Three gambling operators became six. Nowadays, there are many more in Macau sharing the gross gaming revenue without a concession. All because the system has been changing since the 1980′s. Official sources are saying that presently “the system is on the verge of its breaking point”. Up against the wall, the government will react by changing the law. The first step is to bar new entrances, such as Star Cruises, Richard Branson or Donald Trump.
More and more companies not holding concessions or subconcessions continue entering the market and share the oligopoly’s revenues. Several sources reached the same conclusion and pointed out that a meltdown will occur if Law 16/2001 – which sets the regulatory framework of the system – is not changed and if the government is not willing to take a stand.
Investigations have also discovered that the government is starting to change its position and has decided that new investments will not be allowed – including the sharing of gaming revenues, regardless of how fabulously profitable they may promise to be. This means that Star Cruises, Richard Branson, Donald Trump and many others will now have to postpone their plans of sharing Macau’s gaming revenues without a license.
How did it come to this?
Once upon a time…
It’s a long story that began in the mid-80′s. Despite a law prohibiting the granting of credit, Stanley Ho, once again, true to his name, saw solutions where others only found obstacles. Without any opposition from the government or lawmakers, the leader of Sociedade de Turismo e Diverso~es de Macau (STDM) transferred the credit operations’ risk to junkets (intermediaries that bring gamblers in exchange for a commission).
At around that time, Macau started enjoying the expansion of VIP rooms. The VIP rooms were created not only to allow for the extension of credit operations (through the so-called “dead chips”), but also to separate the different junkets.
One thing lead to another and the sharing of gaming revenues appeared, thus allowing junkets to offset uncollectible credit.
After all, if junkets gave credit and took the inherent risk of not being able to collect it – besides having to resort to very imaginative ways of collecting it – at that time it was seen as only natural that they shared the revenues. The government understood that, although it never officially allowed it. Instead, it turned a blind eye, because the junkets procedures were increasing the market and, therefore, the government’s revenue from gaming taxes.
“Despite it all, Macau was lagging behind in revenue growth when credit was legalised”. The same source says that, “Worldwide, credit legalisation allowed for three-fold to seven-fold growth revenue, but that didn’t happen here, at least not in terms of [the] declared or taxed amounts”.
In December 1999, when the Portuguese flag was lowered from the main mast of the Praia Grande Palace, junkets were already getting 25 percent of the VIP rooms gross gaming revenue. The government’s share was 33.4 percent (31.8 percent from the gaming tax plus 1.6 percent as a contribution to a public foundation) and STDM kept the remaining sum. In 2002, immediately before the liberalisation, the law changed. Taxes and contributions from gaming gross revenue rose and a new formula, known as “40-40-20″, dominated. Of course, the new formula functioned more like 40-38-22 in SJM’s case and 40-39-21 in the Galaxy’s case. The formula meant: 40 percent for junkets, 38 percent for the government and 22 percent for the concessionaire.
The junkets’ strong growth is due to simple market factors: for nearly two decades, the junkets managed the relationship with the network of high rollers, bringing them to the respective VIP rooms; concessionaires, starting with STDM/SJM lost almost all ties with highrollers. “That was the reason why the junkets had no trouble in getting better sharing of gaming revenue deals”. The government, fully aware of what was going on, chose to look the other way.
After all, as expressed by everyone involved, “the enormous growth in highroller players from Mainland China, Macau’s main market, was due to the junkets”.
On top of it all, legal collection of gambling debts was not (nor is) allowed in Mainland China. Once again, the concept of intermediaries handling credit concession and collection, instead of the concessionaires, was “very useful”.
At the time, another question could also have arisen: why didn’t the government control the percentage shared by junkets? The answer is blunt and comes from another source that prefers to remain anonymous: “Not only because the junkets’ operational costs increased, but also because, albeit the government was interested in legalising credit operations, it was unable to determine which percentage was needed to offset uncollectible credit”. This left the room free for arrangements to be made according to market conditions. And so, the concessionaire, who was supposed to keep the bulk of the remaining 60 percent gross gaming revenue, was left with only 22 percent.
The business partners enter the floor
Along came the second non-Sociedade de Jogos de Macau (STDM’s substitute) casino. After Sands Macao, which was initially without VIP rooms, Galaxy’s Waldo brought an agreement which for the first time gave intermediaries 55 percent of gross revenues, along with responsibilities for all operational costs. According to January’s issue of Inside Asian Gaming magazine, instead of keeping 22 percent of gross revenue, the operator kept only 5 percent of gross revenue, as well as “an average of six to seven percent of casino revenue” in other properties that didn’t belong to Galaxy: Rio, Grand Waldo and President.
One of our sources confided that, “After the Waldo case, junket pressure over SJM was enormous”.
As a consequence, Stanley Ho’s operator provided two partnership models, both of which allowed for gross revenues sharing: service providers and business partners.
Service providers, like the name implies, are service providing entities. In exchange, they receive a share of the gaming gross revenue, instead of the traditional fixed amount for services provided. One example is the Mocha operations through Melco, where, interestingly, Stanley Ho managed to get a 20 percent individual share.
The so-called business partners system, however, became a more original formula. Still, it became a “significant concern” in the private sector, chiefly among investment analysts. Business partners assume responsibility for the entire property investment and share a [hefty] percentage of the casino gross revenue, since their respective properties have casinos that are operated under one of the concessionaires’ licenses.
Critics say this method “might be acceptable if the operator was “near its debt capacity”. This may well be the case with Melco/PBL. But surely not in SJM’s case, which, according to its own 2005 accounting report, had a MOP 5.5 billion profit and distributed over seven billion patacas among its shareholders. Besides, the same source says, “several business partners also receive according to the 40-40-20 model, but their risk is not comparable to that undertaken by junkets extending credit for casino gaming”. For example: Golden Dragon, Casa Real, New Century and Kingsway, among others.
In short, the government, having achieved to regulate the junket operations with the goal of greater transparency, could not prevent “the most powerful from escaping regulation”. Through the business partners’ model, “some junket-investors are not subjected to suitability assessments nor to a licensing process, nor to one-year licenses, nor to other legal restrictions that severe the potential to raise funds through stock listing, nor to limitations in the transmission of its shares”.
This is where David Chow Kam Fai’s company comes in. His business promises much debate. An October written agreement with SJM was authorised by the government. “The approval of such a contract was a very, very serious mistake”, says a source within the Macau Gaming Commission. Soon, other junkets started asking the government for similar government-authorised contracts. “It is imperative that the Macau government does not allow the same framework. David Chow’s contract is destroying the consistency of the Macau casino gaming legal framework”, the same source warns. Another source feels that if the situation continues to follow the same path, “the government risks receiving directives that may significantly curtail Macau’s autonomy”.
System at peril
According to a specialist, current casino gaming legislation regulates just some operators – concessionaires, subconcessionaires and management companies; meanwhile, others manage to access the market while circumventing the same legislation.
The result: Macau experiences a pop up of “subconcessions per property”.
Which means that an investor can come to Macau, buy land (from the government or from private owners), commit to invest – directly or in partnership – in hotels with casinos, and strike a deal with a concessionaire or a subconcessionaire, ending up with 55 percent of the casino gross revenue. Macau Business sources warn that, except for what the government receives from taxes, the licensed company “keeps no more than 10 percent of the net revenue”.
So the question is: “Who believes that the operator really controls the casino exploration ?” The warning is issued for those who can still change this scenario. The situation is now under the focus of investment analysts, such as Karen Tang from Deutsche Bank, who was recently quoted by South China Morning Post. “These deals highlight supply side risks, and increase competition for the six license holders”, said Karen Tang. “All these deals involve overseas gaming operators who have no concessions in Macau”, she wrote in a February 13 research note. Actually, several of these deals involve entities that have no past expertise in casino operations. And they seem to be increasing in number – see the recent case of Richard Branson.
The extent of the problem becomes clearer if we go back two years, when some bank syndicates, including Deutsche Bank, loaned money to gambling operators at a time when daily gross revenues from non-VIP tables reached US$5,000. Presently, in many casinos the revenues from the same tables are a third of what they were then.
Can the government change course?
The formal written authorization the government gave to David Chow’s company created a “precedent and a new legal entitlement not foreseen in any piece of local legislation”. But this total openness to foreign investment and “market rules” seems to be changing. In the beginning of February 2007, the doors were still open, as Francis Tam, Secretary for Economic and Financial Affairs, told reporters: “Macau will always welcome foreign capital the best way it can”. However, some casino-driven investments “will not be allowed”. Amongst them, those from Star Cruises and Richard Branson .
Gaming Commission sources guarantee that, “The consensus now is that there are too many risks to the sustainable market development. It is urgent to start regulating existing situations and to bring order to the sector, before allowing new business partners investment waves”.
Consequently, the first step – which, apparently, is already decided – is to block more business partners from entering Macau’s stage, at least for now. Soon, step two will be to change Law 16/2001, which regulates casino gambling in Macau.
In other words, the game’s up.
They Still Don’t Know It
The taste of victory was still lingering in Star Cruises’ mouth when it recently announced their entrance into Macau’s gaming world. Their formula was used by others in a not-to-distant past. Through its 75 percent owned subsidiary New Orisol Investments Limited, Star Cruises announced that they had entered into sale and purchase agreements to acquire a 75 percent interest in Macau Land Investment Corporation which owns a parcel of land on the shores of Nam Van Lake in downtown Macau. With a services agreement with SJM, Macau Land intends to develop “Resorts World at Macau”, a boutique hotel which includes a casino on its premises.
“Not anymore”, one official said. Why is that? “It’s time to stop; [to] regularize the past cases; establish criteria on which investments linked with casino gaming [a restricted activity] should be allowed, and make relevant amendments on the legal framework before it is too late”.
British billionaire Richard Branson will be another victim. The high profile Virgin Group CEO has announced his intention to invest US$ three billion. He was also looking for partners among the local gambling operators, trying to work under the license umbrella. In addition, Branson was trying to partner with Australian betting firm Tabcorp Holdings. Tabcorp owns 4 of Australia’s 13 casinos and has already announced it won’t come to Macau. No one knows if the Australians lost interest or if they’re already aware of the government’s intentions not to allow more business partners.
No one is betting what Branson will do next.
Source | Business Macau
