Anticipated demise of levy in favor of direct negotiations with bookmakers poses both promise and peril

Britain's Levy, the decrepit system under which the nation's racing has been maintained on meager rations for decades, is on its deathbed. Before long, Tony Blair's Labor government will declare its demise, and few within the racing industry will weep over the bier.

At some point after its creation in 1961, the levy performed a useful if not necessarily valuable function. Britain's bookmakers take wagers totaling millions of pounds from avid bettors who cannot or will not go to the racecourses, and a protocol was needed to give racing some of the action pouring into the betting shops. The answer was the levy, an indirect negotiation between the bookmakers and racing through the Horserace Betting Levy Board, with the Home Office acting as final arbiter.

If a balance of power ever existed between the bookmakers and the sport, it has long tipped heavily in favor of the bookmakers. On the question of how much money would go to the racing industry, the bookmakers spoke with one voice-unlike the cacophonous racing industry members, who still have trouble sounding the same note. As their businesses prospered, the bookmakers' influence in the Home Office increased, to racing's detriment.

In short, the levy system has been incapacitated for a long time, and the nation's race purses are parsimonious at best. Average purse for Britain's 4,346 races in 1999 was $17,958. The financial structure of British racing is so stingy that Sheikh Mohammed bin Rashid al Maktoum all but threatened to pull out of England a few years ago.

Earlier this year, the government announced three initiatives: to review all gambling legislation, to put the levy system out of its misery, and to transfer the state-controlled Tote to racing's care. Together, the three proposed changes represent a watershed event that should-if implemented as promised-benefit all owners, breeders, trainers, and jockeys in Britain.

While many within the sport are upbeat and hopeful for better purses and thus a boost for the nation's breeding industry, the welfare of racing is not necessarily the focus of attention for either the bookmakers or the Home Office, which oversees both racing and betting. The bookmakers want a lower betting tax, and the government wants to stanch the flow of money to offshore bookmakers or, at the very least, to tax the turnover through foreign shops and the Internet.

Move to direct negotiations

Jack Straw, the Home Office's secretary of state, announced in March that the government wanted to replace the levy system with direct negotiations between the bookmakers and the racing industry.

Michael Harris, chief executive of the Racehorse Owners' Association, said direct negotiations should yield more money for racing.

"The Racehorse Owners' Association believes that the Home Secretary's decision can only be beneficial to racing in the long run," Harris said. "If racing and betting interests can put up a united front, there should be substantially more money for all those involved."

Peter Savill, president of the British Horseracing Board (BHB), echoed Harris's comments. "It is all very positive stuff, and I am very pleased that the government has recognized the maturity of racing," Savill said. In all likelihood, the BHB would negotiate with the bookmakers because it is regarded as the representative of the horse owners' media rights. However, the Racecourse Association is angling for a significant voice in any negotiations. The current system has kept the levy at about 1% of bookmakers' turnover on racing, a level that would have put most American owners out of business a long time ago. As the bookmaking businesses grew into large corporations, they never shared the largesse with racing. Instead, they used their growing political clout to make certain that only modest increases in the levy were approved. But the anticipated increases in racing revenues will not occur until the betting levy is cut. The betting industry is desperate to have the current 6.75% tax reduced so that it can compete more effectively with the growing number of operations based outside the United Kingdom's tax zones.

From racing's point of view, it is well worth supporting a cut in betting tax if it would boost turnover and bookmakers' profits. Then, in direct negotiations and free of political influence favoring compromise, racing would have a chance to demand a bigger piece of the action.

The government could also tax the increased bookmaking revenue directly as corporate profits, thus protecting its own revenue streams and leaving everyone a winner. Or, as English economist John Maynard Keynes may have said, they would be part of the same virtuous economic circle.

Short-term outlook

While the long-term outlook for a fairer division of race wagering is hopeful, the short-term situation is less certain. In the next 12 months, the levy will yield more than $90-million, and the danger always exists that in negotiations the racing industry will end up with less than it gets now with the less than substantial safety net known as the levy.

Over the years, levy yields have kept pace with inflation, regardless of bookmakers' financial well-being. While the levy system denied extra income to racing during the bookmakers' good years, it did provide a guaranteed income when bookmakers' profits shrank (through no fault of racing).

If the current flight of betting dollars offshore cuts bookmakers' profits, the betting conglomerates may well plead poverty in their negotiations with racing and threaten to reduce their contribution to the sport. Also inherent in any commercial negotiation is the possibility of a job action-in which either racing would refuse to permit itself to be the subject of bookmaker wagering or the bookmakers would not take bets on racing.

Another short-term danger is that the sport's shaky internal harmony would shatter and thus undermine racing's negotiating power. Although Britain's 59 racecourses under the Racecourse Association banner may accept that the BHB should negotiate for racing as a whole, their officials have made clear that they are a stakeholder in the process and want a say in shaping any deal. The potential for infighting has never been greater.

The Racecourse Association also fears that abolition of the Levy Board will end important financial benefits on which many members depend-such as prize money subsidies and interest-free loans for capital developments. In the last decade, the Levy Board has lent $122-million, with most loans repaid within 3-to-5 years.

Sandown Park recently was granted a $12.8-million interest-free loan covering part of its $34.6-million redevelopment. At today's commercial lending rates, the renovation project might not have been possible without the Levy Board's help.

For the betting industry, the Home Office's decision to review gambling legislation comes at a critical time. Internet and offshore wagering pose substantial threats to the traditional British bookmaking of cash betting at shops and telephone credit betting.

Straw's decision was a response to these changes, which probably would have meant the end of the levy system anyway because a growing amount of wagering falls outside the tax network, with some bookmakers relocating to tax-free havens. Straw has served only to speed up the levy system's inevitable demise. Although racing may benefit from the changes, the government's main aim is to keep more betting turnover from moving offshore or onto the Internet and thus reducing tax revenues. Betting tax earns the government more than $675-million a year, and the betting industry has been told to propose ways to keep wagering within the tax network. Some bookmakers have argued that all taxes should be dropped, with the lost income recovered from taxes on corporate profits.

The move to transfer the Tote pari-mutuel system to a racing trust also has financial aspects. The government wants to be paid for the Tote, and estimates of its value top $330-million. Although the government most likely will grant the proposed racing trust a substantial discount on that price, racing must decide how much the Tote is worth to the sport. In 1999, the Tote contributed $18.5-million to racing from its profits, up 32% from the previous year. Those negotiations undoubtedly will be strenuous, but they will be nothing at all like the across-the-table talks with the bookmakers, a tough breed with an eye on profit and loss. Racing will need negotiators of equal skill, but Savill is determined that the era of confrontation-a hallmark of nearly all past levy negotiations-is over. "With the levy redundant, the betting industry does have to sit down and negotiate with us," Savill said.

True, but no one can reliably forecast how those talks will end, in either the short term or the long term.