PRESENTATION TO THE PORTFOLIO COMMITTEE FOR TRADE AND INDUSTRY
18TH SEPTEMBER 2003

BY CAPE CMS (PTY) LTD

Mr. Chairman, ladies and gentlemen, thank you for this opportunity to provide oral representation, regarding the draft national gambling bill, number B48-2003.


It is late afternoon and I am sure you have all had a long and trying day, so 1 will make every effort to be as brief as possible.


My name is James Miller and I am a consultant with over 30-years experience in Information Technology business solutions, with specialisation in Central Electronic Monitoring Systems for the gambling industry. I represent Cape CMS (Pty) Ltd., a company established specifically for the monitoring of Route & Site operations on behalf of provincial government.


The two areas of the draft national gambling bill that I wish to address today are those that relate to the method of cash collection from LPM devices specified in Paragraph 26 (3) (c) of the draft bill, as well as the prescribed method of monitoring LPM's specified in paragraph 27 (4) of the draft bill.


While I am sure that the members of this committee are well acquainted with Casino

operations, as Casinos have been part of our lives for many years, Limited Payout

Machines, or LPM's, as they are more commonly known may be less clearly understood.

So I would like to take a moment to explain the LPM gaming environment.
An LPM is just another name for a slot machines, but unlike slot machines in casinos which have a single coin input per device, LPM's have multiple coin input, anything from 50-cents to R 5.00, also unlike casinos which have no real limit on the number of slot machines installed on a casino site (this is normally market driven), the LPM industry is typically limited to a maximum of 5 machines per site, with a maximum bet of R 5.00 and a maximum payout of R 500.00, and no wide area jackpots are permitted.


There are essentially three main players in the LPM industry, the manufacturer of the equipment, the Route operator and the site operator, all of whom have to be licenced by the provincial authority.

The manufacturer manufactures the LPM, including the development of the games played on the machine and sells these to the Route operator. There are many manufacturers of LPM's including such world-renowned names as 13ALLY, IGT, UNIVERSM~, and ARISTOCRAT. The cost of an LPM machine varies between R 25,000 for a refurbished machine to R 120,000 for a new machine. Each manufacturer has their own unique games, which generally can only be played on each specific manufacturers LPM. Manufacturers constantly strive to supply the most popular games as the popularity of the game has a very significant bearing on the income earned by each LPM.


Route operators are those company's who purchase the LPM devices from the manufacturer. They also contract with site operators to have the machines placed on site (typically on a 60%-40% split of machine net take), service the machines, rotate the machines, and in many cases collect the money on a weekly basis. A Route operator can be licenced to operate as few as 5-LPM's or as many as 2000-LPM's, as is the case in Kwazulu-Natal.


Site operators are those individuals who own, lease or rent premises, typically sites where juveniles do not have access, such as bars. They provide the venue for placement of the
connection to the LPM devices and associated site data logger. They may also be required to collect monies from the machines on a weekly basis. A maximum of 5-L PM's
per site is permitted, except in special circumstances, such as a racecourse, where more can be installed, subject to NOB approval.


There are provisions for what are known as Independent site operators, these are individuals who own, lease or rent their premises, but also own the LPM machines located at the premises. Independent site operators are typically limited to licences for 15 LPM's. In the case of both the Site operator and Independent site operator, the LPM activity must be secondary to their main business activities.


In the heyday of illegal casinos, from the mid 80's to the early 90's, there were more than 100,000 illegal slot machines in operation in South Africa, with more than 22,000 in Kwazulu-Natal alone. Current legislation allows for 50,000 LPM's to be licenced, this excludes any slot machines in Casinos. At present Mpumalanga province has completed licencing for 2 Route operators and some 350 Site operators, and there are approximately 200-LPM's installed and operational.


Because of the proliferation of sites on which LPM's will be installed (at an average of 3 LPM's per site, this would result in some 17,000 sites countrywide), it is easy to understand that traditional physical monitoring, such as in a fixed casino environment, is impractical in an LPM environment, which also has the added complication of frequent movement of machines between sites, when customers grow tired of playing the same games. This is why the existing gaming Act specifies that all licenced LPM's must be connected to an electronic monitoring system.


The electronic monitoring system in conjunction with the "site data logger" which is a monitoring device located on each site and connected permanently to each LPNI on site collects, analyses and controls all LPM activity on the site. Typically once per day the electronic monitoring system will connect to the site data logger, via normal dial up Telkom line, and upload all relevant data as specified in SABS specification 1718, which specification is an integral part of national and provincial gaming legislation. This information is available to both the provincial gambling board, as well as to Route operators, but in the case of Route operators it is limited to their specific LPM's and sites, which they have contracted with.


The financial characteristics of the LPM industry are as follows; the weekly gross take per LPM (coins in less coins out) is typically between K 1200 and R 1500, this figure has been substantiated by recent LPM activity in Mpumalanga. Of this weekly gross take 14% goes to VAT, leaving a 'weekly net take" per LPM. Of this net take a regulated percentage is deducted as Provincial Gaming tax or levy, a regulated percentage is also deducted as a "connectivity fee" which goes to the operator of the electronic monitoring system, and the remainder is split between the Route operator and Site operator, dependant on contractual agreement, which is typically on a 60:40 split to the benefit of the Route operator.


Having covered a brief description of what an LPM environment looks like, I would like to return to the two main areas of the draft national gambling bill, which I wish to address today, namely Paragraph 26 (3) (c) regarding cash collection methods, and Paragraph 27 (4) regarding central monitoring system connectivity.

Paragraph 26 (3) (c) states that the Route operator must collect money from the LPM machines. This means that the Licenced Route Operator, and the licenced Route Operator only, must collect monies from all LPM machines installed at sites he has contracted with, rather than offering alternative operational approaches, such as subcontracting collections to security firms, or having site operators deposit cash directly.


Some Provinces allow a single Route Operator to have a licence for 2000 LPM devices, as is the case with KwaZulu-Natal. Based on experience gathered in Mpumalanga, "Gross Weekly Take" (cash left behind if each LPM in one week) is between R 1200.00 and R 1500.00, dependant on machine and game type.


This would result in weekly cash collections (mainly coins) of a minimum of R 2.4 to to milllon per Route operator, a very attractive target for hijackers.


A far more sensible approach would be to require the Site Operator to deposit the "Gross Weekly Take" into a prescribed account, defined either by the Route Operator, central monitoring system operator, or Provincial Gambling Boards, for weekly reconciliation and distribution. In this way an amount of approximately R 6000.00 per week would be deposited by a site operator with 5-LPM's, a far safer methodology, less attractive to hijackers, with reduced collection costs for Route operators. Software applications are available today, which will manage central account deposits from multiple users, with full reconciliation back to what should have been banked, much in the same manner as we all pay our Telkom bill.


Now onto our concerns relating to central monitoring;


Paragraph 27 (4) of the draft bill states that every licenced payout machine that is made available for play must be electronically linked to the national central electronic monitoring system and the licensee of that machine must pay the prescribed monitoring fees in relation to that machine. What has changed here from the existing gaming legislation is the introduction of the single word "national". This change is a direct attempt by national government to usurp the constitutional rights of the province to run their own central monitoring systems where it is viable to do so.


In the Constitutional Court hearing of the 8^th November 2001 (CCT 32/01) where the

National Gambling Board applied for an urgent interdict against the Kwazulu-Natal

Gambling Board and the KwaZulu-Natal Premier to stop the KwaZulu-Natal Gambling

Board going ahead with implementing its own provincial central monitoring system for LPM's. The Constitutional Court entered into its findings of the 2l~ December 2001, "that in terms of section 44 (1) (a) (ii) read with section 104 (1) (b) (i) of the Constitution and with schedule 4 thereof states "the national legislature and provincial legislature have concurrent legislative competence to pass laws concerning gambling."

Paragraph 27 (4) of the proposed new gambling bill, attempts to undermine the Constitutional rights of the province in this regard and should not be allowed.


The Constitutional Court also prescribed (in Paragraph 36 of its findings) that the parties

should "consider alternative possibilities and compromises and to do so with regard to the expert advice the other organs of state have obtained."


This was accomplished in meetings held over two separate days between elected representatives of the Department of Trade & Industry, the National Gambling Board, The Office of the Premier of KwaZulu-Natal and the KwaZulu-Natal Gambling Board. ending on the 6~ August 2002.


The transcripts from these meetings clearly indicate that consensus was reached on a compromise that would best meet the requirements of all parties.


The DTI representative and Chairperson of the meeting states on page 59/10 of the transcript "It does seem to me, however, that the option of the tandem system (where the Province runs its own system, fully compatible with the national system and allows the "national Gambllng Bourd direct on-line access to the data) as you outlined, would be the most preferred option, certainly from a KwaZulu-Natal perspective, and is the option that if we pursued that option, would be the most likely to resolve conflict and, I think the current dispute."









The Chairperson goes on to say on page 59/20 of the same transcript "What I would like
to propose is that I present my Minister (Alec Erwin) with a range of options and I'll take you through the options that I will be presenting, but that I will indicate to him that this (the tandem option) would be the option that would solve the problems".

It would appear therefore that the Minister of Trade and Industry has totally ignored the recommendations of his own elected Chairperson, together with the consensus of the other parties present at meetings to reconcile differences which were required by the Constitutional Court, in favour of placing the interests of the National Gambling Board and its Chairman Chris Fismer, before the interests of the Provinces.


It is important to note that the National Gambling Board's Central Monitoring System, which is prescribed in the draft bill as the system that all LPM's must be connected to, is supplied and operated by Zonke Monitoring Systems (Pty) Ltd. (Zonke), a company specifically established for the sole purpose of operating the NGB's central monitoring system. There are several problems with this situation, which I would like to cover;


The original business plan submitted by Zonke as part of their bid to secure the licence to supply and operate the NOB Central Monitoring System, forecast a rollout of 46,000 LPM's to be installed within two years of winning the tender. In addition they forecast a much publicised financial "break even" situation of 21,000 LPM's.

In the two years since Zonke were awarded the contract by the NOB there are less than 200 licenced LPMs installed.

As the only source of income for Zonke comes from a small percentage (6%) of the gross take of each LPM, which is connected to the central monitoring system, and that the infrastructure costs remain relatively constant no matter how many LPM's are connected to the central monitoring system, our fear is that the Zonke shareholders and investors could at any time decide this is no longer a viable business opportunity and pull out,


l_¡leaving every province in a situation where it could not implement its LPM licencing responsibilities.


This possibility was voiced by none other than IBM, the giant multinational IT company, who were originally partners with Zonke in their successful bid to the NOB, who pulled out of the relationship early in 2002, as they announced publicly that they did not believe Zonke could prove to be a viable business, because of the uncertainty in the LPM market.


The Zonke system, while providing the requirements for a Central Monitoring System, which meets the SABS specification 1718, does not necessarily provide all of the requirements of a provincial gambling board. Such requirements as computerised licence application processing, computerised site policing and site banking reconciliation and funds distribution are not available on the Zonke system.


Zonke do not have their own hardware infrastructure on which to run the central monitoring application, this is in fact subcontracted to a subsidiary of Dimension Data, over which they have no direct control.


This can be a very dangerous situation when hardware resources are shared with other clients of the subcontractor, which client will be given priority over these resources?


Also the subcontractor could decide that the business was no longer financially viable and cancel any contract with Zonke, again leaving the provincial gambling boards without the ability to issue licences, and generate gambing tax income in the LPM arena.


On a technical note, assuming that the population of LPM's eventually reaches the regulated 50,000 unit level, the NOB central monitoring system will have to gather data from approximately 17,000 sites (assuming an average of 3 LPM's per site, 5 LPM's is maximum) each day.

Q_Each upload of data is in the majority over standard Telkom dial up lines, and takes approximately 4 minutes from imtial connection through verification, through data upload, to closure.

This is a total of 1,133 hours, assuming this had to be captured in an 3-hour period (typically data collection is done in the early hours of the morning), then 378 sirnultaneous telephone connections would have to be sustained throughout that 3-hour period, an extremely complex technical challenge.

Assuming that only 5% of the connections could not be made automatically because of Site Data Logger, line or exchange malfunction, manual connection would need to be established to acquire the necessary data, from 850 sites, taking just 5-minutes per call, this would require nine full-time operators over an 8-hour shift to gather the manual data. It is important to note that national regulations call for each LPM to switch itself off automatically if data has not been gathered in the preceding 72-hours. Using one NOB central monitoring system, to monitor all 50,000 LPM's in all nine provinces, places each provinces ability to maximise LPM tax revenues at great risk.


Computer viruses are an everyday fact of our modern world. Companies have been brought to their knees by virus attacks on their enterprise systems, especially when such systems can be accessed via the Internet.


Recent South African virus incidents include the paralysis of police computers across the nation. For more than a week police stations were unable to access crucial information. More than 90 IT specialists were recently desperately fighting the virus, trying to contain it. In addition this country's State Information Technology Agency (SITA), computer systems were recently attacked by a virus, which disabled its entire computerised administrative infrastructure for a month, requiring all purchases, orders and cheque payments to be handled manually.







Try to imagine if you will, 50,000 LPM's attached to a single central monitoring system, with countless Provincial Gambling Board and Route Operators accessing data from this central system, and the system is hit by a virus, of the same intensity as that of SITA.


Then 50,000 LPM's would become inoperative, as legislation requires that they automatically switch off; if data is not collected within 72-hours.


The loss of LPM income would be R 300 million, depriving the fiscal of VAT and Gaming Tax/Levy, as well as seriously undermining the financial viability of Route and Site operators.

In conclusion we believe that in the case of methods of cash collection, this should be left to the discretion of the provincial gambling boards, who can best determine the collection methodologies to be employed.

In the case of all LPM's being connected to one central monitoring system, we believe that to "place all of ones eggs in one basket", places the provincial gambling beards at considerable risk in the execution of their gaming responsibilities, as well as the Route and Site operators in running a successfull business.


Rather allow those provinces who have the LPM allocation, which would support their own infrastructure (generally accepted at around 4000 units), to operate or subcontract the operation of their own systems and to include in the proposed new gaming act, the requirement that those provincial systems must meet the SABS specification 1718, which is an integral part of the legislation, and to be compatible with the NOB system for the purposes of data transfer.


After all it does not cost the national or provincial gambling board's one cent to operate the system, this is ultimately paid by the Route Operator, and whether it is 60% of the LPM's gross take at national level or provincial level, makes no difference whatsoever.

In fact the opportunities for local business growth, local employment, and skills transfer is greatly enhanced.




J.J. Miller


Business Consultant



COMMENT ON THE NATIONAL GAMBLING BILL (B48-2003)