Restructuring in the making

The gaming law revision is finally in motion with tighter rules and supervision for operators and junkets, as expected.  However, some proposed measures in the consultation paper are raising eyebrows among industry insiders, who are calling for clarification.  The new model points to increased oversight, national and economic security interests, a more people-oriented approach and a definite push for diversification

Historians may regard the past month as a watershed in the restructuring of the SAR’s economy, which is to take shape in the years to come. 

On September 5, the Communist Party of China Central Committee and the State Council issued the much-expected Master Plan of the Development of the Guangdong-Macao In-depth Cooperation Zone in Hengqin. The blueprint sets ambitious targets to accomplish a new model of regional cooperation and to promote the diversification of Macau’s economy. Direct references to the gaming industry were unsurprisingly conspicuously absent from the document; however, as the goal for 2035 is that “promoting Macau’s adequate economic diversification will basically be realized”, it seemed clear to many observers that the Hengqin plan is aimed to pushing Macau effectively and finally away from too much reliance on the casino industry.

Questions surfaced about the size and role of the gaming industry in Macau. Part of the answer was provided ten days later with the announcement of another much-anticipated key document: a consultation paper on the revision of the gaming law (Legal Framework for the Operations of Casino Games of Fortune).

The document provides an assessment of the transformational impact of the liberalization of the gaming industry two decades ago and the staggering growth the city witnessed while also pointing out the social and economic imbalances resulting from this ‘miracle’.

 (Over) reaction

While some of the proposed measures to beef up control over the casino operators and gaming promoters had been, to some extent, foreseen, two proposals seem to have sent shivers down the spine of a number of investors: the introduction of the Government delegate to the gaming concessionaires and the distribution of dividends to shareholders subject to certain criteria and priori authorization from the Government. Within two days following the release of this consultation paper, the perceived increase in government control of future concessionaires led to a sell-off in gaming operators stock that erased more than US$19 billion in market value from Macau casino stocks. 

“Most of the Macau government’s announcement was telegraphed in advance, so with few exceptions, it was not a surprise. On the whole, it was negative; but should it have warranted Macau’s gaming companies to lose a third of their value? Definitely not,” Alidad Tash, the managing director at 2nt8 Limited, a consultancy specializing in international casinos and integrated resorts, told Macau News Agency (MNA). Macao Polytechnic Institute gaming industry researcher Carlos Siu Lam also considered the level of investor pessimism to be “excessive”.

By late September, a brokerage warned investors that “until the clarity on the next concession emerges” the city’s gaming sector “could stay un-investable”. In a note sent by  JP Morgan Asia pacific analysts DS Kim, Amanda Cheng and Livy Lyu hint that such clarity is “unlikely in the next six months”, resulting that they advice investors to “stay cautious on the sector”.

On the other hand, gaming consultant and managing partner of IGamix Ben Lee notes that “the lack of official reaction to the stock market turmoil resulting from the release of the draft proposals should alert anyone that it is no longer business as usual”.

Concessions: how many and for how long?

What will the ‘new normal” look like for Macau’s casino industry?

Some of the key ideas included in the consultation document: tighter regulation, increased supervision, narrower room for junkets, stronger focus on non-gaming, and reinforcement of guarantees for workers.

However, a number of questions linger and some observers and industry insiders regard the process as vague and mired in uncertainties. That was partially expressed during the first public consultation on the gaming law revision held on September 20. Nevertheless, representatives of gaming operators tended to prefer to leave more specific questions and suggestions to the documents they plan to submit before October 29, when the consultation period ends.

In the eyes of António Lobo Vilela, former adviser to the Secretary for Economy and Finance on gaming related matters and author of the Macau Gaming Law book, clarity is needed on “ pretty much all the document’s nine key points”.  The Government could “start by stating if the current casino gaming operators are to continue, the Macau government shall clarify in particular, the restrictions on the distribution of profits, the intention to have more Macau permanent residents as shareholders, and the role of the government delegate”, added Mr Lobo Vilela who was in the early 2000s a senior legal advisor, both to the Commission of the first public tender to grant casino concessions and of the think-tank in charge of (co) drafting the gaming law.

A first obvious doubt regards how many will stay in the game and how many concessions will be awarded. 

One matter is tackled head on by the consultation paper: the current sub-concession status will be removed, in line with what many analysts were expecting. However, no indication was provided on the possible number of allowed concessions or if the sub-concessions will be converted into full-fledged concessions. Back in 2002, the Government awarded the three concessions being tendered to Galaxy Casino S.A., Wynn Resorts (Macau) S.A., and Sociedade de Jogos de Macau S.A. Venetian (Sands) was initially a partner of Galaxy but their agreement collapsed and authorities decided to allow Sheldon Aldelon’s company to operate as a sub-concession of Galaxy. Later on, Melco became a sub-concession of Wynn and MGM operated as a sub-concession of SJM. 

Ben Lee contemplates three scenarios: (1) keeping the status quo, meaning that the three sub-concessions become concessions making it six operators on equal footing; (2) the number of concessions being less that six; and (3) one last “seems to have been discounted by most is that it could be back to the original three envisaged by Beijing when they approved the liberalization of the gaming industry”.  

Which scenario is the most likely? “It’s anyone’s guess as there are several ways to read the tea leaves”, Mr Lee stressed to Macau Business. In this respect the consultation document states that “Restricting the number of concessions does not mean reducing the sector’s competitiveness”.  

As for how long will the new concessions last, the document also fails to shed light on that. It does, nevertheless, suggest possible adjustments to both the current maximum concession term – 20 years under the current gaming law – and the extended concession period which now is up to five years. “Ten years appear to be a reasonable period of time to invest, develop and to recoup the new investments likely needed”, Mr Lee suggests. 


Gaming law revision – Consultation Paper

(Translated from original in Portuguese)

Key quotes

NUMBER OF CONCESSIONS

“It is proposed to proceed with the study and review of the number of concessions, as well as expressly stipulating in the law the prohibition of sub-concessions”

“Restricting the number of concessions does not mean reducing the sector’s competitiveness; on the contrary, it aims to ensure a balance between the stability of the gaming market’s size and the liberalization of the sector”

CONCESSION PERIOD

“ (…) The imposition of an excessively long or inflexible concession period may cause a certain level of obstacle, probably leading concessionaires to be less proactive in improving their services to attract new customers”.

“It is proposed that the concession period for the exploitation of games of chance in casino be revised”

PROFIT DISTRIBUTION

“It is suggested that the distribution of profits to shareholders carried out by the concessionaires – regardless of being in cash or in shares – cannot be done without fulfilling the specific requirements defined for this purpose and obtaining prior authorization from the Macau SAR Government”

GOVERNMENT DELEGATE

“This [Decree-Law no. 13/92/M] would be translated in the appointment of Government delegates to extend the direct supervisory power of the Macao SAR Government over the concessionaires, providing it with greater capability in monitoring and controlling the daily operation and operational situation of the gaming operators”

GAMING LAW REVISION – AIMS

  • Stipulate the direction of development of the gaming sector and its size
  • Stipulate number of concessions
  • Stipulate concession period
  • Strengthen supervision and mechanism for verifying the suitability of operators
  • Strengthen supervision and mechanism for verifying the suitability of gaming promoters
  • Introduction of Government delegates
  • Stipulation of criminal responsibility and administrative offenses
  • Define the non-gaming projects that concessionaires must develop
  • Define reinforcement of workers’ guarantees  
  • Define matters concerning social responsibility

Enter the Government delegate

A subsequent question arises. Under which conditions will the concessionaires operate in the new regime? Increased supervision and control is set to be the way forward. This does not come as a surprise to observers. Carlos Siu underlines that the Macau government has been issuing a number of laws and regulations related to gaming in the past years to lay the foundation. “For instance, the money laundering regulations, the new structure of Gaming Inspection and Co-ordination Bureau (DICJ) in mid-June. With the appointment of new chiefs, DICJ is better prepared for the future”, Professor Siu noted to MNA, alluding to the increase in the number of DICJ inspectors from 159 to 324.

For casino concessionaires, the introduction of Government-appointed delegates will be a novelty. The consultation paper refers to in Decree-Law no. 13/92/M – appointment of Government representatives to companies that operate activities on an exclusive basis. This is the case in several companies – namely utilities – operating under the concession arrangement. “I personally assume that it is something similar to the reps for other concessionaires like Macao Water”, Mr Siu told MNA. “If this is the case, they are expected to monitor the concessionaire on behalf of the government and they receive remuneration from the government. I don’t think they will interfere in daily operations unless some negligence is found”.

The consultation paper states that the role of the delegate will be related to providing the Government with greater capability in monitoring and controlling the daily operation and operational situation of the gaming companies. For Ben Lee, this move should be read in light of the overall trend in the mainland. It is time to bid farewell to the current laissez-faire ways.

“With Beijing becoming more directional in their management of the economy and leading industries, the presence of a government representative is probably to ensure that no operator tries to game the system and to promote gambling over in the mainland”.

Vetting profit distribution

Another proposal raised eyebrows among industry insiders – a vetting mechanism for distribution of profits to gaming operators’ shareholders whereby that an only be carried out after meeting certain requirement and upon authorization from the Macau Government. 

For António Lobo Vilela, this raises several questions: “How this is to be implemented and how to reconciled with the generous tax exemptions that casino operators have enjoyed since 2002”, the legal expert asks. Lobo Vilela questions if the Macau Government is to hold ‘golden shares’ in the future casino gaming operators.

A key problem, he argues, is that “an artificial involvement in fundamental management decisions and any vetting mechanism for distribution of dividends distorts the principles of a market economy and would certainly weight on the decision to invest or continue to invest in Macau”.

Hong Kong-based political scientist and author of several books on Macau and Greater China Sonny Lo underscores that the rationale behind the proposed mechanism to oversee profit sharing is related “preventing Macau casinos from being a place to siphon off the revenues from casinos to foreign companies and countries through stock reinvestment and through other money transfer means”.

Some of these proposed measures and requirements could also raise questions for the listed companies and specifically for the operators owned by foreign (US) capital, as they are also subject to supervision by the US authorities regarding their licenses in the United States. With regards to the Government delegate, should he be vested with powers to veto decisions of the concessionaires’ board of directors, Mr Lobo Vilela questions whether “his suitability be scrutinized by the American regulatory entities concerning the casino operators that have American interests”, in an article published by the International Association of Gaming Advisors (IAGA).


“I personally assume that it (Government delegates) is something similar to the reps for other concessionaires like Macao Water (…) If this is the case, I don’t think they will interfere in daily operations unless some negligence is found”, Carlos Siu, scholar

 “An artificial involvement in fundamental management decisions and any vetting mechanism for distribution of dividends distorts the principles of a market economy and would certainly weight on the decision to invest or continue to invest in Macau”,  António Lobo Vilela, legal expert

“(The vetting mechanism over distribution of profits is aimed at) preventing Macau casinos from being a place to siphon off the revenues from casinos to foreign companies and countries through stock reinvestment and through other money transfer means”, Sonny Lo, political scientist  

“There will always be a role for junket operators, albeit it will probably look very different to what it used to look like. Probably smaller in volume and their customers and their funds will have to be squeaky clean”, Ben Lee, consultant

“Most of the Macau government’s announcement was telegraphed in advance, so with few exceptions, it was not a surprise. On the whole, it was negative; but should it have warranted Macau’s gaming companies to lose a third of their value? Definitely not”, Alidad Tash, consultant  


Junkets: tightening the screws

Alongside concessionaires, gaming promoters (junkets) are set to feel the heat of tighter rules. The trend towards more stringent regulations attached to junket operations is not new. It has indeed being adopted over the past few years, but a beefed-up system was seen as inevitable and necessary. For Mr Lobo Vilela, one needs to bear in mind that “gaming is a highly regulated industry”. Indeed, “in some jurisdictions gaming is the most regulated of all industries” and the fact of the matter is that “Macau is still an under-regulated gaming jurisdiction and oversight is the way Macau seems to tackle the issue”, he added. 

The public consultation document also proposes to include in the gaming law penalties against accepting cash or other deposits illegally, and if violations are made by VIP junkets, the gaming concessionaires should bear the corresponding legal responsibility.

The document clearly defines the criminal liability and administrative penalty system with authorities adding criminal responsibility for illegally accepting cash or other deposits, suggesting offenders could face a sentence of up to five years in prison or they could be fined.

Sonny Lo links these newly proposed measures to wider picture related to the Central Government’s comprehensive approach to national and economic security.  For Beijing it is of paramount importance to “prevent Macau casinos from becoming a conduit for money laundering and money transfer from mainland businesspeople and party cadres and officials. This explains why the gaming law needs to be tightened to control the middlemen or the junket operators who cannot and will not be allowed to market casino gaming in mainland China, unlike the past”, Mr Lo adds.  

The case for tightening the screws on gaming promoters’ activities is also shared by brokerage Sandford C. Bernstein.

“Junket regulation and supervision and regulation over “investor deposits” in junket rooms. This has been flagged before repeatedly. Junkets have lacked proper oversight and regulation (although regulation has improved over the past 5+ years), and a key area will be reigning in junket activities,’ Bernstein analysts indicated in a note. 

The downsizing of the junket market is an ongoing process that will now speed up. 

“ This has been clear for some time and will lead to a much smaller junket operation in Macau than in the past (again, nothing new). Junket deposits have been a problem in the past  and the Government has been vocal about the need to reform this system”, the same note by Bernstein added. 

Middlemen crisis?

During the September 20 public consultation session, junket representatives raised a number of questions. 

Kwok Chi Chung, President of the Macau Association of Gaming and Entertainment Promoters, asked for more details on the proposed criminal penalties for the practice of operators taking cash deposits from the general public, which is already illegal in the territory, as well as the working relationship between junket operators and gaming operators defined in the consultation document.

In the proposed gaming law revision, local authorities suggest a possible five-year prison sentence for illegal deposits made in VIP rooms by players, and to hold concessionaires more accountable for the actions of junkets operating under their roof.

Kwok suggested the government could think of ways to legalise the practice of junkets taking capital from the public for running operations “under strict government supervision”.

“In the past 20 years, there has been some negative news about the junket segment; I personally agree there could be more supervision,” he says, adding the gaming law revision could be beneficial to the junket investors and operators as they could have “a better image”. “As long as you don’t break the law, I think it would not be a big deal for us with more government oversight.”

Could the proposed rules on top of the obstacles already in place in terms of outflows of capital from the Mainland be translated in the  “death knell” for junket operators? Not exactly, argue both Ben Lee and António Lobo Vilela.

“There will always be a role for junket operators, albeit it will probably look very different to what it used to look like. Probably smaller in volume and their customers and their funds will have to be squeaky clean”, Ben Lee anticipates while noting that  “the advent of digital RMB will be part of that transformation”.

In the thread, António Lobo Vilela believes that “the number of junkets may shrink and its activity may drop, but they will not disappear”. At the end of the day, “ the junket industry will be reinvented”.

What’s next

As the public consultation ends on October 29, the next step for the Government is to draft a report on the consultation and then move ahead with a draft to be tabled to the Legislative Assembly for first reading deliberation. At this stage, questions remain over how the lawmaking process will be hooked up with the expiration of the current concessions and sub-concessions in June 2022 and the public tender. 

In the eyes of Mr Lobo Vilela, “time is short to conduct a public tender before the termination of the concession and sub-concession contracts”. On top of that “the pandemic crisis, the Covid-19 zero-policy followed by the Macau authorities, the economic downturn that is on the horizon, all together makes the opening of a tender the worst moment ever”, he underlines.

While acknowledging the possibility of an extension of the current concessions due to insufficient time to complete the new tender”, Ben Lee is inclined to another scenario: “with the process finally underway, we could actually see the process completed by the first half of 2022”. This could be the case due to a combination of factors. On the one hand, Mr Lee states that there is a need for  “new investment from the concessionaires to stimulate our economy, to emerge from the pandemic, particularly if they are directed towards non-gaming facilities”. On the other hand, “the development of Hengqin Island is now a national priority and, if incorporated into the terms of the new concession, will Macau then be able to fulfil its obligations”. 

Another source in the industry told Macau Business that another possibility could be under the new law an extension be granted with new strings attached, instead of the current model, whereby extensions are carried out without additional requirements.

Whatever the case, Macau’s gaming industry is being encompassed in the wider picture related to national security. A report issued in August by the Legislative Assembly (AL) Land and Public Concessions Follow-up Committee stated that the development of the local gaming sector has implications related to the country’s national security and it is unlikely the current VIP room exploration model could be sustained under China’s penal legal framework.

“Continuous capital outflows can and will harm the national economic interest of the People’s Republic of China”, Sonny Lo sums up.

Additional reporting by Nelson Moura