FOCUS

Reshaping Macau’s regulatory landscape

Events in Macau have been moving at breathtaking speed since the government first published its outline for changes to the gaming law in September. We saw panicked investors heading for the exits on concern over draconian new regulations for the six operators, only to hear a collective sigh of relief when a second outline was published in early January.

Hot on the heels of that publication came the actual law itself. The 44-page document again had industry watchers scratching their heads, with some gritty surprises buried in its pages and gaping holes as to how the rules will work in practice.

In this edition of our Focus section, we ask some leading figures in Macau’s casino industry to shed some light on the issues.

First, Alidad Tash, managing director of consulting firm 2NT8 Ltd and a former executive at both Sands China and Melco Resorts & Entertainment, takes us through some of the key changes in the legislation. He attempts to shed some light as to how some of the amendments might actually work in practice, addressing issues such as how the junkets will operate without their own private VIP rooms.

Jay Chun, chairman of Paradise Entertainment and head of the Macau Gaming Equipment Manufacturers’ Association, defends the role of satellite casinos. According to the bill, these will no longer be able to operate in buildings not owned by the concessionaire, raising doubts about how they will survive.

Chun argues that these properties, mostly on Peninsula Macau, help to support the local economy, providing foot traffic to the noodle bars and souvenir shops that surround them.

Our third article in this section is written by Carlos Simões, a partner in DSL Lawyers, who acts mostly for developers and international funds with projects in Macau.

He takes a look at the demise of the junket sector, which has been in freefall since the arrest of Suncity CEO Alvin Chau late last year. Whilst not dead yet, he explains that the sector is on life support and we should watch for further changes as the regulatory noose tightens.

Lastly, but certainly not least, in this section we have an article from Glenn McCartney, Associate professor of Integrated Resort Management at the University of Macau. He looks beyond the gaming law amendments to the next stage in the concession re-tender process, which will be the request for proposals from the various bidders. It’s here we’re likely to see more details about the likely shape of Macau 2.0. However, he warns that in making their pitches, the candidates should pay close attention to the government’s stated vision for the industry.

Employment concerns may save junkets, satellites

Junkets have survived in Macau’s amended gaming bill and satellite casinos are likely to continue to be a part of the landscape due to the government’s concern about local employment, says Alidad Tash, managing director of consulting firm 2NT8 Ltd.

In an interview with Asia Gaming Brief, Tash highlighted some of the key provisions of the law that was published in mid-January and discussed how they may affect the operations of the six concessionaires. The draft bill, which came earlier than most market watchers had been anticipating, stipulates that there will be six concessions, with a ten-year term, down from the previous 20-year duration. Junkets are still allowed to operate, although with significant restrictions, while the government will also carry out a three-year performance review of the operators.

Other changes include a cap on both tables and slot machines for each operator. The government will set a minimum level of gross gambling revenue to be met by each table and machine and the operator will be required to make up the shortfall if they are not reached. Failure to meet the threshold for two years may result in a reduction in allocation.

Another surprise in the bill was a ban on operating any casino that is not in a building owned by a concession holder. This effectively abolishes Macau’s roughly 18 satellite casinos, which have been given a three-year transition period to come into compliance with the law.

Details are scant as to how this might happen, but Tash said he doesn’t see the satellites disappearing.

“I think it’s quite reasonable to assume that the satellite casinos, which are very politically powerful, will be able to find a day to wriggle out of the three-year commitment, either by extending it or convincing the government to remove the provision,” he said, pointing to the fact that initially in 2002 Macau had only envisaged three concessions, but somehow that morphed into six.

One of the government’s key concerns is job losses in the local community, which is likely to be quite a persuasive force when arguing the case for the satellite casinos, Tash said.

During the first reading of the bill in the Legislative Assembly, the majority of speakers who chose to intervene, commented on the impact on the employment situation in Macau.

This was probably also a factor in deciding not to outright ban the city’s junket operators, instead imposing more onerous restrictions on them that may lead to a more phased withdrawal.

Under the new regulations, revenue-sharing accords between junkets and operators have been banned. One junket can only work with one operator, while they are no longer able to operate VIP rooms.

Again, the details as to how this will work in practice are scarce and Tash argues it could create some operational challenges.

“Speaking as a gaming operator who has headed operations in the past, how are they going to handle the various chipsets?” he said. “Are they all going to be in the same room on different tables with their own chipsets?

Also, it’s unclear as to how the junkets will be divided amongst the operators and whether there are also limits as to how many junkets one operator can work with. Is there anything to prevent one large junket splitting into six pieces and working with each operator?

“These are all questions that need to be answered. It would have been a lot easier to just strike them out altogether, but the fact that they allowed them to survive a bit longer I believe has to do with the fact that the government doesn’t want to have four, five, six thousand people unemployed on the streets.”

Another element of the bill that has raised eyebrows is the government caps and minimum gross gambling thresholds. Tash said it is a way for the government to exert pressure over the casinos, given that table allocations in Macau are some of the casinos’ most precious assets.

As to how the minimum threshold will be set is another key question given the current divergence in productivity levels across the market, which could result in some of the lowerperforming properties being severely penalized.

“They are going to have to make the goal light enough, or set the bar low enough, so that everyone can clear it,” said Tash, adding that in this sense he sees the measure as being less of a punishment and potentially more of an incentive to those that perform well, especially when it comes to the government’s push for more non-gaming activities.

The bill stipulates that the operators need to play their part in the diversification of the economy with the addition of more non-gaming elements and it’s here that Tash sees sticking points. There are no details in the bill as to what kind of amenities the operators will need to add, or how. However, Tash said it’s just fanciful thinking that Macau could come anywhere near the non-gaming revenue split seen in Las Vegas.

There is not enough space to add substantial numbers of new hotel rooms and Mainland travellers don’t come to Macau for fine dining or shopping, which is readily available at home. Big shows are expensive to put on and have had limited success, while art installations on Cotai are largely empty, he said.

“Nobody flies from China, goes through the visa process, to come to Macau to see a museum,” he said. “People come to Macau for one reason and that’s to gamble as it’s the only place in China where it’s legal.”

The bill has now been passed to the Legislative committees to go through the details before a second reading in the assembly.

In summary, Tash said he views the proposed legislation as largely positive.

“It’s mostly good news, with some curious ones,” he said. “We’re in a much better place than we would have been a couple of weeks ago, so this is definitely a step forward.”

Satellite casino abolition to harm local economy

Jay Chun, chairman of Paradise Entertainment, has warned that a clause in Macau’s proposed gaming law will have a negative impact on the local economy and small businesses.

The amendments to the law, which were made public in January, include a requirement for all casinos to be in premises owned by the concessionaires. They also ban any revenue sharing agreements.

There will be a three-year transition period for arrangements to be made to comply with the regulation. Although there are few details, analysts have noted that it appears to sound the death knell for Macau’s satellite casinos.

The casinos are run under a third-party license agreement with one of the license holders. There are 18 of them in the city, with the majority working with SJM Holdings. Although Galaxy Entertainment and Melco Resorts & Entertainment also have such arrangements.

We are always talking about the economy, but if the satellites are shut down there will be an impact.

Paradise Entertainment runs the Paradise Kam Pek satellite casino in Peninsula Macau under a license from SJM.

“Basically, overall it’s good as it’s more regulated,” Chun said in a recent interview, referring to the law changes. “Several of the items are concerning and we have to see exactly what the articles are. We don’t understand how it works and what percentage they should hold.”

Chun argues that the local casinos are still a good business model. Many are on the peninsula and are surrounded by restaurants, hotels and souvenir shops, which depend on the casino traffic.

“It doesn’t mean that everyone should go to the Cotai side,” he said. “We are always talking about the economy, but if the satellites are shut down there will be an impact.”

Casino Kam Pek Paradise, which opened in 2007, generated gross gambling revenue of HK$416.9 million in the six months to end-June last year, the most recent available figures. That represents an increase of 58.9 percent over that of the last corresponding period.

The casino was operating 39 tables and 481 live multi-game terminals (LMGs), which it pioneered in the Macau market through its LT Game unit.

Chun said the LMGs had been performing well with the pandemic giving a further boost to the already popular games, providing natural social distancing. He said revenue from the terminals is only down 20 percent from pre-pandemic levels, far outpacing the market as a whole.

Gross gambling revenue as a whole in Macau only reached 30 percent of its 2019 levels last year.

He said he sees further room for strong growth due to cost efficiencies in that they reduce labour costs for operators, while still providing the thrill of the live table for the players. High dealer costs in Macau require the casinos to impose high minimum bets, usually about HK$1,000, whichare out of the reach of the mass market player the city is trying to attract.

Chun, who is also head of the Macau Gaming Equipment Manufacturers Association, said the group is currently working on developing new and innovative features for electronic table games, as well as a range of Chinese-themed slot games that are likely to be released in the next few months.

“We are focused on the mechanics of the ETG. We believe that clients like to see the number generator, the dice moving,” he said. “The player still loves this game very much so we are focused on trying to invent new games like these.”

The group is also dedicating more resources to expansion in the U.S., where it sees strong demand for slots.

However, Chun acknowledges that the pandemic is still creating headaches for shippers and manufacturers. He said products that used to take just 23 days to ship are now taking up to three months, with the problem particularly acute when it comes to bill validators.

“It’s tough for everyone,” he said

Junket operators: One activity, two legal systems

By Carlos Simões | Partner, DLS Lawyers

Junkets in Macau aren’t dead yet, but they are on life support, argues Carlos Simões, a partner with law firm DSL, who takes us through some of the momentous events of recent months and asks where next?

The warrant issued by the Wenzhou People’s Procuratorate of Zhejiang Province on November 26, 2021 proved to be a biblical event, triggering a major exodus from Macau’s junket industry and VIP gaming.

The next day, the Judiciary Police detained Suncity CEO Alvin Chau and 10 other executives, on suspicion of committing crimes in Macau within the operations of the group. This was just the start.

What followed was a major collapse in the shares of Suncity stock and other listed junkets, as well as the shares of all the Macau gaming concessionaires, which later became known as the “wipeout.” Then came the closure of all Suncity VIP rooms in Macau by December 1 and the termination of cooperation agreements with Tak Chun. Finally most gaming operators claimed that junkets were no longer welcome in their casinos and terminated existing arrangements.

During an AGB webinar on December 9, 2021 most commentators were unanimous in their view that junkets were dead.

Two months fast forward and this stark diagnosis has not yet been confirmed, but junkets remain in Intensive Care and the diagnosis is “reserved.”

In this article we will focus mainly on the legal aspects of the junket exodus.

Junket activity has been regulated in Macau since 2004 under Administrative Regulation no. 6/2002 and Law no. 5/2004, which governs concession of credit for gaming or betting. Their activities are supervised by the Gaming Inspection and Coordination Bureau (DICJ), which runs background checks to confirm the suitability of shareholders and directors and issues licenses every year.

The licensing process begins with an application to the DICJ, accompanied by a declaration confirming the suitability (trustworthiness) of the applicant, as well as a statement signed by a legal representative, or director, of a gaming concessionaire stating its intention to cooperate with the applicant, in addition to other relevant documents.

However, the number of licenses issued by DICJ has been on a downward trajectory, from a high of 235 in 2013 to just 95 in 2020, 85 in 2021 and 46 in 2022.

The reality is that the biblical events that swept through the junket industry and VIP gaming have not been followed by any regulatory changes…yet.

The DICJ has been processing all the applications for junket licenses as “business as usual.” The only regulatory change that was implemented was the guideline from the DICJ that junkets (“gaming promoters”), were no longer allowed to grant credit to gamblers (as foreseen by law) and that the concessionaires should be granting such credit instead. A gambling debt is only enforceable in Macau if the credit is granted by a casino concessionaire.

But the legal march has started.

As part of procedures to change the Gaming Law (Law 16/2001) in preparation for the re-tendering of the concessions, the DICJ on December 23 published its final report on proposed amendments following a 45-day public consultation.

When it came to junkets, the general public agreed with the need to broaden the scope of verification and regulation of concessionaires/ sub-concessionaires and gaming promoters and their employees, strengthening such mechanisms. The opinions focused mainly on the suitability criteria for gaming promoters and their employees, the increase of share capital of gaming promoters, as well as mechanisms to control their funds & operations in order to combat cross-border gambling practices, illicit betting practices, illicit online gambling and “side betting.”

Views were also expressed on the regulation of the ratio between assets and liabilities in order to prevent financial risks and to avoid illegal capturing of funds and money laundering.

These concerns were in line with most recent court cases, which have begun to hold gaming concessionaires co-liable for the debts of the junkets operating in their premises, whenever those liabilities were a direct consequence of gaming operations. These decisions are supported by Section 29 of Administrative Regulation no. 6/2002, which rules that casino operators are jointly liable for any infringement of regulations by the junkets and for the junkets’ activity in casinos.

The Court of Last Appeal in November 2021, under Court Case 45/2019, made a decision making the gaming concessionaire and gaming promoter co-responsible when the concessionaire does not fulfill its supervisory duty by allowing, or tolerating, the gaming promoter to acquire illegal financing in its casino. The ruling deemed the concessionaire to be jointly and severally liable for losses arising from that illegal activity.

From the above one should conclude that the junkets’ activity in Macau had a proper licensing system and proper regulatory supervision by the DICJ. But the same did not work outside the boundaries of the Macau SAR and the mainland authorities finally patched this major problem.

Participation and facilitation of gambling for mainland China customers has been classified as a criminal activity for some years. But from March 2021, helping mainland residents to take part in “crossborder gambling” – whether in person or online – has been defined as a crime under mainland law.

The penalties apply to any person who “organises” mainland Chinese citizens to gamble “outside the country (borders)”, when there is a “serious” amount of money involved, or for cases considered to have “grave consequences”, according to the amendment to the country’s criminal law.

These were the rules that led to the fall of Alvin Chau and Suncity in mainland China and Macau authorities had to follow.

Back to Macau, one of main changes announced in the draft of the Gaming Law, which was approved as a draft on January 24, 2022, was precisely that revenue share arrangements between junkets and casino concessionaires will be prohibited. Furthermore, junket licenses will continue to be issued but will restrict each licensed promoter to only carry out the activity of promoting games with one gaming concessionaire. Another blow to an already frail industry.

To conclude, the VIP exodus continues, with problems in all directions. Strict controls in mainland China, namely on the flow of funds, a much weaker market since the pandemic started, the successive closures of borders and finally the strikes against the industry leaders – the junkets.

Overall, the legal changes that are affecting the industry would be the most minor problem of all of them.

But even this is not settled yet and more is to come. - Just wait for the next episodes of this saga.

Macau bidders need to pay close attention to government vision

Glenn McCartney | Associate prof. integrated resort management University of Macau

With the concession expiry deadline looming the government is pushing ahead with its plans for a public re-tender for the coveted licenses. Glenn McCartney MBE, Associate Professor of International Integrated Resort Management at the University of Macau, writes that the attention will soon be focused on the request for proposal process and ensuring the pitches are in line with the government’s clearly stated objectives.

The dust has almost settled again from the Macau government’s announcement of the details of the draft gaming bill - but it could likely be short-lived.

Although the public tender for the six casino licenses is imminent, with six licenses confirmed in the draft gaming bill, there has been limited conversation on the request for proposal (RFP) items.

Naturally, they will align with the gaming bill terms and conditions, and through tendering submissions, the winning casino company agrees with these stipulations.

Over the years, I have been involved in bidding for Macau government public tenders (not the casino ones). The public tender can help clarify and remove uncertainties, through reinforcing government expectations and casino deliverables. With the publication of a bidding matrix and marking scheme this makes the tender process an important one.

But beyond the actuals of the bill (i.e. 10-year license, six casino licenses, and so on), what interests me is the intent and sentiment implied and expressed throughout the gaming bill, and how the authorities will measure and score these - and ultimately ‘close the loop’ on these issues. Essentially converting a gaming bill into a governance document. In tandem, it will also be interesting to note the shaping of the casino company pitches - this time around. While not six ‘new’ casino companies, their submissions will differ from two decades previously (and noted that previously three were through sub-concessions).

As such, it’s important to reflect back 20 years – I, and Jonathan Galligan (Deputy Head of Research, CLSA (HK)), wrote this almost a year back:

“The Macau Government will keep to the game plan to have the tendering process in 2022 (sure with some months here and there to discuss with the industry and consultants). There are several moving parts, but this is a major policy issue - and as such, while there has been the Covid-19, the history of the last 20 years (revenues for example) and 20 years of reference, indicates the government will keep on schedule. The government has been examining this policy for some time already (terms and conditions) - so there is no need to wait.” (page 48. Macau fortunes. Customer evolution accelerates post-covid, CLSA Blue Book, G. McCartney & J. Galligan).

It was one amongst other predictions regarding Macau’s casino and tourism trajectory. Looking at two decades of casino development provides perspective on expectations for the next development cycle to mid-2030.

For example, the original casino liberalization had limited metrics, or KPIs, to judge and steer gaming and non-gaming development over 20 years. In 2000, these were largely uncharted waters – the development of The Cotai Strip and the largest gaming economy and integrated resorts in the world. From time to time the government intervened, using mechanisms such as introducing new laws, regulations, and Executive Orders (e.g. providing credit, casino floor smoking ban). Themes such as non-gaming development, economic diversification, CSR, and oversight have been consistent (and not unexpected) from the casino license consultation to the gaming bill. Consequently, this will undoubtedly be illustrated further in the RFP/tendering process.

In 2000, the Commission for the First Public Tender to Grant Concessions to Operate Casino Games of Chance of the Macau Special Administrative Region, was temporarily created. It was made up of Macau civil servants with the aim of promoting the casino tendering process internationally, attracting bids, accepting requests for concepts/RFCs (a few of the scale models are still in the casino properties in Macau), and to finally judge the initial three winning casino tenders.

Much has changed in 20 years. Another commission could be temporarily formed this time around as well to judge the bids. This time, the reality of Macau’s leading position globally in terms of gaming revenues is well-established, along with the physical reality of The Cotai Strip, the integrated resort projects, and neighbouring Hengqin Island. The public tender, an extension of the Macau Government’s position outlined in the gaming bill, will also see the winning tender documents adjusted to align with these. It is important for all stakeholders to be on the same page – given the ‘not to miss’ window of opportunity of ‘Macau 2.0’, as Hengqin Island and Greater Bay Area visions become a reality.