Funding shortfalls faced by national and local governments around the world will lead to increasing calls for higher taxes on gaming and other so-called vice industries. Jurisdictions where casinos are currently banned or restricted will also reconsider long-standing proposals to legalise or expand their gaming industries in a bid to generate much-needed income
The global financial crisis has forced cash-strapped casino developers to scrap, scale back or suspend various high-profile projects around the world.
Until last year, Macau’s nascent Cotai Strip was the darling of gaming analysts touting the idea that supply creates demand in Macau. Now, lifeless shells of sprawling resorts at various stages of completion dot the abandoned construction sites of Cotai, offering a tantalising glimpse of the glittering critical mass that was supposed to arrive this year.
Much of the critical mass on Cotai was being single-handedly built by Las Vegas Sands Corp (LVS), which, in November, placed an indefinite moratorium on billions of investment in developing casino resorts in Macau until its liquidity position improves.
Macau’s casino resort opening pipeline had suffered considerable delays even before the capital markets tuned sour. Melco Crown Entertainment’s US$2.1bn City of Dreams, for example, was originally to have opened in the middle of 2008, but is now set to be the only new addition to Cotai this year. LVS has not offered revised schedules for several properties originally slated to be ready in 2009 or shortly after. Instead, it has suspended them indefinitely. They include Shangri-La/Traders on Cotai parcel 5, Sheraton/St. Regis on parcel 6, Hilton and Conrad hotels on parcel 7, and Fairmont/Raffles on parcel 8. Whereas the announcement of a delayed casino opening schedule merely causes concern for an operator’s cash flow, the issuance of an indefinite suspension raises the spectre of bankruptcy risk.
Other properties removed from the 2009 Cotai opening pipeline include a HK$10bn (US$1.3bn) mega resort from Galaxy Entertainment Group (GEG) and the US$2.5bn Macao Studio City (MSC). Galaxy now says it will open its mega resort in 2010, and though it has yet to set an exact date, work on the external structure will continue this year. In “On Standby“, GEG Vice Chairman Francis Lui and Group CFO Robert Drake explain the benefits the company will realise from the delay, and how its prudent expansion strategy has placed it in a “safe, comfy position.” Work at the MSC site, on the other hand, appears to have ground to a halt, and the prevailing sentiment is that it could be delayed beyond its rescheduled 2011 arrival and faces serious bankruptcy risk.
Bankruptcy risk is not limited to corporations. State governments across the US are facing funding crises, as income and real estate tax receipts fall and outlays for unemployment insurance and health coverage rise. Local authorities around the country are closing libraries and other municipal services. From February, California suspended tax refunds, welfare cheques, student grants and other payments owed to Californians.
The state funding crises have led to several creative revenue-raising proposals. Last month, a member of the California State Assembly proposed a bill to legalise and tax marijuana sales. In Washington State, which faces a US$6 billion funding shortfall, a legislator is calling for an 18.5% tax on the sale of adult entertainment products and services, like phone sex. Various initiatives to tax vice industries are popping up across the country.
Taxing so-called vice industries is an attractive revenue-raising solution for politicians, not only because it can be presented as a means to deter undesirable behaviour, but also because consumption of vice is considered less sensitive to price increases than consumption of other goods and services.
Not so recession-proof
Gambling, like marijuana, porn and other so-called ‘vice industries’, is considered recession-proof to some degree, and the decline last year in casino revenue across the US is viewed as a sign of just how far consumer confidence has sunk there.
In 2008, Nevada’s casino revenue slumped 10% year-on-year to US$11.6 billion. It marked one of only three years that Nevada’s casino revenue has fallen year-on-year since 1955. The other two years were 2001 and 2002, when Americans curtailed their leisure travel following the 9/11 terrorist attacks. The fall in 2008 was also much larger than the falls in 2001 and 2002, of 1.3% and 0.3%, respectively.
Although US casinos are hurting, they remain easy tax targets. Funding shortfalls will pressure the states where casinos are legal to raise their gaming tax rates. Other states will reconsider proposals to lift their bans or restrictions on casino gaming as a means to generate much-needed additional income.
Nevada’s casinos enjoy the lowest gaming tax rate in the country, with a maximum of 6.75% of gross gaming revenue, and additional fees and levies imposed by counties, municipalities and the state adding approximately 1% to the tax burden. The highest gaming tax rate is paid by the nine riverboat casinos operating in the state of Illinois, graduated from 15% to 50% of gross revenue. The state also collects a $2-3 per patron admissions tax.
Casino gaming aboard riverboats was officially legalised in Illinois in January 1990, with gaming operations authorised to begin by April 1991. It was a case of covet thy neighbour. Iowa, which sits just to the left of Illinois along the Mississippi River, legalised casinos a year earlier, in 1989. Passage of the bill through the Illinois legislature was helped by the fact that many Illinois residents were crossing the border to Iowa to use its riverboat casinos.
From Iowa and Illinois, the riverboat casino legalisation wave spread to three other states along the Mississippi River—the country’s longest river—including Missouri, Louisiana and, of course, Mississippi. Only one other state has legalised casino gaming aboard riverboats: Indiana, which sits to the right of Illinois.
Although riverboat casino operators in Illinois are taxed at a higher rate than those in Iowa and Indiana—where the graduated maximums are 22% and 35%, respectively, compared to Illinois’ 50%—they are not calling for a gaming tax cut. Instead, they want the state to lift the smoking ban it imposed on them at the beginning of 2008. They claim the ban led to their revenues falling more steeply than those of riverboat casinos in neighbouring states and deprives Illinois of much-needed tax income. On the Illinois-Iowa border, for example, riverboat casino revenue was down 13.2% last year on the Illinois side but up 3.1% on the Iowa side. Revenue fell 21% in northern Illinois, but only 4.8% in nearby northwest Indiana.
Singapore may have coveted both the spectacular economic boom created by the liberalisation of Macau’s casino industry and the sizeable revenues generated by neighbouring Malaysia’s Casino de Genting, where many Singaporean gamblers flock to get their table games fix because there are no casinos at home. The squeaky-clean city-state reversed its four-decade ban on casino gaming in April 2005, and awarded two licenses to develop casino-centred integrated resorts (IRs)—one to LVS on the downtown Marina Bay site and the other to Genting International on the resort island of Sentosa.
Although LVS has suspended all construction in Macau, it is committed to opening Singapore’s first IR on schedule at the end of 2009. When the Marina Bay Sands opens, it will become the world’s most expensive casino resort, with the original US$3.6 billion budget having ballooned to US$5.4 billion.
Singapore will not only offer a lower gaming tax rate than Malaysia and Macau, but also split the rate for mass market and VIP play. Singapore’s IRs will pay 15% of gross revenue on the main floor as direct tax, but only 5% on “premium” play, covering high-rollers and players brought in by junkets. Neither Malaysia nor Macau offers split rates for standard and “premium” play. Malaysia collects 28% of gross revenue as gaming tax, while Macau collects 35% as direct gaming tax and an additional 3-4% as mandatory social and welfare contributions.
Owing to the Macau government’s heavy reliance on gambling tax receipts—which accounted for 77.5% of its total revenue in 2008—there is no discussion of reducing the city’s heavy gaming tax burden, even though Singapore will soon offer much more attractive rates. There is also a growing perception within Macau that foreign casino operators have been expatriating huge profits from the city and not giving back enough to the local community. In light of their suspension of billions in investment in the city, it will be difficult for the casinos to ask the government for further breaks.
No lobbying for lower taxes
Macau’s casino industry is perhaps more recession-proof than most, and managed to continue growing in the first half of 2008, when other major casino markets were already tumbling. Revenue growth was eventually halted in September, but only after the central government in Beijing imposed stricter visa restrictions on mainland Chinese wishing to visit Macau. The new restrictions significantly reduced the frequency with which individual travellers from mainland China could visit Macau, and the duration of their stays.
Just as Illinois’ riverboat casinos have focused their lobbying efforts on lifting last year’s smoking ban, Macau’s casinos are pinning their short-term hopes on an easing of the recent visa restrictions by mainland China, rather than a lowering of the high but consistent gaming tax rate imposed by the local government.
Macau has been deluged by mainland Chinese visitors since the central government began progressively easing travel restrictions from the second half of 2003. The mainland floodgates were suddenly shut in the third quarter of last year, causing growth in visitor arrivals to slow drastically, particularly as the impact of the global recession became more pronounced in China. Beijing’s munificence in re-opening the floodgates will play a bigger part in restoring Macau’s spectacular gaming- and tourism-led economic growth than any stimulus measure the local government can enact. As discussed in “Macau Visa Restrictions Now Lifted?“, it appears the floodgates have already been partially re-opened.
Macau’s casino boom between 2003 and last year was driven by the same factors underlying Nevada’s near-uninterrupted casino revenue growth since 1955—demand from a growing and increasingly-affluent feeder market met by steady expansion of capacity at ever-grander and more expensive crowd-pulling gaming venues. Las Vegas receives visitors from all over the world, but particularly from the US and neighbouring California. Macau’s primary feeder market is neighbouring Guangdong—a wealthy province on China’s southern coast with a resident population of 94.5 million in 2007, along with a floating migrant population of around 16 million.
Glitzy new IRs in Singapore paying much lower gaming tax rates and hungry to make a return on their blown-out investment costs will intensify competition at a time when Macau’s casinos are already reeling from a fall in revenue and squeezed margins in the VIP baccarat market, which accounted for 68% of the city’s casino revenue in 2008. Macau will remain the preferred destination for mainland gamblers, however, owing to proximity and cultural affinity.
Singapore has a majority Chinese population and will offer a much lower tax rate on high-roller and junket play than Macau, but its indoor smoking ban and stringent financial transaction reporting requirements will keep many mainland VIP gamblers away. Both VIP and mass market players from Guangdong will also be put off by the cost and inconvenience associated with taking a three-and-a-quarter hour flight to Singapore, when Macau is a short trip by car or bus. Singapore’s IRs will cater more to players from Southeast Asia—particularly high net worth ethnic Chinese from Indonesia, Thailand, Vietnam and even Malaysia. Well-heeled Malaysians will probably welcome an alternative to the ageing Genting Highlands Resort.
Exorbitant entry fee
Although Singapore will boast a relatively low gaming tax rate, its citizens and permanent residents will be charged a fee—S$100 (US$65) per day or S$2,000 per year—to enter the IRs, while admission for tourists will be free. A senior government official described the entry fee as “exorbitant” when discussing how it would prevent an increase in the incidence of problem gambling among locals. The fee is one of several measures intended to minimise the potential negative social impacts of the IRs.
At mid-2008, Singapore’s population reached 4.84 million, while Macau’s stood at 551,900. Macau’s population could certainly not generate sufficient demand for the city’s gaming capacity, which included 4,017 gaming tables and 11,856 slot machines at the end of 2008. According to Macau government data, non-residents contributed around 98% of all gaming revenue in the city, though considering local casinos are not required to identify patrons, this could be a rough estimate.
Marina Bay Sands is permitted to have up to 1,000 gaming tables and 1,400 slot machines. To get an idea of how much gaming capacity Singapore’s population could support, consider Melbourne with a population of 3.8 million served by Crown Casino, with 350 tables and 2,500 slots. Crown Casino notably became the most expensive casino property in the world when it opened in 1997 at a cost of over US$1.7 billion. LVS is spending over three times as much (not adjusting for inflation) to earn Marina Bay Sands the title of priciest casino resort at opening.
Crown is Melbourne’s only casino, and apart from its monopoly on table games also contains half the city’s total slot machine capacity. Locals have unfettered access to Crown Melbourne, and they drive a large part of its business, along with contributions from visiting Chinese VIP players. Demonstrating the robustness of locals-only gaming demand during economic downturns, Crown’s non-VIP revenue rose 6% year-on-year in the first seven weeks of 2009.
If Melbourne’s local population is able to just about sustain Crown’s gaming business, Singapore’s could possibly sustain the casino at Marina Bay Sands, but only in the absence of entry fees and other deterrents. Genting plans to open the sprawling Resorts World Sentosa in the first quarter of 2010, and local demand will probably not be able sustain both IRs. The IR operators hope demand from non-locals will more than make up for any shortfall, even though straight-laced Singapore’s ability to attract junkets is untested.
Even without having to worry about an “exorbitant” entry fee holding back local demand, the exorbitant cost of Singapore’s IRs makes generating a healthy return on investment a daunting task. In Macau, LVS managed to build the world’s largest casino resort, Venetian Macao, at a cost of US$2.4 billion—less than half the latest budget for Marina Bay Sands. Still, Venetian Macao struggled to turn a profit even before the economy headed south. Big budget mega resorts are risky ventures, especially now that their developers—including LVS, the most bullish of the bunch in Asia—are facing bankruptcy risk.
The IRs will need to tap every revenue source available to them, and allowing locals unrestricted access to their slots could make a material contribution to their financial survival. Singapore’s current slot market consists of over 2,000 machines at low-key slot clubs. A market player told Inside Asian Gaming that even though the clubs are relegated to non-prime locations, Singapore’s average slot win per machine per day is [probably] higher than that of any other market in the world, suggesting pent-up demand and insufficient capacity.
The casino entry fee not only jeopardises the viability of the IRs by limiting local visitation, but also prevents the release of pent-up demand for slots. Imposing the fee will also prove an administrative nightmare because of the need to identify citizens and permanent residents—the latter generally carry foreign passports, so a separate check needs to be made to verify whether they also have a Singapore resident permit within.
Opposite ends of the spectrum
Whereas the Singapore government has a reputation for sometimes going too far with its attempts at social engineering, the Macau government is renowned for its general neglect, beyond populist quick-fixes such as last year’s 5,000 pataca cash-giveaway to all residents and reserving high-paid dealer jobs for locals. Such measures generally come at the expense of the diversification and long-term development of Macau’s economy.
Singapore’s S$100 entry fee will obviously dissuade low-income players from playing too often, and could thereby make them less prone to develop an addiction. However, it is a regressive tax that could be seen as disproportionately punishing the poor, especially if they are capable of gambling responsibly. If anything, the entry fee will reduce the proportion of low-income players who gamble within their means at the IRs, while raising the proportion of low-income compulsive gamblers, for whom attempting to win back the entry fee is part and parcel of gambling beyond their means.
There has been a perceived increase in the prevalence of problem gambling among Macau locals following the liberalisation of the casino industry, though the last comprehensive survey on the subject was conducted in 2003, before the arrival of any of the glitzy new foreign-operated casinos. Ironically, that increase is seen as resulting from the improved perception of Macau’s gaming industry following the arrival of the first new foreign-operated casinos from 2004, ending Stanley Ho’s 42-year effective monopoly. There used to be a serious stigma associated with Macau’s casino industry, which was rocked by bloody triad turf wars prior to the handover of the city’s sovereignty from Portugal to Macau in December 1999. The industry is now seen to be run by legitimate publicly-listed casino and junket operators, rather than the underworld. The new casinos are also much more comfortable and attractive than the monopoly-era properties, where main floors were allowed to decay because the real money was made in private VIP rooms.
Macau’s limited anti-problem gambling programme only covers locals, even though the majority of gamblers at Macau’s casinos hail from mainland China. The rise of problem gambling across the border also factored into Beijing’s decision to restrict visitation by mainland Chinese to Macau.
Tax hike not on the cards
Although Macau’s casinos operators are not holding their breath for a lowering of their heavy gaming tax burden, they can at least rest assured that the rate is not likely to rise further. Macau, like Illinois, already has the highest gaming tax rate in its neighbourhood. It also does not need the money.
The Macau government has no debt, and accumulated budget surpluses on the back of soaring gaming tax revenue have swelled its fiscal reserves to over US$10 billion at the end of 2008. The fiscal reserves are separate from foreign exchange reserves, which grew 19.6% over the year-ago period to US$15.93 billion at end-2008, in line with growth in gaming spending by visitors in Macau. Expenditure on gaming by non-residents constitutes around three quarters of Macau’s service exports—by far the biggest component of Macau’s GDP.
Macau’s steadily widening budget surpluses have also been boosted by the government’s failure to meet its public works spending targets, largely because of delays in approving infrastructure projects following the 2007 arrest of the former secretary for transport and public works, Ao Man-long, on corruption charges. The subsequent sentencing of Mr Ao to 27 years’ imprisonment in February last year has not restored confidence in the government, and many believe he has been made a scapegoat for corruption that extends much deeper into the administration.
Delays in approving infrastructure projects became more pronounced in 2008, with the government’s public investment expenditure coming in well below target at 3.1 billion patacas (US$387.5 million). Spending on roads and bridges shrank to 61.2 million patacas last year, from 358.7 million patacas in 2007 and 747 million patacas in 2006.
Filling the gap
Macau’s economic growth spurts since 2004 have coincided with the unveiling of new casino resorts, and there will now be a longer wait for many of the planned new attractions. Still, it could be a welcome gap, providing the government much-needed breathing space to improve the city’s infrastructure, which has been straining under an increase in visitor arrivals from 11.5 million in 2002 to 30.2 million in 2008.
Even during periods when growth of visitor arrivals and casino revenue slowed—as occurred in 2005, when no major new resorts were unveiled—Macau’s economic growth between 2003 and last year was sustained by soaring investment spending as operators ploughed billions into developing new casino resorts in the city. Since the fourth quarter of 2008, however, Macau has been hit by a double whammy of halted investment and declining casino revenues.
Although the government’s approach to the local economy has thus far been decidedly laissez-faire—perhaps excessively so—it is now in the rare position of having more than sufficient reserves to fund a slew of long-delayed infrastructure projects. While other governments struggle to pay for essential services, Macau’s government can pick up the slack in the local economy by finally honouring its commitment to provide for the sustainable development of the local tourism and gaming sectors.
In his 2009 budget address, delivered in November, Chief Executive Edmund Ho earmarked 10.5 billion patacas for public investment expenditure. He also announced several measures to support Macau’s small and medium-sized enterprises, which were already struggling to compete for resources with the city’s powerful gaming and tourism interests before the financial crisis took hold.
Macau is heavily reliant on its gambling and tourism sectors, leaving it vulnerable to external shocks. Although much lip-service is paid to the city’s need to diversify its economy, and several high-ranking officials from Beijing have repeatedly stressed the issue in public, the Macau government has no concrete strategy to work towards this.
In the absence of a plan B, all Macau can do is hope for Beijing’s continued munificence in keeping the floodgates open and resisting calls to legalise casinos on the mainland.