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April 30, 2008

Deloitte helps hobbled industry

Deloitte helps hobbled industry

Deloitte Australia has set up a task force to deal with one of the worst sporting tragedies to hit the country this year – equine influenza. Arvind Hickman speaks to thoroughbred owner and task force leader Stephen Harvey about a tragedy that has stopped a nation.

Horse racing, one of Australia’s favourite pastimes, is an industry on its knees. At a time of the year when thousands of thoroughbred enthusiasts usually flock to racecourses for Australia’s Spring Carnival, several grandstands are empty and gambling revenue has plummeted.

On 24 August, an outbreak of the equine influenza (EI) virus was discovered at an animal quarantine station in the Sydney suburb of Eastern Creek. It is the first time the virus has entered the country and within a week it spread across the state of New South Wales and southern parts of Queensland, forcing a 72-hour lock-down of every horse-related activity in the country. Since then, hundreds of horses have been hit with a bout of the flu.

Financial hit In response to the disaster, Deloitte Australia has set up a team of ten partners, who are able to draw upon more than 3,000 professionals, to tackle the financial repercussions of the EI outbreak. The leader of the task force is Deloitte assurance and advisory partner Stephen Harvey – a successful owner/breeder of thoroughbreds, member of the Australian Racing Board and chairman of the Controlling Body for Thoroughbred Racing in South Australia (TRSA).

“Having lived and breathed the risk of it happening for the last six years since I’ve been on the board [of the TRSA], this was almost our worst nightmare, turning up when it did,” he says, while adding that the racing industry directly or indirectly employs 160,000 people and contributes A$8 billion ($6.8 billion) annually to Australia’s economy. “Some observers are estimating the impact of EI will [remove] 15 to 50 percent [from the value of the industry] in this year alone, which is an economic impact of in excess of A$1.5 billion,” he says.

Although severe strains of EI are capable of killing foals, its affect on mature horses is similar to the human flu. Harvey says the real devastation is to the racing and other recreational horse-related industries, which have ground to a halt in some areas. “Revenue streams are substantially impacted as race meetings are cancelled resulting in reduced totalisator revenue, which funds the engine of racing through prize money,” he explains. “The breeding industry is also hard hit as horse movement is banned or restricted resulting in decreased revenue to studs and stallion owners, while mare owners could lose out from future sale of progeny.”

Gathering troops

To help assist the industry get back on its feet financially, Harvey gathered Deloitte colleagues with racing industry know-how, including audit partner Helen Hamilton-James, who is heavily involved in equestrian events, Peter Forester, who has done a lot of work for Racing NSW, and corporate reorganisation partner David McCarthy. The team is largely composed of insolvency and financial modelling experts who could manage cash flows in times of crisis.

“We’ve got people who can sit down with owners of a stud and [calculate] if you have stallions that are unable to serve, [we look at] what that does to your income and cash flow, what it means in relation to your commitments to your financiers and suppliers and all that,” Harvey says. “That might end up with restructuring borrowings, restructuring payments and doing it properly, and not waiting for the last minute.”

This service is equally important to trainers, whose income is dependent on the winnings of the horses they train. Sydney’s premier stable at Royal Randwick Racecourse was hardest hit by the virus, which had an impact on high-profile trainers such as Gai Waterhouse and Bart Cummings. Deloitte’s other clients include totalisator companies, industry controlling bodies, race clubs and jockeys.

Counting the cost Another level of expertise the firm offers is forensic accounting, which could be used to help quantify losses if a government-commissioned independent inquiry determines someone is at fault. “There will be the issue down the track as to whether anybody is responsible for this and there may be potential claims against the government or other parties. Our forensic accounting people are heavily involved with legal people… there will be the need for our people to try and quantify the impact on various individuals,” Harvey says.

In describing his team’s relief work, he adds: “It’s not like a tsunami or an earthquake, there isn’t a spectacular visual look [to] the disaster. Essentially what you see is horses with runny noses or an empty racetrack. The issue will be very much about looking at the financial impact of EI.”

At the time IAB went to press, Sydney’s lucrative 2007 Spring Carnival was on the brink of being cancelled due to EI. However, the outbreak doesn’t appear likely to affect the Melbourne Spring Carnival, which features Australia’s blue ribbon race – the Melbourne Cup – in early November.

Deloitte warns the full extent of the disaster won’t be felt for another five years when reduced foal numbers start depleting the quality and quantity of racing stock and it becomes clear how the strain will affect the fertility of prized stallions.

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