Macau Business magazine – September 2020
Macau’s gaming industry sits at a critical juncture. The gaming law revision and the public tender preparation will take place amid rising Sino-American tensions and the massive impact of the Covid-19 pandemic. As authorities remain tight-lipped, analysts predict an end to the sub-concessions model, and tighter supervision both at a local and a national level. New requirements are in the pipeline related to social responsibility, economic diversification, and regional integration.
It has been the talk of the town over the last couple of years. We are 22 months away from the expiration of the current casino concessions and sub-concessions. And questions remain up in the air. What’s the timeline for amending the gaming law? Will Macau keep its status quo with its existing three concessions and other three sub-concessions? Will all six operators be on equal footing as fully-fledged concessions? Will there be new players? What about the concessions’ length? Twenty more years? Or ten years, as some observers suggest? Will the public tender follow the same rationale as the one held two decades ago? What will be the impact of the ever-growing tensions between Washington and Beijing on the operations of the American gambling companies in town? Many more follow-up questions loom in the background. In a reply to questions put forth by Macau Business, the Gaming Inspection and Coordination Bureau referred to Ho Iat Seng’s Policy Address remarks in April, when the Chief Executive expressed these key points: there will be an open public tender, and the Government has no plans to extend the current concessions nor to reduce taxes on gross gaming revenue.
“Macau is now far more scrutinized by foreign regulators, gaming investment analysts, securities market regulators, and China’s central authorities”, Jorge Oliveira
Blurry timeline
As for the timeline for the legislative works and the public tender, days after Ho’s statements, Secretary for Economy and Finance Lei Wai Nong promised a “detailed” public consultation on the gaming law to be launched before the end of the year.
The consultation paper, which according to Lei will be discussed by citizens from all walks of life, will surely shed light on what’s in store for the post-2022 scenario.
When Ho and Lei addressed the Legislative Assembly in April, the COVID-19 pandemic had already hit the city (and the rest of the world) hard, with a devastating impact on the economy, particularly in the gaming and tourism industries.
Despite the light at the end of the tunnel resulting from the gradual resumption of the individual visa issuance for mainland visitors, the industry is far from getting back on its feet, and observers predict a slow recovery. In light of the impact of the pandemic, some voices have called for a postponement of the public tender, meaning that the current concessions would have to be extended. In late August, a junket representative – Lam Kai Kong, director of the General Association of Administrators and Promoters for the Macau Gaming Industry – called on the Government to extend the current concessions for an “appropriate time”. The law does allow an extension of the concessions for up to five years, on an exceptional basis.
However, there is no official indication or suggestion that the Government is planning to move on with the postponement of the gaming concession bidding.
“The continuing escalation of tensions between the two countries (US-China) will continue to increase the risk of one or two of the US operators either not securing a new concession or giving up their controlling equity”, Ben Lee
Higher stakes 20 years on
This public tender carries different features from the historic one held nearly two decades ago, which broke the 40-year long monopoly hitherto held by Stanley Ho’s STDM. “A lot has changed from the last tender”, says Jorge Oliveira, former Commissioner for the Legal Affairs of the Macau Gaming Commission that oversaw the whole process. Oliveira, who played a pivotal role back then and throughout the first decade following the 1999 handover, notes that “this time there is a lot more critical mass in the local gaming sector”. António Lobo Vilela, who worked under Oliveira as a senior legal advisor in the SAR’s Gaming Commission, also recalls “the lack of critical mass at the time”, when local authorities were launching the international public tender.
In the early years right after the December 1999 handover, there was still a great deal of uncertainly with regards to the prospects for the city’s core industry. The first hopeful indication came with the feedback resulting from the invitation sent by the local government for an Expression of Interest (EOI) for casino concessions in Macau, with the aim of testing the waters. Surprisingly, “there were 22 entities responding, and amongst them some of the big guns of the casino industry”, highlights Lobo Vilela, who currently serves as senior advisor to the Secretary for Economy and Finance.
Four months later, two major Las Vegas casino-resorts players set their foothold in Macau: Wynn, with a concession, and Venetian (Sands), firstly as a partner of Galaxy and later on operating as the first sub-concession. In the ensuing years, another two foreign gaming giants joined the local market via partnership arrangements also as sub-concessionaires: MGM (US) and Crown (Australia).
Two decades on, Jorge Oliveira stresses: “Macau is now far more scrutinized by foreign regulators, gaming investment analysts, securities market regulators, and China’s central authorities”.
Beijing’s oversight
Oliveira’s remarks echo an evolution of Beijing’s oversight on Macau affairs, specifically over the local gaming industry. The SAR witnessed a casino boom over the past two decades, with a significant role being played by foreign-owned gambling operators, namely from the United States. This has elevated the supervision of Macau affairs in this respect to a foreign policy and to a national security level, taking into account the ramifications related to cross-border crime such as money laundering and loan-sharking activities.
The situation can be seen as a double-edged sword, as highlighted in Sonny Lo’s new book “Casino Capitalism, Society and Politics in China’s Macau”. The Hong Kong-based political scientist notes that “if the industry is run in such a way as to allow money-laundering activities, it will undermine the PRC’s national security”. On the other hand, “a healthy casino-led capitalist economy must bring about political and social stability”, and at the end of the day Beijing emphasizes the need to maintain national security, socio-political stability, and the welfare of its citizens”.
A closer cooperation and twine between mainland and local authorities is therefore expected, with the SAR’s police and the gambling watchdog being better equipped and having razor-sharp teeth instead of being toothless tigers. The steps towards a tighter regulatory environment, both for casino operators and the junkets, are set to be sped up.
Two decades ago…
2000
July
New taskforce set up to study the future development of the city’s gaming industry, working directly under Chief Executive Edmund Ho
November 9
Chief Executive Edmund Ho announces plan to liberalize the gaming industry in the Policy Address report for 2001
2001
July 18
Government submits new gaming law proposal to the Legislative Assembly
August 30
The Legislative Assembly passes the Legal Framework for the Operations of Casino
Games of Fortune (Law No. 16/2001), known as Macau Gaming Law
October 8-19
Invitation for ‘expressions of interest’ in the future public tender
October 26
Government adopts public tender regulation
October 31
Government creates public tender commission
November 2
Macau government launches international public tender to grant three gambling concessions
December 7
Public tender bidding deadline: 21 companies bid for three concessions
2002
February 8
Galaxy Casino S.A., Wynn Resorts (Macau) S.A. and Sociedade de Jogos de Macau S.A. win the three gaming concessions
March 28
Government signs an 18-year concession agreement with SJM
June 24
Government signs a 20-year concession agreement with Wynn
June 26
Government signs a 20-year concession agreement with Galaxy
December 19:
Government authorizes Galaxy to enter into a sub-concession contract with the Venetian
The US-China factor
In addition, the preparation for the public tender occurs against the backdrop of an ever-growing tension international geopolitical landscape marred by the US-China rivalry, whereas twenty years ago Beijing had just joined the World Trade Organization and Sino-American economic relations were flourishing. “It is riskier to handle both legal and political terms”, Oliveira anticipates.
At this juncture, if all goes according to the expected timeline, Macau’s incoming public tender will take place in the midst of what some regards as a “New Cold War” and shortly after the key US presidential election this coming November. Alidad Tash, a Macau-based gaming strategist and former Senior Vice President of casino operators Melco Resorts and The Venetian Macao, asserts that “the US elections will play a major role”, and predicts that, in the case where Trump does get re-elected, US-China tensions are set to worsen. “This would exert more pressure on the three US operators”, as the three US casino companies operating in town – Sands, Wynn and MGM – could become “legitimate targets in this new cold war”, particularly if the US Administration continues to ban Chinese companies, adds Tash, managing director at casino consultancy firm 2NT8 Limited.
Ben Lee, another well-seasoned gaming consultant and a former Vice President at Venetian Macao, concurs that “the continuing escalation of tensions between the two countries will continue to increase the risk of one or two of the US operators either not securing a new concession or giving up their controlling equity to retain a presence in the world’s biggest gaming market”. In such a scenario, a Chinese company or investor would become a key stakeholder.
“This kind of operations [satellite casinos] bring some lack of transparency that should terminate soon”, Óscar Madureira
Sub-concessions waning
Part of the answer to these uncertainties can be found in the key political decisions that will shape the future gaming law. And one of the main ones lies in the number of concessions, which will be awarded in the public tender. The current law comprises only a maximum of three concessions; however, they were unfolded into three other operators under the sub-concession model – a controversial approach that played a pivotal role in the magnitude of the boom which the city witnessed over the past two decades. In practice, there are a number of additional de facto casino operators (satellite casinos) through the third-party revenue sharing service arrangements, a legacy of the pre-handover period.
The “3+3” model is set to be overhauled according to most observers. Carlos Siu Lam, an Associate Professor at Macau Polytechnic Institute’s Centre for Gaming and Tourism Studies, points at that direction. “The number of concessions and the concept of sub-concessions need to be reassessed; the practice of restricting the number of concessions without restricting the number of casinos is another regulatory conundrum, as are the relationship between concessionaires and junket operators and the regulations governing the reversion of assets to the government”, Siu notes, pinpointing key areas in the government’s regulatory review efforts.
Industry insiders are also convinced that the model will be adjusted.
“I believe that what brought us here will not necessarily take us to the next level”, argues António Ramirez, a local lawyer and consultant who served as Senior Vice-President for Human Resources at Sands China. The way ahead may lead us to “six or seven concessions”, while “we may see a precise regulation that will allow management companies to work with the concession holders”. Ramirez predicts that “the next twenty years will bring development in automation in the service industry, artificial intelligence and much more”. As result there’s a need to “get new players to develop the sector and Macau by bringing new capabilities that will help with the disruptive changes that are coming”. In fact, he argues, having more players “will most likely result in a gain for Macau and local people”.
In addition to tackling the sub-concessions conundrum, the Government might also address the grey areas wherein the “satellite casinos” operate. Former Melco Crown senior legal counsel Óscar Madureira believes that “this kind of operations bring some lack of transparency that should terminate soon”. Under this line of reasoning, Madureira, from the Rato, Ling, & Cortés law firm, is certain that the law will be adjusted away from the three concessions system to allow for more fully-fledged players: “Not less than 6, but eventually more, I would say”.
Ben Lee claims that the “3+3” model has become “meaningless, given the plethora of casinos we have in the form of satellite casinos”. What stands out as the most likely scenario is the “formalization of the current six concessionaires and sub-concessionaires, as “it would be extremely difficult to squeeze six back into three”. Jorge Oliveira, who played an important role as a top legal officer for the Macau Government in devising the sub concessions’ arrangement back in 2002, believes that a “a prudent and cautious approach will likely lead to a public tender for six concessions”, in a wording that preferably “would not exclude the possibility for more concessions being granted along the way”.
“The number of concessions and the concept of sub-concessions need to be reassessed”, Carlos Siu
D-Day for the D-word
However, before making the call on who will be awarded or re-awarded a concession, the crux of the matter lies in what the operators will be required to do, what their social and economic role will be, in line with the overall political and economic master plan set by the Central Government, and in the direction and implementation to be adopted by the local SAR Government.
In that respect, all roads lead to the D-word: Diversification. It might seem like an oxymoron: casino operators contributing to economic diversification away from gaming. However, the future lies in building an economic structure less reliant on gaming. Local Government officials have been “paying lip service” to that aim over the years, but given his administration it sounds like Ho Iat Seng is determined to walk the talk. The public tender provides an opportunity to inscribe that in the respective concession contracts. Secretary for Economy and Finance Lei Wai Nong said in late April that the Government will listen to citizens’ opinions on the role of the future casino concessionaires in developing non-gaming elements, enhancing social responsibility or supporting local small- and medium-sized enterprises (SMEs).
How could this be translated? António Ramirez, current Managing Director of gaming and hospitality investment company CAP Limited, says operators may play an active role in “education, training, and development that can help and support the gaming industry and such, as supporting new companies that contribute to the diversification of the economy — for example, having IT companies develop management solutions for hotels, casinos, procurement, or security”. This means that gaming companies “may have to present investment plans, not only that support the gaming industry, but that also help to support the region and diversify Macau’s economy”, Ramirez anticipates.
A broader question concerns the way the new concession contracts and the operators’ commitments will be encompassed in China’s national development plans, namely those designated for Macau: One Centre (of world tourism and leisure), One Platform (for economic relations with Portuguese-speaking countries), and One Base (for cultural exchange among different cultures, with Chinese culture being the mainstream), as explained in the Greater Bay Area (GBA) regional integration plan. Within this framework, what can be assigned to gaming operators? Each operator “can contribute to these goals, namely by carrying out investments and developing MICE, and supporting more cultural events” or by investing internationally, with Macau as a base.
Since Ho Iat Seng has set his sights on Hengqin as a “Second Macau”, it is likely that gaming companies will be encouraged or required to invest in the neighbouring island with gains obtained in Macau, Ramirez suggests.
“Gaming companies may have to present investment plans, not only that support the gaming industry, but that also help to support the region and diversify Macau’s economy”, António Ramirez
“Anything shorter [than 10-year long concessions] makes the entire re-bidding process a perpetual one”, Alidad Tash
How long is enough?
The investment requirements put forth at large by the Government will be interwoven with the length of the future concessions. In 2001, the gaming law set a maximum duration of 20 years. Will this be replicated this time around? Some analysts are floating the idea of halving the concessions’ length. Wang Changbin, director of the Centre for Gaming and Tourism Studies at the Macao Polytechnic Institute (IPM), made the case for 10-year-long licenses in an article published in the Las Vegas Gaming Law Journal.
“A 10-year concession should generally be long enough for an operator to develop a large-scale project, while a review and a renewal every five years extends the government’s flexibility to make some changes if necessary”, Wang elaborated. The scholar argued that, while the 20-year period served the interests of the operators well, making sure that “the concessionaires make a profit from the concession”, it made it “difficult for the government to replace a possibly unsatisfied concessionaire or introduce more operators to the market in a timely manner”. Alidad Tash also contemplates the possibility of the 20-year span being reduced. “If so, ten years should be the minimum. Anything shorter makes the entire re-bidding process a perpetual one”, he argues.
Carlos Siu Lam establishes a clear link between the amount and the type of investment which gaming companies will engage in and the contracts’ length. “I think the contract duration depends on what Macao wants to achieve, and what roles and amount of investments are expected from the concessionaires. If there are substantial investment requirements, the contract needs to last for some time to justify their investment”, he stresses.
Ben Lee also highlights the same kind of connection. For instance, “if an emphasis was to be placed on non-gaming investment, such as theme parks or other large-scale entertainment facilities, it would be extremely difficult to justify those sorts of investments on a ten-year horizon, thus rendering a continuation of the 20 years’ concession a likelihood.”
If we do witness a repeat of a maximum 20-year period, it would take us to 2042, just seven years short of the special 50-year period agreed in the Sino-Portuguese Joint Declaration on the Macau Question. Why not stretching a few more years? Jorge Oliveira points out that the length of the concessions is a political decision, not a technical one. “If the final term of the new concessions is [up to] twenty years, they will end in June 2042; perhaps it is wiser to consider 19 December 2049 as a final term”, concludes Oliveira, who heads the JCO consultancy and served as Portugal’s vice-minister for foreign trade and investment between 2015 and 2017.
Meanwhile, as authorities remain tight-lipped and keep the cards very close to their chest on the gaming law review and the future public tender, and amid the uncertainties resulting from the economic downturn and an unpredictable external environment – what should casino operators do? Alidad Tash recommends “behaving like a good corporate citizen”, by embracing or enhancing “more non-gaming elements in your integrated resorts (even if they lose money)”, placing more locals in upper senior management, holding more charitable activities around Macau and, never forget, “praising the wisdom and generosity of the central and local governments at every opportunity”.
