Macau – A lesson in scarcity, value and politics
by Andrew MacDonald and William R Eadington

Macau – A lesson in scarcity, value and politics
By Andrew MacDonald and William R Eadington.

Much of the discussion surrounding Macau’s gaming opportunities refers to abundance. There is reference to the huge demand from China and more specifically the Pan-Pearl River Delta region. Also noted is the abundance of quality supply of new gaming facilities coming into the market. However, in reality it is SCARCITY that is powering Macau and the gaming companies that have been fortunate enough to secure a position there.

Essentially there are three scarce commodities in Macau: Licenses, Land and Labour. The three L’s that drive Macau apart from its location. A fourth important L, which has been historically scarce, is Legitimacy, which will also be discussed below.

The first scarce resource is a License (or “Concession” as it more correctly known in Macau).

In 2001, when the Macau authorities first pursued the opening of the Macau gaming market to new license holders, there were three gaming licenses to be awarded. Twenty-one companies from around the world put their bids forward in a beauty contest held by the Macau Special Administrative Region (MSAR) and overseen by the Chinese Central Government in Beijing. This effectively put an end to the long-standing monopoly over Macau gaming held by Stanley Ho and his company, Sociedade de Turismo e Diversoes de Macau (STDM), which had begun in 1962 and whose monopoly had been extended on several occasions. By all accounts, the Macau authorities had tired of STDM’s lack of investment into their gaming facilities and the Sociedade’s overt control of the gaming market and general economy of Macau. The STDM’s 40 year monopoly had been accompanied by increased associations of Macau with money laundering, prostitution and crime. Somehow Macau had ceded control to Stanley Ho and the STDM in a form of prisoner’s dilemma.

When Macau was handed over to China by Portugal in 1999, it seemed to sound the death knell of that period. China quickly sought to clean up the triads that had brought instability in the last few years before the hand-over. China also wanted to prove to the world that its “one country - two systems” model could work and turn a relative “basket case” into a “showcase”. Furthermore, success in Macau would enhance China’s arguments for perhaps a more challenging and certainly more important success that it wanted with Hong Kong.

To achieve these objectives, both the Macau and Chinese governments understood the need to revitalise Macau’s gaming product and bring in visionaries with high ideals, expectations, and track records. At the same time they could not afford to totally disrupt the market and create a war by stripping Stanley Ho’s company of his license. As a result, the three winners of the gaming licenses awarded in early 2002 were Galaxy Resorts in partnership with Las Vegas Sands International (LVSI), owned mainly by Sheldon Adelson; Sociedade de Jogos de Macau (SJM), the successor company to SDTM, owned mainly by Stanley Ho; and Wynn Resorts, controlled by Steve Wynn. The two visionaries and one incumbent who were selected for licenses—none of whom at the time had publicly traded companies or corporate boards to answer to—were all known to be decisive, passionate and “market makers.”

Interestingly, and little spoken of at present, is the fact that there was a formal list of runners-up or “substitute companies”. Those companies that finished fourth, fifth and sixth etc. who could be called upon if the companies that were officially awarded the licenses could not meet their obligations. Among those substitute companies were a joint venture between Park Place Entertainment and Mandalay Resort Group, MGM Mirage, and Genting. By 2006, of the three substitute companies, only one, MGM Mirage, subsequently found a way into the market.

It is interesting to note that the awarding of the three initial licenses was not without controversy, and there were a great many sceptics as to the value of being in the market. One of the licenses had been awarded to a group called Galaxy that included Sheldon Adelson’s Las Vegas Sands in partnership with a property construction group from Hong Kong led by the Lui family. According to some accounts, this had been a forced marriage put together by the Macau and Chinese authorities after Adelson’s original Taiwanese construction partner was deemed inappropriate. The strained relations became so difficult that the Macau authorities solved the issue they had inadvertently helped create by allowing a split of the Galaxy license concession into two. This created a formal concession (license) and a sub-concession (sub-license) based on considerations that were evident under Portuguese law and which the Macau officials were familiar with. However, this led to some inequities among the license holders and, as a consequence, the Macau authorities allowed each of the license holders to issue one sub-license each. The result was the eventual issuance of three licenses and three sub-concessions. The three sub-concessions are presently held by; Las Vegas Sands International (LVSI); MGM Mirage, in a joint venture with Pansy Ho (Stanley’s daughter); and PBL/Melco, an Australian publicly traded company partnered with a company whose Managing Director is Lawrence Ho (Stanley Ho’s son.)

Apart from the Galaxy license split, the other sub-concessions were awarded on the basis of a commercial sale of the right to operate casino gaming in Macau. The MGM/Pansy Ho sub-concession was sold by SJM (Stanley Ho) at a reported cost of US$200 million, while Wynn Resorts sold the PBL/Melco sub-concession at a cost of US$900 million. The Macau authorities did not originally consider the concept of sub-concessions and it is interesting that only one of the original “substitute companies” was able to enter the market in this manner. (It should be noted that two of the other three were absorbed into larger gaming companies in 2004: Harrah’s acquired Park Place Entertainment (Caesars) that year, and MGM Mirage acquired Mandalay Bay Group.) It is also interesting that the beneficiary of the sale of the sub-concessions were the original license holders rather than the government, with the license holders being able to “deal” with any company that they felt were appropriate (subject to approval by the Macau authorities).

Arguably the Macau government could have run a more traditional bid process rather than a beauty contest for the original licenses and subsequent sale of sub-concessions, but this does not recognise the history of Macau and the manner in which “problems” have been solved. It has been suggested that the right to sell off the sub-concession compensates the license holders in some way for the additional competition entering the market.

The Macau authorities have the right to open up the license process again in 2009 when further licenses could be legally awarded, but it is not yet known whether or not they will do so. Many analysts do not believe there is compelling logic for the government to issue new licenses, given the abundance of projects already underway in Cotai and elsewhere in Macau. Nevertheless it is possible that the MSAR government may decide to further open the market to bring in additional leading casino entertainment companies. The sale of sub-concessions has demonstrated the strength of interest and expectations regarding the Macau market, and the government could seek to capture rents for additional infrastructure needs to continue the casino and tourism boom. However, in light of the high tax rates on Gross Gaming Revenues (at 39%), and the possibility that increased competition might put downward pressure on those rates, it is unclear whether the MSAR government’s interests would be best served by issuance of new licenses.

In sum, licenses to conduct casino gaming are a scarce resource controlled by the government, which

Date Posted: 13-Sep-2006

Andrew MacDonald is founder of urbino.net and is also general manager of international business development for SkyCity Entertainment Group in New Zealand. He can be reached at Andrew.MacDonald@skycity.co.nz.

Bill Eadington is a professor of economics and director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada, Reno. He is an internationally recognized authority on the legalization and regulation of commercial gambling, and has written extensively on issues relating to the economic and social impacts of commercial gaming. Eadington can be reached at eading@unr.nevada.edu.

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