May 22, 2009

Dear Industry Stake Holder,

RE:     Free Riding Not Allowed

I enclose the Australian Racing Board's submission to the Productivity Commission's Inquiry into Gambling for your review. We believe that the inquiry comes at a critical time, with urgent reforms needed to maintain the funding base of the Australian racing industry so as to secure Australia's place as a leading thoroughbred nation and a major contributor to the Australian economy.

I came to the Chairmanship of the Australian Racing Board as someone with more than 30 years experience in the industry, having been at various times a racehorse owner, breeder and stud owner, race club Chairman, current State racing authority Chairman and current non executive director of the wagering operator the Tatts Group. My assessment is that the Australian racing industry faces the greatest challenge in our lifetime.

The wagering landscape in Australia is currently experiencing major changes, in particular, the rapid growth of new types of Australian wagering providers, corporate bookmakers and betting exchanges.

Australian racing and the Australian wagering market are financially interdependent, with product fees paid by existing licensed totalisators under licensing agreements accounting for more than 75% of industry revenue in some states and a major proportion in the others. Accordingly, if corporate bookmakers and betting exchanges are able to do as they please without due regard for the racing industry’s funding then there will be a devastating effect on racing's viability.

At risk is a significant industry. In its March 2007 economic report, IER highlighted that that the racing industry contributes more than $4.93 billion to the national economy and sustains over 47,000 full time jobs. Moreover, nearly 200,000 people or 1% of the Australian population are involved in the thoroughbred racing industry as a participant, employee or supplier. In terms of taxation revenue, $1.2 billion in taxes is generated annually for the Federal and State governments.

The time for our politicians, both Federal and State, to act is now; there is no time for navel gazing or procrastination. Consigning this issue to the too-hard file is not acceptable. 


Stripped down, the problem is not complicated, and the solution is not "rocket science"; all that is required is for the industry to be united for once and demand our politicians have some backbone and take their head out of the sand to face the issue and act on behalf of the hundreds of thousands of stakeholders in this industry.

The central plank of the required solution is for the Federal Government to mandate that all wagering operators offering wagering on the Australian racing product pay a product fee to the  state jurisdiction on which wagering is being conducted on their races. Individual pieces of State legislation being tested by the 'free riders' and the ‘pay what we like operators', is subjecting the industry to too much uncertainty. Crucially the federally endorsed mandate must enable the racing industry to set the fees payable having regard to objective criteria. ‘Pay what we like’ arrangements are not an option.
 
Is it worth remembering that the current commercial agreements under which totalisator operators pay product fees to the industry were arrived at in tripartite negotiations involving the government, industry and licence holders. As was appropriate, the racing industry was acknowledged as the content originator that made the wagering business possible and product fees were set that delivered fair returns back to the industry. This is in complete contrast to newer types of wagering providers who refuse to recognise the right of the racing industry to set its own prices for wagering on its product and adopt the principle of “pay as little as necessary”.

Other matters that must also be addressed are the issues of ‘totalisator odds’ betting and retail exclusivity. The most concerning recent development have been the moves by some corporate bookmakers to arrange for hotels and clubs to allow internet terminals to be installed for the hotel or club patrons to bet with them. We hear a great deal about newer operators ‘growing the pie’ but it looks blindingly obvious that cannibalisation of existing business from TABs is front and centre here. 

Currently the bookmaking operation of Paddy Power has announced that it will start operations in Australia with a 51% ownership of “Sportsbet”.  Paddy Power is recognised as one of the most successful and sophisticated betting operators in the world and it is not its presence per se that the industry should view with great concern. Instead, the arrival of Paddy Power should make us pause and examine the racing industry funding model that it has operated in overseas. As the former Chairman of the British Horseracing Board, Peter Saville, said several years ago, ‘the funding of Australian racing is something that British racing should emulate’, not the other way around.

Paddy Power has fired the first shot, naturally they have been aware of a vulnerable and divided betting market and can see the opportunity to pursue the business model on wagering that sees prizemoney levels in Britain languish at unacceptable levels and bookmakers opposing an increase in funding of Irish racing. The profits that this operation can expatriate to its Irish shareholders, no doubt is a major attraction.

My concern is that what will remain of our racing industry after the corporate bookmakers have been allowed to do as they please will be a skeleton of its current self. Corporate bookmakers will then move on elsewhere with the tide, only racing will suffer.

Currently totalisator wagering provides on average 6% return to the industry of turnover to fund Australian racing. International operators, betting exchanges and the myriad or corporate bookmakers are challenging the states’ race fields legislation seeking to pay only a small percentage of gross wagering revenue for the use of information to conduct their wagering business, incidentally, same product, same end use as the current agreement with totalisators

The wagering market in 2006/07 amounted to $12.849 billion of which $9.342 billion was wagered through totalisators that returned to the industry $560 million.  The racing industry should consider that if federal legislation is not enacted to protect the industry’s revenue and the corporates are successful in paying a minute fee, then cannibalisation of totalisator wagering revenue will be substantial.  As a way of illustration, let’s assume that the corporate bookmakers continue to pay a minimum fee as is the current situation, and are successful in attracting 30% of the current totalisator turnover. 

The difference in return to the racing industry of current totalisator revenue returned to the industry on a loss of 30% of existing turnover would amount to $168 million, in contrast to a corporate bookmaker’s contribution on their present claim would return $42 million this is a staggering industry revenue loss of $126 million. 

It should send a sobering thought and jolt the industry to the real world of corporate bookmaking.  A revenue loss off $126 million is in excess of the total revenue received currently by the Queensland racing industry.

The notion that the wagering market will see substantial growth with the expansion of corporate bookmaking is a fanciful idea.  For instance, the current loss of revenue from a transfer of 30% of totalisator turnover to corporate bookmakers would need to increase corporate bookmaking turnover to $8.4 billion annually for the industry to recover this lost revenue.

Much has been written by journalists and racing administrators about the success and the great opportunities for racing in Hong Kong, Singapore, Japan and of late, Turkey.  They have much in common, great facilities, top quality racing surfaces and superior prizemoney.  This is only made possible by all parties paying their fair share to allow racing to prosper.  ‘Free riding’ is not allowed.

Andrew Harding the CEO of the Australian Racing Board and myself have discussed this issue with the Productivity Commission, the AWU, and are continuing to engage Federal and State politicians. However, for the industry to achieve what it needs all of the industry’s stakeholders must take up this issue.

Yours sincerely

R. G. BENTLEY
Chairman
Australian Racing Board