Commentary by Lee Tak Lim*
The concessions** of Macau’s six casino operators will expire in June 2022. The consultation on the 16/2001 law leading to an open tender for the next-decade’s operators has ended. What’s next?
It looks like the government does not have enough time to kick off and complete the tender process before next June. It, however, is allowed by law to extend the expiry date to a maximum of five years. Extension is inevitable, but for how long?
The public needs an explanation if the inevitable is formally announced. The use of insufficient time as an excuse is unacceptable since the expiry date was fixed at the time when the contracts were signed with the casino operators. The reasons must be persuasive enough for the government to defend its decision to extend. Why does the government ponder?
The number of concessions and structure of the tender might be the dilemma that the government has yet to resolve. All the current casino operators, for sure, will participate in the tender. The government knows that the tender will just be a show if it only wants to award six or fewer concessions. It is because the incumbent casino operators have an advantage over other potential bidders.
Commissioned by the government, the University of Macau (UM) conducted a review on: i) how the economy and society have changed since the liberalisation of the gambling industry; and ii) how the casino operators performed. The report was issued on May 11, 2016.
The report is very detailed and full of figures. After reading it, you will gain a better understanding of how Macau, good and bad, was changed by the casino operators in the period between 2002 and 2014. The conclusion is clear.
The benefits brought about by the casino operators in the form of tax revenue and employment overwhelmingly outweighed the cited casino-induced negative impacts. The consultation paper largely draws on this report.
Required by law, the selection of future casino operators has to be decided by a tender process. Though the casino operators are still breathing and the world has yet to return to normal and co-exist healthily with COVID-19, their years of astronomical profits are the envy of all casino operators around the world.
One thing is sure: the tender, if fair, will be flooded by casino operators, incumbents and those operating in other parts of the world.
The consultation started to portray an unintended impression of a possibility that fewer than six concessions would be handed out for the next-decade casino operators. I concluded this possibility with “Don’t bet on the number of concessions being fewer than six” in my last article entitled “Consultation on gaming law revision starts with a drop in casino stocks.”
Would the upcoming tender be structured similar to the one 20 years ago? Bidders at that time were required to pledge billions of patacas in investments in Macau in return for the 20-year concession.
The report confirmed that they have fulfilled their pledged investments of not less than 260 billion patacas. We have seen sporadic completion of casino projects since 2014 and, even now, a few are still ongoing. Why they are still spending when their concessions will expire soon?
The current casino operators must be very optimistic that they will be awarded the concessions again. They know they have a trump card.
The same requirement of pledged investments as one of the conditions to be awarded a concession would be bad, if not devastating, to Macau. This scenario would stretch our resources to breaking point as the government emphatically highlighted in its consultation.
The concessionaires, in the concession contracts, are required to gratuitously surrender their gambling-related properties to the government when their concessions expire. If it was the plan that these properties would be the subject of this tender, the government was clever.
The gambling-related properties, however, are only a tiny portion or a single-digit percentage of casino operators’ projects. Simply put, hotels, restaurants and commercial properties are not gambling-related properties. They are non-gaming facilities and, collectively, are termed integrated resorts.
Theoretically, these gambling-related properties or gambling floors could be the subject of the tender. These are the areas where, currently, casino customers are playing their hands. But would this be enough from a business perspective?
Now, the government understands and, in its consultation paper, emphasises the importance of non-gaming facilities in attracting visitors. Even the hard-core gamblers would like to enjoy the relaxing ambience and some good food after their exciting gambling sessions.
These beautiful integrated resorts are what the government and casino operators are promoting to lure visitors. Visitors not just stay in the resorts, they will also go to local tourist attractions, local communities and spend on souvenirs, delicacies and dining.
How the government is going to structure the tender is intriguing. I think the government is wise enough not to repeat the strategy, though successful, of the first SAR government. Resources aside, investments take years to complete and we can’t afford to wait for several years without any gambling tax.
With my belief that the number of concessions would not be fewer than six, I start with the assumption that the government will opt for six concessions. How much would the incumbents and other casino operators bid for the concessions, presumably, represented by the six surrendered gambling-related properties?
Casinos operating in other parts of the world understand the importance of non-gaming facilities in driving gambling revenue. Without the control of those non-gaming facilities surrounding the gambling properties, subject of the tender, they would be cautious to submit a high bid.
Shareholders of casino operators are savvy investors. They know it would be very difficult to negotiate a sales and purchase agreement, or a service contract with terms at their absolute disposal, of the non-gaming facilities only after they secure a concession.
Unless the incumbents have decided to pull out of Macau, their desire to execute such a contract before they put a price on the bid would be a fantasy.
It is obvious that incumbent casino operators will dominate. With all players acting rationally, incumbent casino operators will outbid other tender participants.
The other scenario would be less complicated if the government hands out more than six concessions. By the same rationale, the six incumbent casino operators would beat the others. The seventh and, much less likely, more concessionaires would need to build their integrated resorts. Their first stream of revenue would occur only after a few years. Time value has a price.
After winning the next-decade concessions, the business operations of incumbent casino operators, unlike the latecomer, will continue uninterrupted. Given the same concession period, the difference in the timing of revenue generation will work out a lower price tag for the latecomera than the incumbents.
The incumbent casino operators would be the next-decade concessionaires regardless of the number of concessions the government decides to hand out.
*Lee Tak Lim is a retired local banker
** Formally, these are three concessions and three sub-concessions. Functionally, all of them are concessions.
