PAGCOR’s instinct is to blunt the competitive edge of private casinos in the Philippines—it should resist the temptation
An attempt by PAGCOR— the Philippines’ casino operator-cumregulator—to unilaterally tear up a revenue share agreement with a major private casino hotel resort operator and replace it with terms more favourable to PAGCOR, has been met with firm resistance and court action.
The battle threatens to poison the already delicate relationship between the foreign investment community and PAGCOR. In the past, small investors in gaming—short of options in a supply-limited Asian casino market largely sown up by the ‘big boys’—have been willing to risk the Philippines’ somewhat idiosyncratic approach to contractual relationships. Larger investors have repeatedly looked at the Philippines and mostly walked away because they were concerned about a lack of transparency. And in the next five to ten years, those larger investors are likely to have other opportunities—including Taiwan, South Korea, possibly Japan and even potentially a chance to build a third resort in Singapore.
Several sources with good knowledge of the Philippines market separately told Inside Asian Gaming that PAGCOR’s aim in the current dispute was to scrap an agreement negotiated between PAGCOR during the chairmanship of Dr Efraim Genuino and the Frankfurt-listed international casino operator Thunderbird Resorts and its local Philippines units. Under the original (and still current) agreement, there is a 75:25 revenue split in Thunderbird’s favour at the company’s Poro Point casino resort in San Fernando City, La Union, in the northwest of the country’s main island Luzon and at its Rizal resort just east of Manila. In both cases PAGCOR had sought to impose a revised 60:40 revenue share. Other updated terms sought by PAGCOR were changed weightings for the amount of casino space
to hotel space. The new requirements are two slot machines for every three rooms and one live gaming table per four hotel rooms. Also included in the new ‘Authority to Operate’ conditions demanded by PAGCOR were that Poro Point and Rizal must each invest a minimum PHP2.6 billion (US$60.4 million) in facilities over three years.
IAG’s sources add that in early June, PAGCOR officials turned up in the middle of the night at Poro Point. The PAGCOR staff claimed unspecified breaches of the resort’s operating terms. This was followed up with a demand for the company to supply “written unconditional acceptance” of new Authority to Operate terms. Failure to accept such an agreement would result in “cessation proceedings”, said PAGCOR.
The sources say that PAGCOR’s pretext in the case of Thunderbird Resorts was that the revenue deal had been made with Dr Genuino’s management team. The advent of a new PAGCOR management team following the election of a new national government in May 2010 required a new deal.
Thunderbird not unreasonably pointed out its existing agreement was in the name of the Republic of the Philippines, not Efraim Genuino, and that it would see PAGCOR in court. Thunderbird kept its promise and in early June got a court to grant a temporary restraining order preventing PAGCOR from issuing a cessation notice.
IAG understands from sources that PAGCOR’s motivation for acting against Thunderbird was twofold. First, it wants to achieve a claw back of gaming revenue from the private sector casinos in general, because they have reportedly been cannibalising the performance of PAGCOR’s own casinos by offering better facilities and products. Second, PAGCOR also wants to set a precedent so that it could tear up its existing revenue share agreement with Resorts World Manila (RWM), the integrated gaming resort operated and part owned by Malaysia’s Genting Group. RWM is the biggest private casino operation in the country and operates under a 75:25 revenue split in favour of RWM.
Resorts World Manila is owned by Travellers International Hotel Group, Inc, a joint venture split 50:50 between Genting’s cruise ship unit Genting Hong Kong and the Philippines developer Alliance Global Group. If PAGCOR were able to get a bigger share of the revenues generated by RWM, it would make a significant improvement to PAGCOR’s own finances. Industry sources suggest to IAG that Resorts World Manila may currently have around a 66% share of the Metro Manila casino gaming market by gross revenue.
In Genting Hong Kong’s 2010 annual report, the company said in RWM’s first full calendar year of operation following its soft opening in August 2009, it achieved US$355.8 million in total revenue and US$102 million EBITDA (earnings before interest, taxation, depreciation and amortisation). PAGCOR’s total remittances to the country’s Bureau of the Treasury in 2010 were PHP10.343 billion (US$238.8 million).
PAGCOR faces domestic voice calling for the private casino ‘lemon’ to be squeezed
PAGCOR—also known as the Philippine Amusement and Gaming Corporation—has a track record of reneging on or unilaterally renegotiating deals with private casino investors, say industry sources. It is under some domestic financial and political pressure to do so, given that it is one of the national government’s biggest sources of revenue. Thus, the rule of law and the ability of foreign casino investors to execute on their agreements with PAGCOR often seem to come a poor second to political expediency. PAGCOR’s remittances to the national treasury fell by 6% in 2010 as compared to 2009. In other words, in a region where most casino jurisdictions are quarterly setting new gross revenue records, PAGCOR appears to be going backwards. There are, however, question marks about the transparency of PAGCOR’s accounting and that of the government agencies receiving money from it. In any case, placing obstacles in the path of the private gaming sector appears to be more acceptable in domestic political terms than asking PAGCOR to compete in the market by raising its own game.
Investment versus ‘donation’
As one industry executive told IAG: “It’s got to the stage now that people in the industry talk not of investing in the Philippines but of ‘donating’. It’s become in many cases impossible for prospective or existing private investors to get any clarity on the rate of return on their investment. That’s because they find the goalposts being constantly moved in terms of extra fees, costs and middlemen. I understand that what PAGCOR attempted to do with Poro Point in tearing up their revenue share agreement has also happened to some of the VIP slot clubs. Many people don’t like to speak out because they fear even harsher treatment by PAGCOR.”
The Thunderbird court case is still pending. On 23rd June, the Philippine Regional Trial Court issued a preliminary injunction directing PAGCOR to “cease and desist from initiating and completing cessation or other similar proceedings” against the business operations of Thunderbird’s local units, Eastbay Resorts, Inc (ERI) and Thunderbird Pilipinas Hotels and Resorts, Inc (TPHR).
A press statement from Thunderbird following that court hearing indicated that it felt it had kept its side of the bargain with the Philippines government, PAGCOR and the people of the country when it invested there.
“The Group reiterates that we take seriously our responsibilities to our employees, to the communities where we operate, and to the provincial economies of those communities. Currently, we employ over 1,300 people, providing good wages and benefits. We continuously support the Provinces of Rizal and La Union through various community activities. Our facilities also support over 1,700 local vendors, spending with them over PHP 5.2 billion in the past 6 years. We have spent over PHP 27 million on various social responsibility initiatives.
“These include monthly medical missions where we distribute medical care to the local areas in Rizal and Poro Point to over 10,000 constituents, an adopted school program affecting over 3,500 students in 2010, typhoon relief programs and donations to various other charities. In order to protect our employees and our businesses, ERI and TPHR had no choice but to seek the protection of the courts.”
It seems fear of PAGCOR reprisal against those who speak out or resist its pressure is not merely paranoia on the part of the industry. On 29th June, PAGCOR paid for an advert in the Philippines media effectively telling gamblers not to use Thunderbird Resorts’ casinos because of the ongoing court case. PAGCOR said in the event that it wins the litigation battle with Thunderbird, then “players, officers and employees of the said casinos may be held criminally, civilly and administratively liable”.
The advert added: “….the public is hereby informed that PAGCOR can no longer guarantee the integrity and fairness of the games and other gaming activities conducted in the said casinos.”
This is an extraordinary development even by Philippines standards. Imagine the Nevada Gaming Commission taking out a full page advert advising players not to use a Las Vegas casino—before a piece of litigation between the Commission and an operator had even been decided in a state court or US Federal court.
Unsurprisingly, Thunderbird Resorts responded robustly to this attack on it and the apparent attempt to undermine the judicial process.
On 1st July, the company issued a press statement saying: “On 29 June 2011, PAGCOR published a ‘paid advertisement’ in the local Philippine newspapers that The Group believes violates the spirit and intent of the Regional trial judge’s writ of prohibitory injunction by making statements that appear to disparage the integrity of our operations. In order to protect our employees and our businesses, ERI and TPHR have filed a motion to compel PAGCOR to comply with the Injunction Order to prevent this sort of propaganda in the future.”
PAGCOR has also been making life difficult for Resorts World Manila. Six months ago, PAGCOR slapped an embargo on the importation of spare parts for slot machines at Resorts World Manila. Industry sources add, though, that RWM has also created some problems for itself. It failed initially, they say, to provide sufficient generator back up on site to protect against Manila’s frequent interruptions to the mains electricity supply. This resulted in several power ‘brown outs’ at RWM that saw some customers migrating back to PAGCOR casinos. Road access to the casino and parking facilities are also not as efficient as they could be, resulting in long queues of traffic to the property at the weekends, add insiders. This tends to put off local high rollers, some of whom have gone back to PAGCOR’s Metro Manila properties. That might account for why PAGCOR showed a marked improvement in trading in the first four months of this year, posting P11.13 billion in revenues—up by more than P1 billion from the P10.07 billion it earned in the same period last year.
The industry must hope that the rule of law will win out over PAGCOR’s unilateral ‘renegotiation’ of deals with the private sector. But industry sources canvassed by IAG suggest the real remedy for this kind of unilateral PAGCOR action lies not with the courts, but ultimately with the politicians. According to the industry sources, the country’s leaders need to end PAGCOR’s joint regulator-operator role. They say it hopelessly compromises the regulatory function, creating a conflict of interest when it comes to overseeing the private casinos. Nor ultimately does it help the casino operations wing of PAGCOR to protect it from market competition. It merely reinforces inefficiency and gives succour to those who may seek to misuse the system for their own private enrichment. A more efficient, competitive, public casino sector standing alone from the regulator and working in tandem with the private sector will ultimately deliver more revenue for the public purse than the current arrangement, they argue.
In the end, even Philippines politicians may not have the final say. Markets have a tendency over the medium- to long-term of rewarding those investment destinations that offer the greatest transparency, by creating a net inflow of investment, and penalising the most opaque or difficult markets by creating a net outflow of capital. It’s difficult to see how under the current dispensation the Philippines will be able to attract significant amounts of foreign investment capital for the remainder of the Manila Bay project—especially as with time larger investors are likely to have other regional opportunities available to them, such as Taiwan, South Korea and possibly Japan. Good news travels fast in the investment community. Bad news travels even faster.