Global Market Advisors’ Brendan D. Bussmann runs through the next steps for Japan’s burgeoning IR industry following passage of the IR Implementation Bill in July.
Japan reached a major milestone in July when the Diet, Japan’s legislative body, passed both the IR Implementation Bill and the Basic Bill on Gambling Addictions Countermeasures. Both laws will serve as the framework for the regulation and governing body of IRs in Japan.
Japan has tried to move forward with the legalization of Integrated Resorts for roughly 20 years and has finally crossed that threshold. The gaming industry is at a point where they will be allowed to compete through a robust RFP process with the eventual awarding of up to three IR locations over the next few years. Operators and suppliers are now seeking answers to the next steps in the process and what they need to focus on during the regulatory phase.
KEY ASPECTS OF THE IR IMPLEMENTATION BILL
The IR Implementation Bill includes several key aspects that will govern Japanese IRs, which are currently targeted to open in the second half of 2025 at the earliest. Throughout the debate, it has been clear that the Japanese Diet is relying on the Singapore model as a framework for regulation, while taking a Japanese view on how best to implement their own regulations.
Below are some of the key aspects of the bill as it relates to taxation, scope of the facility and entry:
* A tax rate of 30% on gross gaming revenue, one of the higher tax rates in most leading jurisdictions. Tax revenues will be split evenly between the central government and the local municipality/prefecture, depending on which local government selected their operator group.
* The casino gaming area will be limited to 3% of the total facility. As the casino gaming floor is the engine that supports other nongaming amenities within an IR and allows operators to develop facilities with iconic design, this limitation could certainly impact the bids received by certain host markets. It is yet to be determined how that number will be calculated.
* There will be a casino levy or tax of ¥6,000 (US$56), which is higher as a percentage of GDP than the levy imposed in Singapore of SG$100 (US$72). Additionally, the Japanese entry levy, as well as the Singapore levy, is only applicable to local market patrons, thus allowing foreigners access to the gaming area free of the tax. Like the gaming tax, casino levy revenues will be divided in the same manner between the central and local government.
* Visitation restrictions will be put into place that limit the amount of times that local market patrons can visit a casino within a given time period. Specifically, the proposed restrictions would prohibit local patrons from visiting a casino more than three times a week, with a maximum of 10 visits per month. This will be tracked through an ID card system, referred to as the “my number” card. However, it may be difficult to use the “my number” system as most Japanese do not currently carry this form of identification.
* There are several key steps that must occur before an RFP process is launched. The first of these is the reorganization of the Cabinet Office and the appointment of the Casino Control Commission. This includes the approval of the appointees to the Casino Control Commission by the Diet, which is likely to occur in its next Ordinary Session in 2019. Additionally, hearings will begin with potential candidate local governments over the next six to eight months.
* Once this initial phase has taken place, the Casino Control Commission and other government entities within the Ministry of Land, Infrastructure, Transport and Tourism will begin to issue regulations on over 300 items that still need to be addressed. The criteria for selection and the RFP process will be outlined during this time. The remainder of this process will be completed near the end of 2019.
VALUING THE MARKET OPPORTUNITY
One of the more important questions that operators are asking right now is what the potential gross gaming revenue would be for the overall market. This includes looking specifically at the site(s) where operators intend to launch bid(s). There will likely be at least 20 different operators that will submit bids to garner one of three potential licenses to build and operate large and regional facilities. There may be just as many host locations submitting bids, but likely less than 10 will prove to be strong sites for consideration in this first round.
However, the most important questions that operators are asking deal with the measurement of area for a gaming facility. The first of these questions is the calculation of square area. Does the calculation include parking structures, outdoor plazas or other amenities? This serves as the baseline to determine the ultimate calculation, based on the 3% limitation on casino area.
Just as important as the gross square area metric is the casino square area calculation and what elements count, or do not count, in that equation. Under a Singapore model that might be followed, major walkways between non-gaming amenities do not count, but areas such as the pit and operational areas are considered as part of the total 15,000 square meter limitation imposed on Resorts World Singapore and Marina Bays Sands.
One of the other key areas of focus during the regulatory phase will include the casino entry levy and the admission identification process. This will not only include how to collect the entry levy or tax that is applied to locals, but it also includes tracking the number of visits so that locals do not to exceed the parameters established. Since it will be several years before IRs will be operational, there will likely be technological advances such as those in facial recognition or other identifiers that will aid in this social safeguard.
Operators must also consider items of the regulations on which they can collectively agree and advocate to form a strong market that balances the regulatory and operational needs. However, they will likely hold their cards close to the vest because of the competitive RFP process, not tipping their hand as they try to secure one of the three potential licenses.
Education will be a key element in crafting a strict regulatory market that allows operators to maximize their project for the local and tourist markets. A collective voice from experienced operators in international markets, along with gleaning from other major regulatory bodies in jurisdictions like Nevada, Singapore and Macau, can aide in this education process with the newly formed regulatory body.
LOCAL AWARENESS AND RESOURCES
One other highly important issue is winning over the hearts and minds of a local community. This will need to be a focus of the RFP process to show support within a community for an operator and their respective proposal. It also goes to the longer play that, if they are selected, the operator will have to continue to receive local approval every five years.
However, this goes beyond an operator’s relationship with a local jurisdiction and involves the greater benefits of an integrated resort. Prime Minister Shinzo Abe during the IR Implementation Bill debate stated that he would travel the country talking about the benefits of IRs as a mechanism to generate tourism and investment throughout the country. Both efforts will raise the awareness and benefits that IRs can and will bring to Japan.
Running in tandem with this process will be the establishment of responsible gaming measures that were established as part of the Basic Bill on Gambling Addictions Countermeasures. While it is not as detailed in the bill’s language, the bill calls for the framework on gambling addiction to be established by central government while tasking the local government with the execution plan to implement such measures.
Any responsible gaming programs developed in Japan should be evidence-based and should focus on all (IR-based and non-IR-based) forms of gambling including pachinko. It will also require the training of individuals to address the small percentage that may develop a problem with gambling.
While many outsiders over the next year will question the expediency in the market, the next year poses as the most important year in the process in setting up the cornerstone for the regulatory structure governing Japan’s integrated resorts. The RFP process will not likely begin until the start of 2020. However, operators must begin to fully develop their ground games, partnerships, relationships with the host prefecture or city and other aspects which will be included as part of the bidding process. All of this will set up an extremely competitive RFP process throughout 2020 with prefectures’ selection of operator groups.
Once interested prefectures have made their selection, it will likely be another 18 months before up to three locations are chosen. This extended selection process will serve as a catalyst to making sure that Japan is a successful market by selecting the best operators in the best locations to maximize investment and generate additional tourism. The race begins.