MdME’s Rui Pinto Proença looks at the recent flurry of satellite casinos entering the Macau market and their apparent flouting of the “2008 Moratorium.”
By Rui Pinto Proenç
As we enter the final stretch of 2017, it is clear that Macau will end the year with no additions to its portfolio of integrated resorts. MGM, owner of the next big project in the pipeline, has already announced that it will not be able to open its first Cotai Strip property until next year and SJM is racing to finish Grand Lisboa Palace by the end of 2018. While the big boys are struggling to deliver their promise of the Macau dream – one that offers a world of non-gaming attractions appealing to patrons from all over the globe – the lower echelons of the market have seen a level of movement unprecedented in the last decade.
As early as February, Macau Legend opened Legend Palace, its latest casino-hotel located within the Macau Fisherman’s Wharf complex. Fast forward to June and we witnessed the opening of a new casino at Taipa’s newly built Roosevelt Hotel, described as a relocation of the former Macau Jockey Club Casino. Three months later, a company associated with a veteran businessman and former legislator, Chan Meng Kam, cut the ribbon of Royal Dragon Casino – a new property on the Macau Peninsula. The same businessman surprised the market again in October when it was announced that he had signed a sale and purchase agreement to acquire Hotel Lan Kwai Fong, another downtown hotel and casino.
What do all these properties have in common? For starters, none of them have a stand-alone casino license. They are what we in Macau call a “satellite casino” or “service provider.” Secondly, all operate under the umbrella of the SJM license. To be precise, they operate under the concession contract between the Macau Government and SJM, the offshoot of Dr Stanley Ho’s former monopoly operator STDM and one of the three original awardees of the 2001 gaming concession tender.
As many readers of Rules of the Game would know, Macau allows the operation of casino games of chance under an administrative concession contract framework. A concession contract is a civil law concept used in the Portuguese legal tradition as the preferred way for the government to outsource public services to private entities (the provision of water and electricity, waste management, public transportation and so on). It is also used to allow the commercial operation of activities that, although not being of direct public interest, are as profitable as they are socially costly.
This is the case in gaming, which is an activity that may generate considerable (tax) revenues but has a strong potential to induce addictive behaviors in its consumers and is particularly vulnerable to fraud and certain types of criminal activities.
For such reasons, the operation of games of chance for profit is an activity reserved by law to the Macau Government and so may only be pursued by private entities that have been awarded a concession contract. Gaming concession contracts have three important characteristics. Firstly, they are awarded by public tender, a transparent and competitive process that allows the government to select the best, most suitable and financially sound operators. Secondly, they create a direct relationship between operator and government that incorporates mutual checks and balances and contractual mechanisms to promote and, when necessary, impose the compliance of operators with their obligations. Thirdly, but no less important, they are limited in time. At the end of their term the government may reassess its policies for the sector and make a judgment on the capacity of existing operators to pursue them.
The last time the Macau SAR Government conducted such an exercise was in 2001, when it decided to move away from a monopolistic concession and launched an international public tender. From such a tender, three concession contracts and three subconcession contracts were awarded, allowing for a total maximum of six casino operators in Macau.
Why, then, do we see a myriad of lesser known operators running numerous casinos throughout town? And why are fresh satellite properties opening, relocating and changing hands under the umbrella of concession contracts that may expire within two to four years? The answer to the first question has historical roots that have transpired into the 2001 gaming law. What may be the answer to the second question could affect the government’s ability to define policy following the term of the existing concessions. It may ultimately influence what the post-2022 gaming framework will look like.
A concessionaire’s right (and obligation) to operate casinos is, by law, unassignable to third parties … except with previous government authorization. This five word exception found its way into the 2001 gaming law and effectively created a backdoor entrance to the party. The move was deliberate and represented a real-life approach to the Macau gaming market of that time. This was simply the way things were run under Dr Ho’s monopoly. The pie was shared with a tangle of smaller players. These represented different interests of the local business community and operated with a substantial degree of autonomy vis-à-vis the concession holder.
If Macau had moved forward with modernizing the gaming sector while ignoring this reality it would have risked serious social unrest, which could ultimately have jeopardized its credibility as an international gaming jurisdiction. Let us not forget that the pre-handover 1990s saw shootouts on the streets and bombing of gaming inspectors’ cars!
As with all meritorious exceptions, this one ended up being overused. What was meant as a mechanism to accommodate a certain status quo was quickly turned into a channel for new players to enter the market without passing “Go.” As a result, there are currently 16 active satellite casinos – almost as many as the number of casinos directly operated by all six concessionaires.
Having realized the direction the industry was heading due to this trend, the government issued the famous “2008 Moratorium” – a policy decision (never translated into law) that told the market there would be no further approvals of such arrangements and that the ones currently in place would remain as they were.
Until this year, the 2008 moratorium was perceived as an unavoidable reality. But that perception has been challenged by recent events and the reasons for such change are unclear. Is the government being pressured by local players hoping to ride the incoming concession renewal wave? Or is the apparent lifting of the moratorium grounded in an underlying change of policy?
The first possibility would represent an unwarranted assault on the government’s ability to uphold its own policies. It could damage its credibility and hijack the discussions on concession renewals before they even start. I do not believe this is the case.
On the other hand, the idea that we are facing a soft lifting of the moratorium would bring the glimpse of opportunity to many. Because it allows the restructuring and consolidation of the satellite tangle of interests, it would also add fuel to the theory that there could be a future seventh concessionaire – one that could aggregate the interests of the owners of these properties into a standalone operator. But how would such a strategy contribute to the goal of creating an international tourism destination? How would it help achieve the Macau dream?
Let’s face facts. With a couple of honorable exceptions – such as Ponte 16 and the Fisherman’s Wharf complex – these properties offer pretty much nothing in the form of non-gaming attractions. They require incomparably less investment than a Cotai IR and add little value to the city’s tourism supply. While concession holders are expected to invest billions of dollars to build and maintain flagship properties, most satellite casinos get by without putting in much effort at all. This ultimately affects the market’s bottom line and the return on investment of quality integrated resorts.
Furthermore, because smaller operations are more reliant on a fewer number of players, they are naturally more prone to looking the other way. This may instigate a greater propensity for money laundering, corruption or problem gambling – all top-of-the-list issues that the government and concessionaries have listed as of great importance. Unfortunately, it does not take a lot to erode a hard-earned reputation.
This brings us to one key question: are small, low-cost casinos what Macau really needs? We all understand that Macau is limited in the ways it can positively influence tourist demand across the border. However, it may – and should – positively influence its offer at home too. In my opinion, that means one thing only: less quantity and more quality. But I’m sure someone out there disagrees.