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By
Alex Kyriakidis and David Wright - London
Dean Wallace - Johannesburg

Outside the United States, it is rare to see a major development opportunity that has national and international casino operators scrambling to stake an interest. In the past few months, development directors from the world's leading casino gaming organisations have visited South Africa - and have come back excited by the opportunities. Nonetheless, there is concern about the complex issues still to be resolved.

This article assesses the opportunities and current situation in South Africa and sets out the key issues that remain to be addressed if the country is to establish a properly regulated and controlled casino gaming industry, free from criminal elements.

The Opportunity

South Africa's climate, varied cultures, parks and other" ecotourist" attractions put it in a strong position to win its fair share of world tourism. Hospitality and gaming consortia have the opportunity to create an industry that will not only satisfy domestic demand but also meet the needs of this rapidly developing tourism.

Currently, the 17 authorised casinos in the country are estimated to generate 1.5 billion Rand in gross gaming win. Although most of the country's illegal casinos have been closed, a number still continue to operate openly. South Africans also have access to gaming in several surrounding African states. The performance of the authorised casinos to date and the historic proliferation of illegal operations demonstrate the domestic population's strong propensity for gaming. Conservative estimates for South Africa's total casino gaming market could be around 6 billion Rand (US$ 1.6 billion). Estimates of the country's total gaming market, including horse racing, exceed 25 billion Rand (US$ 6.8 billion).

National and international operators are expressing interest in developing city-based stand-alone casinos and major resort casinos with all the facilities to cater to the domestic leisure and international tourist market.

The difference in the economic impact of these two types of development is substantial. Capital investment in a stand-alone city-based casino can be as low as US$ 15-20 million, whereas a major resort casino can require investment of $150 million or more. Casinos in major resorts will create significant direct and indirect employment as well as an economic multiplier for local business of 1.3 for every Rand spent in the development.

Current State of Play

The Lotteries and Gambling Board, chaired by Professor N.E. Wiehalin, issued its long-awaited report on gambling in March, 1995, with recommendations on all aspects of gambling. As a result, draft national gaming legislation has been published and is currently expected to be passed through Parliament early in 1996. The draft legislation provides for the establishment of a National Gambling Board charged with monitoring the effective regulation, control, policing and licensing of gambling activities to ensure the protection of public interests in general and transparency, equity and fairness in the licensing process.

The draft legislation permits a maximum of 40 casino licenses to be granted in the country as a whole with a maximum number of licenses for each Province. Furthermore, a single consortium will be limited to holding a maximum of 16 casino licenses in the country as a whole, with no more than two in any one Province.
 

Key Issues for Implementing Casino Gaming in South Africa

The major issues affecting governments, applicants and the public are summarised below - experience in other countries has proved that it is best to address these before licensing begins.

Overall co-ordination between national and provincial governments
Provincial governments will have responsibility for issuing licences and regulating casino gaming in their jurisdictions within the framework set out in the National Gambling legislation. Many have issued draft gaming legislation and some have passed their gambling acts for their provinces and are anxious to start the licensing process. Operators and investors are bringing great pressure to bear with offers of major projects and promises of substantial government revenues, and rumours are rife that some groups are already confident of licences, largely thanks to personal contacts at senior levels of government. In addition, the North-West Provincial
Government's interests in certain of the Sun International casinos will need to be disposed of in a way that does not harm the existing enterprises there. Several parties are known to be considering these interests.

The National Gaming Board and the nine provincial governments must coordinate their approach to the licensing process to prevent internal conflict and inconsistent standards undermining the entire industry. As well as cooperating closely as the national gaming legislation is debated further, national and provincial governments must co-ordinate to:
 

Closure of illegal casinos
The remaining illegal casinos must be closed; they not only deprive government of legitimate revenues but are also a barrier to licensed operators. Mature jurisdictions such as Nevada, Atlantic City, the United Kingdom and Australia require licensed operators to maintain minimum standards wherever they operate. By participating in an unregulated environment where illegal casinos exist, operators run the risk of losing their licences in these jurisdictions.

Checks on financial standing of applicants
Each applicant's ability to deliver according to their development plans must be thoroughly reviewed at an early stage. In addition, applicants should demonstrate a firm commitment on financing and be required to post a suitable performance bond. This will avoid the risk that consortia promise the licensing authorities they will invest in capital-intensive projects, which later collapse for lack of funding.

Ownership
Applicants will need to prove that the opportunity to invest in their gaming projects is widely available to black South Africans, so that ownership does not end up in the hands of a few influential investors, black or white. This means that applicants will have to use innovative ways to fund projects. These could include listing on the stock exchange, investment trusts, municipality funds or other funding methods that will encourage public participation.

A clear strategy for development
A clear strategy is needed if South Africa is to attract the right type of development, particularly casinos in major tourist resorts. The government must establish fees and duties at levels that match the development desired. High bid fees and gaming duties may produce an internal rate of return that makes substantial capital investment unattractive. However, higher bid fees and duties might be appropriate for city-based casinos as these demand relatively low capital investment.

Employment and other benefits for local communities
Creating jobs and other benefits for local communities will be a high priority for national and provincial governments. Applicants will need to offer a clear commitment on this, backed with a detailed analysis of how the project will create jobs directly and indirectly, and of other benefits that will flow to local communities.

Checks on probity and integrity
This is a crucial phase of the licensing process and ignoring it would bring catastrophic consequences both for government and the entire industry. As well as making the industry vulnerable to criminal elements and money laundering, in the longer term inadequate checks could threaten public safety and introduce social pressures caused by the irresponsible administration of credit.

At the moment, the practical difficulties of making probity checks include the general lack of readily available information, the need to distinguish between political and other forms of crime in assessing criminal records, and the extent to which the government will be prepared or able to investigate major international corporations.

International participation
International operators are showing a substantial interest. Their expertise and that of the existing authorised casinos will be invaluable in establishing a properly regulated industry and training nationals. For large resort-style developments in particular, the government will need to take care that the operator has the right design, development and technical skills for the project.

Other provincial considerations
Draft gaming legislation has been published by the Provincial Legislature of Gauteng, the province which includes Johannesburg and Pretoria and enjoys the greatest concentration of the country's wealth. The draft legislation includes the following criteria to be considered in evaluating a casino licence application:
 

The Way Forward

Both national and provincial governments have significant workloads and much time and work will still be required to finalise strategies, enact legislation, establish licensing authorities and develop bid documentation. At the same time - with the immense pressure to generate government revenues - a way must be found to get the bid process started without compromising the overall integrity and transparency of licensing.

One approach would be for each provincial government to immediately authorise a minister to request expressions of interest. Applicants would be invited to supply information about themselves to an evaluation committee appointed by the minister. The committee would then determine whether the applying consortia met the basic licensing criteria, which would include, among others, experience in developing and operating casinos, financial strength, and proven probity and integrity.

Allowing a three-month period for responses, and a further two months to evaluate these, each government would have a short list of "finalists" within five to six months. In parallel with the bid process, governments would enact the gaming legislation and establish the requisite independent licensing committees. Once the gaming law was passed, the second stage of the process would be to issue full briefs to the finalists, including details of the licences, bid fees and gaming duties.

If a two-stage licensing process is adopted and sufficient effort is exerted by national and provincial governments, the first licences could be awarded within nine months. However, whatever the process adopted,
the important implementation issues described above must be addressed and dealt with. Failure to do this will almost certainly bring disaster.

Conclusion

The draft National Gambling Legislation recognises the need for controlled and regulated gaming in South Africa. There are clear opportunities for operators, governments and the public to benefit from the development of the industry. Effective communication and coordination between the national and provincial governments is critical to its success. From the level of local and international interest and from our experience of developments so far, we are optimistic that the industry in South Africa will succeed.

Alex Kyriakidis is the partner in charge of Arthur Andersen's world-wide hospitality and leisure practice. He is based in London. Dean Wallace is the partner leading Arthur Andersen's hospitality and leisure practice in South Africa. David Wright is an experienced manager in Arthur Andersen's London office casino gaming practice.
 

©Arthur Andersen