South Africa: The House Shouldn't Always Win

Last Updated: 3 February 2012
Article by Michal Johnson and Jessica Griffiths

Without Prejudice December 2011

The National Lottery Board (NLB) holds in trust approximately R6 billion which it has accumulated over the last three years. Given that the NLB is now declining applications from charitable institutions based on "budgetary constraints", the duties of the NLB and their fulfilment need to be examined.

The National Lotteries Board Act 57 of 1997 established the NLB as a juristic person. In terms of s14(2)(e), certain amounts of the money raised by the National Lottery must be paid into the National Lottery Distribution Trust Fund (NLDTF), where it is held in trust for the purpose of distribution to a range of charitable projects.

The Act dictates that set percentages must be allocated to charitable institutions or other institutions promoting sport and recreation, arts and culture and miscellaneous other projects, which are intended to develop the community or uplift the poor. s28(1), s29(1) and s30(1) all emphasise that allocations of funding should be distributed "fairly and equitably amongst all persons who meet the prescribed requirements".

In order to give effect to this, the NLB is required to set up "Distribution Agencies" to consider applications for allocations by charitable institutions. Prior to the publication of regulations by the Minister of Trade and Industry, the Distribution Agencies developed and applied their own guidelines, often rigidly.

During August 2010, the Western Cape High Court was called upon to review decisions taken by the NLB to reject a number of applications for funding. These were rejected on the basis that they had not complied with the technical guidelines established by the Agencies.

The High Court, in adjudicating the matter of South African Education and Environment Project and Another v National Lotteries Board and Others, held that these guidelines were not prepared and promulgated in accordance with the Act and as such any attempt to interpret them as peremptory rules would be ultra vires and unlawful. While the guidelines were useful tools for the Agencies in the uniform consideration of applications, they could not constitute binding regulations. The court held that the guidelines served to restrict the power of the Agencies to distribute as much of the funds as possible in accordance with its mandate and the object of the legislation. The decisions were therefore set aside and the NLB was ordered to reconsider them.

The presiding judge also indicated that he had reservations about the effective functioning of the NLB. He expressed his dissatisfaction with the fact that charitable institutions had to wait so long for access to be granted to funds they were prevented from delivering much needed social services. The NLB lodged an appeal.

Following the initiation of the case (but before judgment was granted), two sets of regulations came into force during July 2010. The first of these was the Regulations Relating to the Allocation of Money in National Lottery Distribution Trust Fund. Paragraph 3 of the regulations sets out the requirements to qualify for funding. These requirements include that the entity must be a juristic person established for charitable, benevolent or philanthropic purposes, the entity's income and property cannot be distributed to its members except as reasonable compensation for services given, and the project must be financially viable and must produce significant results which would not otherwise have occurred.

On that same date, the second set of regulations was published: the Direction and Procedure for the Distribution Agencies in relation to the Distribution of Funds from the National Lottery Distribution Trust Fund.

Part I(2) of the latter regulations requires that the Agencies prioritise developmental needs, enhancement of social and moral responsibility, as well as economic viability of programmes designed to advance rural, underprivileged or poor communities. Further, at least 50% of the total allocation available for distribution to charitable institutions should be allocated to areas including training and infrastructure for the elderly, sick or vulnerable persons, orphans, and disabled and rehabilitation homes, and the provision of educational facilities, adult literacy programmes and mentoring skills development.

Part II sets out the procedure for applications and the adjudication procedures to be followed by the Agencies. The Agency may grant the application with or without conditions or reject the application and is required to advise the applicant within 30 days of its decision. If the application is declined the Agency is also required to furnish its reasons.

Despite the regulations coming into force more than a year ago, it has become apparent that, in practice, applications are not being addressed within the allotted time period and some organisations are waiting years for responses to their applications. Given that these organisations rely on funding for their continued operation, many may be forced to fold as a result of the NLDTF's failure to respond.

Contrary to what has been reported, most charitable organisations do not rely solely on funding received from the NLB but rather to cover only a percentage of their operating costs. We have seen in practice that when applying for a small amount, some applicants have been advised by the NLB to apply for their full budgetary shortfall only for the application to be declined altogether at a later stage.

In September the Supreme Court of Appeal heard the appeal filed by the NLB against the decision taken in the high court. In the matter of National Lotteries Board and Others v South African Education and Environment Project and Another, the SCA dismissed the NLB's appeal on the basis that the High Court was correct to find that the guidelines established by the Distributing Agencies should not have been applied in such a way as to prevent the NLB from achieving its legislative mandate. The court noted that the NLB has failed to meet its target of allocating the entire balance of the funds held in the NLDTF. The result is that there has been massive under-expenditure of public money, which it is required to allocate to charitable institutions.

Cachalia JA reiterated that the NLB holds public funds in trust for the sole purpose of allocating them to deserving institutions. The funds do not belong to the NLB to be distributed as and when it sees fit. The NLB is required to ensure that the entire balance of these funds is distributed to all institutions that make application and meet the necessary requirements.

Writing the majority judgment, he emphasised that there is an administrative duty on the Agencies to consider and justify every decision on an application individually. Where guidelines are applied too rigidly, it amounts either to a failure to exercise discretion or to an improper/unlawful exercise of discretion. The court stated that the rigid application of the guidelines is one of the main reasons for the NLB's under-expenditure.

In light of the Act, the regulations and the case law, it is evident that the NLB has a duty to distribute the funds held in trust equitably among all applicants that meet the criteria, and that each application must be properly considered against the requirements. It no longer befalls the NLB to make its own guidelines and employ them with an unfettered discretion.

Applicants who rely on such funding do have some right of recourse against the NLB, but this is only once the application has been declined or ignored. The applicant would be entitled to lodge an appeal with the NLB for the reconsideration of its application and thereafter would be able to approach the courts for judicial review of administrative action. However, as this can only occur once the application has been declined or ignored, and given that court applications can be so lengthy, this would not assist an organisation that is in desperate need of the funding.

Charitable organisations seeking funding should be in a position to apply for it without fear that a delayed response or unreasonable decline is inevitable. Every applicant who meets the regulatory criteria should be given a portion of the funding. In cases such as these, organisations should not have to gamble for funds in a situation where "the house" always wins.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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