HARNESS RACING VICTORIA
REPORT ON THE AUDIT OF HARNESS RACING VICTORIA April 2015 Dale G Monteith CONTENTS E X E C U T I V E S U M M A R Y ............................................................................................................... i R E C O M M E N D A T I O N S .................................................................................................................iv I N T R O D U C T I O N ......................................................................................................................... 1 T H E A U D I T A N D C O N S U L T A T I O N P R O C E S S ................................................................................ 2 T H E V I C T O R I A N H A R N E S S R A C I N G I N D U S T R Y ......................................................................... 3 G O V E R N A N C E I N C L U D I N G B O A R D E X P E R T I S E A N D S K I L L S ....................................................... 6 O T H E R I S S U E S A S S O C I A T E D W I TH HRV G O V E R N A N C E .......................................................... 10 Appointment of Chief Executive Officer and direct reports............................................. 10 Strategic planning............................................................................................................... 10 Audit Committee ................................................................................................................ 11 Risk Management functions within HRV........................................................................... 12 I N T E G R I T Y S E R V I C E S ............................................................................................................... 14 Harness Racing Integrity Council ....................................................................................... 15 Race day stewarding .......................................................................................................... 16 Swabbing ............................................................................................................................ 16 Attraction and retention of stewards................................................................................ 18 HRV Racing Appeals and Disciplinary Board ..................................................................... 18 F I N A N C I A L M A T T E R S I N C L U D I N G D E B T S A N D L I A B I L I T I E S ...................................................... 20 R A C I N G P R O D U C T A N D I N C O M E S T R E A M S ............................................................................. 23 Income from improving the racing product ...................................................................... 23 Income streams .................................................................................................................. 25 Wagering revenue .............................................................................................................. 26 Tabcorp Joint Venture (JV)............................................................................................. 26 Racefield product fees ................................................................................................... 27 Interstate wagering operators....................................................................................... 28 Vision fees from wagering operators ............................................................................ 28 Simulcasting Income .......................................................................................................... 29 Income from better performing tracks ............................................................................. 29 Sponsorship income ........................................................................................................... 30 Victorian Harness Racing Social Club (VHRSC) .................................................................. 31 Gaming, event and function income growth .................................................................... 32 TP income ........................................................................................................................... 32 VRIF Funding....................................................................................................................... 33 I N F R A S T R U C T U R E .................................................................................................................... 34 A D M I N I S T R A T I V E D U P L I C A T I O N ............................................................................................. 36 RISE ..................................................................................................................................... 36 Shared Services Program (SSP) .......................................................................................... 36 F U R T H E R I S S U E S F O R HRV C O N S I D E R A T I O N A R I S I N G F R O M T H E A U D I T .............................. 38 Promotion of harness racing ownership ........................................................................... 38 Lack of owners advocacy ................................................................................................... 38 Breeding.............................................................................................................................. 39 Country harness clubs and racing...................................................................................... 40 Tabcorp Park Melton.......................................................................................................... 41 Investment in human resources and participants ............................................................ 41 Marketing ........................................................................................................................... 42 Marketing for the future................................................................................................ 42 2014 Harness Racing Australia Report .......................................................................... 43 Wagering information provided by Tabcorp..................................................................... 44 Interstate wagering operators........................................................................................... 45 HRV economic impact ........................................................................................................ 45 APPENDICES ........................................................................................................................ 47 Appendix A ‐ Media release................................................................................................ 48 Appendix B ‐ Terms of Reference ....................................................................................... 49 Appendix C ‐ Reports and documents considered ............................................................. 52 Appendix D ‐ Summary of consultation and written submissions process ........................ 53 Appendix E ‐ Results from government sponsored refinancing......................................... 65 Appendix F ‐ 2015 HRV Audit Tender ................................................................................. 66 Appendix G ‐ HRV shared services model........................................................................... 69 Abbreviations used in the audit review report ARB AICD AP CEO CFO COO COS CRV FTA FTE GMI GRV HRA HRAB HRM HRNSW HRV IC IER JV KPI MV NSW NT OH&S RADB RASL RIC RISE RVL Sky SS TAB TCV The Act ToR TP VCAT VHRSC VRC VRIF Australian Racing Board (thoroughbreds) Australian Institute of Company Directors Appointments Panel HRV Chief Executive Officer HRV Chief Financial officer HRV Chief Operating Officer Chief of Stewards Country Racing Victoria (thoroughbreds) Free to air television Full time employment equivalents General Manager Integrity (HRV) Greyhound Racing Victoria Harness Racing Australia Harness Racing Advisory Board Harness Racing Management (TP Melton); HRV subsidiary Harness Racing New South Wales (governing body) Harness Racing Victoria (governing body) Integrity Council (for HRV) Economic modelling consultants Tabcorp Joint Venture Key performance indicators Moonee Valley racecourse New South Wales Northern Territory Occupational Health and Safety Racing Appeals and Disciplinary Board Racing Analytical Services Limited Racing Integrity Commissioner Racing Information Services Enterprise; HRV subsidiary Racing Victoria Limited (Thoroughbred governing body) Sky Channel, Tabcorp owned and holder of HRV vision rights Shared services Off course wagering (Formerly Totalisator Agency Board) Treasury Corporation Victoria Racing Act 1958 Terms of Reference for the HRV Audit Tabcorp Park Melton Victorian Civil and Administrative Appeals Tribunal Victorian Harness Racing Social Club Victoria Racing Club Limited (Races at Flemington) Victorian Racing Industry Fund E XECUTIVE S UMMARY On 7 January 2015, the Minister for Racing, the Hon Martin Pakula MP, commissioned an independent audit of Harness Racing Victoria (HRV). The audit was a high‐level review of HRV and more generally key components of the harness racing industry (the industry) in Victoria. It is abundantly clear that many challenges confront the industry, including the need to achieve sustainable funding levels to maintain and grow the industry. Flat or reduced income from wagering over the past five years has been a major issue for HRV and I am not sure that this will change substantially in the future unless the industry, not only in Victoria but nationally, reinvents its core racing product to make it more attractive to the wagering customer. This must necessarily involve seriously questioning many of the traditions and practices that currently prevail, which may be limiting wagering outcomes. As part of the audit process, I engaged Des Gleeson, the former Chief Steward of the Victoria Racing Club and Racing Victoria Chief of Integrity Services to provide advice regarding the conduct of integrity and stewardship functions by HRV. It has become apparent, through that process, that there are a number of key deficiencies in the area of integrity that need to be addressed, including the level of funding allocated by HRV for integrity services, the training of stewards and drug testing. To that end, I have recommended that there is a need for the government to consider whether responsibility for the integrity of harness racing should remain with HRV. The consultation phase of the audit provided an opportunity for industry participants to share their views on HRV and the industry more generally. During the audit, I met with more than 60 individuals and groups and received 35 written submissions. I wish to record my thanks to all involved for their openness and genuine interest in contributing to improving harness racing in Victoria. Whilst past decisions taken by HRV had some currency during the process, most were interested in looking to the future to create a vibrant and growing industry. There were no surprises regarding the key messages for HRV from the consultation phase. Notwithstanding the relatively small sample size, including written submissions received, there was an overwhelming message of a need for change in the Victorian industry. In all my time in the racing industry, I have never underestimated the challenge confronting peak racing bodies. HRV is no different in this regard. Dealing over time with a wide and varied range of participants and stakeholders, HRV has not been able to please all of its constituents. i However, it is clear that participants believe that the industry is ‘fractured and polarised’ and that this is the result of an absence of leadership. A strong HRV Chair, Board and executive is essential to reunite the industry, rebuild trust and establish a collaborative approach with consistent and inclusive processes to ensure buy‐in to planned strategies from key stakeholders and participant groups. Inevitably, when reviewing any industry one must start with an analysis of the governance arrangements to ascertain if the model is appropriate and can deliver on the core mission, key goals and objectives for the organisation and the industry. The HRV Board and executive are collectively and individually responsible for the control of an industry that operates in a highly competitive commercial environment. As a statutory body, HRV faces a number of challenges on the governance front, most notably legislated requirements for membership to the Board that do not reflect modern governance practices, and an appointments process that can change depending upon the views of the Minister of the day. I have found no evidence to lead me to conclude that the HRV Board does not take its role seriously, or has acted against what it believes are in the best interests of the industry. It is essential however that the Board and executive have the necessary skills and expertise to lead HRV and the industry to enable it to compete effectively in the markets in which it operates and to grow the industry. The current Board does not have the expertise or specialist skills it needs in a broad range of areas such as legal, marketing, media (including new media) and technology to enable HRV to robustly test the advice it receives from within the organisation. This has led me to recommend that the Board composition provisions of the Racing Act 1958 (the Act), be amended to reflect modern governance arrangements. In amending the Act, consideration should be given to the appropriate size and skill mix required for the Board. Following the amendment of the legislation, it may be appropriate to reconstitute the Board with current members encouraged to apply. A mandated appointment process that enables the government to attract the best and most appropriately skilled candidates, that includes an opportunity for measured involvement from stakeholders and participants, while taking into account the Minister’s desire to appoint the most appropriate and independent person(s) makes sense. Other key messages for HRV from the consultation phase include the need for: more effective communication and consultation with the industry an increased focus on attracting new and young people to the industry to address the ageing demographic and heavy reliance of the industry upon volunteerism and hobbyists a strategy to grow ownership as a key industry driver improved returns for industry participants ii increased marketing and promotion of harness racing. It is most interesting that these messages have been confirmed by the findings from the 2014 IER Culture Change and Engagement Report, currently in draft form, which was commissioned by HRV. Whilst it has not been finalised the HRV Board should act as a matter of priority on the findings of the report. In formulating recommendations, I have endeavoured to concentrate on the key matters that I believe will make a difference to harness racing in Victoria. The recommendations are detailed on pages 9 ‐ 11. In summary, they address the need for: the appointment of a skills‐based board and the establishment of an Appointments Panel to ensure that the best possible candidates are identified the establishment of a Harness Racing Advisory Body (HRAB), that includes representatives from the Board, to improve consultation and industry engagement stronger leadership from the HRV Chair, Board and Chief Executive Officer that includes a commitment to inclusion, transparency and engendering trust within the industry improved governance processes and practices, particularly in the areas of risk management, strategic planning and stakeholder engagement an increased focus on integrity the development of an infrastructure plan to ensure the industry is well positioned to respond to future wagering growth opportunities the development of diverse revenue streams that will be crucial to the medium to long term viability of the industry. A number of the recommendations will have financial implications for HRV. In an ideal world, all of the recommendations should be implemented immediately. However, I recognise that this may not be possible given current financial restraints. Priority must be given to increasing the funding for integrity services and ensuring that HRV has the right leadership to move the organisation forward and reinvigorating the racing product. Dale G Monteith April 2015 iii R ECOMMENDATIONS Governance, Board expertise and skills 1. 2. 3. 4. 5. 6. 7. 8. That the Racing Act 1958 (the Act) be amended to provide for the appointment of a skills‐based board in line with modern governance practice. Following the amendment of the Act, it may be appropriate to reconstitute the Board with current members encouraged to apply. That an Appointments Panel (AP) be established to assist the Minister to identify appropriate candidates for appointment to the Board. Members of the Board and senior executives be required complete the Australian Institute of Company Directors (AICD) Company Directors course, or a similarly approved course, which focuses on high standards for directors and corporate governance. The government give consideration to undertake a review of the remuneration levels for board members of racing statutory bodies. That a Harness Racing Advisory Board (HRAB) be established (with membership approved by the Minister and including at least two HRV Board members) to facilitate consultation required under section 44B of the Act. That the Board take action to ensure more effective leadership and communication, to reunite the industry and reinvigorate the racing product. That the Board implement best practice risk management, including a requirement for the Audit Committee to meet with the Board at least once a year. That the Board revise the its draft Harness Racing 2020 Strategic Plan to ensure that it includes, at a minimum a clear vision for harness racing clear accountabilities for the delivery of initiatives risk management and mitigation strategies timelines for implementation quarterly reports to the Board on implementation of deliverables, against identified performance measures the development of a communications strategy to effectively engage with stakeholders strategies for growing industry revenue strategies to attract new and young people to the industry. iv Integrity services 9. That the government consider the removal of integrity as a function of HRV and the establishment of a separate integrity body for Victorian harness racing. 10. That the government consider providing funding from the Victorian Racing Industry Fund (VRIF) to significantly strengthen integrity capabilities. Debts and liabilities 11. That the government work with HRV to identify strategies to speed up HRV’s debt retirement plans, including consideration of accessing unused HRV VRIF funding, the sale of surplus land at Melton and improvements to the HRV operating model. 12. HRV must, as a matter of priority, communicate to its key stakeholders its intentions regarding its debt management strategy, including timelines and consequential financial implications for the industry. Income streams 13. That HRV: work collaboratively with all wagering service providers, in addition to Tabcorp, to grow wagering income from all sources adopt the recommendations of the Ford Sponsorship report to grow sponsorship income initiate discussions with the free to air networks for coverage of the Summer of Glory feature races develop strategies to improve returns from HRV racing product, both nationally and internationally. Infrastructure 14. That HRV develop a ten‐year strategic infrastructure and racing plan that: identifies the number of tracks required to sustain the annual racing program and capitalise on emerging wagering markets considers increasing the number of metropolitan meeting venues (e.g. Cranbourne) identifies patron facility upgrades that need to be undertaken at Melton (e.g. a roof over the grandstand seating, tiered dining facilities and a parade ring closer to the stand) and at other major racing venues ensures that owners are appropriately recognised and catered for examines the establishment of training and stabling facilities at racetracks such as Melton, Shepparton, Ballarat and Bendigo to reduce the barriers to entry by new participants. v Administrative duplication 15. That HRV reconsider its continued ownership of Racing Information Services Enterprise (RISE). 16. That HRV, as a matter of priority, continue its roll out of its financial shared service model and extend the shared service model to include: occupational health and safety compliance risk management marketing of racing. Other issues arising from the audit 17. That HRV consider, in the development of plans to establish horse training facilities on harness tracks, making provision for the establishment of an education Centre for Excellence for industry participants and employees. 18. That government consider providing funding support for this important industry initiative. vi I NTRODUCTION On 7 January 2015, the Minister for Racing, the Hon Martin Pakula MP, announced that he had asked me to conduct an independent audit of Harness Racing Victoria (HRV), (Appendix A). This fulfilled an election commitment to review the harness racing industry (the industry) in Victoria. The Terms of Reference (ToR) (Appendix B) provided by the Minister established the context for the audit, which examined the effectiveness, efficiency and appropriateness of arrangements in the following areas: governance board expertise and skills debts and liabilities infrastructure income streams (including race field fees, joint venture revenue, sponsorship) administrative duplication across HRV, Tabcorp Park (TP), RISE Pty Ltd and clubs integrity services (licensing, registration, drug sampling and testing in and out of competition and out‐of‐competition investigative arrangements) stewards ‐ attraction and retention. This audit has examined HRV’s governance of the industry and its dealings and arrangements with government, interstate harness racing, the other Victorian racing codes and, importantly, the passionate industry stakeholders and participants in Victoria. This report makes 18 recommendations that I believe will better position HRV to fulfil its obligations under the Act and to ensure a growing and viable industry in Victoria. 1 T HE AUDIT AND CONSULTATION PROCESS This audit presented a unique opportunity to bring all sectors of the industry closer together and to assist the government and HRV to identify shared and improved outcomes for Victoria. The reports and documents considered during the audit (Appendix C) provided important background information. Key reports considered included: HRV Annual Reports from 2010 to 2014 2014‐15 HRV budget Tabcorp Park Melton and RISE 2014‐15 budgets 2013 IER Victorian Racing Industry Economic Impact Study Draft IER Cultural Change and Engagement Report 2014 commissioned by HRV HRA October 2014 Wagering Working Party Report and July 2011 report on the Australian Standardbred Breeding Industry 2014 Ford Sponsorship Report 2010 and 2014 Australian Racing Board Fact Books – sections on harness racing wagering. In conjunction with this audit, I retained Mr Des Gleeson, highly respected former Chair of Stewards with the Victoria Racing Club (VRC) and Racing Victoria Chief of Integrity Services, to provide advice regarding the conduct of integrity and stewardship functions by HRV. The audit involved an extensive consultation process, including meetings with more than 60 individuals and groups and the receipt of 35 written submissions. A summary, grouped under broad headings, of all matters raised during the consultation and written submission phase is at Appendix D. To protect the confidentiality of individuals, I have not attributed comments to a specific person or group. An important document considered during the audit was the draft Culture Change and Engagement Research Report commissioned by HRV in late 2014. This work was a positive step to gauge industry views on how HRV is performing across a range of measures. The report, currently in draft form, contains key findings and recommendations that are consistent with the issues identified during the consultation and written submission phase of the audit. 2 T HE V ICTORIAN H ARNESS R ACING I NDUSTRY My career within the Australian racing and wagering industries has led me to form the view that harness racing in Victoria has, over many years, made a valuable contribution to the state’s economy and social fabric, particularly in rural areas. The industry has also made a significant contribution to the health and well‐being of the three codes of racing in Victoria. HRV is unquestionably a national leader, particularly when it comes to exporting its product to international wagering markets. The simulcasting of 57 Victorian trotting races into France is a prime example of this leadership. HRV’s strategic decision to focus on trotting races, while the rest of Australia has not, has facilitated the expansion of its racing product into international markets. A 2013 report by IER on the Size and Scope of the Victorian Racing Industry identified that harness racing contributes more than $421 million annually to the Victorian economy and is responsible for generating $226 million per annum of household income. The industry also creates nearly 4000 jobs and has more than 25,000 active participants. Apart from its economic benefits, the industry also makes a significant contribution to the social fabric of Victoria, particularly in rural areas. It delivers community and social benefits including leisure and entertainment options, community building through its support of local charities and contributes to the health and well being of individuals employed or participating in the industry and their families. The challenges confronting HRV are many and varied. As the governing body, it cannot please all people all of the time, particularly in an industry driven by passionate generational involvement. Some of the challenges include, but are not limited to, maintaining the integrity of the industry to the highest standard, managing the industry’s financial well‐being in the face of diminishing returns from traditional wagering sources and dealing with ageing participant, volunteer and customer demographics. The challenges faced by HRV are no different from those of other harness racing industries throughout the world. Papers delivered at the recent 2015 World Trotting Conference by Harness Racing New Zealand and the United States Trotting Association confirmed these same challenges. A national response on many of the important issues makes sense. Fundamental changes to the Australian wagering landscape over the past decade have led to financial uncertainty for all Victorian racing codes, but probably more so for HRV. Returns 3 from wagering have stagnated and there is now intense competition for the customer’s wagering dollar, from sport in particular. Under the current industry funding arrangements, the Victorian codes compete against each other for wagering revenue from the Tabcorp Joint Venture (JV), which has nine years to run. In this regard, HRV has been affected the most by diminishing market share (see Table 2). This reduction is due to the shift in punter behaviour, away from betting on harness racing mainly in favour of greyhound racing, which has significantly fewer resource requirements and a more mobile racing population. In addition, customer wagering preferences have been shifting away from pari‐mutuel wagering towards TAB fixed odds betting, contributing to further uncertainty about HRV’s JV wagering revenue. Of the three codes, HRV has been the most affected by this shift, which has largely occurred since 2012. Prior to then there was little, if any, fixed odds betting provided by Tabcorp on harness racing compared with thoroughbred racing. Fixed odds betting, when combined with the relatively smaller harness racing field sizes and the number of short priced winners in harness racing, has led to lower revenue yields and placed the industry at a competitive disadvantage to the other codes. During the audit, many participants expressed the view that the industry’s product and brand (both in Victoria and nationally) need to be re‐invented to attract wagering customer interest. HRA’s 2014 Wagering report findings support this view. The advent of corporate bookmakers licensed in the Northern Territory (NT) has caused all codes, throughout Australia, financial and other concerns (through amongst other things, legal challenges to the industry’s right to charge product fees). These operators have captured significant market share, grown total wagering on racing and now pay valuable product fees to the industry. HRV is now capitalising on growing this wagering revenue stream rather than solely relying on returns from the JV with Tabcorp. However, there is a fine balance in maximizing such product fee levels to optimize that revenue stream given the ability of wagering operators to influence their customers to gravitate to lower product fee racing and sport. HRV probably took a commercial decision in setting its current fees, which I understand are at the upper end of the scale compared with its interstate counterparts. This is not a criticism but it has the potential to lessen HRV’s competitiveness in the market particularly if it was to increase such fees or other states 4 reduce their fees. Of particular concern for the Australian harness racing industry and governments is the significant downward trend in most of the key metrics associated with the health of the industry. Table 1 provides a summary of key metrics in Victoria for the period 2010 to 2014. Table 1: Key performance indicators for the Victorian harness racing industry 2010‐ 2014 (Sourced from HRV Annual Reports) Indicator Horses racing Starters Drivers Trainers Foals Stallion services Sires at stud 2010 4,440 39,973 897 1,460 2,985 4,943 103 2014 4,039 35698 762 1,247 2,215 3,269 79 These figures do not indicate a healthy and growing industry. 5 per cent change ‐ 9.0 ‐10.7 ‐15.0 ‐14.6 ‐26.0 ‐34.0 ‐23.0 G OVERNANCE INCLUDING B OARD EXPERTISE AND SKILLS Legislative requirements The HRV Board is established by Part II of the Act and obtains its authority to control the sport of harness racing in Victoria by Section 44 of the Act. Section 44 of the Act states that the function of the Board is ‐ (a) to control the sport of harness racing; and (b) to conduct harness races; and (ba) to consult with harness racing industry participants and facilitate consultation amongst harness racing industry participants; and (c) to exercise such powers functions and duties as are conferred on the Board by or under this or any other Act. HRV Board members are appointed by the Governor in Council on the recommendation of the Minister for Racing. Section 39 (2) of the Act states that the Board shall consist of seven members appointed by the Governor in Council of whom – (a) one shall be chairperson (b) three are persons who have experience in business or marketing (c) three are persons who have experience in the harness racing industry. There does not appear to be a consistent or mandated appointments process nor has there been a recent review to holistically examine the needs of HRV in terms of overall Board skills. The last time a review occurred was prior to the privatisation of the TAB in the early 1990’s when Ian McEwen was appointed Chair with a diverse and high quality skills‐based Board. The last time the appointment provisions within the Act were amended was in 2001 (through the Racing and Betting Acts (Amendment) Act 2001). That Act increased the number of board members from five to seven. As a result, the legislated requirements for membership to the HRV Board do not reflect the needs of a modern commercial organisation that requires a broad range of skills to lead and grow the industry. Best practice boards Many corporations and public bodies have moved to requiring directors to complete formal training in corporate governance. At a minimum, members of the Board and senior executives should be required complete the Australian Institute of Company Directors (AICD) company directors course, or a similarly approved course, which focuses on high standards for directors and corporate governance. The nine common attributes found in all high quality board members are: they possesses a deep interest and enthusiasm for the company or organisation they serve 6 they have the wisdom and courage to confront issues and make the tough calls and decisions they invest time and energy to gain a solid understanding of the company and its products, as well as its markets and all its competitors they possess sound business judgment they devote the time and energy required to do the position justice they are unquestionably independent and objective they can articulate views clearly and in a controlled manner and tone they are invariably collegial team players they serve as ambassadors for the company According to the Governance Matters ‘Top 10’, superior board members: know what they are there to do understand how the company or organisation works are diligent and conscientious have a sharp and inquiring mind have sound business judgment consistently display the courage of their convictions are articulate and persuasive are ethical and fair in all their dealings understand their risk profile understand their shortcomings and are committed to continuous personal improvement Board and executive The Board and executive are collectively and individually responsible for the control of an industry that operates in a highly competitive commercial environment. It is essential that the Board and executive have the necessary skills and expertise to lead the industry and the organisation, and to enable it to compete effectively in the market and to grow the industry. The Board is a by‐product of successive governments and appointments by ministers of the day. This has led to the appointment of a board that does not have the experience or expertise it needs in areas such as legal, marketing, media (including new media) and technology to enable it to robustly test the advice it receives from within the organisation. That is not to say that the current Board does not comprise competent people. The question is whether the legislation, as currently drafted, lends itself to the establishment of a Board that has the appropriate range of skills. It is clear from the consultation and submission process that participants believe that the industry is a ‘fractured and polarised industry’ and that this is the result of an absence of leadership. A strong Chair, Board and executive is essential to reunite the industry, rebuild trust and establish a collaborative approach with consistent and inclusive processes to ensure buy‐in to planned strategies from key stakeholders and participant groups. 7 I am unaware of past or present Boards having reviewed their individual or group performance. Such reviews are healthy and often involve a confidential process to protect information and to establish if levels of board “self‐belief” are consistent with those of critical stakeholders. Such a process would accord with good corporate governance practice. From the audit, I have concluded that it is appropriate to amend Board composition provisions of the Act to reflect modern governance arrangements. In amending the Act, consideration should be given to the appropriate size and skill‐mix required for the Board. Following the amendment of the legislation, it may be appropriate to reconstitute the Board with current members encouraged to apply. It is noted that remuneration levels for Board members are established according to the Department of Premier and Cabinet – Appointment and Remuneration Guidelines for Victorian Government Boards, Statutory Bodies and Advisory Committees (Guidelines). The Board is classified under the Guidelines as a Group B, Band 1 Organisation (significant industry advisory boards and other bodies advising Government on key strategic matters). The remuneration level set for the Chair and members of a Group B, Band 1 Organisation is re set at between $16,971 ‐ $47,764 for the Chair and $10,183 ‐ $19,125 respectively. This may inhibit the ability to attract the best possible independent talent to the Board. The government should give consideration to undertake a review of the adequacy of remuneration levels for board members of racing statutory bodies. The Act should also be amended to provide for the establishment of an Appointments Panel (AP) to assist the present and future ministers identify appropriate persons for appointment to the Board. Consideration could be given to replicating an AP process for GRV. The AP should have an independent Chair with corporate governance expertise, appointed by the Minister. The remaining two members of the AP would be the Minister or his nominee plus a person nominated by the industry. The AP should consult with the HRV Chair to determine the skills required. The AP should be convened no less than six months prior to the expiry of a board appointment, to allow for a rigorous board selection process. Consideration should be given to the engagement of specialists in the director recruitment to identify suitable candidates for consideration by the AP. A universal theme arising from the consultation process was the view within the industry that the current Board has very limited experience in and understanding of harness racing. Stakeholders also criticised directors for not attending enough race meetings or engaging with participants. There was also the general view that the Board and executive of HRV has failed to effectively communicate and engage with the industry. To supplement the Board’s racing expertise it is recommended that a Harness Racing Advisory Board (HRAB) be appointed to act as a sounding‐board and to make 8 recommendations to the Board in relation to all racing related matters. This will importantly give industry stakeholders and participants the opportunity to have formal input whilst at the same time avoid potential conflicts of interest if such persons with significant involvement were to be appointed to the Board. Recommendations 1. That the Racing Act 1958 (the Act) be amended to provide for the appointment of a skills based board in line with modern governance practice. Following the amendment of the Act, it may be appropriate to reconstitute the Board with current members encouraged to apply. 2. That an Appointments Panel (AP) be established to assist the Minister to identify appropriate candidates for appointment to the Board. 3. Members of the Board and senior executives be required complete the Australian Institute of Company Directors (AICD) Company Directors course, or a similarly approved course, which focuses on high standards for directors and corporate governance. 4. The government give consideration to undertake a review of the remuneration levels for board members of racing statutory bodies. 5. That a Harness Racing Advisory Board (HRAB) be established (with membership approved by the Minister and including at least two HRV Board members) to facilitate consultation required under section 44B of the Act. 9 O THER ISSUES ASSOCIATED WITH HRV G OVERNANCE It is appropriate for the Board and government to consider a number of other initiatives, which go hand‐in‐hand with good governance practices. Appointment of Chief Executive Officer and direct reports All boards are responsible for ensuring that the organisation they govern has the best and most diverse management skills available. The most important decision any board can make is the appointment of its CEO. It is incumbent upon boards to regularly review and discuss the performance of the CEO against KPIs set for the role. Concerns were raised during the audit about the length of service of the CEO and his ability to lead the industry. A common theme emerged that a new leader with stronger communication skills and a demonstrated history of innovation and change management is needed to lead the industry and HRV. I note that the then Minister’s approval was sought for the initial appointment of the CEO as is usual practice with statutory authorities. It is not clear if the Minister’s approval is required, or was sought, for the CEO’s reappointment. Ultimately, the CEO’s appointment is at the discretion of the Board. An appropriately skilled HRV Board should have the authority to make decisions regarding the appointment, re‐appointment or removal of the CEO. Without having formed a view on the matter, the current CEO has been in the role for more than eleven years, with the Board reappointing the CEO for a further three year term in July 2014. The Board should review, with the assistance of specialist consultants, the role of the incumbent CEO including his capacity to lead the industry over the next five years. The recent departure of the Chief Operating Officer (COO) and the appointment of a replacement, apparently without testing the market, is a concern. All CEO direct reports should be approved by the Board. An independent management skills audit of the CEO and the senior management team should be undertaken to satisfy the Board that the expertise within the current management team matches the skill set required to lead the industry. It may well be that the ability of the Board to employ the best possible management team is limited by the remuneration levels that can be offered in the public sector. It is important that HRV is not limited in its ability to attract the best possible talent. Strategic planning It is not evident, from the perusal of 2014 Board agendas, that strategic planning is a standing Board agenda item, as it should be. At the very least, the Board should require 10 from management quarterly reporting on performance outcomes to enable the Board to determine if changes are required to address poor performance. I have reviewed HRV’s 2006‐2009 and 2010‐2014 strategic plans. From the consultative process, it is clear there has been very little industry understanding of and hence buy‐in or support for, HRV’s strategic plans. Upon commencing the audit, I became aware that HRV has all but completed its draft Harness Racing 2020 Strategic Plan (the plan) for the period 2016 to 2020. The release of the plan to the industry has been delayed pending outcomes from this Audit. Experience from previous HRV strategic plans must serve as a guide for HRV to develop and implement a rigorous communications and consultation program for the rollout of the plan if HRV is to effectively engage with stakeholders and gain their support. Communications strategies must be an important component of the plan. In addition, a number of participants’ spoke of HRV’s past lack of commercial due diligence practices when entering into major contracts or adopting strategies that had significant financial implications. All sought such practices from HRV in future. Horse welfare is addressed in the plan, particularly the re‐homing of retired horses under the “Raising the Standard” program. With the current level of resources available to the program, up to 30 horses can be re‐homed each year. This is a long way behind the animal welfare and re‐homing initiatives of the other two codes through Off the Track and the Greyhound Adoption Program (GAP). In 2013‐14 alone, GAP re‐homed 536 greyhounds. The Board needs to provide adequate funding to expand the program if it is serious about the finding homes for retired horses. In the past, government has provided funding from VRIF to assist with establishing the program. Whilst HRV strategies associated with VICBred and the first winners’ bonus are working well, the breeding industry believes that HRV should work more closely with it to develop further programs to encourage participation in the breeding industry and address declining horse numbers. Examples such as a successful Sires Stakes program like in USA and Canada, were raised during the review. Audit Committee The independent Audit Committee Chair is currently satisfied with the level and quality of information provided to enable that committee to perform its role as specified by its charter. The Chair advised that the standard of information provided to the Audit Committee has improved since the appointment of the current Chief Financial Officer. The Audit Committee does not formally meet with the Board. Good governance practice would require that the Audit Committee and the Board meet formally, at least annually and in the absence of senior executives, including the CEO. 11 The HRV Board and the Audit Committee should be able to confidentially discuss issues, without management present; in much the same way boards should meet annually with external auditors to be satisfied that management is adequately fulfilling its responsibilities. Risk Management functions within HRV HRV’s risk management practices fall short of those recommended by AICD and organisations with which I have been involved. In 2014, the only reference in Board papers to risk management was the adoption in February 2014 of an October 2013 Risk Assessment report, which identified key risks for HRV. Consideration of OH&S and Compliance risks did not form part of this report. I understand that HRV is planning for the independent Audit Committee to take responsibility for risk management. I do not consider that it would be appropriate for the Board to delegate to the Audit Committee responsibility for risk management. Board and individual directors cannot delegate their responsibilities with respect to HRV’s risks. Best practice risk strategies need to be implemented by the Board, as it alone should be responsible for ensuring an effective risk management strategy is in place. It is a concern that risk management is not a standing item on the Board meeting agenda. Again, this does not accord with best practice for boards or directors, which should be responsible for embedding a culture of managing both risks and compliance. Risk management practices need to be embedded, in a real way, in HRV’s strategic planning process to mitigate risks associated with strategies that do not meet expectations. The Board must assume responsibility for directing risk management and require management to provide at least quarterly, preferably monthly, reports to the Board. Best practice risk management must be the Board’s goal. Identifying and accepting key risks is the start of the risk management process, not the end. The Board should require management to identify risks and recommend strategies to mitigate them and to monitor those strategies. Normally this would include status reports on the current risk environment, risks under active management, risk profiles, enterprise risks and incidents and accident reports. One aspect of risk management often overlooked is crisis management and the protection of an organisation’s reputation with appropriate public relations strategies already in place. This is an area for improvement for HRV. All HRV policies and procedures should be reviewed to identify gaps in current practices, including the requirement for Board sign‐off on all such policies. 12 Periodically, the Board should alo receive presentations from individual managers responsible for managing key risks to enable the Board to be fully satisfied with measures put in place to manage risks. Recommendations 6. That the Board take action to ensure more effective leadership and communication, to reunite the industry and reinvigorate the racing product. 7. That the Board implement best practice risk management, including a requirement for the Audit Committee to meet with the Board at least once a year. 8. That the Board revise the draft Harness Racing 2020 Plan to ensure that it includes, at a minimum: a clear vision for harness racing clear accountabilities for the delivery of initiatives risk management and mitigation strategies timelines for implementation quarterly reports to the Board on implementation of deliverables, against identified performance measures the development of a communications strategy to effectively engage with stakeholders strategies for growing industry revenue strategies to attract new and young people to the industry. 13 I NTEGRITY S ERVICES The audit has included a review of HRV’s carriage of industry integrity matters, the HRV Racing Appeals and Disciplinary Board (RADB) and Victorian Civil and Administrative Tribunal (VCAT) appeals processes, the attraction and retention of stewards, licensing, registration, drug sampling and testing in and out of competition, and out‐of‐competition investigative arrangements. During the audit, a number of serious integrity matters occurred across all three racing codes. These were: alleged harness race fixing in Mildura cobalt positive swabs in thoroughbred and harness racing in Victoria the ‘live baiting’ of greyhounds. These events combined have had a bearing on the overall perception of the adequacy of racing integrity arrangements in Victoria. In response to the cobalt issue, the Minister for Racing announced in February 2015 that $200,000 in funding would be provided from VRIF to Racing Analytical Services Ltd (RASL) to enable it to acquire the capability to routinely test for cobalt. Currently, samples have to be sent to Perth and Hong Kong to be tested for Cobalt. Subsequent to commencing the audit, the Minister requested that the Racing Integrity Commissioner’s (RIC) report into the late scratching of multiple runners from the Ballarat Cup be incorporated into this audit report. That report has been delayed by the RIC’s Own Motion Investigation into live baiting in greyhound racing and the RIC report on the Ballarat Cup is now expected to be finalised by the end of April 2015. A common theme that emerged through the consultation process was that industry stakeholders do not believe that HRV is delivering high quality integrity services. Some of the concerns raised by stakeholders are: HRV has not done enough to respond to current and emerging drug threats (e.g. Cobalt), when compared to other jurisdictions HRV is not spending enough on integrity Stewards are poorly trained and do not have the respect of industry stakeholders Inconsistencies in the interpretation of the Rules of Racing and preferential treatment to bigger stables. Many participants have spoken of their dismay that HRV has not been as proactive with respect to cobalt as has Harness Racing New South Wales (HRNSW) and this reflected poorly on the integrity of the industry. It is noted that, to date, there has been minimal evidence of cobalt use in Victorian harness racing, yet more than 1600 cobalt readings have been recorded in harness racing in NSW, with HRNSW fully disclosing these results since October 2013. The only positive finding announced in Victorian harness racing (17 March 2015) has resulted in the suspension of the training and driving licence of the person responsible, 14 pending an investigation. The decision by stewards to suspend the trainer was subsequently upheld by the Racing Appeals and Disciplinary Board (RADB). Other issues raised during the audit were: the potential for conflicts of interest with two HRV Board members sitting on the Integrity council (IC) relating to HRV commercial interests and/or any horse ownership they might have HRV’s ability and preparedness to fund integrity to best practice levels the decision taken some time ago by the government to abolish the Racing Appeals Tribunal and for VCAT to be the final body for appeal by aggrieved industry participants for all three codes. Mr. Des Gleeson, former Chair of Stewards, Victoria Racing Club and Racing Victoria Limited Head of Integrity Services, was engaged to assist with the audit of HRV integrity services. He consulted with all of the key persons involved with the integrity of the industry in Victoria. His expertise and knowledge in this important field was invaluable. Mr Gleeson’s findings are set out in detail in this section of the report and cover the issues of the IC, operational integrity matters, the attraction and retention of stewards and the HRV RADB. One of the key issues identified is the lack of clarity about the current reporting structures for integrity staff within HRV. In his 2012 Report on Own Motion Inquiry into Race Fixing, the RIC recommended the establishment of an independent three‐code integrity body. The objective of that recommendation was to provide Victoria’s racing industry with a clear separation between its commercial and integrity functions, thereby removing the potential for the commercial arm of the organisation to influence integrity outcomes. At the time, the racing industry argued successfully for the establishment of an alternate model of ICs that were intended to provide the necessary separation of commercial and integrity functions. Harness Racing Integrity Council The functions of the HRV IC are to: 1. Oversee the integrity assurance functions of HRV and to consult with, advise, and where necessary direct the Integrity Department in relation to operational matters. 2. Advise the HRV Board and make any recommendations in respect to: (i) rule making proposals (ii) integrity policy (iii) participant licensing applications and related procedures (iv) resourcing of the integrity assurance function (v) any other integrity matter. 3. Advise and report on any matter referred to it by: (i) The Board members (ii) the Chair of Stewards (COS) or General Manager, Integrity (GMI) (iii) Racing Integrity Commissioner. 4. Liaise with the RIC and external law enforcement agencies. 15 5. Liaise with IC’s of the other codes in order to promote cross‐code cooperation, resource sharing and integrity related training and development. 6. Review integrity policy and compliance. 7. Otherwise consider and review any matter relevant to the integrity of racing the Council deems appropriate. There are concerns about the current reporting arrangements for integrity staff at HRV. In particular, COS reports to both the IC and the GMI and, at times, also reports to the COO on day to day operational matters. The GMI reports to the IC and the COO who reports to the CEO. This can lead to confusion. The clear intention of establishing IC’s was to remove the potential for commercial considerations to drive integrity decision‐making. If HRV is to retain responsibility for integrity services, clear and defined reporting lines must be established, as follows: the CoS should be responsible to the GMI the GMI should be responsible to the IC on all matters relating to integrity and integrity operations the GMI should be responsible to the CEO on operational and business matters not related to integrity and integrity operations. Due to potential conflict of interest issues, IC member ownership of harness horses is not desirable. Race day stewarding Stewards are required to officiate at all race meetings conducted by HRV. A minimum of three stewards attend race meetings. In addition there is one part‐time steward and two club stewards at Mildura. There is currently one investigator with another steward (available on a rotational basis) who is undertaking on the job training as an investigator. During the audit it has become clear that there is no formal training program in place for stewards or investigators. In addition, HRV does not employ a dedicated form analyst to assist stewards and no formal bet monitoring is undertaken other than through a Memorandum of Understanding with Betfair. These tasks are generally performed by the stewards that are officiating at a particular race meeting. It is a major concern that head‐on stewards patrol video coverage is only available at Melton, Geelong and country cup meetings. HRV should immediately re‐introduce head‐on video patrol coverage at all professional meetings. This not only greatly assists stewards and appeals bodies to make the correct decision; it also provides confidence to participants and punters. Swabbing Data obtained from RASL shows that there has been a significant reduction in the number of swabs samples being taken by HRV. In 2007, a total of 2076 post race urine samples were provided. In comparison only 1350 samples were taken in 2014. RASL has also advised that there have been reductions in post race blood samples, TCO2 samples and EPO samples. 16 Currently, every Melton winner is swabbed with up to three pre‐race samples taken per race. By comparison, only two to three winners are swabbed at country meetings. The number of swab samples taken by HRV should immediately increase and should include: all winners at TAB meetings horses that perform poorly with no obvious explanation well‐backed horses and beaten favourites horses that drift markedly in the betting others at random pre‐race samples should be taken regularly at all meetings. In 2014, only 53 out of competition samples were taken on the advice of the investigators with very little input from the stewards. Out of competition testing should be increased with samples taken on a regular basis. This program should involve the GMI, stewards and investigators in the selection process. The conclusion reached from the audit of HRV’s control of operational integrity functions is that it is under resourced, probably due to limited financial resources. This is a major concern for the integrity of the industry if allowed to continue. HRV’s evident downsizing of its integrity functions falls short of what is expected by government and the industry. Additional resources, including funding, must be provided to enable stewards and investigators to protect the integrity of the industry by upholding the Rules of Racing. Consequently, it is appropriate to review HRV’s continued responsibility for the industry’s integrity functions. Nothing less than best practice is acceptable. The same integrity practices and standards should be uniform across all three Victorian racing codes. If integrity services remain with HRV, the Board must ensure, at a minimum, that: formal training programs are developed and undertaken by all stewards and investigators to equip them with the confidence and the knowledge they require to properly undertake their important decision‐making roles as provided by the Rules of Racing. This training must include skills and requirements for presentation of cases to RADB and VCAT HRV enters into discussions with Racing Victoria Ltd about utilising its state of the art race day control room, where expert race analysts, form analysts and bet monitoring analysts complement race day stewards. This technology in respect of bet monitoring is now of great importance when considering that upwards of 75 per cent of bets placed on Victorian harness races are placed with corporate bookmakers and pari‐mutual operators licensed outside Victoria (source Tabcorp) there is an immediate increase the number of in and out of competition swabs taken and tested. 17 Attraction and retention of stewards Given the competition for good stewards from around Australia and internationally, it is natural that there will be a high level of mobility within this profession. Appropriate and competitive remuneration levels will play a role in attracting and retaining HRV stewards. In 2005, HRV employed 18 stewards. This number reduced to 14 in 2008 and HRV currently employs 11 full‐time stewards. However, it should be noted that the number of race meetings conducted by HRV reduced from 500 to 450 between 2011 and 2014. Outside the metropolitan area and Geelong, swabbing stewards are employed by clubs conducting the race meeting, many on a voluntary basis. All attendants involved in the swab sampling process and other integrity assurance operations should be employed by HRV and properly trained. It is likely that HRV’s ability to attract and retain stewards is inhibited by a number of factors. Appropriate and competitive remuneration levels, the lack of structured training programs and career paths and the development of a culture of mutual respect and professionalism, led by the Board, will all play a role in retaining HRV stewards. To attract and retain stewards HRV must: benchmark remuneration rates paid to its stewards compared with those paid to thoroughbred stewards and interstate harness racing authorities separate the level of remuneration paid to the CoS from the remuneration levels for those associated with the management and administration of HRV develop structured training programs for all stewards to provide them with a career path in the industry in Victoria ensure that structured training programs are available for all stewards to provide them with career path opportunities in the industry in Victoria embed a culture of mutual respect, trust and professionalism across the industry. Many during the audit said this was missing. HRV Racing Appeals and Disciplinary Board The RADB is an independent body established under the Act to hear: appeals in relation to decisions made under the rules by the stewards or the controlling body to impose penalties charges made by stewards against persons for serious offences as specified in the Rules of Racing. The Act also includes a right of appeal to VCAT against a decision of the RADB, by either the stewards or the person penalized. Some industry dissatisfaction was evident in cases where there is a second line of appeal against a steward’s decision that has already by heard by the independent RADB. A study of appeals processes throughout Australia by HRA has shown that the VCAT process has proven to take more time than the previous Racing Appeals Tribunal (RAT) process. 18 The Government decided in 2008, based on recommendations from the 2007 Lewis Review of Integrity Assurance in the Victorian Racing Industry, to abolish the RAT, to establish a RADB for both HRV and GRV and to transfer responsibility for hearing of appeals against decisions of the RADB to VCAT. The decision to abolish the RAT was in part, made because of racing industry concerns about the time taken by RAT members to hear and determine an appeal. Since then, based upon an HRA Australia submission to a 2013 Australasian Racing Ministers conference, the average time for appeals to VCAT, at that time, was in the order of 195 days compared with 40 days for the RAT. Another complicating factor for participants, given their propensity to travel around Australia to race, is that jurisdictions are not consistent in terms of appeals processes. Victoria and Queensland are one out with final appeals being to civil tribunals. If VCAT, rather than RADB, is to remain the appeal body, it is highly desirable that those persons sitting on appeals have the necessary expertise in the industry. Recommendations 9. That the government consider the removal of integrity as a function of HRV and the establishment of a separate integrity body for Victorian harness racing. 10. That the government considers providing funding from the Victorian Racing Industry Fund (VRIF) to significantly strengthen its integrity capabilities. 19 F INANCIAL MATTERS INCLUDING DEBTS AND LIABILITIES HRV’s financial position has, in part, been affected by the decision taken in 2007 to establish an entertainment and racing venue at Melton and its subsequent decision to cease racing at Moonee Valley. I understand that the original 33‐hectare parcel of the land at Melton was acquired in the early 1990’s for training, with no intent to race there. While establishing an industry owned asset (TP) compared to leasing a venue without certainty or control (Moonee Valley) made sense, it came at a cost to industry with HRV taking on substantial debt. Debt in and of itself is not a bad thing. HRV’s present operating model, with supporting income streams, has enabled it in 2013‐14 and the current year to generate sufficient cashflow and internal reserves to exceed expectations in servicing the debt (Table 2 page 35). In 2014‐15, HRV will make at least $5m in additional repayments from the short‐term principal to reduce its current liabilities by this amount. Total borrowings will therefore reduce to $25.5m from $32m in 2013‐14. As to whether this level of debt repayment can be sustained is questionable as I suspect HRV will have other important needs to address with spare cash. I note that HRV has a strategy in place (Appendix E) to retire its current debt over a period of 15 years. Should the lack of wagering income growth over the previous five years continue in the future, it might necessitate a review of HRV’s debt retirement strategy. In 2014, the government directed HRV to refinance its debt through Treasury Corporation Victoria (TCV). This enabled HRV to substantially reduce its annual interest costs, with savings in the order of $1.3 million per annum. As it is a statutory authority, HRV debt ultimately forms a risk for the State. Refinancing debt through TCV should be seen as a positive move for the industry. With the government sponsored refinancing facility HRV has access to a total of $35.3m, through long ($22m) and short ($10m) term facilities and a line of credit ($3.3m). Under this facility, HRV must make $1.5m in repayments per year on the long‐term principal. 20 The $1.439 million of interest paid on the loan in 2014 represents 1.7 per cent of total HRV income. While this is a small percentage, the cost of servicing the loan impinges upon spending in other areas of HRV’s business, particularly integrity, prizemoney and marketing and promotion of the industry. Table 2 ‐ HRV Borrowings (interest bearing debt), Six years, 2010 to 2015 Current Liabilities 2015 $m 6.5 2014 $m 11.5 2013 $m 29.9 2012 $m 2011 $m 2010 $m Non Current Liabilities 19 20.5 4.7 29.1 29.1 29.1 Total Borrowings 25.5 32 34.6 29.1 29.1 29.1 0 0 0 Increase/Reduction ‐6.5 ‐2.6 5.5 Source: 2010 to 2014 HRV Annual Reports and advice re 2015 Based upon 2014‐15 repayments, the Board may wish to consider whether there is a benefit in revising its debt repayment strategy over a shorter timeframe than the planned 15 years. In addition, strategies that may be considered include the sale of surplus land at Melton or an approach to government to use VRIF funds for this purpose. The impact upon current interest commitments will be important to understand. It was evident during the consultation process that stakeholders were unaware that HRV had renegotiated its loan through the TCV and of the quantum of the subsequent savings. HRV must ensure that it effectively communicates its debt reduction strategy to its key stakeholders. Questions were raised about the transparency of the arrangements regarding HRV’s ownership of TP and RISE and its part ownership of Australian Pacing Gold. In particular, stakeholders were concerned about the potential for cross‐subsidisation between the businesses at the expense of the industry. HRV’s treatment of these entities complies with accounting standards, with the arrangements “consolidated” in HRV’s annual financial statements. This treatment has led to a degree of participant confusion. There are, however, details of the individual financial performance of these entities, separate from the financial statements, in the historical financial performance summary section of the annual report. It is not widely understood that HRV Management currently makes an annual rental payment of $570,000 to HRV for TP or that cost savings associated with racing at Melton, compared with those previously at MV, are in the order of $1.3m per annum. Both are positive benefits for the industry and should be better explained to stakeholders and participants. HRV’s end of year results have, and will continue to be, impacted by the treatment of capital expenditure and VRIF grants in each year. Generally, VRIF grants must be matched with like commitments from HRV. As VRIF grants must be recognised as revenue in the year that they are received this means the total capital expenditure is also taken into account in the year it is incurred rather than amortised over a number of years. This treatment negatively affects HRV’s published profit each year. 21 The Board receives from management detailed monthly segmented reporting of the various entities owned by HRV to enable it to monitor the performances of the entities but also to monitor HRVs normalized performance. This is normal business practice. It is noted that the 2013‐14 annual accounts record other expenses in the order of $4.2m, which is 5 per cent of total HRV income. Based upon HRV’s 2014‐15 budget there are a number of items, two of which are in excess of $500,000, which could be recorded in their own right for transparency purposes. Recommendations 11. That the government work with HRV to identify strategies to speed up HRV’s debt retirement plans, including consideration of accessing unused HRV VRIF funding, the sale of surplus land at Melton and improvements to the HRV operating model. 12. HRV must, as a matter of priority, communicate effectively to key stakeholders its intentions regarding its debt management strategy, including timelines and consequential financial implications for the industry. 22 R ACING PRODUCT AND INCOME STREAMS The biggest threat to harness racing revenue is the loss of punter confidence and the resultant shift in betting activity away from harness racing. Anecdotally, the reduction in enthusiasm for betting on harness racing appears to result from concerns about its integrity and how the racing is regulated, as well as general disenchantment with the racing product, which is seen as tired and outdated. HRV must take action to significantly strengthen its integrity assurance program and to reinvigorate its racing product if harness racing is to remain viable and have a long‐term future as part of the Victorian racing landscape. I have made recommendations to strengthen the integrity of the industry in Section 8 of this Report. Income from improving the racing product Consultation has highlighted the industry perception that HRV race programming is tired, lacks innovation and that little effort appears to have been made to improve the competitiveness of the industry. A number of participants felt that HRV programming was not as innovative as in other parts of Australia. It was acknowledged during the consultation phase that Western Australia leads the way in presenting an attractive racing and wagering product. The fact that WA industry has grown its national wagering share from 12 to 18 per cent since 2002 confirms this. The NSW ratings and handicapping systems are seen as better than Victoria’s as the NSW system seems to produce more even fields with fewer short‐priced favourites. In particular, the HRNSW system of allocating horses nominated for a meeting to races based upon the class of horses rather than taking entries for specific races has reduced the number of short‐ priced favourites. In 2014, HRA conducted a national wagering survey. All states were involved and more than 1000 wagering customers surveyed on ways to improve wagering on the industry. A number of the recommendations and findings were adopted but, as many require national support, the adoption of all recommendations is problematic. While this issue is not unique to Victoria, HRV must introduce innovations to its racing product if it is going to entice punters back to the industry. 23 As a party to the JV, HRV is contractually obliged to provide a minimum amount of racing product for the purposes of wagering, based upon the 2011‐12 racing calendar. In 2011, as a cost‐saving measure, HRV negotiated with Tabcorp to reduce the annual number of harness racing meetings, down from more than 500 to 455 per season. The wagering impact of this reduction was partly offset by scheduling of up to three additional races at the remaining TAB meetings. In previous strategic plans, HRV has identified the need to focus on improving the racing product from a wagering perspective. The consultation conducted as a part of this audit has clearly identified that participants and stakeholders saw a need for HRV to focus on this area. The need to strengthen harness racing product has also been confirmed by HRA in its 2014 Wagering Review. In my view, a fundamental starting point is to set the racing program based on the ability and distance capabilities of the available horse population. The majority of the horse population is at the lower end of the ability scale (pyramid) and the challenge is to program races that will encourage even competition, with a focus on significantly reducing the number of short‐priced favourites that is broadly seen as having stifled betting on harness racing. The programming of more maiden and lower class races would generate more winners and, in turn, add form into races higher up the scale. Along with the aforementioned need for significant improvements to integrity assurance discussed previously, the major challenge for the Board and senior management is to significantly reinvigorate the racing product and to reduce the number of short‐priced or odds‐on favourites. Wagering providers believe that this will result in stronger wagering turnover on harness racing, with obvious benefits for HRV, both through its JV revenue and also through improved revenue from product fees and increased buy‐in by corporate bookmakers. Without going into detail, some of the initiatives identified through the audit that HRV should consider include: increased programming of fillies and mares races to increase the number of horses racing. Many are lost to racing because they cannot compete with males. This is demonstrated by the fact that 25 per cent of mares in the Australian Standardbred Studbook have never raced. A further 27 per cent have never won a race not scheduling races at Melton which clash with Country cups increasing the professionalism of HR and its participants a strong focus on reducing the number of short‐priced favourites which contributes to uncompetitive racing and resultant wagering reintroducing picnic class meeting on Saturday afternoons to promote HR locally to communities and grow participation allocating prizemoney to better class races rather a strategy where most races carrying the same prizemoney regardless of class the introduction of nominations for major races and late entry fees for Futurities as ways of increasing prizemoney creation of facilities at all TAB tracks specifically for owners creation of racing circuits that are consistent so that participants know where meetings will be conducted. This would need to be considered in the context of driving wagering turnovers 24 the re‐introduction of tiered racing, such as inner and outer country circuit racing OR metropolitan, provincial and country racing, with different prizemoney levels consistent Saturday night metropolitan racing the use of sprint lanes, which many saw as contributing to boring racing. (it is interesting that the HRA Wagering review identified sprint lanes had little impact on wagering) the use of fixed colours for horse numbers to make it easier for non‐HR punters to be involved (it was noted that Queensland HR and NSW had recently gone down this route but HRV has not acted) a review of standing start procedures to ensure consistency increased co‐operation between Victoria and NSW with the programming of races and meetings on either side of the border the “hand up rule” compared to a “go forward rule” in the USA, which is successful in ensuring exciting racing with many moves excluding the progeny of NZ sires and mares from Vic Bred shorter times between races to make a day/night at the races more attractive to on course customers. This will need to be balanced against driving off course wagering outcomes the programming of short distance races versus more distance races and the possible advantages to NZ horses because they have more distance races programmed in NZ excluding well‐performed horses from restricted races preferential barrier draws based upon heat performances into finals. Income streams As part of this audit, I undertook an analysis of HRV’s key revenue streams, including: JV revenue (and the code sharing arrangements that are applied to that revenue) racefields product fees from interstate wagering operators including TABs, corporate bookmakers and betting exchanges international product fee earnings and sponsorship income. Over the past five years, HRV gross revenue has increased by 11 per cent. This compares unfavourably with inflation, which has increased by around 13 per cent over the same period. HRV has worked hard to hold total costs (including prizemoney) over the same period. Without adequate growth in its income streams, it is difficult to see how HRV will be able to invest in expanding its integrity needs, increase prizemoney and effectively promote the industry as much as it needs to in such a competitive environment. In addition to being the controlling body for Victorian harness racing, HRV also conducts race meetings at TP, operates the entertainment and accommodation venue at TP and operates RISE. All revenue streams, both core and non‐core HRV businesses, are recorded in the consolidated HRV annual results. 25 Wagering revenue As with all racing codes and clubs throughout Australia, wagering revenue streams are the major source of revenue. In 2014, revenue from all wagering sources accounted for approximately 82 per cent of total HRV revenue, excluding TP. There has been very little or no real growth in wagering revenue streams for some time. It is instructive to consider HRV’s wagering revenue growth for the five years from 2010 to 2014, when compared with that achieved by RVL and GRV. Table 3: Comparison of wagering growth from 2010 – 2014 (obtained from Annual Reports) Joint Venture Racefields Total Increase Harness 2010 $50.0m $3.6m $53.6m 2014 $47.1m $9.7m $56.8m 6 per cent Thoroughbreds Greyhounds 2010 2014 $206.5m $200.2m $28.7m $85.0m $235.2m $292.3m 24.3 per cent 2010 2014 $37.4m $58.7m $7.4m $15.4m $44.8m $74.1m 65.4 per cent Tabcorp Joint Venture (JV) Income from the JV alone represents nearly 70 per cent of HRV revenue (excluding Tabcorp Park venue revenue). The lack of growth in this income, if it continues for the remaining 10 years of the JV, will cause concern for the future viability of the industry. Debate continues within the racing industry about the adequacy of industry funding gained through wagering tax rate changes enacted by the government in 2009 and commencing with the new Victorian Wagering and Betting licence in 2012. The industry view is that the tax rate was intended to fully offset the loss of racing industry funding from Tabcorp’s gaming machine licence and that the current arrangements fall short of that mark, with direct implications for harness racing revenue. It would appear that the JV funding arrangements under the current Victorian wagering licence have delivered a substantial funding boost to the Victorian racing industry. It is also clear that the majority of the increased funding has been to the benefit of greyhound racing. Once the poor relation of the racing industry, betting turnover on greyhound racing has increased dramatically and this was reflected in the profit‐sharing arrangements agreed between the codes in the lead up to the commencement of the new licence. Declining turnover on harness racing is a national problem and has been exacerbated by the growth of competition from corporate bookmakers licensed in NT. Following a lengthy and costly court process, HRV is now receiving product fees from interstate totalisators and other wagering providers offering betting product on Victorian harness racing. It is clear that this revenue stream has not adequately compensated the industry for its reduced revenue through the JV. 26 In addition to revenue loss through leakage to interstate betting operators, HRV revenue has been negatively affected by the decision of the JV partners to allow fixed odds betting by Tabcorp, in direct competition to its pari‐mutuel wagering product. Fixed odds betting by Tabcorp on the majority of race meetings only commenced in 2012 at the start of the new wagering licence and HRV may not have anticipated its impact on industry revenue. Fixed odds betting has been enthusiastically embraced by TAB punters. This has had a negative impact on HRV’s wagering revenue. Yields from harness racing fixed odds wagering are currently running at 12.5 per cent, compared with the pari‐mutuel win and place at 14.25 per cent. Therefore, harness racing faces a net reduction in revenue for each dollar transferring from pari‐mutuel to a fixed odds betting product. By comparison, the fixed odds yield on thoroughbred racing is currently higher than that for pari‐mutuel wagering with the result that RVL benefits financially from the shift of wagering to fixed odds, under the JV code sharing agreement. The extent to which HRV could have anticipated these impacts and their effect on current distribution arrangements between the codes is presently the subject of formal negotiations between the codes. Racefield product fees In my view, revenue from racefield product fees is a growth opportunity for HRV, but is unlikely to make up for the lack of growth in JV revenue. As can be seen in Table 3, racefield product fees have increased by about 300 per cent since 2010. This increase is similar to that of thoroughbreds and a higher multiple than greyhound racing, albeit from a much lower starting point for harness racing. There may be opportunities for HRV to improve its position by working collaboratively with interstate wagering operators, particularly corporate bookmakers. Given HRV conducts 455 meetings per season compared with 1071 for GRV, HRV’s product fee earnings do not seem unreasonable. More than 60 percent of product fees ($6m per annum) flowing to HRV are from interstate TABs operating on HRV product. Thoroughbred racing has been seen to embrace a corporate bookmaking culture, including through marketing and sponsorship arrangements. The opportunities for HRV appear to have been limited in this regard, possibly due to its close relationship with Tabcorp (including exclusive marketing arrangements). The limited involvement in harness racing by corporate bookmakers may be a response to its racefield fees policy, which sees HRV charging at the top end of the national market (compared to other codes and harness racing authorities in other states). It could also be simply a reflection of the lower profile of harness racing and current customer preference. 27 Interstate wagering operators Interstate wagering operators (TABs, corporate bookmakers and Betfair) now contribute in the order of $11 million per annum in product fees to HRV. In general terms, 60 per cent comes from the interstate TABs and 40 per cent from corporate bookmakers licensed in the NT and from Betfair. There may be potential for HRV to grow this revenue by working more collaboratively with all wagering operators in what is now a very competitive market place. All interstate wagering operators would prefer a product fee regime that is set for at least three to five years to enable them to plan with certainty their active participation in, and promotion of, their racing product (including harness racing). I do not consider this to be an unreasonable position, when you consider that the Tabcorp JV product fees, based on gross revenue and have been set for the term of the JV, which still has nine years to run. A constantly changing product fee landscape will make it difficult for interstate wagering operators to commit to actively promoting wagering on HRV product when they have access to so much alternative racing and sports content. Presently US basketball is the growth wagering sport, particularly with 18 to 35 year olds, and wagering operators effectively pay no product fees on this sport. This product fee regime will present a challenge for all racing codes into the future. The major corporate bookmakers each spend in the order of $50m to $80m annually on advertising and bonus offerings to their customers. They argue that this order of spend makes it difficult for them to adjust to sudden increases in product fee charges by the codes. GRV is considering lowering its product fees and setting them for three years in order to gain a competitive advantage in race wagering. Strategies such as this and others aimed at attracting punters back to harness racing, must be seriously considered by the Board. The major corporate bookmakers each have up to 1.5m customer interactions per day. Their commitment to the promotion of HRV racing product presents a significant leveraging opportunity. Vision fees from wagering operators HRV should seriously consider embarking upon a strategy to make its vision available to all wagering operators on their digital and wagering platforms. This should be extended to HRV’s own website as occurs now for thoroughbred racing in Australia. This will have the dual affect of increasing wagering on HR whilst at the same time wagering operators are prepared to pay a vision fee based on turnover, in addition to current product fees levied by HRV. It is a concern that HRV’s 2022 vision agreement with Sky may be restrictive of HRVs ability to extend its vision footprint. HRV must seek to renegotiate its rights in this regard, if this is the case. By comparison, RVL is considerably more advanced than HRV with its digital strategies to broaden the availability of its vision to interstate wagering operators. Recent newspaper 28 reports indicated that RVL has signed a deal with Sportsbet, worth $3m over five years, for Sportsbet to show Victorian thoroughbred race vision to its on‐line customers across all platforms. This is additional to racefields product fees. Simulcasting Income It is pleasing to note that HRV has worked collaboratively with HRA to grow product fee revenue from the simulcasting of its product internationally to the extent that more than $1m per annum in income is generated. This is an important growth income stream for HRV and accords with its strategy to promote trotting, which is the dominant gait in Europe compared to pacing, which is more accepted in USA. In January 2015, HRV gained an advantage over the rest of Australian harness racing with the announcement that 57 Victorian trotting events will be simulcast into France. This was a direct result of HRV’s trotting strategy, which other states have not embraced. The results have already been positive for HRV with the four races on Shepparton Cup night generating in excess of $A1.2m in turnover from betting in France. HRV programmed the four trotting races as the last four of the night to enable telecasting at more convenient times into France for wagering. I understand that Sweden is considering a similar approach. HRV recently extended its international rights agreement with Sky Channel (Sky) to 2022, which aligns this agreement with the domestic rights held by Sky. The previous net revenue sharing arrangements with the Sky international rights agreement had its genesis in the early 1990s and limited HRV’s ability to maximise simulcast income. The revenue sharing arrangements under the new 2022 agreement should enable HRV to double its simulcast income even without further international penetration. HRV’s Strategic Plan should include a priority to grow international wagering revenue on its product and position it as the product of choice with international wagering operators. This will very much depend upon improving the quality and type of product provided. Income from better performing tracks The HRV racing program has been developed with a view to maximising wagering turnover and therefore revenue. This is consistent with its obligations under its JV agreement with Tabcorp. HRV must also fulfil its obligation to develop Victorian harness racing participation by racing at venues other than the better performing tracks. This may come at a cost to industry revenue, which needs to be understood. If HRV was to solely have a commercial focus and be able to maximise revenue from wagering it may well choose to race more at the better performing tracks, not race at all at some tracks or a mix thereof. 29 I have reviewed the 2005 V3 Strategic Plan, which focused upon a number of key strategies including the closure of seven country tracks, each of which were subsequently re‐opened at the instigation of the previous government. The Board must have the ability to make decisions in the best interests of the industry. It will however be incumbent upon HRV to consult fully with key stakeholder and participant groups in such a process and to provide tangible evidence of how any action taken will deliver increases in wagering income for the industry. Sponsorship income HRV generates approximately $1.4m per annum in gross sponsorship income at a cost of around $0.3m per annum, leaving net sponsorship income of $1.1m per annum. On face value, this seems low and must present an opportunity particularly in relation to joining with the clubs to offer industry‐wide sponsors for targeted partners, who already supply or could supply the industry with a range of product offerings. Sponsorship review During 2014, HRV commissioned a review of its sponsorship portfolio that was undertaken by former VRC General Manager Sponsorship, Mr Brendan Ford. The review looked at all HRVs current sponsorship assets and identified areas to focus on to grow sponsorship income. It also identified deficiencies with current resources applied to driving this income stream together with the need for a more professional approach. The review did identify that HRV net income retention levels from sponsorship, at 70 per cent, were at, or about, benchmark levels for sporting and racing industry bodies. Mr Ford identified that FTA TV coverage of feature meetings would be a catalyst for driving sponsorship income. In discussions with me Channel Seven Melbourne said it has an open mind on considering coverage of the Summer of Glory Carnival. To date Seven has not been approached by HRV but would welcome discussions. Seven will be covering the Interdominion Championships from Perth for the next three years. Importantly, Mr Ford estimated that HRV could grow sponsorship income by more than $700,000 per annum if it were able to successfully offer and obtain industry sponsorships in the categories of finance, alcohol, motor vehicles, insurance and multi‐venue supply‐based sponsorships. There are currently no substantial sponsorships in these categories. If HRV wishes to grow sponsorship income in the short‐term it may well consider appointing someone like Mr Ford, on small retainer and on a success commission basis, to test this market. Tabcorp Park A significant component of HRV sponsorship income comes from Tabcorp involvement at TP. I believe this provided HRV with a $7m upfront payment when Melton was being 30 developed. The servicing of the venues gaming requirements by Tabcorp is a separate commercial agreement. Tabcorp largely chooses to limit its sponsorship of Victorian harness racing to TP at Melton. By comparison, for Victorian thoroughbreds clubs, the majority of clubs have sponsorship arrangements with wagering operators other than Tabcorp, and receive sponsorship income of more than $3m per annum, from such sources. HRVs support of its JV partner is admirable and one that I embrace. However, it is restrictive of country clubs generating sponsorship income from this source, which may assist them to, in some cases, avoid annual losses and/or enable clubs to contribute more of their own funds to prizemoney for their feature races. Assisting country clubs During the audit, a number of clubs suggested that HRV should use its expertise and resources to assist on a wider scale in the sponsorship area. Many clubs, run largely by volunteers, simply do not have the resources to identify, seek and sign up potential sponsors. HRV should extend the shared services model to include sponsorship support for country clubs. Victorian Harness Racing Social Club (VHRSC) Questions were raised during the audit about the position of the Victorian Harness Racing Social Club within the industry. In particular, questions were asked about the amount of income generated by the Junction Hotel function and gaming venue in Moonee Ponds, how the income is used and whether HRV has the ability to capitalize in a strategic way upon this industry revenue stream. Some years ago, HRV sold the Junction Hotel to assist with the development at TP. HRV subsequently leased back the ground floor of the hotel for use as a gaming venue and transferred the gaming licence to the VHRSC. The cost of this lease is of the order of $650,000 per annum and is expensed against Junction Hotel gaming revenue. HRV could investigate the sale of the gaming machine entitlements. HRV provides accounting, marketing and administrative services to the VHRSC under a management agreement. HRV charges the VHRSC $235,000 per annum to provide these services. In addition, the VHRSC provides $125,000 per annum in sponsorship to HRV. 31 VHRSC also distributes around $85,000 per annum through its bonus scheme to its members who own horses that win selected races within Victoria. Gaming, event and function income growth Very few country clubs are involved in gaming activities or run gaming venues. Those that do (Ballarat, Cranbourne and Horsham (Stawell)) have access to valuable non‐racing income streams, which has contributed to their ability to be financially viable and to provide additional prizemoney. There are substantial barriers to clubs becoming gaming venues. In addition to the costs associated with obtaining a licence, entitlements and construction, it is difficult for clubs to gain community support for gaming at racetracks. As such, it appears that there would be limited opportunities for the industry to increase its revenue through this avenue. However, there is an opportunity for those clubs to better utilise their infrastructure and facilities on non‐racedays to generate additional income. This has been successfully achieved by clubs like Ballarat, Cranbourne and Shepparton, which have good facilities and existing function businesses. HRV should work with other clubs to identify barriers that are stopping them from maximising the potential to expand this aspect of their business (e.g. skills to market and promote the venue, outdated infrastructure etc). TP income HRV’s 2014 Annual Report shows that TP has accumulated losses in the order of $2.75 million since 2009. Major ventures, such as TP, seldom return a profit within the first five years, mainly due to the considerable costs associated with establishing such a facility and the efficacy of assumptions made with business models adopted. In some respects, this may be the case with TP and HRV acknowledges that the original business projections for TP were overly optimistic. The annual rental payment made by HRV Management has contributed to the accumulated booked losses at the venue since 2009. The initial rent (based on revenue projections contained in the business case) was set at around $1 million per annum. The rent has subsequently reduced to approximately $570,000 per annum. The strategy of management and the previous Board in developing the venue as a function centre has not fully delivered the benefits identified in the business case. Unless strategies are developed to address the poor performance of the venue, it will continue to affect HRV’s ability to financially service the industry’s needs. Concerns were raised during the audit that the branding of the venue as TP is having a negative impact on the ability of the venue to attract function bookings from local community groups, including schools. I understand that the on‐site hotel has not performed well to date and that a new strategy has been implemented by management (including a focus on offers to participants and owners racing horses at TP) to improve vacancy rates and improve revenue. 32 VRIF Funding The decision to return unclaimed dividends and on‐course wagering taxes to the industry was a very important development for the three codes. These funds support the three codes and are critical to HRV’s ability to plan for capital replacements and developments that benefit the industry. During the audit a number of country clubs spoke of the importance of the raceday attraction program in assisting them to promote race meetings and country cup meetings in particular. All requested that this program continue. Recommendation 13. That HRV: work collaboratively with all wagering service providers, in addition to Tabcorp, to grow wagering income from all sources adopt the recommendations of the Ford Sponsorship report to grow sponsorship income initiate discussions with the free to air networks for coverage of the Summer of Glory feature races develop strategies to improve returns from HRV racing product both nationally and internationally. 33 I NFRASTRUCTURE The timeframe for the audit did not enable a full review of facilities at all racing, trial and training tracks. This meant focusing on the adequacy of the venues necessary to meet the needs of the industry racing program. I also examined HRV’s investment on infrastructure over the past five years together with the infrastructure plans outlined in the draft 2016‐ 2020 Strategic Plan. There are currently twenty‐six harness racing tracks in Victoria, at which approximately 455 TAB meetings are conducted annually. HRV is confident that all tracks are up to standard. On reviewing capital expenditure over the past five years and that planned for the next three years (Appendix F), this would seem to be the case. Renovation projects to increase the camber of tracks at Echuca and Horsham have been delayed pending this audit. These works are required to improve the racing performance of those tracks and should proceed as soon as practicable. After examining the finances of HRV, I doubt that it would have the capacity to keep its tracks and facilities up to the required standard without having access to VRIF funding. I note that HRV’s 2005 V3 Strategic Plan led to a reduction in the number of tracks with a view to reducing the industry’s cost base and enabling HRV to redirect scarce resources to other venues. This decision was subsequently reversed with the provision of special government funding support outside of VRIF. It is important that in future the Board has the authority to determine whether all tracks are necessary for the conduct of the annual racing calendar. Metropolitan racing generates more wagering turnover per meeting than racing at country tracks. TP is the only metropolitan harness racing venue and this places HRV at a disadvantage compared with the thoroughbred and greyhound racing codes that have four and two metropolitan racing venues respectively. HRV should consider scheduling regular metropolitan meetings at Cranbourne, notwithstanding horse population issues, given its excellent facilities and its significant local population base. This would have the potential to grow wagering revenues and attract improved meeting attendances and revenue. I understand that original parcel of land at Melton was purchased with the view to developing a training facility. Subsequently, HRV swapped this land for another parcel of land close by and then purchased additional land that is now part of HRV’s total landholding at Melton. Some years thereafter it was decided that TP would serve as a secondary racing venue (27 meetings) to Moonee Valley (MV), the main metropolitan track for harness racing over which HRV held a 13‐year lease. Following the decision to terminate the lease agreement at MV, TP became the sole metropolitan racing venue for the industry. The carrying value of HRV’s landholding at Melton is of the order of $17.3m, which on face value seems low. Presently 107 hectares of land is surplus to TPs racing and venue needs. 34 During the consultation phase, a number of concerns were raised about TP and its suitability to cater for racing at the venue. These included the lack of a roof over the grandstand seating, no tiered dining facilities and the location of the parade ring, which is significantly removed from public areas. The need for training facilities and stabling at the venue was also raised. The general view of participants is that TP currently provides a substandard offering compared with MV. HRV is in the process of developing a masterplan for TP, which appears to address most of the concerns of stakeholders, except perhaps the need for a focus on providing meaningful facilities and a race meeting experience for owners. Another issue raised by stakeholders was the lack of public horse training facilities, which is a significant barrier to the recruitment of new trainers. A large proportion of training operations are on private facilities. The personal investment involved with purchasing land and establishing a training venue is a high barrier to the entry of new participants. HRV infrastructure plans for the next ten years should address this barrier to entry and examine the potential to establish training facilities (including stabling) at racetracks such as Melton, Shepparton, Ballarat and Bendigo. It would also make sense for HRV to plan to incorporate “Centres of Excellence” training facilities for industry employees and participants in any planned on course horse training facilities. HRV must address the lack of owners’ facilities at racecourses’ throughout Victoria. Ideally, each TAB track should have the ability to host owners in a meaningful way. Recommendation 14. That HRV develop a ten‐year strategic infrastructure and racing plan that: identifies the number of tracks required to sustain the annual racing program and capitalise on emerging wagering markets considers increasing the number of metropolitan meeting venues (eg Cranbourne) identifies patron facility upgrades that need to be undertaken at Melton (e.g. a roof over the grandstand seating, tiered dining facilities and a parade ring closer to the stand) and at other major racing venues ensures that owners are appropriately recognised and catered for examines the establishment of training and stabling facilities at racetracks such as Melton, Shepparton, Ballarat and Bendigo to reduce the barriers to entry by new participants. 35 A DMINISTRATIVE D UPLICATION RISE HRV expends around $1.3 million annually with the operation of RISE. Since 2010, RISE has at best generated a profit of $20,000 per annum. In HRVs annual accounts, RISE IT income is recorded but RISE expenses are not. This leaves the impression that such costs are absorbed in HRV’s operating cost base, which would be a concern as it would indicate a cross subsidisation. However, such costs are summarised in the historical financial performance section of the annual report. It is noted that HRV receives in the order of $850,000 per annum in management charges/expense recoveries from/to subsidiaries. Approximately $75,000 relates to RISE. HRV’s annual accounts do not record a carrying value for RISE. This should happen and the methodology for such valuation, like with HRV’s share in RSN, should be recorded. It is a concern that HRV is limited in terms of the resources it can apply to the industry let alone RISE, which is effectively a national database for the industry. This seriously calls into question the commerciality of the business model and whether HRV is obtaining any real value from owning and controlling RISE. The cost associated with investing in new technology that may be required to upgrade RISE system in the future would not be insignificant and why should HRV alone meet such investment costs. During the audit, it became clear that other state industry bodies are now producing some of their own data due to time delays associated with RISE data. Consideration should be given to RISE becoming a nationally owned HRA body. This occurred for thoroughbred racing when RVL in 2005 transferred the ownership of Racing Services Bureau, now RISA, to the Australian Racing Board. This would spread investment costs across the national industry and enable RISE to be more proactive in upgrading and improving its systems. It would also free up capital spending by HRV. The divestment of RISE may well deliver some cost savings for HRV. Shared Services Program (SSP) During the audit, many clubs spoke of the need for assistance from HRV to ensure that they could effectively manage their affairs to the highest standard possible. Ballarat offered its assistance in this regard, given its leadership position in administration of harness racing in country Victoria. A number of options were canvassed including shared services, regional centres and the bigger clubs assisting the smaller clubs. 36 In addition to financial benefits, the industry will gain considerably from shared services through consistency, increased professionalism and the adoption of best practice standards across HR administration. It was therefore pleasing to receive positive advice from HRV regarding its strategies for shared services initiatives (Appendix G), notwithstanding the other codes are some years ahead of HRV in this regard. One recent noteworthy initiative has been HRV’s continued audit tender process for country clubs (Appendix H). Recommendations 15. That HRV reconsiders its continued ownership of RISE. 16. That HRV, as a matter of priority, continues its roll out its financial shared service model and extend the shared service model to include: occupational health and safety compliance risk management marketing of racing. 37 F URTHER I SSUES FOR HRV CONSIDERATION ARISING FROM THE A UDIT A number of other issues arose during the course of the audit that should be further examined by HRV. Promotion of harness racing ownership If the industry is to grow in the future, HRV needs to understand and define its target audience and identify opportunities to capture the imagination of the next generation of owners, punters, trainers and drivers. In particular, HRV should be identifying ways in which to engage more broadly with women, young people and families. HRV marketing should be targeted at those demographics. One of the key areas that must be addressed is ownership. During the audit stakeholders raised concerns about the lack of owners in the industry and the failure of HRV to promote the benefits of horse ownership. An owners strategy should be a key focus for HRV. This should include attracting new owners and retaining existing owners. Rewards other than prizemoney are essential to ensure the owners experience means they continue to participate. There are also lessons to be learnt from the growth in owner syndication in the thoroughbred industry that could be applied to harness racing. HRV also needs to focus on syndication and promoting the affordability of owning a harness horse. It has been asserted that the cost of acquiring a Standardbred is 25 per cent of that of a thoroughbred and 50 per cent of the cost to train. Prizemoney, whilst being of major importance to many participants, needs to be balanced with ensuring best practice integrity and such things as the promotion of HR, educating participants and addressing welfare issues. Other codes have successfully used participants and celebrities who own racing animals to promote racing, ownership and animal welfare programs and this is an area in which HRV could improve. Lack of owners advocacy It is disappointing that owners, responsible for the more than 4,000 horses that race annually in Victoria, do not have an effective advocate representing them on important industry issues. It is vital that the opinions and concerns of owners as a group are canvassed by HRV. Owners are the industry’s major investor group and without their retention and continued investment, the livelihood of nearly 4,000 industry participants would be in jeopardy. 38 HRV should consider assisting with the establishment of an effective owners body like the Thoroughbred Racehorse Owners Association (TROA) to which RVL contributes funding to make every owner a member. Key areas where an effective owners’ body would provide valuable input to HRV include prizemoney, including the spread between city and country, feature and non‐feature races, and owners’ opinions on the application of funds to prizemoney increases. The issue of owners’ privileges on race days, or the lack thereof, is an underestimated area, which influences decisions by owners to remain in the industry and to reinvest. Studies in thoroughbred racing have shown that the intangibles are just as important as prizemoney, given few owners enter the industry expecting a return on their investment. Breeding During the consultation phase there was considerable concern regarding the industry’s key breeding metrics. Since 2010 the number of foals bred has reduced by 26 per cent, mares served by 34 per cent and the number of active stallions by 23 per cent. However, the reality is this trend is occurring Australia‐wide, albeit at a faster pace in Victoria. Other major harness racing nations are experiencing similar trends as evidenced by US and NZ reports presented to the recent Trotting Conference in Sydney. Principal racing authorities, in concert with HRA, need to be concerned and develop strategies to support breeding. HRV is already doing this with a number of its programs. Whilst breeding issues should be addressed on a national basis, HRV’s primary obligation is to Victorian racing and breeding participants. Some of the breeding issues raised during the audit, that should be investigated by HRV include: the Breeders Crown, which is a highlight for HRV, now caters more for the top‐end horses and participants, so many participants no longer aspire to be involved removing the one month misalignment of the Australian and NZ harness breeding seasons, which is to the competitive disadvantage of Australian breeders the adoption of a mandatory date before which mares cannot be served, (like 1 September with thoroughbreds) which avoids the situation where foals that arrive early and are born before 1 August are deemed to be one year old on 1 August the introduction of a Victorian sires stakes program that mirrors highly successful programs in US and Canada the lack of transparency and potential conflict of interest with the operation of Australian Pacing Gold sales (HRV is a 50 per cent owner of APG with HRNSW) the programming of more fillies and mares races to increase the value of mares and their progeny. Currently 28 per cent of studbook mares have never raced and 27 per cent have never won a race. 39 Country harness clubs and racing HRV, with its conduct of racing at Melton, effectively competes with many country clubs. A number of clubs raised conflict of interest issues with HRV being the industry regulator and running race meetings in its own right. HRV strategies should take account of the fact that HR is a country and hobbyist based industry. Volunteerism provides a low cost base and is an advantage but it also presents a risk if new people do not replace volunteers. The significant level of volunteerism affects levels of professionalism in the industry. Many clubs have limited skills in finance, marketing, risk management and OH&S. Many do not have full time secretary managers. The skills shortages need to be addressed by supporting clubs and regions through strategies such as hubs and administrative centres. Using the skills of better performing clubs make sense. HRV’s current funding model provides all country clubs with the same grant ($10,000) for the conduct of a race meeting. As a direct result, a number of low cost country clubs supported by volunteers can accumulate surpluses, while professional clubs need the funding to meet the cost of conducting meetings. HRV should consider moving to a 3‐tier funding model of city, provincial and country clubs compared with current 2‐tier model of city and country. It also does not make sense that HRV makes the same prizemoney grant for all country cups. For example, the Cranbourne Cup receives the same prizemoney funding of $15,000 from HRV, as does the Boort Cup. Many country clubs believe that HRV, in conducting racing at Melton, is competing with them and should not be running restricted meetings and similar races to those programmed at country meetings. Most of these HRV meetings are in fact country club meetings held at Melton. Country clubs are concerned that the programming at Melton of free for all races against country cups may affect their viability. HRV’s free admission strategy for TP makes it difficult for country clubs to charge admission as patrons constantly refer to Melton being free. This may have something to do with the fact that the entertainment venue is free all year round and its customers still attend on racedays/nights. Admission fees are a vital income stream for country clubs and assists to cover the cost of racing. HRV should review the benefits of its free admission strategy – does it attract more people to race meetings? As with thoroughbred racing, there was a call for the reintroduction of community‐based, picnic non‐TAB meetings, to cater for low class (slow) horses and to promote grass roots attendance. This strategy would appeal to HR’s core participant base of country, family and hobbyists. 40 Picnic, non‐TAB community‐based meetings, conducted on a low cost structure, including low prizemoney and with volunteer support to run the meetings, would promote attendances. More maiden races in the country to cater for the horse population (slower horses) would provide more form into higher‐class races and improve betting. Tabcorp Park Melton A potential conflict of interest exists for HRV, being the statutory authority responsible for the well‐being of the industry, with the conduct of racing by HRVM a 100 per cent owned subsidiary, at TP. It is noted that HRV and HRVM nominated delegates to the HRA Board. Notwithstanding the separation created with the establishment of HRVM to manage TP, HRV is the only PRA in Australia that conducts race meetings. This can be compared to the situation that existing for Victorian thoroughbred racing, prior to the creation of RVL in 2001, to remove industry responsibilities from the VTC which also conducted racing as a club at Flemington. Apart from creating a completely separate body from HRV, such as a new harness racing club, a model does not exist to remove such conflicts of interest, either real or perceived. It is noted that the Act provides for HRV to conduct race meetings. Another issue which needs to be considered by the HRV Board, is Melton’s branding by a wagering operator and the impact this may have on the ability of the venue to maximize non race meeting function and event revenue. TP Melton has not met its original business case expectations, therefore its branding warrants consideration. During the audit a number of people spoke of concerns with the branding of Melton as TP and the impact this is having upon sourcing function business particular from schools and youth based sporting groups and organisations. Investment in human resources and participants HRV’s draft 2020 Strategic Plan includes “People and Culture” as an area is critical to the industry’s strategic success. The attraction and retention of high quality staff and the creation of a culture that promotes ongoing professionalism are important. The strategy must include HRV staff, country club committees and staff and industry participants. HRV’s plans on how it will deliver the strategy are not clear. The consultation process identified this as being a critical issue, as does the yet to be released 2014 Culture and Engagement Research Report. 41 Training to up‐skill and educate all employees and participants in the workings of the industry so that they can become advocates for the promotion of harness racing is critical. The establishment of an education “Centre of Excellence”, in addition to the current education centres at Bendigo and Warragul, warrants serious consideration. A partnership with recognised education providers to tailor programs that encourage the acquisition of multiple skills to support a career in the industry is critical. Programs will need to be broadly accessible, including web‐based tuition, to maximise take‐up. Importantly, such training should be a prerequisite for the issue of a licence by HRV. Marketing HRV marketing is not rated highly by participants. Many believe that not enough is done or being spent to attract new people to the industry. In 2014‐15 HRV will incur marketing expenses of $1.5m, not including related salary and wage costs. HRV’s management accounts should apportion wages and salary costs across the business to ensure that there is a true reflection of the costs involved with each business segment. Marketing and promotion of wagering initiatives, including Herald Sun form guides and broadcasting costs associated with coverage on radio station RSN, which HRV partly owns, are not included in the marketing budget. In recent years, HRV has attempted to rebrand the industry, with a focus on trotting. The success of this initiative was questioned during the consultation, as was HRV’s ongoing commitment to the rebranding, even though it has spent heavily on the strategy in past years. HRV’s rebranding of the Summer of Glory in 2015 proved to be a success and a report is presently before the Board with respect to the success of the Carnival, which includes recommendations for the future. Marketing for the future One of the challenges for HRV, whilst acknowledging its current customer base, is that it must identify its target audience for the future. This must include 18 to 35 year olds, women and families, to grow the industry’s customer base. Wagering operators are particularly targeting the 18 to 35 year olds and HRV should look to leverage off all operators in the pursuit of expanding its customer base. A digital strategy is essential for the future marketing of the industry. HRV would seem to lack the skills necessary to undertake the creation and roll out of a digital strategy. HRV should seriously consider retaining expert advice in this field. HRV currently lags behind RVL and GRV in this important future proofing of the industry’s income streams and customer base. 42 2014 Harness Racing Australia Report This report is most insightful in understanding wagering on harness racing both in Victoria and nationally. One thousand respondents were surveyed, of which 39 per cent were Victorian and 28 per cent were NSW based. Males accounted for 89 per cent and 70 per cent of respondents were over 35. The report focused on existing wagering customers, particularly professional and regular customers and did not seek to understand why potential new customers, women and younger people do not wager on harness racing. In 2013‐14, the industry nationally experienced a 2.66 per cent increase in wagering across all operators. However, pari‐mutuel (tote) betting was down 14 per cent whilst TAB fixed odds betting was up by 98 per cent. Between 2012 and 2014, tote betting was down by 21 per cent, a fixed odd betting was up by 287 per cent and betting with corporate bookmakers’ was up by 50 per cent. The biggest issue for HRV and for harness racing nationally is that each of the three wagering options delivers different revenue yields for the industry, with tote betting revenue being the highest. A significant shift away from tote betting has harmed harness racing because of lower income yields and this continues to present a funding dilemma which cannot be ignored. Some of the key findings of the report included: (a) Unappealing aspects of harness racing from a wagering perspective, which impact‐ betting turnover and returns to harness racing: significant number of short priced favourites small state based tote pools, which limits bet size standing starts and the uncertainty of horses “getting away” Tabcorp advised that there is little difference in betting turnover because standing starts generally had larger fields. team driving and collusion unattractive slow tempo racing small field sizes integrity issues around tactics and stablemates. (b) Customer preferences professional and frequent harness racing punters predominantly prefer to bet fixed odds and with TABs and corporate bookmakers (they do not invest as heavily on pari‐mutuel exotic bet types, at higher take out rates, as occurs with thoroughbreds) Victorian punters have highest take up of phone app betting at 50 per cent (this is an opportunity for HRV to market with a phone app and via social media) up to 28 per cent of punters will not bet on trotting races. (Tabcorp has confirmed there is a bias in other states against trotting races, whereas there is a positive bias to betting on trotting races in Victoria) 43 lead‐ time requirements do not influence betting. Nearly 40 recommendations, all associated with making harness racing more attractive from a wagering perspective, were made. The primary recommendations related to improving integrity via driver’s tactics and professionalism, improving Sky channels poor presentation of harness racing, how wagering operators service harness racing, improving access to information for wagering customers and the promotion of ownership. To date about 10 of the recommendations have been adopted across Australia. However, consensus amongst state‐based authorities has not been achieved with a number of recommendations held in abeyance. HRV should consider whether there is merit in going alone on some of recommendations fif it believes they are in the best interests of the Victorian industry. Wagering information provided by Tabcorp For the period 2008 to 2014: HRV metropolitan meetings have increased from 51 to 74, peaking at 93 in 2011. During that period, the shift from Moonee Valley to Melton occurred. Wagering revenue generated by metropolitan meetings is generally 25 per cent or more greater than for the same standard meeting scheduled at a country venue wagering turnover per metropolitan race, on the Victorian TAB, reduced significantly from $108,000 to $75,000 HRV country meetings reduced from 461 to 385. Normally this would negatively affect wagering but HRV adopted a policy of running up to three more races per meeting to make up for the reduced number of meetings Victorian TAB average turnover per country race fell from $56,000 to $48,000 per race the total number of HRV meetings per season reduced from 512 to 455 average turnover for all HRV races reduced from $61,000 to$53,000 per race on the Victorian TAB Victorian harness racing wagering trends are generally better than for the rest of Australia (the increased number of starters over the period in Victoria has assisted with Victoria being up by 7.6 per cent compared with only 1.6 per cent nationally) contrary to the concerns of some, average wagering on trotting races, compared with pacing, is positive in Victoria, albeit from a lower number of races in 2014, average turnover per trotting races was $54,000 compared with $52,000 per pacing race (nationally the average for pacing races is higher than for trotting races) the total number of trotting races increased from 694 to 949, whilst the number of pacing races reduced from 3443 to 2921. From 2002‐03 to 2013‐14 Victorian harness racing has more or less held its share of national betting at about 28 per cent whereas harness racing NSW has dropped from 37 per cent to 32 per cent. WA harness racing has grown from 12 per cent to 18 per cent. There has been a rapid shift in turnover share per wagering operator on HRV product for period first quarter 2012 to second quarter 2015 as evidenced by the below table. Betting on HRV product has fared better in relative terms than for the rest of Australian HR product. 44 Of concern for all racing codes is the rapid shift over the three (3) year period to corporate bookmakers. Table 4: Wagering Market Changes 2012 – 2015 Vic TAB Interstate TAB Corporates 1Q 2012 29.7 per cent 53.5 per cent 2Q 2015 Other codes 25.4 per cent 26.3 to 23.9 per cent 38.8 per cent 49.1 to 41.6 per cent 16.5 per cent 35.8 per cent 24.6 to 34.5 per cent Interstate wagering operators Currently 60 per cent of $11m in racefields product fees are paid by interstate TABs wagering on HRV product and 40 per cent or roughly $4.4m is from corporate bookmakers and Betfair. An issue for HRV will be the need to leverage off interstate wagering providers, which actively promote and encourage wagering on HRV product. In this regard, whilst understanding of HRVs need to be flexible in setting product fees that are fair and reasonable for the industry, it is clear that such operators crave certainty for an extended time frame to commit to promoting HRV product. Such certainty exists for Tabcorp with its JV with Victorian racing until 2024. Interstate wagering operators favour at least a three year commitment, if not five years, to fixing product fee rates. HRV economic impact The 2012 IER study into the economic impact of the Victorian Racing Industry is most insightful and provides a sound base for understanding the importance of the racing codes to the Victorian economy. The report is based upon information gathered during the 2010‐ 11 racing season. The key findings of the report, with respect to the Victorian harness racing industry, are as follows: Table 5: key indicators of the economic impact of harness racing in Victoria Indicator Impact Total value add impact Total household income generated Total FTE employment Total participants Support industry employment Total jobs and participants within HRV Registered Breeders Registered Owners Licensed Trainers Horses in training Licensed Drivers $421m pa $226m pa 3,991 13,100 12,000 25,100 3,049 7,850 2,068 3,576 843 45 Sixty‐three per cent of the value‐add for the industry related to the country and 33.7% related to the metropolitan area and 97% of horses were deemed to have been trained in regional Victoria. The IER report importantly identified community and social benefits in addition to economic benefits. These include employment, leisure and entertainment activities, community building and support of local charities, health and well being, environmental benefits and the sharing of facilities at country tracks. It is appropriate, given the last economic impact study was based upon data collected in 2010‐11, that the three codes commission at least every three years further economic impact studies. Recommendations 17. That HRV consider, in the development of plans to establish horse training facilities on harness tracks, making provision for the establishment of an education Centre for Excellence for industry participants and employees. 18. That government consider providing funding support for this important industry initiative. 46 APPENDICES A B C D E F) G) Media Release announcing HRV Audit, dated 7 January 2015 HRV Audit Terms of Reference Reports and documents considered during the audit Summary of consultative process and written submissions received during the audit Summary of HRV debt financing facility with the Victorian Government 2015 HRV Audit Tender HRV Shared Services Model (as explained by the CEO) 47 Appendix A ‐ Media release Wednesday, 7 January 2015 MINISTER ANNOUNCES HARNESS RACING VICTORIA AUDIT The Minister for Racing, Martin Pakula, today announced that Mr Dale Monteith will conduct the audit of Harness Racing Victoria foreshadowed in the Andrews Labor Government’s plan to Keep Victorian Racing Strong. Mr Monteith served as the Chief Executive of the Victorian Racing Club from 2000 to 2012 after nine years with the Melbourne Racing Club. Mr Monteith has also recently undertaken reviews of the racing industry in Tasmania and the Northern Territory. The audit will begin on 12 January 2015 with the report delivered to the Government by 31 March 2015. It will examine governance, board expertise, debts and liabilities, infrastructure, income streams, administrative duplication and integrity services, including out‐of‐competition investigative arrangements, and attraction and retention of stewards. The audit’s terms of reference can be found on the Department of Justice & Regulation website at www.justice.vic.gov.au. The audit will consult with key stakeholders, industry participants and members of the public. Regional visits will also give people the opportunity to contribute to the audit. Participants can also send a formal submission or email Mr Monteith at hrvaudit@justice.vic.gov.au or call 03 8684 4148. The Victorian harness racing industry contributes about $421.8 million a year to the state economy and provides almost 4000 jobs, mainly in regional Victoria. Quotes attributable to the Minister for Racing, Martin Pakula “This audit will help ensure that harness racing in Victoria is on the right track.” “This audit is vital to ensure that Harness Racing Victoria has the necessary expertise to continue to promote and deliver quality harness racing." “With his extensive experience in the racing industry, I am confident Mr Monteith will do a fantastic job leading this important audit.’’ Media Contact Vanessa Williams 0422 261 937 | vanessa.williams@minstaff.vic.gov.au 48 Appendix B ‐ Terms of Reference The Victorian Government is committed to supporting a vibrant and active racing industry and recognises that the three racing codes, thoroughbred, harness and greyhound racing, are major economic drivers for Victoria, in particular for regional Victoria. The Government is also committed to ensuring that appropriate governance structures are in place for all three racing codes to ensure that those managing the industry have the necessary expertise and industry experience. The Victorian racing industry contributes more than $2.8 billion annually to the Victorian economy and provides more than 26,600 full time jobs. The Victorian racing industry is comprised of three racing codes each with a separate controlling body. In the case of harness and greyhound racing the controlling bodies, HRV and GRV gain their authority from the Racing Act 1958 (the Act). The controlling body for thoroughbred racing, Racing Victoria, is a public company limited by guarantee under the Corporations Act (Cth) 2001 and is similarly authorised by the Act to control Victorian thoroughbred racing. HRV is a statutory corporation established under section 39(1) of the Act and is responsible for the administration, regulation and promotion of harness racing in Victoria. The members of the board of HRV are appointed by the Governor in Council on the recommendation of the Minister for Racing pursuant to section 39 of the Act. The Board appoints the Chief Executive Officer, with the approval of the Minister for Racing. The 2014 HRV Annual Report states that the goal of HRV is to create a vibrant and sustainable harness racing industry by: maximising returns to participants and remaining a market leader improving the product and the brand increasing harness wagering turnover and market share building a business that is stronger and more financially viable Increasing the professionalism of the sport. The Victorian harness racing industry contributes approximately $421.8 million annually to the Victorian economy and provides almost 4000 jobs, mainly in regional Victoria. Between 1997‐98 and 2013/14 harness racing’s market share declined from 15.802 per cent to 12.3521 per cent. The Victorian Government is committed to commissioning a full audit of HRV to examine governance, board expertise, debts and liabilities, infrastructure, income streams, administrative duplication and integrity services, including out‐of‐competition investigative arrangements and attraction and retention of stewards. Terms of Reference 49 Scope The full audit of HRV will examine and assess the effectiveness, efficiency and appropriateness of current arrangements in the following areas: governance (including the business structure and the performance of key business units including HRV Management Ltd (Tabcorp Park) and RISE Pty Ltd (RISE) board expertise and skills debts and liabilities (debt profile and positioning) infrastructure income streams (including race field fees, joint venture revenue, sponsorship) administrative duplication across HRV, Tabcorp Park, RISE Pty Ltd and clubs integrity services (licensing, registration, drug sampling and testing in and out of competition, and out‐of‐competition investigative arrangements) attraction and retention of stewards. The audit will make recommendations about improvements that could be implemented by HRV or government to ensure a strong harness racing industry. To assess the matters outlined in the terms of reference the audit will evaluate data and information from a range of sources including HRV’s procedures, internal and external financial reports, operational documents, audit reports and independent studies and audits, including the 2014 Industry Participant Survey. Consultation Consultation will be undertaken with a number of key stakeholders including but not limited to: the Chair, Chief Executive and officers of HRV, HRV Management Ltd and RISE Pty Ltd Association of Victorian Country Harness Racing Clubs Victorian Harness Racing Trainers and Drivers Association Victorian Harness Racing Sports Club (representing owners) Victorian Square Trotters Association Harness Breeders (Vic) Harness Racing Australia Victorian Bookmakers Association race clubs VicRacing Racing Analytical Services Pty Ltd Racing Integrity Commissioner Chair, HRV Integrity Council Chair, HRV Racing Appeals and Disciplinary Board Tabcorp/Sky Channel Other wagering operators. 50 A limited number of regional visits will also be undertaken to provide participants with the opportunity to contribute to the audit. In addition, interested individuals and participants will have the opportunity to contribute to the audit through a formal public submission process. The public submission process will run for a minimum of four weeks and individuals will be able to lodge their submission electronically or via post. Interested individuals can contact Mr Monteith at Email: hrvaudit@justice.vic.gov.au Phone: 03 8684 4418 Timing The audit will commence on 12 January 2015 with a draft report and recommendations to be provided to the Minister for Racing by 31 March 2015. 51 Appendix C ‐ Reports and documents considered Racing Act 1958 ‐ HRV HRV Organizational Structure 2013 IER Three Code Economic Impact Study HRV IER Culture Change and Engagement Report RISE 2014/15 Budget Tabcorp Park 2014/15 Budget HRV 2014/15 Budget consolidated and Normalized Correspondence ‐ Dispute between Codes regarding distributions from JV Sponsorship Review by Brendan Ford HRA 2014 Wagering Working Party Report including State comparisons HRV 2005‐ 2010 V3 Strategic Plan HRV 2011 ‐2015 Strategic Plan HRV Draft Summary of 2016 ‐ 2010 Strategic Plan Briefing Documents on HRV Finances Victorian Ombudsman’s Own Motion investigation into GRV HRV Annual Reports 2010, 2011,2012,2013 and 2014 RVL 2010 and 2014 Annual Reports GRV 2010 and 2014 Annual Reports 2011 Australian Standardbred Breeding Panel report on Breeding Industry Report on Integrity Assurance in the VRI ‐ Judge GD Lewis AM Breeding Statistics and Trends in the NZ HR industry Statistical & Marketing overview of HR in the USA ‐ A Sport in Transition Various "From the CEO's Desk" Industry Emails from John Anderson 2014 HRV Board Meeting Agendas (10) 2014 HRV Audit Committee Meeting Agendas (4) 2014 TP Melton Masterplan 2010 Project Pegasus – Development plans for surplus Melton land. 52 Appendix D ‐ Summary of consultation and written submissions process Key themes emerged during the extensive consultation process that included more than 63 meetings with clubs, participant groups and individuals and extended from 13 January until 24 March 2015. The process included meetings with stakeholders in key regional centres at Ballarat, Shepparton, Cranbourne and Warragul. In addition, 35 written submissions were received. The key themes to emerge from the consultation and submissions processes have been grouped under headings as follows. HRV Board and management HRV problems start at the top participants lack confidence in HRV leadership (Board, CEO and COO) participants believe that a new Board and CEO is needed (CEO has been 11 years in job, which is long enough) changing the CEO should be the number one priority for the Board the industry needs a culture of openness, honesty, transparency and trust (this is not the case and this change must be led from the top) unlike previous Chairs, the current Chair is not a strong leader (is there benefit in having a full time Chair) are we paying the Board roles enough to attract the best people? the selection process for appointments to the Board is compromised and open to politics the establishment of a selection panel to manage the appointment process would help to get better skilled people on the Board prominent people need to get involved in the industry an Advisory Board including industry knowledge should be set up specifically to deal with racing and breeding matters HRV does not display professionalism in everything it does (it must do everything it says it will) there is no clear vision from HRV to encourage participants to follow. HRV has poor commercial negotiating skills (there has been a lack of due diligence and risk assessment) no innovation Board is not questioning management enough and doesn’t understand the industry Board is not well known and do not attend meetings other than features (must be more accessible, have knowledge and passion for the industry) Board members must commit to attending a minimum number of race meetings at Melton and in the country (a roster may help and would go a long way to instilling confidence that the Board cares about HR, provides participants, and Clubs access to them) need more stakeholder knowledge on Board like in NSW 53 a thorough induction program for new Directors should be implemented GRV Ombudsman’s reports led to clean out of Board and management, which was a good thing (it would benefit HRV and industry confidence if the same happened) HRV consultation process has been a farce for too long HRV has been too focused on market share, Melton, and little else (there is so much more that needs HRV’s attention) HRV is too Melton centric HRV must lead and focus on integrity Board must benchmark how it operates compared with RVL, GRV and interstate harness racing controlling bodies the Board and management do not adopt best practice corporate governance HRV must get the right governance structures in place at country clubs country clubs should have right to appoint, subject to Ministers approval, one person to the Board HRV does not fully understand best practice risk management strategies, ensure risk management is a key issue for country clubs and lacks skills in this vital area Board should not own horses or bet like for staff because of potential conflicts however, many said Board must have “skin in the game” questioned whether the Board critically reviews policies and procedures on a regular basis in line with good Corporate Governance principles governance of APG is a concern (there is little transparency and many spoke of conflicts relating to its management) the influence of kindred bodies can be too great at times control of integrity needs to be separated from the business of HRV the industry is being managed NOT led should learn from the other codes HRV does not reply to correspondence leadership, integrity and education are most important areas of focus for HRV corporate governance standards were questioned (do directors understand their responsibilities? Perhaps training is needed or it is mandatory to have completed and graduated from AICD Company Directors course) HRV very slow and not dynamic, lacks commercial and customer focus Board and Senior managers should do AICD Corporate Governance course some Directors don’t have a clue about the industry HRV has been badly run for 6 to 8 years criticism of the appointment of Geelong staff to HRV. HRV operational issues in recent times, HRV has lost good people with industry knowledge a skills audit of all positions and current incumbents from CEO down is needed training stables are needed at tracks to encourage increased participation given high costs of entry to training as a career 54 no standards or expectations are published for clubs to follow communications lines are blurry and usually one way HRV does not respond to queries, correspondence or requests for information regional management is urgently needed to assist in upgrading skills level at country club level. there is limited OH&S skill at Club level (HRV must be responsible given largely volunteer base in the country with little skill in this important area) staff training needed for country managers particularly with HRV policies and procedures an increased focus on horse welfare is needed. “Raising the standard” is the primary HRV provider. It only re‐homes 30 horses a year due to limited resources. A business case to expand this program is urgently needed. Tabcorp Park the sale of excess land is critical to HRV controlling its finances for the benefit of the industry HRV is conflicted by running Melton and conducting race meetings when it is the industry’s controlling body (this no longer happens in any code in Australia and there is a query whether HRV should be competing with country clubs) debt associated with Melton is a burden to the industry all possibilities,including outsourcing and leasing should explored it is not really a metropolitan track (HR is disadvantaged compared with thoroughbreds with four such tracks and greyhounds with two) there is a lack of Board strategic direction for Melton HRV programs country class races at Melton, which significantly diminishes the brand of the track from a wagering and customer perspective races at Melton compete with country cups, which is not good for racing training facilities at Melton is urgently needed the track, grandstand and horse areas are badly designed (a masterplan is needed to address its inadequacies longer term given it is Victoria’s only metropolitan track) HRV is $1.4m pa better off racing at MELTON than at Moonee Valley Melton has not worked as an entertainment centre the development fund is monopolised by Melton there is little transparency about the financial impact of Melton on the industry (the annual report in particular reinforces this lack of transparency. HRV needs to explain fully the benefits of the Melton model to dispel scepticism) there is no members facility and corporate facilities are nonexistent the free admission strategy has damaged the brand and severely limits country clubs ability to charge admission (strategy needs should be reviewed) a roof is needed on the grandstand and tiered dining needs to be provided start later on Fridays to assist patrons to avoid traffic Tabcorp branding is holding back function business because of gambling connotation 55 the venue not suited for purpose, both racing and function businesses mostly small businesses in Melton so 1000 person function room not being used original business plan had TP generating 50 per cent more revenue than it currently generates after 8 years of operation. HRV never intended to race more than 27 times per annum but moving from MV forced it to be used for HRV metropolitan racing HRV would have built Melton differently if it had known Melton would be conducting 90 meetings per annum. Country racing people issue is of most concern, the age of committee members and reliance upon volunteerism is a risk for the industry and a huge challenge for HRV the industry’s roots are in the country, which provides 80 per cent of horses the poor financial position of a number of major clubs has happened under HRV’s watch (lack of HRV guidance and ownership of this issue) funding by HRV is one size fits all which has contributed to the problem some smaller clubs have benefited because of low cost volunteer meetings, which has allowed them to pocket money administrative hubs need to be introduced to reduce costs and increase efficiencies and skills spread the shared services model already working with four clubs and savings of $280,000 per annum (savings have been achieved in workers’ compensation, electricity, fuel and procurement costs) race meeting payments have not increased yet costs have need to review funding based upon viability and contribution to industry and only spend where clubs have a stable operating structure little HRV documented material to assist clubs HRV should develop strategies to assist clubs to grow revenues e.g. sponsorship, gaming risk management understanding not good and volunteer committees do not understand their exposure HRV needs to look at a strategy to fund different classes of races at different levels to encourage better horses to travel outside their region to race for higher prizemoney country racing/clubs needs a strong advocate on HRV Board limited OH&S skills exist in the country, therefore, risk exposure is significant the number of tracks for number of race meetings should be reviewed on a regular basis financial reporting and monitoring by HRV needs to be improved too much infrastructure. Need to focus on regions. Look at assets not performing. Sell assets not required. governance in country racing is a big issue 56 HRV does very little consultation on dates and types of races vis a vis Melton and country HRV’s fund distribution system has resulted in a number of smaller clubs having excess funds that should be returned any review of country clubs to include contribution to the Industry and number of horses in area clubs affected by V3 closure racing at other tracks make money (whereas at best host club break even) 27 country clubs and there is no oversight (this number cannot be sustained the way they are currently run. Need to move away from volunteerism to more professional). Integrity appeals to RADB and VCAT are not serving industry well, as significant reductions in penalties not well received by majority of participants role of Chair of Stewards has been downgraded as the position used to report to Board (should report to CEO) scarce resources and do not monitor betting like RVL stewards’ numbers reduced from 14 to 11 since 2008 swabbing is limited by budget head on cameras are not available at all meetings what is the role of the IC (is it policy or oversight) integrity is the main issue confronting HRV current COS is not strong (perhaps the role is not remunerated well enough to attract the best person possible) more training for stewards is urgently needed as the current group is young and inexperienced HRV’s understanding of integrity assurance is not good need CCTV cameras in stalls drivers should be banned from having mobile phones once they arrive on course and should be surrendered to stewards similar to the process for jockeys in thoroughbred racing a number of people questioned whether all swabs are tested Victoria’s record on cobalt with two unsubstantiated cases compared with NSW’s 40 is hard to understand and on face value says HRV is not on top of the issue disqualified persons should not be allowed to transfer horses to ex‐employees or spouses to train increased funding for testing is vital there are two sets of rules (one for the top trainers and drivers’ and one for the rest. Rules must be applied equally) integrity should be removed from HRV and transferred to a three codes body forty‐two stewards have left HRV since 2001 (only two retired and in 2005 there were 17 stewards) 57 integrity council has been told that inadequate resources are being applied to integrity increase pre and post race blood testing an independent body should employ stewards minimum penalties should apply for serious breaches of the rules trainers and drivers lack professionalism and stewards do not hold them to account drivers should not communicate during warm ups tactics should be disclosed where trainers have multiple runners in races lack of consistency in standing starts and starters not held to account welfare of horses is an important integrity matter participants are allowed to mock stewards on social media (no respect is shown) numerous mentions were made of the Ballarat fiasco with varying views on responsibility national training for stewards, which should incorporate three codes for uniformity (has a training manual been produced yet) three codes career paths for stewards current stewards have little knowledge of the industry set up a steward’s panel to review changes in driving tactics promote existence of RIC Office engage older trainers and ex‐drivers to act as consultants to stewards. introduce part time stewards to increase skills base RVL integrity is seen as better than HRV should be back of house cost sharing between codes withintegrity NSW integrity model should be adopted in Victoria dress codes should be enforced for participants, with stewards to police drug use is prevalent both in and out of racing (methamphetamines use is going undetected) top trainers horses not being swabbed regularly HRV should take over licensing of vets working in HR. Racing and breeding HRV problems are in fact Australia wide and this needs to be taken into account when looking at ways to improve the racing product WA leads the way whilst NSW is insulated by the creation of a futures fund from the sale of Harold Park A National wagering review conducted in 2014 made 30 recommendations which are slowly being rolled out (some did not gain support) HRV should focus on promoting the affordability of the industry Victoria lacks Saturday night metropolitan racing Some saw sprint lanes contribute to boring racing, with the view that WA has the most exciting racing because they don’t use sprint lanes an innovative product focus is needed 58 prizemoney levels also attracted extreme views (participants thought that the matter was at the top of the list to make the industry viable whereas other saw a need for balance to promote the industry, educate participants, and concentrate more on integrity and welfare issues) the introduction of fixed colours for numbers was seen as a means of making it easier for those who don’t understand the industry to get involved (it was noted that Queensland had recently gone down this route as had NSW some time ago but Victoria continued to put it off) Victorias’ key metrics are declining at a faster rate than for the rest of Australia syndication is an area that many identified as an opportunity which HRV should embrace and develop a strategy to grow ownership drop 50 race meetings and apply the money to increase prizemoney for remaining races wagering outcomes for trotting races are similar to those for pacing races and standing starts turnover held up well against mobile starts the NSW handicapping system was seen as better than Victorias (as was the system of allotting entries to races based upon the class of horses rather than taking entries for horses for specific races) Melbourne needs more metropolitan racing, conducting one metropolitan meeting a month on Saturday nights should be considered starts are not helping brand and image of harness racing more fillies and mares races should be programmed to increase the number of horses racing as many are lost because they cannot compete with males return to Moonee Valley races run at Melton conflict/clash with country cups racing lacks professionalism foal numbers continue to drop and HRV has no strategy to address the matter low class restricted meetings and $3,000 races devalue the Melton metropolitan brand and should not be run there there are too many short priced favourites with a lack of competitive racing there is little consultation on date’s allocation whilst Breeders Crown is a highlight, it caters more for the top end HRV seems to focus too much on attracting horses from NZ and other parts of Australian than Victoria the Australian industry is at a significant disadvantage compared to NZ because of the misalignment of the breeding season by one month sires stakes program like in US and Canada is needed there is little cooperation between Victoria and NSW with programming races and meeting on either side of the border training centres are need a second metropolitan track is needed Saturday night race meetings should not be programmed at remote tracks 59 800‐metre tracks produce more exciting racing reintroduce picnic low class meeting on Saturday afternoons to promote the industry locally to communities the hand up rule advantages favourites (is this good for racing and fair to all runners) better class races should carry higher prizemoney rather than most races carrying the same prizemoney regardless of class there is a lack of cooperation between the codes increase prizemoney for signature events to $1m (others thought races should be cut with prizemoney reallocated to other races) introduce nominations for major races as a way of increasing prizemoney late entry fees for Futurities VicBred whilst strongly supported by most had detractors because it allows progeny of NZ sires and mares to benefit free for all races at Melton are programmed against country cups tracks need improved facilities for owners including an owners room at Melton there is no transparency around APG’s operation HRV should shorten gaps between races to make a day/night at the races more attractive increase first win bonus to $10,000 all country cups should be on weekends to maximize attendances meetings should be held on Sunday afternoons instead of twilight meetings which are not conducive to attracting families to the races the racing program does not cater for majority of horses HRV must regain pre‐eminence in the city introduce Stride Master system to grow wagering turnover (it has worked in Tasmania) program a grass race regularly at Cranbourne and Kilmore too many short distance races and not enough longer races advantages NZ horses in feature races must exclude well‐performed horses from restricted races every track should have sprint lanes and tracks should be widened preferential barrier draws based upon heat performance into finals fixed odds betting should be expanded by Tabcorp on same basis as for thoroughbreds (more than 15 minutes before the race) reduce distance of sprint lane winning posts are dull create a racing circuit that is consistent so everyone knows where meetings will be drivers and trainers should not have to reveal tactics nor should they be made public re‐introduce tiered or inner and outer circuit racing with different prizemoney levels consider a straight mile track 60 programming is atrocious and HRV doesn’t think outside the square and look at different ways to grade horses such as prizemoney which works well for thoroughbreds need a strong focus on programming to drive wagering look at what Greyhounds have achieved (it offers consistent product and customers don’t have to be experts to bet on it) should be racing at TP twice weekly to maximise revenue it cost significantly less to race at TP than it did at MV Saturday nights should be night for racing re‐opening closed tracks was a retrograde step (should downgrade a number of tracks) mentoring system for young drivers like for apprentice jockeys (competence of participants is a concern) HRV should take over licensing of vets working in the industry many farms are of poor quality for breeding, agistment and rearing of foals the clamping down on the use of anabolic steroids on yearlings has lead to smaller sized yearlings which indicates many were being subjected to such treatment VicBred ownership eligibility to receive bonuses has changed and some have been disadvantaged. HRV should take responsibility for setting the rules. Participants desperately need to focus on owners including facilities and privileges, owners do not have a strong representative group drivers are controlling the sport participants’ culture is holding back the sport need training facilities at tracks to make HR more affordable and to attract young people cultural change is urgently needed must tell participants as it is and bring them along to gain their support dress standards are appalling and better standards should be enforced education levels of a number of trainers and drivers is alarming participants have a glass half‐empty attitude the returns to participants are disproportionately in favour of the top 20 trainers who earn 70 per cent of prizemoney there is too big a gap between the top and the bottom (the foundation of the industry is the small owner, trainer, and country based participant) bad people are welcomed back into the industry by HRV and media HRV does not listen to owners, trainers and drivers focused on increasing prizemoney levels and noted Victoria’s poor record over past 6 or 7 years compared with rest of Australia HRV is looking after the tall poppies the industry is stuck in the past and must move forward 61 the people putting the product on do not realize they are not the customer and buyers of the product must develop pathways and careers in racing for young people. Marketing and promotion HRV has lost its brand identity Sky Channel coverage does a huge disservice to HR (it warehouses the product and preference is given to the other two codes) HRV should use more social media marketing, as it is more affordable must engage with local communities and promote meetings as such with a charitable focus HRV receives scant media coverage (there is a media bias against the industry) need to centralise marketing to help country cups lost connection with family and women, spending too much on form guides and RSN focus on social and family days, picnic meetings on Saturdays in local communities free entry at Melton has never been tested as a strategy that has achieved a positive result brand issue affects sponsorship potential HRV lacks a customer focus, particularly on course need to shift focus away from wagering centric more to the sport and its benefits must improve the image of HR.(it lacks glamour and there is perception of dishonesty) standing starts do nothing for image of sport and customers promote affordability of harness racing compared with thoroughbreds what has happened to HRV roll out of Trots rebranding exercise (it seems to have stopped) must focus on needs of customer instead of needs of self‐interest industry groups if industry is to grow rather than increase prizemoney need to increase spend on marketing introduce an amateur driving program like in other parts of world to promote involvement TP branding should be revisited (is it stifling non raceday business) HRV needs a high quality Marketing Manager. There is no innovation. Statutory authority issues HRV needs to be freed up, there is too much red tape minister of the day can make appointments, which may not be in the industries best interests an Appointments Panel process should be considered which has industry participant input into recommendations for the Ministers approval HRV’s governance structure is convoluted HRV’s governance problems start at the top with the Minister 62 must use the industry’s great business people to play a role in furthering the cause of HR. HRV strategies not understood or well explained by HRV and they have not encouraged industry buy‐ in prizemoney strategies should be given priority trotting has it supporters and detractors and the international benefit is not promoted well enough little strategic focus on sponsorship notwithstanding a report was commissioned last year no breeding strategy HRV should encourage more stallions to stand in Victoria by allocating 5 per cent of Vic Bred money must increase field sizes not addressing breeding issues HRV’s strategic plan is not working the foal crop target should be a key KPI for HRV strategic direction from HRV for country clubs is lacking a training centre strategy is urgently needed a new management paradigm for HRV is needed not understood that V3 was a strategic plan with 10 or more key strategies not just the closure of seven country tracks (track closure took focus away from the plan) need racing strategies to improve programming to improve wagering. Finance issues HRV debt is the biggest issue and needs to be extinguished as soon as possible (is government assistance possible) pay debt to free up interest cost for use to grow the industry flat revenue from new wagering licence is a major concern for HRV, which is not getting as much as it expected compared with the other codes are Racefields fees high enough (did the legal battle with corporate bookmakers affect HRV’s ability to deal with them now to grow wagering) there must be some accountability for the poor deal done with the other codes on distribution of revenue from new JV finance resources within HRV are not the best (how does it attract the right people) sale of excess land must be a first priority to create an annuity for HRV HRV has highest racefields fees in harness racing in Australia (this might be detracting from HRV’s ability to maximize revenue with corporate bookmakers promoting lower cost racing product) the previous Government’s decision to reopen tracks came at a great cost to HRV and set it back 2 or 3 years Melton purportedly costs $1.4m pa less to operate than at Moonee Valley 63 HRV is looking to move its administration to Melton. This should improve management of venue and synergy benefits HRV cannot increase product like greyhounds which has increased product by 20 per cent over the past 2 years fixed odds lower yield at about 12 per cent compared with Tote win and place at 14.25 per cent is hurting the code as distributions from JV are partly based upon revenue increasing prizemoney every year is not sustainable, there must be balance, which incorporates other priorities shared services could save $1m per annum there is a distinct lack of financial transparency with respect to HRV’s ownership and management of RISE, Melton and APG (a full audit is needed to identify the actual cost of these business activities to the industry and too identify any subsidies that flow to them) get rid of duplication in the industry there are solvency concerns with some clubs (Geelong) HRV purposely sets low budget targets to enable to be insulated from poor performance a review of HRV tender practices and procurement processes is needed. 64 Appendix E ‐ Results from government sponsored refinancing Facility Long Term Facility (“LTF”) is $22,000,000 15 year Term Fixed 2 years reverting to Floating on 30 June 2016 Short Term Facility (“STF”) $10,000,000 Line of Credit “At Call” Floating Rate renegotiated at 30 June 2015 Temporary Line of Credit (“TLOC”) $ 3,300,000 Temporary Line of Credit “At Call” Floating Rate Facility expiring at 30 June 2015 Benefits of facility LTF Principal Repayments have been structured to co‐inside with HRV high cashflow balance being from December to June. The principal repayments are $750,000 both in December and June. Interest on the LTF is payable in arrears. Interest on the LTF is payable in December and June – circa $340,000 per payment. STF Interest is payable monthly at 2.665 per cent HRV is transferring excess cash between ANZ Trading Account and STF $10m to minimise interest. This commenced in August 2014 circa balance at end of December 2014 $2.3m. Financial Assistance Levy (FAL) is 2.10 per cent and is levied/payable quarterly. The FAL is calculated on the Closing Debt of Debt on the quarter. Therefore by managing excess cash and reviewing creditors/stakemoney payments timings significant reductions can be made to the cost of the FAL. HRV Strategic funding objectives HRV to target a minimum Cash at Bank at June 2015 of $4.5m. 65 Appendix F ‐ 2015 HRV Audit Tender 66 67 68 Appendix G ‐ HRV shared services model HRV’s primary focus is to improve club governance and mitigate risks in this regard. The program has been endorsed by the Audit Committee and HRV Board. Importantly it will also improve HRV’s much needed engagement with Clubs. The absence of full time commercial oversight of 25 independent clubs has undoubtedly led over time to inefficient cost management. HRV target is “stretch savings” of $1million over 3 years and the Shared Service program is seen as an enabler for change. The initial areas targeted by HRV for savings are audit fees, accounting services and Workcover costs with $187,000 in savings. HRV anticipates that once the country club network has consolidated the additional savings of the order of $500,000 pa, in the areas of electricity, insurances, motor vehicles, communications, bank charges and interest costs, administration wages, group purchasing and rates and taxes. Once data mining is completed, HRV envisages more items being identified once the clubs’ transferring to HRV Shared Services has been completed. In conjunction with Shared Services, HRV is re‐working meeting fee payments, which are seen as a critical part of efficiency to manage the clubs. The program will be structured to ensure accountability of club commercial Costs instead of the pooled approach where Clubs see the meeting fee payment as the all‐encompassing funding instead of separating the commercial activity (catering/functions) from the racing activity. With implementation, it may become apparent that further efficiency or indeed additional cost may be incurred to support the organisational structure. This may be necessary due to; consolidation of clubs without losing their identity, better management of sponsorship groupings which could increase income, I.T. Infrastructure, improved cash flow and funding from HRV on their savings accounts, regional track maintenance, asset utilisation, improved club management skills and project management. To achieve optimal efficiency within the club network savings are likely to be re‐invested in the operational up skilling, governance and capital cost saving projects in conjunction with development funding. 69
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