Australian racing: Reining in the free-riders

Will Davies

Until the Gold Cup comes around again in November, the majority of Australians will probably take little notice of horse racing matters. However, those with more than a passing interest in the Australian racing industry will be watching closely for the outcome of the Interactive Gambling Act (IGA) review, currently being undertaken by the Commonwealth Department of Communications, Information Technology and the Arts (DCITA). The operations of ‘offshore’ bookmakers taking bets by phone or ‘interactively’ over the internet have caused quite a storm in the industry over recent years and the review of the IGA is seen by many as a chance to secure the future of racing by reining in these alleged free-riders. The offshore bookies themselves claim the fuss is motivated by nothing more than commercial interests. So what is really going on?

BACKGROUND

The IGA was introduced in 2001 to ‘address community concerns about the availability and accessibility of interactive gambling in Australia’ (DCITA 2003, p. 1). The Act focused largely on the issue of ‘problem gambling’, but the current review will be considering both the ‘social and commercial impact of interactive gambling services’ (DCITA 2003, p. 4). Submissions to this review from all sides of the Australian racing industry—a powerful alliance of bookmakers, racing boards and jockey clubs—have been damning in their treatment of one particular commercial issue, that of ‘offshore’ bookmakers.

The racing industry is funded almost entirely by gambling revenues.

At present, the industry is funded almost entirely by gambling revenues, recycled through payments from the major Totalizer Agency Board (TAB) companies, each of which have monopolies for both off-course retail outlets and on-course totalisators (where bets are pooled and paid out to winners, minus commission) in their respective states. For example, NSW Tab paid $192 million to the NSW racing industry in 2002, which represented approximately 80 per cent of the industry’s total funding in the state (Tab Ltd 2003, pp. 4, 7). This money is paid to NSW Racing Limited, whose role is to represent the industry in dealings with NSW Tab (NSW Thoroughbred Racing Board 2003, p. 7). NSW Racing Limited allocates the money between the three codes of racing: thoroughbred, harness, and greyhound. The thoroughbred racing authority (NSW Racing), which is responsible for the regulation of thoroughbred racing and the operation of the various state race courses, pass the Tab funds on to owners, in prize money and subsidies. The owners, in turn, bear the costs of race entry, such as jockeys and trainers wages, and veterinary expenses. In this way, gambling revenues trickle down to support the foundations of the industry.

The most comprehensive study of the economic significance of the Australian racing industry, commissioned by the Australian Racing Board in 2001, estimated that 249,000 Australians participated in the thoroughbred racing industry, which created an annual ‘gross economic impact’ of $7.7 billion (ARB 2001, p. 1). This put employment in the industry ahead of industries like Communication Service industries, which employed around 120,000, and pubs, clubs, bars, and taverns, which employed around 140,000 combined (ARB 2001, p. 20). The report also emphasised the regional importance of the industry: 67 per cent of racing-related jobs were in ‘non-metropolitan areas’ (ARB 2001, p. 4).

Offshore bookmakers present a problem for the funding of the industry, because although they derive profits from Australian racing, they are under no obligation to recycle funds back into the sport. For this reason—and also because some bookmakers face a lower regulatory burden overseas—they have a competitive advantage that enables them to profit at the expense of domestic companies, and hence at a cost to the domestic racing industry. This problem has been exacerbated in the last few years by the growing popularity of betting exchanges such as Betfair, which have hugely increased the competitive pressure on Australian bookmakers, something to which I return.

The issue is complicated further because each state in Australia independently regulates bookmaking businesses. The resulting inter-state competition has led to the bizarre situation of ‘offshore’ bookmakers actually being merely ‘off-state’, operating from places like the Northern Territory or Norfolk Island, where they face no obligations to contribute to the funding of racing.

PARALLELS WITH THE UNITED KINGDOM

In Australia the smart money is already going offshore.

The British government faced similar circumstances in 1999 when the country’s major bookmakers took flight overseas to avoid the United Kingdom’s 9 per cent duty on gambling turnover. In a classic ‘race to the bottom’ scenario, the government hurriedly submitted to the pressure of these internationally mobile businesses by abolishing the duty in 2001. From a commercial perspective this proved to be a great success: the new ‘liberalised’ United Kingdom gambling turnover from punters both at home and abroad has since boomed (HM Customs and Excise 2003, p. 4–5). On the flip side, the social rationale for the original duty—to reduce harmful gambling—has been lost. Further, by drawing business from overseas the move puts regulators in other countries like Australia under greater pressure to follow suit.

In Australia the smart money is already going offshore and, as internet access increases and punters become more aware of the better prices available online, the not-quite-so-smart money will not be far behind. This offshore leakage inevitably threatens the Australian racing industry and the jobs it provides often in rural areas. The Australian Racing Board estimates that loss of as little as 3 per cent of turnover would reduce racing funds by $115 million, ‘causing a significant rationalisation of country race clubs’ (ARB 2003, p. 14).

OPTIONS FOR THE IGA REVIEWERS

One solution would be to imitate the British and join the liberalisation race: cut regulations, cut taxes and retain revenues through the increase in turnover that such liberalisation would bring. Given that one goal of the IGA was to address concerns regarding the extent of gambling, a solution which encourages it further would seem less than ideal. At the other extreme, the government could attempt to close its borders to prevent punters resident in Australia placing bets overseas. This might solve the problem in theory but would be hugely difficult to enforce.

A far more preferable compromise, and one suggested by several contributors to the IGA review, would be to require offshore betting businesses to hold Australian licences (Australian Racing Board 2003, p. 16–17; Australian Jockey Club 2003). In this way, offshore bookmakers would only be able to tap into the Australian market if they contribute to racing in the same way as their domestic rivals and adopt the same levels of regulation aimed at discouraging problem gambling. Similar conditions could be required of interstate bookmakers, although given the need to maintain investment and employment in these areas, such conditions could be offset by commercial incentives for businesses, such as tax breaks, that will not distort racing industry funds.

Although enforcing such licences on overseas companies might again seem difficult, there are two main reasons why it is likely to be effective. First, offshore bookmakers may be branded as ‘parasites’ by their opponents, but supporting the racing industry is clearly in their own long-run commercial interests. For example, Betfair is currently voluntarily taking part in ‘product fee’ negotiations with the ARB. In this sense, the role of government is simply to solve the collective action problem that competitive firms naturally have difficulty overcoming.

Bringing offshore companies into the fold will generate competition in the betting market.

Second, and more important, is that bringing offshore companies into the fold will generate competition in the betting market and reduce the need for punters to access offshore, non-licensed companies. The TAB companies may provide most of racings funding, but this is simply a virtue of their monopoly position. It would be far preferable to have a competitive market, where firms all contribute to the racing industry, but otherwise remain free to offer the best prices to customers. This also helps sidestep the thorny question of whether or not the government can effectively close its borders to overseas punters.

It could be argued that this solution would increase gambling problems, but this would be misguided. Given the difficulty in preventing business being lost overseas in an uncompetitive environment, bringing overseas bookmakers into line with Australian standards on limiting the harm of gambling would actually increase governments’ capacity to deal with the problem. Further, in 2001–2, of the remarkably high $1,016 a year spent on gambling per Australian adult, only 13 per cent was spent on racing and sports betting, or ‘wagering’, compared to 59 per cent on poker and gaming machines, or ‘gaming’ (Australian Gambling Statistics 2003). Also, between 1997 and 2003 growth in wagering turnover was less than 2 per cent per annum, despite growing online access, compared to 14 per cent annual growth in gaming turnover (Tab Ltd 2003, p. 14). Therefore anyone who tries to reduce problem gambling by targeting wagering is barking up the wrong tree: gaming, not wagering, is Australia’s main gambling problem.

BETTING EXCHANGES

While free-rider concerns are perfectly legitimate, domestic Australian bookmakers are also trying to use the IGA review to advance their commercial interests by eliminating competition from the new online betting exchanges. Traditional bookmakers worldwide have been threatened with this growing phenomenon, which allows punters to bet directly with each other, thereby removing both the need for a bookmaker and the bookmaker’s profit source. Even taking into account the commissions charged by these betting exchanges, shrewd punters are generally able to obtain better prices on exchanges than from traditional bookies.

Traditional bookmakers have put forward many reasons as to why these exchanges should not be allowed, all of which can be easily challenged. Critics object to the opportunity to ‘lay’ a horse on a betting exchange, which means accepting a bet from another punter in the same way as a bookmaker does, which provides an opportunity to back a horse not to win. Their argument is that this can encourage devious behaviour on the part of racing insiders, but incentives of this kind have always existed, since higher odds could be obtained in future races through such a practice. Also, profiting from a bad performance was already possible via spread betting, which allows a punter to bet ‘high’ or ‘low’ on an expected outcome, as predicted by the spread betting firm, and therefore profit from an underperformance by going low.

Bookmakers also argue that betting exchanges put less money back into the sport.

Bookmakers also argue that betting exchanges put less money back into the sport. Licensing would largely solve this problem as I have argued. Admittedly, the precise costs exchanges should face remain ambiguous, because they derive profits from commissions based on each customer’s net winnings. This means that profits are not related to turnover in the same way as for traditional bookmakers, who will have an expected profit margin on each bet. However, British regulators have already done most of the necessary homework on this question (see HM Customs and Excise 2003, p. 9-11).

Another argument bookmakers make is that exchanges increase ‘problem gambling’ due to the higher level of ‘interactivity’ (NSW Department of Gaming and Racing 2003, p. 1). Since placing bets after an event has started (called ‘in-running’) is currently illegal in Australia—a restriction Tab Ltd would ironically like to see removed for itself—exchanges have very little in the way of ‘interactivity’. In fact, it could be argued that they reduce risk in allowing punters to hedge their bets, by laying a horse they have previously backed, or vice versa. Overall, it is hard to disagree with Betfair’s argument that ‘claims that betting exchanges pose a threat to the integrity and funding of sport are commercially motivated’ (Betfair 2003, p. 9).

CONCLUSIONS

The IGA review is an opportunity to safeguard the future of Australia’s world class racing industry, by ensuring that all businesses profiting from racing support the foundations on which these profits rely. The review is also an opportunity to potentially undermine the funding of racing by pandering to the entrenched commercial interests within the current system. The free-riders may need to be reined in, but they should not be excluded from the race.

REFERENCES

Australian Bureau of Statistics 2002, ‘Special Article – Gambling in Australia’, Yearbook Australia 2002 [Online], Available: http://www.abs.gov.au/Ausstats/abs@.nsf/0/99d3b5096368c2e9ca2569de002842b7? [2004, Aug 6].

Australian Gambling Statistics 2003, ‘Australian Gambling Expenditure’, Tasmanian Gaming Commission [Online], Available: http://www.lotteryinsider.com/stats/expend.htm [2004, Aug 6].

Australian Jockey Club 2003, Submission to the Review of the Commonwealth Interactive Gambling Act, May [Online], Available: http://www.dcita.gov.au/download/0,2720,4_114229,00.doc [2004, Aug 6].

Australian Racing Board (ARB) 2001, Size and Scope of the Australian Thoroughbred Racing Industry, December [Online], Available: http://www.australian-racing.net.au/SizeandScopeStudy.pdf [2004, Aug 6].

Australian Racing Board (ARB) 2003, ‘Review of Issues Related to the Commonwealth Interactive Gambling Regulation’, Submission by the Australian Racing Board, Australian Harness Racing Council Inc and the Australian and New Zealand Greyhound Association Inc, April [Online], Available: http://www.dcita.gov.au/download/0,2119,4_114178,00.doc [2004, Aug 6].

Betfair 2003, Submission by Betfair to the Department of Communication, Information and the Arts, 2 May [Online], Available: http://www.dcita.gov.au/download/0,2720,4_114237,00.pdf [2004, Aug 6].

DCITA (Department of Communications, Information Technology and the Arts) 2003, Review of Issues Related to Commonwealth Interactive Gambling Regulation: Call for Submissions [Online], Available: http://www.dcita.gov.au/download/0,2720,4_113452,00.pdf [2004, Aug 6].

HM Customs and Excise 2003, The Modernisation of Gambling Taxes: A Report on the Evaluation of the Gross Profits Tax on Betting, May [Online], Available: http://www.hmce.gov.uk/forms/graphics/gambling.pdf [2004, Aug 6].

NSW Department of Gaming and Racing 2003, Submission by the NSW Department of Gaming and Racing: Section 68 – Review of Interactive Gambling Act 2001 [Online], Available: http://www.dcita.gov.au/download/0,2720,4_114129,00.pdf [2004, Aug 6].

NSW Thoroughbred Racing Board 2003, Annual Report [Online], Available: http://www.racingnsw.com.au/pdf/2003_Annual_Report-screen.pdf [2004, Aug 6].

Tab Ltd 2003, ‘Strengthening the IGA by Removing the Parasites’, Tab Limited's Submission to the Commonwealth Interactive Gambling Review, April 28 [Online], Available: http://www.dcita.gov.au/download/0,2720,4_114112,00.pdf [2004, Aug 6]).

Will Davies is currently studying for a Masters degree at the University of Sydney. His academic and professional experience is in the fields of economics and political economy, but his interest in racing arises from his experience as a semi-professional bookmaker in the United Kingdom.