Executive summary
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The audit was conducted following a request from the Minister for Gaming and Racing. The request coincided with an audit of the amalgamations creating the Department of Primary Industries and the Department of Commerce. The Auditor-General agreed to apply the approach from that audit to this audit. |
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The Greyhound and Harness Racing Regulatory Authority (the Authority) was created in October 2004 to safeguard the integrity of the two racing industries. It achieves this through its stewards officiating at race meetings and by administering the registration of participants and the handicapping or grading of the dogs and horses. The Authority was a merger of the regulatory functions of the former Greyhound Racing Authority (GRA) and Harness Racing Authority (HRA) and was expected to achieve operating efficiencies. The foundation of the amalgamation was a feasibility study completed in August 2003. Its recommendations were accepted by government and they formed the basis of the amalgamation objectives. Earlier in February 2003, the commercial functions of the two former authorities were transferred to Harness Racing NSW (HRNSW) and Greyhound Racing NSW (GRNSW). |
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The primary objective of the amalgamation was to return savings to the two racing industries and maintain integrity. This occurs at a time when the industries are under commercial pressures as revenues are steady but costs are rising, competition for the gambling dollar is increasing and racing code participant levels are falling. The two industries also contribute the majority of the Authority’s annual budget (in excess of $5 million). This puts the Authority under close scrutiny for monies saved through the efficiencies of amalgamation and spent on implementing the amalgamation. |
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It is important to state at the outset that when we refer to the Authority in this report, we mean those responsible for its governance, namely the Board and its executive. The Board is responsible for the Authority’s activities to the Minister for Gaming and Racing. The Minister is advised on racing matters by the Office of Liquor, Gaming and Racing (OLGR) in the Department of Arts, Sport and Recreation. The Authority’s revenue largely consists of contributions from the two racing industries. The Chief Executive Officer (CEO) is responsible for the day-to-day management of the Authority. |
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The audit’s objective was to assess if the Authority is realising the intended benefits of amalgamation. We did this by asking if the amalgamation project was well planned, implemented according to plan and if anticipated outcomes and benefits were achieved. |
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Objectives for amalgamation
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The main objectives for the amalgamation were to: § achieve savings, mainly through reductions in staff numbers from 63 to 51 § implement an appropriate structure to achieve the target number of staff and related savings of $800,000 per annum § sell a surplus building to fund the costs of the amalgamation, with any balance paid to the racing industries - costs of amalgamation included building refurbishment, new IT systems and possible voluntary redundancies § implement new systems to improve administrative processes § clarify the composition of cash reserves held on amalgamation and distribute any excess to the racing industries. |
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It was the Authority’s task, from October 2004, to plan and implement the amalgamation objectives. These objectives were included in briefings to the Authority’s new Board. Briefing papers were provided to the Board and subsequently to the CEO. Many changes, challenges and the opportunity for implementing rewarding solutions were expected within the first 12 months. |
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The Authority has achieved staff reductions and salary related savings in line with targets. It has achieved salary savings in excess of $850,000 during 2007-08. This is better than the $800,000 per annum savings set as an amalgamation target. In September 2007 the Authority sold its surplus building and moved into its newly refurbished Bankstown building.
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In implementing the amalgamation, there were inherited difficulties which affected the timely achievement of amalgamation objectives. These included the need to: deal with high levels of bad debts; continue disciplinary actions against two senior stewards; improve internal reporting; revise operating procedures; and address staff morale issues.
That said, the amalgamation was not project managed effectively. It has been slow to implement some of its key objectives against plans and the costs of the amalgamation have increased to the extent that it is unable to meet key objectives. Stakeholders are dissatisfied with the amalgamation outcomes. This dissatisfaction would have been mitigated with better communication. The Authority’s approach to implementing the amalgamation varied from that originally proposed by government. But it did not record the changed approach in an amalgamation plan.
The racing industry bodies largely fund the Authority and had owned the two buildings transferred to the Authority. Both the government and the stakeholders expected that the racing industries would receive: § a return from the proceeds of the sale of the surplus building, after the payment of amalgamation costs (these included building refurbishment, redundancies and a new IT system) § annual savings of $800,000 based on staff reductions. |
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However, they received: § a ‘bill’ for $267,000 being the excess of total refurbishment costs (including building, establishment and furniture and fittings costs) over the proceeds of the building sale § no reduction in their contributions, with salary savings absorbing compulsory award increases for remaining staff and the funding of racing integrity initiatives § a small ($133,000) contribution towards the new IT system. |
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The Authority has identified $400,000 in cash reserves as excess to its current needs. This sum is largely being applied to the building costs deficit, with the excess of $133,000 to help fund the new greyhound registration system. The excess comprises funding for capital replacement and past operating surpluses by prior greyhound racing authorities. The Authority’s approach disadvantages the greyhound racing industry, as the harness racing industry is not asked to fund a portion of the building costs deficit. The Authority has advised that it is reviewing its approach and is advising the industries accordingly.
The Authority’s structure is yet to be finalised and integration of activities completed. Outstanding amalgamation issues are the installation of a greyhound registration IT system to consolidate racing administration activities and revision of the structure to reduce the number of staff directly reporting to the CEO.
We consider that the Authority would have better managed the implementation if it had had a formal amalgamation plan to achieve objectives, including a timetable to achieve savings. This would have provided a sound platform on which to communicate with stakeholders on its targets and progress against them. |
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Planning the amalgamation
The amalgamation objectives were based on studies carried out over a 14 month period before the amalgamation commenced. The Authority had discretion to plan and implement within the parameters of the guidance and direction provided. |
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Accountability against a plan |
Whatever the course of action, we expected to see a plan against which the Authority would be accountable for in implementing the amalgamation. Without such a plan it risked not being clear in its goals, actions and progress. It also risked being held accountable by stakeholders against the expectations set prior to the amalgamation - those recommended by the feasibility study, accepted by government and set-out in the briefings to the new Board. During its early months of operation the Authority had the option of clarifying concerns about its amalgamation objectives and targets. The amalgamation feasibility study acknowledged that its recommended courses of action should be fine tuned to changed circumstances by a future amalgamated board. |
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The Authority believes many of the benchmarks to be unsound because of flawed methodology applied by the feasibility study. However, it was the Authority’s responsibility to assess its amalgamation responsibilities at the outset, obtain clarification or alteration of them and to develop an amalgamation plan around the clarified or altered objectives. By not doing this their stakeholders’ expectations remained based on the earlier plan. And in the absence of the Authority having done so, its performance is assessed against benchmarks set in the feasibility study. |
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The Authority did not develop a plan to manage the amalgamation. There was no formal response by the Authority to the amalgamation strategies recommended in the feasibility study and sanctioned by government. Although the Authority was established in October 2004, it was not until August 2005 that it developed its initial strategic plan. Progress against this initial Strategic Plan was not reported to the Board until June 2006. |
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The Authority’s 2005-06 Strategic Plan was included in the Authority’s 2005 Annual Report. It did not cover all amalgamation objectives or any reference to achieving savings in salary and accommodation costs, formalising a new structure or resolving the level of any excess cash reserves. |
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Implementing the amalgamation |
The Authority’s expectations were that many key amalgamation objectives would be implemented by 30 June 2006, twenty months after formation. Examples of targets included in the 2005-2006 Strategic Plan and their results are: |
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Actions |
Targets |
Results |
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Sell surplus building |
30 June 2006 |
to auction on 15 June 2006 |
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Exchange contracts for refurbishment |
15 February 2006 |
30 January 2007 |
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Move to refurbished building |
30 June 2006 |
6 September 2007 |
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The Better Practice Guide: Implementing Successful Amalgamations produced by the Audit Office (March 2008) provides guidance on interpreting and implementing directions from government. These lessons learned from the Audit Office’s recent audit Managing Department Amalgamations (March 2008) are applicable to the situation the Authority found itself in. |
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Immediate challenges for the Authority
During the first months of amalgamation the Authority had to expend considerable effort to deal immediately with high levels of bad debts in harness racing, continue disciplinary actions against two senior stewards, improve internal reporting, revise operating procedures and address staff morale issues. The Authority also had to maintain its day-to-day operations. These included registration, handicapping and stewards officiating at race meetings. |
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Staff reductions
The Authority has achieved staff reductions and salary related savings in line with targets. Between October 2004 and July 2007, it reduced staff numbers from 63 to 51 and achieved annual salary reductions in excess of $850,000, compared to the amalgamation objective of $800,000 per annum. The savings reduced industry contributions by absorbing compulsory award increases to Authority staff. During the four years 2004-05 to 2007-08 the four per cent per annum salary increases are estimated to total $623,000. The Authority believes that award increases should have been factored into pre-amalgamation savings calculations and that the failure to do so caused stakeholders to have inflated expectations. |
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The process of natural attrition took three years. Forty five per cent of the total salary savings first occurred in 2004-05 and the balance was achieved over the remaining two years. The cost of natural attrition was approximately equal to the use of redundancies, as the majority of surplus staff, including many long term employees, left during the first two years. The Authority states that the process of natural attrition allowed it to make use of the departing officers between 2005 and 2007, and that they did not experience staff morale problems. However, the Authority’s approach was slower than that expected by stakeholders. |
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Organisational structure
On amalgamation, the Authority had been provided with a consultant’s report (the Spencer Report) including a suggested structure and a staff management program, incorporating the use of voluntary redundancies. The Authority chose not to pursue the approach supported by the feasibility study and government. The Authority did not develop a structure or staff program comparable to the detailed one provided. The new structure and new positions evolved incrementally as the Authority assessed its situation. For example, steward activities for the two racing industries were not integrated and continue to operate separately (in line with practices elsewhere in Australia). Positions for a Deputy CEO and HR Manager were created, although not included in the feasibility study report. |
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The Spencer report |
We were advised that the Board did not at any stage adopt the Spencer Report. And that an important factor in this decision was the advice provided by a very senior executive of the Department of Gaming and Racing soon after the establishment of the Authority in October 2004 regarding the status of the Spencer Report. This advice to the Board was that the Spencer Report was a guide only and need not be followed rigidly. |
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The current structure has ten staff directly reporting to the CEO. We consider this to be too many to manage effectively. The integration of greyhound and harness racing administration activities will not be achieved until the greyhound registration system is installed. Integration is also impeded by staff being employed under separate awards, with differing employment conditions for greyhound and harness racing industry staff. The Authority states that not having an amalgamated award has not impeded workflows or the transferring of staff between the two areas. |
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We understand that the Authority is negotiating with GRNSW for funding of the new computerised registration system for its greyhound racing administration operations. This will lead to further integration with harness racing operations and should improve service and productivity. |
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Authority buildings
The amalgamation’s implementation was affected by the later than expected sale of the Auburn building, the lower than expected sale price achieved for this building and the higher than estimated cost of refurbishing the Bankstown building. |
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The Authority sold its surplus building in September 2007. The original expectation was for the sale to occur by 30 June 2006. The sale price of $2.05 million was $350,000 less than the reserve set for auction, which was also the amount used in the business case to the Minister supporting the sale and the costs of refurbishing the remaining building. We consider the Authority should have raised the implications with government and stakeholders more regularly. The expectations of government and stakeholders were that the sale proceeds would cover the costs of amalgamation, including building refurbishment, redundancies and a new IT system, with any surplus being returned to the racing industry bodies who originally owned the Authority’s two buildings. |
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Refurbishment costs |
The refurbishment of the Bankstown building fell behind schedule as contracts for the refurbishment were approved a year later than anticipated. In addition, building refurbishment costs increased by $807,000 against business case estimates. As a result of these increases sale proceeds fell $267,000 short of the building costs, and there are no funds for other amalgamation costs or for a return to the racing industries. The business case had estimated a surplus of $853,000 would be available to do this. |
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Communication with stakeholders
The Authority’s lack of formal amalgamation planning did not provide it with a reference point from which to inform stakeholders of its intentions and progress against them. |
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They did not include in their communication strategy managing relationships with its external stakeholders. The Authority’s Communication Strategy of May 2006 did not contain any reference to maintaining regular communication with the Minister and the Office of Liquor Gaming and Racing (OLGR), two of its most important stakeholders. We consider that it would have been helpful to advise such stakeholders to revise their expectations about the sale price and the increasing costs of refurbishment. The Authority points out that it did inform OLGR and the industry bodies of its inability to sell the Auburn building in mid 2006 at the reserve price. |
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Cash reserves
At the commencement of the audit, the allocation of the potentially significant cash reserves for capital replacement or return to GRNSW was not resolved. The issue was identified by the feasibility study as requiring immediate action, but was not resolved before amalgamation. The ‘cash reserves’ comprise funded provisions for staff entitlements and capital replacement, and past operating surpluses of the GRA and its predecessors. |
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Applying surplus funds |
During the audit the Authority undertook analysis of the likely surplus funds comprising funded accumulated depreciation and past operating surpluses by prior greyhound racing authorities. The Board resolved in October 2007 that there was $400,000 available. Of this an estimated amount of $256,000 (since revised to $267,000) was to fund the deficiency in amalgamation building costs and the remainder of $144,000 (revised to $133,000) to help fund the greyhound registration system. The system’s anticipated price is $668,000 and the balance of $524,000 (now $535,000) is to be funded by GRNSW. The Authority states that GRNSW has included $680,000 in its 2008 budget for this project. The Audit Office notes that neither HRNSW nor GRNSW has been asked to fund the deficit in amalgamation costs and that it is to be solely borne from greyhound industry sourced funds. The Authority has advised that it is reviewing its decision on the funding of the building refurbishment deficit. A factor influencing its decision at the time was uncertainty in the industries caused by the outbreak of equine influenza. |
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Budgets and strategy
The Authority’s budget submission to the Minister does not clearly indicate how it is linked to the services and results it delivers, and how it creates ongoing efficiencies. The Results and Services Plan (RSP) approach, applied across government, is designed to do this. An RSP will facilitate a more strategic discussion between the Authority, the Minister and racing industries about the agency’s future funding needs. |
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The Authority’s budget practices do not include three year forward estimates, which is a common practice across government. In addition, the Authority’s budget does not include efficiency dividends at levels applied in State Budgets to agencies. |
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The Authority points out that historically it was not requested to provide either an RSP or three year forward estimates, but has no objection to doing so. |
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It is recommended that the Authority:
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§ finalise the structure of the Authority to achieve full amalgamation and reduce the number of direct reports to the CEO (page 42)
§ install the new greyhound registration system as soon as possible to gain productivity and service benefits (page 45)
§ report the final costs and benefits of amalgamation against the Authority’s amalgamation objectives (page 51)
§ prepare a results and services plan (RSP) in support of its budget submissions (page 51)
§ include three year forward estimates in its annual budget and RSP submissions (page 51)
§ include efficiency dividends in budgets and estimates consistent with levels in State Budgets (page 51)
§ revise the corporate plan in line with their RSP for improved external accountability (pages 28 and 51)
§ commit to the implementation of a communication strategy to ensure that stakeholders are well informed of the Authority’s performance against its corporate statements and plans (page 28). |
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Response from the Greyhound and Harness Racing Regulatory Authority |
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The Greyhound and Harness Racing Regulatory Authority (“the Authority”) appreciates the effort of the authors of the Performance Audit Report: Managing the Amalgamation of the GHRRA (“the report”) in seeking to understand the nature of the industry at the time around amalgamation and the role of the Authority within it. This is important as background to the factors that influenced the management of the amalgamation.
The Authority notes that the report specifically seeks to audit the management of the amalgamation that formed the Authority and does not seek to explore the day-to-day regulatory operations of the Authority and its staff.
Industry stakeholders will also note that this report evaluates the management of the amalgamation in the context of the expectations set at the time, but does not attempt to validate the robustness of the basis of these expectations.
Nonetheless, as a general comment, the Authority notes that almost five years have passed since feasibility planning began and the related assumptions were made. Many of the challenges the greyhound and harness racing industries are confronted with in 2008 are very different to those in 2003.
The Authority is focused on the future of the industry and with this report now completed, the Authority considers there to be little benefit in retrospectively analysing the basis for assumptions that have long since dated. Such an analysis would contribute very little to the future of our industry.
This report is valuable to the Authority in that it provides the industry with more context around the factors influencing the management of the amalgamation. It also provides the Authority with additional direction as to best practice methodology in finalising the amalgamation and managing its operations in the future.
The report makes special mention of the importance of communication and planning. The Authority accepts it could have done better at communicating decisions around its plans and priorities related to the management of the amalgamation. In practice, faced with a plethora of challenges at amalgamation, the Authority placed the priorities of participants above those of the government on too many occasions. Even though those priorities were set for appropriate reasons and while the Authority never failed to respond to corrective advice or direction from any department throughout the amalgamation, the importance of pro-activity is an important take-out from this report. Pro-activity in planning and communication are two areas in which the Authority has already begun improving its practices.
Communication is also fundamental to the setting of expectations. The importance of clarity around the role all stakeholders play in working to a particular goal is clear; including government, commercial bodies and other industry participants. Far greater emphasis must be placed on ensuring that the expectations of all stakeholders are understood and managed, with anomalies identified well before they become systemic.
In providing a segue to the future, the Authority notes the Recommendations contained in this report. Pleasingly, progress has been made on many of these:
Thanks to the authors of this report for their patience and dedication in understanding the wide range of factors that influenced the management of the amalgamation. Their recommendations represent important guideposts for the future.
The Authority recognises the demands of the future in upholding racing integrity in an industry under pressure on multiple fronts. We look forward to working with all industry stakeholders in addressing these challenges.
(signed)
STEPHEN PRICE Chairman
Dated: 20 March 2008 |