President Mahinda Rajapaksa is pro-business, pro-investment and pro-casino, and there isn’t much on his island that dares oppose him … So what’s not to like?
“On the 19th May 2009 His Excellency the President Mahinda Rajapaksa successfully annihilated the scourge of terrorism from the land ushering in a period of reconciliation, development and prosperity for Sri Lanka.”
— Ministry of Economic Development, “Tourism Development Strategy 2011-2016”
The government of Sri Lanka wants tourism to become the island nation’s primary generator of foreign exchange earnings over the next three years and is maneuvering resort casinos into the mainstream of that push.
As an economic development model it is one that is growing in popularity among governments across the Asia-Pacific landscape. This is an opportunity, however, that is unique in some key respects: Sri Lanka’s proximity to India being one, with all that implies in terms of access to the subcontinent’s increasingly affluent and gambling-hungry millions; the authoritarian character of the regime is another, 67-yearold Percy Mahendra “Mahinda” Rajapaksa having over the last eight years constructed around himself and his family an all-but unassailable and swiftly moving economic policy machine.
Australian casino tycoon James Packer is a believer, and his faith has been affirmed over the last several weeks with the fasttracking of two foreigners-only gaming projects in the capital of Colombo totaling 1,200 hotel rooms—US$1 billion in initial capital investment—and involving no less than the country’s largest publicly traded company, leisure giant John Keells Holdings, and in Mr Packer’s own Crown Resorts, the first Western operator to commit big money to the market.
“Mixed developments,” these are called, in part to quiet a sullen parliamentary opposition, mainly to appease the country’s ultra-nationalist and highly politicized Buddhist clergy, Theravadists who purport to have serious qualms about all this.
But a certain squeamishness has always marked official attitudes toward gambling in Sri Lanka, and euphemism has always been a convenient method for dealing with it. The handful of small casinos catering to the Colombo tourist trade operated for years as “recreation clubs” before their existence was formally recognized by legislation passed in November 2010 just months after Mr Rajapaksa, hammer of the Hindu Tamils in the north of the island, champion of the Buddhist-Sinhalese majority nearly everywhere else, narrowly won a second term as president. Tourist arrivals surged 46% in 2010, that first full year of peace following the defeat of an armed Tamil revolt that had battered the country for a generation. It’s when Mr Rajapaksa and his brother Basil, the minister of Economic Development, began to look at the gaming industry in the bigger picture. At a billion dollars, there will be no masking the destination-scale casinos John Keells and Crown are contemplating, and it’s precisely this that distinguishes His Excellency’s approach. It could change the game for South Asia.
“I think the main thrust of the government is they see this as a potential revenue generator for them as well as a big driver for tourism into Sri Lanka, and a large part of that focus would be to get Indians to come across and gamble in the casinos because of the close proximity,” says Manav Thadani, who heads the Indian office of HVS, based outside New Delhi. “Right now, if you look at the tourist arrivals into Sri Lanka, Indians dominate that, and the thought process is that that number could go up significantly if they had casinos because casinos are something which currently are prohibited in India.”
“Not a bad move,” as an analyst at Melbourne’s Karara Capital sees it.
“The Sri Lankan government is making a lot of changes,” Akshay Chopra, a portfolio manager with the firm, told Reuters after Crown’s US$350 million resort plan was approved about a month ago. “You’ve got China investing a lot of money in Sri Lanka, building a lot of infrastructure, and you’re close to India and a big gaming market there.”
How big? It’s impossible to say exactly. Rakesh Jhunjhunwala, the billionaire investor known as the “Warren Buffett of India,” has observed that “Indians are prone to gambling as much as the Chinese.” So it must be pretty big. KPMG in a study from a couple years back estimated that US$60 billion was wagered on the subcontinent in 2010, most of it through various black markets, the dimensions of which can be surmised from the scandals that erupt regularly in the betting on cricket, the national pastime. There are no legal casinos outside the tiny Arabian Sea state of Goa, and elsewhere they’re allowed only in Daman and Sikkim. The rest of the country— around 750 million adult-age Indians—are limited to state lotteries and horseracing. Mr Jhunjhunwala is so enamored of this tremendous disconnect between demand and supply he bought a chunk of Mumbaibased resort and property developer Delta Corp., whose three floating casinos on the Mandovi River in Goa qualify it as India’s largest operator and the only publicly traded company in the space.
“Right now, if you look at the tourist arrivals into Sri Lanka, Indians dominate that, and the thought process is that that number could go up significantly if they had casinos because casinos are something which currently are prohibited in India.”
Manav Thadani, HVS South Asia
Goa is India’s smallest state and the wealthiest on the basis of GDP per capita, and what drives that is tourism. About an hour by air from Mumbai it is the country’s most popular domestic getaway, hosting in a year well more than twice as many visitors as its population of 1.4 million, and 80% are Indians. The official stance toward the casinos that generate a good deal of this business— five offshore, about a dozen in tourist hotels in and around the capital of Panaji— tends to swing between ambivalence and hostility, the latter served up more for local consumption than anything else since the prospect of walking away from the US$45 million or so in taxes and fees accruing annually from the casinos is not something anyone is seriously considering. It does, however, make it difficult to get a fix on the actual size of the market. Recent results posited with the Legislative Assembly have annual turnover at 900 to 1,000 crore— roughly $145 million-$160 million—but the state has a political interest in soft-pedaling the industry’s impact, and sources cited by national newswire IANS say the real numbers are way higher. The tax haul alone would suggest as much.
KPMG estimated that US$60 billion was wagered on the subcontinent in 2010, most of that flowing through various black markets. As Rakesh Jhunjhunwala, the billionaire investor known as the “Warren Buffett of India” has observed, “Indians are prone to gambling as much as the Chinese.”
Besides the boats, Delta owns three non- gaming tourist hotels in Goa and holds an equity interest in an Advani resort hotel in Daman, where Delta plans to add a casino to its own Thunderbird convention hotel complex.
It’s the view of CFO Hardik Dhebar that “We have not even scratched the surface yet” in terms of regional gaming opportunities, as he told Bloomberg some time ago, and Sri Lanka figures prominently in the company’s plans as it dearly would like to secure an industry name or two as investors. In India this is forbidden by law, but in Sri Lanka Delta owns two small gambling venues in Colombo (one of them the strangely named “Bellagio”) and controls four acres of land in the capital for which it’s looking for partners to help fund something a bit more like the real Bellagio with a 150,000-square-foot casino and a 500-room hotel.
This would appear to mesh nicely with Mr Rajapaksa’s larger ambitions for his country. Perennially rated one of the world’s top destinations by the likes of Lonely Planet, Conde Nast and The New York Times, the “Pearl of the Indian Ocean,” as the island is known, certainly offers no end of delights for the traveler—hundreds of miles of beaches, tropical forests, lush, unspoiled highland valleys, stunning waterfalls, 15 national parks, botanical gardens, sprawling plantations where those legendary Ceylon teas are grown , centuriesold temples, ornate colonial-era landmarks, eight UNESCO World Heritage sites, even wild elephants—but what it doesn’t have is anywhere near enough tourist-caliber hotel rooms to accommodate the government’s target of 2.5 million visitor arrivals by 2016. And the Ministry of Economic Development is rather blunt about “attracting the right type of tourists,” too. “It is important that the country moves away from the low-cost tourism and focuses on high-end tourism,” it states in its five-year master plan for the industry. It’s an assessment that finds the market short about 22,000 of the 45,000 rooms the ministry believes it needs, a goal that might gently be termed quixotic at this point. Several global brands are investing in new product or planning to invest in it or manage it—Shangri-la, Avani , Six Senses, Hyatt, Marriott, Mövenpick, Starwood, Onyx, ITC—but this will add at most about 5,000 rooms, according to HVS, assuming everything gets built.
For Mahinda and Basil Rajapaksa— brothers Gotabhaya and Chamal are, respectively, minister of Defense and speaker of the Parliament, Mahinda also has a son who is a sitting MP, he’s got a nephew serving as a provincial chief minister and another on the board of directors of SriLankan Airlines, whose chairman is his brother-in-law, the ambassadors to Russia and the United States are cousins—this is precisely where casinos fit in.
Perennially rated one of the world’s top destinations by the likes of Lonely Planet and The New York Times, Sri Lanka offers no end of delights for the traveler—but what it doesn’t have is anywhere near enough star-quality hotel rooms to accommodate the government’s target of 2.5 million visitor arrivals by 2016.
Plans, Problems
Not a lot of detail is available on the Crown and John Keells resorts, which may be by design until the government is comfortable that the Buddhist clergy, the most powerful political faction after its own People’s Alliance coalition, are on board. What is known is that both will be built along Beira Lake in the center of Colombo just back from the beaches and the popular Galle Face promenade. News reports on Crown Colombo mention only a 400-room luxury hotel with a price tag of US$350 million and a 2016 opening. Plans initially called for a 36-story hotel tower but that was scrapped at the insistence of Gotabhaya Rajapaksa, who was said to be concerned about preserving views of the lake. ASX-listed Crown, Australia’s dominant operator and a 33% stakeholder in Macau casino giant Melco Crown Entertainment, was not amused by the Defense minister’s interference, according to reports. (The company did not respond to a request for comment.) Revised plans call for two smaller towers, and Mr Packer’s local partner, Ravi Wijeratne, the country’s largest casino operator, probably had a hand in smoothing things over.
The government has intervened twice to prop up Colombo’s sagging room rates.
“Ravi happens to be a childhood friend of the president,” says Mr Thadani. “And that’s something that is publicly well known.”
HVS represented Mr Wijeratne a couple of years ago in negotiations with MGM Resorts International about a possible tieup in Colombo, and “He is extremely wellpositioned,” Mr Thadani says of him, “so therefore getting approvals and licenses and so forth is not much of a challenge.”
No one is revealing Goa’s real revenues.
John Keells isn’t going to be challenged much in this respect either. It’s one of the island’s most respected commercial names, its forebears having started out in the 19th century as tea growers and exporters in the days of the British Raj. Plantations are still part of the Keells portfolio, but the conglomerate as it exists today encompasses everything from consumer goods and financial services to transportation, property development and information technology. Listed on the Colombo Stock Exchange under the ticker JKH, the company posted a 26% increase in net income in the latest financial year on group revenues that were up 10% to 85.56 billion Sri Lanka rupees (US$651.4 million). The leisure business, which generated 34% of 2013’s pre-tax earnings, includes 12 resort hotels in Sri Lanka and the Maldives under the Cinnamon, Chaaya and Bentota brands. The Cinnamon Grand and Cinnamon Lakeside are two of the best-known hotels in Colombo. The latter occupies seven acres along Beira Lake, where the company will be siting its casino. This will be developed in phases: the first, priced at US$650 million, calls for a five-star hotel with 800 rooms, a convention center, a shopping mall, entertainment facilities, luxury condominiums, serviced apartments and office space. It will be “iconic,” the company has told its shareholders. “It will aesthetically and functionally add to transforming the landscape of Colombo, potentially making it one of the most sought after destinations in South Asia.”
John Keells’ resort casino will be developed in phases: the first, priced at US$650 million, calling for a five-star hotel with 800 rooms, a convention center, a shopping mall, entertainment facilities and luxury condominiums and serviced apartments and office space. It will be “iconic,” the company says.
Just what the Rajapaksa brothers want to hear, and both projects have been granted 10-year tax holidays (though not on gaming revenue) as part of a package of incentives crafted to attract more investments of a similar scale and sweetened with the promise of speedy approvals and long-term leases and/or outright sales in exchange for cash commitments up front and agreements to develop hotels.
What remains for JKH as of this writing is to secure a partner to manage the allimportant gaming side. This of course is key and not least because an investment in luxury product on this scale will need a lot of roulette and baccarat and blackjack tables to subsidize it. Hotel occupancy in Colombo hovers around the mid-60s (it’s lower in the countryside), and the government has intervened more than once to prop up room rates, a strategy that has backfired somewhat, according to HVS, steering tour group and MICE bookings away from the capital and into outlying areas.
For obvious reasons the government would like Keells to tie up with a leading Western name, but the market lacks a comprehensive regulatory framework capable of passing the muster of most Western jurisdictions. Keells at least has reputation going for it. “I certainly think they will probably be a better fit for at least most of the casino companies coming out of the West,” says Mr Thadani.
Keeping the Peace
India is expected to send 50 million tourists out into the world by 2020, which finds Sri Lanka at about 33 miles at the narrowest point of the Palk Strait from the southeastern tip of the subcontinent rather ideally situated. The island derived 17.5% of its 1 million tourist arrivals last year from India, its largest feeder market. Figures released by the Sri Lanka Tourism Development Authority for August show Indian arrivals up 4.9% through the first eight months of 2013 and tracking at 16% of total arrivals, which are up 14.3% over the same period last year.
A “Sri Lanka Shines in Beijing” promotion at the end of August brought a high-level delegation from the island to the Chinese capital for several days and resulted in contracts for newspaper and radio spots and ads on billboards and buses and in train stations around the city.
This is impressive, but if it continues the market won’t get to this year’s target of 1.3 million arrivals, and it will be the first time that has happened since the end ofthe civil war, and it will happen in spite of significant increases in arrivals from North America and Europe—the UK is Sri Lanka’s second-largest feeder market, Germany is third, France is fourth, US visitation is up 20% year on year—and notably from China, whose 24,300 visitors through August represent a 74% increase over last year. China also features prominently in a $6 million tourism marketing campaign launched earlier this year and targeting East Asia, the Middle East, India and Russia with road shows, press conferences, meetings with dignitaries, trade fair exhibitions and straight-up sales pitches. A “Sri Lanka Shines in Beijing” promotion at the end of the summer brought a high-level delegation to the Chinese capital for several days, the deputy minister of Economic Development and the head of the TDA among them, and it resulted in contracts for newspaper and radio spots and ads on billboards and buses and in train stations around the city. The goal is 275,000 Chinese visitors by 2016, at which point the government hopes to have attracted US$3 billion in tourism-related FDI and FOREX earnings of $2.75 billion, which would elevate tourism from sixth on that list to first. Ideally, tourism-related employment will have more than tripled to 500,000 direct and indirect jobs.
US$3 billion in tourism-related investment is the goal over the next three years.
It’s not likely the country will get there in time, mainly given the infrastructure issues, and at any rate it’s already ruffling political and religious sensibilities. The United National Party, Mr Rajapaksa’s main opponents in Parliament, complains that he’s giving away the store. They’ve zeroed in on the 10-year tax holidays and the Crown-Wijeratne joint venture, which they say is an evasion of government pledges not to issue new casino licenses. They’ve called for an accounting and a full debate in Parliament, neither of which has occurred, and they don’t have the votes to make them occur, but they are kicking up a fuss. How far they’ll take it remains to be seen. Earlier this year, Mr Rajapaksa fired the nation’s Chief Justice Shirani Bandaranayake after his supporters in Parliament voted to impeach her in a process the country’s highest courts declared illegal. She was accused of financial irregularities, though it appears her offense was to rule that a $600 million development bill floated by Basil Rajapaksa had to be submitted to the provincial councils for approval. Things looked headed for a standoff when she refused to vacate her office, but then she relented, fearing violence, she said, according to news reports. As for the media, they’re on a tight leash, having been schooled by a quartercentury of civil war to toe the government line as a cost of staying in business and out of jail or worse. On a scale of press freedoms, Reporters Without Borders ranks Sri Lanka 165th of 173 countries.
The monks are a different matter. They’ve succeeded in legislating limits on the sale of alcoholic beverages and they’ve prevailed on the government to close down all the country’s liquor stores. The clergy-dominated National Heritage Party has warned the government not to get too promiscuous with its casino favors, and the hardline Bodu Bala Sena (“Buddhist Strength Force”), the “unofficial police” of the Sinhalese majority, as it styles itself, also has vowed to keep a close eye on any tendencies it considers overly liberal. Earlier this year, the BBS was implicated in news reports in a wave of attacks on Muslim businesses.
The clergy-dominated National Heritage Party has warned the government not to get too promiscuous with its casino favors, and the hardline Bodu Bala Sena, or “Buddhist Strength Force,” also has vowed to keep a close eye on any overly liberalizing tendencies.
His Excellency, meanwhile, rails against sanctions imposed by the European Union and the United States in the wake of evidence pointing to war crimes in the suppression of the Tamil revolt, which the UN also is investigating, and continues to push forward on the economic front. Billions of dollars in investments have been committed to improve and expand road and air transportation and port facilities. China, which isn’t deterred by the war crimes issue, is expected to play a significant role, as it is in the Maldives, where Chinese are now the largest visitor contingent and Putonghuaspeaking front desk clerks and waiters and diving instructors are much in demand. Chinese money helped build the island chain’s foreign ministry headquarters and its national museum, and talks are in progress for PRC involvement in road construction and education—all part of a China strategy known as the “string of pearls” aimed at outflanking India in a region where the Maldives and Sri Lanka happen to sit on or near the most important shipping lanes in the world.
None of this will matter much if Mr Rajapaksa can’t maintain order across the ethnic and religious divides that keep Sri Lanka at war with itself. The Tamil north remains under heavy military occupation. The UNP claims it lost the close-run 2010 presidential election Mr Rajapaksa captured with 50.3% of the vote because Tamils were forcibly kept from the polls. His Excellency has, however, bowed to international pressure and recently allowed the first provincial election in the north in 25 years. The Tamil National Alliance, the political wing of the defeated Tamil Tiger insurgents—terrorists, the government calls them—was expected to win, and there were reports of voter intimidation and attacks on candidates and harassment of election monitors. They won anyway.