Gambling world anything but ordinary

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The casino industry, and the established gambling industry in general, face threats from new sources. Gambling is no ordinary industry. To enter the gambling business, investors have to cross high barriers to entry set by regulation. They will need to acquire a special licence and, much harder perhaps, a prescribed suitable venue to play the games. They will also have to satisfy strict instructions as to what particular games of chance and prizes they can offer.

The reason why societies intervene in the gambling market has much to do with a religious, essentially paternalistic, objection to gambling, or rather perhaps a visceral objection to the sometimes large gambling losses that may be suffered by particular gamblers.

The best practical argument for tolerating and legalising gambling services is that what inevitably follows prohibition or the imposition of onerous taxes, illegal gambling, is worse for the community. This argument applies also to how society can best manage all of what are regarded as the popular “vices”. Driving consumption underground is not good public policy. Furthermore, if enthusiastic gamblers are prevented from gambling near where they live, they will travel to jurisdictions near and far to do so.

The opportunity to tax the activity for useful local purposes – perhaps to reduce the burden of other taxes or to provide employment at home rather than elsewhere – may well win the political arguments for and against licensing gambling.

The history of the large entertainment casinos in the country with their banks of slot machines and a variety of table games that attract many players, provides a good case study of the practical and political forces at work when dispensations for gambling are imposed or relieved.

Casinos were illegal before the so-called “homelands” were allowed to license them. The customers would travel from South Africa to gamble and for other pleasures or vices not legally available closer to home. The homeland authorities would tax these activities. In South Africa, consequently, there had also grown up a large, illegal, unregulated and untaxed, casino industry.

With the reunification of a democratic South Africa and the demise of the homeland authorities, it was decided to legitimise the casino industry in South Africa – to place it under the authority of the respective provinces and most importantly, to limit the number of casino licences.

Only up to 40 casino licences in all could be issued and provinces were able to license their operation within the urban areas close to potential customers. The distant, homeland casinos, while they retained their licences, lost their competitiveness. Why travel further than to a convenient casino closer to home?

The success of these newly established urban casinos in attracting customers became apparent, as well as their success in attracting a larger share of household budgets became immediately and painfully obvious to the horse-racing clubs and their dependents on the tracks and farms.

Horse racing had benefited from something close to a legal gambling monopoly. The revenues from gambling on horses, shared with the private bookmakers and with the provinces as taxes, had helped support a thriving, labour-intensive industry. Casinos too provide employment and income-earning opportunities for local business to supply their needs. But the gains of the owners, workers, suppliers and the players at the new casinos, at the expense, in part, of the racing clubs and their extended network, help illustrate an important point.

The different gambling offers compete with each other for a fairly predictable share of domestic household disposable incomes equivalent to between 1 percent and 1.5 percent of disposable income on average, though the share varies by province and by city. The demand for gambling services can also be shown to depend in part on the disposable incomes of households, and on the travelling time taken to access gambling venues.

The role played by the archetypal foreign travelling high roller in the typical casino, outside of the special cases of Las Vegas and more lately Macau (casinos are still illegal in mainland China), has been shown to be minimally important to the large urban casino in South Africa.

But while the casinos compete with each other and with the tote, the lottery and the private bookmakers, the limits to entry have proved valuable to the licenced casino operators. For these reasons, a partial casino monopoly in one urban area can prove so valuable – and something the operators are prepared to pay for (in cash or kind).

On this basis, the Western Cape government in the late 1990s was persuaded to grant an exclusive 10-year right to operate one casino within the Cape Town metropolitan region, (as well as on the basis of a more decentralised economic development that would come with allocating a limited number of new licences outside of the city).

The exclusive licence was then determined by way of a competition between different potential operators who were asked to compete for the licence by offering a variety of additional benefits to the province, as well as the new casino itself in exchange for this exclusivity. Sun International and its partners won a closely contested bidding process with an offer of a themed casino in Goodwood, plus other benefits to the province of a major financial and organisational contribution to help fund the Cape Town International Convention Centre.

This exclusivity agreement has run its course and the province could exercise a further opportunity to extend the exclusivity agreement for upfront benefits in cash and kind in the broad public interest. Sun International, with a well-established and well-preserved casino complex in operation, would be in an especially strong position to compete financially for a new exclusive licence and to offer significant benefits to the province and its citizens for a renewed exclusivity agreement.

Unlike its potential competitors it would largely save the cost of building a new casino. Yet judging by recent public commentary or rather the absence of it, the province seems inclined to forgo these potential benefits and seems inclined to allow the transfer of one of the rural casino licences to the city.

The people of the province have not been widely consulted on or informed about such a choice – of two casinos or one (with all the upfront payments in cash and kind that might be offered for continued exclusivity). It is a choice deserving of serious consideration by the citizens of the province and its elected representatives.

The upshot of any decision to permit two casinos would be likely to divide the market roughly between the two operators, as well as to reduce the market for casino-like services in one of the rural areas with the indirect knock-on effects on local employees and suppliers.

Unless the total casino market in the Western Cape grows significantly in response to an additional casino offering in Cape Town (an unlikely outcome), there will not be a meaningful increase in tax revenues for the province to collect nor additional employment or continuing economic activity.

The rural area losing its casino would suffer obvious economic losses. The established Cape Town operator might well offer, in its bid for renewed exclusivity, additional benefits to the city or province in exchange for an extension of exclusivity.

Any additional hotel or entertainment facilities that might accompany any additional casino cannot be regarded as among the additional benefits provided by a new urban casino in Cape Town. There is no shortage of hotels, restaurants or entertainment amenities in Cape Town. Such additional entertainment facilities would likely displace activity in restaurants and entertainment venues generally.

There is, however, a more serious threat to legitimate gambling interests in South Africa. It comes in the form of more competition for the gambling rand from the proliferation of limited payout slot machines and electronic bingo terminals (EBTs), which are slot machines in practice. The latter offer an additional competitive advantage to the gambler in that they can promise unlimited payouts, unlike the limited payout slot machines previously licenced. Limiting payouts restricts the competition of conventional casino-based slot machines for gambling revenue with casinos, the tote and the National Lottery. Unlimited, or less limited payouts, have an attraction to many casino or horse-racing gamblers whose objective is the big win.

The slot machines, masquerading as bingo machines, overcome this disadvantage of limited payouts and may well become increasingly ubiquitous and competitive against the established providers.

A bigger threat to established gambling enterprises are online gambling opportunities. The cost of providing a gambling opportunity on the internet or participating in one from home anywhere in the world, is close to zero. The offering is infinitely scalable. By comparison running a casino or a racing club is a costly enterprise because they employ people and require a physical structure and presence.

Lower costs of production of any good or service usually means lower prices as firms compete for a larger market share with better terms – and in the case of gambling, this might well mean better terms or bigger potential prizes for gamblers.

This provides online gambling with a great competitive advantage over conventional gambling providers. The online sites that can attract many customers from all over the world, at very low cost, are likely to offer the better odds or the most commanding big payouts – especially if internet gambling pays very little tax.

The value of any casino or racing club is, therefore, under threat of the potential proliferation of EBTs and legal access to internet gambling. The threat from new technology and the great uncertainty about what the gambling landscape will look like over the foreseeable future is influencing the value attached to casinos and their licences in the country. Therefore, the case for establishing an additional casino in Cape Town, or the price the established casino might pay to keep it out, must now be subject to unusual uncertainty.

It is in the interests of the wider community that as much certainty as possible about the gambling landscape be created. The objective should be to maximise as far as possible the domestic public interest in the gambling industry for taxpayers, employers or employees and investors in addition to those of gamblers.

The possible migration to a highly competitive gambling industry dominated by offshore providers, with the interest of the serious gambler in effect treated as paramount, should surely not be allowed to happen by default, but only rather after careful consideration of its full economic and social consequences.

* Brian Kantor is the chief economist and investment strategist at Investec Securities.


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