EXTRACT FROM THE STRATEGIC ANALYSIS OF THE SPORT OF SOUTH AFRICAN HORSERACING
South African horse racing makes a significant contribution to the national economy:
- In 2009 it contributed R2.71bn to Gross Domestic Product.
- Between 2002 and 2009 it has made a cumulative contribution of R16.8bn to Gross Domestic Product.
There are three groupings of people who fund the sport of horse racing. These are owners, punters and “other” in the form of sponsors and concessionaires. In the 2009 financial year owners made a net contribution to horse racing of R574m and punters a R1.74bn contribution. This is 25% and 75% respectively of the overall contribution to horse racing. This resulted in a total industry size of R2.3bn. When the multiplier effects are taking into consideration horse racing makes a R2.71bn contribution to GDP. It sustains 16 244 direct and indirect jobs and R694m is generated in the form of direct and indirect taxes.
Of the total inflow of funds into South African horse racing:
R274m goes to the breeding industry. This is 12% of horse racing. The breeding industry in turn contributes R368m to GDP (13.6% of the total) and sustains 3 340 direct and indirect jobs (20.6% of the total).
R544m goes to the training industry. This is 23% of horse racing. The training industry contributes R764m to GDP (28.2% of the total) and sustains 4 801 direct and indirect jobs (29.6% of the total).
R337m goes to bookmakers. This is 15% of horse racing. Bookmakers in turn contribute R330m to GDP (12.2% of the total) and sustain 1 957 direct and indirect jobs (12.0% of the total)
R1.16bn goes to the racing operators Phumelela and Gold Circle
. This is 50% of horse racing. The operators contribute R1.25bn to GDP (46.0% of the total
) and sustain 5 189 direct and indirect jobs (31.9% of the total). This makes a total R1 245m contribution to GDP. A closer examination of the operators reveals that:
- R229m goes to provincial taxes and VAT (19.7% of operators revenue);
- The upkeep and running of race courses and training facilities contributed R372m to GDP;
- Jockey remuneration makes a R66m contribution to GDP;
- Governance of the sport contributed R92m to GDP;
- The running of the betting operations contributed R620m to GDP;
- In 2009 horse racing paid R694m in direct and indirect taxes of which 28% was paid to provincial governments and 72% to the national government.
- Between 2002 and 2009 horse racing paid a total of R4.3bn in taxes.
Compared to the domestic casino industry horse racing is a very labour intensive industry. For example, in 2009 the South African casino industry employed 0.289 people for each million rand of gross gaming revenue. South African horse racing employed 7.01 full time equivalent people for each million rand of gross gaming revenue. This is makes the racing industry twenty four times more labour intensive than the casino industry for each rand of gross gaming revenue.
The most labour intensive part of horse racing is the breeding industry where 12.18 jobs are created for each R1m that is spent on breeding. While the racing operators’ job multiplier are low at 4.46 it should be recognised that a significant part of their spending is transferred back into horse racing as prize money. As a result the operators also take credit for the labour intensity of governance at 9.83 jobs per R1m expended; race course and training facilities at 6.88 and jockey remuneration at 6.30. Training produces 8.81 jobs per R1m expended. In contrast, at 5.81, bookmakers have one of the lowest job multipliers.
South African horse racing traces its roots back to 1797 when the first horse race was run in Cape Town. Five years later, in 1802 the first club race took place on what is now Green Point Common. Since that time the sport has developed largely through a process of evolution not one of structural design. It is this evolution that has resulted in some of the challenges that horse racing now faces. Three of these need to be highlighted.
First is the evolution from a plethora of racing clubs into the two existing operators, Phumelela and Gold Circle. Phumelela was created through the corporatization of the racing clubs of Gauteng in 1998, and subsequently joined by the racing clubs of the Northern Cape, Free State and Eastern Cape. Phumelela listed as a public company on the JSE in 2002. Gold Circle is similar to Phumelela in that it is the result of the amalgamation of several racing clubs and organizations in KwaZulu-Natal and the Western Cape. It differs from Phumelela in that it is a non-profit Section 21 company. Apart from the TAB Phumelela and Gold Circle have two other partnership ventures. The first of these is Betting World (Pty) Ltd. This operates 28 bookmaking branches across the country and offers fixed odds bets just like independent bookmakers. The second is Phumelela Gold Enterprises (PGE). This joint venture is managed by Phumelela and owns the local and international broadcasting rights to South African horse racing.
A listed profit orientated company and a Section 21 non profit company are likely to make for uneasy bed fellows. Objectives are different as are philosophies and processes making this a relationship that deserves further investigation.
The second challenge resulting from the evolution of the sport is the role of bookmakers. There are a large number of bookmakers who in 2009 took 46% of all gross gaming revenues in horse racing. The operators return 42.4% of gross gaming revenues to horse racing. Via punters’ contribution on winning bets struck with bookmakers, they return just 18.1% to horse racing. This means that in 2009 Phumelela and Gold Circle took in R1.2bn as gross gaming revenues and returned R607m to horse racing while the bookmakers took in R411m and returned R75m.
If bookmakers faced the same rules as the operators then a further R100m would have been returned to horse racing in that year. The first phase of the investigation has found that there is some evidence to suggest that the less that prize money covers that cost of owning a race horse the smaller the industry. This will be analyzed more carefully at an individual country level in phase 2 of the investigation. Given that the South African racing industry has declined over the last decade and given the fact that it is a very labour intensive industry compared to, for example, the casino industry this is a structural constraint that deserves further investigation.
The final constraint resulting from the evolution of the sport is the existence of a challenging regulatory environment. In its heyday racing was a local event that was governed by local authorities. Over time, and prior to the liberalization of gambling in 1996, the control of horse racing was placed under the then four provincial authorities. Subsequent to the liberalization of gambling the operators are now required to report to both the National Gambling Board and the Gambling Boards of each of the nine provinces. This has resulted in a number of challenges for horse racing in South Africa:
The Boards have different standards and there appears to be little cooperation on achieving consistent standards. This increases the costs of horse racing and results in economic inefficiencies.
There are also regulatory differences between provinces with licensing requirements, conditions of license, license durations, licensing processes, interpretations of rules and standards, differing from province to province.
Gambling taxes, levies and fees are also different between different provinces.
Some license conditions further increase the cost of operation because they force the continued operation of loss making operations. For example there are requirements in some provinces to retain certain racetracks. There are requirements to stage a minimum number of races each year and to retain a telephone betting Call Centre.
All of these factors work to compromise the financial integrity of the sport. High operating costs mean that less funding can be challenged back into horse racing with the obvious implications for jobs, incomes and the future of the sport.
In addition to this bookmakers and the lottery face a different regulatory environment which puts the racing operators at a disadvantage. For example:
This executive summary concludes by giving a brief description of the structure and size of horse racing before outlining some of the changes that have occurred over the last decade. A substantial part of the macroeconomic analysis was dependent on an accurate analysis of the size and structure of horse racing.
- The totalisator is restricted in its expansion plans with just over 400 outlets nationally. This is a fraction of the 8 000 outlets that service the lottery.
- The totalisator is required to submit rules for approval by the gambling boards prior to introducing any new product or revising existing products. The experience of operators’ is that decisions on these new products can be a long time in the making. Bookmakers and the lottery are not subject to such delays.
One of the incentives in owning and racing horses is the potential payout that can be made in the form of stakes earned by winning or being placed in a race. In 1998 total stakes (in real 2008 terms) were R273m. This fell to R211m by 2002 before increasing again to reach R277m by 2009. Stakes paid for individual races showed a similar trend with the average stake per race falling from R65 500 in 1998 (2008 values) to R51 700 in 2003 before increasing to R72 600 by 2009.
Partially as a result of these financial trends, South African horse racing is largely in the doldrums. In some areas there have even been remarkable decreases. The most illustrative example of the latter is that the number of registered breeders of thoroughbreds decreased from 925 in 1998 to 453 in 2008. The number of trainers declined from 204 in 1998 to 187 in 2009 reaching a low of 170 in 2005. The number of jockeys fell from 164 in 1998 reaching a low of 81 in 2008 before increasing again in 2009. These changes between 1998 and 2009 are the equivalent of an 8.4% fall in trainers and a 34.1% fall in the number of jockeys.
Similar trends are evident in the number of races and race meetings that are staged, the number of registered racehorses and the number of starters that have run in these races. All four of these measures show a decline. In 1998 there were 487 race meetings, 4 178 races, 7 377 registered racehorses and 49 310 starters taking part in these races. By 2009 there were 436 race meetings, 3 820 races, 6 455 registered racehorses and 42 103 starters. These are decreases of 10.5%, 8.6%, 12.5% and 14.7% respectively.
In conclusion it is realised that in many parts of the world, South Africa included, horse racing has been facing competition from a wide and growing variety of other forms of entertainment and wagering. The consequence of this is that there are fewer industry participants and less interest from younger members of society. These trends, from a socio economic perspective in countries with high levels of unemployment, are unfortunate because South African horse racing is a particularly labour intensive industry relative to other forms of gambling. Many of these jobs are in rural areas where the need of employment is particularly desperate. The sport faces many challenges. Addressing these challenges would contribute to the greater good of the country.