Someone has to pay to play
'HE is probably, after 300 years of bloodstock breeding, the ultimate development of the thoroughbred horse." This is how John Oxx contextualised Sea The Stars, champion of his generation and -- comparatively by any measure -- many generations before him.
Here we had a truly international champion bred in Ireland, trained in Ireland, ridden by an Irishman and retired to stud in Ireland. The illustrious exploits of Sea The Stars last year brought to a fitting close a decade that showcased Irish racing at a level rarely, if ever, matched across both Flat and National Hunt codes.
Sea The Stars was the popping cork of a champagne noughties era that witnessed Irish horses win five Epsom Derbies, three Prix de l'Arcs, five Champion Hurdles, and five Grand Nationals . In 2009, three of the top four rated horses in the world were Irish-trained while the top three were all Irish-bred. A fitting tribute to an industry that supports some 16,500 jobs.
However, to coincide with the release of Tim Burton's Alice in Wonderland this weekend, nothing is precisely as it seems. For just as the Celtic swell lifted all boats, funding for horseracing has suddenly and dramatically receded (to the tune of 23 per cent in the last two years) and no one can predict at this stage how deep the rabbit hole goes.
The decline has led to Horse Racing Ireland in recent weeks publicly targeting the betting industry as an area of untapped potential to shore up the deficit. HRI's repeated speculation as to the value of the online and telephone betting sector has in turn ignited a bitter crossfire of words with leading Irish bookmaker Paddy Power (accusing HRI of "wild misstatements") in particular over the issue of funding for racing.
This might be an open-and-shut affair if both sides were fixed on the same point but with each accusing the other of more red herrings than a Clogherhead trawler, the debate is turning into a bit of a Mad Hatter's Tea Party which is serving up more heat than light.
With horse industry employment, racecourse attendances, prizemoney, bloodstock sales and on-course betting as well as government funding all in significant decline, it is hardly surprising that, as industry guardian, the HRI should make a bold attempt and throw down the gauntlet in an effort to redress the position. Given the historic links between gambling and racing, it is perhaps unsurprising that the betting industry, and in particular online and telephone betting, should be their target.
HRI believes online betting should be taxed so that racing can become 'self-financing' and not reliant on the future largesse of a cash-strapped government, but it is the estimate as to the value of the pot that provoked a public reaction from Paddy Power chief executive Patrick Kennedy.
HRI claims the value to be around €1.7 billion while Paddy Power is adamant the figure is less than half that. As there are no audited returns available, the closest we can get to the real figure comes from a very recent, bookmaker-commissioned, PricewaterhouseCoopers report which surveyed all the significant online and telephone betting operators including Bet365, PartyGaming, Boylesports, Ladbrokes, William Hill and Paddy Power and estimates the value at €797m (split €558m online, €239m telephone).
HRI chief executive Brian Kavanagh, however, continues to stand by his figure of €1.7bn claiming this includes activity on the exchanges and spread betting. Stewart Kenny, founder of Paddy Power, insists however that HRI are simply "plucking figures out of the sky" saying that "even with the inclusion of exchanges and spread betting the figure wouldn't get anywhere near the HRI claim."
At this very moment the value of the market is academic because even if a definitive figure was arrived at, there is no means to implement taxation under current legislation. The Department of Justice, Equality and Law Reform have had the area of internet betting on their radar for some time as an offshoot to the regulation of casinos. A report by the Casino Committee concluded that regulatory systems are lagging behind technology, with governments globally stymied by the fact that the internet doesn't stop at the border.
In fact as international jurisprudence is still evolving there is no single international or even EU model for regulating online betting. The UK regulates by blocking advertising. In Italy, they block the ISPs of gambling sites. France is currently re-regulating, but advertising online gambling is illegal. In the US, the regulation is imposed on banks (not to transfer funds to online bookmakers or gaming companies) while in China internet gambling has always been 'illegal'.
At this stage we don't as yet have a government policy in Ireland and even if legislation were introduced to tax online betting how would it be implemented?
The irony of all of this is that Paddy Power is not objecting to paying tax on its Irish internet business on the basis that, says Patrick Kennedy, "it can be applied in a manner which will not put it at a competitive disadvantage."
The devil here, of course, is in the detail because of all the bookmakers available to Irish consumers online only Paddy Power and Boylesports are domiciled here. The rest have their servers registered offshore.
The Government's dilemma is obvious. To tax the online operations of those operating here only could easily lead to those operators also migrating offshore, meaning the loss of 250 jobs in the case of Boylesports and 650 in the case of Paddy Power. In the case of Power, that would mean a loss of €44m currently being contributed to the exchequer annually.
But then, to provide a level playing field and tax all operators available in Ireland via the internet means the Government would need to successfully introduce and implement a taxation procedure no jurisdiction in the world has yet perfected.
The biggest bone of contention between HRI and the bookmakers is around the issue of racing becoming "self-financing". Brian Kavanagh's position on this is simple. "It's a question for Government -- do you want a world-class racing and breeding industry?" And if so, he proposes that all tax on betting be returned to racing.
"It's an accepted principle internationally that betting funds racing," he says. In recent years, owing mostly to a decrease in the rate of betting tax (now 1 per cent and the lowest in the world) and the rapid growth of the largely untaxed telephone and online market, the tax take by the Exchequer has been declining.
It has shrunk from €68m stemming from a turnover of €1.3bn in 2001 to the latest figures revealing just €30m on a turnover swollen to over €5bn. Even the reduced funding for racing this year amounts to €47m -- so it is easy to understand HRI's anxiety to speed up the means for taxing the internet product.
However, Paddy Power has refuted the viability of HRI's claim. "Simply, there is no pot of gold," says Patrick Kennedy, who points to the fact that only 15 per cent of bets taken in the shops are on Irish racing and that reduces to 11 per cent for telephone and internet channels.
"At a one per cent turnover tax rate on Irish horseracing, the maximum which could be generated from bookmakers would be €6 million, of which a maximum of €1 million would be generated from internet/offshore sources."
But Brian Kavanagh is not proposing a tax return purely on Irish racing, rather on all turnover, counter-claiming that "the figures indicate that 85 per cent of turnover in the shops is on horse and greyhound racing, and the figure for Irish racing simply reflects the scale of the British product." This doesn't wash with bookmakers. "No other sport in the world levies betting from other sports to support their local horse racing sector," says Kennedy.
This whole debate as to what should or shouldn't be taxed is simply a result of the changing geography of betting over the years. It used to be that having a bet was almost exclusively the domain of horses and dogs, with the occasional football coupon at the weekend.
Nowadays, and with the explosion of interest in betting and wall-to-wall coverage of all sports and novelty events, betting has extended as far as American politics and the Eurovision, muddying the connection between betting tax take and its direct transfer to support the domestic racing product.
Comparisons with many other jurisdictions where betting turnover is high -- like Hong Kong or France -- is a misnomer because they operate on the principle of a Tote monopoly, so the UK model is the closest parallel. Interestingly, in UK betting shops there are two forms of taxation. Bookmakers pay 15 per cent of the gross win business (called gross profits tax) to the Government. They also pay a second tax (referred to as 'the levy') which is calculated as 10 per cent of gross win derived from races run in Britain. This means there is no levy on bets on Irish horseracing struck in UK shops. Also no levy on any other sports. This levy is then directed to fund the British Horseracing Board (BHB).
To demonstrate how times have changed we need only go back to 1985 to find a time when government funding did not exist at all for horseracing in Ireland. Then, in 1986, a sum of £318,000 was granted by Minister for Finance Alan Dukes, specifically to boost National Hunt prizemoney.
Government support of racing peaked in 2002 when Charlie McCreevy endeavoured to copper-fasten funding for racing by ring-fencing the betting tax (then at 2 per cent). Funding from government during the last decade has been in excess of €500m and has played a large part in the performance of the industry on the international stage. But not only has the economic wind changed, the political wind has changed also and is blowing an icier chill in this direction.
Racing's portfolio has been moved outside the Department of Agriculture and into the Department of Arts, Sport and Tourism. Instead of presiding ministers Joe Walsh and John O'Donoghue, racing now has Martin Cullen who is not as closely connected to the sport as his predecessors.
While Charlie McCreevy wore his heart on sleeve where racing was concerned, Brian Lenihan does not. There was a strong expectation that betting tax would move to 2 per cent at the last budget and some disappointment when it didn't as it would have doubled the tax take. The 2 per cent, by the way, was strongly opposed by smaller retail bookmakers who are already suffering badly with the closure of over 130 shops within the last year and the loss of 560 jobs.
And therein lies the third major upheaval from the racing perspective. Racing benefited from sympathetic government handling and generous funding when the economy was booming. Now, 180 degrees later, every aspect of our economy is suffering. It's the economy, stupid. And it is this more than anything which is bringing funding for racing under much closer scrutiny.
Brian Kavanagh is right to ask the question of Government whether they want a world-class racing and breeding industry. It is something we can be proud of on many fronts. But what Government wants and what Government needs in the present climate are very different things.
Provoking the bookmakers into a debate on taxing the hitherto untaxed biggest growth area in betting (an industry largely recession-resilient) is a tactically astute manoeuvre in the direction of securing funding.
However, when you pick up one end of a stick, you also pick up the other. And the other in this instance is to provoke the bookmakers to call in return for "a proper debate on the appropriate level of funding for HRI, and the sources of that funding," with Stewart Kenny going further by accusing HRI of having "become junkies for State support and are not prepared to wean themselves off."
HRI can brace itself for a more persistent scrutineering of its performance than in the boom times and whilst on one hand it can showcase some of its achievements listed here, it is disconcerting on the other hand to read recent remarks by 14 times champion jockey Tony McCoy.
"For jockeys, there have been more changes (in the last 15 years) in England than in Ireland. In Ireland, it is a joke. It actually makes me not want to go there at times. A couple of weeks ago I went to one racecourse in Ireland and couldn't have a shower afterwards. It wasn't that the water was cold, it wasn't working." There will be many preferring to use examples like McCoy's to question the fundamentals of racing's entitlement and the value being added.
Robert Nardelli, CEO of Home Depot, the most successful retailer in US history, said when he took over the reins: "What so successfully got us from zero to $50bn, isn't going to get us to the next $50bn." In a different, more Darwinian climate, it is imperative that racing needs to think about itself differently. In the UK they are making an effort with the Racing For Change initiative. It strikes me that instead of fighting with Paddy Power, HRI and racing might be better off collaborating by seconding its marketing department.