The Future of the Scottish Horseracing Sector on Paper September 2014 BiGGAR Economics Midlothian Innovation Centre Pentlandfield, Roslin Midlothian, EH25 9RE Scotland 0131 440 9032 info@biggareconomics.co.uk www.biggareconomics.co.uk
CONTENTS Page 1 KEY POINTS... 1 2 INTRODUCTION... 3 3 ECONOMIC CONTRIBUTION... 4 4 POLICY AND STRATEGIC ISSUES... 9 5 DEVELOPMENT OF A NEW STRATEGY... 13
1 KEY POINTS The Scottish horseracing sector, which encompasses the five Scottish racecourses (Ayr, Hamilton Park, Kelso, Musselburgh and Perth), breeders, owners, trainers and stables, and their suppliers, is estimated to contribute: direct expenditure of 55 million to the Scottish economy; supporting 870 full time equivalent employees; and has a wider economic impact estimated at 173 million. The Scottish sector represents an estimated 5% of the overall economic impact of the British horseracing sector. Horseracing also provides the bedrock of the betting sector and Scotland has 950 betting shops (11% of the UK total), with 5,000 staff (12.5% of the UK total). During the independence referendum campaign a number of leading figures in the Scottish horseracing sector have highlighted issues that will need to be resolved to secure the long term future of the sector. However, it is important to distinguish between practical issues that will need to be resolved in the coming weeks and months, in the event of a Yes vote on 18 th September, and those longer term strategic issues that will determine whether the sector can flourish in the future. Indeed some of the issues that have been discussed in the sector, such as whether the Great Britain wide institutional and administration arrangements should continue, are not issues of direct relevance to Scotland s constitutional future. Many other sports (notably football) are already independent from the rest of the UK, while others have a mixed model where some issues are managed in Scotland and others at the UK level. So while the independence debate may stimulate the horseracing sector to review its current institutional and administrative structures, it is for the sector to decide what arrangements most suit its needs. There are some practical issues that would need to be resolved, where the sector interacts with government in regulatory and taxation matters. This includes the operation of the betting levy, which is charge based on bookmaker profits and is used to fund racing, including prize money. The UK Government is in the process of consulting on the future of the levy and has indicated that it will either be reformed or replaced. Analysis by Scottish Racing has indicated that the income received from levy by Scottish racecourses exceeds that bet on Scottish fixtures. However, given that Scotland accounts for 9.8% of the betting on Paper: The Future of the Scottish Horseracing Sector 1
taxes and levies collected in the UK while Scotland accounts for 5% of the British horseracing sector, it is likely that Scottish punters make a net contribution to horseracing in the rest of the UK, estimated at 2.8 million per annum. The best option for the Scottish horseracing sector in an independent Scotland would, to some extent, depend on UK Government decisions on the reform or replace the current levy system. However, it would appear that a separate levy system for Scotland, based on the Scottish bookmaking sector could result in additional income to Scottish horseracing. Any changes at UK or Scottish level would require to be consistent with European state aid regulations. There is also a range of more strategic issues that the Scottish horseracing sector needs to consider. The sector is small compared with in England and Wales (and Ireland) in both absolute and per capita terms and so consideration will need to be given to how greater critical mass can be built. A reform of the levy could be part of the answer but the sector must also attract investment from other sources. As well as growth of the sector itself, there may also be diversification opportunities. The five racecourses are real assets, but they might be considered to be underutilised resources. Even if the number of fixtures was to grow substantially, that would still leave many days in the year where the facilities could be used for other purposes. Other sport and leisure sectors may offer inspiration for diversification, such as the move of some of the ski centres into mountain biking, substantially extending their seasons, with knock-on economic benefits to the Scottish tourism sector. The recent Commonwealth Games and the forthcoming Ryder Cup have highlighted and demonstrated Scotland s expertise in hosting major events. Other strategic issues that might be worthy of review include the approach to breeding (including whether there is scope for greater interaction with Scotland s world-leading academic research institutions that have boosted productivity in agricultural animals), the attraction, retention and training of new talent, the marketing and promotion of the sector, investment in facilities, and how the sector interacts with other parts of the economy, including the tourism sector. Decisions on the administration of the sector and whether or not to remain part of the wider British horseracing sector should be made based on a strategic review of the opportunities so that the sector can agree a strategy with government that will deliver growth. As an independent business organisation that believes that the key to Scotland s economic success is to foster a collaborative approach between the business community, government, public sector and wider society, N-56 is in a position to facilitate this process. on Paper: The Future of the Scottish Horseracing Sector 2
2 INTRODUCTION N-56 commissioned BiGGAR Economics to review the economic contribution of the horseracing sector in Scotland, including its current economic impact, important policy issues and strategic issues that might impact on its future. BiGGAR Economics is an independent economic consultancy based in Scotland, advising governments, public sector agencies, companies, universities and industry organisations across Europe. N-56 is an independent business organisation that aims for Scotland to become one of the top five wealthiest countries in the world through the introduction of an economic strategy that will lead to stronger and more sustainable economic growth. N-56 believes that the key to Scotland s economic success is to foster a collaborative approach between the business community, government, public sector and wider society in establishing and implementing a new economic strategy. This applies to the horseracing sector as much as any other and given the scale of the sector and the strong networks that already exist, there may be an opportunity for horseracing to a the lead in introducing a more collaborative approach to strategy that others can then follow. The rest of this discussion paper is structured as follows: section 3 summarises the economic and financial contribution of the Scottish horseracing sector, in the context of the British sector as a whole; section 4 discusses some of the policy and strategic issues currently concerning the sector; and section 5 proposes an approach to developing a new strategy for the sector that will secure its future and provide a routemap for growth. For copies of this report or for further information please contact Graeme Blackett at BiGGAR Economics by telephone on 07890 998147 or by email at graeme@biggareconomics.co.uk. on Paper: The Future of the Scottish Horseracing Sector 3
3 ECONOMIC CONTRIBUTION This section considers the economic and financial contribution of the Scottish horseracing sector, in the context of the British sector as a whole. 3.1 Economic Contribution of British Horseracing The British Horseracing Association commissioned Deloitte to undertake an economic impact assessment of the sector, the main findings of which are summarised in the graphic below. That found that the direct expenditure of British racing was 1.1 billion with 17,400 full time equivalent employment and that the wider economic impact was 3.45 billion. Economic Contribution of British Horseracing Source: Economic Impact of British Racing 2013, Deloitte for BHA on Paper: The Future of the Scottish Horseracing Sector 4
Of the 60 racecourses in Great Britain, 5 are in Scotland: Ayr; Hamilton Park; Kelso; Musselburgh; and Perth. 3.2 Scottish Share of British Horseracing Economy Given the differences in scale between Scotland (with a population of 5.3 million) and England and Wales (with a population of 56.0 million), it would be expected that the Scottish horseracing sector would be much smaller than in England and Wales in absolute terms. However, the sector is also smaller in relative terms. Scotland accounts for 8.7% of the population of Great Britain (note that a more commonly quoted figure is that Scotland accounts for 8.4% of the UK population however, the BHA does not cover Northern Ireland and so in this context, it is the proportion of Great Britain that is relevant) and 9.5% of the economy of Great Britain. Based on the 2011 BHA Factbook, Scotland had: 5 of the 60 courses (8.3%); 94 of the 1,469 horseracing fixtures (6.4%); and less than 0.3 million of the 6.2 million attendances (4.9%). Weatherbys, which manages the General Stud Book for Great Britain and for Ireland reports that there are 122 breeders in Scotland, with 112 foals from 221 mares in 2013. This represents 2.4% of the Great Britain total and just 0.9% of the Great Britain and Ireland total. A study commissioned from Professor Terry Stevens by Scottish Racing in 2014, confirms the scale and economic contribution of the sector in Scotland, relative to the Great Britain total, with key measures including: racecourses in Scotland: 8.3% of British total; number of fixtures in Scotland: 7.4% of the British total; total attendance at Scottish fixtures: 5.0% of the British total; average gate per fixture in Scotland: 75% of the British average; number of full-time equivalent jobs directly supported in Scotland on Paper: The Future of the Scottish Horseracing Sector 5
by racecourses: 5.0% of British total. On the basis of these measures, the Scottish horseracing sector is estimated to contribute 5% of the economic impact of the sector in Great Britain as a whole. This would imply the following economic impact metrics: direct expenditure of 55 million (of Great Britain total of 1.1 billion); 870 full time equivalent employees (of Great Britain total of 17,400); and 173 million in wider economic impact (of Great Britain total of 3.45 billion). The British horseracing sector also supports the betting sector, which also provides it with an important source of income (the Betting Levy). In a submission to the Scottish Parliament in 2012, the Association of British Bookmakers stated that there were 950 betting shops in Scotland (11% of the UK total of 8,700), with 5,000 staff (12.5% of the UK total of 40,000 jobs). So while Scotland accounts for less than its per capita share of the horseracing sector, it accounts for more than its per capita share of the betting industry, an important source of income for racing. Summary of Scotland s Share of GB Horseracing Sector Scotland's'%'share'of'GB' 12%# 10%# 8%# 6%# 4%# 2%# 0%# Courses' Fixtures' A-endances' Breeding' (Foals)' Racecourse' jobs' Economic' Impact' Be>ng'Shops' Be>ng'Jobs' 3.3 Levy The horseracing sector is subject to the same general taxation system as the rest of the economy and so pays a range of corporate on Paper: The Future of the Scottish Horseracing Sector 6
and employment related taxes. However, there are also other taxes and levies relevant to the sector, not least the betting levy, a levy that is paid by bookmakers on profits. The levy is collected and managed by the Horserace Betting Levy Board (HBLB). The UK Government is in the process of consulting on the future of the levy, with either reform or replacement with a different system the potential outcomes. While the Deloitte report for the BHA indicated that the levy, 75 million in 2013, accounted for only 7% of the total direct expenditure associated with the sector, it is considered to be of critical importance to the sector because 90% of the levy is used to fund racecourses in the form of prize money, raceday services and the fixture investment fund. For example, the BHA s Facts Report for 2011 suggests that 35% of prize money across all fixtures came from the levy ( 32.4 million of the 93.9 million total). For the 5 Scottish courses it was 39% ( 1.7 million of the 4.4 million total). Scottish Racing has estimated that Scottish racecourses receive around 4.6 million per year in funding pa in funding from the HBLB but generate just 3.8 million in levy yield through bets placed in English, Welsh and Scottish betting outlets. On this basis it can be said that Scottish Racing collects 0.8 million more in funding than the racing generates across the whole of the UK. However, while this is a valid analysis from the perspective of the Scottish courses, in terms of economic and financial flows between Scotland and the rest of Great Britain, it is not the events that bets are placed on that is relevant, but the source of those bets. The annual Government Revenue and Expenditure in Scotland (GERS) analysis suggests that the per capita income from betting taxes and levies is higher than Scotland s population share, at 9.8% of the revenue collected. It seems reasonable to assume that this is reflected in the horseracing levy, which would imply that 7.4 million is collected from Scottish punters (9.8% of the 75 million total levy). Given that 4.6 million is received from the HBLB by the Scottish racecourses, this implies that a net 2.8 million collected from punters in Scotland goes to racecourses in England and Wales. on Paper: The Future of the Scottish Horseracing Sector 7
Estimated Scottish Share of Levy Collected & Spent 10%# Sco-sh&%&share&of& 9.80%& 9%# 8.70%& 8%# 7%# 6%# 5%# 5.20%& 4%# 3%# 2%# 1%# 0%# Sco-sh&Popula5on&Share&of&GB& Be-ng&Taxes&&&Levys& HBLB&Prize&Contribu5ons& EsAmated&Sco4sh& &Levy& 8.0m% 7.4m& 7.0m% 6.0m% 5.0m% 4.6m& 4.0m% 3.0m% 2.0m% 1.0m% 0.0m% Levy&Paid&by&Sco4sh&Customers& HBLB&Spending&at&Sco4sh&Courses& Source: GERS, BHA & Scottish Racing on Paper: The Future of the Scottish Horseracing Sector 8
4 POLICY AND STRATEGIC ISSUES During the independence referendum, some leading figures in the Scottish horseracing sector have raised issues that would need to be addressed in the event of a Yes vote. The main issues that have been concerning the sector are discussed below. 4.1 Institutional and Administration Arrangements The horseracing sector is currently managed by British institutions including the BHA, the HBLB and Weatherbys. It is for the Scottish horseracing sector to decide whether the institutions that are industry-based should continue to be organised on a British basis or whether there is a case for separate Scottish institutions. This is not really an issue that is related to the independence referendum since there are already a range of arrangements in place in other sports: some are organised on a Scottish basis (notably football and rugby) while others are organised either on a UK wide basis or have a mixed model where some issues are managed in Scotland and others at the UK level (including those sports that are part of both Olympic and Commonwealth Games). So while the independence debate may stimulate the horseracing sector to review its current institutional and administrative structures, it is for the sector to decide what arrangements most suit its needs. Some of the existing institutions have already made their position clear. For example, Weatherbys has indicated that it would continue to register Scottish-bred foals in the General Stud Book after independence. In July 2014, horse registry general manager Paul Palmer said: "In terms of what would happen in the event of Scottish independence, the General Stud Book would be happy to continue to assist Scottish breeders by including their foals in the GSB. Obviously there is a long history of recording both British and Irish foals in the one stud book, so there would be no obstacle there. In recent years we have published Irish-born foals in their own separate section of the GSB and, should this be what Scottish breeders want, we could do the same for their foals." However, there are some elements of the administration of horseracing that have some legislative basis, including levy and taxation issues. 4.2 Levy and Taxation There are some practical issues that would need to be resolved, where the sector interacts with government in regulatory and taxation on Paper: The Future of the Scottish Horseracing Sector 9
matters. This includes the operation of the betting levy, which is charge based on bookmaker profits and is used to fund racing, including prize money. The UK Government is in the process of consulting on the future of the levy and has indicated that it will either be reformed or replaced. As discussed in the previous section, analysis by Scottish Racing has indicated that the income received from levy by Scottish racecourses exceeds that bet on Scottish fixtures. However, given that Scotland accounts for 9.8% of the betting taxes and levies collected in the UK while Scotland accounts for 5% of the British horseracing sector, it is likely that Scottish punters make a net contribution to horseracing in the rest of the UK, estimated at 2.8 million per annum. The best option for the Scottish horseracing sector in an independent Scotland would, to some extent, depend on UK Government decisions on the reform or replace the current levy system. However, it would appear that a separate levy system for Scotland, based on the Scottish bookmaking sector could result in additional income to Scottish horseracing. In either case, any new system, whether introduced in Scotland or across the UK, would need to ensure compliance with European State Aid regulations. There are also some specific taxation issues that apply in the horseracing sector. These include the scheme by which owners can register for VAT and so reclaim VAT paid on training and other ownership costs. The sector would be keen to retain such an arrangement to avoid becoming uncompetitive with competitors in England and Wales. There may also be potential to learn lessons from elsewhere on the tax treatment of the sport. Examples worthy of examination include the Irish system where sportspeople can reclaim higher rate tax earnings paid, on retirement (subject to rules on residency), which has helped to retain sporting talent in Ireland. 4.3 Jockey and Staff Training The training of jockeys and stable staff is mostly undertaken in at the British Racing School at Newmarket and the Northern Racing School in Yorkshire. Given the scale of the sector in Scotland, the case for a separate Scottish training school may not be strong. However, there are many examples of Scottish colleges developing new courses and qualifications for niche industries, often in partnership with industry organisations, and so this approach should not be ruled out. If the Scottish horseracing sector decided that continuing the on Paper: The Future of the Scottish Horseracing Sector 10
current arrangement was most appropriate, then there may be merit in reviewing how training is currently funded. There is a precedent of public sector funding of some education undertaken outside Scotland with the Student Awards Agency for Scotland funding some study in other countries, particularly at postgraduate level. 4.4 Sustainability and Critical Mass The Scottish horseracing sector is small compared with in England and Wales (and Ireland) in both absolute and per capita terms and so consideration will need to be given to how greater critical mass can be built. As in any other sector of the economy, the key to growth and critical mass is to identify areas of existing or potential competitive advantage. In the case of horseracing potential advantages might be identified by looking at each part of the sector separately and considering whether there might be lessons to learn from other sports, where there are common issues. For example, in football, Scottish clubs have realised for some time (although it took some longer than others) that it was difficult to compete for the best players with the wealthier English leagues. Some clubs (Hamilton Accies and Dundee United being examples) have responded by investing in development of talent with the best players moving to England and other wealthier leagues, while providing an attractive domestic product. In horseracing, the equivalent advantage might be delivered by investing in research and development. While the approach to breeding is both traditional and sophisticated, the same could be said about many areas of agriculture. However, the world leading research institutions based in Scotland (such as the Roslin Institute and the Moredun International Research Institute) have done much to boost productivity by applying genetic analysis and other sophisticated methods to selective breeding. Closer links between the horseracing sector and this academic excellence could identify new opportunities to establish competitive advantage. From the perspective of the racecourses, the approach taken to marketing and the negotiation of media rights may also be worth reviewing. The racing media has not been immune from wider media trends, with declines in circulation of physical copies. For example, the Racing Post declined from more a circulation of more than 70,000 in 2007 to less than 50,000 in 2012, although it has stabilised at this level. Based on wider media trends, it is possible that further decline in traditional media serving the sector may well be experienced. With that in mind, on Paper: The Future of the Scottish Horseracing Sector 11
consideration could be given to whether there is anything innovative that the Scottish sector might do, perhaps in partnership with a new media partner, so that it was leading rather than following the trend. Similarly, the negotiation of media rights and marketing to date has assumed that the main interest will be within the UK. While that may well continue to be the case, there is also merit in considering whether there may be interest in niche audiences, elsewhere in the world, perhaps in the Scottish diaspora. 4.5 Diversification and Growth As well as growth of the sector itself, there may also be diversification opportunities. The five racecourses are real assets, but they might be considered to be underutilised resources. Even if the number of fixtures was to grow substantially, that would still leave many days in the year where the facilities could be used for other purposes. Other sport and leisure sectors may offer inspiration for diversification, such as the move of some of the ski centres into mountain biking, substantially extending their seasons, with knock-on economic benefits to the Scottish tourism sector. The recent Commonwealth Games and the forthcoming Ryder Cup have highlighted and demonstrated Scotland s expertise in hosting major events. The Scottish racecourses have to a greater or lesser extent sought to diversify their businesses, with most now available for conferences and meetings. However, there may be merit in examining larger scale opportunities including outdoor events and tourism and leisure activities. on Paper: The Future of the Scottish Horseracing Sector 12
5 DEVELOPMENT OF A NEW STRATEGY During the independence referendum campaign a number of leading figures in the Scottish horseracing sector have highlighted issues that will need to be resolved to secure the long term future of the sector. However, it is important to distinguish between practical issues that will need to be resolved in the coming weeks and months, in the event of a Yes vote on 18 th September, and those longer term strategic issues that will determine whether the sector can flourish in the future. Decisions made on the administration of the sector and whether or not it makes sense to remain part of the wider British horseracing sector should be made based on a strategic review of the opportunities so that the sector can agree a strategy with government that will deliver growth. In this context, the starting point for the Scottish racing sector to consider the most appropriate framework for the future should not necessarily be to assume that the current arrangements are the most appropriate. Instead, consideration should be given to the opportunities for future success and the framework required to deliver on those. That might include retaining current arrangements in some areas and a new approach in others. If the Scottish horseracing sector is serious about flourishing in the future, it should be taking a lead in developing a growth strategy, rather than expecting government or its agencies to identify the opportunities. As an independent business organisation that believes that the key to Scotland s economic success is to foster a collaborative approach between the business community, government, public sector and wider society, N-56 is in a position to facilitate this process. Over the next few weeks N-56 will invite the racecourses, training yards, breeders, media and other parts of the sector and the government to contribute to a process that identifies the growth opportunities and any constraints, and develops a routemap for the sector, to be implemented by the sector itself and by the government. on Paper: The Future of the Scottish Horseracing Sector 13