Gambling outlook Africa PwC 2015-2019 (1)

Taking the oddsGambling outlook: 2015–2019South Africa – Nigeria – Kenya

4th annual edition December 2015

www.pwc.co.za/gambling

© 2015. PricewaterhouseCoopers (PwC), the South African firm. All rights reserved. In this document, ‘PwC’ refers to PricewaterhouseCoopers in South Africa, which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity and does not act as an agent of PwCIL.

‘PwC’ is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as an agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.

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Gambling outlook: 2015–2019South Africa – Nigeria – Kenya

Fourth annual editionPwC’s team of gambling specialists provide an unbiased overview of how the gambling industry in South Africa is expected to develop over the coming years. The publication focuses on the following major industry segments: casino gambling, limited payout machines, sports betting, bingo and the National Lottery. It details the key trends observed in these industry sectors as well as the challenges they are facing and their future prospects. For Nigeria and Kenya, we cover only casino gambling.

Gambling outlook: 2015–2019 provides deep knowledge of the local gambling market and is a powerful tool for understanding critical business issues. To learn more about the challenges and opportunities that lie ahead for the gambling industry in South Africa, please visit www.pwc.co.za/gambling

About PwC’s gambling industry groupEvery day, PwC plays a significant supporting role in respect of gambling businesses across the world. With our knowledge of local cultures, laws and business needs, we help clients make the most of changing market scenarios. Because we understand how developments in the broader gambling environment are affecting our clients, we can work with them as a trusted advisor to provide solutions that help improve their organisation’s effectiveness and long-term success.

More significantly, we focus on those issues and challenges that are of the utmost importance to our clients. These include restructuring, talent management, compliance, regulatory changes, changing gambler requirements and managing capital spend. We are committed to understanding the forces that have an impact on these issues, and we continue to develop and deliver solutions to help our clients achieve their financial, operational and strategic objectives.

iv | Taking the odds

Prepared and edited by

PwC helps organisations and individuals create the value they’re looking for. We’re a network of firms in 157 countries with more than 195 000 people who are committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.co.za.

PricewaterhouseCoopers Inc. 2 Eglin Road Sunninghill, 2157 +27 11 797 4000 www.pwc.co.za

Quantitative research and analysis was provided by Wilkofsky Gruen Associates Inc., a provider of global research and analysis of the gambling industry. See www.wilkofskygruen.com for more information.

Editorial team

• Pietro Calicchio, PwC South Africa Gambling Industry Leader

• Jacques de Villiers, Associate Director

• Sunet Liebenberg, Senior Manager

• Veneta Eftychis, Senior Manager

• Yolan Naidoo, Senior Manager

• Osere Alakhume, PwC Nigeria, Partner

• Michael Mugasa, PwC Kenya, Partner

Editing and design

• Catherine Ensor

• Linda Botha

• Jackii Esterhuizen

Gambling outlook: 2015–2019South Africa – Nigeria – Kenya

Many other professionals within PwC reviewed the text and contributed local expertise to this publication and we thank them for their assistance.

Photos courtesy of Sun International and Tsogo Sun.

Photo courtesy of Tsogo Sun.

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Use of Outlook dataThe information in this publication is given for general information purposes only and is not meant to be taken as legal or professional advice in any way. You should consult a professional advisor before making any decisions or taking any action. The author, copyright owner and publisher cannot accept any responsibility for loss to any person acting or not acting as a result of any material in this publication. The information in this document is given ‘as is’ with no assurance or guarantee of the completeness, accuracy or timeliness thereof, and without warranty of any kind. In no event will PwC be liable for any losses arising from any decision made or action taken in reliance on the information.

Designations used by companies to distinguish their products are often claimed as trademarks. In all instances where PwC knows about a claim, the product names appear in initial capital letters or all capital letters. However, readers should contact those companies for more complete information regarding trademarks and registration.

Permission to citeNo part of this publication may be excerpted, reproduced, stored in a retrieval system, or distributed or transmitted in any form or by any means, including electronic, mechanical, photocopying, recording or scanning, without the prior written permission of PwC.

Requests should be submitted in writing to Pietro Calicchio at [email protected] outlining the excerpts you wish to use along with a draft copy of the full report that excerpts will appear in. Provision of this information is necessary for every citation request to enable PwC to assess the context in which the excerpts are being presented.

vi | Taking the odds

Johannesburg 1 December 2015

To our clients and friends in the gambling industry:

Welcome to the fourth edition of Gambling outlook: 2015–2019 (South Africa – Nigeria – Kenya). This publication focuses on segments within the gambling industry, with detailed forecasts and analysis. For each segment, we give details about the key trends we have noted as well as key challenges and future prospects we have identified.

The gambling industry is often associated with glamour, high rollers, opulent settings and the trappings of wealth. As a business, however, the margins are low, a large portion of the costs is fixed, regulatory compliance is stringent and profitability depends on volume.

Of the three countries included in our analysis, South Africa has by far the largest overall gambling market. In South Africa, gross casino gambling revenues totalled R17.2 billion (USD1.6 billion) in 2014 compared with R497 million (USD46 million) in Nigeria and R218 million (USD20 million) in Kenya.

We at PwC continue to stay on top of trends and developments that may impact gambling companies, now and in the future, and we look forward to sharing our thoughts with you once again. We appreciate your feedback and ask that you continue to tell us what we can do to make our publications more relevant and useful to you.

If you would like clarification on any matters covered in this publication or you believe we can be of service to your business in any way, please contact one of our industry specialists listed on page 44 of this report.

Finally, we thank you for your support and wish you an exciting and rewarding year ahead.

Sincerely,

Pietro Calicchio Partner Gambling Industry Leader PwC South Africa

PricewaterhouseCoopers Inc., 2 Eglin Road, Sunninghill 2157, Private Bag X36, Sunninghill 2157, South AfricaT: +27 (11) 797 4000, F: +27 (11) 797 5800, www.pwc.co.za

Chief Executive Officer: T D ShangoManagement Committee: T P Blandin de Chalain, S N Madikane, P J Mothibe, C Richardson, F Tonelli, C VolschenkThe Company’s principal place of business is at 2 Eglin Road, Sunninghill where a list of directors’ names is available for inspection.Reg. no. 1998/012055/21, VAT reg.no. 4950174682

Pietro Calicchio Gambling Industry Leader

PwC | 1 PwC | 1

About this report 2

The gambling market – an overview 6

Gambling in South Africa 10

Gambling turnover 11

Gross gambling revenues 14

Gambling taxes and levies 16

Casino gambling 18

Limited payout machines 21

Bingo 23

Sports betting 25

National Lottery 28

Looking back: 2014 29

Casino gambling in Nigeria 30


Casino gambling in Kenya 34


Maximising non-gambling casino revenue 38

Conclusion 40

Glossary of abbreviations 42

PwC contacts 44

Contents

Photo courtesy of Sun International.

2 | Taking the odds

About this report


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Research methodologyFigures for South Africa are expressed in rand, and figures for Nigeria and Kenya are shown in US dollar (USD). Tables showing comparisons between countries are in rand. We used a constant exchange rate for the 2010–2019 period.

Exchange rates used in the report

Currency Exchange rateRand: USD 10.835USD: Naira 163.591USD: Shilling 86.562Naira: Rand 15.098Shilling: Rand 7.989

Source: PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

The National Gambling Board of South Africa is our source for historical data for South Africa. Their fiscal year covers the period from 1 April to 31 March. As the fiscal year overlaps the calendar year, for our purposes figures represent the year that accounts for the majority of the activity. Thus, our figures for 2014 correspond to the National Gambling Board of South Africa’s financial year 2015, which covers the 1 April 2014 to 31 March 2015 period.

4 | Taking the odds

The past and future economic environment impacting the market in South Africa is shown below.

Economic and consumer price growth in South Africa (%)

Historical data Forecast data CAGR 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2015–19

Nominal GDP 9.6 10.1 7.9 8.4 7.4 5.4 6.0 6.7 7.5 8.0 6.7Real GDP 3.0 3.2 1.9 2.2 1.5 1.6 2.1 2.5 3.0 3.2 2.5Consumer price inflation 4.3 5.0 5.6 5.7 6.1 4.5 4.7 5.0 5.2 5.4 5.0

Sources: Statistics South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

With respect to Nigeria, figures are derived and extrapolated from selected company information. In cases where the fiscal year ends on 30 June 2014 or later, figures are included in 2014 totals.

The past and future economic environment impacting the market in Nigeria is shown below.

Economic and consumer price growth in Nigeria (%)

Historical data Forecast data CAGR

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2015–19Nominal GDP 19.7 14.9 13.9 11.6 11.3 4.7 5.3 5.9 6.7 7.4 6.0Real GDP 7.8 4.7 4.3 5.4 6.3 3.1 3.5 3.9 4.5 5.0 4.0Consumer price inflation 13.7 10.8 12.2 8.5 8.0 8.8 9.4 10.1 10.8 11.6 10.1

Sources: Nigeria National Bureau of Statistics, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

With respect to Kenya, figures are derived and extrapolated from casino taxes. In this case, the data are consistent with calendar years.

The past and future economic environment impacting the market in Kenya is shown below.

Economic and consumer price growth in Kenya (%)


Nominal GDP 7.7 18.6 14.4 11.0 13.3 13.5 13.7 14.1 14.1 14.2 13.9Real GDP 5.8 6.1 4.6 5.7 5.3 5.7 6.0 6.3 6.1 6.0 6.0Consumer price inflation 4.1 14.0 9.4 5.7 6.9 7.2 7.5 7.7 8.0 8.2 7.7

Sources: Kenya National Bureau of Statistics, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

PwC | 5 Photo courtesy of Sun International.

6 | Taking the odds

The gambling market – an overview


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The gambling report covers South Africa, Nigeria and Kenya. In South Africa we include casino gambling, limited payout machines (LPMs), sports betting, bingo and the National Lottery. In Nigeria and Kenya we include only casino gambling. This report provides data on gross gambling revenues (the amount wagered minus the amount returned to players as winnings); turnover (the total amount wagered by players, including winnings which are wagered again by the players); and gambling taxes and levies, which is the amount levied and collected by provincial licensing authorities from legal gambling. In the case of the National Lottery in South Africa, contributions are made from proceeds on the sale of lottery tickets to the National Lottery Distribution Trust Fund.

Gross casino gambling revenues totalled R17.2 billion (USD1.6 billion) in South Africa in 2014 compared with R497 million (USD46 million) in Nigeria and R218 million (USD20 million) in Kenya.

There are 38 licenced operating casinos in South Africa compared with 13 in Kenya and only three in Nigeria. Beyond the casino count itself, casinos in South Africa generally are larger with more slot machines and table games than casinos in Kenya and Nigeria.

Gross casino gambling revenues improved by 4.5% over the prior year in South Africa in 2014, continued to grow by double digits of 17.5% in Nigeria and grew by 7.4% in Kenya.

We expect slower economic growth to lead to slower growth in gross casino gambling revenues in South Africa and Nigeria, while Kenya’s casinos will face increasing competition from legal online and mobile gambling.

8 | Taking the odds

Fig 1. Casino gross gambling revenue in South Africa (R millions), 2010-2019

Sources: National Gambling Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

0

5 000

10 000

15 000

20 000

2019201820172016201520142013201220112010

Gross gambling revenue

South Africa

Nigeria’s growth will drop from over 17% annually over the past three years to 8.5% on a compound annual basis over the next five years, principally reflecting a slowdown in economic growth. Even with that slowdown, though, Nigeria will continue to have the fastest-growing casino market of the three countries. We project gross casino gambling revenues in Nigeria to reach R747 million (USD69 million) in 2019.

Fig 2. Casino gross gambling revenue in Nigeria (R millions), 2010-2019

0

100

200

300

400

500

600

700

800

2019201820172016201520142013201220112010


Sources: PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

South Africa will be the slowest growing of the three countries, reflecting a slower-growing economy. We project that gross casino gambling revenue in South Africa will increase at a 2.2% compound annual rate to R19.2 billion (USD1.8 billion) in 2019.

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Kenya’s casino market moderated to 7.4% in 2014, and we project similar growth over the next five years with gross gambling revenue rising to R313 million (USD29 million) in 2019, a 7.5% compound annual increase from 2014.

Fig 3. Casino gross gambling revenue in Kenya (R millions), 2010-2019

0

50

100

150

200

250

300

350

2019201820172016201520142013201220112010



For the three countries taken together, gross casino gambling revenues will total an estimated R20.3 billion (USD1.9 billion) in 2019, a 2.5% compound annual increase from R18 billion (USD1.7 billion) in 2014.

Casino gross gambling revenue in South Africa, Nigeria and Kenya (R millions)


South Africa 14 043 14 855 16 404 16 498 17 235 17 300 17 500 17 850 18 450 19 200 % change 2.3 5.8 10.4 0.6 4.5 0.4 1.2 2.0 3.4 4.1 2.2Nigeria 263 297 354 423 497 533 574 623 680 747 % change 9.5 12.8 19.3 19.6 17.1 7.2 7.9 8.5 9.0 9.9 8.5Kenya 132 173 183 203 218 233 250 270 290 313 % change 18.4 30.3 6.3 11.2 6.9 7.0 7.4 7.8 7.6 7.8 7.5Total 14 438 15 325 16 941 17 124 17 950 18 066 18 324 18 743 19 420 20 260 % change 2.6 6.1 10.5 1.1 4.8 0.6 1.4 2.3 3.6 4.3 2.5


10 | Taking the odds

Gambling in South Africa


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Gambling turnover

Rand value of money wagered, including ‘recycling’, which refers to amounts that are staked on more than one occasion

Overall gambling turnover rose by 4.9% in 2014, down from the 7.5% increase in 2013 and the slowest gain during the past five years. LPMs, sports betting and bingo each rose at double-digit rates, in large part reflecting growth in the number of licensed outlets available for legal wagering. Turnover in the casino component of the market was adversely affected by the weakening economy and by growing competition from both legal and illegal gambling. Casino turnover edged up only 0.5% in 2014, down from the 4.0% increase in 2013 and well below the growth achieved in the prior three years.

An issue of particular concern to casino operators is illegal online gambling. The Casino Association of South Africa (CASA) argues that the decrease in casino turnover growth from 7.1% compounded annually between 2009 and 2012 to only 2.2% compounded annually over the past two years is largely due to growth in illegal online gambling. CASA estimates that online gambling costs the government R110 million lost in tax revenue.

The Democratic Alliance (DA) introduced legislation that would legalise and regulate online gambling and capture lost tax revenue. The Department of Trade and Industry (the dti) has fought that proposal, arguing that online gambling could not be controlled and that ‘no amount of control will adequately curb the harm that may be caused to South African citizens by online gambling’. In May 2015, the dti published a draft national gambling policy review that proposed that online gambling should remain illegal and that no new forms of gambling should be allowed at this point. As at the time of this writing, we expect that online gambling will remain a banned activity.


Casinos are facing growing competition from legal electronic bingo terminals (these operate as stand-alone sites and are sometimes referred to as mini-casinos), limited payout machines (LPMs), and sports betting shops that are proliferating in the catchment area of casinos, although such outlets outside casino catchment areas are not considered to be a threat. Bingo turnover jumped 50.6% in 2014, LPMs rose 21.3% and sports betting increased by 20.9%, in each case boosted by growth in the number of licensed outlets that have, in effect, expanded the market to reach more people.

We project bingo turnover to remain the fastest-growing category at a compound annual growth rate of 19.1%. LPM turnover will average 10.2% compounded annually, while sports betting, fuelled principally by wagering on sporting events, will grow by a projected 7.8% on a compound annual basis.

Casinos are by far the largest component of the market with turnover at R252.4 billion in 2014, 79% of total gambling turnover. We expect casino turnover to remain weak in 2015 but to improve somewhat over the latter part of the forecast period as the economy begins to strengthen and as investment in casinos increases. Nevertheless, we project only low single-digit gains in casino turnover with growth averaging 2.2% compounded annually to R281 billion in 2019.

Gambling and National Lottery turnover in South Africa (R millions)


Casino gambling 209 263 224 563 241 576 251 177 252 416 253 500 256 000 261 000 270 000 281 000 % change 6.3 7.3 7.6 4.0 0.5 0.4 1.0 2.0 3.4 4.1 2.2Limited payout machines 8 653 11 953 16 070 20 227 24 530 28 700 32 400 35 500 37 900 39 900

% change 24.8 38.1 34.4 25.9 21.3 17.0 12.9 9.6 6.8 5.3 10.2Bingo 2 426 3 372 5 504 8 746 13 170 17 780 22 225 25 550 28 750 31 500 % change 27.3 39.0 63.2 58.9 50.6 35.0 25.0 15.0 12.5 9.6 19.1Sports betting 12 643 17 699 20 186 24 490 29 600 29 750 31 800 35 000 42 000 43 000 % change 23.8 40.0 14.1 21.3 20.9 0.5 6.9 10.1 20.0 2.4 7.8Total gambling 232 985 257 587 283 336 304 640 319 716 329 730 342 425 357 050 378 650 395 400 % change 8.0 10.6 10.0 7.5 4.9 3.1 3.9 4.3 6.0 4.4 4.3National Lottery* 4 390 4 575 4 710 4 594 4 559 4 550 4 565 4 590 4 620 4 655 % change 1.5 4.2 3.0 -2.5 -0.8 -0.2 0.3 0.5 0.7 0.8 0.4*Lotto and Powerball

Sources: National Gambling Board of South Africa, National Lottery Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Fig 4. Gambling turnover by type (R millions), 2014 vs 2019

Bingo

LPMs

Sports betting

Casino gambling

Total gambling

281 000

319 716

395 400

252 416

43 000

29 600

39 900

24 530

31 500

13 170

2019 2014


We project overall turnover to increase by R75.7 billion over the next five years, 27% less than the aggregate increase of R103.9 billion generated between 2009 and 2014. Bingo is the only category where we expect larger aggregate growth in turnover over the next five years compared with the past five years. The projected R18.3 billion cumulative increase in bingo turnover over the next five years will be 62% more than the R11.3 billion gain since 2009.

Gambling turnover as a whole will rise from R319.7 billion in 2014 to a projected R395.4 billion in 2019, a 4.3% compound annual increase.

National Lottery ticket sales, or turnover, fell by 0.8% in 2014. We expect a further decline in 2015, followed by a modest rebound in 2016 and somewhat faster increases thereafter. The National Lottery will remain a slow-growing category with turnover rising by only 0.4% on a compound annual basis.

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Fig 5. Aggregate change in turnover by category (R millions), 2009-14 vs 2014-19

Bingo

LPMs

Sports betting

Casino gambling

Total gambling

28 584

103 890

75 684

55 638

13 400

19 389

15 370

17 598

18 330

11 265

2009-14 2014-19




Gross gambling revenues in South Africa rose by R2.1 billion in 2014. This growth rate of 9.6% is more than twice the 4.3% increase in 2013 and the second-largest gain during the past five years.

Gross gambling revenues

Rand value of the gross revenue of an operator – amount wagered less winnings paid to players

Fig 6. Gross gambling revenues in South Africa (R millions), 2015-2019

0

5 000

10 000

15 000

20 000

20192018201720162015

Casino gambling

Sports betting

LPMs

Bingo

Source: National Gambling Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Casinos took the largest share of this growth, with their gross gambling revenues growing by R0.7 million or 4.5% over the prior year. Limited payout machines achieved a growth of 19.6% to breach the R2 billion gross gambling revenue mark.

Bingo, the smallest category at only R1.1 billion gross gambling revenue, continued to be the fastest-growing category in 2014 with a 52.6% increase over the prior year, fuelled by the opening of new sites. Bingo was introduced in KwaZulu-Natal in 2014 and expanded rapidly in the Eastern Cape and North West following their introduction in the prior year.

Sports gambling consists of horse racing and betting on sporting events. Online wagering is permitted. Horse racing accounted for 54% of the total gross sports gambling revenues, down from 82% in 2010. The overall market rose by 22.2% in 2014, up from the 9.1% rise in 2013. The pickup was centred on sporting events, which surged 57.6% as wagering on the FIFA World Cup held in June and July of 2014 boosted that market. With much of that wagering leaving the market in 2015 and with horse racing growing at low single-digit rates, we expect growth to drop to 0.5% in 2015.

We look for another 20% increase in 2018 associated with the next FIFA World Cup. The absence of FIFA World Cup wagering in 2015 and 2019 will be mitigated somewhat by wagering associated with the Rugby World Cups in those years. Otherwise, the increase in betting outlets and growth in broadband penetration will fuel betting activity on sports events in future periods.

Fig 7. Gambling payout rates by category (%), 2013 vs 2014

Casino gamblingSports bettingLPMs Bingo

87

88

89

90

91

92

93

94

2013

2014


PwC | 15

Gambling payout rates have remained relatively constant year on year, and casinos still have the highest overall payout rates to punters at 93.2%.

We project gross casino gambling revenues will rise from R17.2 billion in 2014 to R19.2 billion in 2019, a 2.2% compound annual increase. We expect gross LPM gambling revenues to average growth of 10.3% compounded annually to rise to R3.4 billion in 2019 from R2.1 billion in 2014. Gross sports betting gambling revenues will increase at a projected 7.7% compound annual rate from R3.5 billion in 2014 to R5 billion in 2019.

We project gross bingo gambling revenues to continue to be the fastest-growing category with a projected 19.0% compound annual increase, rising to R2.7 billion in 2019.

Gross gambling revenues as a whole will expand from R23.9 billion in 2014 to R30.3 billion in 2019, a 4.8% compound annual increase.

Gross gambling and National Lottery revenues in South Africa (R millions)


Casino gambling 14 043 14 855 16 404 16 498 17 235 17 300 17 500 17 850 18 450 19 200 % change 2.3 5.8 10.4 0.6 4.5 0.4 1.2 2.0 3.4 4.1 2.2Limited payout machines 899 1 174 1 476 1 739 2 079 2 430 2 750 3 010 3 215 3 390 % change 21.5 30.6 25.7 17.8 19.6 16.9 13.2 9.5 6.8 5.4 10.3Bingo 196 235 437 732 1 117 1 500 1 885 2 165 2 440 2 670 % change -0.5 19.9 86.0 67.5 52.6 34.3 25.7 14.9 12.7 9.4 19.0Sports betting 2 003 2 153 2 597 2 834 3 463 3 480 3 715 4 085 4 895 5 010 % change 24.8 7.5 20.6 9.1 22.2 0.5 6.8 10.0 19.8 2.3 7.7Total gambling 17 141 18 417 20 914 21 803 23 894 24 710 25 850 27 110 29 000 30 270 % change 5.4 7.4 13.6 4.3 9.6 3.4 4.6 4.9 7.0 4.4 4.8National Lottery* 2 195 2 288 2 355 2 297 2 280 2 275 2 283 2 295 2 310 2 328 % change 1.5 4.2 2.9 -2.5 -0.7 -0.2 0.4 0.5 0.7 0.8 0.4*Lotto and Powerball

Sources: National Gambling Board of South Africa, National Lottery Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Gross National Lottery revenues (ticket sales or turnover less payouts to winners) declined for the second consecutive year, falling by 0.7% to R2.28 billion. We expect a further drop in 2015, followed by modest growth thereafter, with revenues for the forecast period as a whole rising at a 0.4% compound annual rate to R2.33 billion in 2019.

Fig 8. Gross gambling revenues (R millions), 2014 vs 2019

Bingo

LPMs

Sports betting

Casino gambling

Total gambling

19 200

23 894

30 270

17 235

5 010

3 463

3 390

2 079

2 670

1 117

2019 2014



Gambling taxes and levies

The amount levied and collected by provincial licensing authorities from legal gambling. Corporate tax and VAT on gambling revenues are excluded from our analysis.

Gambling taxes and levies totalled R2.5 billion in 2014, up 10.7% from 2013 – the second-largest increase during the past five years. The 2% tax rate hike for casinos in the Western Cape introduced in September 2013 had its full impact in 2014 and contributed to the 16.8% rise in total gambling taxes and levies in that province.

As a percentage of gross gambling revenues, LPMs had the highest tax rate in 2014 at 12.6%, up from 12.3% in 2013. Casinos were next at 10.4%, five-tenths of a point higher than the 9.9% average in 2013. Sports betting was next at 9.9%, down from 11.6% in 2013, and bingo had the lowest share at 7.3%, a bit higher than the 7.2% share in 2013. For the market as a whole, taxes and levies averaged 10.4% of gross gambling revenue, a modest increase from the 10.3% share in 2013. These taxes and levies are paid to the provincial gambling boards.

Fig 9. Gambling taxes and levies as a share of gross gambling revenues (%), 2013 vs 2014

Casino gambling Sports bettingLPMs Bingo

2013

2014

7.2 7.3

11.6

9.9

10.4

9.9

12.612.3


Casinos also pay deemed output VAT to the National Treasury on the gross gambling revenues that they have earned. The estimated deemed output VAT collected on gambling revenues from casinos in 2014 amounted to R1.9 billion, or 11% of gross gambling revenue. Gambling taxes and levies represented 10.4% of gross casino gambling revenues. When VAT is included, the share of all taxes for casinos rises to nearly 21.4%.

Gauteng, KwaZulu-Natal and the Western Cape generated a combined R2 billion in gambling taxes and levies, 82% of the total. Gauteng surpassed R900 million and KwaZulu-Natal and the Western Cape each topped R500 million. The Eastern Cape at R141 million and North West at R102 million were the only other provinces above R100 million in 2014. KwaZulu-Natal, North West and Free State were the only provinces that did not generate double-digit growth in 2014.

Gambling taxes and levies by province (R millions), 2012-2014

2012 2013 2014 2012-13 % change

2013-14 % change

Gauteng 836 848 939 1.4 10.7KwaZulu-Natal 494 535 559 8.3 4.5Western Cape 402 459 536 14.2 16.8Eastern Cape 112 122 141 8.9 15.6North West 86 96 102 11.6 6.3Mpumalanga 67 74 83 10.4 12.2Limpopo 46 48 59 4.3 22.9Free State 40 40 40 0.0 0.0Northern Cape 16 15 18 -6.3 20.0Total 2 099 2 237 2 477 6.6 10.7


PwC | 17

The Western Cape and KwaZulu-Natal have the highest share of taxes and levies as a percentage of gross gambling revenues, reflecting their dominance in the LPM market, which has the highest gambling tax rates. In the Western Cape, the share of taxes over gross gambling revenues rose to 14.2% in 2014 from 12.6% in 2012, the largest percentage point increase of any province over that period. That growth corresponds to a 30% increase in gross LPM gambling revenues.

Taxes/Levies as a % of gross gambling revenues, 2012-2014

2012 2013 2014Gauteng 9.2 9.2 9.3KwaZulu-Natal 12.5 12.9 12.7Western Cape 12.6 13.4 14.2Eastern Cape 7.9 8.0 8.2North West 7.8 8.1 7.6Mpumalanga 7.6 7.7 7.7Limpopo 7.9 7.6 8.1Free State 7.8 7.6 7.7Northern Cape 7.6 7.5 7.9


We look for slower growth over the forecast period as the LPM market matures and as growth in gambling revenues as a whole moderates. We project taxes and levies to expand by 4.7%, compounded annually, to R3.1 billion in 2019.

Gambling taxes and levies in South Africa (R millions)


Casino gambling 1 318 1 405 1 579 1 640 1 791 1 800 1 820 1 855 1 920 2 000 % change 4.4 6.6 12.4 3.9 9.2 0.5 1.1 1.9 3.5 4.2 2.2Limited payout machines 105 140 181 214 262 305 345 380 405 425 % change 26.5 33.3 29.3 18.2 22.4 16.4 13.1 10.1 6.6 4.9 10.2Bingo 23 29 45 53 81 110 135 155 175 195 % change 4.5 26.1 55.2 17.8 52.8 35.8 22.7 14.8 12.9 11.4 19.2Sports betting 223 259 294 330 343 345 369 407 488 500 % change 7.7 16.1 13.5 12.2 3.9 0.6 7.0 10.3 19.9 2.5 7.8Total gambling 1 669 1 833 2 099 2 237 2 477 2 560 2 669 2 797 2 988 3 120 % change 6.0 9.8 14.5 6.6 10.7 3.4 4.3 4.8 6.8 4.4 4.7


Fig 10. Gambling taxes & levies vs gross gambling revenues (R millions), 2014

Bingo

LPMs

Sports betting

Casino gambling

Total gambling

17 235

2 477

23 894

1 791

3 463

343

2 079

262

1 117

81

Gross gambling revenues Gambling taxes and levies



Casino gambling Fig 11. Gross gambling revenue shares by type (%), 2014

9%

14%

5%

72%

Casino gambling

Sports betting

LPMs

Bingo


Casinos accounted for 72% of total gross gambling revenue in 2014, down from 76% in 2013, reflecting the maturation of this segment of the market. The National Gambling Act permits 40 licenced casinos in South Africa: seven in Gauteng and five each in KwaZulu-Natal, the Western Cape and the Eastern Cape. In the Eastern Cape, however, only four licenses have been issued. Four licenses have been authorised in the North West, the Free State and Mpumalanga, although only three licenses have been issued in Mpumalanga. Limpopo and the Northern Cape each have three licences that have been authorised and issued. A total of 38 licences have been issued and all 38 casinos are now in operation with the opening of the Grand Oasis Casino in the Northern Cape and the opening of the Thaba Moshate Casino in Limpopo in the past twelve months. The Tsogo Sun Group, Sun International and Peermont Global Group are the largest casino companies in South Africa, together accounting for 35 of the 38 licenced casinos.

On 31 October 2015, the Minister of Trade and Industry gave notice of intention to increase the set maximum number of casino licences that may be granted throughout South Africa from 40 to 41, with the additional licence to be allocated to the North West. Public comment on this is yet to be finalised as at the date of this report.

Gauteng with its seven operating casinos was the leading province in gross casino gambling revenues in 2014 at R7.2 billion, up 2.4% from R7.0 billion in 2013. KwaZulu-Natal and the Western Cape, each with five operating casinos, were next at R3.2 billion and R2.8 billion, respectively, an increase from 2013 of 4.1% in KwaZulu-Natal and 8.5% in the Western Cape.

These three provinces accounted for 76.1% of total gross casino gambling revenues. The Eastern Cape and North West were the only other provinces to generate more than R1 billion in gross gambling revenues. The Free State was the only province where gross casino gambling revenues declined in 2014.

Gross gambling revenues earned by casinos by province (R millions), 2012-2014

2012 2013 2014 2012-13 % change

2013-14 % change

Gauteng 7 229 6 988 7 156 -3.3 2.4KwaZulu-Natal 2 967 3 073 3 200 3.6 4.1Western Cape 2 393 2 536 2 752 6.0 8.5Eastern Cape 1 108 1 171 1 197 5.7 2.2North West 1 015 1 042 1 177 2.7 13.0Mpumalanga 709 729 764 2.8 4.8Free State 419 420 409 0.2 -2.6Limpopo 373 352 370 -5.6 5.1Northern Cape 191 187 210 -2.1 12.3Total 16 404 16 498 17 235 0.6 4.5


Casino licences and operating casinos by province, 2014

Authorised licences

Issued licences Operating casinos

Gauteng 7 7 7KwaZulu-Natal 5 5 5Western Cape 5 5 5Eastern Cape 5 4 4North West 4 4 4Free State 4 4 4Mpumalanga 4 3 3Limpopo 3 3 3Northern Cape 3 3 3Total 40 38 38


PwC | 19

We do not expect an increase in the number of operating casinos during the forecast period and in the near term, assuming no significant change in the payout rate. The weak economy will lead to slower growth in casino gambling revenue. While we do not expect growth during the next five years to match the 4.5% increase in 2014, we do look for modest improvements over the latter part of the forecast period, reflecting an improving economic environment and increased investment on the part of casino operators.

In 2014, Tsogo Sun received approval to expand its Suncoast casino, which it budgeted R3.5 billion for. The expansion includes a destination retail mall, additional restaurants and entertainment offerings, a multipurpose venue, resort-style rooftop swimming pools, additional parking, and an expansion of the casino floor to incorporate an additional 900 gambling machines and 16 gambling tables. The new casino will have 2 350 gambling machines and 80 gambling tables. Construction is expected to commence in 2016 with three years to completion. The increased capacity is expected to serve more people and increase the revenue potential of that casino. Tsogo Sun has completed the R560 million expansion and redevelopment of its Silverstar Casino and continued with the R630 million refurbishment and expansion of Gold Reef City Casino and Theme Park.

In a major development in 2015, Sun International has entered into agreements to acquire the Peermont Group, which owns eight casinos in South Africa, including Emperors Palace in Gauteng, for R9.4 billion. The transaction is subject to regulatory approval by the gambling boards and competition authorities. With that acquisition, Sun International and the Tsogo Sun Group will have 35 of the 38 issued casino licences in South Africa. London Clubs International, Northern Cape Casino Consultants, and Leitlho are the other licencees. It is expected that this consolidation will lead to increased investment on the part of both companies, which should have a positive impact on total casino turnover and revenue.

Sun International’s bid to relocate its Morula Sun casino in Mabopane to Menlyn was approved by the Gauteng Gambling Board in 2015. Sun International plans to spend R3 billion to relocate the Morula Sun to Menlyn Maine, an R8 billion entertainment destination that will include a hotel, conference centre and concert hall. The casino will be considerably larger than the Morula Sun facility, with 2 000 slot machines and 60 gambling tables. Menlyn is a more affluent area that is easier to access and faces less competition from non-casino gambling than Mabopane. The Menlyn casino is scheduled to open in September 2017.

We project gross casino gambling revenue growth to drop to 0.4% in 2015, reflecting a slowing economy. We then look for modest improvements thereafter as economic conditions stabilise and as the impact is felt of increased investment by Tsogo Sun and Sun International, including the relocation of the Morula Sun to Menlyn Maine. At the same time, casinos will face increasing competition from expanding LPM and bingo outlets. The casino share of non-sports betting gambling revenues fell from 92.8% in 2010 to 84.4% in 2014, and we project it will drop to 76.0% by 2019.

Fig 12. Casino share of non-sports betting gambling revenues (%), 2012-2019

70

75

80

85

90

95

20192018201720162015201420132012


Casinos also face growing competition from the increasing number of legal sports betting outlets as well as from the increased number of illegal online casinos that will dampen growth. On balance, we project gross casino gambling revenue to increase at a 2.2% compound annual rate, rising to R19.2 billion in 2019 from R17.2 billion in 2014.

Taxes and levies will total an estimated R2 billion in 2019, up from R1.8 billion in 2014, growing at a 2.2% compound annual rate. That figure does not include the deemed output VAT of R2.1 billion on gross gambling revenue, which would more than double that figure.


Casino gambling in South Africa (R millions)


Gross gambling revenue 14 043 14 855 16 404 16 498 17 235 17 300 17 500 17 850 18 450 19 200 % change 2.3 5.8 10.4 0.6 4.5 0.4 1.2 2.0 3.4 4.1 2.2Taxes and levies 1 318 1 405 1 579 1 640 1 791 1 800 1 820 1 855 1 920 2 000 % change 4.4 6.6 12.4 3.9 9.2 0.5 1.1 1.9 3.5 4.2 2.2


Fig 13. Casino gross gambling revenue (R millions), 2010-2019

0

2 000

4 000

6 000

8 000

10 000

12 000

14 000

16 000

18 000

20 000

2019201820172016201520142013201220112010



PwC | 21

Limited payout machines

Fig 14. Gross gambling revenue shares by type (%), 2014

9%

14%

5%

72%

LPMs

Casino gambling

Sports betting

Bingo


LPMs, principally located in bars, clubs and restaurants, accounted for 9% of gross gambling revenues in 2014, up from 8% in 2018. Limited payout machines are monitored by the Central Electronic Monitoring System (CEMS) and are licenced to route operators who manage and operate LPMs in conjunction with site operators. The introduction of new machines and new sites is expanding the market. There were 10 279 active LPMs in 2014, up from 9 288 in 2013 and 7 743 in 2012, a cumulative 33% increase over the past two years. That increase was the principal driver of the 41% increase in gross LPM gambling revenue over the same period.

Fig 15. Number of active LPMs, 2012-2014

2014 2013 2012

10 279

9 288

7 743

Source: National Gambling Board of South Africa

The Western Cape had the largest LPM market in 2014 at R626 million, with KwaZulu-Natal next at R474 million. Gauteng, which has the largest casino market, ranked only third in the LPM market with gross gambling revenues of R365 million. The Eastern Cape, at R239 million, was the only other province above R200 million, and Limpopo at R178 million and Mpumalanga at R123 million were the other provinces above R100 million. LPMs have not yet been introduced in the Northern Cape. Each province with LPMs recorded double-digit increases in 2014.

LPM gross gambling revenues by province (R millions)

2012 2013 2014 2012-13 % change

2013-14 % change

Average GGR per LPM 2014

R thousandsWestern Cape 481 551 626 14.6 13.6 358.1 KwaZulu-Natal 339 404 474 19.2 17.3 204.4 Gauteng 242 287 365 18.6 27.2 172.5 Eastern Cape 161 190 239 18.0 25.8 154.7 Limpopo 119 145 178 21.8 22.8 154.1 Mpumalanga 101 110 123 8.9 11.8 185.8 North West 15 28 44 86.7 57.1 91.9 Free State 18 24 30 33.3 25.0 117.6 Northern Cape - - -Total 1 476 1 739 2 079 17.8 19.6



Although the Western Cape is the leading province in LPM gambling revenues, it ranked only third in the number of active LPMs at 1 748. KwaZulu-Natal and Gauteng have the most active LPMs at 2 319 and 2 116, respectively, together comprising 43% of the total number of active LPMs. The Eastern Cape and Limpopo are the only other provinces with more than 1 000 active LPMs.

Fig 16. Active LPMs by province as of 31 March 2015

LPMs

Western cape1 748

KwaZulu-Natal2 319

Gauteng2 116

Eastern Cape1 545

Limpopo1 155

Mpumalanga662

North West479

Free State255


The continued installation of LPM machines in new locations will expand the market, but with the most lucrative areas having already been reached, further growth is likely to be moderate. In addition, an expanding bingo market may cut into LPM growth as electronic bingo terminals are installed in more areas, some of which will be in competition with LPMs. The LPM market rose by 19.6% in 2014. We expect continued double-digit growth over the next two years, followed by single-digit gains in 2017–19 as the market matures. For the forecast period as a whole, we project gross LPM gambling revenue to expand at a 10.3% compound annual rate to R3.4 billion in 2019 from R2.1 billion in 2014.

Taxes and levies will increase from R262 million in 2014 to a projected R425 million in 2019, a 10.2% compound annual increase.

Limited payout machines (R millions)


Gross gambling revenue 899 1 174 1 476 1 739 2 079 2 430 2 750 3 010 3 215 3 390 % change 21.5 30.6 25.7 17.8 19.6 16.9 13.2 9.5 6.8 5.4 10.3Taxes and levies 105 140 181 214 262 305 345 380 405 425 % change 26.5 33.3 29.3 18.2 22.4 16.4 13.1 10.1 6.6 4.9 10.2


Fig 17. Limited payout machines gross gambling revenue (R millions), 2010-2019

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

2019201820172016201520142013201220112010


PwC | 23

Bingo


9%

14%

5%

72%

Bingo

Sports betting

LPMs

Casino gambling


Bingo consists of traditional bingo positions and electronic bingo terminals (EBTs), which are similar to slot machines. There are 9 813 licenced bingo positions of which 5 369 were operational as at 31 March 2015.

EBTs are now the dominant category at 3 212, 60% of the total, and the proliferation of EBTs is driving the market. Gauteng is the leading province with 2 974 total positions and 1 731 EBTs. The Eastern Cape, at 1 004, is the only other province with more than 1 000 positions, all of which are EBTs.

Operational bingo positions by province as at 31 March 2015

EBT Traditional TotalGauteng 1 731 1 243 2 974Eastern Cape 1 004 0 1 004Mpumalanga 170 159 329North West 307 113 420KwaZulu-Natal - 642 642Total 3 212 2 157 5 369


Gross gambling revenues for bingo by province (R millions), 2012-2014

2012 2013 2014 2012-13 % change

2013-14 % change

Gauteng 428 685 903 60.0 31.8Eastern Cape - 4 114 - 2 750.0Mpumalanga 9 38 55 322.2 44.7North West - 5 43 - 760.0KwaZulu-Natal - - 2 - -Total 437 732 1 117 67.5 52.6


Bingo is the smallest category, accounting for only 5% of total gross gambling revenue in 2014, but that share rose from 3% in 2013 on the strength of a 52.6% increase in gross gambling revenue. Bingo became available in KwaZulu-Natal in 2014 and benefited in 2014 from a full year of operations in the Eastern Cape and North West. Revenues in the Eastern Cape jumped to R114 million in 2014, propelling it over Mpumalanga and North West to become the second-largest province behind Gauteng, which continues to dominate the market at R903 million, 81% of the total. Electronic bingo terminals have not yet been introduced in the Western Cape, Limpopo, Free State and Northern Cape.


The total number of operational bingo positions rose by 18% in 2014 to 5 369, 61% above the level in 2012, reflecting the introduction of bingo into the Eastern Cape, Mpumalanga, North West and KwaZulu-Natal in the past two years, and expansion in Gauteng.

Fig 19. Number of operational bingo positions, 2012-2014

2014 2013 2012

5 369

4 557

3 338


We expect bingo positions to continue to be added in the provinces where they have been authorised, which will lead to continued double-digit growth over the next few years. If bingo is limited to its current provinces, however, growth will ultimately be limited, and we project a single-digit advance in 2019. Nevertheless, bingo will continue to be the fastest-growing category during the next five years with a projected 19.0% compound annual increase in gross gambling revenues from R1.1 billion in 2014 to R2.7 billion in 2019.

We project taxes and levies generated by bingo to rise to R195 million in 2019 from R81 million in 2014, a 19.2% compound annual increase.

Bingo (R millions)


Gross gambling revenue 196 235 437 732 1 117 1 500 1 885 2 165 2 440 2 670 % change -0.5 19.9 86.0 67.5 52.6 34.3 25.7 14.9 12.7 9.4 19.0Taxes and levies 23 29 45 53 81 110 135 155 175 195 % change 4.5 26.1 55.2 17.8 52.8 35.8 22.7 14.8 12.9 11.4 19.2

Sources: National Gambling Board of South Africa PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Fig 20. Bingo gross gambling revenue (R millions), 2010-2019

0

500

1 000

1 500

2 000

2 500

3 000

2019201820172016201520142013201220112010


PwC | 25

Sports betting


9%

14%

5%

72%

Casino gambling

Sports betting

LPMs

Bingo


Sports betting is the second-largest category, comprising 14% of total gross gambling revenues, up from 13% in 2013. It includes fixed-odds bookmaking and pari-mutuel wagering on horseracing and other sports events. This is the only category where online wagering is permitted.

Horseracing remained the dominant component of the market in 2014 at R1.9 billion compared with R1.6 billion for sports events, but betting on sports events has been driving the market, accounting for 75% of the increase over the past five years. Horseracing is controlled by two companies, Phumelela Gambling and Leisure, and Gold Circle. Phumelela Gambling and Leisure operates in the Free State, Northern Cape, Eastern Cape and Gauteng, while Gold Circle controls wagering in KwaZulu-Natal and the Western Cape.

Horseracing is a mature market with growth during the past four years at less than 5% annually and a 2.8% increase in 2014. Sports betting, on the other hand, is an emerging market, fuelled by the proliferation of sports betting shops and online wagering. We expect sports betting to overtake horseracing in 2017 and to account for 57% of the market in 2019, compared with 46% in 2014 and only 18% in 2010.

Fig 22. Sports betting share of overall betting revenues (%), 2010-2019

10

15

20

25

30

35

40

45

50

55

60

2019201820172016201520142013201220112010


Gross sports betting gambling revenues jumped by 57.6% in 2014, more than three times the 18.5% rise in 2013, in large part reflecting wagering associated with the FIFA World Cup held in Brazil during June and July 2014. An 18% increase in the number of operational bookmaker outlets also contributed to the 2014 increase.


Fig 23. Number of operational bookmaker outlets, 2012-2014

2014 2013 2012

435

369

380

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker

Bookmaker Bookmaker

Bookmaker

Bookmaker

Bookmaker

Source: National Gambling Board of South Africa

We expect the underlying sports betting market to continue to benefit from growth in bookmaker outlets as well as from expanding broadband penetration that will allow more people to have access to online gambling. We project the underlying market to continue to expand at double-digit rates. Overlaying the underlying market will be FIFA World Cup wagering that enters and leaves the market. In 2015, we expect the absence of wagering related to the FIFA World Cup will have an adverse effect on the market, mitigated to some degree by wagering on the Rugby World Cup. On balance, we project a 2.0% drop in sports betting in 2015.

Gross sports gambling revenues by category (R millions)


Horseracing 1 651 1 675 1 750 1 830 1 881 1 930 1 980 2 035 2 095 2 160 % change 17.0 1.5 4.5 4.6 2.8 2.6 2.6 2.8 2.9 3.1 2.8Sports betting 352 478 847 1 004 1 582 1 550 1 735 2 050 2 800 2 850 % change 81.4 35.8 77.2 18.5 57.6 -2.0 11.9 18.2 36.6 1.8 12.5Total 2 003 2 153 2 597 2 834 3 463 3 480 3 715 4 085 4 895 5 010 % change 24.8 7.5 20.6 9.1 22.2 0.5 6.8 10.0 19.8 2.3 7.7


We expect another bump in sports betting in 2018 of 36.6%, associated with the next FIFA World Cup in Russia, followed by a modest 1.8% advance in 2019. For the forecast period as a whole, we project sports betting to rise at a 12.5% compound annual rate to R2.9 billion in 2019.

Gauteng is the leading horseracing province with R761 million in gross gambling revenues in 2014, up 17.8%. KwaZulu-Natal is next at R520 million, a 7.8% decline from 2013. Together, the two provinces generated 68.1% of total gross horseracing gambling revenues. The Western Cape at R198 million and the Eastern Cape at R170 million were the only other provinces above R100 million in 2014. Limpopo was the only province other than Gauteng that recorded a double-digit increase in 2014. The Western Cape and Eastern Cape recorded modest increases, while the remaining provinces were flat or down.

Gross gambling revenues for horseracing by province (R millions), 2012-2014

2012 2013 2014 2012-13 % change

2013-14 % change

Gauteng 641 646 761 0.8 17.8KwaZulu-Natal 549 564 520 2.7 -7.8Western Cape 203 192 198 -5.4 3.1Eastern Cape 148 164 170 10.8 3.7Free State 62 64 55 3.2 -14.1North West 55 90 59 63.6 -34.4Limpopo 42 71 82 69.0 15.5Mpumalanga 33 33 30 0.0 -9.1Northern Cape 17 6 6 -64.7 0.0Total 1 750 1 830 1 881 4.6 2.8


We expect horseracing to continue to grow at low single-digit rates, with slower growth in the near term reflecting a weakening economy and somewhat faster growth over the latter part of the forecast period as economic conditions improve. Growth will average 2.8%, compounded annually to R2.2 billion in 2019.

PwC | 27

Sports betting is reported based on where the licence is issued. Gauteng accounted for 59.4% of total gross sports betting gambling revenue in 2014 at R939 million. The Western Cape and KwaZulu-Natal were next at R194 million and R193 million, respectively, and were the only other provinces above R100 million.

Gross gambling revenues for sports betting by province (R millions), 2013 vs 2014

2013 2014 2013-14 % change

Gauteng 596 939 57.6Western Cape 133 194 45.9KwaZulu-Natal 117 193 65.0Mpumalanga 54 99 83.3Limpopo 60 98 63.3Free State 21 28 33.3North West 18 20 11.1Northern Cape 5 11 120.0Eastern Cape 0 0Total 1 004 1 582 57.6


For sports betting as a whole – horseracing plus betting on sports events – we project gross gambling revenues to expand at a 7.7% compound annual rate to an estimated R5 billion in 2019 from R3.5 billion in 2014. Taxes and levies will rise from R343 million in 2014 to a projected R500 million by 2019, a 7.8% compound annual increase.

Total sports betting (R millions)


Gross gambling revenue 2 003 2 153 2 597 2 834 3 463 3 480 3 715 4 085 4 895 5 010 % change 24.8 7.5 20.6 9.1 22.2 0.5 6.8 10.0 19.8 2.3 7.7Taxes and levies 223 259 294 330 343 345 369 407 488 500 % change 7.7 16.1 13.5 12.2 3.9 0.6 7.0 10.3 19.9 2.5 7.8


Fig 24. Sports betting gross gambling revenues (R millions), 2010-2019

0

500

1 000

1 500

2 000

2 500

3 000

3 500

4 000

4 500

5 000

5 500

2019201820172016201520142013201220112010



National LotteryThe National Lottery is different from other gambling categories in that it is operated with the goal of generating funds for charitable, sports, arts and other worthy causes rather than as an entity focused on maximising returns for shareholders, employees and other stakeholders. A percentage of revenue, agreed between the operator and the government as part of the licence terms, is paid to the National Lottery Distribution Trust Fund (NLDTF). The Lotteries Amendment Act of 2013 led to the launch in 2015 of the National Lotteries Commission (NLC), whose mandate is to regulate the National Lottery along with other lotteries. The NLC also advises the Minister of Trade and Industry on issues relating to the National Lottery. The NLC is the successor to the National Lotteries Board.

The National Lottery, established in 2000, is operated on behalf of the government by an appointed licensee for a term of seven years. The third seven-year license was issued in 2015 to Ithuba Holdings. Faced with a declining market, Ithuba Holdings is planning to upgrade the lottery infrastructure through various partnerships. GTECH will provide the operating system for lottery machines. SIM cards will be used to connect lottery terminals at retail locations so that terminals will be available in more locations throughout the country and winners can receive payment promptly. The hope is that more people will have access to the lottery and more people will be induced to participate.

Lottery ticket sales have fallen during the past two years by a cumulative 3.3%, including a 0.8% decline in 2014, reflecting a slowdown in the economy and the growth in other legal and illegal gambling outlets. We anticipate an additional drop in 2015, followed by a modest pickup in 2016. We look for somewhat faster growth over the latter part of the forecast period as the lottery infrastructure is upgraded, as more people have access to the lottery, and as economic conditions improve. Nevertheless, we expect growth to remain under 1% annually throughout the forecast period, and the National Lottery will remain the slowest-growing category. We project gross gambling revenues to rise from R2.28 billion in 2014 to a projected R2.33 billion in 2019, a 0.4% compound annual increase.

National Lottery (R millions)


Turnover 4 390 4 575 4 710 4 594 4 559 4 550 4 565 4 590 4 620 4 655 % change 1.5 4.2 3.0 -2.5 -0.8 -0.2 0.3 0.5 0.7 0.8 0.4Gross gambling revenue 2 195 2 288 2 355 2 297 2 280 2 275 2 283 2 295 2 310 2 328 % change 1.5 4.2 2.9 -2.5 -0.7 -0.2 0.4 0.5 0.7 0.8 0.4Contribution to NLDTF 1 603 1 670 1 600 1 562 1 550 1 545 1 550 1 560 1 570 1 585 % change 4.3 4.2 -4.2 -2.4 -0.8 -0.3 0.3 0.6 0.6 1.0 0.4

Sources: National Lotteries Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

Contributions are made from revenue to the NLDTF, which allocates funding to arts, culture, national heritage, charities, child welfare, religious, medical, sports and recreation entities. Eligible organisations seeking funding must apply to the NLDTF. As the National Lottery is operated with the specific purpose of distributing funds to needy causes, a significant portion of gross revenue (68.0% in 2014) goes to the NLDTF.

Contributions to the NLDTF will increase from R1.55 billion in 2014 to a projected R1.59 billion in 2019, a 0.4% compound annual increase. Cumulatively, the NLDTF will receive an estimated R7.8 billion from the National Lottery during the 2015 to 2019 period.

Fig 25. Gross gambling revenues vs contribution to NLDTF (R millions), 2010-2019

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

1 670

2 288

2 1951 603

2 3551 600

2 2971 562

2 280

1 550

2 275

2 283

2 295

2 310

2 3281 585

1 570

1 560

1 550

1 545Gross gambling

revenue

Contribution to NLDTF

Sources: National Lotteries Board of South Africa, PricewaterhouseCoopers LLP, Wilkofsky Gruen Associates

PwC | 29

Looking back: 2014

In our previous Raising the stakes in Africa report, released in November 2014, we forecast overall gross gambling revenues for South Africa to grow by 7.3% in 2014, which turned out to underestimate the market, which actually grew by 9.6%. Each category except sports betting grew faster than we projected. Casinos achieved a 4.5% increase in gross gambling revenues compared with our 1.8% projected increase.

Bingo benefited from the introduction of electronic bingo terminals in new provinces, and overall growth in the number of outlets boosted the market. We had projected a 35.2% increase but that proved to be well short of the 52.6% growth achieved.

LPMs also benefited from an increase in the number of outlets and revenues rose by 19.6%, surpassing our 15.6% projected growth.

In the case of sports betting, slower growth in horseracing, still the dominant component, offset a large increase in wagering on sports events, boosted by the FIFA World Cup and growth in bookmaker outlets. This resulted in an overall 22.2% increase, which was less than our 27.0% projected growth.

Fig 26. Gross gambling revenue by type (% growth), 2014

Casino gambling Sports bettingLimited PayoutMachines

Bingo Total

Forecast

Actual

7.3

52.6

36.2

22.2

27.0

19.6

15.6

4.51.8

9.6


The higher-than-expected increase in gross gambling revenues led to an unexpectedly high growth in taxes and levies. The 10.7% increase in 2014 was above the 8.4% projected rise.

Fig 27. Gambling taxes and levies (% growth), 2014

Forecast Actual

10.7

8.4



Casino gambling in Nigeria


PwC | 31

Gross casino gambling revenues in Nigeria rose by 17.1% in 2014, continuing the pattern of double-digit annual increases. Since 2009, growth has been averaging 15.6%, compounded annually to USD45.8 million in 2014. That advance reflects a strong economy. Nominal GDP over the 2009-14 period increased at a 14.2% compound annual rate and real GDP expanded at a robust 5.7%, compounded annually.

The casino market was not hurt by either the Boko Haram attacks or the Ebola outbreak that hit the country in July 2014. (Nigeria was declared Ebola-free by the World Health Organisation in October 2014.) Casinos in Nigeria do not rely on foreign tourism, which may have suffered from these events. Instead, the market principally relies on business travellers and upscale domestic players, and the strong domestic economy supported both sectors. Moreover, Lagos and Abuja, where the three licensed casinos in Nigeria are located, were not affected by the terrorist activity.

Casinos in Nigeria do not face much competition from other legal gambling as most forms of gambling are illegal in Nigeria. Exceptions include skill-based card games, backgammon and the national online lottery. Illegal betting exchanges are widespread and there are a number of unlicensed casinos in operation. Throughout 2014, however, unlicensed casinos do not appear to have significantly cut into the licenced casino market.

The principal driver of the casino market in Nigeria remains the domestic economy. Nigeria has an energy-based economy that has been driven by oil and natural gas production. However, with energy prices falling, economic growth is slowing. In the first half of 2015, nominal GDP was on pace to grow by only 4.7%, down from the 11.3% rise in 2014. Real GDP growth will drop from 6.3% in 2014 to 3.1% in 2015. While we expect somewhat faster increases beginning in 2016 as the global energy market stabilises, we do not expect a return to the growth rates experienced during the past five years. We project nominal GDP over the next five years to grow at a 6.0% compound annual rate, less than half the increase over the past five years, with real GDP growth dropping to 4.0% compounded annually – still healthy, but well below the 6.3% rise in 2014.


We expect slower economic growth to lead to slower growth in casino revenues. We expect casino revenue growth to drop to 7.2% in 2015, with faster increases expected in subsequent years as economic growth picks up. For the forecast period as a whole, gross gambling revenues will expand at a projected 8.5% compound annual rate to USD68.9 million in 2019. Although projected growth will be substantially lower than during the past five years, we expect Nigeria to continue to expand at a faster rate than either Kenya or South Africa.

Taxes and levies will rise to an estimated USD8.6 million in 2019 from USD5.7 million in 2014, growing by 8.6% on a compound annual basis.

Casino gambling in Nigeria (USD millions)


Gross gambling revenue 24.3 27.4 32.7 39.1 45.8 49.1 53.0 57.5 62.7 68.9 % change 9.5 12.8 19.3 19.6 17.1 7.2 7.9 8.5 9.0 9.9 8.5Taxes and levies 3.0 3.4 4.1 4.9 5.7 6.1 6.6 7.2 7.8 8.6 % change 7.1 13.3 20.6 19.5 16.3 7.0 8.2 9.1 8.3 10.3 8.6


Fig 28. Gross gambling revenue vs taxes & levies (USD millions), 2010-2019

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

27.4

3.4

3.024.3

4.132.7

4.939.1

5.745.8

6.1

6.6

7.2

7.8

8.6

68.9

62.7

57.5

53.0

49.1


Taxes and levies


PwC | 33

The casino market in Nigeria substantially outperformed our expectations as the 17.1% increase in gross gambling revenues was well in excess of the 5.0% projected increase. Taxes and levies also grew faster than we anticipated, rising by 16.3% compared with the 6.0% projected increase.

Looking back: 2014

Fig 29. Gross gambling revenue and taxes and levies (% growth), 2014


Taxes and levies

16.3

6.0

5.0

17.1

Forecast

Actual




Casino gambling in Kenya


PwC | 35

Casino gambling revenues rose by 6.9% in Kenya in 2014, down from the 11.2% increase in 2013 and the 24.2% compound annual increase between 2009 and 2011. It is believed that the imposition of a 20% withholding tax on gambling winnings contributed to the slowdown.

Growing competition from legal online gambling and from a new national lottery may also have contributed to the slowdown in 2014 for the 13 licenced casinos. Virtually all forms of gambling are permitted in Kenya, including online gambling and even mobile gambling. The first online gambling site was launched in early 2013 and new sites were added in 2014. BR Gambling introduced a lottery in June 2013 that is based on the EuroMillions lottery, offering Sh30 million (USD 0.3 million) as a top prize. There are also SMS lotteries offered by mobile telecom companies as well as the Kenya Charity Sweepstakes. Sports betting is also flourishing in Kenya. SportPesa, launched in February 2014 at a cost of Sh400 million (USD 4.6) million, is an online/mobile platform.

Kenya, like Nigeria, has been beset with terrorism, which has hurt tourism. Also like Nigeria, Kenya’s casinos do not rely on foreign tourism, though, and have held up relatively well. Kenya’s domestic economy has been growing rapidly with nominal GDP expanding at a 12.9% compound annual rate over the past five years, a key element contributing to the 14.3% compound annual increase in gross casino gambling revenue over the same period.

We expect Kenya’s economy to continue to grow at healthy rates, with nominal GDP rising by a projected 13.9% compounded annually over the next five years and real GDP increasing at a 6.0% compound annual rate. Strong economic expansion will continue to support the casino market going forward. However, we do not expect casino revenues to match either the rate of nominal economic growth going forward or the increases achieved over the past five years.

With the growth in legal online and mobile gambling, casinos will face growing competition for the gambling shilling, and we expect that growth going forward will remain at single-digits. The withholding tax on casino gambling winnings will continue to put a damper on casino wagering, although much of the impact has already been felt and its incremental effect on the market will be limited. For that reason, we expect somewhat faster increases in casino revenues compared with 2014.

For the forecast period as a whole, we project gross casino gambling revenue to increase at a 7.5% compound annual rate, rising from USD20.1 million in 2014 to USD28.9 million in 2019.

Casino taxes and levies will total an estimated USD4.6 million in 2019, up 7.5% on a compound annual basis from USD3.2 million in 2014.


Casino gambling in Kenya (USD millions)


Gross gambling revenue 12.2 15.9 16.9 18.8 20.1 21.5 23.1 24.9 26.8 28.9 % change 18.4 30.3 6.3 11.2 6.9 7.0 7.4 7.8 7.6 7.8 7.5Taxes and levies 2.0 2.6 2.7 3.0 3.2 3.4 3.7 4.0 4.3 4.6 % change 17.6 30.0 3.8 11.1 6.7 6.3 8.8 8.1 7.5 7.0 7.5


Fig 30. Gross gambling revenue vs taxes & levies (USD millions), 2010-2019

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

15.9

2.6

2.012.2

2.716.9

3.018.8

3.220.1

3.4

3.7

4.0

4.3

4.6

28.9

26.8

24.9

23.1

21.5


Taxes and levies



PwC | 37

Looking back: 2014

The casino market in Kenya rose by 6.9% in 2014, exceeding our projected 4.9% gain, as the withholding tax appears to have had somewhat less of an impact than we anticipated. Taxes and levies rose by 6.7%, a bit slower than the 6.9% projected increase.

Fig 31. Gross gambling revenue and taxes & levies (% growth), 2014

6.76.9

4.9

6.9


Taxes and levies

Forecast

Actual



Maximising non-gambling casino revenueby Veneta Eftychis


PwC | 39

The South African gambling market has evolved over the past ten years into a more complete lifestyle experience destination, with hotel, entertainment, retail and fine dining becoming increasingly important revenue drivers. Our mature and stable casino environment heightens the need to offer fully fledged lifestyle experiences to the wider market in order to increase non-gambling revenue.

The advancement in the convergence of retail, restaurant and gambling sectors is clear. Over the last two years alone, South Africa has seen the approval of a R3 billion Sun International casino destination in Menlyn, Pretoria as well as the significant expansion of the Suncoast Casino and Entertainment World in Durban to include a retail mall, expanded restaurant area, rooftop swimming pools, multipurpose venue and expansions of the casino floor.

The demand for wider guest-centric services, especially in the food and beverage sector, is changing the way that casinos approach their branding. In the past, casino food service was more about large buffets or free meals for VIP gamblers. Today, however, menu innovation and healthy meal options are key to casino restaurants, whose offering now ranges from quality fine dining to quick and convenient fast foods.

The overall goal is to keep patrons entertained for as long as possible, whether it be on or off the gambling floor, and diverse restaurant choices and other entertainment offerings have been a major reason for successfully accomplishing this.

Furthermore, guest-centric technologies can change the way restaurants operate and play an important role in maximising non-gambling revenue. Restaurants can introduce mobile apps and ordering kiosks and they can make tablets available to place orders and attract patrons from the gambling floor.

Millennials embrace the introduction of technology, especially when it entails convenience, customised orders and loyalty programmes linked to their gameplay. Sophisticated technologies can heighten the customer experience, increase per-guest revenue and earn the ultimate gift from a guest – loyalty. The following guest-centric solutions can assist in achieving this:

• Re-engineer business processes and initiatives to improve process efficiencies;

• Improve resource productivity;

• Introduce organisation-wide technological improvements; and

• Improve distribution to reach areas that were previously untapped.

Sources

Sudipta Ghosh, India, August 2015: The New Paradigm Article by PwC

Roy Student and Carolan Pepin : Tracking the Non-Gaming of Gaming , Retail Dining and Entertainment in the Gaming and Hospitality Industry Journal, 2009:https://www.sas.com/resources/asset/104331.pdf

Sam Ro: Las Vegas Hasn’t Been About Gaming since 1999, Business Insider, March 2013:

http://www.businessinsider.com/las-vegas-gaming-vs-non-gaming-revenue-2013-3

Natalie Osborn: Destination Dining, Food and Beverage Trends within the Canadian gaming industry, Canadian Gaming Business, August 2015:

http://canadiangamingbusiness.com/DestinationDining.aspx

Mark Tapling: Maximising Non-Gaming Casino Revenue, Hotel Executive:

http://hotelexecutive.com/business_review/1822/maximizing-non-gaming-casino-revenue

Lonnie Bryant and Doug Walker: UNLV Caesars Hospitality Research Centre Grant, Profitability and Return on Investments from Casino Amenities, 2010:

http://digitalscholarship.unlv.edu/cgi/viewcontent.cgi?article=1072&context=hhrcg


Conclusion


PwC | 41

The gambling industry in South Africa and Nigeria will be adversely affected in the near term by slower economic growth, but improving economic conditions over the latter part of the forecast period will boost spending at a faster pace. In Kenya, growth will remain relatively stable over the forecast period compared with the increase in 2014.

In the three market regions as a whole, gross casino gambling revenues will total an estimated R20.0 billion (USD1.8 billion) in 2019, a 2.5% compound annual increase on the R18 billion (USD1.7 billion) in 2014.


Glossary of abbreviations


PwC | 43

CAGR Compound Annual Growth Rate

CASA Casino Association of South Africa

CEMS Central Electronic Monitoring System

FIFA Fédération Internationale de Football Association

GGR Gross Gambling Revenue

LPM Limited Payout Machine

NLDTF National Lottery Distribution Trust Fund

VAT Value-Added Tax

dti The Department of Trade and Industry

EBTs Electronic Bingo Terminals

NLC National Lotteries Commission

GDP Gross Domestic Product


PwC contactsGambling industry group contacts

Technology, Information, Communications and Entertainment Industry Leader

Berno Niebuhr

[email protected]

+27 12 429 0050

Technology, Information, Communications and Entertainment Industry Leader – Nigeria

Osere Alakhume

[email protected]

+234 (1) 271 1700 Ext 4103

Technology, Information, Communications and Entertainment Industry Leader – Kenya

Michael Mugasa

[email protected]

+254 (20) 2855688

Gambling Industry Leader and Assurance services

Pietro Calicchio – Southern Africa

[email protected]

+27 11 797 5292

Advisory services

Marthie Crafford

[email protected]

+27 11 797 4555

Taxation services

Louis Carney

[email protected]

+27 11 797 4715

Corporate Finance

Jan Groenewald

[email protected]

+27 11 797 5380

Transaction services

Peter McCrystal

[email protected]

+27 11 797 5275


www.pwc.co.za/gambling

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Data & Analytics

Gambling outlook Africa PwC 2015-2019 (1)