Inside Asian Gaming

INSIDE ASIAN GAMING | June 2009 24 H arrah’s, the US-based gaming operator, chose not to tender for entry into the Macau market following liberalisation there, but has been linked more recently (albeit on a speculative basis) with Taiwan. Michael Chen, President, Asia, Harrah’s Entertainment Inc., has in the past indicated some enthusiasm about the likely opportunities in Taiwan. His boss, Gary Loveman, Chairman and Chief Executive of Harrah’s, said earlier this year the jurisdiction is “potentially a terrific market,” although crucially he added it would depend on the levels of taxation. Mr Chen includes attractive tax rates as one of five key elements in successful development of a new casino market. “It is all about competing for the customer, says Mr Chen. “There is great product all around the world. Your project has to be competitive with all the other products in the region. You have to make your market attractive from the get-go. “The five rules for a successful gaming market are as follows: you need to have open access—anybody has to be able to go; you need to have an excellent location; you need to have tax rates—especially in this challenging environment—that invite investors; you need to have a progressive, predictable, regulatory environment, so that investors can have confidence about what they’re getting themselves into; and you also need what I call a right-sized licensing paradigm,” adds Mr Chen. Access all areas On the open access issue, Taiwan arguably scores middling marks. On the plus side, she has shown no inclination so far to go down the nanny state road by imposing the sort of foreigners-only conditions seen in all South Korean casinos save one. Mr Chen argues South Korea’s casino industry has been ill served by such strictures, and he says it shows in the quality and financial performance of the properties in that market. “The two largest foreigners-only casinos in the world—Atlantis in the Bahamas and Paradise Walker Hill near Seoul [South Korea]—do no more than US$250 million each per year, and yet they are in great In Focus Taiwan’s Council for Economic Planning and Development said earlier this year it thought a domestic casino industry could generate annual revenues of NTD100 billion (US$3 billion) though this is considered extremely optimistic by industry analysts. Mr Liu says local analysts think domestic demand for casinos could generate similar revenues to Singapore. Demand “WithTaiwan’s [state] lottery, the average net revenue is about US$1 billion per year, and the sports lottery is about US$1.06 billion to US$1.1 billion. We also have electronic arcades. There are about 3,000 gaming arcades in Taiwan. It’s a grey area, like the pachinko business [in Japan]. Taken together it means the yearly revenues from existing gaming in Taiwan already stand at about US$3.7 billion,” says Mr Liu. There are signs, though, that competing pressures created by Taiwan’s often fractious parliamentary system could lead to political interference in the Taiwan projects, which risks hobbling the schemes. The first of these political pressures is that the locations for the resorts—outlying islands—may have been chosen not necessarily on the basis of what’s best for the industry, but in terms of what’s least offensive to the anti-gaming campaigners within the country. The second is that the level of investment required—US$1 billion per resort—has arguably been set at a level moreappropriatetopre-creditcrunchcapital markets than to current realities. A third is that the proposed tax rate—understood to be 50% of gross gaming revenue—appears based on a belief in political circles that demand for casino gaming is so elastic that it can withstand a heavy financial assault by the government on operators and on consumers. This may be unrealistic. Two rival casino destinations—Macau and Manila— are respectivelyonly anhour andanhour and 15 minutes away by plane. A fourth potential stumbling block is that the licences will last for only ten years—a short operational life for such a massive investment. Terms & conditions “The government insists that each property should have US$1 billion capital investment, and each should provide 1,000 hotel rooms.Taxwill be 50%on gross gaming revenues,” says Mr Liu. “The gaming floor should only be 5% of the resort’s total floor area. The rest should be for hotels, shopping malls, convention centres,” he adds. “The Ministry of Transportation and Communications will issue two casino licences of ten years’ duration each,” says Mr Liu. “The government says it expects two resorts will bring in up to five million visitors per year. Currently Penghu has only 160,000 visitors annually, so this seems like a difficult goal to reach. We believe, though, the schemes can generate 10,000 jobs for locals,” says Mr Liu. Five Golden Rules Ways of guaranteeing success for a new casino jurisdiction