industry. In this regard the industry would, if a charter or non-generic Code of Good Practice were to be imposed, have no option but to reserve its rights in order to safeguard shareholder value and BEE partner rights.

CONCLUSION

As will be evident from the above, the casino industry has demonstrably achieved many of the objectives in respect of BEE that government has only recently codified. It has structured BEE participation at all levels in the industry and has undertaken pioneering initiatives in this regard. Many of the requirements that faced the industry with its inception are in fact only now, some 6 years on, being required of other industry sectors.

The industry will undertake further actions to enhance BEE participation. All CASA members are pursuing active steps to secure this objective but this is capable of achievement only within the parameters set by the conditions of licence of individual casinos. It is however not possible to achieve this under a charter or non-generic Code of Good Practice that will not be able to accommodate the exigencies of the conditions of licence of 33 different casino operations.

The reality of what has been achieved by the casino industry was recognised by the Department of Environmental Affairs and Tourism when it recently developed a "tourism scorecard" for the industry sector. The working group tasked with developing the scorecard decided to exclude casinos from the ambit of their work since "The steering committee understands that.. pre-conditions to the licensing process did set an Empowerment framework for Casinos to follow. The Tourism BEE scorecard process will not include the casino operations." It is the view of the casino industry that this attitude reflects recognition of the strides that it has made in accomplishing the objectives of BEE. It is also of the view that the Department of Trade and Industry should do likewise.

Against this backdrop it will be appreciated that the Members of the Casino Association of South Africa are unable to see merit in the development of a further "scorecard" for the industry especially in view of the de jure situation that already exists in respect of the industry and that I have extensively discussed today.