An Interview with Henry Chan

Henry Chan, Executive Director of the Hong Kong Jockey Club and HKJC Lotteries, discusses the Hong Kong gaming model; the Jockey Club’s focus on protecting the public from illegal operators; and the trend lines for different gaming product categories and distribution channels.

Paul Jason, Public Gaming Magazine:  How is the Hong Kong Jockey Club organized with respect to ownership and governance?

Henry Chan:  The Jockey Club itself was formally established in 1884 as a private membership club for a group of people who love horse racing.    They organized the racing and then brought in the wagering on horse racing for the entertainment of the members as well as opening up to the public who attended the race meetings at the racecourse.  Over time, it has become a way of life in Hong Kong, something that people enjoy. It was amateur horse racing until 1971.  Then it was recognized by the government that illegal gambling had become a widespread problem.  So the Hong Kong government issued a license to the Hong Kong Jockey Club in 1973 to extend the wagering service from the racecourse to outside the racecourse.  This was done as a means to provide a legalized service to satisfy the public demand and to help enforce the government’s policy in containing and combating illegal gambling.  It was much more about combating illegal gambling than raising more money.  The Jockey Club is a not-for-profit organization.  It's not part of the government and it’s not a private enterprise.  We have no shareholders.  All our surpluses go to charity.  In 1975 the government asked the Jockey Club to launch a lotto and in 2003 the government issued a license to the Jockey Club to conduct football betting.  Both were done for the purpose of combating illegal gambling.  We are a de facto monopoly, but under the law the government can issue as many licenses as it wants.  The reality, though, is that we provide a service that meets the expectations and the needs of the people in Hong Kong.  We are supporting a lot of charitable organizations and a lot of community projects which will help to improve the quality of life of the people of Hong Kong.   

The Jockey Club funds causes that the public might expect the government to provide for; things like Ocean Park, Academy for Performing Arts, Football Academy, old age and special needs homes, environmental research projects, specialized hospital equipment, and other needs that would not have the same priority in the government budget as education, medical care, social welfare, infrastructure and the like.   The most recent one is that we supported the Olympic equestrian events in Hong Kong, we provided the venue, we helped run it, we funded the whole thing and also now we have given HK$1.8 billion to support a heritage protection project.  Most of these projects would have a hard time getting funded without the help of the Jockey Club.  The Hong Kong Jockey Club Charities Trust acts to enhance and improve the quality of life for the people of Hong Kong. That’s our role.  I believe that in my 35 years’ experience of observing this industry that the Hong Kong Jockey Club model is quite special.  

Public Gaming:  So, back in 1973 your government identified you as an organization that would be an effective tool to combat illegal gambling.  How important was the fact that you also generated revenue for good causes? 

H. CHAN:  The priority is very much to combat illegal gambling.  We have a model which is the best of both worlds.  Our interests are totally aligned with those of our government, so we are allowed to operate in a more entrepreneurial way, finding the best balance between minimizing social costs, combating illegal gambling, and generating revenue for charities.

Public Gaming:  An interesting part of the Hong Kong model is that you, the operator, are incentivized to optimize performance on all fronts, revenue generation and responsible gaming and combating illegal gaming, by the fact that the government is free to assign additional gambling licenses if they feel that would serve their interests to do so.  That gives them the leverage to make sure that you stay consistent with all of their goals.  In turn, they allow you the flexibility to be creative and innovative to implement the best strategies.

 HENRY CHAN:  Right, right.  Exactly.  The Chinese believe that we have to strive for equilibrium and balance in everything we do, and that ultimately the whole world operates that way and you need to create a model that supports and promotes that harmony.  Checks and balances. We have to really over-deliver in order for the government and the public to feel good about allowing us to be the only gambling operator.  We appreciate that it is a privilege to be given this responsibility and realize that we need to perform well because the government does answer to the public as to why the Jockey Club is the only gaming operator. 

In 2003, illegal football gambling was causing a lot of social problems.  The government assessed its options and chose the Jockey Club to spearhead the effort to deal with that problem.  Unlike in Macau, the option of licensing private operators was never seriously considered.  Here in Hong Kong, the government felt that the goal of combating illegal gambling could be combined with the public service benefit of channeling the profits back to the community.  And that the best way to do that was to operate through a not-for-profit organization.  The Jockey Club had a track record of integrity and good management along with a high level of public trust and confidence.  But you are absolutely right, in the law the government says that if you cannot uphold the public trust, if you are not performing well in any way, if you are not managing the money wisely, if you’re not implementing effective responsible gaming measures and combating illegal gambling … if you are not fulfilling the public’s expectations in any way, the government could and would explore alternatives to relying on the Hong Kong Jockey Club to be the sole operator.  The government has a lot of alternatives so they keep us on our toes! 

Public Gaming:  You recently contracted to purchase terminals from Sagem Security.  These terminals have the flexibility to be either self-serve or controlled by the retailer, and easily switched from one mode to the other.  What are the benefits to having the option to be either self-serve or retailer controlled?  Is there a security issue with self-serve?

H. CHAN:    No security issues with self-serve.  We have very strict age limit for access, we have security guards at every door to stop under age access.  The window operators have been trained and instructed that if they have any doubt about the age of the customer they have to do an identity check for proof of age.  Withour self-service channels the player must open an account with us and have funds on deposit, have legal identification verified at the time the account is opened.  So the age and identity is confirmed and we monitor that very strictly.  By law, everybody in Hong Kong has to carry a photo i.d. issued by the government, so it’s very easy for us to check.

Public Gaming:  Then why couldn’t you have 100% be self-service?

H. CHAN:  We are moving gradually in that direction, but it will never be 100% self-serve.  We would like to get as close to 100% self-serve as possible but we expect to always have some customers who, due to whatever reasons,  like to be served. Many people don’t mind taking a little extra time to interact with a human operator  because they just like to talk to a person rather than a machine.  Of course, we want all of our customers to enjoy using our service and so we try to deliver the service in whichever way works best for the customer.  Also, people like to get the payout in cash right away instead having it posted to their betting account.  Bottom line is that we need to be customer friendly, and so if the customer prefers to be served by a human operator, that’s fine.  I’ll be pleased if we can get to 60% or 70% self-serve.  That is why it is important to have that flexibility to quickly and easily convert between manned operation and self-serve mode.

 Public Gaming:  Sports betting … it’s only football?

H. CHAN: Right now we only offer betting on non-local football matches.

Public Gaming:  Is it being considered to move into other sports.

H. CHAN:  If or when the market demand arises and government wants us to operate other types of sports betting, we will do that.  It actually does not make business sense until there is a need to combat illegal gambling, because that also means there is not enough demand.

Public Gaming:  So the government does not want you to expand beyond football until there appears to be an underground or illegal market to combat.

H. CHAN:  True.  But it also does not make business sense for us to operate in a market that does not have demand and players.  So it does not make sense from either a business or a responsible gaming point of view.

Public Gaming:  Any consideration being given to opening a casino in Hong Kong, or would Beijing prefer that you not compete with Macau?

H. CHAN:  That kind of policy decision is totally beyond the scope of our organization.  That would be up to the Hong Kong government and the Beijing leadership.  The Jockey Club has a very good image and position with the people in Hong Kong, but we do not have any influence on the government’s policy of whether the city should have a casino or not. 

Public Gaming:  It seems like it would be a good thing for the profits of casino gambling to be channeled back to charitable causes that the Jockey Club supports.  Your approach to issues like this is admirable, Mr. Chan, in that you seem to focus on simply doing your job well so that if the government does want to expand gaming in any way, they will look favorably on the option of choosing you as the operator.

 H. CHAN:  We’d like to always think that.  We hope that insofar as we are doing a good job, the government will not choose to license other operators in Hong Kong.  We like to position ourselves as the ideal candidate to implement any initiative to combat illegal gambling or to expand gaming in Hong Kong.

Public Gaming:   Yours is an operating and financial structure that creates alignment between the gaming operator and government agendas, striking the right balance between the need to generate revenues and minimize problem gambling, between the need to combat illegal gambling and yet not encourage gambling.  It’s difficult for many governments to find that delicate balance.

H. CHAN:  There are other parts of this picture that we should point out.  The Hong Kong Jockey Club is the single biggest taxpayer in Hong Kong.  We are one of the largest employers in Hong Kong with a customer base of 4 million people out of a total population of 7.5 million.  So almost every adult in Hong Kong uses at least some of our service in one way or another.  That is important because it is a source of the broad base of public support that the Hong Kong Jockey Club enjoys.  We have three major lines of service: horse racing wagering, football betting and the lotto and the fact that we are running all three services together provides us with very advantageous economies of scale and efficiency, utilizing the infrastructure we have built to support the different lines of service.  This enables us to keep our operating costs down.  Our performance is measured by the revenue that we contribute to the government, the amount of charitable donations, and how much we consume as a business operation to provide the service. 

Public Gaming:  So the Hong Kong Jockey Club is in a position to implement new games far more efficiently and cost effectively than a new operator would likely be able to do. 

H. CHAN:  There are even more factors that go into making the Jockey Club successful.  The government has given us the flexibility to determine cost and payout ratios, because they understand we need to be competitive in the market.  For lotto, we are required to pay 25% of turnover as lottery duty to the government. The government gets at least 72.5% of gross profit on turnover from horse racing; in football they take 50% of gross profit on turnover.  We do that along with the mission of combating illegal gambling and running our operation in an efficient and honest manner.  What is left after paying the government must be enough to cover our operating cost.

Public Gaming: That’s not much.

H. CHAN: That’s not much.  With horse racing, 72.5% tax on gross profit is the highest in the world by at least double, I think.  Football 50%, that is almost double that of Singapore which is the second highest in the world.  For the lottery, we run everything for 6% of total revenue.  If you look around the world, you will see that most lotteries pay about 5% or 6% just to the retailer.  

Public Gaming:  And for you, that percentage must support the whole operation.

 H. CHAN:  Exactly. Computers and IT, marketing, administration, everything.  And at the end of the day, we still have a surplus, HK$1 billion  every year, to give to charity.

Public Gaming:  The interesting thing is that all the government does is dictate the percentage of the profit that they take from you, so if you determine that the better way to operate would be to increase or decrease the payoff percentage, the government knows that you’re operating in its interest because it is in your own interest to maximize the total profit. 

H. CHAN:  The government knows our interests are aligned. Like in the football betting, we can introduce new games as the market requires.  In Lottery we have only one game, and if we want to run another game we have to get another license, and we have to justify our case.  The Hong Kong government takes a view that they do not encourage gambling.  But they recognize since there is a demand for recreational wagering, it is important to meet that demand with a legalized service.  We work hard because we believe that we are doing something good for the people of Hong Kong, we are creating jobs, we are helping the government to combat illegal gambling, and we turn all of the money back to the community for tax revenue and charitable donation.

Public Gaming:  So if the government were to come to you with a criticism it would not be that they need you to generate more income, it would more likely be to ask you to increase your efforts to combat illegal gaming where they think it may be expanding?

H. CHAN:  Yes, but it is not as simple as that either.  For instance, casino gambling in Macau is, of course, perfectly legal but it still has a negative impact on Hong Kong both in social and financial terms because of the proliferation of VIP gambling junkets to Macau which can operate legally here and specifically target our customers.  We would like our government to allow us to be a little more proactive at helping us keep the gaming revenue in Hong Kong. 

 Public Gaming:  It sounds as though your government is actually more responsive to you than many governments are to the lottery organization.

H. CHAN:  We have a close working relationship, but sometimes they are not as responsive as we would like to changes in the global operating environment.  We totally respect the role of government to determine gaming policy, but we would like them to act more aggressively to defend against trends that threaten our market. 

Public Gaming:  For example?

H. CHAN:  We knew back in 1998 that there were developments in football betting and that action should be taken to bring that betting into a legalized and regulated environment.  As we all understand, everything takes time with the government system and so it was 5 years before we were authorized to do anything about it.  That is not only lost revenue, it is too much time to allow the illegals to gain a foothold in the marketplace.

Another issue is that our racing season is too short.  We can only race 78 times a year and because of that we have about 2 months of the year that we do not have horse racing.  Macau is racing year round.  Of course, we are not saying that people should not go to Macau.  But we should also be providing more horse racing that people want to have, so that they are not being forced to go to Macau for two months out of the year.

Public Gaming:  And your reason for doing that isn’t to raise more money, it's because the money is just going over to Macau and so why not provide the service to keep the gambling money in Hong Kong.

H. CHAN:  Exactly right.  Now people have no choice, they depend on someone else because we are not providing it.

Public Gaming:  What options exist for the player to place the wager or purchase a ticket?

H. CHAN:  The terminals as POS are very popular in Hong Kong.  Like right now the trend we’re seeing is that roughly 10% of our horse racing business is transacted at the racecourse; 30% is through the Internet; 30% is through telephone operators, and 30% is over the counter in the off track betting shops.  With telephone and Internet, we operate on an account basis, the player having funds on deposit.

We are quite successful actually in a way in building barriers against offshore operators.  In the year 2002, our government legislated to make it a criminal offense for anybody in Hong Kong to bet with an offshore operator.  Some people would say that it is not enforceable, but actually it has worked quite well to minimize illegal Internet wagering.

Public Gaming:  It’s a deterrent.

H. CHAN:  Government is very serious about that.  If you are in Hong Kong, you have to bet with the Hong Kong government authorized operator if you want to have a bet.  People argue that it’s against human rights or freedom of choice or free competition or whatever, but sorry, this is the public policy in Hong Kong.  It’s our gambling policy, you can only bet with an authorized  operator, otherwise it’s a criminal offense under the law.  People say that in this world you cannot enforce it because everyone is capable of getting anything on the Internet and how can you catch people who wager over the Internet.  The answer is that it can be stopped, it can be enforced, and it works effectively as a deterrent.  The government upset the payment system of the offshore operators and made it very difficult to operate in Hong Kong because if you are not an authorized operator you cannot advertise, you cannot promote your service, and that will cut your customer contacts.  So the law has helped to serve as a deterrent mechanism.  The law can’t be 100% deterrent, but it's enough to stop the advertising activities and make it very difficult to do business. 

In the year of 2000, internationally well known commercial operators/bookmakers came in and advertised on the bus bodies and the newspaper, and some had even invested hugely to penetrate this market.  The law stopped them.  They had to give up.

Public Gaming:  Just because a law is not perfect, or that a clever criminal can get around the enforcement mechanism, doesn’t mean that it is not an effective deterrent, making it far more trouble than it’s worth for people to break the law in order to gamble.

H. CHAN:   The government sent a clear message to the public that this is illegal, and people should not engage in any illegal activities.  We depend on public education in these matters as well as legislation.

Public Gaming:  If there were legislators or shapers of public policy in other parts of the world who wanted to emulate your model in their own jurisdiction, is there anything that you would point out about the Hong Kong model as not necessarily being good for other jurisdictions?

H. CHAN:  I think that if you were to start something really from scratch, the Hong Kong model is a good reference.  But everywhere is different.  Circumstances vary greatly, so it would never be a case of duplicating our model somewhere else.  But a fundamental part of any model is creating alignment between the operator and the government.  It takes time to evolve an effective working relationship and the operating model that works well for everyone.  And it remains an ongoing work in progress for us as well. 

Public Gaming:  Is there anything of particular relevance that you would point out as being a difference between Asia Pacific and other regions?  Anything of a cultural, geographic, economic, or regulatory nature about the way that the industry exists in Asia Pacific that you think we might be quite different in the Americas or in Europe.

H. CHAN:  There are many differences.  In Europe most of the operations are well established, and the products from a consumer point of view are in a more mature stage of their life cycle than they are in Asia-Pacific.  Europe does not have a common language, but many countries share the same currency and work together as a European Union to address issues of common interest.  The same things could be said of the North American markets and jurisdictions. 

We don’t have that in Asia Pacific.  Some countries are still in the very early stages of economic development, and this impacts the way our industry operates here.  And the cultures are far more diversified.  So trying to put this group together requires a good understanding and sensitivity to those differences.  We need to organize in ways that helps everyone understand the value for them.  I was involved in the setting up of APLA (Asia Pacific Lottery Association), and even before APLA was established, I was involved  in forming an interest group among the operators in Asia Pacific.  So I’ve been working for more than 10 years to find ways and means to get all the operators together.  We have made good progress.  When I took over four years ago as chairman of APLA we had 17 members, and now we have 24.  In the last two years we established a new category of membership to bring in service providers of the industry and some other regulated operators who are not members of the APLA because we implemented a rule that all our members have to be full members of the World Lottery Association (WLA) so if they’re not they can only join APLA as associate members.  We now have 14 associate members. So we have a family of 38 now.  It’s still small when compared with other regional lottery associations, but we are growing and we are running seminars and annual regional conference and we have very good support from members.  The attendance at our annual conference which was held in Beijing was around 160.  The 2009 conference will be held in Auckland, New Zealand. 

Public Gaming:  The diversity of interests and agendas must be challenging.  The European Union Commission is having a difficult time figuring out a gaming policy that meets the needs of all of its member nations.  And yet the differences throughout Asia-Pacific are much greater than in Europe.

H. CHAN:  Yes. Really.  Even between Singapore, Malaysia, and Thailand there are significant differences in culture and economic priorities. So you really just have to remember that seminars and conferences must be tailored to make everything deliver value and be meaningful to the whole membership.  We are making excellent progress, not only because the membership is growing, but moving the venues and activities around the member countries brings people together and creates a much stronger association.  We are gaining a much better understanding between the different members and establishing a really good relationship with each other. 

Public Gaming:  Is there anything of interest or importance about the way your product mix might change?  Is football betting going to increase more than another, or is lotto going to be doing something different?

HENRY CHAN:  We started off with horse racing only, so that was 100% of our business.  When the lottery was launched in 1975, it was about 5%,and 95% was horse racing. And now after the launch of football betting, lottery is still about 5%.  That’s not increased much, but has about stayed at that level and the other 95% is now split between horse racing and football betting.  Horse racing wagering is about two thirds, football betting is now about one third.

PAUL JASON:  So there’s a significant shift from horse racing over to betting on football.

HENRY CHAN:  We have grown.  Before the launch of football betting, we had about HK$76.5 billion of annual turnover, and now we have HK$ 108.5 billion. Looking ahead now, the growth potential of football betting is high now with the marketing of the EPL and the Champions League every year, and the big global event of the World Cup, the interest in soccer around the world is increasing, gaining more popularity.  The horse racing on the other hand is suffering.  It’s a worldwide dilemma and the reason is that it’s difficult to attract the younger generation to take an interest in horse racing.  Football will probably keep on growing, but horse racing is our own self-organised sport and it supports a lot of jobs and we are putting extra effort, particularly among our own members, to bring in the younger generation to take an interest in the sport, in the horse racing.  It’s not so much about the turnover on money but looking ahead we want to sustain the world class of racing in Hong Kong.  Over the course of the next few years, the focus of our effort will be in horse racing.  We are going to spend a lot more money and bring in and foster some of the programs to improve our race track facilities.  We believe we already have very good facilities in Hong Kong.

Public Gaming:  Well known over the whole world.

H. CHAN:  But after seeing the casinos in Macau we realize that our customer expectations have been raised and so we need to keep on improving our facilities and racecourse in order to keep up with the higher customer expectation.

Public Gaming:  Can you bring in slots, electronic table games?

H. CHAN:  Not now, but we can have restaurants and catering services of a five star hotel standard.

Public Gaming:  And the government could authorize you to implement a few more races and operate every month of the year.

H. CHAN:  We’re trying to get agreement from government which would certainly help to keep the interest going year round.

Public Gaming:  Even though football betting appears to have more profit potential, you will be focusing on building the horse racing business.

H. CHAN:  Absolutely.  Horse racing is who we are.  Horse racing is an exciting and wonderful event that is loved not just by our members but by enthusiasts all across the world, and it supports many people and economic activities.  The Hong Kong Jockey Club is a public institution here in Hong Kong, part of our identity, and one of the most recognized brands in the industry and so we are very proud of it and dedicated to protecting its legacy and to ensuring its healthy and prosperous future.