Response to

Proposals for an industry-owned WATAB

Michael Reindl BEc GDipEd

A: 5A Third Avenue, Bassendean WA 6054M: 0419 966 256E: mike_reindl@yahoo.com.au

Declaration of Conflict of Interest

The author of this report is a shareholder in Tabcorp Holdings LTD and Tabcorp

Holdings LTD is a likely bidder for any sale of the WATAB.

Executive Summary

The WA Government has indicated intentions to sell the Western Australian TAB

(WATAB) as part of initiatives to manage State debt. Following from this, the

Western Australian Racing Representative Group (WARRG) engaged a consultant,

Ray Gunston, who identified four potential privatisation models and explored a range

of matters concerning the privatisation of the WATAB.

There is support within the racing industry for industry-ownership of the WATAB

including proposals that would see:

The WA Racing Industry form a corporate entity similar to a “mutual society”

The mutual society purchase Racing and Wagering Western Australia

(RWWA), including the WATAB, on behalf of the industry

Government transfers all responsibilities performed by RWWA into the

mutual society

The purchase is funded through Government receiving the proceeds from the

sale of Ascot Racecourse

These proposals though have not significantly addressed matters concerning

Meeting the capital requirement for an industry-owned entity to purchase the

WATAB

Addressing the governance structure of the racing industry going forward to

deliver benefits in an open, accountable and transparent manner

Funding of the industry on the basis of expectations the WATAB would

continue performing at current levels during consolidation in the wagering

industry and declining market share

For these reasons, it is highly unlikely that the sale of the WATAB to an industry-

owned entity would meet the needs of Government or serve the longer-term interests

of the industry itself.

Table of Contents

Declaration of Conflict of Interest................................................................................2

Executive Summary....................................................................................................3

Table of Contents........................................................................................................5

1. Introduction...........................................................................................................6

2. Financial Arrangements........................................................................................7

2.1. Sale of the ACT TAB......................................................................................7

2.2. Estimated value of the WA TAB.....................................................................7

2.3. Calculating the value of the WATAB..............................................................7

2.4. Industry owned proposals..............................................................................8

2.5. Other interested parties..................................................................................8

3. Governance Structures.......................................................................................10

3.1. Defining the Western Australian Racing Industry.........................................10

3.2. Creating an incorporated (industry-based) body to purchase RWWA.........10

3.3. Changes in governance...............................................................................11

3.4. The 2017 State Election...............................................................................11

4. RWWA Performance..........................................................................................12

4.1. Dual roles of Wagering and Racing.............................................................12

4.2. Failure of Current Governance Arrangements.............................................12

4.3. Conflicts of Interest......................................................................................13

4.4. New Governance Structure..........................................................................14

5. Other Considerations..........................................................................................15

5.1. Sale of Ascot racecourse.............................................................................15

5.2. Metropolitan Equine Asset Review Taskforce Report..................................15

5.3. Corporate bookmakers.................................................................................16

6. Conclusion..........................................................................................................17

References................................................................................................................18

1. Introduction

During the State Budget of 2014-15, the WA Government indicated it had intentions

to sell the WATAB to assist with managing State debt (Nahan 2014, p3).

In response, the WARRG engaged Ray Gunston in 2014 to provide a report on the

potential privatisation of the WATAB and issues the industry needed to consider as

part of that process. The report identified 4 models for the privatisation of the

WATAB.

Joint Venture Model

Contractual Model

Separation Model

Industry Ownership Model ( Gunston 2014, Table 6.2.1.3, p117)

Of those 4 models, the report recommended against the industry-owned model

because:

It delivered a smaller upfront payment to Government as synergies and asset

disposal are not realised

It reinforced governance conflicts between responsibilities for wagering,

racing and integrity

It increased risks associated with ongoing wagering success as a standalone

TAB in market where wagering providers are consolidating (Gunston 2014

pp15, 118, 147)

Two subsequent papers by industry participants presented support for an industry-

owned WATAB and proposed:

The WA Racing Industry form a corporate entity similar to a “mutual society”

The mutual society purchase RWWA/WATAB on behalf of the industry

Government transfers all responsibilities performed by RWWA into the

mutual society

The purchase is funded through Government receiving the proceeds from the

sale of Ascot Racecourse

Whilst an industry-owned WATAB is possible, current proposals fail to address the

key stumbling blocks raised by Gunston (2014, Table 6.2.1.3, p 117).

2. Financial Arrangements

2.1. Sale of the ACT TAB

The ACTTAB was the smallest of the state owned TABs and in 2014 sold for $105.5

million plus a $1 million per annum Licensing Fee. The sale included a 50-year

exclusive wagering licence, 15-year sports wagering licence and approval to add

Keno and Trackside to the product range. As a potential indicator for a sale, the

ACTTAB had revenues of $30.5 million per annum, creating a multiplier where the

price is 3.45 times the revenue (Clack P 2014).

2.2. Estimated value of the WA TAB

Media reports highlight the WA Government could potentially sell the WATAB to

private interests for around $1 billion (Williams 2016).

Alternatively, If wagering revenue for the WATAB is $335 685 (RWWA 2015, p46)

and using the ACTTAB sale figure to calculate an indicative. An estimate of $1.15

billion for the WATAB is not unrealistic. But note, this is for the full separation model

identified in Gunston (2014, Table 6.2.1.3, p 117).

The WA Government is more likely to choose a privatisation model more aligned to

the models in Victoria or Queensland where funding of the industry is through a joint

venture or contractual arrangement, and the purchaser agreeing to pay a fixed

annual payment and share of revenue to the industry. This would remove any

potential longer-term impost on the WA Government.

The actual amount of revenue the WA Government could expect from a sale of the

WATAB depends on the model for privatisation, cash flows from the current

operations and potential new incentives such as Keno and Trackside. But, the WA

Government could rightfully expect a figure significantly higher than proposed in the

industry-owned proposals.

2.3.Calculating the value of the WATAB

Determining a value for the WATAB is complex and likely to include a calculation

involving

The Net Present Value (NPV) of cash flows over the period of the licence

An adjustment savings made through synergies and efficiencies

The value for any transferable intellectual property rights

An adjustment to account for any changes in the treatment of taxes

The estimated value of new revenue streams, such as Keno and Trackside

It is most likely the WA Government has already engaged a corporate advisory firm

to undertake an estimation of the WATAB’s value, with such firms best positioned,

with access to the relevant information from RWWA, to make this calculation.

Potential bidders would also require access to detailed RWWA figures and

understanding with the WA Government about the ongoing funding arrangements of

the racing industry before being able to make an offer.

2.4. Industry owned proposals

The proposals for an industry-owned WATAB estimated the WA Government

receiving between $100 and $300 million and the purchase funded by WATAB cash

reserves and the sale of Ascot Racecourse. This is significantly less than WA

Government expectations and if the racing industry wished to Purchase the WATAB

would most likely require significant additional funding injections from stakeholders

beyond that currently considered.

Perth Markets Limited (PML) provides an example of an industry initiative to

purchase a State-owned asset. PML recently agreed to the purchase of Market City

for $135 million and is a private company established by industry stakeholders for

the specific purpose of purchasing the markets (Nahan, Hon M 2016). PML raised

nearly $60 million in capital from various stakeholders including Brisbane Markets

and listed property Trust Rural Funds Group and the remainder of the purchase cost

is debt funded (Financial Review 2016).

Unless race clubs and other industry based associations have significant funds in

reserves or the ability to raise funds from members or capital markets, the prospect

of an industry-owned WATAB is unlikely.

2.5.Other interested parties

Only three major players are likely to have capacity to raise capital of the magnitude

expected by the WA Government. They are Tabcorp, Tatts Group and SevenWest

Media, as part of a joint venture with a bookmaker (Williams 2016).

This appears consistent with the ACTTAB sale which attracted five expressions of

interests but only invited Tatts and Tabcorp to bid, as the other interested parties

were deemed as not having the operational capacity (ACT Audit Office 2015, pp44-

48).

Current economic conditions are significantly different in the first few months of 2016

than when the ACTTAB sold in 2014 and include tightening capital markets which

may impact the ability of interested parties to raise capital of the magnitude expected

by the WA Government.

The economic conditions may also see an offer of a lower price, assuming the

WATAB’s revenues streams have peaked along with the Western Australian

economy.

3. Governance Structures

3.1.Defining the Western Australian Racing Industry

Gunston (2014, p.59) defines the racing industry to include thoroughbred, harness

and greyhound racing and encompasses all those employed in and/or participate in

the production of racing animals and the production of the racing product.

It is important to note even Gunston’s definition includes only suppliers to the

industry. Gunston’s definition does not include end users (customers) of the product,

those that attend race meetings and those who use the wagering products.

Therefore the racing industry comprises a mix of incorporated and unincorporated

stakeholder groups with vested interests and includes racing clubs and the

associations representing breeders, owners, trainers and jockeys for each of the

three codes. Gunston (2014, Figure 5.1 p.61) demonstrates the complexity of the

industry and the difficulty in defining membership.

3.2.Creating an incorporated (industry-based) body to purchase RWWA

The proposals for an industry-owned WATAB suggest the creation of an

incorporated body similar to a mutual society where the organisation is run to benefit

the members. However, racing is not membership based, it is stakeholder based,

with self-interested groups represented by a mix of incorporated and unincorporated

associations and committees.

An incorporated entity managing a state racing body is not unachievable as

demonstrated by Racing Victoria which is jointly owned by the three metropolitan

race clubs and Country Racing Victoria. However, Racing Victoria is owned by the

customers, members of the various race clubs and not by industry participants. The

breeders, owners, jockeys and trainers are not directly represented in the ownership

of Racing Victoria.

If the WA Government were to progress a model for an industry-owned WATAB, all

stakeholders would need to agree an understanding of ownership of the incorporated

entity and how that entity would then raise capital to purchase the WATAB.

3.3.Changes in governance

The responsibilities of RWWA, including the operation of the WATAB, are

established under a legislative framework. The principal legislation governing RWWA

includes:

Racing and Wagering Western Australia Act 2003

Racing and Wagering Western Australia Tax Act 2003

Racing Restriction Act 2003

Racing Bets Levy Act 2009

Gaming and Wagering Commission Act 1987

Betting Control Act 1954 (RWWA 2015 p12)

Establishing RWWA required the passing of five Parliamentary Bills in 2003 followed

by the Racing Bet Levey legislation in 2009. It is therefore not presently clear, with

the WA Government yet to determine the model for privatisation, what legislative

change is required (Parker 16 Feb 2016).

The preferred privatisation model, including any proposal for the funding of the

industry going forward, and an alternative governance structure for the management

of the industry and integrity issues will strongly influence the nature of the

legalisation.

3.4.The 2017 State Election

The WA Government faces a State Election in March 2017 and will enter caretaker

mode around 1 February 2017 and cannot make any major undertakings or enter

into any contracts after this date. As parliament recesses around mid-December, the

WA Government would need to at least select the preferred buyer by November if to

conclude the matter before the election.

The Minister for Racing, Colin Holt and Premier Colin Barnett express different views

on the timeline for sale legislation. Mr Holt is optimistic that Parliament will pass sale

legislation before the election; however, it still remains unclear whether the

government could also conclude the sale process before the election. In contrast, the

Premier is not convinced the sale legislation would get through the Parliament.

(Parker 16 Feb 2016).

4. RWWA Performance

4.1.Dual roles of Wagering and Racing

The creation of RWWA as a single controlling body for the three racing codes was

seen at the time as crucial to overcoming vested interests, whilst absorbing the

functions of the WATAB into RWWA was seen as an essential mechanism for

enabling the industry to be less reliant on government and capable of achieving long-

term viability. (JSCRWWA 2010, p1)

However, RWWA was formed in a very protectionist environment with limited

competition for the gambling dollar. At the time, wagering across Australia occurred

under a “Gentlemen’s Agreement” between state-owned TABs. The informal

agreement saw each state-based TAB fund their own industry and allowed other

TABs to offer wagering on their product with the understanding that no TAB sought

wagering from another jurisdiction (Gunston 2014, p39).

In 2009, a Joint Standing Committee report raised concerns about the sustainability

of RWWA’s structure and the industry funding model in a changing landscape where

the WATAB was no longer the sole source of revenue (JSCRWWA 2010, pp38-42).

4.2. Failure of Current Governance Arrangements

In essence, RWWA represents a two-tiered board structure with a supervisory and a

management board (Tricker 2015, p50-52).

The management board of RWWA is defined in Division 2 of the Racing and

Wagering Western Australian Act 2003 (the Act) and comprises a chair, three

industry-based directors and four independent directors.

The function of the supervisory board is performed by the Minister, in concurrence

with the Treasurer under Part 6 of the Act. This includes the Minister approving (and

tabling in Parliament) both a Statement of Corporate Intent (SCI).

However, RWWA has history as not meeting the legislative requirement to table an

annual SCI. The SCI are a form of annual agreement with government, and the tool

by which government directs policy, making them an important governance and

accountability mechanism (Parker 5 Feb 2016) (OAGWA 2015, pp25-28).

In both 2009 and again in 2015, the Auditor General noted that RWWA had not

tabled SCI’s for the 2008, 2009 and 2015 financial years and it was therefore unclear

if these important governance documents even existed (JSCRWWA 2010 pp61-62)

(OAGWA 2015, pp25-28).

The powers of the Minister in relation to the approval of the SCI are important in the

context of Government Policy, primarily because Section 81 of the Act states unless

specifically prescribed, RWWA is not otherwise subject to a direction from

government. Therefore the SCI is the only means by which Government may

influence policy with regard to the racing industry (JSCRWWA pp62-63).

The role of government in the racing industry is often debated but if the Government

does have a role to represent industry stakeholders and the Minister is the

Government’s representative entrusted with that role, the Minister must ensure the

RWWA board complies with the requirement or replace the board. This is a critical

component in improving RWWA’s transparency and accountability to stakeholders

(JSCRWWA pp xix and 62-63).

4.3.Conflicts of Interest

Gunston (2014) raises on many occasions the conflict of interest from responsibility

of wagering, racing and the integrity of the industry being combined in one body.

It needs to be understood that the interests of wagering and the interests

of the racing industry are not necessarily always aligned and in fact in a

number of instances can be in conflict

Some examples include

Race programming where the wagering provider is looking for the cheapest

product and in the case of RWWA this has been the purchase of product

through product fee from the eastern states and overseas at the exclusion of

developing WA racing.

Racing Integrity where a provider of wagering products is also responsible for

licensing participants and adjudicating on the outcomes of breaches, penalties

and appeals.

Profits are driven into the development of new wagering products and

technologies rather than being returned to the racing industry. In the case of

RWWA this been evidenced by strong increase in wagering revenues but

increases in distributions are limited to around CPI.

4.4.New Governance Structure

The racing industry in Western Australia differs significantly from what existed in

2003 when RWWA was established and is also significantly different to what the

Joint Standing Committee observed during 2009.

There is significant ongoing evidence that the governance structure around RAWA

does not meet the interests and needs of stakeholders and continues to be criticised

in relation to

A lack of transparency and accountability

A lack of innovation in the development of the industry

A lack of engagement with stakeholders

A focus on wagering at the expense of developing the racing product

The separation of wagering, racing and integrity and the privatisation of the WATAB

provide the opportunity to revisit and reconsider the governance provisions of the Act

to ensure better transparency and accountability for stakeholders and a focus on the

development of racing.

5. Other Considerations

5.1.Sale of Ascot racecourse

The proposals for an industry-owned WATAB suggest the funding of the purchase

through the sale of Ascot racecourse. Bearing in mind that numerous race clubs

across three racing codes would have ownership of the TAB, it seems unrealistic for

one race club (Western Australian Turf Club trading as Perth Racing) would fund the

whole arrangement by relinquishing trust over the lands upon which Ascot

racecourse is situated.

Further, the majority of the Ascot landholding is a Crown Grant in Trust

arrangements and conditional on continued use as a racing facility. If racing were to

cease at Ascot, the land reverts back to the Crown without compensation (GHD

2015, Page vi).

The proposals for an industry-owned WATAB suggest the sale of Ascot racecourse

would not disadvantage trainers utilising Ascot as they could relocate to (cheaper

land) in the Lark Hill area. The proposal doesn’t acknowledge the substantial

investment in Ascot properties and the financial commentary doesn’t consider

assistance or compensation costs for those relocating.

5.2.Metropolitan Equine Asset Review Taskforce Report

Both proposals spend considerable time using the Metropolitan Equine Asset

Review Taskforce Report (MEART) as justification for the sale of Ascot. However the

MEART report is about addressing the sustainability of funding infrastructure needs

and not the sustainability of the industry as a whole.

The MEART Report ruled out the sale of Ascot due to the legislative and trust

matters surrounding the ownership of the facility but these are not addressed in the

two proposals.

Infrastructure upgrades are important but need to be considered as part of the

distribution from the final solution rather than part of the funding for the purchase of

the WATAB.

5.3.Corporate bookmakers

The rise of the corporate bookmaker is not relevant. Corporate bookmakers form

part of the wagering environment and will continue despite some consolidation

through mergers and acquisitions in recent years.

The argument against corporate bookmakers is emotive around profits going to

shareholders rather than industry. But this is not correct as corporate bookmakers

currently contribute to the industry through product fees and sponsorship.

The distribution to industry will be determined before the sale of the WATAB and it

should be noted, the distribution under both the JV and contractual models will

establish arrangements for fixed annual payments and shares of revenue which are

expense amounts and considered prior to taxation and any distribution to

shareholders.

Rather than looking at corporate bookmakers as a threat, the industry should look at

them as an opportunity. Race clubs in WA currently miss out on sponsorship and

other benefits from partnering with other players in the wagering area (Gunston

2014, p 54, 143).

6. Conclusion

WATAB sits within the operations of RWWA and hence currently is not a separate,

saleable entity (Gunston 2014 Page 8). In the first instance, Government needs to

develop legislation that separates the WATAB from the overarching structure of

RWWA. Similar models were developed in Queensland and the ACT where

subsidiary companies were established with a 100% share ownership by the

governing body. The sale of the TAB then only involved a transfer of the

shareholding in the subsidiary.

If the WA Government were to establish the WATAB has 100% owned subsidiary of

RWWA it can then proceed to address the funding and governance arrangements at

the same time as progressing the sale process.

It is highly unlikely that the sale of the WATAB to an industry-owned incorporation

would meet the needs of Government or serve the longer-term interests of the

industry itself.

References

ACT Audit Office 2015, ACT Auditor-Generals Report – Sale of the ACTTAB – Report No.7/2015, Australian Capital Territory, Canberra

Australian Financial Review (AFR) 2016, Rural funds group buys stake in Perth’s wholesale fruit and veg market as appeared in The Australian Financial Review on 14 February 2016, Fairfax Media.

Clack, P 2014, ACTTAB sale a body blow for Canberra’s racing industry, 11 August 2014, viewed on www.the-riotact.com 15 February 2016.

GHD 2015, Future asset needs for the WA racing industry: Racing and Wagering Western Australia – Metropolitan Equine Asset Review Taskforce – high level asset options paper (20-40 year outlook), GHD, Perth

Gunston, R 2014, Report to the Western Australian Racing Representative Group (WARRG) on the potential privatisation of the Western Australian TAB (WATAB), WARRG, Perth

Joint Standing Committee on the Review of the Racing and Wagering Western Australia Act (JSCRWWA) 2010, Inquiry into the Racing and Wagering Western Australia Acts – Report No 2, Parliament of Western Australia, Perth

Nahan, Hon Dr M 2014, Transcript of Budget Speech in Budget Paper No.1 (2014-15), viewed on www.ourstatebudget.wa.gov.au, Government of Western Australia, Perth

Nahan, Hon. Dr M 2015, Our State Budget 2015-16 – Securing Our Economic Future released on 14 May 2015, viewed on www.mediastatements.wa.gov.au, Government of Western Australia

Nahan, Hon. Dr M 2016, Media Statement: Market city sold to industry consortium released on 12 February 2016, viewed on www.mediastatements.wa.gov.au , Government of Western Australia, Perth.

Office of the Auditor General Western Australia (OAGWA) 2015, Western Australian Auditor General’s Report – Audit results Report Annual 2014-15 Financial Audits - Report 24, Government of Western Australia, Perth

Parker, G 2016, Utilities fail laws to table yearly report in The West Australian on 5 February 2016, SevenWest Media

Parker, G 2016, Holt in push to speed up TAB Decision in The West Australian on 16 February 2016, SevenWest Media

Racecourse Association (RCA) 2015, British Horseracing On Course For Record Attendances in August 2015 Update Newsletter, Racecourse Association, London

Racing and Wagering Western Australia (RWWA) 2015, 2015 Annual Report, Racing And Wagering Western Australia, Perth

Tricker B 2015, Corporate governance – principles, policies and practices, 3 rd

edition, Oxford University Press, Oxford

Williams, P 2016, Tatts, Tabcorp jockey for $1b WA TAB sell-off, in The Sydney Morning Herald 7 January 2016, Fairfax Media.