How the Hong Kong Jockey Club exaggerates its charity
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So important is horseracing to Hong Kong life that Deng Xiaoping once reassured the population that “the horses will still run” as the UK prepared to hand over sovereignty of the territory to China. For those crammed into the Happy Valley stadium every race night since 1997, the late Chinese leader has been true to his word.
Compact, noisy and filled with thousands of punters squeezed around the floodlit track, horseracing at Happy Valley is at the heart of Hong Kong island. It is also at the heart of the Hong Kong Jockey Club, the colonial-era institution whose members make up the city’s business and political elite, and which holds a government-granted gambling monopoly in the city.
In the year to June 2017 that monopoly generated revenues of nearly HK$34bn ($4.3bn) on record betting turnover of more than HK$216bn — that is almost HK$30,000 gambled for every man, woman and child in the city. The monopoly is justified on the grounds that the club’s charity arm redistributes some of its profits to good causes — part of a deal dating back to 1952.
But a Financial Times analysis shows the club exaggerates its donations, paying out only a sliver of the charity funds that serve to justify its lucrative monopoly. For instance last year a press release from the club detailing its annual results recorded “total charity donations” of HK$7.6bn but that counted money “allocated” to charitable organisations and community projects and thus earmarked for potential payment. The annual donations — defined by Hong Kong law as payments made, not just pledged — were just HK$2bn, according to the annual report of the Jockey Club Charities Trust.
The gap between the two figures has the potential to become a flashpoint in a city where one in five people live below the poverty line — defined as half the median income of HK$8,000 per month for a single person. And income inequality has risen to a record level as real estate prices have soared.
“The charities trust is a fig leaf to justify having the monopoly rather than having competition in that space,” says David Webb, a corporate governance expert and longtime critic of the Jockey Club. “If they simply paid an extra 1 per cent of their revenue to the government instead and let the government do it, they wouldn’t have that moral high ground.”
Critics have been especially animated by the 2016 decision by the charity arm to bankroll a local branch of Beijing’s Palace Museum with a HK$3.5bn grant at the request of club patron and member Carrie Lam, now Hong Kong’s chief executive. The move, say critics, highlights the trust’s role as a piggy bank for pet projects that would struggle to win legislative support.
It also provides an insight into how the Hong Kong elite is managing its relationship with Beijing. Coming after the tumultuous “Umbrella revolution” that saw thousands of protesters take to the streets to oppose moves by China to extend its influence in Hong Kong, the Palace Museum donation was seen by pro-democracy campaigners as an attempt by the Jockey Club to curry favour with the central government.
Supporters of the club prefer to emphasise its local philanthropy. “The strong justification for the monopoly is the charitable status,” says Andrew Li, a former club steward and the first chief justice of Hong Kong, from 1997 to 2010. “If you don’t understand what the club does, just look around you.”
From hospital wings to university buildings and middle schools, the Jockey Club logo — the same one that hangs outside its 102 neighbourhood betting shops — features on wall plaques across Hong Kong. It is a very visible sign of the money that has been raised and spent over the past six decades by a club whose members include the likes of Li Ka-shing, Hong Kong’s richest man.
Yet what the club calls “donations” in press releases is essentially grant funding that may not be paid out for years or, in some cases, ever. The FT analysis shows that the Jockey Club’s charity arm has donated HK$30.5bn since its creation in 1959, rather than the HK$51bn it has publicly claimed, a gap of HK$20.5bn.
Much of that is accounted for by HK$17.4bn in outstanding donations still to be distributed. Winfried Engelbrecht-Bresges, the club’s chief executive, insists donations pledged are as good as money spent, as the club has never defaulted on its commitments. But the club, Hong Kong’s biggest taxpayer, declined to provide a breakdown of where that money was pledged.
Leong Cheung, head of the charities arm and a former operating partner at Bain Capital, acknowledges that for almost every project supported by the club some money is never distributed. In 2016 it recognised HK$340m that would never be paid out, freeing up those funds for donation elsewhere.
Lusina Ho, a law professor at the University of Hong Kong who is an expert on trust and non-profit legislation, says that in the territory “a donation refers to an executed gratuitous transfer and hence strictly speaking does not include pledged donations”. By that measure donations did not double last year, as the club has said. They shrank 13 per cent, marking the first drop since the global financial crisis.
That left charity trust assets, net of payments due within a year, at HK$43.1bn. Asked why it held on to so much money, Mr Engelbrecht-Bresges says the club wants sufficient reserves to honour its commitments and not let donations drop, “even if we would have zero income coming from the club into the trust”.
Caroline Fiennes, director of Giving Evidence, which advises international clients on philanthropic best practices, says the quarter-century increase in trust net assets made no sense in light of its stable revenue from the club’s gambling operations. “That’s not hanging on to some additional assets waiting for a downturn,” Ms Fiennes says. “This is a pattern you might see only if a foundation thinks the economy goes in 30-year cycles.”
Many of those contacted by the FT — from club members to non-profit organisations and charities — were unaware of how much money the trust held, or that the club’s definition of “donations” includes payments not yet made.
Lam Cheuk-ting, a legislative councillor and former investigator with Hong Kong’s Independent Commission Against Corruption, says the club’s positive public image is largely due to its charitable donations which have not, to his knowledge, ever been subjected to serious public scrutiny.
David Eldon, a former vice-chairman of the club and a one-time HSBC chairman, says it is possible the club could do more with its funds but adds he would have to see how many applications it received and rejected each year to be sure. The club, however, does not publish those figures and refused to disclose them to the FT. Compare that to the UK’s Big Lottery Fund, for example, which does provide such data and even discloses how much grant funding applicants requested versus the total approved.
Applying for funds from the trust can either begin with submitting application forms available on the club’s website or, according to Mr Cheung, with a simple phone call from a well-known organisation. But the head of one mid-sized non-profit organisation, who asked not to be named, says large, well-funded groups regularly receive big donations while smaller, equally worthy ones were forced to do without.
Indeed, corporate filings also reveal 22 per cent of donations over the past decade went to companies controlled by the club: HK$240m for its lossmaking public golf course operator and almost HK$2.8bn for Tai Kwun, an arts and shopping complex housed in former police headquarters.
When asked why the club did not spend more on other causes in addition to Tai Kwun, Mr Cheung said it had committed to making the shopping and arts complex a “world class” establishment but did not address the broader question. He also emphasised he did not control the rough target range for annual pledges set by club stewards — a dozen individuals drawn from the tycoon-rich ranks of 200 elite voting members, who ultimately sign off on all donations.
Jockey Club — where the money goes
Donations to Tai Kwun, an arts and shopping complex housed in an old prison, which opened this May.
Grant for a branch of Beijing’s Palace Museum currently being constructed in West Kowloon, and due to open in 2022
Grants to Ocean Park, a Hong Kong theme park
According to data on every pledge made between July 1979 and June 2017, compiled by the FT, the Palace Museum pledge is the biggest single donation ever promised by the club. The combined HK$3.4bn for Tai Kwun is second. Among the other major beneficiaries are the University of Hong Kong, with pledges of HK$2.6bn, along with the club’s golf course operator (HK$989.2m), club-run riding schools (HK$674.2m) and Ocean Park (HK$590.9m), a local theme park.
About one-fifth of pledges over the nearly 40-year period went to government bodies, including about HK$900m for departments and programmes at the Home Affairs Bureau, which regulates Hong Kong’s gambling industry. The club itself pays directly into the HAB’s Ping Wo Fund, which covers operations at the territory’s four main gambling addiction treatment centres.
Mr Engelbrecht-Bresges dismisses the suggestion that discretionary payments to its regulator is a conflict of interest. But Ms Fiennes, the London-based charitable giving expert, says she is not aware of any similar arrangement elsewhere. “It does look very strange for a charity which derives all of its money from a state-sanctioned monopoly to be giving grant funding to the very department which oversees its monopoly,” she says.
A Jockey Club spokesperson declined to explain its arrangement with the Ping Wo Fund, beyond describing contributions as “a requirement of the government”. The HAB says, however, that no such requirement exists and that the club’s contribution is voluntary.
At a support-group meeting for recovered addicts at the Caritas Addicted Gamblers Counselling Centre, Chu Wei Hung, a former policeman in his forties, describes the club’s charitable spending as a distraction.
“The charities fund has covered up the harm caused by gambling,” he says. “Many families in this city have been destroyed by gambling. [The club] is just using the money to do something superficial, to improve their image. But have they reflected on or cared about the needs of those broken families?”
Governance questions have also been raised by the presence of club members on the body advising the government on gambling regulation. In response to an FT request, the HAB confirmed that four of the eight non-official members of the Betting and Lotteries Commission appointed by Ms Lam, the territory’s chief executive, are Jockey Club members, including chairman David Fong.
The club, which calls itself a “pioneer in promoting responsible gambling”, frequently contrasts its non-profit status with for-profit gaming groups in Macau, the only Chinese territory where casinos are legal. But internal club reports reviewed by the FT show it sets growth targets like any other business.
Betting turnover is the key determinant of club earnings before interest, taxes, depreciation and amortisation, which Mr Engelbrecht-Bresges told the FT was the major factor for his yearly performance-based bonus. Club executives earned about HK$934m over the past decade, more than four times the amount the club donated to combat gambling addiction over the same period, according to the HAB.
Even some club members acknowledge the need for governance reforms at the charity arm. “I think they are a wonderful body which has done fantastic work over many years,” says John Budge, a club member who sits on the boards of a number of non-profit organisations in Hong Kong. “But having some non-stewards as trustees who are familiar with the NGO scene in Hong Kong would be helpful.”
Mr Lam, the former investigator, recommends adding independent representatives from grassroots organisations to the trust’s board and has urged the club to fully explain why it donated so little while holding on to so much.
Asked whether it should continue to wield ultimate discretion over how the billions in its charity fund are distributed, he admitted that “before this interview, I hadn’t thought about it”. Before adding: “I think it should be open for discussion”.
Additional reporting by Nicolle Liu in Hong Kong
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End of empire: Colonial throwback and its place in modern Hong Kong
The Hong Kong Jockey Club was not always such a powerful gambling monopoly and philanthropic juggernaut. That first role dates from 1930, when the government introduced restrictions on bookmaking, granting the club an effective monopoly.
The betting duty that makes it Hong Kong’s biggest taxpayer — it contributed 7 per cent of the total in 2017 — dates from 1931 and transformed the club, founded in 1884 by business magnates and equestrian enthusiasts from the young colony’s elite, into a lucrative and centralised source of tax revenue for the sparsely staffed colonial administration.
The charities role only came in 1952 when the governor Alexander Grantham, struggling to deal with an influx of refugees from newly communist China, was pushing through a rise in the colony’s betting duty to boost revenues. The then Jockey Club chairman Arthur Morse proposed supplementing government spending by donating some of its takings to “civic and social undertakings”.
“There is nothing about this in writing. It happened verbally”, writes historian Austin Coates. But as Morse left government house, “a more joyous governor could not be imagined”.
The club established a dedicated charities subsidiary in 1959 and transitioned to the current trust in 1993, but the arrangement remains essentially a handshake agreement with the government that places no requirement on the club to mete out a certain portion of its charity funds.
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