Strategic Analysis of Horse Racing in South Africa

Phase 1: Profile and Economic Contribution

Executive Summary

The sport of horse racing is said to be the sport of kings. It attracts the rich, the famous and the glamorous. They have to be rich because in many countries they are paying for part of the sport. In South Africa, for example, the contribution by owners supported 25% of the sport in the 2009 financial year.  It also attracts the intelligent and thoughtful punter. This is the punter who studies form, who looks at the horses and places a careful wager. This is the punter who thinks of casino slot machines with disdain. Yet, arguably it also attracts punters who do not study form and are simply guessing. These are punters who, possibly, do not have a casino located close by or who believe that a bet on a horse race has a better chance of winning that a bet on a slot machine.

It is the owners of race horses and the punter who pay for the sport. In some countries government may give some subsidy although this is rare. More commonly the sport makes a contribution to government.

Yet, at least from the beginning of this century and possibly longer, the sport is not as popular as it once was. There is less interest in the sport both internationally and locally. There are fewer people prepared to subsidize the sport as owners; there are considerably less breeders; less jockeys and, as a result, less horses.

The challenges are multiple. There is the growth in other forms of betting, the proliferation of on-line betting (both casino and sports betting) and the growth in other forms of entertainment, particularly on the internet. In recent times the onset of the Great Recession has also been a major contributor to the decline in betting. In some countries, like South Africa, there is also a dual wagering system where one part – the totalisator – returns more funds to the sport than fixed odds bookmakers. An examination of trends in world horse racing suggests that countries with a higher proportion of bookmakers relative to totalisators tend to cover less of the costs of horse owners and have seen a greater decline in their sport than countries where the totalisator is more dominant.

The sport of horse racing in South Africa faces a further and rather unique constraint – African Horse Sickness (AHS). AHS originates from indigenous wildlife – mainly zebras, but also African donkeys and other species (equids) – and is transmitted by insects. It is lethal to most horses that are not vaccinated. Over a quarter of AHS incidences occur in working horses used for transport in rural areas. There are control measures and vaccines but they have not managed to eradicate the disease since not only must all horses be vaccinated but also all zebra and other animals that transmit the disease.

A domestic interest in a sport is often driven by the success of local sporting personalities and teams in the international arena. In Australia, for instance, the 2009 Melbourne Cup attracted six international entrants[1] and international horses regularly compete in and win the Melbourne Cup. This raises the profile of Australian horse racing both within the country and internationally. Apart from raising the profile of racing by having international entrants there is a very lucrative international trade in the breeding of race horses. South Africa faces major constraints on the international front because of African horse sickness. The result is that South African horses rarely compete overseas, international horses are rarely brought to South Africa and there is a limited trade in breeding. AHS has limited the economic potential of South African horse racing not least because it constrains horses from competing and being sold overseas which therefore lowers their potential sales price. The consequence is a lower profile for the sport than would otherwise be the case.

It is in this context that Racing South Africa, the strategic arm of horse racing in South Africa has, with growing concern, commissioned an investigation into these changes. This is done with a view to being able to make strategic and informed decisions about the future of horse racing. Economics Information Services, a specialist consultancy in the tourism and gambling industries was appointed to start this investigation. The investigation is expected to be done in three phases:

The first phase, which is this report, is a factual investigation. It outlines the profile of horse racing and the economic contribution that it makes to the country. It examines local and international trends. It identifies constraints. (The scope of the study is restricted only to the racing segment of sport of horse riding. It therefore excludes show jumping, recreational riding, etc. The economic contribution reported in this document would be considerably larger if these other aspects of the sport had been included).

• The second phase will provide a framework in which horse racing can make strategic decisions about the future of horse racing and monitor the impact of those decisions. The objective of the second phase would be to develop an econometric and analytical model that can be used for the strategic analysis of horse racing.
• The third phase is to implement a triple bottom line reporting process which will include the social and environmental dimensions of horse racing.

Economic Contribution

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.

Figure ES1 illustrates the structure of South African horse racing, the financial flows between the various sectors and the economic contribution made by each sector.

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).

Figure ES1: Economic Contribution in 2009

• 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[3]) 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:

o        R229m goes to provincial taxes and VAT (19.7% of operators revenue);

o        The upkeep and running of race courses and training facilities contributed R372m to GDP;

o        Jockey remuneration makes a R66m contribution to GDP;

o        Governance of the sport contributed R92m to GDP;

o        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.

Horse racing is a labour intensive industry.  In 2009 horse racing directly employed 12 537 people. Of these 9 445 were full time positions and 3 092 were part time. As full time annual job equivalents this is equal to 11 639 jobs.  The distribution of these jobs across the various parts of horse racing is shown in Table ES2.

• The estimate for the number of employees on stud farms is based on a census commissioned by Racing SA of all aspects of the sport. The census indicates that 2 452 people are involved in the breeding of race horses.  Of these 2 160 are full time jobs and 292 are part time jobs.
• There were 187 registered trainers in South Africa in 2009, who in turn employ assistant trainers, grooms, work riders and other support staff.  The results of the census indicate that as many as 3 494 people could be employed in training.  The majority of these (3 422) are full time jobs while only 72 are considered to be part time.
• In 2009 there were 108 registered jockeys, 41 apprentice jockeys and 13 jockey’s agents. In total this is 162 full time jobs.
• In 2009 Phumelela employed 490 people on a full time basis and 1 059 on a part time basis for a total of 1 390 full-time equivalent jobs. Gold Circle had 781 full-time and 1 447 part-time employees which amounted to an estimated 1 671 full-time equivalent jobs. There were 240 independent bookmakers with an estimated 1 231 employees.
• In 2009 there were 316 people employed in various governance institutions in the country. These included 82 full-time and 124 part-time people working for the NHA; 32 with Racing South Africa including the Equine Research Centre, the Kenilworth quarantine station, the African Horse Sickness Trust and the Equine Trade Council, 47 with the SA Jockey Academy, 7 with the Racing Association (owners body for Phumelela) and 14 with the SA Racing and Equestrian Academy (including the Grooms School Trust).
• In 2009 South Africa’s two bloodstock auctioneers and agents employed 43 on a full-time equivalent basis of which 36 were employed by the Thoroughbred Breeders Association and its marketing arm Bloodstock SA and 7 by Equimark Equestrian Sales.
• The media is made up of Tellytrack, PGE, and the print media. Employment by Tellytrack and PGE, which are fully-owned subsidiaries of the two racing operators, is included under racing and wagering jobs for Gold Circle and Phumelela. The turf directory lists 22 racing editors around the country which is therefore a minimum number for print media employment. Including a total of 15 equine photographers also listed in the SA Turf Directory gives an estimate of the total number of media employment attributable to racing to 37.
• The final component in South African horse racing is the various support services. This includes equine racing and other South African Equine Veterinarian Association (SAEVA) registered veterinarians, their staff, equine physiotherapists and equine dental technicians, as well as farriers and people employed in horse transport. These support services provided a total of 719 jobs in 2009.

Table ES2: Direct Employment by sector, 2009

Table ES2: Direct Employment by sector, 2009

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.

Challenges

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[4]. 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:

• 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.

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.

Structure

The regulatory body of horse racing is the National Horseracing Authority of South Africa (NHA). This was formerly called the Jockey Club of Southern Africa. Horse racing is best understood by, initially, separating out breeding and training from racing and betting. At last count there were 509 breeders in the country although there are only 193 registered stud farms. It is clear therefore that more than half the registered breeders keep their horses on another breeder’s stud farm. Most breeders are registered with the NHA and the Thoroughbred Breeders Association (TBA). Some are also members of regional clubs. There is some international trade on the breeding side although this is relatively small.

Owners receive income from a number of sources. The most important of these is prize money (stakes) from their horse winning or being placed in a race. They are also paid when a horse is sold or, very occasionally, from international prize money. In turn owners pay breeders either directly (of which there are no records) or through the auction houses. The auction houses are Bloodstock South Africa and Equimark Equestrian Sales. Owners also pay trainers. This includes the training fee and often includes a portion of any stakes that are won. On occasion owners also cede a portion of their stakes to the jockey who rode a winning or placed horse.

Jockeys, in turn, are trained through the Jockey Academy and are represented by the South African Jockeys Association (SAJA). Most of the costs involving jockeys are paid by the betting operators. There are four Grooms Schools in the country with two each in the Western Cape and KwaZulu-Natal. The schools train aspirant grooms how to work in stables.

The final important components of the breeding and training side of horse racing are the Thoroughbred Horseracing Trust, the owners and trainers bodies and the Onderstepoort Equine Research Centre.

There are several interrelated agencies involved on the wagering side of the horse racing industry. The first of the important distinctions is between bookmakers and SAFTOTE (TAB). The TAB is a partnership between Phumelela and Gold Circle who combine all totalisator bets into one national pool. Registered bookmakers, of whom there were 240 in 2009 are independent operators in horse racing. They generally offer fixed odds betting to punters, pay taxes and a 3% levy to the TAB. Some bookmakers have been offering variable odds based on the TAB payout. Any profits accruing to bookmakers go to their equity owners.

There are three categories of people who place wagers. There are punters, who bet but are not actually at the race, race goers who actually go to the race and international punters. The bulk of wagering is done by off course punter rather than race goers. In 2009, for example, 94% of all wagering was done off course. Wagering contributed 75% to the operation of the horse racing industry in that year. There is also some flow of funds from race goers and food and beverage concessionaires who operate at the race tracks. Some of the larger races also have sponsors who bring in their own concessionaires[5].

Funds flow from the wagering side of horse racing back to punters and to horse racing itself. The first of the important outflows is the remittance of profit to the owners of the independent bookmaking operations. These independent bookmakers are required to pay a 3% levy on winning bets to the TAB. The second important outflow is the payment of a 3% provincial betting tax on winning bets by bookmakers, the TAB and Betting World.

Net of provincial betting taxes the remaining funds from the TAB and Betting World flow to Phumelela and Gold Circle. From here the most important components of horse racing are financed. These funds are used to pay for:

• Fixed costs. These include the upkeep of all the race tracks in the country; all relevant betting premises and facilities; and the National Racing Bureau.
• Operating costs which include all running expenses like wages and salaries, the payment for Tellytrack, and the actual staging of the races.
• Racing South Africa (which is also funded by owners and breeders supports:

o        the export promotion part of horse racing;

o        the South African Equine Trade Council (SAETRAC) which is the marketing arm of Racing South Africa and responsible for the promotion of local horses (of all breeds) to world markets;

o        the African Horse Sickness Trust;

o        the Kenilworth Quarantine Station which is necessary for South Africa to be part of the international trade in horses;

o        the Equine Research Centre;

o        the Equus Awards; and

o        various exhibitions that are held to promote horse racing.

• Taxes are paid in the form of municipal rates and levies, VAT and income tax.
• Any profits accruing to Phumelela are remitted to shareholders.

Phumelela and Gold Circle also make a significant contribution to many other parts of horse racing. The racing operators:

• Fund the NHA.
• Pay the KwaZulu-Natal breeder’s premium. This is an anachronism that is a throwback to when the Natal racing club paid such a premium and its continuation was negotiated as part of the structure of Gold Circle.
• Remunerate jockeys, fund the Jockey Academy and the Grooms’ school.
• Provide prize money for the races.

Recent Changes

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[6]. 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.

Strategic Analysis of the Sport of Horse Racing in South Africa
Phase 1: Profile and Economic Contribution

Prepared for:
Racing South Africa

by Economic Information Services
Barry Standish, Antony Boting, Brian Swing
March 2011

[2] This table reports economic values not financial values.

[3] The contribution to GDP is less than the share of horse racing because stakes are transferred from the operators to other parts of horse racing.

[4] http://www.southafrica.info/about/sport/horseracing.htm

[5] We were not able to source information about how much was spent by sponsors and concessionaires.

[6] This does not mean that the number of stud farms decreased although it was not possible to source information about this aspect of horse racing. Many registered breeders stable their horses on farms owned by other breeders.