Rebates have a sting in the tail

PUBLISHED : Wednesday, 15 February, 2012, 12:00am
UPDATED : Wednesday, 15 February, 2012, 12:00am


Double-digit percentage turnover increases may sound like a reason for the Jockey Club to rest on its laurels and a reason for its critics to think continued requests for government assistance boil down to something approaching greed.

But the club has so often been at pains to point out where the turnover increases are going and its critics might find some interesting reading on the subject in last weekend's Australian Financial Review newspaper.

The paper ran an article on Zeljko Ranogajec, the world's biggest and most successful...we were going to say punter but it doesn't really fit. Along with the names of the late Alan Woods and American player Bill Benter, Zeljko, as he is known, was one of the players to totally transform betting on horses from a pastime to a field of quantitative investment.

The Australian bets more than US$1 billion a year on meetings from Santa Anita to Fuchu to the Portuguese trots, and of course on racing in Hong Kong.

But what was relevant in the article were some figures presented during a court hearing that highlighted his use of rebates to increase profits. In order to attract the business of his organisation, Zeljko is, like other mega-bettors, offered double digit percentage rebates on losing bets by operators in many different jurisdictions, with the result that total profits on the losing bets can be as much if not more than on the winning ones.

It just becomes a game of betting more to collect more. Cover huge proportions of the betting array, bet $100 million with the aim of losing $5 million and you're $5 million in front after the rebate.

Imagine playing every number on the roulette table. Naturally, paid at 35-1 for your 37 bets, you lose off the stick. But then the 10 per cent rebate on your 36 losing bets kicks in and happy days. (Though in the unlikely event that you find a casino doing that with roulette, hurry up and take advantage because it won't be there for long.)

The Financial Review article notes that from 2007 to 2011 the use of rebates allowed the relatively small Tasmanian totalisator organisation in Australia to swell turnover by a factor of three to more than A$900 million (HK$7.4 billion), but its published profit dropped to only A$1.5 million, as the rebates chewed up its profit share and more from the increased turnover.

And this is the nightmare, souped-up version of the type of scenario the Jockey Club in Hong Kong has faced since the introduction of 10 per cent rebates on high value $10,000-plus tickets in 2006.

From racing turnover of just over $60 billion in 2005-06, the figure climbed to $80.4 billion in 2010-11 and can be reasonably expected to make close to $90 billion this season.

And those steep rises on the surface have made it difficult for the club to argue that it needs more help to continue changing and fine-tuning its business model, so as to ensure continued bottom-line growth for reinvestment in its facilities and growth in returns to the community - reported at the annual general meeting last September as almost $18 billion in 2010-11.

The rebates have been directly responsible for the growth of turnover.

Even the money we see 'late stomping' prices and coming from offshore exchanges and illegal bookmakers would not be finding its way back into the Hong Kong pools in such amounts without the 10 per cent rebate. Illegal operators offer their clients rebates, too, so to be offering that on one side and not receiving it on the other side would hurt their business.

Yet the responsibility of paying the 10 per cent rebates falls on the Jockey Club alone, coming out of its share of revenues and growing as the turnover grows larger, which then attracts even heavier participation from sophisticated computer betting groups, like Zeljko's team and others.

Furthermore, as we have seen so starkly in the past five years, the migration of turnover to rebate pools of win, place, quinella and quinella place, from the non-rebate pools like the Triple Trio and other exotics - where the Jockey Club does generate some bottom line - has hammered down the exotic pools, now a shadow of their former selves.

So next time you see a report of soaring Jockey Club turnover and think how well the club must be doing, and how greedy the club is asking to do more, remember that, yes, racing is a turnover business but not everything is how it appears.

Rebates are the new black - the numbers look great on the surface but they are concealing fundamental faults beneath. And that is why the club continues to ask for government assistance and presses for things like commingling.