Behind the mask of government-operator relations in Macau
Galaxy Entertainment Group and Las Vegas Sands Corp were expected between them to add at least 1,000 tables to the Macau gaming market within the next two years via new projects on Cotai.
But in late March, local media sources reported Francis Tam, Macau’s Secretary for Economy and Finance, as saying a maximum of 500 new tables would be allowed in the Macau market between now and 2013. That appeared to be in contradiction to a previous statement from Fernando Chui, Macau’s recently installed Chief Executive, made in his maiden policy address earlier that month. At that time, Mr Chui said the government would honour the table and slot quotas assigned to under-construction or previously approved casino projects.
At the time Inside Asian Gaming went to press, no official comment either clarifying or adding detail to Mr Tam’s statement was available from the government. It’s possible the 500-table figure quoted was either a misunderstanding or a miscalculation by the media of quota previously discussed with the industry. The absence of any clarifying statement from the government, however, tends to support the impression the Macau government is somehow sending a message to the market. Exactly what that message is, is not entirely clear.
If Mr Tam’s announcement does amount to a substantive change of policy, then it’s likely to hurt Las Vegas Sands the most. Galaxy Macau, GEG’s Cotai project, is due to open in the first half of 2011. If Galaxy were granted the majority of the tables it seeks to have in the property on a ‘first come first served’ basis, it would gobble up the table quota for the entire Macau market before LVS’s Cotai plots five and six have a chance to open—possibly in the second half of 2011.
Reasoning
Galaxy has declined to comment and LVS has confined itself to a general statement from Steve Jacobs, President of Sands China. “We believe in the future of Macau and Sands China remains committed to working in partnership to help diversify the economy,” was about as far as Mr Jacobs was prepared to go.
If Mr Tam’s statement were designed to address the issue of Macau’s overheating gaming market, it would certainly have some logic. In January and February, Macau’s gross gaming revenue (GGR) increased by an average of 66% year-on-year. GGR in the first three weeks of March alone was around 13 billion patacas (US$1.63 billion), according to unofficial sources.
That consistent, red hot performance led to speculation among analysts that the central government in Beijing would seek some kind of cooling measures in the form of visa restrictions and/or curbs on China’s domestic credit markets.
As it stands, however, Mr Tam’s announcement appears potentially to be penalising new projects rather than spreading a little pain equally across the market by requesting closure of tables in existing venues. The lop-sided nature of Mr Tam’s policy announcement—if that’s what it was, and not a misunderstanding or a miscalculation of the numbers—raises the question ‘Why?’
Background noise
In the absence of clear guidance from the Macau government on the table allocation issue as it applies to Cotai five and six, the temptation to speculate is strong. It rarely pays to give in to such speculation—especially in Macau. The wider point is that when such episodes of uncertainty occur, they tend to leave in the mind of external analysts and commentators the impression Macau is a difficult market to call in political and regulatory terms. It also leads to the impression that the process by which policy is formulated is also not easily understood and therefore not easily subjected to rational analysis. That inevitably leads to a certain nervousness or at least caution on the part of investors.
What we can say is that if the Macau government were minded to act in a ‘punitive’ way against LVS, it would not necessarily be a random act without any understandable context, even if the precise circumstances may not be public knowledge at this stage.
As always in Macau, context counts. It’s also worth noting that the question mark over table allocation for LVS on plots five and six comes at precisely the moment LVS was due to complete a new deal with lenders for US$1.75 billion credit. That deal has been reported in the financial press as an important element in ensuring the resumption of work on plots five and six.
An earlier incident involving LVS’s Macau market rival Steve Wynn may be instructive in providing some context to the present Macau conundrum. The length of time it took the Macau government to process paperwork for Mr Wynn’s first Macau project—Wynn Macau—is well documented. The delays happened to coincide with Mr Wynn’s decision to go public on his desire for legislation to allow direct credit issuance and actionable debt recovery from high roller players in the Macau casino market and the Macau courts. It’s possible, of course, that the two things—government bureaucratic delays and his public statement on credit issuance—were coincidental. Many think they were not. It’s certainly the case that since then, Mr Wynn has refrained from talking about Macau gaming policy in public. That strategy appears to have paid dividends, with no reported regulatory or government problems for Encore Macau, the new VIP-focused property next door to Wynn Macau due to open to guests on 22nd April.
By contrast, LVS, Wynn’s market rival in Macau, had something of a track record for public announcements unlikely to endear the company to the Macau government—something that continued until the departure of William Weidner in March 2009.
Public lobbying
In November 2008, Mr Weidner, then President and Chief Operating Officer of LVS, hinted to journalists at that year’s Global Gaming Expo (G2E) in Las Vegas, that the suspension of building work on Cotai plots five and six and the laying off of 11,000 workers, was linked to Macau politics and visa restrictions imposed by China on its citizens travelling to Macau, as well as to the global credit crisis that hit then highly leveraged LVS so hard.
“Macau, because of what has happened, has kind of created for itself unfinished or semi-finished projects. I don’t think we’re alone in not completing developments,” Mr Weidner told the journalists.
Although the Macau government gave no official reaction to Mr Weidner’s statement at the time, it’s difficult to imagine it went down especially well. The government did, however, make it clear where it thought the responsibility for suspension of Cotai five and six lay.
“Because of its over-leveraged borrowing in the US and around the world, it’s normal and expected that it [LVS] has to suspend some of its projects,” said Macau’s then Chief Executive Edmund Ho in his next annual policy address following the 2008 financial crisis.
Repeat ‘offender’
Mr Weidner wasn’t finished with his high visibility approach. In January 2009—possibly lulled into a false sense of security because he was addressing a group of investors in the US rather than the Macau government directly—Mr Weidner made a point of stressing that despite suspending its work on Cotai five and six, the company would be pressing ahead with construction of Marina Bay Sands, Singapore. Mr Weidner cited the favourable tax regime in Singapore and the likely strong yield on capital invested as the basis for the decision. This was despite the fact LVS had received its Macau concession several years before its Singapore one.
“There have been some changes in the central government’s attitude towards Macau,” Mr Weidner told the US investors’ forum.
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“We don’t think it’s necessarily all that prudent to put more money in until we see how that attitude works its way out.”
The reaction was outrage in Macau and the emergence of a group calling itself ‘The Concerned Residents Group’. They held a meeting at the Grand Emperor Hotel in Macau a week later asking local people to protest at LVS for, in the words of a group spokesman: “having suspended parcels [plots] five and six on the Cotai Strip and given [sic] priority to its new casino project in Singapore over Macau”.
Mr Weidner subsequently issued a statement denying that LVS was taking money out of Macau, though the issue of whether LVS was using its Macau revenue stream as leverage with investors or potential investors in its Singapore project was not directly addressed.
Shaky moment
Earlier, in 2008, Sheldon Adelson, the Chairman and founder of LVS, may have inadvertently set LVS-Macau relations on a rocky path. It related to court testimony prepared for defence of a civil action against LVS by Hong Kong businessman Richard Suen. Mr Adelson claimed in the testimony that he lobbied senior US politicians asking them to support China’s bid for the 2008 Summer Olympics (eventually held in Beijing). He said this had been a key element in getting LVS a Macau licence, not the political contacts of Mr Suen, as the latter had claimed. Regardless of the merits of Mr Adelson’s statement, its repetition in court papers is likely at best to have embarrassed the Chinese government, and at worst is likely to have angered it.
The Macau government has a relatively light touch on the regulatory ’tiller’ of its gaming market compared to the ‘command and control’ approach adopted by Singapore. In Macau, therefore, it’s arguably crucial to develop and maintain good personal relationships between gaming company officials and government officials to get things done.
That goodwill is particularly important for effective and timely execution on new resort projects. The Macau government understands this, and naturally sees the granting of its goodwill in co-operating on such new projects as its key point of leverage with the concession holders.
Intangibles
‘Goodwill’ from government is arguably harder to define, measure and predict than the ‘fit and proper person’ test applied to licence holders by regulators in the ‘all comers’ system used in the Nevada gaming market. The people sitting on a US regulatory body don’t personally have to ‘like’ an applicant in order to find them a ‘fit and proper person’ to hold a gaming licence, though it may not do any harm to the applicant’s cause if they do. Regulators are only human after all.
Nonetheless, governments, regulators and operators in Western markets know that forthright lobbying and debate via the media is an acceptable part of the rough and tumble of business. Governments and regulators in the West do not normally bear grudges against companies for engaging in this kind of public debate. Indeed, grudge holding by the authorities towards an operator (if proven) would probably be actionable in the civil courts as an unjustifiable restraint of a company’s right to do business. Such rules do not generally apply in Chinese business culture.
The ‘goodwill’ dynamic is a common element encountered by foreigners doing business in China. A foreign investor may not necessarily know whether or not he’s keeping the goodwill of the powers that be. He will certainly be sure to know when he’s lost it, even if the loss is only temporary. Steve Wynn already knows how that feels. The other gaming operators in the Macau market are unlikely to want to repeat his experience.
