Will Davies pander, push or play the Lotto?

On Friday trade and industry minster Rob Davies, reconfirmed the award of the third national lottery license to Ithuba Holdings. 

The move comes after former operator Gidani, took the minister’s decision to grant Ithuba the license in 2014 on judicial review. In a ruling handed down in early July Judge Neil Tuchten found the award of the license to be invalid and inconsistent with the Constitution, but gave the minister 31 days to address the court’s finding. 

Late on Friday afternoon Davies reconfirmed the award of the lottery to Ithuba, after concluding a new licence agreement. Gidani however intends to once again challenge the minister. “We are extremely disappointed by the decision,” said Gidani’s head of head of Legal and Compliance Dawid Muller. 

He confirmed that the company would be going back to the courts to plead its case. In a statement the ministry said: “While the High Court set aside the minister Davies’ decision to issue the licence to Ithuba and the ensuing licence agreement, it refused to set aside the minister’s decision to select Ithuba as the preferred bidder.” Davies elected to renegotiate the license with Ithuba on the basis of its selection as the preferred bidder, addressing the concerns the court raised with the issuing of the 2014 license. 

“Minister Davies is confident that now that the process has been finalised, Ithuba will continue with its plans to operate and invigorate then national lottery and ensure continued contributions to good causes,” the statement said. Ithuba chief executive Charmaine Mabuza said the decision was “testament to the fact that our bid was exemplary, and has passed the scrutiny of even the highest courts in the land”.

The new licence agreement will now replace the initial licence issued in November 2014 and Ithuba will continue to operate the lottery.

Meanwhile, Ithuba has rubbished claims that it will not be able to achieve its sales targets and pay what is owed to the National Lottery Distribution Trust Fund.

The lottery operator must pay part of the revenue raised from the lottery to the fund. It disburses this to charities and is a crucial source of funding for thousands of nongovernmental organisations. The fund is managed by the National Lotteries Commission.

Ithuba was awarded the licence last year, but the previous operator, Gidani, took the minister’s decision on judicial review.

The minister did not respond to requests for comment regarding the allegations or the judgment. But the department’s spokesperson, Sidwell Medupe, said the department wanted to respect the court process and would comment in a “holistic” manner after the 31 days had passed.

Not irrational
Judge Neil Tuchten ruled that the decision to choose Ithuba as the preferred bidder was not irrational, but he found the decision to award the licence to Ithuba “inconsistent with the Constitution and invalid”, and set it aside. He said the minister acted beyond his powers by entering into an agreement with Ithuba after it had failed to pay the required R125-million performance bond when signing for the licence.

The licence agreement was signed on November 24 last year and Ithuba only secured the performance bond on May 29 this year.

In light of this, the judge found that, at the time, the minister “could not have been satisfied”, given the “fixed rand commitment”, that Ithuba had the financial resources necessary to conduct the lottery.

“It is not open to the minister to contract with the successful applicant on the basis that the successful applicant will try to demonstrate its financial credibility after the award to it of the licence,” he said.

Ithuba has committed to paying R16.5-billion over the lifetime of the licence to the trust fund, and a reported R1.57-billion in the first year. In its licence applications, it proposed to pay a lower percentage contribution to the fund – 27.4% – while Gidani had proposed 34%. But that was based on a substantial growth of the lottery itself, with Ithuba forecasting revenues of more than R85-billion, much more than Gidani’s R48-billion.

The judge questioned the imposition of a fixed contribution on Ithuba, particularly because it was based on a need to grow sales substantially for it to meet its promised payments.

Expert opinion
Expert opinion given to the minister by Genesis Analytics said Ithuba was far more dependent than Gidani on expanding the lottery to increase trust fund payments because of its lower percentage contribution. It calculated that Ithuba would need to achieve sales 25% to 27% higher than Gidani’s to make similar contributions to the fund.

Genesis said the figures were unrealistic and it seemed “unlikely that it could honour such payments without losing money and going insolvent”.

According to the National Lotteries Commission’s website, during the period 2008 to 2014, between R1.5-billion and R1.6-billiion was paid to the trust fund each year.

Everything will depend on how the minister interprets the judgment. Davies said in a statement after it was handed down that the judge had set aside the licence because certain terms relating to the guarantee and performance bond were invalid and that he would resolve these issues.

But Gidani is prepared to go back to court if the minister decides simply to remedy what the court viewed as problems in the licence agreement and reaffirms awarding the licence to Ithuba.

The company’s legal and compliance head, Dawid Muller, said Gidani was concerned that it had heard nothing from the department. He said Gidani stood ready to take over the lottery on an interim basis, or to negotiate a third licence.

‘Mischievous attempts’
The spokesperson for Ithuba, Anda Ngani, said the “unceasing attempts to create confusion on the judgment are nothing but mischievous. The judgment delivered in June has been very clear about the judge’s thoughts about the selection of Ithuba – that it was indeed correct.”

Hosken Consolidated Investments (HCI), an important backer of Ithuba, has agreed with the department’s apparent interpretation of the judgment. The company revealed in its results earlier this year that it had agreed to fund Ithuba “by way of a high-yielding five-year preference share and loan”. The deal with HCI was crucial to helping Ithuba secure the performance bond it needed.

The chief executive of HCI, John Copelyn, said he was confident the minister would adhere to the judgment and correct the parts of the licence that were invalid. “Ithuba’s okay and in consequence our funding arrangements behind them are also,” he said.

Since the judgment a month ago, an anonymous source has sent emails to departmental officials, the commission and the media claiming that Ithuba is not meeting its financial commitments.

The commission refused to comment on the allegations. “All matters pertaining to the licence are sub judice. The [commission] can therefore not comment,” said commissioner Thabang Mampane.

“With regards the performance of Ithuba, we reserve comment. Suffice to say that the licence details operations and consequences should there be noncompliance.”

Ithuba denied that its performance was not up to scratch.

‘Gravely concerned’
Ngani said Ithuba was “gravely concerned by what appears to be a vested interest [in the emails] to weaken Ithuba’s efforts to continue with its mandate” to deliver an efficient national lottery and “serve as a vehicle to raise significant funds for good causes”.

But the emails claimed that, based on Ithuba’s sales figures, it would fall well short of the guaranteed payments it owed the trust fund. Figures provided in the emails show that, by the eighth week of its operations, Ithuba would already be R147-million shy of the required guaranteed payment to the fund.

Ngani said that, over the past two months of its operations, “Ithuba can confirm that all its contributions to the [fund], as required of its licence agreement, have been duly paid”.

Ithuba does not wish to be drawn into a mudslinging match with the outgoing operator, she said.

She said Ithuba reports to the commission, which publishes all monies contributed to the Fund by the operator annually when it publishes its annual report.

The operator’s lottery roll-out has experienced widely reported problems, with people complaining about machines being offline and difficulties in claiming winnings.

Ithuba said many of the “launch glitches have been ironed out” and it was making considerable progress in achieving its ambitions to increase the lottery footprint by 34%. 

It had created nine millionaires in eight weeks and now had more than 8 000 terminals in the field, with a target of 9 000 countrywide, she said, “far exceeding the number of those of the outgoing operator at the height of their operations”.

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Lynley Donnelly
Lynley Donnelly
Lynley is a senior business reporter at the Mail & Guardian. But she has covered everything from social justice to general news to parliament - with the occasional segue into fashion and arts. She keeps coming to work because she loves stories, especially the kind that help people make sense of their world.

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