Hong Kong racing scene

Downhill racing
Zach Coleman

Weekend: June 4-5, 2005
SIMON SONG

The Hong Kong Jockey Club's public image is a lot like church bingo. Only it is on a monumental scale.

A few who wager with the Jockey Club take home big prizes. The rest of the money goes to good causes. Those who run the club are generous, upstanding social benefactors, their motives and character beyond question, save the odd rumor or scandal.

Macau's Stanley Ho is known for his philanthropy too, but is tagged as a debonair devil. Having crossed paths with powerful gangsters during decades of operating casinos in Macau, many take his word that he beat off their attempts to muscle in on his business. His ways with women are such that his consorts are referred to by number and his children outnumber his casinos.

Behind these public images, Ho and the Jockey Club bear striking simi-larities.

Each has prospered from decades of dominating gambling on their respective turf. Ho's Macau franchise includes lotteries, sports betting, and horse and dog racing in addition to casinos. The Jockey Club's Hong Kong mandate encompasses the Mark Six lottery and soccer betting as well as horse racing.

The Hong Kong Jockey Club and Sociedade de Jogos de Macau (SJM), Ho's casino company, are the biggest single taxpayers in their cities and among the largest employers.

The Jockey Club paid HK$12.2 billion in taxes in the year ended last June 30; SJM's tax bill last year came to 12.3 billion patacas (HK$11.9 billion).

Their philanthropy, too, is similar. The Jockey Club contributed HK$1.1 billion to trusts to support education, health, sports and other community causes last year. SJM paid 1.1 billion patacas to support cultural, educational and other community needs.



Indeed, SJM's largesse presumably has a much greater impact on Macau than the Jockey Club's here given that Hong Kong's population is 15 times larger.

It is worth noting that SJM's community contribution is fixed at 3 percent of its gross revenue under its franchise agreement with the government. The government and foundations it designates allocate the funds.

Though the Jockey Club calls itself Hong Kong's premier charity, it has no legal obligation to donate any of its proceeds from horse and soccer betting. It donates to causes and groups of its own choosing, aside from 15 percent of gross lottery proceeds which are channeled by law through the government.

"Lots of people assume all the profits go to charity and that's not true,'' says John Bacon-Shone, director of the Social Sciences Research Center at the University of Hong Kong. "They could cut the charity amount by half and there's nothing anyone could do.''

Last year's charity allocation represented half of the club's total net profit and equaled a third of the commission the club took for itself on horse bets. In terms of gross revenue left after paying out winning bets, the Club put 7 percent toward charity.

Even the charitable nature of many club donations can be debated. Included in its biggest grants last year was HK$134 million for the construction of a third public golf course on an island off Sai Kung and HK$100 million for Hong Kong University of Science and Technology to construct a center for collaborative research with private business.

"I'm not saying they are not making a contribution [but] they should not exaggerate that they are doing a lot for social welfare,'' says Nelson Chow, chair professor of social work at the University of Hong Kong.

By the club's count, HK$232 million of its donations last year went to community services, nearly as much as went to the golf and industrial research center.

Says Chow: "The charity goes largely to capital works.''

Programs run by organizations with an established channel to members of the Board of Stewards, the club's governing body, also have an edge.

The club is nevertheless fundamentally different from Ho's empire.

As SJM is a private company, Ho and other shareholders were free to spend their share of its 4 billion pataca profit last year on private jets or anything else.

As a nonprofit organization, club income not allocated to the Hong Kong Jockey Club Charities Trust goes in the bank. Out of its HK$2.3 billion profit last year, the club put HK$64 million into a fund for membership facilities and HK$1.1 billion into general reserves.

Including its charities trust funds, the club had a net worth of HK$29.1 billion as of June 30.

Forbes magazine put Stanley Ho's net worth at US$3.6 billion (HK$28 billion) in its 2005 list of the world's richest people.

There are other key differences - Ho's core casino operations are monitored by full-time regulators. Since May 2004, his casinos have contended with licensed competitors. Gross revenue grew by a hefty 6.5 billion patacas last year.

The Jockey Club's core racing operations are self-regulated. The government controls the types of bets the club can introduce, but otherwise largely leaves gambling oversight to the club itself, though the Board of Stewards usually includes a number of former top civil servants.

``It's quite unusual not to have a proper regulator,'' says Bacon-Shone. The Home Affairs Bureau has jurisdiction over gambling policy, but pointing to its role in interceding on the club's behalf with District Councils to allow the opening of off-course betting centers, Bacon-Shone says, ``It's almost like they are serving the Jockey Club rather than the other way around.''

Gross revenue from its core racing business shrank by HK$1.1 billion last year though the club faced no licensed competitors. Indeed, the Hong Kong government expanded the scope of its monopoly to include soccer betting a year earlier.

The billion-dollar question is how much impact the difference in competition policy between the SARs is having.

Before Macau made its move in 2001, Ho warned that ending his monopoly would jeopardize charitable donations and tax revenues and might produce unemployment, chaos and crime. Yet he and Macau have both prospered from competition.

The Jockey Club relies on its record as a nonprofit charitable benefactor as a major justification for its monopoly. To date, the Hong Kong government has shown little interest in challenging that.

This deference dates back to 1952 when the Jockey Club shrewdly came to the rescue of a colonial government overwhelmed by the arrival of about a million refugees fleeing the Communist revolution and its aftermath on the mainland.

According to a historical study commissioned by the club, Sir Arthur Morse, then chairman of both the Board of Stewards and of Hongkong and Shanghai Banking Corp, proposed to then-governor Sir Alexander Grantham that the club dedicate a third of its profits to addressing the needs of the community for schools, hospitals, housing, parks and the like. Fund recipients would be chosen in consultation with the government.

``It happened verbally,'' writes author Austin Coates, a former civil servant. ``There is nothing about this in writing.''

The commitment has never been formalized, but the club's donations soared almost 14-fold in the first year afterward. Early fruits of the arrangement included Tsan Yuk Maternity Hospital and Victoria Park. The club has gone on to fund medical clinics, scholarships, battered women's shelters and suicide prevention hotlines as well as splashy projects like Ocean Park and Hong Kong University of Science and Technology.

``Historically, the Jockey Club has been very good for Hong Kong,'' says Bacon-Shone.

It's been good for the government too. By outsourcing the funding of much community work to the club, the government has kept the spending off its books and maintained low personal and corporate income tax rates, burnishing Hong Kong's image as a free-market bastion.

``It makes the government look smaller than it really is,'' says commentator David Webb.

Channeling social spending this way benefited the club too. The Board of Stewards has long counted corporate captains like David Eldon of HSBC and Larry Yung of CITIC Pacific among its number.

In the words of Michael DeGolyer, associate professor in the government and international studies department at Hong Kong Baptist University: ``They earned the thanks of the lowly for their generosity in returning some of the money lured from the economically desperate to good causes.''

The club's high-society status pre-dates its philanthropic role. Coates writes that in the 1920s and 30s, an annual five-day race program in February served as the de facto channel for young women of leading families to be presented to society.

``Everyone, of every hue and nationality, attended, even those not particularly interested in racing,'' he wrote. ``The ladies, de rigueur, had to have new dresses - five, because they wore a different one each day.''

Undoubtedly aware of the multiple faces of the club, in the 1950s the Home Office in London resisted allowing the club to add the appellation ``Royal'' to its name. Queen Elizabeth II had declared the title could only be attached to organizations fully devoted to charitable causes. The club eventually got the prefix in 1960.

Like much else in Hong Kong, the gambling arrangement came close to breaking point in the late 1960s. Rampant corruption allowed widespread illegal bookmaking and numbers rackets to flourish and led to doping scandals at the track. ``There was illegal gambling going on in the streets everywhere,'' says Bacon-Shone.

The club addressed racing integrity by making jockeys and trainers full-time employees of the club instead of associates of the horse owners. The government undercut the numbers rackets by turning over its own struggling lottery operations to the club to run. It took on the bookies by permitting the club to open off-course betting centers instead of requiring bettors to come to the track.

These moves set the club off on an explosive growth streak that saw Happy Valley become the world's top horse-racing money-spinner. Rocketing economic growth filled residents' pockets with cash to wager at the track. With no other professional sport competing for attention, the club held the media spotlight.

The Queen went to the races in Happy Valley in 1975 to take in the splendor. A second track opened in Sha Tin three years later. Club officials talked of a third and over the years kept adding new channels for bettors to place their wagers, including telephone hotlines, personal digital assistants, its own dedicated handheld devices and the Internet.

The club's good works included using hundreds of millions of dollars to prop up the stock market in the wake of the 1987 crash.

Soon after, the club's annual community donations climbed above the HK$1 billion mark.

The Jockey Club galloped along despite more scandals, including the exposure of a large race-fixing syndicate that included tycoon Sir Gordon Wu. Though the club had allowed in Chinese owners since the 1920s and had ethnic Chinese stewards for years, it stepped up its localization in the run-up to the 1997 handover, electing its first Chinese chairman, hiring its first Chinese chief executive and dropping the once-coveted ``Royal'' prefix.

Betting volume topped HK$92.4 billion in the season that ended with the handover. That was the peak for both Hong Kong and the Jockey Club. Bird flu, the Asian financial crisis and the crash of the property market saw the economy spiral downward and with it, racing revenue.

Though economic growth has had its ups and downs since 1997, betting volume has slid ever downward, hitting HK$65 billion last year. As the club states in its annual report, the drop is linked to the broader economy as well as a shift in consumer preferences towards spending on other items and activities.

Club officials, however, mostly put the blame on two related culprits - high betting tax rates and illegal bookmakers. The government repeatedly ratcheted up betting taxes during the 1980s and 90s despite warnings from club officials that this would help the bookies. Since they don't pay tax or underwrite track operations, bookies can afford to discount bettor losses at no risk to their profit. But the government paid little heed to club pleas since racing revenue kept rising each year regardless of higher rates.

The post-1997 downturn got the government's attention since slower racing revenue reduced the tax take. The property sector downturn had already deflated the biggest source of government revenue, raising the importance of betting duties.

At the top of the club's enemy list were overseas betting shops, including the Macau Jockey Club and Ladbrokes, which were threading a legal loophole to set up shop in Hong Kong. The club got them run out of town through a 2002 law that legal scholars say is among the broadest of its kind anywhere. The law makes it a crime for a person in Hong Kong to place a bet with anyone anywhere except the club, or for anyone anywhere except the club to receive bets from Hong Kong bettors.

The law cut off residents' ability to gamble online with Hong Kong-issued credit cards, but otherwise had little effect on arresting the surge in Internet betting or the decline in racing revenue.

A year later the government allowed the club to extend its reach into soccer betting. That proved a boon. Including HK$3.3 billion in pre-tax gross revenue from football, total revenue last year ticked upward for the first time since 1997. The figures also included the highest lottery receipts since the handover thanks to added draws. Club profits more than doubled from 2003.

Nevertheless, racing revenue dropped again last year. Club chairman Ronald Arculli warned in last year's annual report: ``Given the rate of turnover decline, we have real concerns over the long-term ability of the club to sustain operations.

``Support for charities and the community may be placed in jeopardy and the club's average allocation of HK$1 billion a year may well fall on the shoulders of the government.''

Despite the profit jump, donations by the Charities Trust last year sunk to HK$975 million.

Aside from race revenue, the club hasn't fallen far from its pre-1997 pedestal. A long campaign to raise prize money to attract higher quality horses means the club now offers the highest average stakes in the world by far, according to International Federation of Horseracing Authorities figures.

Socially, the club is still a winner. Sharie Tse, editor-in-chief of society bible Hong Kong Tatler, says club membership and events are as prestigious as ever, especially with the excitement generated by the record-breaking winning streak of Silent Witness. ``The chairman's box is still a very coveted invitation,'' she says.

Indeed, the club last year counted 23,310 members, 2,000 more than five years before and more than almost any other organization in the city. Many, such as Liberal Party legislator Howard Young, belong for social reasons and rarely go to the races.

The club is still pouring money into upgrading facilities and services for bettors and members. At the Sha Tin track, it last year installed the world's widest television display and a retractable roof to cover the area where horses are saddled. It also upgraded many of its off-course betting centers, adding more television screens to show soccer matches.

The addition of football has livened up the club's 117 betting centers. At noon on a recent non-racing day, two dozen patrons milled through a center in Wan Chai, placing bets at the window or using electronic terminals, watching game replays or checking a bulletin board displaying numbers pulled in recent lottery drawings.

Club races still set the agenda like little else in Hong Kong. On race days, trains and buses run on special routes. Twenty-odd newspapers survive just covering racing and 168 full-time racing writers are registered with the club, making for a press pack that dwarfs Donald Tsang's. For some years, the club has controlled television broadcasts and commentary, but radio stations and regular newspapers offer a deluge of race coverage too.

Last month, the government end-orsed the latest measure championed by the club as critical to its fight against illegal bookmakers.

The proposal would reform the betting tax system so that instead of paying a duty on every bet placed, the club would pay tax on the difference between bets taken and winning bets paid, as SJM does.

This would allow the club to raise its payouts, presumably leading bettors to place more or bigger bets.

By the club's estimate, the betting volume handled by illegal and offshore bookmakers matches that of the club. Since such betting is illegal, it's hard to know for sure and the police no longer try to measure it. The University of Hong Kong is processing survey results on gambling participation for the Home Affairs Bureau to get some handle on the issue.

Some believe the club's figures are far on the high side. Bacon-Shone says bookies were much more of a problem 30 years ago before off-course centers opened. He believes only professional gamblers choose to bet with bookies given the risks involved.

The club might be barking at a fading ghost.

``Horse-racing is experiencing a downturn in most countries,'' says Chung Kim-wah, assistant professor of applied social sciences at Hong Kong Polytechnic University. Many young adults are more interested in sports betting than horse-racing. ``Horse-racing may be becoming outdated,'' he says.



A 22-year-old man who gave his name as Fai says soccer betting is simpler than horse betting. ``You need a lot of knowledge about the horses and you have to pay attention to morning training,'' he says. ``I have more confidence to win in soccer.''

To sway the government on its reform proposal, the club agreed to a progressive tax rate structure starting at 72.5 percent and to guarantee payment of at least HK$8 billion a year for the next four years. The club paid HK$8.8 billion in race betting duty last year, but told the government it expects to owe less than HK$8 billion next year given the rate of revenue decline unless the tax structure is reformed.

Even most club critics say the proposal is a reasonable deal for the government and likely to stimulate an increase in horse betting with the club. Whether it will be enough to raise revenues to the lofty HK$137 billion a year level forecast by British con-sultants last year is another matter.

Club officials admit bookies will still have a valuable competitive edge in that they allow bettors to wager on credit rather than pay upfront as the club does. Some observers expect bookies to come up with new enticements too.

``Illegal bookmakers can always find opportunities and different ways to attract consumers,'' says Democratic Party legislator Andrew Cheng.

DeGolyer says officials should be aware that attacking the bookies could have unintended consequences. He believes that the extension of the club's mandate to football betting deprived triad gangs of a major source of income. In his view, this has led low-level members to take matters into their own hands and commit street crimes.

Getting the tax reform plan through the Legislative Council may require more concessions from the club. The government's proposal would extend the jurisdiction of the Football Betting and Lotteries Commission to include recommendations on horse betting regulation, but there are likely to be demands for tighter oversight.

That's particularly because the club expanded soccer betting operations more aggressively than expected when it won that franchise in 2003, Professor Chung says. He adds that the betting commission rarely meets and members don't seem well informed about betting.

Some community groups are particularly interested in having a greater voice in where the club's charity goes.

Li Cheuk-yan, executive director of the problem gambling counseling center, Zion Social Service, says club money now comes with heavy strings attached, particularly an insistence on attaching its name to programs it funds.

Gambling Watch director Wu Chi-wai says community groups are afraid to criticize the club's funding process for fear of retribution and he favors turning the funds over to an outside agency to distribute.

Li and Reverend Wu are particularly keen on requiring the club to make an annual commitment to education and treatment to address problem gambling.

At the time of the soccer franchise award, the club agreed to provide HK$60 million in funding for two treatment centers for five years. The two centers have been swamped with requests for help and Polytechnic University is now studying their performance for the Home Affairs Bureau. Chung expects researchers will recommend two or three more centers be set up.

Other critics may take advantage of the tax debate to call for more revolutionary reform, namely opening up the gambling market to competition.

Webb believes officials should call the club's bluff on dumping its social commitments on the government since the programs could benefit from centralized backing. Simon Lee, policy director for think-tank Lion Rock Institute, says shifting charitable oblig-ations back to residents would be best since community groups would then learn to better explain the value of donating to the public.

``[The current arrangement] stifles the development of a giving culture in Hong Kong,'' he says.

Competition, say the critics, would be as good for Hong Kong as it is for Macau. Even Wu agrees, saying that with multiple gambling operators, customers could choose who to bet with on the basis of the company's responsible gambling policies. Odds are that the tax reform package will pass largely intact. Should racing revenues fail to reach the heights the club forecasts, it has more targets. Reports emerged this week that the club wants to add basketball betting to its portfolio.

A bigger target lies across the Pearl River Delta. Top club officials have pointed the finger at Macau's multiplying casinos as another culprit in revenue decline.

Arculli claimed in February that Macau parlors take HK$10 billion-HK$15 billion in gambling receipts from Hong Kong a year. Race tracks in Canada, the United States and Macau have won permission to add slot machines to better compete with casinos. Noting that Howard Young and other Liberals are pushing for a tourist-only casino on Lantau island, Arculli says it should be the club's to run.

MONDAY NG CONTRIBUTED TO THIS REPORT

zach.coleman@singtaonewscorp.com

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