The Australian Racing Board has come up with the odd suggestion that horses visiting from the UK will be banned from racing, in the latest twist to its long running campaign to ban the operation of betting exchanges in Australia. In what appears to be a publicity stunt designed to take advantage of the one time of year that racing has widespread media coverage, ARB Chairman Andrew Ramsden suggested in an article in the Herald Sun, that a ban on English horses racing here next year was "a strong probability" if Betfair was not outlawed.

Ramsden's convoluted logic appears to be that if British horses cannot run in the Melbourne Cup, their owners and trainers will hold their breath until they turn blue, thus forcing the British government to ban Betfair.

The British government is already on record as being very supportive of Betfair, not the least because the downward pressure the betting exchange has placed on wagering margins in the UK has been of great benefit to millions of British punters - a somewhat larger constituency than the handful of racing folk who have sent their horses to race in the Melbourne Cup.

And unlike the cries of doom and gloom coming from Australia, where Betfair has operated for 18 months with no obvious betting scandal, the experience for British racing over 5 years of exchange operation has been largely positive, with record racecourse attendances, wagering turnover and prizemoney.

The fact is that governments internationally have a declining interest in betting on racing as a funding resource, while racing needs such funding more than it ever did. Historically there has been a natural affinity between government's thirst for taxation revenue and racing's need to fund ever increasing prizemoney. There was also a natural affinity between the ruling classes and those who benefited most from racing. In many cases they were one and the same.

However in 2004, the average person knows less about the horse than at any time in recorded history and the nexus between horse ownership and those who run society is rather more tenuous.

Some would see the campaign against Betfair as an attempt to prevent price competition in the wagering market. Such tactics seek to preserve the fat margins of totalisator operators, from which racing enjoys rich funding. However in an age where governments worldwide are acutely conscious of the benefits of competition, demands for government intervention to protect an industry not noted for efficiency, the benefits of which flow to a select group of wealthy individuals, are not exactly politically correct.

Another important political issue is the growing realisation that problem gambling is related to the amount of money removed from the pool by the gambling operator. The larger the deduction for tax, wagering operator profit and racing industry funding, the greater the problem gambling issue. Unfortunately, government is inevitably stuck with the social consequences of problem gambling and count these against whatever taxation benefit it may enjoy from gambling taxes.

So the international racing industry has hit upon "integrity" or more to the point, the possible lack of it, as its weapon of choice to fight what they see as the scourge of betting exchanges, of which Betfair is the largest and most obvious target.

In doing so, the mantra has become that "betting to lose" is the source of unspeakable evil, so much so that TABCorp wagering CEO, Michael Piggott, described betting to lose as "un-Australian".

Such hyperbole ignores the fact that with the betting exchange model, the business of offering odds on horse races has been reduced to exactly the same principles employed in markets of all kinds. That is the matching of buyers and sellers, whereby sellers offer a higher price, buyers offer a lower price and the parties gradually converge their prices until there is a match and a transaction takes place. That is for every seller there is a buyer and vice versa.

The beauty of such a system from the punter's viewpoint is that it is possible to back and lay on the same race and lock in a profit no matter what the outcome. Such arbitrage opportunities not only make it possible to bet profitably on horse racing, but also create an intellectual challenge attractive to the younger computer savvy person which racing so badly needs to capture to replace its ageing fan base.

With electronic trading now the norm, the physical process of displaying prices and matching buyer and seller is done via the internet, thus taking much of the cost out of what used to be a very labour intensive system. The result in a host of markets ranging from shares, to currencies, commodities and even electricity, is that the traders buy and sell in the same market, looking all the time for opportunities to lock in a profit. Transaction costs are low which allows for more liquid markets. Traders also realise that someone has to be on the other side of the transaction for it to take place.

"Betting to lose" in such markets is intrinsic. Without it they wouldn't exist.

The racing industry wants to enjoy the cost saving benefits of such electronic markets, but to simultaneously continue to enjoy the fat margins previously available. For the entire time that wagering has been computerised, the cost of capturing and processing wagers has decreased due to computerisation, but the cost savings have never been passed on to the punter in the form of higher dividends. If anything, over time, punters have been slugged with higher takeouts from the totalisator pool. A deduction of 12.5% from win and place markets in the 1960's has now become 14%. Dividends are routinely rounded down. The recently introduced Mystery 6 "lotto" product has a takeout of 25%.

Is it any wonder that when betting exchange technology offers punters deductions of only 2 to 5%, they snap to attention? The fledgling Norfolk Island based AusTOTE also offers volume based commission rates of 2 to 5%, proving that a totalisator can be run on those low margins. Where is the "official" racing product which competes? The racing industry and the TAB's are hooked on high margins brought about by lack of competition. They are incapable of operating in a low margin environment, yet in every other field, from telecommunications, to car manufacturing, to textiles, governments have moved to facilitate competition, which has brought down prices and kept them there.

So when the racing industry runs bleating to the government demanding that betting exchanges be banned, one would have thought that they would have an alternative plan in place to provide an equivalent low cost wagering service. The fact is there isn't one and more importantly, no plan to introduce one.

The racing industry needs to also consider Australia's changing taxation base, particularly the effect of the GST on state government funding. Recent projections suggest that state governments will enjoy funding increases of $12 billion over the next 5 years as a result of the GST. This is because all GST revenue is distributed to the states by the Federal government.

What this means is that betting taxes on race wagering will become less and less relevant to state governments as time goes on. Even now, we have a precedent where bookmakers turnover tax is no longer kept by government, but paid to the race clubs as a pseudo "product fee". Ironically, TAB's and bookmakers pay GST on their gross wagering margin, so the states are already getting an increased betting tax via their slice of that GST.

There is therefore the opportunity for the racing industry to get together with state governments and persuade them that state taxes on wagering should be eliminated, with the resultant cost savings passed back to the punter in the form of higher dividends. All wagering operators will therefore be in the same boat, with the taxes they pay being GST on their gross wagering margin, plus corporate tax on their profit after expenses, plus of course the PAYE tax paid by their employees.

Racing industry funding can then be "product fee" based probably on a further percentage of the wagering operators gross margin. All operators, including the much despised corporate bookmakers, Betfair and AusTOTE have offered to make such payments. The figure generally agreed on is somewhere between 10% to 25% of gross margin. Clearly it will be subject to negotiation. Wagering operators then have the option of pitching their business at a high margin "full service" wagering operation or a low margin "no frills" service. Punters will decide which ones survive, just as customers do in all other market sectors.

In the process of establishing this new funding framework, the industry will also need to get its act together on the collection and distribution of its product fees. As things stand now, the tidy arrangement where one state equalled one TAB, which provided funding to that state's racing is rapidly unravelling. With TAB takeovers and internet technology, there is less of a connection between the location of the TAB and the running of a race than there has ever been. Which race club collects the fee when a Victorian punter bets on a race in Western Australia with UniTAB?

The current system is a dog's breakfast and is totally incapable of properly distributing funds collected from a body operating nationally such as corporate bookmakers or Betfair. Even within the existing system, states like Victoria are providing the racing product free of charge for other state's racing industry to benefit from. There is no sound reason why Victoria's high quality racing should subsidise that of other states.

Unless and until the racing industry can come up with a far sighted way to provide the benefits of a lower cost wagering environment to Australia's punters, plus better organising its own inefficient funding mechanisms, it has no right to demand that the Federal government take anti-competitive measures against Betfair or anyone else.

PS One wonders if the recent spate of strident anti-Betfair articles emanating from the Murdoch press has anything to do with the fact that the Herald-Sun receives millions of dollars a year in classified advertising income from the TAB's for publishing form guides.