Macau Hopes for Renaissance

(source: Wall Street Journal August 15, 2001.)

Macau Hopes for Renaissance
With End of Casino Monopoly
By Gren Manuel
Staff Reporter of The Wall Street Journal
MACAU — The drive-by assassinations and gangland shootouts finally have died down in the former Portuguese enclave of Macau. Now comes the hard part: turning a city famed for gambling, girls and guns into a wholesome family and business travel destination.

The small city, an hour from Hong Kong by high-speed boat, was a Portuguese enclave for 442 years before being handed back to China on December 20, 1999. But locals now jest that the real handover will come at the end of this year. That will be the end of the 39-year casino monopoly run by Sociedade de Turismo e Diversoes de Macau, or STDM, a consortium of Hong Kong and Macau investors and 5%-owned by Hong Kong-listed Shun Tak Holdings Ltd. The monopoly dominates the Macau economy.

Approved in outline in late July, Macau’s legislators are expected to give the final go-ahead to the new legislative framework next month. If all goes as planned, the government will offer three licenses to competing operators and is hoping international gaming companies will come in and help rescue the city’s ailing economy.

It will be the end of an era for the city and STDM. Stanley Ho, its 79-year-old managing director who famously never gambles, has said his company will bid for a new license, but either way STDM’s days as the only game in town are over.

For Macau, the change will be far-reaching. “This is the most important policy since the handover,” says Antonio Ng, a directly elected member of the city’s legislative council and head of New Macau Association, a grass-roots political grouping.

Macau economist Chan Sausan says the change is critical because the economic well-being of Macau’s 440,000 people has become heavily dependent on gambling-led tourism. The slow decline in manufacturing due to lack of investment means that gaming taxes now make up more than half of government revenue, tourism is the biggest industry and the assets of STDM are estimated at being half of Macau’s gross domestic product.

Secretary for Economy and Finance Francis Tam dismisses suggestions that all the city’s economic bets have been placed on one horse. “We’re sure that this policy will be successful,” he says.

Step one was to stabilize the industry, hard-hit by the shootings and bombings as Chinese gangs known as triads fought over profit from loan-sharking and other casino-linked ventures. In the last year of Portuguese rule some 37 people died in gang-related killings. In the first year of Chinese control, with the People’s Liberation Army hoisting the red flag over a high-profile barracks in the middle of town, the number of killings fell to one.

Although this helped gambling tourism recover in late 1999, a difficult road remains. The city faces two key problems. First, across Asia the casino business is changing, and Macau no longer has the game to itself. Second, the route to turning today’s casinos to upmarket entertainment venues isn’t an easy one.

For a look at how Macau’s casinos now operate, take a stroll through the Casino Lisboa, a vast concrete palace in a bizarre Portugal-meets-Beijing’s Forbidden City style. Past the guards who politely check for weapons is the main gambling hall, where a dim, fume-filled furnace of Hong Kong truck-drivers squander their salary.

Rooms catering to Taiwan and mainland visitors offer chandeliers, better seats and less smoke. But don’t expect Las Vegas-style hospitality; if you lose enough cash, you will be lucky to get a soft drink in a plastic cup.

Despite the crime crackdown, many saunas across the city still allow customers to pick out their masseuse from among bikini-clad women wearing numbers on their wrists. In addition, the casinos have been implicated in numerous money-laundering investigations in Hong Kong. Macau has laws against such activity, but a report earlier this year by the U.S. State Department noted “little active enforcement” in the city.

Professor Jan McMillen, executive director of the Australian Institute for Gambling Research at University of Western Sydney, says the city’s big problem is that Asian gambling is changing. Across the region governments have decided they can’t afford to lose revenue to sin-city destinations such as Macau. The result has been that casinos are losing their pariah status across the region and are opening in greater numbers, albeit with heavy regulation. Governments “are not going to let money drain out of their country. Gambling has now become legitimate,” Professor McMillen says.

Although Macau is the only city in China that permits casinos, Hong Kong — Macau’s biggest source of tourists — looks likely to permit betting on soccer games and Internet-based gambling, while Taiwan already has talked to international casino groups about setting up casinos on its island of Penghu. Japan is considering casinos, while South Korea opened its first casino for local residents in October. And although mainland China appears firmly against legalization, underground casinos flourish.

Macau’s aim is to become a cleaned-up resort in which gambling is a vital but not dominant part of the entertainment mix. Macau’s chief executive, Edmund Ho, has said his role model is Atlantic City in the U.S., in which 12 competing casinos not only have gaming tables but also feature sports and other entertainment.

Professor Bill Eadington, Director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada at Reno, says the plan is the city’s biggest challenge.

“It depends on the fundamental integrity of government, operators, and of the local business community,” he says. “The main question is, can such things change in less than a generation?”

And like many governments across Asia pledging to open up a closed industry, the Macau authorities haven’t quite followed through on their pledge. Bidders will have to have a Macau permanent resident as general manager who also will hold at least 10% of the casino’s shares.

For many overseas companies, this could be the deal breaker. Frank J. Fahrenkopf, Jr., president of the American Gaming Association, which represents most of the big U.S. casino operators, says that he receives regular inquiries from Asia about trying to get U.S. casinos to invest in the region. But U.S. regulators would be leery of any such move and no U.S. operator would get involved in an Asian venture if it weren’t first cleared by regulators at home.

“Before Macau could attract an American casino over there, the Macau government and regulatory regime would have to pass muster with the New Jersey, Nevada, Missouri and Indiana regulators,” Mr. Fahrenkopf says. He points out that even Australia had to work hard before getting approval from U.S. regulators. Mexico, he added, hadn’t managed to attract a single major U.S. operator. Having to find a joint-venture partner and general manager in Macau could only make entry harder, he says.

The casino operators themselves are keeping their cards close to their chest. Park Place Entertainment Corp., the world’s biggest casino group whose brands include Caesars Palace and Bally’s, declined to comment, as did Australia’s Crown Casino and Entertainment Complex, a subsidiary of Kerry Packer’s Publishing and Broadcasting Ltd. that has long targeted Asian high rollers.

Nevertheless, Secretary for Economy and Finance Mr. Tam says he believes major firms will be interested — although none have yet contacted the Macau authorities.

“They have started collecting information,” he says.

Date Posted: 16-Aug-2001