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How Phumelela Gaming & Leisure captured SA’s horse ra...

Business Maverick

Business Maverick

How Phumelela Gaming & Leisure captured SA’s horse racing industry – Public Protector

Horses race past the finish line during the Charity Mile event held at Turfontein Race Course in Johannesburg, South Africa, 03 November 2018. TEPA-EFE/KIM LUDBROOK

Public Protector Busisiwe Mkhwebane will fight many battles in the courts over the next few months. State organs and private sector players are lining up to review and set aside her reports. The latest is Phumelela Gaming & Leisure, the JSE-listed horse-racing and betting operator, which is dragging Mkhwebane to court for her report on the privatisation of SA’s horse racing industry in 1997, which she said unfairly benefited the company’s shareholders over the public.

The decision by the Gauteng provincial government to privatise the horse racing industry in 1997, which saw other provinces across SA follow suit, was never intended to benefit the country’s majority black population, but only a white minority group of Phumelela Gaming & Leisure shareholders.

This is a finding made by Public Protector Busisiwe Mkhwebane in her final report released on Friday 24 May, ending a marathon investigation begun by her predecessor Thuli Madonsela in 2012.

Mkhwebane’s report tears into the conduct of the Gauteng provincial government in privatising the horse racing industry, which she says was intended to protect JSE-listed Phumelela “at all costs” and for it to succeed.

Before privatisation, the state was heavily involved in the horse racing industry, as it licensed independent racecourses across the country to host their own race events. The decision to privatise the industry 22 years ago was set in motion by a memorandum of understanding (MoU) concluded by the Gauteng provincial government, then represented by the MEC for finance and economic affairs, Jabu Moleketi, and Gauteng’s racing industry. It was understood that privatising the industry would make it more competitive and economically viable. The government didn’t want to continue bankrolling the capital-intensive industry.

In the process, the government restructured the industry into a single corporate structure that would be listed on the JSE — later named Phumelela.

Businesswoman Phindi Kema, who laid a complaint with the Public Protector, says the move to privatise the industry was illegal as the MoU led to the transfer of all of Gauteng’s racecourses as well as their movable and immovable assets to Phumelela, free.

These include Turffontein, Gosforth Park and Newmarket racecourses (though Newmarket is now the site of a shopping mall). In addition, the Highveld Racing Authority, North Rand Training Centre and the Totalisator Agency Board were transferred. The “tote” as it is known, offers gamblers across SA a platform for betting.

Mkhwebane supported some of Kema’s claims, finding that the Gauteng provincial government’s conduct in privatising the horse racing industry amounted to maladministration because it enabled Phumelela to become the dominant horse-racing and betting operator it is. Phumelela operates and controls all races in all provinces, excluding KwaZulu-Natal and the Western Cape, where the company’s racing operations are managed through partnerships.

How the government supported Phumelela

Two decades ago, the Gauteng provincial government granted Phumelela R17.5-million in taxpayer funds from a social development fund that was meant to develop accommodation for grooms. The funds were approved in 1995, two years before the province would privatise the industry.

However, Mkhwebane found that only R3.6-million of the approved R17.5-million went into improving the living conditions of grooms at Phumelela’s Vaal Racecourse in the Free State. The balance of R13.9-million was channelled into the company’s accounts, reflected as accumulated profits in its 2002 financial statements.

As Chophelikhaya Simoto, from the South African Grooms Association, which represents more than 400 grooms in SA, told Mkhwebane:

Grooms are made to sleep with the horses in the stables and when they travel to races, they are made to travel with horses in a trailer that is drawn by a vehicle, thus putting their lives at risk… There are medical aid and retirement benefits for horses and not the grooms that look after them.”

The government also helped Phumelela acquire prominent racecourses beyond Gauteng for next to nothing. These include the Fairview and Arlington racecourses in Nelson Mandela Bay and the Vaal and the Bloemfontein racecourses in the Free State, as well as the Griqualand West Racing Club in the Northern Cape.

Mkhwebane has also taken umbrage at the tax levies on punters’ winnings that Phumelela enjoys. This is thanks to the regulation promulgated by the Gauteng provincial government. A 6% tax is levied on punters’ winnings on bookmaker bets and the Gauteng province donates half of this to Phumelela.

Since 1997, Phumelela has been awarded a total of R711-million. This money is intended to be used by the gaming firm to redress the socio-economic impact of gambling in SA, but Mkhwebane doubts this is the case.

She says government’s unfettered support for Phumelela has resulted in its market dominance, which distorts the playing field and bars new entrants — especially black individuals — from participating in the market.

The corporatisation of the industry in the Republic did not ensure participation of black people in the sport. It has and continues to be dominated by one minority race group, in particular whites, at the expense of the black majority citizens and constituencies who would otherwise be interested in the sport.”

However, the MoU concluded between the Gauteng provincial government, represented by Moleketi, and the Gauteng horse racing industry was only meant to cover the privatisation of that province’s racing industry. As Moleketi told Mkhwebane in an interview:

Any allegation that the MOU binds provinces other than the Gauteng provincial government is baseless and without merit.”

However, Mkhwebane’s report found that Phumelela used the MoU to “coerce” other provinces to privatise their horse racing industries.

Phumelela to haul Mkhwebane to court

In her recommendations, Mkhwebane asked President Cyril Ramaphosa to institute a ministerial committee that will set up an independent body, which will serve as a regulator for the horse racing industry. Mkhwebane wants the levy that is paid to Phumelela to be withdrawn and redirected to fund the regulator and the socio-economic development of the industry.

She also wants the Special Investigating Unit to investigate any taxpayer funds that might have been unlawfully awarded to Phumelela, and recovered.

Phumelela is not happy about Mkhwebane’s findings and recommendations. It is in the process of applying to the high court to have her report reviewed and set aside.

The company believes that the transfer of its horse racing assets is above board and rejects allegations of diverting funds intended for grooms to its balance sheet. In fact, Phumelela says that between 2002 and 2016 it spent R19.6-million refurbishing groom’s quarters — well above the R17.5-million in taxpayer money it received. DM


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