MACAU GAMING POLICY UPDATE
António Ramirez1/Luís Pessanha2 I. BACKGROUND On 22 April 2008 Edmund Ho, Macau SAR Chief Executive, made at the Legislative Assembly what was to become a famous and somehow unexpected announcement with regards to the future of the gaming industry. The Chief Executive stated that it would be the policy of the Government of Macau to award no further gaming concessions in addition to the six casino sub/concessions 3 already granted. Furthermore, he announced that no additional land would be allocated for casino development and that no more casino venues would be permitted. Only ongoing casino projects already submitted for Governmental approval would be considered4. Macau Chief Executive also mentioned that the Government would not approve any increase of gaming tables at the existing casinos or of the number of tables requested for projects under approval. This may raise many issues, as was we know that the casino business is very dynamic and changes are required on an almost daily basis. We are not aware if this prohibition of increase of the number of table games would also apply to slot machines. Overall the message was that at least for now there should be a freezing and cooling-off period of the gaming market of Macau5.
1
Antonio Ramirez is the Managing Partner of Ramirez Law Firm. Member of International Masters of Gaming Law, with years of experience in the Gaming Industry, worked as an in-house counsel for an American gaming operator. He can be reached via e-mail: antonio.ramirez@ramirezlawfirmacau.com or by phone (+853) 2871 6221. 2 Luís Pessanha is a lecturer on the Faculty of Law at the University of Macau, where he lectures tax and administrative law. He earned his L.L.B. from the New University of Lisbon; he has a postgraduate from the Catholic University of Lisbon and obtained his L.L.M. from the University of Macau. He may be reached via e-mail at luisp@umac.mo 3 Up to date, only the Wynn Macau, Galaxy and SJM hold a casino gaming concession and Venetian Macau, Melco PBL and MGM Macau are casino sub-concessionaires. There has been widely reported that many other renowned gaming operators are potentially interested in entering the gaming market of Macau (namely, Harrah’s Entertainment Inc., who purchased a golf course on the Cotai Strip for approximately US $577.7 million, certainly hoping for a latter rezoning of the land use). 4 This will almost certainly include ongoing casino developments and construction projects, namely the “City of Dreams” complex by Melco PBL, the extension of the “Fishermen’s Wharf ” casino and the “Macao Studio City’s” casino both by SJM. 5 See, Editorial, Booming Macau needs to plan for the future, South China Morning Post, 23
The Macau Government also made known that it intends, in the short term, to submit a new legislative package to impose stricter regulations on a number of sensitive issues, from re-zoning of gaming free city areas (so far gaming can be offered anywhere in Macau), to issuing new regulations to deal with the qualifications of the top management of casino operators (whatever this may imply) and that the commissions paid to the gaming promoters (better known as junkets) should be regulated (which appears to imply imposing a mandatory cap on the commissions paid out to the gaming promoters). It was even suggested that this course of action was in accordance with the wishes of Beijing. This is somehow surprising, since as a matter of principle the policy decisions in question must have been taken by the local Government, as these matters are part of the exclusive regional competence of the Macau SAR 6 . However, it may be that the Chief Executive mentioned Beijing regarding the new land at the Cotai Strip, since reclamations must be approved by the Central Government. II. POLICY IMPLICATIONS The reaction of the stock markets to this announcement was nothing but enthusiastic, with the shares of the gaming companies already operating in Macau gaining in value as news of the announcement made by the local regional Government broke7. However, this may have been an excessive
April 2008; Rowan Callick, Macau puts brakes on new casinos as Beijing frets over quality of life, The Australian, 24 April 2008; James Pomfret, New Casinos Run Out Of Luck; Macau puts limits on its gambling habit, National Post, 24 April 2008; Fox Yi Hu, Casino horse may be slowed to gallop, South China Morning Post, 25 April 2008. 6 The Basic Law of Macau states that the Macau SAR shall “on its own, make policies on tourism and recreation in the light of its overall interests” (article 118 of the Basic Law of Macau). It is understood that this provisions entails that tourism, recreation and gaming is part of the exclusive regional autonomous powers of the Macau SAR, as it would have to be the expected, as the local government as a ample space of autonomy, under the principle of “one country, two systems” (Deng Xiao-Ping). However, it is also clear that the Central Government does have no small degree of influence on the major policies decisions of the local government, even if such has seldom been openly acknowledge, as it is contrary to the constitutional framework of Macau. It may be worth mentioning that recently Jorge Oliveira, a well known top local governmental official, stated that “There was no involvement from mainland government” and that “Macau was not told what to do” as far as the 2001/2002 casino concession selection process was concerned (See, Howard Stutz, Las Vegas Sands Lawsuit: Licensing Process described, Las Vegas Review-Journal, 02 May 2008; Howard Stutz, Macau Official: Subconcession necessary to save Sands from elimination, Las Vegas Review-Journal, 03 May 2008). 7 In the aftermath of this announcement the shares of Las Vegas Sands Corp. (which controls the Venetian Macau) increased 12.8%; MGM Mirage’s (which controls MGM
reaction, as the Chief Executive essentially restated what has been the official policy of the local Government for the last several years (not to issue new casino gaming concessions8, at least until 2009)9. Indeed, this could have been expected, as the Government of the Macau SAR would certainly be hard pressed to make major policy changes at this stage, as the Chief Executive is reaching the end of his mandate and cannot be reelected (the Chief Executive can only serve two terms (article 48 of the Basic Law of Macau)). It is also becoming more obvious that local politics is increasingly being overshadowed by the backstage maneuvering with regards to the choice of the next Chief Executive. The Ao Man Long case10 should also be considered here, as it limited the choices that can be made with regards to future land concessions. In Macau, little is more scarce than land, and in the recent past there has been a considerable public investment in the promotion of new casino sites, not only because land has in some cases been leased11 bellow market price, but because a great share of the new land obtained by reclamation was allotted to gaming projects (namely, the Cotai). This was done because of a deliberate political decision to prioritize and promote the local gaming industry, as such was considered to be in the public interest. But in years to come the use of land for residential purposes will most likely be the new priority, as it becomes clear that more has to be done with regards to provide affordable housing to the population12. III. END OF THE LEGISLATIVE STALEMATE Worthy of attention is surely the fact that the Government of the Macau SAR appears to be set at finally pushing forward the next big wave of
Macau) shares rose 4.4%; the stock of Wynn Resorts Ltd. (which controls Wynn Macau) went up 8.8%; Hong Kong listed Galaxy Entertained Group gain 13%; and Melco PBL climbed 6.7% (See, Fox Yi Hu and Dennis Eng, Macau to curb casino growth, South China Morning Post, 23 April 2008; Macau draws the line, Macau Business, May 2008). 8 It has been understood that each casino gaming concessionaire would have only one sub-concessionaire each (which he could choose) and the government has always consistently denied that additional casinos gaming sub/concessions would be awarded. 9 There is a mostly ignored provision in the gaming concession contracts under which the Macau SAR guarantees to the casino gaming concessionaires that no additional casino concessions shall be awarded until 01 April 2009 (see clause 104(1) of the Gaming Concession Contracts between the Macau SAR and Wynn Macau; clause 106(1) of the Gaming Concession Contracts between the Macau SAR and Galaxy; clause 110 of the Gaming Concession Contracts between the Macau SAR and SJM). 10 See, Jorge A.F. Godinho, The Ao Man Long case, Macau Business, 01 December 2007. 11 Most private use of land in Macau is made by means of long-term leases of public land. Usually the leases have a term of 25 years and may be renewed from time to time. 12 See, Ground Swell, Macau Business, May 2008.
gaming legislation which has been on the pipeline for the last five years13. This is good news for the gaming industry as a whole, as a more or less obvious lack of key regulations has been highlighted in the recent past and clear rules are essential to ensure fair competition and the healthy future development of the Macau gaming market. It is still too early to fully understand the legislative agenda and to know what will be the main focus of the legislative reform. Nevertheless, it may be expected that the Macau Government will determine in which areas of the city gaming may or may not be permitted (namely, to avoid casinos near hospital, schools, temples and churches), which so far has not been regulated. A greater mystery has to be what future regulations, if any, may be enacted with regards to the requirements imposed upon the management of the gaming operators. Other issues clearly in need of legislative action are the regulation of slot machines (setting a minimum percentage of return of the betting amounts and regulating the licensing of slot machines in the Macau SAR, as well as their maintenance and other issues; so far the approval of new slot machines is purely discretionary), the regulation applicable for the licensing of gaming vendors in Macau, the enactment of regulations dealing with the administrative fines applicable for breaches of the gaming law of Macau by the gaming operators (which has long been expected to pass) and potentially also some form of basic regulations to start to address problem gambling (so far unregulated in the Macau SAR, but gradually a more visible concern). IV. REGULATING COMMISSIONS But almost certainly the most relevant legislative change announced by the Macau Government is the intent to enact regulation dealing with the gaming promotion, which may also include regulating the commissions paid out to the local gaming promoters (junkets). It was suggested that this may imply to put a ceiling on the commissions paid out by the casino operators to the local gaming promoters (namely, by setting a maximum percentage of the monthly rolling chip turnover volumes that can be legally paid out as commissions), which must be understood as a first steep to impose certain mandatory standards and eventually also stricter regulations on the highly
13
The last major legislative intervention relating to gaming law was done in 2004, when the credit for gaming in the Macau SAR was regulated (see Law no. 5/2004, of 14 June 2004). Moreover, it may also be mentioned that in 2006 the money laundering regulations were fundamentally reviewed, which had a very substantial impact with regards to the accountancy and control of the gaming revenues (see Law no. 2/2006, of 3 April 2006).
competitive premium gaming market14. The main issue here under legislative review is the growing perception of the necessity to regulate and restrain the excessive command and control of the Macau casino premium market by the local junkets. Indeed, not only are the local junkets increasingly organized15 and are able to impose ever higher commissions16, but if this trend persists they will quickly capture the larger share of the gaming revenues generated by the premium market, leaving the local casino operators with shrinking profit margins and becoming little more than a mere suppliers and managers of the casino venues and facilities. It certainly is an unexpected development that the local operators have been allowed to be pushed into an all out price war over the commissions paid to the junkets and that they are shifting more and more of their profit margins to the gaming promoters that they engage. This is not only unfortunate for the local gaming operators themselves, and naturally their shareholders, but it certainly creates considerable new regulatory challenges to be overcome. The regulatory framework presently in force in the Macau SAR focuses essentially on the supervision and control of the casino gaming sub/concessionaires and substantially less attention is paid to the great number of gaming promoters presently
14
In 2007 around 66.5% of the total casino revenues of the Macau SAR were generated in the “VIP” rooms. The gross gaming revenues of “Baccarat VIP” were of 10,790 in 2000; 12,755 in 2001; 16,340 in 2002; 22,178 in 2003; 29,783 in 2004; 28,864 in 2005; 36,783 in 2006; 55,762 in 2007 (amounts in millions of patacas; the pataca is the official currency of the Macau SAR; presently one US Dollar is around 7.8 patacas) (see, http://www.dicj.gov.mo/PT/Estat/DadosEstat/2007/estat.htm#n1). 15 The gradual consolidation of the local gaming promoters has been ongoing for quite some time and can be perhaps best exemplified by the recent creation, in December 2007, of “AMA International”, which is a highly successful gaming promotion company that functions as an consolidator and umbrella company to aggregate a vast number of local junkets, and transfers a substantial part of its profits to “A-MAX Holdings, Ltd.” (see, http://amaxhldg.com/aboutus.html), a company incorporated in Bermuda and openly traded at the Hong Kong Stock Exchange (Stock Code 959) In this regard many questions should obviously be raised by DICJ (Gaming Inspection and Coordination Bureau of the Macau SAR), since by law only authorizes individuals or companies with individuals as shareholders are allowed to hold a gaming promotion license. 16 It has been reported in the local press that Melco PBL has been payment commission rates of up to 1.35% of the monthly rolling chip turnover volumes to “AMA International”. If such is true, then Melco PBL already transfers most of the gaming revenues generated by the premium market to the junkets. But it also helps to explain how the market share of Melco PBL raised from 9% in December 2007 to 18% in March 2008 (See, The Billions Race, Macau Business, May 2008).
populating the local gaming market17. It is currently rather easy to obtain a gaming promoter’s license in Macau, the level of scrutiny that potential candidates have to face to assess of their suitability is low, and one just needs to apply, disclose a series of basic information and comply with certain minimum requirements. It is also obvious that it has been difficult to keep track of all junkets operating in Macau and ensure their full compliance with the applicable regulations. Otherwise the local regulators would have long came to wonder why local gaming promotion companies, that by law have to disclose their shareholders and cannot have other companies as shareholders18, are advertised as been transferring most of their profits to public companies listed on the Hong Kong stock exchange19. Also here, with the increasing importance of the junkets there must come greater scrutiny by the Macau regulators, as otherwise the Macau Government may well lose control over who is in fact running the local gaming market. We should also consider that gaming companies operating in Macau are investing billions in the construction and development of resorts, casinos and hotels, they are creating new jobs and they are expanding the business scope of Macau. Moreover, they have signed sub/concessionaires agreements with the Macau SAR which require that large investments must be made and that local companies and local employee should take part in the gaming projects that they develop. Junkets do not have similar obligations under their junket licenses; as a matter of fact, it is rather obvious that the investment of the junkets companies in Macau is almost non-existent. The announcement that the commissions paid to the junkets may be limited by law was more or less universally welcomed by the local gaming
17
It is obvious much more easier to supervise the activity and ensure the suitability of the six casino gaming operators, which are highly visible and already dispose of powerful internal audit and control mechanisms, than to oversee and keep track of the vast number of gaming promoters operating in Macau (as of December 2007 there were 124 licensed gaming promoter companies and 63 individual licensed gaming promoters; see official List of the Gaming Promoters, of 18 January 2008, provided by DICJ). 18 Article 4 of Administrative Regulation no. 6/2002, of 1 April 2002. 19 This is how this issue usually is presented, but the opposite view merits to be considered, since for the Macau regulator it is up to the Hong Kong authorities, namely the Hong Kong Securities and Futures Commission to review the claims of the companies there listed, and to make sure all information provided to the public is accurate and in accordance with the applicable legislation (of Hong Kong and Macau).
operators20, and one can easily understand why. However, it remains to be seen if the legislative intervention now announced will indeed be able to effectively curb the commissions paid out to the gaming promoters or if it will be another case of too little too late. It is obvious that the temptation to break any mandatory limitations on the commissions paid out will be considerable. However, it is clear that this legislative intervention may offer a unique opportunity to put a hold on the destructive commission race that the local gaming operators were engaging in the recent past and give them an opportunity to recapture the lion’s share of the gaming revenues generated by the premium casino market of Macau. But this will raise another flag. If the Macau Government wants to impose maximum commissions rates to be paid by the local casino gaming operators to the junket, it must also give to the local police forces and regulatory authorities sufficient manpower and clear instructions to ensure that the new law will be fully enforced. There is always the risk that deals under the table will take place, so it is crucial to be prepared. Junkets companies have a very important role to play in the gaming industry of Macau, so important that they also need to be regulated to the same level as that of a gaming concessionaire. In the long term this will be good for Macau and good for the junket license holders. At the end of the day this may be a win-win situation for the casino operators, the local Government and even for the junkets; since a clear legal framework will help the market to mature, increase revenues and will bring greater transparency. Junkets companies that will be successful under these new regulations will have the ability to expand their market in Macau and also in other jurisdictions such as Singapore, Philippines and maybe in the future Japan or even the US.
20
See, Joyce
Pina, Limiting Casino Influence, Macau Business, May 2008.