Minister on Gambling Review Commission Report

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Trade, Industry and Competition

28 June 2011
Chairperson: Ms J Fubbs (ANC)
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Meeting Summary

Gambling Review Commission Report
The Minister of Trade and Industry gave the Committee a brief overview of the Gambling Review Commission Report, saying the Commission would present more thoroughly to Parliament at a later stage. He emphasised that the report did not necessarily reflect the views of his Department or government, and it was simply the findings of the appointed commission. The Minister reported that the Commission proposed that the number of casinos in South Africa remain at forty.
The Minister said the Wall-Mart/Massmart merger was a special case for South Africa given its vast size and well-established global procurement networks and its potential impact on the South African retail environment. South Africa had a right to protect itself from a sudden surge of imported products from abroadSouth Africa welcomed Foreign Direct Investment and the process unfolding around the Wall-Mart/Massmart entry in South Africa should be viewed as indicative of its policy towards foreign investment.

SADC-EAC-COMESA Tripartite Initiative and Free Trade Area Negotiation
The Minister said this was considered the next big integration process amongst African nations. It was an attempt to leverage economies of scale by integrating trade amongst African nations. The Development Integration process was the modul of choice as African nations had to learn from the European and international integration experiences, while at the same time acknowledge the realities specific to Africa. He focussed on the need for cross border infrastructural development that could facilitate trade within the African region. Currently, Africa did not have the physical infrastructure to facilitate intra African trade, and did not share the high level of complementarity of national economies, that existed within Europe prior to its integration.

The Committee was
briefed on the progress made with the redraft of the Intellectual Property Laws Amendment Bill. The aim was to have the redrafted Bill ready for the Committee to deliberate on by August.

The Committee also received a briefing on the Budget Review and Recommendation Report (BRRR) process.
Section 32 expenditure reports for the four quarters of the financial year should be requested from the Department. Further, a new version of quarterly reports was required with a column on financial information. The DTI should include financial performance indicators as opposed to only quantitative performance indicators. The Department had been requested to furnish financial information reflecting quarterly expenditure of individual programmes. This would assist in ascertaining incidences of fiscal dumping and adherence to the value for money principle. 

Meeting report

Minister on Gambling Review Commission on South African Gambling Industry and its Regulation
The Minister of Trade and Industry, Dr Rob Davies, introduced this topic, saying he would present only a brief overview of the Gambling Commission Report, highlighting the main recommendations in the report as the Commission would have an opportunity to present this more comprehensively at a later stage.

At the time of the new democratic dispensation in South Africa only horse racing was legal in South Africa. While casinos operated legally only in the (no disbanded) TBVC states, illegal gambling occurred throughout the country. At the time it was decided to regulate the gambling environment in order to protect the public.
Constitutionally, gambling was considered a joint provincial and national competence, serving as a major source of revenue for certain provinces. Four different modes of gambling were permitted in South Africa:
• Forty casinos were permitted in South Africa
• Horse racing
• Limited payout machines (maximum of R500 payout) 
• Bingo.

It was decided to engage in this study to keep abreast with the advance of technological and other changes in the gambling environment. He referred to online gambling from areas outside South Africa and new forms of person-to-person virtual betting which allowed gamblers to place bets on anything without physically leaving their homes. The introduction of new bingo machines, which closely resembled traditional casino machines, blurred the lines between casino gambling and bingo. All these served as indicators that a new approach was necessary.
Dr Davies said the Department held the overall approach of regulating gambling rather than banning it. However, it could also not just treat all these technological changes in an ad hoc manner. An overarching set of guidelines was required to guide the way forward. In this regard the Gambling Review Commission was established to conduct a study on gambling in South Africa to guide the Department further. The Department would get public opinion on the Commission’s report through parliament and then process those opinions and make additions to the report. This review was to be presented more thoroughly to Parliament at a later stage. He emphasised that this was the Commission’s report and not necessarily the views of either government or the Department. Amongst other things this report contained a wealth of information on the growth of gambling in South Africa and its contribution to the economy. The gross gambling profit had gone up from R6.2 billion to R11.3 billion between 2001/02 and 2008/09. The gambling industry had had double digit growth before the start of the last decade and had shown approximately 9% compound growth over the last decade. This, while the national economy grew much more modestly during the same period.

The Commission’s report had several indicators which highlighted the propensity of the activity in the country. South Africans had shown to have a relatively higher propensity for gambling. In what the report defined as the ‘developed affluent community’, gambling patterns were described as consistent with Europe whereas the ‘underdeveloped community’, indicated a higher exposure to problem gambling.

Dr Davies reported that the Commission proposed that the number of casinos in South Africa remain at 40. This was interesting since many had been calling for the number of casinos to be increased. The Commission noted that not all casino licences were being utilised at present. The Report indicated a concern about casinos being placed close to shopping centres.

Dr Davies said the limited payout sector had not proven as lucrative as other forms of gambling and it found itself in a difficult position. Perhaps in an attempt to address this, there was a request to place limited payout machines at racecourses. Developments in technology had caused bingo machines to increasingly resemble traditional casino machines and did not look and feel like bingo anymore. All of these factors had contributed to the current Act possibly not being comprehensive enough, specifically because it did not adequately regulate electronic gambling. Other games, such as Fafi, required more research.

The Commission had drafted its report and it would now be presented to Parliament to engage with and then to present the Department with its guidance.

He cautioned that the South African market did not contain infinite opportunities for gambling since social issues and community impact had to be considered as well.

He reiterated that this was the Commission’s report and he had only sought to give brief a overview thereof. The Commission itself would present a more comprehensive presentation to Parliament at a later stage. Members could more meaningfully interrogate the report at that time.

Mr B Radebe (ANC) welcomed the report.

Ms Fubbs welcomed the tabling of the report saying it was not a requirement to table it in Parliament but it enabled Parliament to take this report further. She thanked the Minister.

Mr X Mabaso (ANC) asked whether the Commission had researched the effect of gambling on older persons and scholars.

Dr Davies said he did not want to expand much more on the report at that stage. He would really appreciate the guidance of the Committee and Parliament on the matter. There was anecdotal evidence indicating the impact of gambling on older persons and scholars but he could not recall whether a comprehensive study had been completed.

Ms Fubbs said this was the first comprehensive study into gambling in South Africa that had been performed and as such they had only begun to scratch the surface of the impacts of this industry.

Dr Davies continued with an update of the Wall-Mart/Massmart process, saying there were many myths about the government stance on the Wall-Mart/Massmart issue, which he hoped to clarify in the meeting. He wanted to make it very clear that South Africa welcomed Foreign Direct Investment (FDI) and it provided significant tax incentives and other motivations for foreign companies to do business in South Africa.

On the other hand South Africa had a duty to protect itself and its policy priorities; he listed black economic empowerment and job creation, amongst others, as important factors.

The entry of Wal-Mart, one of the world’s biggest employers, second only to the Chinese army, into the South African retail environment was a special case and should be treated as such.

he Competition Commission initially accepted Wal-Mart’s entry into South Africa without any conditions on the understanding that there would be an ongoing dialogue between the parties. As this dialogue progressed, it seemed less evident that some of the government’s concerns were being addressed.

He explained that Wal-Mart had an extensive international procurement network. This could force others in the industry to increasingly procure their products abroad as well, to remain price competitive. The result could have negative repercussions on local procurement of retail goods. This understanding led the parties into the current process.

Dr Davies welcomed the conditions set by Competition Tribunal such as Wal-Mart could not retrench staff for two years and employees who were recently retrenched would be given special consideration when Wal-Mart sought to employ new staff.

He was not informed though, why government’s recommendations were not included in the conditions set before Wal-Mart but added that this matter was still subject to court proceedings and he did not want to discuss it in too much depth.

The presence of Wal-Mart presented a major change in the South Africa retail environment. Government had to protect the public interest especially regarding employment equity, black economic empowerment and other relevant policies. This was specific to Wal-Mart because of it enormous size and potential impact on the South African retail environment. He reiterated this process did not reflect the general approach of the South African government to foreign investment.

Mr N Gcwabaza (ANC) asked for more clarity on the fate of recently retrenched staff in the affected companies and whether the two-year ban on retrenchments imposed on Wal-Mart could be renegotiated, upon its expiry.

Dr Davies said Wal-Mart was prohibited from retrenching staff for two years but thereafter it was not bound to any agreement. The retrenched employees would only receive preferential consideration for re-employment at Wal-Mart, and nothing more. Members should remember that Wal-Mart like all companies in South Africa was bound to South African labour law.

Mr Mabaso asked whether companies could play up one country against another by threatening to set up shop in a neighbouring country.

Dr Davies did not think this was feasible for Wal-Mart. Wal-Mart also wanted to enter Namibia, and the nation had considered allowing Wal-Mart entry into its retail sector without any conditions. Wal-Mart was a huge company that was started in a country with an economy that was known for industrialisation and massive imports from different parts of the world. Wal-Mart has established successful global supply networks, which could upset local procurement patterns if large quantities of products suddenly came from abroad. This was a huge concern for South Africa. From a consumer point of view, everyone wanted to buy the cheapest goods. But if people consumed only imported goods and the South Africa did not produce anything, then the economy would be “up the creek”. One of the diagnosis included in the Industrial Policy Action Plan (IPAP 2), said that the consumption driven sectors were growing twice as fast as the production driven sectors. The country could not carry on this way because it would lead to a massive deficit on the current account of the balance of payments. At the moment, this could be compensated for by short term inflows of “hot” money of carry trade, but this was unreliable. The country could not count on cheap imports forever. This would have to be looked at. If there was ever another incident that would significantly alter or affect the current account of the balance of trade in a negative way at the expense of local production, it could be tilting the balance in the wrong direction again. However, consumption was growing at twice the rate of production in South Africa and this was not sustainable.

Mr Radebe complimented the Department’s handling of this matter. South Africa had legal protection for its workers and as such it was often difficult to compete with countries that paid their workers according to what he termed ‘slave labour’. Referring to the R100 million fund that would be set up to help local procurement, this would barely make a dent, relative to the overall impact of Wal-Mart’s entry into the local market.

Ms Kotsi-Ramotsamai (Cope) said South Africa had to balance the desire for cheaper retail products with the need to protect South African workers.

Dr Davies replied that the country seemed to achieve certain successes from a change in the retail system. There was an older system that was used before where retailers were given an incentive to substitute local production. If a company in South Africa exported their clothing, they earned a Duty Credit Certificate. This system was stopped. An analysis showed that the biggest problem in the clothing industry was that too many companies were “sweating” their assets, which meant that their machines would break down, the factory would be shut down and the workers would be fired. These companies were not investing in the country, nor were they increasing productivity. Last year, the government introduced the production incentive, which was taken up by 200 companies. The employment figure grew by 1000. This was the right way for the South African retail sector to function.

He said 10% of South Africa’s imports were illegal. This included the importation of pirated DVDs, drug trafficking, money laundering, illegal immigration, and so on. This was becoming quite a “sophisticated” battle. The government was trying to take this matter on. 

Mr J Smalle (DA) asked if the Department would be involved in the administration of the fund. Were penalties specified if Wal-Mart should breach the conditions imposed on them? Lastly, which of government’s proposed conditions were not imposed on Wal-Mart?

Dr Davies said the details concerning the establishment of such a fund still had to be resolved but that government would have representation on the fund’s management.

Ms Fubbs said R100 million seemed like petty cash for a big company like Wal-Mart. She asked if it could be ensured that Wal-Mart did not simply use foreign trainers thereby sending half the fund out of South Africa, and not invest in local trainers. Wall-Mart was a huge conglomerate with revenues bigger than most African countries. Although competition was necessary, government should be careful not to harm the native progress made in the retail and related sectors.

Dr Davies said that the only mechanism the country had to deal with these types of mergers was the competition process. Other countries such as Australia and the United States had the ability to set up various conditions that would discourage these kinds of mergers, but South Africa could not do the same. Companies such as Wal-Mart had the right to come to South Africa and the only protection the country had was the competition process. This was the reality.

Dr Davies said the R100 million fund was a proposal made by Wal-Mart during the proceedings. The company had argued for much of the negotiation process that no conditions should be imposed on it. Government responded that it had the right to defend its economy against a sudden, abnormal surge of imports. The government argued that it had the right to monitor the process and that if there were an abnormal surge in inputs they would assume it was at the expense of local jobs and industrial development. The onus would then be on Wal-Mart to show that this was not the case. But, the Tribunal went with Wal-Mart’s proposal for the R100 million fund. The details of this proposal would still have to be worked out. The issue was that some retailers still wanted to have some local supplies such as fresh fruit and vegetables. But, what about the marginal areas where there were industrial jobs at stake? What was R100 million over three years going to amount to? These were some of the country’s concerns.

Ms Fubbs agreed that it seemed South Africa, unlike many Western countries, had only one mechanism to deal with matters such as this. She asked whether the DTI would initiate something at Cabinet level.

Dr Davies said there was a wide range of tools employed by other countries to protect their local industries. There was the Intellectual Property Laws Amendment Bill. Members were aware of the status of the Bill. There was also the Co-operatives Amendment Bill that was currently sitting before Nedlac. The aim of the Bill was to provide for co-operative specific institutions. The legislation arose because of the policy discussions about co-operatives. The problem was that co-operatives were treated as if they were small subsets of businesses. There was a need to establish a set of institutions such as a co-operative advisory board, a co-operative development agency, a co-operative tribunal, and a co-operative training academy. He anticipated coming to Parliament in September 2011 to inform Members of the Bill, but it will probably only be dealt with next year. The Black Economic Empowerment Bill (BEE Bill) was with the lawyers at the moment that were working on the draft amendments. The Estate Agencies Affairs Bill was also being discussed and there were a few issues that had to be resolved. It would be brought to the Committee in September once the issues were resolved. The National Credit Amendment Bill was anticipated to be submitted in April 2012. The Bill looked at debt counseling issues. There were major consultations for the Lotteries Amendment Act. There would be a major restructuring of the Act to align with the countries priorities. The Business Act was very important as well. As of 1994 the Business Act governed matters such as applying for a license to open a business. This responsibility was delegated to provinces in 1994. There was a sense that the Business Act was incapable of dealing with a number of issues and abuses from a number of illicit businesses that were being set up. The DTI and COGTA were in the process of looking at the legislation. It would come to parliament some time in the future. The DTI was also focused on Industrial Development Zones (IDZs). A new act was needed to sort out governance issues regarding these IDZs. He mentioned the protection of strategic industries and the protection of national champions. South Africa had many options to consider in this regard.

SADC-EAC-COMESA (Southern African Development Community-East African Community-Common Market of East and Southern Africa) Tripartite Initiative and Free Trade Area Negotiation
Dr Davies said mineral rich Africa would be the next growth area after China and India, especially due to the growth in the raw mineral sector internationally. When considered on its own South Africa had a comparatively small population of only 49 million but once one considered the population of Africa as a whole, it was an entirely different case. This was one of the economic incentives behind the development integration process currently envisaged.

President Jacob Zuma hosted the 3rd Tripartite summit on 12 June 2011. The integration process included 26 African countries and was intended as a vehicle to grow regional markets. It focussed on the development integration model which required a Free Trade Area (FTA), cross border infrastructure development and a more liberal movement of business people within the region.

He said the South African President, Jacob Zuma, had been designated to champion the North-South Corridor of the multifaceted integration process.

Dr Davies said theoretically formal trade integration developed in stages as the integration process advanced within the entities involved. Again theoretically this meant starting with preferential trade agreements, progressively developing into a free trade area, a customs union, a common market, an economic union, and lastly a political federation. Theoretically the process worked best when the economies of the integrating entities shared significant complimentarity. This was not the case with most African economies that conducted most of their trade with partners outside of the continent. Intra-African trade was comparatively much more modest

Infrastructural underdevelopment often caused goods from countries in East Africa to take a very long time to reach geographically-close South Africa. The development integration model more adequately suited the infrastructural development needs of Africa and was preferred over the European integration experience.

In terms of industrial development, three main developmental areas had been identified: advancing mineral exploitation into industrial development, moving from agricultural production to the processing of food products and developing the pharmaceutical industry.

He said
SADC-EAC-COMESA would be the next big integration process. The principle behind establishing this process was fundamentally member driven, with give and take negotiations. This meant that countries would bear reciprocal and proportional roles, given the differing capacities of the nations involved. He insisted this would not become a back door for products produced outside the region to enter South Africa.

Mr A Alberts (FF+) said it was worth exploring the debt contagion experience currently affecting much of Europe in relation to the African integration process.

Mr Smalle asked if the Department had done an impact assessment of this integration process on the South Africa economy.

Dr Davies said this integration was very important and stressed South Africa could find itself disadvantaged in African trade, given the trade negotiations between some African states and Europe. The current trade surplus that South Africa enjoined in trade with Africa was not sustainable and the trade imbalance had to be addressed. It was important to recognize the differences between Africa and Europe instead of simply imitating the European development experience. Africa had to calibrate the European lessons with the realities facing the continent.

Regarding pharmaceutical development, he said the major pharmaceutical companies often did not invest sufficient research in diseases specific to the African experience.

The Committee passed the minutes of the meeting held on 08/06/2011 and 10/06/2011 respectively.

Intellectual Property Laws Amendment Bill Progress on Redraft
Adv Charmaine van der Merwe,
Parliamentary Legal Adviser
, briefed the Committee on the progress made with the redraft of the Intellectual Property Laws Amendment Bill. The aim was to have the redrafted Bill ready for the Committee to deliberate on by August.

Concept Document on the Budget Review and Recommendation Report (BRRR) Process
Mr Zibele Ngxishe, Senior Researcher for the Committee, provided a briefing on the BRRR process designed to track expenditure and outcomes relative to the allocated budget. He said that
Section 32 expenditure reports for the four quarters of 2010/2011 financial year and quarterly reports for the current year should be requested from the Department. Further, a new version of quarterly reports was required with a column on financial information. The DTI should include financial performance indicators as opposed to only quantitative performance indicators. The Department had been requested to furnish financial information reflecting quarterly expenditure of individual programmes. This would assist in ascertaining incidences of fiscal dumping and adherence to the value for money principle. 

The Committee unanimously expressed satisfaction on the update and praised Mr Ngxishe for his diligent work.

Ms Fubbs commented on the difficulties Mr Ngxishe had had in accessing information from the Department. She pointed out that the Committee was not a “gentleman’s oversight committee” and asked that the Department’s response to Mr Ngxishe’s requests for information be improved as soon as possible. She said the Committee did not want surprises at the end of the financial year in terms of expenditure and insisted on enhanced communication with the Department. She said nonetheless the BRRR process had taken off to a good start.

Meeting Adjourned.

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