With the confusion created by a couple of U.S. facing sell-side analysts, let’s clear up the confusion over the renewal of Macau gaming concessions.
We will first look at Paulo Chan (head of Macau’s DICJ) statements, the law and the interpretations by local Macanese gaming lawyers; then look at concessions in other industries, consider the political dimensions, and lastly frame the more likely concession scenarios.
What Paulo Chan Said
Paulo Chan’s statement at the recent G2E Asia gaming conference and exhibition in Macau appeared to have raised fears, particularly amongst investors who have long been led to believe that concessions would somehow be automatically “renewed” at the end of the concession period.
So What Did Chan Say?
Chan was reported by the local Chinese media as saying that “all of Macau’s gaming concessionaires will have to rebid for the their licences through a public tender.”
Statements from one Macau-based U.S. analyst did nothing but perpetuate the foregoing mistaken belief when the analyst claimed the Chinese press had somehow “misconstrued” Paulo Chan’s statement.
Bear in mind that Chan is the head of the DICJ, but before that, he was the Assistant Prosecutor General (equivalent to a deputy public prosecutor) and a trained lawyer.
To reinforce my stance that there was no misunderstanding on the part of the Chinese media, Paulo Chan made a similar statement in April 2016 when he gave an interview on TDM’s Portuguese radio station.
Here is the excerpt from that interview, which was translated by a local Portuguese lawyer. In response to repeated questions on the gaming concessions, Chan said: “As I said, it is too early to talk about the new concessions. Strictly speaking it’s not a renewal but a new concession.“
And should that be insufficient to clear any lingering doubts, two days after that news article with the US analyst’s “misconstrued” description appeared, Secretary for Finance Lionel Leong made the effort on the sidelines of a non-gaming public event to re-affirm Chan’s position by declaring: “The government will not simply renew the city’s gaming concessions and sub-concessions when they expire, but will instead launch a new bidding process”.
It can’t get any plainer than that. Since then, Leong has gone further and stated that the Macau government may even consider amending the terms and conditions of the legislation.
What The Lawyers Say
However, it would be remiss of MGG if we did not canvass the opinions of various local gaming legal counsellors.
1. Bruno Beato Assencao
Assencao wrote in a local magazine Asian Gaming Lawyer that the current concessions will expire after 18 years (SJM) and 20 years (Wynn and Galaxy). However, they can be exceptionally extended by the Chief Executive for periods of three and five years respectively. Once the extensions have elapsed, the concessions will be terminated, he said, and unless the Gaming Law is amended, all future concessions will be subject to a new public tender procedure.
He goes on to point out however that the government may allow concessions by direct award instead of public tender. But any amendment to the gaming law will have to pass through the Legislative Assembly, which in itself would represent a significant hurdle, one which this government probably would not have the guts to take on.
Assencao concludes with certainty that the government’s handling of the concession issue will abide by the directives set by the central government.
2. Jorge Godinho
A leading academic on Macau gaming legal issues, Godinho recently clarified the understanding of the term “Renewal” as referring to the same contract but with more time added, and that the ability of the chief executive to grant such extensions may be seen as a renewal. But he also confirms that the Administrative Law in Macau very clearly states that the awarding of concessions must be carried out by public tender.
3. Luis Pessanha
Another leading gaming legal academic, Pessanha wrote in “Studies on Macau Gaming Law” that, as a rule, the public authorities shall award their contracts through a transparent tender procedure. However, he agrees with Assencao that there are exigencies for the government to conduct closed public tenders or even direct awards, but only under exceptional circumstances and only where a certain private party possesses special knowledge.
This last point is obviously not the case here, where every gaming operator in the world would give anything to enter the market, and anything other than an open tender would raise suspicion of impropriety, something the Macau government would want to avoid in light of recent high-level corruption cases.
Precedents
It is helpful to consider some of Macau’s other public concession awards, which shed some light on what we may see in the next round of concessions in the gaming industry.
The first sector to note is the troubled bus service in Macau, while the second is the duty free concessions awarded at Macau International Airport.
Bus Concessions
In 1988, the Macau government gave a 10 year concession to two bus companies, Transmac and TCM.
The concessions were extended to 2010, upon which an open bidding process was undertaken.
A new entrant, Reolian, joined the bidding process and together with incumbent, Transmac, won a concession.
For inexplicable reasons, TCM failed to submit their bid on time. lodging it some four minutes past the deadline and was thus disqualified, though the operator was allowed into the market a few months later.
Reolian subsequently went bankrupt in December 2013. The bankruptcy triggered a media storm at an already sensitive time for a government struggling to provide a reliable bus network to Macau residents.
Worse for the government’s reputation, the Commission Against Corruption found in a subsequent report that aspects of the concessions were not conducive to good or sustainable service (such as operators receiving no income directly from passenger volume) but also illegal.
Key among the Commission Against Corruption report’s recommendations was converting the service provider contracts for the three companies into public concessions, which has since occurred.
The changed contracts brought operations under greater government scrutiny, linked performance to revenue and imposed caps on subsidies, with the intention also of increasing the prospects of competitive bidding for the next wave of concessions.
Macau’s unsettled bus market is significant in examining casino concessions because public concessions came to be seen to be essential to upholding a competitive market and to ensuring the selection process has integrity.
But the weight of the Commission Against Corruption’s involvement surely does not restrict itself to a certain industry.
Even if some of the objections the commission raised in the case of the bus contracts apply less powerfully to casino operations (such as in relation to subsidies for a highly profitable enterprise), this does not reduce the incentive for the government to maintain an aura of propriety in the concession awarding process.
In other words, the transportation industry has been shown that public concessions are a cure for disorder and possible corruption. Casinos will not be considered any differently, and whether in the law or in the public understanding, there will be no room for the perception that special favours await incumbent operators.
It is also possible that anything resembling a concession “renewal” without a competitive format and level-playing field runs the risk of pushback from the commission itself.
Duty Free Dual-Concessions
Let us now look at the Macau International Airport dual concession as an example of what the government considers to be feasible, and possibly as an example of what may be on offer to gaming concessions applicants from 2020.
Ahead of the expiry of the contract of duty free monopoly King Power Group (HK) in November 2014, the airport operator and government concession holder surprised the industry by announcing not one but two five-year concessions for duty free operations (within less than 2,300 square metres of shopping space) would be issued to successful applicants.
The conditions of entry to the bidding process and likely lower margins, together with a block on the two concessions being awarded to the same bidder, led to stronger international interest in the bid, including from smaller companies that normally might have struggled to compete with regional duty free giants.
In the end, Sky Shilla, a Korean-Hong Kong joint venture application submitted by The Shilla Duty Free and Sky Connection, won one of the concessions, while King Power gritted its teeth in winning the second, reduced concession.
What can be learned from this? The Macau government was prepared to see a monopoly broken, carved up and expanded, as with the gaming market that had been controlled by STDM.
Observers should be under no illusion that the shape of the next wave of gaming concessions could see some real surprises that reflect the need to correct the untenable concession/sub-concession structure that prevails today.
Just as powerfully, the Macau government will be acting under extreme pressure from local and national business and political interests, not least the Chinese Communist Party government and state-owned enterprises.
Consider, too, that the Macau government was prepared to take a risk on duty free concessions in a space-restricted, low margin business environment.
Imagine what it may hold in store for an industry that is rebounding and guaranteed enormous turnover as long as Beijing is on side.
Political Risks
Looking over the build-up and transition period from now until new concessions are awarded, much remains mysterious and unpredictable, not least the specific criteria the Macau government will require the next set of concession applicants to meet.
However, if MGG is certain of one thing, it is this: there will be no more fiefdom building by any chief executive that runs parallel or opposite to the Chinese Communist Party’s agenda, which is to say, the agenda of President Xi Jinping.
We will assume for argument’s sake that Macau’s next chief executive from 2019 will have to adhere much more rigorously to implementing and enforcing Beijing’s will in Macau.
Presently de facto authority in Macau has detoured from the CE and certain formerly influential secretariats to their counterparts in China’s Liaison Office and its director.
This is not to say that the rule of law will be undermined in Macau, other than the Basic Law, of course, which Beijing has all but dismissed as a legal document.
Rather, laws will be created and amended in the pro-Beijing, pro-business Legislative Assembly to more precisely satisfy public and back channel concerns of Beijing.
With those parameters in place, Xi Jinping has nothing to fear and everything to gain from a diligent judiciary, unlike in Hong Kong.
Such will also be the case with the awarding of concession applications.
The problem will not be whether the rules are followed when the selection process occurs; rather, the problem is what application criteria will be compelled to be included by Beijing loyalists, who will ensure that the selected applicants satisfy Macau and Beijing.
It is in this context that no one should be surprised if a mainland dark horse candidate or two secure concessions with little or no direct gaming experience, and if so possibly at the expense of at least one Western operator.
We have seen with certain concession applications in China, such as the duty free airport concessions at Beijing and Shanghai airports, that the influence of SOEs and other companies with family connections to powerful CCP officials can have a decisive impact not only on bid selection, but also on the market pricing mechanism.
Consider the possibility of Macau, under Beijing’s instruction, imposing financial criteria that price in property and casino assets that revert to the government at the expiry of the current concessions as part of the entry fee or ongoing fee structure.
Such criteria could easily be tuned to admit a powerful, cash-rich SOE as a concession holder at the expense of a gaming companies with limited cash and market diversification and a spotty record on non-gaming diversification.
And if Beijing wants a result, then that will be the result.
Some of the current concessionaires seem to acknowledge this danger, with chatter indicating that lobbying has taken place to restrict reverted assets to each concessionaire’s flagship (i.e. first) property. We say: best of luck with that, gentlemen.
To be sure, existing concessionaires will be displeased by much that is going to follow. But there will be little to no complaint in public.
No one with a sense of self-preservation will want to bell this cat.
Scenarios
There are clearly three possible scenarios for the new concessions.
The gaming lawyers are unanimous that the current gaming law (#16/2001) restricts the number of concessions to just three, and there are no provisions for sub-concessions either.
In fact, gaming lawyers still do not fully understand why the Macau government did what they did when they allowed the sub-concessions, as (a) the sub-concessions did not undergo the checks and processes of the tender to ensure that only the best were selected and in fact, the sub-concessions were selected by the concessions for their own private interests, and (b) it allowed more competition than the originally anticipated three.
As one of the lawyers pointed out, the opaqueness of the sub-concessions is evident in the fact that whilst the concession agreements are publicly available, the sub-concession agreements remain unpublished to this date (though they have been distributed privately).
Scenario #1, they argue, is that at the very least the government has to rectify the problem by amending Law #16/2001.
Ergo, the most benign of the scenarios is one where the sub-concessions are turned into full concessions, leaving the status quo of 6 concessions. The chances of this outcome is probably 50:50 at this point in time. The second possible outcome is that the overall number of concessions and sub-concessions will be decreased. After all, the original intention was to have only three manageable concessions.
There are two possible sub scenarios here, one being the government offering less than 6 concessions up for tender, or second, forcing a rescinding of the sub-concessions back into the concessions.
Although both are technically possible, they are unlikely to happen as it would be an admission of gross error and the Macau government would not tolerate the loss of face.
Scenario #3 would be to either add more seats to the table or change the place holders.
Whilst a decrease is unlikely as it would be an admission of gross error, the chances of a new concession(s) coming in is high.
Macau has prospered on the back of China’s population over the past two decades, but has actually given very little back in return. Certain groupings of politicos, particularly in neighbouring Guangdong, have in recent years voiced this opinion, even going so far as to call Macau “spoilt”. The resentment arises out of the perception that having made trillions from Chinese residents, particularly those from neighbouring Guangdong province, the Macanese have failed to return the “favour” by reinvesting some of that profit into Hengqin island to help them build a new city there.
The forgotten saga of cashless casinos in Hainan island was one such attempt to retain some of the action within China’s provincial borders. In fact, that failed attempt to set up a pilot pseudo gaming industry possibility could be the genesis of a recent explosion of both private and SOE investment in gaming outside of China and Macau.
South Korea has seen an explosion of investment in huge greenfield developments involving gaming. LOCZ in Incheon with Caesars, and Greenland and Landing in Jeju, are just some examples of the private entrepreneurs from China investing big. SOEs such as China State Construction Co and China EXIMBank are also leading the charge.
The biggest construction company in Macau right now is the same China State Construction mentioned above.
It is obvious that the previous restrictions on SOEs getting involved in gaming have been lifted, and the Chinese are positioning themselves to be players in this industry.
Speculation in Macau has the odds in favour of at least one new player, most likely from China, being allowed to sit at the table perhaps through a front.
In answer to the inevitable questions on the availability of land: apart from the fact that there are several plots still available in Taipa, i.e. Parcels 7&8, the former Caesars Golf Course, and Angela Leong’s parcel next to the Sports Dome, there are also several parcels with existing old buildings that could be easily torn down. These include the Pousada Marina Infante hotel opposite Galaxy Macau and/or the empty parcel just north of it, the former Greek Mythology that is currently shut down, as well as several other parcels on the Macau side, such as the land next to the Grand Emperor, the Genting Treasure Island site, several parcels stretching from the Macau Tower to the front of MGM; and even the Trinity site next to Sands Macao that was to be developed by Melco at one stage.
On top of that, Macau is in the process of reclaiming even more land, and we wouldn’t bet against the authorities zoning them for gaming should the right parties be interested.
Land is most definitely not an issue if under “guidance” at the highest levels.
Conclusion
We rank the probability associated with each scenario as follows:
Scenario 2: Decrease in concessions—less than 5 percent
Scenario 1: 6 full concessions—50 percent
Scenario 3: Change in concession holders or increase in the number of concessions—greater than 50 percent.
How the market will look with one or more new entrants come 2020-2022, one can only speculate at this point, but the competitive landscape will without doubt be changed drastically.
Macau after 2022, or after extensions are granted, will be a less boisterous, more pliant and more stable gaming market, with concessionaires equally beholden to Macau law and back channel edicts from Beijing.
With the latter much more unpredictable and risk-laden than the former, the Macau government’s wiggle room will sharply decrease.
Finally, whilst other analysts speculate that the SJM/MGM concession will be pushed back to 2022 to align with the others, we think that the possibility is high that SJM may want their new concession confirmed in 2020. Why prolong the uncertainty for another two years when you can get ahead of the pack?
