BHA Chairman Paul Roy’s letter to Government over the 47th Levy Scheme.
26 November 2007
Rt Hon James Purnell MP, Secretary of State &
Gerry Sutcliffe MP, Minister for Sport
Department for Culture, Media and Sport
2-4 Cockspur Street
LONDON SW1Y 5DH
DETERMINATION OF THE 47TH LEVY SCHEME
Despite our best efforts to seek a resolution, the stance of the Bookmakers’ Committee has meant that statutory Determination of the next Levy Scheme is now required.
Our submission, for and on behalf of British horseracing, is enclosed for your consideration.
Since becoming Secretary of State and Minister in June, you have both consistently made a powerful case for sport, and the role sport plays in society, highlighting the many benefits it brings, from national prestige to building social cohesion and promoting healthy lifestyles through to skills, training, and employment opportunities.
As the new governing body for the sport of racing, created in close co-operation with Government, we could not agree more.
The Case for British Horseracing
British horseracing is proud of the strong contribution it makes to Britain’s sporting, cultural, economic and social life. Our sport appeals to people of all ages, backgrounds and socio-economic groups. Last year, almost six million people enjoyed a visit to one of 1,332 racedays. Highlights of the racing calendar such as the Cheltenham Festival, the Derby and the Grand National bring in tens of millions of tourist pounds to support local economies. The world views British horseracing as the best there is.
As you heard when the Secretary of State shared a platform with our Chief Executive Nic Coward during a debate on tackling youth crime through sport, racing is the largest sporting employer, creating 18,800 direct full time equivalent jobs and indirectly supporting almost 90,000 FTE jobs.
The nature of our sport means it is represented in all parts of Britain, with both a rural and urban profile.
We are fully committed to the Government’s skills and training agenda, through significant Levy-backed investment in top class institutions such as the Northern Racing College in Doncaster and the British Racing School in Newmarket as well as British Racing’s qualifications awarding body, the British Horseracing Education and Standards Trust.
All Party support for the Levy
For nearly half a century, Governments of all parties have recognised that British horseracing should not just survive, but thrive and grow. The Levy ensures that racing’s success and development is funded by revenues created through betting on racing.
The Levy exists to provide a fair and reasonable return to racing from the profits that betting operators earn. As last week’s Parliamentary debate showed, currently there is overwhelming cross-party support for the Levy and the principles that led to its creation over forty years ago.
Revenues from the Levy are the financial foundations of our sport. Examples of the wide range of essential activities funded by the Levy are; meeting the growing cost of maintaining the sport’s integrity and enhanced regulation, creating important sporting and community hubs at 59 racecourses across the country, supporting the livelihood of stable staff, investment into cutting edge veterinary research and promoting wider people and equine welfare in the sport.
The Levy is an integral part of Britain’s market-led approach to betting, and betting on racing in particular. The rest of the world is largely characterised by state sponsored betting through a pool, generating a very substantial return to their racing industries. We fully recognise and support the market model in Britain, but this must be coupled with an appropriate return to racing from betting.
Our competitor nations currently offer considerably higher returns to owners, trainers and others. They are using their comparative riches from betting to try to erode Britain’s position as the leading horseracing nation.
Racing has put together a thorough and comprehensive document for the Determination process. It includes a detailed assessment of racing’s contribution to British life; the requirements of racing to thrive in 2008 and beyond; the recent growth in the size and scope of the betting industry and the associated profits that are being made directly and indirectly from racing; and an independent assessment of the value of British racing to betting operators.
We were grateful for Government’s clear position in December 2006, reiterated last week by the Minister for Sport, that the Levy will continue until a sustainable, viable and enforceable alternative can be identified and put in place. For so long as the Levy is the mechanism, we will work with you to ensure that its processes and governance are fit for purpose. We are at the same time committed to working with you to develop thinking as to the legislative change required to support an alternative commercial mechanism.
In this submission, our central contention is that neither the way the Levy has been calculated, nor the amount it now delivers to racing, have kept up with developments in our sport and the betting industry. The current level of return is neither fair nor reasonable. The needs of racing have increased since the last Determination process in 2002, a period which has seen a growth in the number of fixtures and a greater investment in protecting the integrity of our sport, all of which benefits a betting industry now making record profits.
There is a very real need to invest now in promoting racing, to make the most of the sport and its significance in British life.
We do not address in this submission the Bookmakers’ Committee’s contention that certain commercial costs, such as the cost of buying television pictures for broadcast in shops and the fees charged by the Gambling Commission, should be taken into account when calculating their Levy payments. We have said that this is without any merit. We note that this case has already been rejected by the independent members of the Levy Board and criticised by independent commentators.
We strongly believe that a detailed and holistic examination of the current evidence will conclude that a fair and reasonable return to racing is far greater than current levels. Despite our confidence that a Determination will deliver this for the 47th Scheme, we offered to engage in a detailed and binding process that would have delayed these major issues until the 48th Scheme. The Bookmakers’ Committee flatly rejected this approach.
A Fair and Reasonable Return
Determining the fair and reasonable return to Racing through the Levy is a complex process. We have sought to adopt a reasonable approach.
We have taken as our starting point the last Levy Scheme that was subject to Determination, and updated the Secretary of State’s conclusions to reflect conditions in 2008.
The last time the Levy was determined, requiring the Government to assess the “needs of racing” and “the capacity to pay of betting operators”, was in 2002. An independent analysis undertaken by OCP consultants led to Tessa Jowell determining that the 41st Scheme should achieve a return to racing within the target range of £90 to £105 million.
We have taken this outcome, and updated it to 2008, taking into account the following factors, which are set out in detail in our submission as to the needs of racing:
• Indexation between 2002 and 2008.
• The increase in fixtures from 1,158 in 2002 to a programmed 1,504 in 2008, an increase of 30% at a cost of £22 million.
• The £10 million increase in integrity and regulatory costs accruing to British horseracing. These were £15 million in 2002, and will be £25 million in 2008.
• A specific increase in resource for the promotion of the sport. We state this as an additional £4 million, which is the equivalent of the expenditure by the Levy Board in 2002.
This is against the backdrop of significantly increased capacity to pay of the betting sector since 2002 (evidenced by the gross win of the two leading bookmakers rising from £1.1 billion in 2002 to £1.8 billion in 2006).
Taking account of indexation within the increased costs in relation to fixtures, and integrity and regulatory costs, and allowing for fixture related increases in the latter, our analysis shows that a fair and reasonable return to British horseracing requires a Levy return in the range of £135 to £153 million in 2008/09. This equates to a gross win rate on British horseracing for all betting operators of between 14% and 16%.
The separate analyses undertaken for us by LECG conclude that the value of British Horseracing product to Licensed Betting Offices, on a conservative basis, is within a range of £152 to £186 million. Expressed as a gross win percentage this would be in the range of 15% to 19%. This range increases to a range of 18% to 23%, or £177 to £225 million when the link between racing product and its contribution to the betting operator business, that we say exists, is fully and properly recognised.
Racing’s Proposal for the 47th Scheme
We have given these findings very careful consideration, and our proposal to you is that the next Levy Scheme should specify a payment of 15% of gross profits on British horseracing by off-course bookmakers.
This is an increased rate in comparison to the 46th Scheme. However, 15% is the mid point in the range we identify from our analysis based on bringing the 41st Scheme up to date. It is also the bottom end of the lower range of reasonable outcomes from the LECG analysis, despite our case that the higher range applies.
We have chosen to take this reasonable route to reflect our continuing desire to adopt a business-like relationship with betting operators within the existing Levy framework, and to support Government in its stated desire of completing the Determination as soon as possible in the New Year.
We believe that this Determination result would allow Government to achieve the objective it has set, as stated by both Stephen Timms in 2001 when betting tax was reformed, and Tessa Jowell in 2002, that racing and betting should share in the benefits of the new legal and fiscal framework introduced for betting operators.
All our figures assume the end of abated rates of levy for small bookmakers. If the current scheme of abated levy payments continues, then the headline percentage numbers quoted here would need to increase by 0.3% to maintain the financial return to racing at the fair and reasonable level we propose.
Income to the Scheme from other sources is small, and the detail of any Scheme must balance the potential sums to be raised using the methods outlined above against the costs of collection and administration on both the Levy Board and the betting operator in these sectors. For this reason, we propose that for spread betting firms, on-course bookmakers and bookmakers betting solely on Point-to-Point, harness racing and trotting, the 47th Scheme replicates the 46th.
There is one further important element to the Determination which we believe must be addressed separately. Betting exchanges now require specific consideration. In 2002, they were a relatively new market entrant. Now they are a significant and established part of the betting market place.
As they operate a different business model to betting operators, it is right that their Levy contribution made by this sector of the betting market is given full consideration, separate from that of other traditional operators. Our analysis concludes that there needs to be a significant increase in the Levy payments from this sector to ensure that it is making a return to racing that is seen as fair and reasonable when compared to that made by other parts of the betting industry.
The exchange market’s contribution to the 45th Scheme (2006/7) was £6 million. As part of delivering the increased levy return set out above, this needs to increase to £20 million.
The different business model of betting exchanges requires a different levy charging mechanism within the existing framework. Using the same net winnings basis as exchanges themselves use to charge their customers, racing proposes a charge on exchanges equivalent to 1.15% of their customers’ net winnings. This would deliver a levy contribution to racing of £20 million.
If this fair and reasonable return from exchanges is established, it would allow the headline gross win levy rate for traditional bookmakers to be reduced to 14%.
A fair deal for British Horseracing
In this submission, Racing has explained its case for a fair return from the Levy, correcting the imbalance that has arisen between the two industries since the Secretary of State last determined the Scheme in 2002.
This imbalance is recognised if one considers that Ladbrokes latest financial reports reveal that that it is able to achieve an annual return on invested capital of 67%, whereas the average racehorse owner is losing 75% their annual investment into the sport, and this before accounting for the costs of purchasing the horse.
Horseracing looks forward to engaging in open and constructive discussions with you about this. Nic Coward and I would be delighted to have the opportunity to meet with you and provide any further information you may require. I look forward to hearing from you.