Victim of Its Own Success

#146 © Copyright 2008, all rights reserved worldwide. Gambling and the Law® is a registered trademark of Professor I. Nelson Rose, www.GamblingAndTheLaw.com

Most casinos in the world face one of two major problems with their government regulators. Either the system is too new, or it is too old.

Macau is both.

When a gaming regulatory system is new, regulators, both the true casino regulators and lawmakers, have freedom to play at being social engineers. They can impose fairly arbitrary rules for what they think is the protection of the general population. This is how you end up with docked riverboats throwing all their patrons off the ships at the end of phantom cruises.

New regulators also have to show how strict they can be. So they impose stiff punishments for minor violations and are often inflexible in allowing the rules to change to match real-world experience.

It is not fair to say that regulators don’t know what they are doing (although that is sometimes true of legislators). Casino regulators learn fairly quickly. But at the beginning, they often spend a lot of time reinventing the roulette wheel.

Casinos face different problems if a system is too old. In fact, the existing casinos usually don’t have many difficulties, because the regulators often become their friends. It is potential competitors and players who find themselves shut out.

Macau is unique in that it faces the best and worst of having a system that, at the same time, is too new and too old. And most of the problems this has caused has been ignored, because everyone is making so much money.

Start with the number of licenses. Can anyone say exactly how many there are?

Macau is the only jurisdiction in the world that licenses operators and not casinos. The system developed from the Portugese law of concessions.

America has a similar history, only we call them regulated utilities. The idea is that something that is vital, but too expensive to build, should be given to a monopoly operator. Telephone, gas and electric – I still don’t have a choice of cable television companies.

In 1937 Macau gave the gaming concession to a single company. But unlike monopoly operators in most other parts of the world, the company was not limited to one casino.

After the establishment of Macau as a Special Administrative Region of China in 1999, the government decided to end the monopoly. It was only natural, and fair, for those companies winning the new concessions to also be allowed to operate more than one casino.

One of the successful bidders was a partnership between Galaxy Entertainment and Las Vegas Sands, that fell apart. Most regulators would have told the partners, “It’s your problem, work it out yourselves.” But since concessions were not limited to a single casino, the Macau government allowed Galaxy to have the concession and created a new law, creating a sub-concession for LVS.

Since one concession had this right, the other concessions were also given the right. Wynn Resorts, for example, sold its newly created sub-concession to Melco-PBL for $900 million.

Everyone won: Wynn got a $900 million windfall and Melco-PBL got the right to open casinos in Macau. Of course, the three concessions had now turned into six, with no fixed limit on the number of actual casinos.

There is only one part of China, the largest market in the world, with legal casinos: Macau. And capitalism, even in a Marxist nation, is a dynamic force. Allowing competition in Macau created an explosion of construction. There are now 29, 30, or 31 casinos, depending upon what day you are reading this.

Growth has been so explosive that when Macau’s Chief Executive announced a freeze on new casinos and casino expansions on April 22, 2008, after the initial shock, there was a general sigh of relief. Everyone agreed it was the right decision. No one complained that this is not the way to run a casino jurisdiction.

The Macau government, without hearings, votes or any public input, simply said these are the new rules. And no one is sure exactly what these rules are. Concessions and subs are frozen at six “for the foreseeable future.” No new land for casinos, although current construction, and “negotiations,” can proceed. Expansions of existing tables, and maybe slot, will be “tightly restricted.”

Would you invest $2 billion to build a new casino if you didn’t know how many competitors you could face, or even what the law will be? You would if your table games would make five times what they make on the Las Vegas Strip.

The old Macau casino regime had, for many years, allowed the then-monopoly concession to enter into revenue-sharing partnership deals with unlicensed individuals and companies. Continuing a practice that would never be tolerated by a new casino regulator, Macau allowed the three concessions, and the three sub-concessions, to get funding through revenue “franchises” with unlicensed outsiders.

Macau is finally looking at getting a handle on this, including possibly licensing key casino employees, as a result of warnings from the leading government lawyer Jorge Oliveira.

Similar problems exist with the casino tax rates. Like many jurisdictions, Macau has piled on a myriad of separate fees and taxes. But unlike others, Macau taxes concessions at different rates. And the details of the agreements between the casino owners and operators have not all been made public.

The effective tax rate is about 40% of gross gaming revenue. Not only is this high, it is obviously too high. The Macau government is sending a check for MOP$5,000 (about US$672) to every resident. This isn’t the old communist “from each according to his ability, to each according to his need.” No one is checking for need.

Even Stanley Ho, owner of one of the concessions and one of the richest men in the world, will get his MOP$5,000.

I wonder if he will write a thank you note.

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© Copyright 2008. Professor I. Nelson Rose is recognized as one of the world’s leading authorities on gambling law and is a consultant and expert witness for governments and industry. His latest books, Internet Gaming Law and Gaming Law: Cases and Materials, are available through his website, www.GamblingAndTheLaw.com.