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The ultimate concession: The future shape of the Macau gaming market

By - 18 May 2021

Discussions about the future of Macau have been put on ice due to the intervention of the Covid-19 pandemic, but they have also crystalised around the argument for change. The impact of the coronavirus has put into stark relief Macau’s reliance on a single economic resource and the fragility of its infrastructure as a result.

Decisions regarding the licences for each of the Integrated Resort concessionaires remain indistinct, when this year we were promised concrete directions as to the course Macau will take over the next decade. Prominent analysts Rui Pinto Proenca, Ben Lee, and Andrew Klebanow offer their respective insights on whether the existing status quo can be maintained.

Did the ending of the state-granted monopoly, held by Stanley Ho, and the commencement of the bidding process for the concessions and subsequent sub-concessions, mark a significant departure from traditional casino market norms?

Rui Pinto Proença, Managing Partner, MdME: A major difference between the system in Macau and other international licensing systems is that by law, and this has been like this for a very long time, casino gaming and other forms of gambling are an economic activity that is reserved, and can only be pursued, by the State itself.

This is where concession derives its name. A private operator is able to offer gambling in Macau because the State government concedes that right. Such a system ensures that the role of the government is both absolute and essential.

Secondly, in both controlling the method by which concessions are awarded and the means by which the market operates, the obligations under which private operators function are derived not only from the laws and regulations of Macau, but also from the concessionary contracts agreed with the government.

This contract between the operator and the government regulates the right to pursue this economic activity. The concessionary contracts are essentially a coupling of state and private enterprise.

The state’s role in determining that gambling should continue, shifting from a monopoly to a system essentially driven by six operators, has unquestionably shaped the subsequent economic growth of Macau.

Ben Lee, Managing Partner, IGamiX Management and Consulting Ltd: When Hong Kong and Macau became self-autonomous regions following their respective handovers, Hong Kong adopted the role of international financial centre, whereas Macau was to become a centre for hospitality and tourism.

Had Hong Kong the ability to open up casinos, not only would it have leapt at the chance, but the industry would also have been much more efficiently managed too. However, they were restricted to the Hong Kong Jockey Club and a handful of lotteries, while Macau was handed the prize of casino liberalisation.

Was a more liberalised market with relatively light regulation a deliberate move to accelerate the growth of the industry and to achieve economic development?

Rui Pinto Proença: Absolutely, and I think you have to place this decision in a historical context. As the transition from Portuguese to local government control under Chinese sovereignty took place, an exodus of locals to Portugal saw Macau enter a period of economic recession.

And there was no clear path as to how to improve the economic circumstances. Most of the industries that had previously flourished, such as the garment industry, had already moved or were in the process of moving across the border into China, incentivised by reduced labour costs.

I think it was essential, therefore, to put in place a driver for economic growth, one guaranteed to generate sufficient tax revenue and greatly increase employment. And importantly, gambling was an established industry in Macau.

Furthermore, it was the only place in China where casino gambling was legal and regulated. The intention was to attract not only foreign investment by means of capital investment, but also experience and brands to take the gaming industry is to the next level. However, I don’t believe anyone foresaw the extent to which this would eventuate.

So the authorities had created a roadmap?

Ben Lee: The Macau government had identified a wish list, with at least one, if not two, US-based operators that they believed could help propel the industry to a much higher level. The incumbent, having operated a monopoly for many years, had no interest in growing the industry at that time, content as they were with the size of the pie they’d been sliced.

Authorities on both sides of the border had a hand in making sure the proposition attracted enthusiastic entrepreneurs who they believed would grow the industry.

Do you believe the authorities during that initial period could have foreseen the future levels of growth?

Ben Lee: No absolutely not. The growth we saw peak in 2013 at US$45bn was totally unprecedented and, I believe, unanticipated. Since then, we’ve seen various initiatives, announcements and edicts from the northern side of the border, all designed to temper the gaming industry in Macau.

Andrew Klebanow, Principal, Klebanow Consulting: I don’t think anyone in the Macau government envisioned how massive the industry would become or the phenomenal impact that concept had on Macau’s fortunes. Macau has subsequently become the largest gaming jurisdiction in the world within in a couple of years.

The opening of Sands Macau was a pivotal event. The fact that the project paid for itself in six months drew the attention of the entire industry. They recognised that there was something special here.

The growth of Macau snowballed. Wynn opened and then Star World, Grand Lisboa and developments on Cotai island swiftly followed one another. And then, just as Cotai opened up with phenomenal growth, a global recession hit.

How did the recession impact on Macau? Was it relatively immune?

Andrew Klebanow: The recession in 2009/2010 brought the industry to a standstill. Galaxy World in 2010 was a half-built structure with nothing moving or getting built. Across the street, Sands Cotai Central, the three hotel towers didn’t have a single construction worker scrambling over them.

The financial crisis severely impacted gaming operators, but what was crucial was that it was short-lived and by 2012, Macau was back in business. Projects were completed, Galaxy World opened, Sands Cotai Central’s is completed and construction moved forward on Paris, Studio City, and the Encore project on the peninsula was completed by 2013/2014.

All of these properties are up and running and making a lot of money. So that was an important period around 2010.

According to the Gaming Inspection Coordination Bureau, Macau’s revenue peak was in 2013. Up until this point, despite the fact that local governance may not have foreseen such growth, how embedded in the industry were the foreign operators?

Rui Pinto Proença: From the perspective of Macau and its economy, these are extremely important players; we’re talking about the six biggest employers bar the government. In addition to employing a substantial number of people directly, they also employ an even larger number indirectly through service providers; they are an integral part of life in Macau.

These companies generate almost 80 per cent of the enclave’s tax revenues. So, I don’t think they could be more embedded in Macau’s economy or society. In terms of the individual operators, SJM is a local business. They don’t operate anywhere else. Galaxy is in the same position, albeit with a few minority shareholdings in overseas markets. Melco is another home-grown operator, but it’s expanding beyond the borders of Macau.

Finally, you have American capital for which Macau represents a substantial part of each operator’s worldwide revenue. Taking all of this into account, I don’t think any operator would voluntarily leave Macau. Not only would it be an unwise decision from a business standpoint, I don’t think their shareholders would be too pleased either.

How has the PRC sought to temper the growth of gaming in Macau?

Andrew Klebanow: Cotai opened with the capacity to accommodate 600 tables, but the government allowed only 225 new tables to the market, forcing operators to steal tables from their peninsula properties and relocate them to Cotai. The Sands Macau circa 2004 was floor after floor packed with hundreds of table games.

However, visit today and the top two floors are barren, filled with concessions for jewellery and watch stores, because they had to relocate tables to their more profitable Cotai location. So, I’d say that the Macau government has unquestionably sought to temper the phenomenal growth of gaming.

What sort of intentionality is behind that, is it to stop currency leakage? Is it to boost diversification or a bit of both?

Andrew Klebanow: I think diversification. Macau’s dependency on gaming revenue is a concern for the PRC. Control lies in the hands of the state and the operators, but you always have the PRC in the background.

I believe that Macau, unfettered by regulation and activities from the PRC could have been a US$50bn gaming market by 2024 and could have eventually soared to $100bn. It could again, but by capping the number of new table games, imposing currency controls and pursuing anti- corruption campaigns, the government is very effectively tempering growth.

Post 2013’s peak, an anti-corruption campaign headed initially by Xi Jinping was followed by increased regulation of the industry in Macau. Did this moment represent a new era for the gaming industry in Macau?

Ben Lee: Yes, and it’s not just the casino operators. The most recent incoming administration, headed by Ho lat Seng, our new Chief Executive, represents a huge departure from previous norms. Macau’s first two executives, Edmund Ho and Fernando Chui, were both deeply connected with the old money network in Macau.

The current Chief Executive has very little connection with the ruling class. This also includes the various departmental secretaries, which are all politically aligned with China, as opposed to local interests. So yes, there is a deliberate effort to ‘decouple’ the gaming industry from national interests.

Rui Pinto Proença: Watching the events unfold at the time, I think it was clear that we were experiencing a significant slowdown, not just because of the broader corruption campaign, but also due to the fact that there were elements within Macau that were incompatible with the long-term goals of the campaign. I believe there was also a heightened perception of corruption that didn’t actually exist.

I would describe this period as a cooldown and correction of certain segments of the industry that were not contributing to a healthy industry. However, with the benefit of hindsight and perspective, I would not call this period a decoupling. I think this period, in the broader context, is one that is leading Macau instead towards diversification.

I think the period from 2013 onwards was clearly a moment where the industry needed to be cleaned up, as opposed to the start of a process to end the industry. Macau rid itself of certain behaviours and certain aspects of the business that were not healthy or sustainable.

More stringent money laundering legislation and enforcement, including the barring of politically exposed individuals visiting Macau to gamble with dubiously obtained funds, these are behaviours that you don’t want in the industry wherever they occur in the world. So I think it was a positive move and I think we’re now into the second stage of that process.

Andrew Klebanow: Both the PRC and local government in Macau have had a profound effect on the gaming sector. An example of which and a seminal event in the story of Macau took place in June 2014, when President Xi implemented his anti-corruption campaign.

This had a chilling effect on gaming revenue in Macau, impacting upon a run rate of about $47bn in gaming revenue, of which VIP was well in excess of 60 per cent. The crackdown was severe, ripping the wheels off the wagon.

Not only did the crackdown affect public officials, who realised that they shouldn’t be spending so much time in casinos, it also affected what we call ‘conspicuous consumption.’ Anyone with wealth living in the PRC who came to Macau on a regular basis to gamble and shop also recognised that this was not a good idea. Combined, this realisation caused VIP revenue to collapse.

During this period, Macau’s VIP traffic dried up; it has recovered, but there were some tectonic shifts post-2014. Junket operators saw their share of the market decline, which at one point contributed 72 per cent of the revenue in Macau, falling to 56 per cent in the last few years, and in 2019 it was at 45.6 per cent.

Were there any instruments used for the purpose of anti-corruption that were specifically targeted at Macau’s gaming industry, or do you believe that this was just an extension of the broader Xi Jinping campaign?

Andrew Klebanow: I think it’s more the latter. Did the DICJ (The Gaming Inspection and Coordination Bureau) tighten up the movement of money across the border? Yes. Old techniques, such as using Union pay to send money to Macau, is watched more vigilantly by the DICJ, but this is definitely driven by the PRC.

It wasn’t so much the huge outflows of money going to Macau, but concern that it was flowing elsewhere. You can see a comparable example in the way in which the PRC has focused its gaze upon online gambling in the region and how it has used its influence to seek to exert control.

The Philippines is currently a major online gambling hub. Estimates place gaming revenues wagered online somewhere north of US$8bn, perhaps as high as $20bn per year. And it’s leaking like a sieve out from the PRC into the coffers of gaming operators in the Philippines.

So concerned is the PRC at this situation that the Prime Minister of Cambodia was kindly asked to close down his online gaming industry, and, obligingly, he did so on December 31, 2019. Online gambling in Cambodia came to an abrupt end, shuttering a $4bn per year gaming sector in the country.

Speaking of bans, China maintains a ban on gambling activities, while Macau has become one of the world’s leading gaming hubs. Do you think China views Macau as a success or an aberration?

Rui Pinto Proença: I think that’s a question the current Chinese decision-makers also pose themselves. The majority of Western jurisdictions and definitely the majority of Western thinking follows that while gaming is considered a vice with the potential to cause social harm, it is better to control gaming as opposed to leaving it unregulated and illegal.

Legislation, regulation and taxation is a practical approach to the reality that if you prohibit gambling, you will never suppress it completely and never be able to control it the same way as when you legalise it.

Ben Lee: Macau is a world gaming hub, the only problem is that this is not a positive. It’s actually a huge negative. China recently announced a blacklist on foreign gaming jurisdictions and most analysts are of the view that Macau is not considered as part of the mainland.

So Macau is viewed as an aberration, rather than a success?

Ben Lee: From the recent spate of announcements and edicts, one could probably draw that conclusion.

In view of this, do you believe the liberalisation of Macau was part of a scheme to evolve the gaming industry into a broader tourism sector?

Andrew Klebanow: I think that’s exactly what the plan was; the Macanese government recognised that in abandoning the monopoly, the market could attract investment capital. I have a hard time believing anyone with the exception of Sheldon Adelson and Steve Wynn could have envisioned how big Macau was to become.

I think that they saw this peninsula, across the harbour from 10 million people in Hong Kong and Guangdong province with 90 million people, and thought that if we build ‘something attractive,’ they will come.

Certainly, if you look at Macau before 2002, there wasn’t a whole lot of ‘attractive.’ The genius of the plan was to attract outside investment and bring visionaries to Macau to build integrated casino resorts. They just did the math.

What we’ve always known about casinos is that proximity and ease of access are the primary drivers of revenue. The closer you place your casino to a population centre, the more successful you will be.

In the initial years, as Cotai was in development, it was all about increasing supply because demand was almost limitless. However, as a strategy for diversification, there are lots of problems with this model, and so the Macau Government started limiting growth by restricting the volume of table games.

Which is why, to this day, if you walk the beautiful expansive casino floor at Wynn Cotai, it still seems a little light on tables.

With major developments such as the construction of the Hong Kong – Zhuhai – Macau Bridge and the recently published Macau Tourism Industry Development Plan or Master Plan, how do you envisage the future of Macau and its gaming industry?

Rui Pinto Proença: I think there is definitely a push, which was very apparent in the policy changes announced by the Macau government this year, for diversification into financial services. This region continues to explore and attempt to understand what role it can play in the financial services sector in the near future.

However, it remains unclear, when you consider the powerhouses of Hong Kong and Shenzhen on our doorstep, what exactly is Macau’s niche in this fiercely competitive sector? I think the plan is still being thought through and from planning to execution, we’re still at the early stages of this process.

Despite this, even if such a scheme were successful, I think any plan to replace the gaming industry as the key economic driver in Macau would be extremely difficult to achieve.

Financial services can complement the gaming industry and even diminish its economic importance, but I think the strategy of diversifying the industry would be more advantageous and achievable than seeking to replace or end this business in Macau.

Ben Lee: The bridge isn’t a Macau-centric project. It wasn’t designed to facilitate more tourism and to attract the premium mass market. The bridge was constructed primarily to bring Zhuhai closer to Hong Kong, just as Shenzen enjoyed the boost from Hong Kong. It was designed to enable transportation and logistics from Zhuhai to the ports of Hong Kong.

Andrew Klebanow: I believe casino gaming will always be a primary source of tax revenue for the government in Macau. If you compare with Las Vegas, at one time 80 per cent of property revenues came from the casino, now it’s well below 50 per cent and more like 35 per cent.

Vegas is dependent on hotel rooms getting a great average daily rate, on filling the conventions and meeting spaces; and upon nightclubs and restaurants. Vegas has truly diversified its product. Gaming revenues continue to grow, but non-gaming outpaces the gaming segment. I think both the Macau government and the PRC would like to see similar trends in Macau.

Encouraging this type of diversification is part of the process to control the market; limits on the number of table games, stipulations on the volume of currency crossing the border into Macau, and a crackdown on the role of junket promoters conduct their business in China. These are significant steps.

Both the PRC and the Macau government are encouraging operators to continue to diversify and create additional, more exciting entertainment experiences that are non- gaming. Consider the fact that the renovation of the Sands Cotai Central to create the Londoner Casino is a US$2bn investment. That’s a lot of money for what essentially isn’t a new property, it’s renovation that isn’t adding to the gaming offer.

In relation to the tourism development plan, do you think China has a firm strategy to reduce Macau’s dependency on gaming revenues?

Ben Lee: We have been listening to this rhetoric over the past 10 years and we have seen very little concrete results. I think the issue is that the rhetoric runs counter to Macau’s ability to diversify our economy, an actuality that is not seen in the lower rungs of Macau.

There’s lots of talk about encouraging SMEs in Macau, but in fact the SMEs are dying because labour is being sucked up by the gaming industry. To this day, very few people want to work in non-gaming environments compared to the casinos, where the pay and the benefits are much higher.

In the short term, due to the contraction caused by Covid, the gaming industry has scaled back on recruitment. People are seeking work with other companies, but when things improve, they will be back to the casinos in a heartbeat. So, the gaming industry has literally sucked the lifeblood out of other areas of the economy.

If Macau really wants to diversify its economy, it needs to allow the invitation of skills and talent from outside the gaming sector. Unfortunately, there is no political will to accomplish this, and we haven’t seen change in the last decade.

In fact, the situation is about to get even worse. Working visas or blue cards for foreign workers have already been withdrawn, which means the situation is going to get even more complicated in the future. How do you diversify an economy when there’s no talent to do so?

In that vein, do you think it’s useful for China to maintain Macau as an enclave where gambling is legal and the issues surrounding gaming can be externally managed?

Rui Pinto Proença: In regards the extent of the role Macau plays, the enclave is defined by both its physical borders and Chinese currency controls, which create robust barriers to entry. I think without these barriers Macau would enjoy even higher revenues.

However, I believe the measures Chinese authorities have imposed restrict the growth of gambling to promote policy decisions that would diversify the economy away from gaming. The problem is that in reality, this is simply not possible.

Do you believe a deep, successful diversification is possible in Macau?

Rui Pinto Proença: I think to expect industries outside of gaming to match tax revenues generated by today’s casino operators would be extremely difficult in the foreseeable future. I wouldn’t say it’s impossible, because China has disproved things that were considered impossible many times over.

However, I think what’s more feasible is a diversification model that would work with the existing gaming industry. This type of diversification has been government policy in Macau for some time, as the government seeks to reposition gaming as an entertainment focused business, a component of the tourism industry, rather than for its own sake.

What changes are coming for the concessionaires and foreign operators?

Ben Lee: That’s the billion-dollar question. Nobody knows, we’re all hearing the same narrative. As aforementioned, we also haven’t seen any positive approaches to stabilise and help in the diversification of Macau’s economy. One significant boost to Macau would be the introduction of the digital Renminbi.

Essentially, our default casino currency and the default major currency in Macau is not the MoP, it’s the Hong Kong dollar. Cars, real estate, casinos – these three major activities are all conducted in Hong Kong dollars.

When the Chinese visit Macau they convert Renminbi into Hong Kong dollars, but they face all sorts of restrictions, capital control, currency control caps and so forth. However, if China were to introduce digital Renminbi in Macau, which has already been trialed in five cities in China, it could replace the Hong Kong dollar as the default currency in Macau.

Such a change would then help the new-found narrative of becoming an international clearing centre for Chinese Yuan. This makes a lot of sense, as the casino industry is by far and large the single biggest potential contributor to an international clearing platform.

Such a system would remove the controls and constraints on mainland Chinese citizens gaming in Macau, because China wouldn’t have any problem with mainland Chinese visitors coming to Macau, because China could keep track and control all digital money transfers across the border.

Andrew Klebanow: I believe the retender process centres around a single question: what are you going to do for us? What are you going to build that will further the goal of diversification, and how much money are you willing to invest into properties to further diversify them? What I’m sure about is that there will be phenomenal commitments to non-gaming components.

Rui Pinto Proença: It’s clear now that the junket system is an undesirable hangover from Macau’s past and that moving forward means the acceleration of the mass market. I think the challenge is, can the enclave capture a different type of mass, the so-called premium mass?

A mass market willing to spend more money in non-gaming segments, restaurants, entertainment and hospitality. I think this is the next stage in development of the gaming industry in Macau – and it’s a positive step.

Perhaps we won’t see the crazy numbers we’ve seen in the past, but it will be more sustainable. To achieve this, Macau needs to answer one big question – how do we keep visitors here for more of the time? The current average stay is very low, around 1.2 days, which means that the allocated time for people to spend their money in non-gaming segments is very low.

But it’s a cycle we need to break, because if you don’t have a sufficient entertainment offer, if you don’t deliver sufficient quality, then it’s hard to attract those kinds of people.

And finally, one of the changes that I think needs to happen, is the digital transformation of an entrenched analogue industry. The sector is still catering to a clientele that enjoys the environment of a crowded baccarat table. However, this holds little appeal to a young, affluent more travelled Chinese consumer. And I think the digital transformation of the industry is overdue.

Some of the operators are more advanced than others, and I think the ones that grasp this concept, will take the lead.

Is first mover advantage significant?

Rui Pinto Proença: Yes, definitely – that goes for everything. From cashless to different types of games and different ways of playing those game. The new consumer doesn’t necessarily want to be sitting at the table next to a lot of people. If they want to take their game via an iPad to their room, they should be enabled to do that.

Obviously, these changes require regulatory approval, but I think we’re at a very interesting intersection where technology will benefit not only the gaming business, but will also benefit the regulator.

Regulators need to move past the point of distrust and suspicion of technology and embrace it because it brings benefits to all parties. So, I think we’re in that intersection where it’s possible for technology to be adopted and to benefit both the business and public policy. We just need to move forward with it.

Would a development like the digital Renminbi alter the rhetoric of diversification if they’re less worried about currency leakage?

Ben Lee: Yes, it would. It would help diversification, but I believe that diversification is the old narrative. The new narrative right now is for Macau to become an international Renminbi clearing centre.

We’ve seen a slew of small banks setting up in Macau, so conceivably what would happen is that the Hong Kong dollar is replaced by Renminbi and China relaxes control on the transfer of digital Renminbi from the mainland.

It’s a better system because at present, the operator generates revenue in Hong Kong dollars and pays out to their players in Hong Kong dollars, which is freely tradable and means that players and the casinos can repatriate this money oversea.

If gaming in Macau is conducted in digital Renminbi, this huge capital outflow from the Chinese economy is no longer an issue because; firstly, China can track every single Renminbi that crosses the border and, secondly, the casinos will be generating their revenue and profit in Renminbi.

So in order to repatriate their profit, they would have to seek central government approval to convert Renminbi into a foreign currency. Capital controls would, therefore, devolve from having to monitor these millions of smaller transactions to simply monitoring the big players, i.e. the casinos.

So hypothetically, if this leakage is plugged via the adoption of digital Renminbi, would local governance be incentivised to ‘open the taps’ as it were?

Ben Lee: Yes. Right now, mainland Chinese coming to Macau face constraints upon the amount of money they can withdraw, since this is subject to central government approval. Each time they hit the ATM, it’s a 3,000 Hong Kong dollar per day limit, while there’s also a limit on the amount of money they can bring across the border, which is why a lot of the current outflow is through underground channels.

If players are instead permitted to withdraw Renminbi in Macau, without limits, then we would truly have a mass market in Macau. At the moment, we don’t have a true mass market because every one of our visitors and gamblers is an international traveller subject to outbound and inbound visas, which in turn are subject to currency controls.

If Macau becomes a single currency jurisdiction with China, we’d no longer have the capital constraints China imposes on Macau, due the casinos trying to repatriate profits overseas, that’s why a single currency would make it easier for China to control the leakage.

Wilfred Wong, President and Executive Director of Sands China, recently said whilst awaiting government direction that he does not see a future in which Chinese companies operate within the gaming industry – thoughts reinforced by Chairman and CEO Rob Goldstein.

However, Priscilla Roberts, Associate Professor at the City University of Macau, believes: “it’s very possible that American casinos will no longer be as welcome in Macau and there may be some pressure for the casinos to be more China operated.” Where do you stand on this subject?

Rui Pinto Proença: Well, there’s a line of thought that says American operators will ultimately become the victims of the geopolitical tensions that exist between China and the US, reinforced during the era of the Trump administration, but which has long been part of the narrative in this part of the world.

First of all, I think the geopolitical context is both complex and ever changing. That said, it’s definitely a risk and something that the operators need to bear in mind and consider in their approach to the concession retendering.

I also think it’s important to understand the declaration that there will be no Chinese capital in the gaming sector and where it comes from, as there are a lot of difficulties associated with that assumption. If you asked me, will the companies investing in gaming be state-owned enterprises? I find that unlikely.

Do you believe that the upcoming licence renewal process will be used as a stick to impose greater control?

Ben Lee: Yes. The problem with the first concession is that there was no ‘stick’ in terms of what the concessionaires had to accomplish. It was basically open ended and allowed operators to play ‘bait and switch.’ Each promised the moon and the stars and delivered, well, significantly less.

Now, with the new concession, I would expect that the promises by the new proposers will be highly detailed and specific this time around, and there will be penalties involved should the promises not be met.

Andrew Klebanow: I believe the licensee renewal process will demand that each concessionaire commits to massive amounts of investment in non-gaming components. Each 10-year concession will come with a stipulation that the concessionaire must, for example, commit $10bn in non-gaming facilities.

Every concessionaire will step up to the plate. The casino prize is huge, but there’s also money to be made in retail, commerce, amusement and theme parks. I think, with the changing political scene in the United States; the recent election; the passing of a Sheldon Adelson; the resignation of Steve Wynn, has seen the removal of the major political lightning rods.

The next phase will see President Biden increase efforts to move towards normalised relations with the PRC and away from the sabre rattling. I think the PRC and Macau government are, therefore, more amenable to working with the existing concessionaires. I don’t think they’ll chase them out as I don’t think denying a renewal to any of the US based operators is in Macau’s best interests.

What do you think those licence stipulations might be?

Ben Lee: It’s likely we’ll see increases in the ratio of entertainment, MICE and retail within the gaming concession, despite the fact that Macau already offers too much retail; MICE has never realised its potential and entertainment has died on its feet.

I’d also expect the government to compile a list of non-gaming amenities and request concession proposers to submit their plans before selecting the best proposals.

Contemplating the nuclear licensing option, could the state nationalise the industry in Macau and make gambling a state-run business?

Rui Pinto Proença: I would say that’s entirely unforeseeable. However, the gaming concession in Macau has always been in the hands of a private operator – it has never been government operated. The company running the business during the monopoly, STDM, the predecessor of SJM, was fully private. So, I don’t think you can find a parallel with that possibility.

I also think that such an assumption wrongly evaluates the situation. Looking at the industry going forward, the integration and increased focus upon tourism and the entertainment industry is the ultimate goal for Macau. This leaves open the door for Chinese investment in what are desirable businesses and infrastructure in Macau.

No matter how much the enclave seeks to attract international visitors, the fact is that the majority of visitors to Macau hail from China, and to that extent I think some of these companies would benefit from having Chinese partners, people that know the market and what Chinese customers want. There would be many benefits from this type of cooperation.

One example of this is when you arrive at a casino in Macau. If you wish to play on the casino floor you must withdraw cash, and to do this you must visit a counter and purchase your chips with cash. When you’ve finished playing, you redeem your chips back into cash. Cash is the currency of choice in Macau, but in China, if you try to pay with cash anywhere – you’re a caveman. People don’t use cash in China anymore.

It’s absolutely a cashless society, and so there is a mismatch between how the Macau gaming sector is operating and the reality of Chinese consumer spending habits. I think that mismatch could be addressed by the involvement of Chinese companies from different sectors; technology, retail, fintech, in the Macau market.

I think that there’s definitely space for cooperation with Chinese businesses, but that does not necessarily mean an exit of US market capital. However, I do think it would be beneficial from a business standpoint at the point at which the spheres of gaming, tourism, hospitality and entertainment meet.

Ben Lee: Each operator has sought to ingratiate themselves into the economy with varying levels of success. The issue for foreign operators is one of cultural norms and differences, which contrasts with their fellow competitors, particularly the local and the Hong Kong operators who are more or less considered locals.

We’re talking about cultural norms, corporate cultures practices, HR, legal, basically a conflict driven approach versus a compromise/harmony-oriented attitude adopted by the locals. We see major differences arise between the US-based operators and the local operators.

Some have attempted more successfully to adopt local practices, but each have acquitted themselves with differing levels of success in their ability to do so.

Having said all that, when push comes to shove, if Beijing decides that it’s politically convenient to check the Americans, it will be done. Without blinking an eye. And there’s clear precedence. When Macau’s public bus network held, for the first time, an open tender to take over the existing duopoly, a French consortium won a major part of the tender.

However, what followed is that the French consortium was not paid by the Macau government, they declared bankruptcy hoping to force the local authorities to the table and the Macau Government immediately announced that they would take over the running of the buses.

Everyone returned to work the very next day, and the government continued running the buses for a couple of months until they arranged for the other companies to take over.

Do you think the fears of foreign equity being sold to mainland China are greatly overstated?

Ben Lee: No. The fears are not overstated, the fears are real, the risks are real. The original concession was issued on the basis of one third of its constituents would have US interests. One out of three – the one being Wynn. However, the three became six and the American’s share grew to 50 per cent control of the industry.

Beijing is not happy with this situation. And don’t forget that the new concession tendering is not a retender, it is not a reissuing, nor is it a renewal, it is a brand-new RFC. Anybody can submit a proposal. This is the first opportunity for China to rebalance the industry. So there are risks.

The way for China to rebalance the concessions is to either reject one of one or two of the three foreign controlled entities, or one or two of the foreign country entities, or contrive a dilution of their equity to a point where it is acceptable or they are seen as locally vested business. Such a decision is clearly on the table.

Andrew Klebanow: The fears exist, but it’s the pandemic that has really thrown a wrench in the Macau business model. Both the Macau government and the operators want to see business recover as quickly as possible. In order to achieve those goals, operators need junket operators to deliver high rollers to Macau.

They need to reach out to Sun City, to the David group, Tak Chun, etc. Traditionally, junket operators have been very good at delivering the players operators need. However, there’s a problem…

In December 2020, China’s National People’s Congress passed an amendment to its criminal law that will make it a crime to enable mainland Chinese citizens to gamble outside of the country. The penalty for such an infraction is severe, with prison sentences up to five years for minor infractions and 10 years for more serious ones. Basically, it’s no longer as businesses usual.

While both Macau’s government and casino operators want to turn the volume up with the help of the junkets, the junket operators are saying: ‘wait a minute, I’d like to bring people to the market too, but I also don’t want to go to prison.’

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