Plan For Ontario Racing Released

On Friday, June 28 the Horse Racing Industry Transition Panel released "Toward a Sustainable Future – A Draft Plan for Horse Racing in Ontario", as mandated by Ontario's Premier Kathleen Wynne.

Horse Racing Industry Transition Panel

June 21, 2013

The Honourable Kathleen Wynne
Minister of Agriculture and Food
Government of Ontario

Dear Minister:

It is our pleasure to submit this draft of our plan for a sustainable horse racing industry in Ontario. It reflects our consensus on the next steps the government and the industry should now take to optimize and grow horse racing in the province.

We look forward to a lively and constructive conversation with stakeholders and the public to chart a path for the industry to take responsibility for its future.

Elmer Buchanan
John Snobelen
John Wilkinson

Table of Contents

1. Executive Summary
2. From a Model to a Plan
3. Key Objectives: Optimize and Grow
   • From Bigger to Better
   • Nurturing Sustainable Growth
4. New Ontario Horse Racing Plan - the Details
   • A New Funding Model
   • A New Governance Model
   • Restructuring the Horse Racing Industry
   • A Focus on Marketing and Promotion
   • Promoting Equine Welfare
   • Public Interest Principles
5. Conclusion: Driving Continuous Improvement

1. Executive Summary

• In May 2013, the Minister of Agriculture and Food, the Honourable Kathleen Wynne, requested the Horse Racing Industry Transition panel provide a concrete plan for a long-term sustainable horse racing industry in Ontario, effective April 1, 2014. The panel consists of three former Ontario Cabinet ministers. This document is a draft plan, for consultation. After considering responses from stakeholders and the public, the panel will produce a final plan.
• The panel was retained in June 2012 to make recommendations on how the Ontario government could help the horse racing industry adjust to the end of the Slots at Racetracks Program (SARP). In its two reports, the panel found that dependence on slots revenue - a funding source unrelated to wagering by horseplayers - had divorced the industry from its customers and spurred artificial and unsustainable growth. As a result, much of the industry today is built on racing that is not attractive to the consumer. This has to change. At the same time, the panel found that a sustainable horse racing industry requires a measure of public funding, though much less than SARP.
• The panel concludes that the path to success lies in aligning economic interests. The panel recognizes that gaming in Canada is a highly regulated industry. We therefore acknowledge that the final plan for horse racing in Ontario must comply with all existing laws, regulations and authorities.
• To firmly link the industry with the horseplayer and fan, the panel now concludes that future public funding for horse racing should be based on a dollar-for-dollar match with the industry commission on pari-mutuel wagering. In this way, public investment will reinforce rather than undermine the dictates of the market.
• The panel observes that nearly two thirds of pari-mutuel wagering in Ontario is on foreign races. On the other hand, Ontario tracks export their live-racing signals to other markets, netting about $20 million a year from wagering outside the province.
• The panel finds no public interest in using government funds to encourage wagering on foreign product. A major aim of the plan is to strengthen and promote live racing in Ontario - that is, races actually run in the province. Live racing generates more economic benefits in terms of jobs on the track, on the farm and in spinoff industries than do simulcasts of races in other jurisdictions. In distributing matching funds to the industry, the panel therefore proposes to use a formula aligned with the commissions earned from wagering on live Ontario races and also reflecting exports. The government will invest in success as defined by the marketplace. It will not subsidize failure as SARP did by supporting racing that does not attract customers.
• To govern a reformed industry, the panel recommends the creation of a new market-driven central body - Ontario Live Racing (OLR). OLR would consolidate all industry revenues and share them among industry partners on the basis of consumer demand for live Ontario racing.
• The panel has been asked to facilitate a more integrated relationship between horse racing and the Ontario Lottery and Gaming Corporation (OLG). The purpose of integration is to align the interests of the horse racing industry and the OLG to enhance gaming revenue to the province and provide a stable base of funding for live racing in Ontario.
• In the panel's view, non-track betting (including wagering at off-track betting sites, telewagering and online wagering) is essentially a gaming activity. The panel therefore proposes that all non-track wagering should be administered by the OLR and willing racetracks with input and, where appropriate, direction from OLG, through mutually beneficial relationships. This structure would provide for the use of OLG expertise in optimizing the non-track wager and facilitate the introduction of race-themed gaming products (historic racing, race-based lotteries, etc.). Integration should give the OLG an incentive to expand non-track wagering and introduce new racing-themed products, generating more revenues for the government and the industry.
• As a further step to boost investment in Ontario live racing, the panel also proposes to direct industry commissions from on-track and off-track wagering to OLR. In addition, OLR would take charge of the savings from Ontario's pari-mutuel tax reduction.
• OLR would distribute the consolidated industry revenues - including all public funds and pari-mutuel commissions - to the three breeds based on their share of wagering on live Ontario racing.
• As the linchpin of a new industry governance structure, OLR would take on the current non-regulatory roles of the Ontario Racing Commission - including coordination of the racing calendar and direction of horse improvement programs. OLR would also organize the common marketing and branding of Ontario horse racing.
• The new governance structure would include three breed-based divisions: Standardbred Live, Thoroughbred Live and Quarter Horse Live. These organizations would develop the racing calendar, conduct live racing, encourage fan participation and operate horse improvement programs within their respective breeds. As well, they would work with the respective horsepersons group and tracks to arrange a split of purses and track operating costs.
• Structural changes are necessary to optimize the industry's operations. This especially so in the standardbred sector, which was the most reliant on SARP and most affected by its termination. The panel urges creation of a world-class racing circuit to embrace all premium and signature standardbred racing in Ontario. Designed to appeal to horseplayers and fans, the circuit would be hosted at five tracks located within a commercially practical shipping distance.
• The horse is the heart of the racing industry. The panel believes that the existing Horse Improvement Program has overemphasized purse support for races that are restricted to Ontario horses. Recognizing successful results in unrestricted competition might provide more of an incentive to improve Ontario breeds. The program should be redesigned with a focus on developing quality and rewarding excellence.
• The panel recognizes that several racetracks have entered into multi-year agreements with the government. We therefore acknowledge that the final plan for horse racing must comply with these agreements, except as mutually agreed.
• The panel looks forward to constructive consultation with stakeholders and the public on how Ontario horse racing can take responsibility for its own future.

2. From a Model to a Plan

The Horse Racing Industry Transition panel was originally created in June 2012 to make recommendations on how the Ontario government could help the horse racing industry adjust to the end of the Slots at Racetracks Program (SARP). The panel consists of three former Ontario Cabinet ministers.

In May 2013, the Minister of Agriculture and Food, the Honourable Kathleen Wynne, requested the panel provide a concrete plan for a long-term sustainable horse racing industry in Ontario, effective April 1, 2014. This document is a draft plan, for consultation. It reflects the panel's consensus to date. After considering responses from stakeholders and the public, the panel will produce a final plan.

Panel's Earlier Findings

In its consensus Interim Report in August 2012, the panel concluded that it would be a mistake to reinstate SARP. The program provided far more funds than necessary to stabilize the industry - its original purpose. Moreover, with more than 60 per cent of purse revenue - that is, the prize money awarded in races - coming from SARP, the industry came to rely on a funding stream that was unrelated to wagering by horseplayers. As a result, the industry became disconnected from its customers and had little incentive to face the challenges of a changing entertainment marketplace by investing in a better consumer experience.

At the same time, the panel found that a thriving, world-class horse racing industry required a measure of public funding, though much less than the $345 million provided by SARP in 2011-12. Scanning international jurisdictions, the panel could not find a single example of a viable horse racing industry without some form of public support.

The panel emphasized that any further public investment in the Ontario industry should be based on clear public interest principles, namely:

• accountability
• transparency
• renewed focus on the consumer and
• positive return to taxpayers.

A Year of Transition

In its consensus Final Report in October 2012, the panel proposed a new Sustainable Horse Racing Model for the conduct of the industry, based on the above principles. To strengthen the link between the industry and its customers, the model called for all racing purse revenue to come from the industry's commission on pari-mutuel wagering.¹ (The industry commission is about 20 per cent of the total amount wagered by horseplayers, less deductions for taxes.) Under this approach the total purse money available declined by about half. The model also reduced the number of race days by about half to maintain sizable average purses that can compete with other jurisdictions.

In the past, the industry commission was split 50-50 between racetracks, which used the money to cover their operating costs, and purses. With the industry share of wagering devoted entirely to purses, racetracks required public funding to continue to operate. Moreover, Ontario's highly regarded Horse Improvement Program (HIP) was funded mainly through SARP and the industry commission. Under the model, this program also needed public support. The panel recommended an investment of $180 million in new public funds over three years to offset racetrack operating expenses and guarantee up to $30 million a year for HIP.

The government approved these allocations. Transitional funding agreements have been signed with 12 racetracks - eight for two years and four for one year. (Three tracks are racing in 2013 without transition funding assistance.) In all, 867 race dates are planned for 2013-14 at 15 tracks.

New Instructions to Panel

On May 1, 2013, the Minister of Agriculture and Food, the Honourable Kathleen Wynne, requested the panel to move beyond the model outlined in its Final Report to produce a concrete plan to assist the industry in assuming responsibility for its future. The Minister explicitly stated that the plan should quantify the amount of government investment required into the future of horse racing. She also directed the panel to take a lead role in facilitating a new integrated relationship between the horse racing industry and the Ontario Lottery and Gaming Corporation (OLG).

The Minister asked the panel to prepare a draft plan to be made public prior to consultations with the industry and government ministries, and to submit a final plan to allow for implementation on April 1, 2014.

This is the draft Ontario Horse Racing Plan. The panel will consult widely to refine its analysis and recommendations and deliver a final plan by October.

3. Key Objectives: Optimize and Grow

As the panel has commented in earlier reports, Ontario's horse racing industry is worth saving. It has a strong economic impact, generating jobs, spinoffs and tax revenues. It is a valuable social and cultural asset, woven into the fabric of Ontario life for generations and appealing to many communities in today's diverse society. Moreover, it has the potential to become a key component of Ontario's gaming strategy, since it offers a modern infrastructure of facilities and systems with an established customer base. Optimizing the existing racetrack infrastructure can and should be an important element in Ontario's plans to modernize gaming.

The goal of this plan is to construct a solid foundation for a renewed and revitalized horse racing industry in Ontario. The panel believes firmly that the industry can build a bright future. But to do so, it must optimize and grow.

"Optimize" means getting the most value from the industry's assets, such as skilled personnel, quality horses, innovative technology and first-class racing and gaming facilities. In particular, the industry must make the most productive use of Ontario's racetrack infrastructure. This can be achieved by offering an attractive series of races year round. It is also necessary to focus investment on track facilities that demonstrate customer support while reducing investment in facilities with limited customer appeal.

"Growth" means smart, sustainable growth - not artificial expansion fuelled by revenue unrelated to the industry's core business, which is to provide a racing experience that is attractive to consumers. Sustainable growth involves expanding the fan base, increasing wagering, maximizing the export of Ontario races through simulcasts and other systems, and building the demand for Ontario horses.

Optimizing and growth are also the fundamentals at play in integrating horse racing into the Ontario gaming strategy under the OLG. Historically, as laws against gambling were relaxed, horse racing was Ontario's original legal gaming product. While it now has much competition, horse racing can help to grow the overall provincial return from gaming. The key will be to optimize the use of existing infrastructure by adding new gaming products at racetracks. The industry can also contribute to gaming revenues through gaming products linked to racing.

From Bigger to Better

Ontario horse racing has a proud record of excellence, from the Queen's Plate - North America's oldest continuous running thoroughbred race - to stellar horses like Northern Dancer and Thinking Out Loud. Recently, however, the industry has lost its way. The focus has shifted to producing more, not better, races and racehorses.

The reason is SARP. From 1998 until March 31, 2013, SARP provided a substantial flow of revenue to the industry based on activity at slot machines. The way SARP was designed created an incentive to produce a quantity of racing to match the purse money available from slots revenue. There was, however, little or no incentive to offer racing of the quality expected by horseplayers.

In the short term, this arrangement appeared to be successful. Large purse pools at tracks with enviable slots revenue sparked enormous growth in the industry. But the industry drifted away from its core constituents - the horseplayers and fans.

In the SARP era it simply did not matter if races drew the interest of horseplayers or if the stands at tracks were empty. Breeders could produce horses of limited value outside Ontario, content in the knowledge that the slots revenue had created a large domestic market for average horses. In short, SARP encouraged mediocrity.

That is not to say that Ontario breeders, owners and trainers have not continued to produce and race some excellent horses with international appeal. In every sector of the industry a component of excellence can still be found.

But much of the industry is built on racing that is not attractive to the consumer. This has to change.

It is important to understand that, with modern technology, Ontario racing now operates in an international market. Cross-border simulcasts and wagering put the Ontario industry in competition with the racing product of other jurisdictions for the horseplayer's dollar.

One of the main directions in the panel's Final Report was to re-size and re-focus the industry. Producing the quality and quantity of horses and racing that can draw an international audience is essential for the industry's survival in modern times. To further this end, the panel recommended tying the revenue for purses to the commission available from wagering by horseplayers. This has been done for the 2013 racing season.

The panel continues to believe it is crucial to base the size of the industry on the demand for Ontario racing. In fact, to optimize the industry's operation, the panel has concluded that it is necessary to go beyond its initial proposals linking purse revenue with wagering commissions. The panel now recommends a new funding model that will tie public investment in the industry to the level of commissions from wagering. The panel's plan will link government funding with the consumer response.

Nurturing Sustainable Growth

While the panel believes the industry has much potential to grow domestically and internationally, significant change and assistance are required to realize this opportunity. The panel's new funding model, which will be explained in the next section, is part of the answer. Other fundamental reforms are also imperative.

Uniting a Fractious Industry

The industry has long been characterized by competition among stakeholders for a share of revenues. These different constituencies centre around the three types of racehorse - thoroughbred, standardbred and quarter horse - with tracks, breeders, owners, trainers and jockeys or drivers for each type.

The substantial funds provided by SARP allowed for some flow of revenue to all of these groups. The industry's existing governance reflects this arrangement and is premised on stakeholder representation and consent. As the panel observed in the Interim Report, the industry is fractious and has proven capable of only limited collaboration for the common good.

Moreover, horseplayers and fans are missing from this mix. While this was not a serious concern in the SARP era, it is a fatal flaw for an industry that must focus on consumer demand.

Centralized management is critical to optimizing and then growing Ontario racing. The industry's current governance is not able to direct activity and investment to the areas of the industry with the highest potential for growth and return. Strong leadership is needed to target investment to, and direct the production of, racing in the most attractive and marketable form. Creating a basis for growth will also require withdrawal from aspects of the industry that are not commercially viable.

In short, the horse racing industry requires determined leadership with the power to make and execute the decisions necessary to refocus the industry on the consumer. In the panel's opinion, the industry, as currently organized, is not capable of generating this leadership. A new governance structure is proposed later in this plan.

The industry's future depends on attracting and retaining a robust horseplayer base. Collaborative marketing and branding of the Ontario racing product in the global wagering market should be a priority. Presenting Ontario racing as a single brand will strengthen its market presence and particularly support the export of Ontario racing as a package. Common branding requires an investment in brand building, a focus on target consumers and an aggressive promotional effort. All this also calls for strong leadership and will be addressed by the new governance model.

Changes in Industry Practices

Two other changes in current practices are advisable to help horse racing function as a more united industry: purse pooling and the consolidation of Home Market Areas.

In the SARP era purses largely depended on the slots revenue generated at individual tracks. Some of the pari-mutuel commissions also went into purses at each track, accounting for about half of thoroughbred purses, but only about a fifth of standardbred purses. The panel's plan calls for the pooling of revenues available for purses and a distribution of purses based on the conditions of a particular race. The effect of this form of purse pooling is to offer the same purse for races of comparable quality, helping to meet the needs of the industry and the demands of the market.

Purse pooling allows for even and predictable purses for similar races. For example, a signature level standardbred race would offer the same level of purse regardless of the track venue or season. Pooling purses within quarter horse, standardbred and thoroughbred racing, respectively, eliminates the competition between tracks and focuses the industry on developing and maintaining customer support.

Apart from Ajax Downs, each Ontario racetrack has a Home Market Area (HMA) assigned under its racing licence from the Ontario Racing Commission, and receives a commission on all types of wagering in its area (both on and off the track). Hence the revenue from wagering is divided, in part, based on the HMA boundaries of the tracks. The panel proposes that the individual HMAs be consolidated into one, with the entire province considered a single market area and revenues distributed to support attractive, marketable racing events rather than confined within arbitrary borders.

Working with the OLG

The panel believes that considerable revenue is lost to the industry and the provincial government through the current disconnect between the horse racing industry and gaming under the OLG. This present "silo approach" does not encourage and in some instances prevents the optimal use of expertise and assets for the good of all.

As has been demonstrated by SARP, racetracks provide a community-friendly venue for gaming. In addition to the physical track infrastructure, racing also provides a virtual and physical off- track network. It makes sense to maximize the revenue from gaming at these facilities, for example, by enhancing the existing gaming activities or linking the Greater Toronto and Hamilton area racetracks into a network of gaming centres.

Optimizing gaming within the existing racetrack infrastructure fits with the goals and objectives of the OLG modernization strategy. Doing this would reduce the need for extensive new infrastructure and hence could deliver a much faster return.

The OLG has a wide network of retail outlets, a sophisticated marketing department and deep understanding of the business of gaming. This expertise should be brought to the forefront in repositioning horse racing, enticing new horseplayers and enhancing the gaming experience on- and off-track.

In other jurisdictions, various racing-themed gaming products - such as race-based lotteries and historical horse races (where players bet on the outcome of unidentified past races through an electronic terminal) - help support live racing and contribute to public revenues. Ontario should introduce these kinds of racing-themed gaming products under the auspices of the OLG within the framework of relevant legislation.

As noted in the panel's October report, the Senate of Canada is considering a bill that would permit single-event sports wagering under a provincially regulated system. The panel believes that this potential new offering in the Ontario gaming product mix would be a natural fit with some components of the racing infrastructure, such as the off-track betting network.

4. New Ontario Horse Racing Plan - the Details

In the Interim Report, the panel sketched a vision for a sustainable horse racing industry. The vision has three dimensions:

• a racing product that appeals to horse players - which means state-of-the-art tracks, ample race dates, full cards, competitive fields and an attractive pari-mutuel wagering pool
• an Ontario-based breeding industry - for thoroughbreds, standardbreds and quarter horses - including world-class horse improvement programs needed to preserve a high-value horse racing industry
• an Ontario-based racehorse training network - serving resident Ontario horses, not just horses shipped in for a short season and then shipped out.

To realize this vision, the panel believes it is critical to reach the following goals:

• optimize the industry's size and activity by aligning investment with market demand
• grow the industry through collaborative marketing and branding, and development of a racing product that attracts and retains customers
• strengthen and promote Ontario live racing
• encourage the breeding of superior Ontario horses
• build the industry's capacity for self-management
• maximize provincial gaming revenue by making the most of racetrack facilities and the OLG retail network and tapping the expertise of both.

The panel believes that the measures outlined below meet the test of good public policy and will foster best-in-class racing, engage racing fans and horseplayers, produce an internationally competitive product, nurture jobs in horse breeding and training, and promote a sustainable industry. To achieve these results, the plan calls for a strategic redesign of the way the industry is funded, governed and structured.

A New Funding Model

In the October report, the panel determined that the right size for the racing industry could best be reached by deriving all purse money from the industry commission on wagering. To make this benchmark work in 2013, the panel advised the government to provide tracks with transition funding to make up for the loss of operating revenue that previously came from the industry share of wagering.

While this model preserved live racing this year, it is not a long-term or even medium-term fix. Without sharing directly in pari-mutuel commissions, tracks have no incentive to increase the volume of wagering by making their product more attractive. To firmly connect all parties in the racing industry with the horseplayer and fan, the panel has concluded that, going forward, all public funding should be based on the commission from wagering.

The new funding model addresses two key questions:

• how to determine the amount of government funding that will be required to sustain the industry in the future, and
• how to share this public investment among the partners in the industry.

Amount of Public Investment Needed

In 2013-14, the public contribution to racing from transition payments and the pari-mutuel tax reduction² is approximately $110 million. This is the amount the panel calculated was needed to maintain a viable industry by keeping a competitive racing product in the marketplace. During the year, industry commissions from pari-mutuel wagering are also expected to total about $110 million. Since these amounts are in balance, the panel believes it would be reasonable and practical to benchmark the future public contribution to horse racing on a matching-dollar basis with commissions earned.

Under this formula, if the pari-mutuel commission remains the same in future years, the public investment will too. On the other hand, if the commission declines, so will the public investment. Conversely, government funding would increase with an increase in the pari-mutuel commission. In short, the industry as a whole will be able to maximize government funding by maximizing pari-mutuel wagering. The government investment will reinforce rather than undermine the choices of the marketplace.

Since the proceeds from the pari-mutuel tax reduction would be included in the matching funds, this model requires renegotiation of the existing memorandum of understanding (MOU) with the industry. The tax reduction savings would be redirected to a new provincial racing governance body to be known as Ontario Live Racing (OLR).

One of the principles the panel has adopted to guide public investment in the industry is a positive return to the taxpayer. This means that any public funding should generate at least an equivalent amount of provincial tax revenue through the industry's direct and indirect economic activity. The metrics for precisely measuring the industry's tax contribution have not been established. Still, the panel is confident that the funding recommended in the October report - $180 million over three years and a continuation of the pari-mutuel tax reduction - reflects a reasonable estimate of tax revenues from the industry. Since a growing industry will yield more tax revenue, the net cost to government should remain stable or even decrease even if the public investment increases in line with growth in pari-mutuel commissions.

Distributing Public Funds to the Industry

As noted, the panel proposes to match overall public funding to horse racing with the industry commission on pari-mutuel wagering. In determining how to allot this public investment within the industry, the panel considered some current realities about Ontario wagering. First, wagering in the province is based largely on imported product: races in other jurisdictions account for almost two thirds of wagering in Ontario. Wagering is also weighted heavily in favour of thoroughbred racing, while in standardbred racing, the highest of the three divisions (premier) attracts the most betting, while the lowest (grassroots) attracts much less. As well, Ontario tracks export their live-racing signals to other markets, netting about $20 million a year from wagering outside the province.

A major aim of this plan is to promote and strengthen live racing in Ontario - races actually run in this province and not transmitted from elsewhere. Live races generate more economic benefits in terms of jobs on the track, on the farm and in spinoff industries than do simulcasts of races in other jurisdictions. In particular, they build a market for superior Ontario-bred horses.

It is in the public interest for the government to invest in Ontario racing products, not foreign ones. In distributing matching funds to the industry, the panel therefore proposes to use a formula closely aligned with live-racing commissions and exports and the level of racing offered.

Matching fund grants would be allocated within each breed sector based on commissions from wagering on Ontario live racing³ and on net export earnings. Under this model, the funds provided would be a multiple of the actual commissions, creating a strong incentive for the industry to grow the fan base, attract horseplayers and expand wagering on live racing in Ontario. Within standardbred racing, a special formula would be needed for grassroots racing, as this generates relatively little wagering but is an important component of the industry.

For each track, the level of public funding will be tied to consumer demand for the Ontario racing product. The government will invest in success as defined by the marketplace. It will not subsidize failure as SARP did by supporting racing that does not attract customers.

Industry Revenues to Be Consolidated

Public funds for the racing industry in 2013 are flowing through two streams: the pari-mutuel tax reduction (approximately $50 million) under the MOU with the industry, and transition funds (approximately $60 million) through transfer payment agreements.⁴ These funds have come either as foregone government revenue (tax reduction) or a direct payment from the Ontario treasury (transfer payments).

A more permanent and more transparent payment structure is desirable. Designing such a structure creates an opportunity to further a more integrated relationship between horse racing and the OLG.

In the panel's view, non-track betting (including wagering at off-track betting sites, tele-wagering and online wagering ⁵) is essentially a gaming activity. The panel therefore recommends that all non-track wagering should be administered by OLR and willing racetracks with input and-, where appropriate, direction from OLG. OLR would receive the net revenue (after operator profit) from non-track wagering.

In this arrangement the gaming expertise of the OLG would be combined with the racing expertise of the industry, while respecting federal and provincial gaming legislation. An enhanced collaboration would be able to create the best non-track customer interface and increase the export of Ontario racing. It would also provide the groundwork for introducing new racing-themed gaming products, such as historical horse races or race-based lotteries. The OLG's role would be to assist in coordinating the non-track wagering offering - including contractual arrangements with service providers and operation of off-track betting sites - as well as the delivery of new products.

The panel believes public matching funds should be generated from gaming activities. Under this approach, the panel expects the OLG to come out ahead. If racing-related revenues exceed funds flowing to the industry, the OLG would be in a position to increase returns to the treasury. Moreover, the OLG would have an incentive to grow non-track betting and develop new racing-themed products, thereby increasing the horse racing fan base and generating more revenue for both the industry and taxpayers.

The panel is confident that integration will contribute to provincial revenues, creating a stable source of public funding for horse racing. The ongoing government matching funds to the industry will come from the fruits of an integrated relationship between horse racing and the OLG.

In addition to the matching funds and the non-track wagering revenues, the panel proposes to direct all industry commissions from on-track wagering to OLR. Moreover, as mentioned above, OLR would take charge of the savings from the pari-mutuel tax reduction.

OLR would consolidate all industry revenues - including all public funds and all pari-mutuel commissions - and then distribute them to the three breeds based on their share of wagering on live Ontario races. This model would give the industry a laser-like focus on the live-racing customer. In particular, commissions from wagering on foreign product would be diverted to support for Ontario live racing.

The panel recognizes the need for cash flow management for purse accounts and track operations. Creating an efficient method for distributing funds within the industry may include retention of on-track and other revenues by a track up to an agreed threshold.

The panel further notes that transfer payment agreements with several tracks have been signed for 2014. These agreements must be honoured except as amended by mutual consent.

A New Governance Model

As suggested above, horse racing in Ontario is not a monolith. The industry divides into three distinct groups based on breed: quarter horse, standardbred and thoroughbred. Within these three groups there are further divisions between tracks, breeders, horse owners, trainers and jockeys or drivers - and between the various levels of racing. What is deemed good for one group is not always, or even often, good for all.

Beyond the competition for resources, the three breeds have different histories, cultures and practices. For example, thoroughbred horses are resident on track while standardbreds and quarter horses ship in for racing. This difference implies a much higher level of track costs for thoroughbreds.

Another example: artificial insemination can be used in standardbred and quarter horse breeding, permitting the shipment of semen, while the thoroughbred industry restricts breeding to live cover. This difference in allowable technology profoundly influences the nature of the breeding industry and the required supports.

Horseplayers also divide by breed. There is very little overlap between thoroughbred, standardbred and quarter horse wagerers.

All in all, it is unrealistic to assume that treating the three breeds in a similar fashion will result in good outcomes. Each breed deserves and requires its own management structure. At the same time, however, the industry as a whole has functional areas that cut across all breeds and require industry-wide management.

The panel understands that the government is interested in permitting the horse racing industry to govern itself, as a number of industries now do. However, in the panel's opinion the industry lacks the capacity and structure to self-manage effectively at this time. Therefore, the panel proposes a governance model that will reflect the current state of the industry and provide an opportunity for capacity-building with the ultimate goal of self-governance.

Regulation

The government is proceeding with an independent review of the Ontario Racing Commission (ORC) to determine the appropriate regulatory role for that organization. Its current regulatory functions include approving the racing calendar, officiating at all horse races, licensing of tracks and of individuals directly involved in racing, and adjudicating appeals⁶. The ORC also performs industry management and development roles, which the panel proposes to move to a new industry governance structure, as discussed below.

It has often been observed that a conflict occurs where a regulator participates in managing the regulated industry. The panel agrees and is determined to avoid this. The new industry structure could be created as an arm of the ORC, but it would have to be firewalled from the ORC's regulatory function.

OLR should report annually to the public through a report submitted to the government.

Reformed Racing Governance

The ORC's non-regulatory roles to be transferred to the new structure include creation of a racing calendar - with race dates and conditions - and administration of the Horse Improvement Program (HIP) and the Quarter Horse Racing Industry Development Program (QHRIDP).

The linchpin of the new model would be a central industry-wide umbrella organization, Ontario Live Racing (OLR). There would also be three breed-based divisions:

• Standardbred Live
• Thoroughbred Live
• Quarter Horse Live.

Since OLR would have responsibility for substantial public funds, it would be appropriate for the government to appoint its leadership. A board of directors appointed by the government would lead OLR, with advice and input from industry experts, particularly from the horseplayer community.

The organization would coordinate and review the racing calendar proposed by the divisions, ensure a fair process for developing the calendar and submit the calendar for regulatory approval. OLR would also determine the budget and priorities for HIP and QHRIDP and undertake centralized marketing and branding of the Ontario racing product. (This crucial marketing function is discussed more fully later in this plan.)

In addition, as outlined above, OLR would play a pivotal financial role. It would consolidate all public investment (including the pari-mutuel tax reduction and the matching funds) plus all net commissions from all types of wagering. It would then flow funds to the three breed-based divisions based on their share of wagering on live Ontario racing.

The three divisions would be led by representatives of tracks, horse breeders and horsepersons. These organizations would be responsible for conducting live racing and encouraging fan participation within their respective spheres. They would develop the racing calendar and work with the respective tracks and horsepersons to arrange a split of purses and track operating costs, as well local marketing initiatives. The results of this planning would be provided to OLR so signal output and overall race scheduling could be coordinated. The divisions would also support the breeding of superior Ontario horses through operation of the horse improvement programs for their designated breed.

Under the new model, both purses and track operating costs would be covered by the allocation from OLR. This contrasts with the current transitional arrangements in which all industry pari-mutuel commissions are devoted to purses, and track costs are offset by government grants.

Standardbred Live would include the standardbred track alliance mentioned in the panel's October report. While the track alliance model assumed working groups of breeders and horsepersons, the panel suggests formalizing this relationship.

Currently, standardbred horsepersons in Ontario are represented by four organizations. The panel urges consolidation into one group for all Ontario. This should be accomplished by a vote of all licensed horsepersons who are currently a member of one or more of the associations.

Standardbred breeders now participate in a working group with the ORC. This group should move over to Standardbred Live. The panel suggests making the existing breed governing body, Standardbred Canada, the formal breeders' partner in Standardbred Live.

The thoroughbred sector has fewer tracks and racing divisions than the more complex standardbred industry. With two operational tracks, one horsepersons group and one breed registry, a decision-making nucleus already exists. The new governance body, Thoroughbred Live, should be relatively easy to design.

Similarly, in the quarter horse division of OLR, a track alliance would be unnecessary, and horseperson and breeder representation could be achieved through existing organizations.

Refocusing HIP

The government has guaranteed up to $30 million in funding for HIP for 2013-14 and also for 2014-15. One of the first orders of business for OLR should be to decide how to deploy these funds.

The panel recognizes that many jurisdictions support purses for races that are restricted to local horses. In Ontario HIP has done this through the Ontario Sires Stakes and a similar program for thoroughbreds. However, the panel observes that, while restricted races have a role, they do not truly promote excellence. It might be worthwhile to consider new breeder incentives that would focus on successful results in unrestricted competition. For example, incentive awards could be presented to breeders of Ontario horses that perform well in major international races.

In any event, the panel believes that HIP should be redesigned with an emphasis on developing quality and rewarding excellence. HIP affects breeders, owners and other horsepersons and should be remodeled in consultation with all of these stakeholders.

QHRIDP requires a similar redesign, again in consultation with stakeholders.

Integrated Gaming Strategy

The OLG is responsible for most gaming in the province - specifically lotteries, bingo, slots and casinos. The Minister has asked the panel to work with the OLG on integrating horse racing into the province's gaming strategy.

In its October, 2012 report the panel stated the OLG should not subsidize the horse racing industry but neither should the horse racing industry subsidize the OLG. Building on this theme, the panel now believes that by aligning economic interests, the OLG and the horse racing industry can work collaboratively to reduce costs and increase revenues. A more integrated relationship will increase revenue to the province.

As a step toward optimizing the gaming sector, the panel proposes to enhance all non-track wagering through mutually beneficial agreements between the OLR, willing tracks and the OLG-,. This arrangement should create a more competitive environment for non-track wagering, hasten the introduction of new wagering products by the OLG and encourage tracks to focus on marketing live racing to fans and horseplayers. In fact, the OLG retail networks could potentially be used to expand wagering on horse races, if the changes to the Home Market Area provisions proposed earlier in this plan are made. The panel has also identified opportunities for the OLG to offer a race-based lottery product or present historical horse races, in collaboration with the industry, as noted previously.

The panel reiterates what is one of the most important aspects of integration: the use of racetracks as gaming centres. Ontario communities support enhanced gaming opportunities at tracks, and new gaming products can be added to existing facilities quickly and at relatively low capital cost. The panel believes that tapping the potential of racetracks as gaming centres should be a top priority in the integration of horse racing into the provincial gaming strategy.

Restructuring the Horse Racing Industry

The racing industry must be restructured for success. This need is most acute in the standardbred sector.

Standardbred Challenges

Standardbred racing consumes the majority of the racing calendar in Ontario. It was the largest beneficiary of SARP and consequently suffered most from the termination of the program.

Standardbred racing is comprised of three divisions:

• Premium - The best horses running for relatively large purses. This level of racing attracts the most interest from horseplayers.
• Signature - Second tier horses that may occasionally run in premium races. This level of racing has an inconsistent following among horseplayers.
• Grassroots - Racing for very young and unproven horses or horses that are not competitive in premium or signature races. This level of racing attracts relatively little wagering.

Under SARP all three levels of standardbred racing prospered regardless of wagering levels. In an industry more focused on the consumer, this cannot continue.

Growth in wagering will come from a condensed product offering (fewer race days more strategically located) featuring competitive races. To grow the standardbred industry in Ontario, a focus must be placed on the products most attractive to horseplayers: premium and signature racing.

Racing of this kind currently takes place at Woodbine and Mohawk (the Woodbine Entertainment Group tracks), Flamboro and Georgian (the Great Canadian Gaming tracks), Western Fair, Grand River and Ottawa.

This plan proposes to incorporate all Ontario premium and signature standardbred racing into a world-class circuit. The panel has been advised that such a circuit must conduct races within a practical shipping limit to be commercially viable for the bulk of the industry. With this in mind, the panel proposes hosting the Ontario standardbred racing circuit at five tracks: Mohawk, Flamboro, Georgian, Western Fair and Grand River. These tracks lie within a practical shipping region and present a variety of track conditions suitable for a range of horses.

To support such a racing circuit, it will be essential to pool purses and align racing schedules into a coherent, coordinated program that consistently offers competitive racing and captures the consumer's imagination. This would be a task for Standardbred Live.

Left off this list is a fine track within the area, Woodbine. Woodbine is the preeminent racetrack in Canada and hosts standardbred racing in the winter season. However, the panel has sympathy for those in the standardbred industry who prefer Mohawk as the anchor for the circuit. Many feel Mohawk creates a more exciting venue for standardbred live-racing fans. Unlike the Woodbine standardbred track, which lies inside two other tracks, the Mohawk track is directly in front of the grandstand and ideal for trackside viewing. Horsepersons also report that Mohawk's location improves the logistics for most of the industry. The panel anticipates much debate on the merits of this proposal during the consultation period.

Rideau Carleton in Ottawa currently offers a combination of signature and grassroots racing with support from horseplayers through a network of off-track wagering facilities. In many ways this represents an enviable local market. However, the track's location makes participation in an Ontario racing circuit commercially unfeasible. The track does not currently receive transition payments from the government for its operations.

The panel proposes to exempt Rideau Carleton from participation in the consolidation of commissions and permit it to continue to use its on-track wagering proceeds. In addition, the panel would allow Rideau Carleton to retain profits from operating non-track wagering. Export of races from Rideau Carleton as part of an Ontario-based racing package would be subject to agreement with Standardbred Live and OLR.

Grassroots and fair racing is an important, rural-based component of the standardbred racing industry. This segment does not contribute materially to the export of Ontario racing. On-track wagering, while low compared to other levels of racing, can be locally significant. The panel proposes limited participation in funding for grassroots tracks based on wagering on live races and urges flexibility in scheduling these races to meet local needs.

Thoroughbred Challenges

Thoroughbred racing currently takes place at two tracks, Woodbine and Fort Erie. This sector was less reliant on SARP funding than other players in the racing industry. Therefore thoroughbred racing faces a less daunting task in engaging racing fans and restructuring its operations.

This does not, however, mean that thoroughbred racing is without challenges. In particular, the second tier track, Fort Erie, requires considerable public support to conduct races and has struggled to maintain an adequate supply of competitive horses.

Under the new governance model the business case for track funding will be determined by Thoroughbred Live and OLR. There will be a competitive process designed to put the right racing product at the right, best-value venue.

Support for signature level thoroughbred racing has been difficult for many years. While the product has good market acceptance, the production cost is high. As the industry is currently configured, two operational thoroughbred tracks require a duplication of on-site stabling. Mitigating these costs and retaining customers will be primary tasks for Thoroughbred Live. Cost-reduction strategies could include cost recovery of stabling and ship-in racing options.

Quarter Horse Challenges

Though the quarter horse industry has existed in Ontario for decades, it is often considered a cottage industry within the racing community because of its limited scale. The size of the industry and the distance from other North American tracks make a racing circuit impractical. Due to these factors it is also a challenge to arrange large competitive fields and frequent race dates. However, the races are enthusiastically supported by owners and horsepersons.

Quarter horse racing at Ajax Downs and Fort Erie has proven fan appeal and strong community ties and attracts a younger demographic than other racing products. The level of wagering on these races is an issue. To provide a robust future for the quarter horse industry, the live-racing wager must continue to grow. To this end, the industry is exploring innovative ways to appeal to horseplayers and fans.

Quarter Horse Live will face the toughest wager improvement challenge of the three breeds. It will benefit from an existing, cooperative relationship between the track, breeder and horseperson elements of the industry.

A Focus on Marketing and Promotion

As currently organized, the industry is unable to present the Ontario racing product to fans and horseplayers under a common brand. While some excellent local efforts have made inroads in fan appreciation, these activities lack coordination and funding.

Several tracks host successful community outreach days, which represent valuable opportunities to expose more people to the excitement of live racing. However, new fans do not immediately contribute much to the wagering pool, and the financial benefit of attracting new fans is a long-term proposition. This situation will be partially addressed by the panel's proposed revenue distribution model that puts a premium on wagering on live racing. Common fan education tools and other marketing materials on a range of platforms would assist horsepersons and tracks to enhance the new fan experience.

OLR would be charged with creating a common brand for Ontario racing, executing a marketing plan for Ontario racing and assisting the breed divisions with the design and execution of local marketing and fan education initiatives. Included in the marketing plan would be a robust earned media plan, including targeted local media, a common social media approach and support for a variety of platforms.

The industry currently underutilizes the promotional value of its higher-profile events. The panel has examined endorsement and promotional campaigns in other jurisdictions and believes opportunities exist for revenue generation and product exposure. OLR would also be charged with developing promotional agreements with targeted industries.

Overall, the industry would benefit from a deeper understanding of its primary customer, the horseplayer. While some work has been done in this area, the expertise of the OLG in understanding the behaviour of the gaming consumer will be invaluable. The panel sees an opportunity for the racing industry and the OLG to partner in a marketing effort to target and reach consumers who may be attracted to the experience of live racing and enhanced gaming products.

Internal Communications

An element of any marketing plan is internal communications. The best ambassadors for the sport of racing are the horsepersons and breeders who know and understand it. Therefore it is vital to keep everyone in the industry informed of the marketing strategies, fan outreach opportunities and future plans for live racing in Ontario. To this end, the panel recommends directing a fixed amount of funding from the 2013-14 transfer payment budget to support a communications plan within the industry. This fund should be established immediately to provide a framework for communications during the consultation period for this plan and the development of the 2014 racing program.

Promoting Equine Welfare

In its two previous reports, the panel underlined the important issue of equine welfare. The well-being of the equine athlete - the horse - continues to be a principal concern.

Ensuring fair and honest competition is fundamental to the credibility and integrity of horse racing. This oversight is the purview of the regulator.

However, fairness is just the beginning of the equine industry's responsibility to respect community ethical norms. The racehorse industry must treat equine athletes with the care and kindness the public reasonably expects. These standards include not exposing the equine athlete to undue risk of disabling injury, and ensuring that the equine athlete is free of pain. Given that even successful racehorses often finish their racing careers by age five, the public also has a reasonable expectation of a second career for retired equine athletes.

By their nature, all competitive sports push the limits of performance. Racing should be a test of athletic ability, conditioning and heart. The public will not support an industry that is unwilling or unable to prevent substandard animal care, limit injury and provide a full life expectancy.

The panel believes everyone connected to the racehorse industry has a responsibility to ensure that public expectations for the care of horses are met on and off the track. Standards of care must go beyond regulatory requirements and be enforced through OLR and the breed divisions.

As the panel has noted previously, the horseplayer is absent from the decision-making bodies of the industry as currently construed. Also absent from the governance structure is representation of the public concern for the ethical treatment of the equine athlete. The panel therefore proposes that a sport ethicist be included in the advisory capacity for OLR.

Life cycle planning for race horses is the responsibility of owners and breeders. The panel's October report recommended government funding for foundational work on the development of life cycle plans through Equine Guelph. The panel understands that this effort is only the first step to proper care for retired racehorses. The three divisions of OLR would be responsible for developing a robust post-racing path for all horses in their breeds.

Public Interest Principles

As the panel has observed in previous reports, any government investment in horse racing should be based on clear public interest principles:

• accountability
• transparency
• renewed focus on the consumer
• positive return to taxpayers.

This plan so far has centred mainly on a renewed consumer focus. The other three principles remain critical, and it will be up to OLR to deliver on them.

SARP funds were paid without any reference to performance - or any requirement to disclose results. This mistake must not be repeated.

OLR would be responsible for developing clear objectives and benchmarks to show that the government funding to the industry is in the public interest. In particular, OLR will design performance metrics to demonstrate that the government investment is being recouped through tax revenue. OLR would also report results on a regular basis, so that the public knows who is receiving public money and what is being done with it. Accountability and transparency will be the hallmarks of the new partnership between government and Ontario's horse racing industry.

5. Conclusion: Driving Continuous Improvement

To recap the highlights of this plan, the panel recommends the following actions to optimize and grow Ontario horse racing:

• Match overall public funding to horse racing on a dollar-for-dollar basis with the industry commission on pari-mutuel wagering of all types (about 20 per cent of gross wagering, less deductions).
• Distribute public funding among tracks based on their share of commissions on wagering on Ontario live racing.
• Refocus the Horse Improvement Program (HIP) on developing quality and rewarding excellence.
• Create an industry-wide governance organization, to be known as Ontario Live Racing (OLR), to:
  • Take on the current non-regulatory roles of the ORC, such as coordination of a racing calendar and direction of horse improvement programs
  • Coordinate common marketing and branding of Ontario horse racing
  • Consolidate all industry revenues and flow funds to three breed divisions, based on their share of wagering on live Ontario racing
  • Develop metrics to measure the industry's performance in meeting public interest objectives, including a positive return to taxpayers on the government investment in the industry.
• Firewall the regulatory functions of the Ontario Racing Commission from OLR.
• Establish a separate management structure or division for each of the three breeds - Thoroughbred Live, Standardbred Live and Quarter Horse Live - with responsibility for:
  • Conducting live racing
  • Expanding wagering and promoting fan participation
  • Supporting the breeding of superior Ontario horses through the operation of horse improvement programs
  • Developing the racing calendar
  • Working with the respective tracks and horsepersons to arrange a split of purses and track operating costs.
• Integrate horse racing with Ontario's gaming strategy under the OLG by:
  • Creating mutually beneficial agreements between OLG, OLR and racetracks to manage non-track wagering (including off-track betting sites, telewagering and online wagering)
  • Charging the OLG to explore new horse racing-themed gaming products to earn new revenue for the industry and the government
  • Maximizing government revenue from gaming by making the most of racetracks' network of facilities and systems - for example, by transforming tracks into gaming centres.
• Restructure the standardbred sector into a world-class Ontario racing circuit operating at five tracks within a practical shipping area.
• Promote equine welfare by enforcing standards of care and developing life cycle plans for all racehorses.

Like any other industry, the horse racing industry exists to create satisfied customers. This plan makes sure that the flow of money in the industry reflects rather than distorts this reality. By matching public investment in the industry with pari-mutuel commissions - the key gauge of customer satisfaction - this plan will drive the industry to continuously improve the racing experience for fans and horseplayers.

Under this plan, a track's return on live racing will increase substantially with all funding - from both government investment and pari-mutuel commission revenues - calculated as a multiple of commissions on live Ontario races. The industry will have a strong incentive to develop live racing, rather than rely heavily on imported simulcasts. Growth of live racing will maximize the industry's economic impact by creating more jobs and more business in the equine sector and related industries. A focus on live racing will also encourage the industry to produce high-quality horses that win fans and generate wagering.

The purpose of this plan is to build a solid foundation for a renewed and revitalized Ontario horse racing industry. To do this, it aligns the economic interests of all industry partners toward the common goal of maximizing the fan base and wagering - now the key to the industry's success.

The panel looks forward to a constructive dialogue with stakeholders and the public on how Ontario horse racing can take responsibility for its own future.

footnotes

¹ Wagering on horse races is conducted through a pari-mutuel system, under which all amounts bet are combined in a single pool. After deductions for purses, track operating expenses and taxes, the balance of the pool - nearly 80 per cent - is shared among the winning bettors. The payoff odds depend on the number of winners sharing the pool.

² In the mid-'90s, the Ontario government sharply reduced the tax on pari-mutuel gambling in the province. The reduction is equivalent to 6.9 per cent of gross Ontario wagering. The tax reduction is subject to a memorandum of understanding between the ORC, the government and the industry. The industry no longer remits the funds to the government, but has agreed to spend the savings on Horse Improvement Programs and various consumer benefits and other initiatives.

³ Wagering on Ontario live racing includes: betting on races run at the track where the bet is placed, inter-track wagering at one track on races at other Ontario tracks, and non-track betting - including off-track sites, tele-wagering and online wagering - on Ontario races. The panel is examining ways to measure the various aspects of Ontario live racing. It is often difficult, however, to disentangle wagering data on Ontario product from that on foreign product. To simplify the method for allocating funds, the panel is considering the use of just one measure: wagering at the track where the bet is placed. It appears this can be relatively easily determined and could serve as an accurate indicator of overall wagering on Ontario product. The panel will be analyzing data and considering various data collection options to determine if this is the best criterion to use.

⁴ Racetracks with slot facilities are also receiving commercial rents from the OLG. The panel assumes these funds cover slots facility costs and do not subsidize racing.

⁵ Also known as advance deposit wagering (ADW).

⁶ Complementing the ORC's regulatory role, the Canadian Pari-Mutuel Agency regulates and supervises pari-mutuel betting on horse racing at tracks across Canada.