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The growing influence of South Africa in the world Pari-mutuel industry

BUSINESSWebmaster

Trivia fiends interested in international horseracing and betting will have a field day with the combined question: Which country operates the world’s most extensive pari-mutuel system, and which company is the operator?

Many would probably go straight for Hong Kong and the local Jockey Club as the joint answer, given that Far Eastern punters are deservedly renowned for their fanatical pursuit of riches through horseracing and more recently football betting, and that Hong Kong has the best-known, most successful legalised system. They would be wrong.

A sizeable proportion of those who dismiss Hong Kong as being too obvious for a trivia question might plump for the United States, based on its size and well documented propensity for gambling. They would be wrong. A few might look to Europe, and suggest either the French PMU or Britain’s Tote as their solution. They too would be wrong. The answer is South Africa, and Phumelela Gold Enterprises. Surprised? I’m not surprised that you’re surprised, especially since Phumelela did not exist until April 1999, when a new dispensation was negotiated between the country’s horsemen and the South African government, which included the “corporatisation” of the several individual race clubs and totalisators, and a reduction in betting taxes.

The development led to the consolidation of South Africa’s racing and tote betting industries into two operators – Phumelela Gaming and Leisure, which immediately listed on the Johannesburg Stock Exchange and became responsible for operating in seven of the country’s provinces, and Gold Circle, which takes in the remaining two provinces. As Brian Mehl, a well respected businessman who became Phumelela’s first chief executive and remains deputy chairman, explains, the new dawn was born out of sheer necessity.

Without it, racing and betting in South Africa would almost certainly have sunk into third-world status, drowned by the tide of new forms of legalised gaming, such as metropolitan casinos, bingo halls and the national lottery. He adds: “The situation was further exacerbated by South Africa’s re-entry to the international community, with renewed access to international sporting events, all of which resulted in industry decline and the chalking up of significant losses. The future was very bleak indeed.” Today, Mehl enthuses that both Phumelela, which also operates football and sports spread betting, and Gold Circle are viable and operating profitably; the South African breeding industry is producing record levels of sales, “and the future looks very promising.”

To get to this point in such a short time, though, has involved a deal of pain. Costs have been cut back ruthlessly, hundreds of jobs have been lost, racecourses have been closed - and are still closing - and the financial model has been changed. Mehl explains: “The turnaround can be attributed to the restructuring of the South African racing and betting industry into commercially orientated, professionally managed and focussed businesses, with successes - and failures - being enjoyed by all participants.” The two companies operate under different philosophies. Phumelela sets aside 30% of its income for race stakes, but has shareholders - the Racing Association (35%) and Black Empowerment Groups (27.5%) being the biggest - who can expect to earn dividends of around half of any profits after the payment of expenses for running racing on five courses and a major training centre – including the provision of transport from stable to racecourse at no cost to owners - staging events and operating the tote. Its 2005-6 operating profit, following a loss the previous year, was R9.7 million (£680,000).

Gold Circle essentially runs a non-profit making business, ploughing back income for the benefit of its racing constituents. Despite the differences, the two companies have worked closely together to achieve efficiencies, economies and scale. Mehl explains: “Wherever it makes good commercial sense, we have either combined our operations - for example in TV broadcasting, racing services and publishing - or we co-operate fully to try to achieve an optimal result, on race programming and fixtures for instance.”

The earliest most obvious example of co-operation was the co-mingling of tote pools, which came about in April 2002, when single national pools were created under the banner of Saftote. Growth in tote betting turnover was achieved for the first time in several years. More significantly, though, came the establishment of a joint venture company, Phumelela Gold Enterprises (PGE), which controls all media and information rights emanating from the two entities, owns and controls the industry’s broadcasting and publishing interests, as well as totalisator co-mingling activities and internet sites, and is responsible for developing the jointly-owned international business. This is the foundation on which South Africa’s worldwide reputation as a pari-mutuel facilitator has been built.

The first indication that the old colonial country at the tip of the African continent had a technological capacity that very few could rival came in October 2002, when Saftote betting pools on the Breeders’ Cup meeting at Arlington Park were co-mingled with those of the host tote operator. “That enabled South African punters to bet into the huge US pools, and demonstrated Phumelela’s ability to participate on the global horseracing and betting stage,” says Mehl, with justifiable pride.

However, the traffic is not all one way, and four and a half years on, this year’s Dubai World Cup experience demonstrated how far, and how fast, Phumelela has come in advancing its capabilities as a host for co-mingling bets. Over R36.7m (£2.57m) was bet in global tote pools handled by Phumelela, of which R32m (£2.24m) arrived via 56 individual tote sources in the US and Canada, compared with R17.43 (£1.22) on the same day the previous year. Other betting centres connected to the service in Johannesburg were in Holland, Austria, Germany, the Isle of Man (where Phumelela has a secondary hub), Spain, Russia, the West Indies and Tasmania. More than 400 outlets in South Africa also bet on the meeting through Saftote.

Remarkably, at least to those who can only look in from the outside, the UK Tote system does not penetrate the same internet language as Phumelela’s can. The UK Tote operated its own pool on the Dubai World Cup, which throws up a further irony, since many of Phumelela’s customers that day also co-mingled bets on the Kempton meeting that was going on almost simultaneously. Phumelela redirected win, place and exacta bets on Kempton to the UK Tote, but due to various limitations hosted trifecta and quartet bets itself, declaring its own dividends. John Stuart, Phumelela’s director of international operations, reflects: “Hosting the global tote pools on behalf of the Dubai Racing Club is a substantial undertaking, but it’s a responsibility that we’re immensely proud of.” Live pictures go with co-mingling like bread and cheese, and Kempton’s appearance on the same programme as Dubai came down a path trodden originally by Stuart’s energetic predecessor, the late Derrick Wiid, who was largely responsible for forging the link with Attheraces in 2003 that first brought UK racing into South Africa.

The following year, after the UK’s daily satellite racing coverage had fallen apart, Racing UK was born, with 30 tracks in the fold, and Phumelela joined as its international partner. Phumelela also retained rights to other UK meetings for showing, and, more importantly, betting on in the local market of 400 shops, three call centres, the internet and mobile phones, and race tracks. UK racing is the mainstay of South Africa’s imported product, but events also come in from Australia, Singapore, Hong Kong, France and the US, as well as more local fare from Mauritius, Kenya and Zimbabwe. “Our growth strategy depended on international racing,” Stuart explains. “South African racing alone was boring for punters, with a race every 30 minutes. Now we have an event every ten minutes, and the aim is to provide a round-the-clock service. Our betting shops are open from 10am to 10pm, but the internet has no boundaries, and we recently had our first race, from Hong Kong, at 6.30am. “Simulcasting was our only option, and that feeds into everyone down the line. Our prize-money increases are earned from simulcasting, and that means the whole industry benefits, from local horsemen to jockeys and stable staff.”

The UK also presented South Africa with its first opportunity to export its racing pictures, when in the mid-1990s bookmakers realised they needed something to keep mid-morning punters in their shops on Saturdays, before the afternoon programme began. South Africa provided the answer, and proved the saviour when a foot and mouth epidemic closed much of UK racing for a period in 2001.

The Racing UK link prompted Phumelela to create Racing International, a pictures and data television product that now covers four-fifths of the world, by Stuart’s estimation, and is seen in 30-plus countries, fostered most recently by the introduction of a 48-hour declaration system in the UK. However, co-mingling is the key, and Phumelela works on the back of a tote system bought off the shelf from leading US supplier Amtote. It has net pool pricing capabilities, dealing with any major currency through exchange-rate software, and supports scan-type bets such as the Pick6 and Superfecta, while each country pays its own local tax rate, to avoid double counting.

Stuart says: “Our vision is to have the global switch, to provide connectivity to any legal betting operator anywhere in the world, with royalties being paid to the host track.” The development of a race every ten minutes on Racing International has produced a 50 per cent increase in turnover over the last five years to R4.8 billion (£336m) in 2005-6. Stuart explains: “There are two parts to our business. Exporting pictures abroad gives us the opportunity to earn a royalty from betting, traditionally a margin of 3-4%. At the same time, bringing bets into our own pools means we pay the royalty but earn the full margin from the tote, which on average in South Africa is 24%.”

Looking ahead, Stuart is working to make Racing International a 24/7 horseracing channel, with prime content supported by a global tote system. He reasons: “Without betting, there’s nothing, and we have to create the premiership of horseracing and tote betting to take on competition from legal and illegal bookmakers, the sports betting market, casinos and websites. “If we reach the ideal, racing will get its fair share out of the market, and a tote system delivers the money to ensure that racing is the survivor in the long term.”