As Manila’s Entertainment City spurs growth and regulatory challenges, Pagcor chairman Cristino Naguiat wants all sides to profit
Pagcor Chairman and CEO Cristino Naguiat isn’t a man of many words. But he doesn’t need to be. The progress of Pagcor—the Philippine Gaming and Amusement Corporation—speaks for itself since President Benigno Aquino handpicked Mr Naguiat for the top job in July 2010. A former Pagcor auditor before serving as a hospital chief executive, Mr Naguiat has to balance Pagcor’s diverse roles as gaming regulator, casino operator, government revenue generator and driving force behind Entertainment City, a master-planned district in Manila Bay that’s developing into the largest cluster of integrated resorts between Macau and Las Vegas.
Though Entertainment City was conceived under Mr Naguiat’s predecessors, his administration has made it a reality. In February, City of Dreams Manila held its grand opening as the second resort in Entertainment City. The first was Solaire Resort and Casino, a US$1.2 billion project spearheaded by Philippine ports billionaire Enrique Razon Jr, which opened in March 2013 at the 120 hectare (300 acre) district that will also include commercial and residential developments.
City of Dreams Manila brings Macau casino operator Melco Crown Entertainment to the Philippines. Working in partnership with SM Group, controlled by Henry Sy, the Philippines’ richest man, Melco Crown increased its investment in the $1.3 billion project and took over operations after Pagcor reinterpreted its terms of reference for licensees’ projects, basing its allocation of gaming tables and machines on total size of lodging areas as well as number of rooms. That revision increased the resort’s permitted number of tables by 50% to 384 and more than doubled the number of electronic gaming positions.
The Resorts World Bayshore City project, scheduled to open in 2018, broke ground last year. Its owner, Travellers International Hotel Group, operates Resorts World Manila, the country’s first major independently operated casino resort, which opened in 2009 and enjoyed rapid success, paving the way for the new breed of properties now opening at Entertainment City. Travellers is a joint venture between local billionaire Andrew Tan’s Alliance Global Group and Genting Group subsidiary Genting Hong Kong. Genting and Melco Crown partner Crown Resorts are both developing resorts on the Las Vegas Strip and are expected to be approved for Nevada gaming licenses, an indication of Pagcor’s increased legitimacy as a regulator. Genting already has a gamine venue in the US, Resorts World New York City—considered the most profitable machine-only gaming venue in the country—and recently won a license to develop a second property outside New York in the Catskill Mountains resort area.
Caesars Entertainment, which operates some 40 casinos in the US, has expressed interest in building a Manila integrated resort, another sign of Pagcor’s enhanced regard as a regulator. Despite Caesars’ brand profile and history, Mr Naguiat reacted coolly to the idea. Pagcor says it wants to let its Entertainment City operators find their footing before granting further gaming licenses. That had to warm the hearts of current licensees.
Similarly, Pagcor under Mr Naguiat has stood up for its licensees in the battle over income tax with the Bureau of Internal Revenue. A 2011 Supreme Court decision removed Pagcor’s exemption from the 30% corporate income tax, and a 2013 BIR circular said the tax also applied to Pagcor’s licensees. Exemption from income tax was a key selling point for Pagcor to attract licensees, and the court ruling fueled doubts about the Philippines as a reliable investment destination with repercussions beyond the gaming industry. Pagcor fought the BIR decision in the courts and pledged to negate the impact on licensees. Last year, it agreed to cut license fees, effectively the gaming tax, by 10 percentage points to 5% on VIP play and 17% on mass market revenue, a decision that was unpopular with the public and the bureaucracy. In February, the Supreme Court ruled that Pagcor was exempt from the income tax but made no mention of its licensees. Bloomberry Resorts, Solaire’s Manila-listed corporate parent, has filed suit against the BIR ruling, and that case is pending.
Pagcor has also been ready to stand up to licensees.Tiger Resort, Leisure and Entertainment, a subsidiary of Japanese pachinko magnate Kazuo Okada’s Universal Entertainment, has been embroiled in legal and regulatory issues, including bribery allegations that arose amid Mr Okada’s ouster as a director at Wynn Resorts in 2013. Philippine investigators have reportedly dismissed the bribery case but investigation continues into allegations that Tiger attempted to circumvent the legal requirement of 60% land ownership by Philippine nationals through dummy corporations. While the judiciary process plays out, Pagcor has said repeatedly that the $2 billion project known as Manila Bay Resorts needs to satisfy the Philippine land-ownership requirement before it can open. Potential partnerships between Tiger and Philippine companies have fallen through twice, and Tiger says it is in partnership talks again.
Tiger’s Marina Bay Resorts completion date is a more immediate issue. Its contract with Pagcor mandated completion by the end of March, extended from an original 2013 completion date. Tiger told a congressional hearing last month that it has asked Pagcor for an extension to the first quarter of 2017, promising to invest an additional $700 million to increase the size of the resort by 97,000 square meters—more than 1 million square feet—including more guest rooms, parking and design enhancements. Pagcor President and Chief Operating Officer Jorge Sarmiento stated at the hearing that Tiger would forfeit its 100 million Philippine pesos ($2.3 million) performance bond for missing the deadline. He added that Pagcor was evaluating the construction status and could revoke or suspend Tiger’s license if the project is not more than 50% complete.
Mr Naguiat has also had to help Pagcor’s operating arm cope with the impact of private licensees in Manila on Pagcor’s Casino Filipino properties. In 2013, Pagcor closed its casino at the Heritage Hotel, the closest of its gaming properties to Entertainment City, and last year it shuttered its Airport casino, near Resorts World Manila. That leaves Pagcor with just two of its 11 casinos in the capital region. Pagcor also operates electronic gaming arcades, mini-casinos with machines and table games, and bingo halls across the archipelago.
In his office at Pagcor’s headquarters, above its casino at the New World (former Hyatt) Hotel in Manila’s Ermita district, Mr Naguiat talked to Inside Asian Gaming Editor at Large Muhammad Cohen about the state of gaming in the Philippines.
IAG: Entertainment City now has two integrated resorts open. Do Solaire and City of Dreams Manila live up to Pagcor’s expectations?
Mr Naguiat: Definitely. It gets better and better. If you compare it with what we had 10 years ago, these are totally different establishments. They are integrated resorts. That was part of our terms of reference since the project started in 2009. They have to have a certain number of rooms. They have to have a specific percentage of gaming and non-gaming.
I know it’s like asking a parent if they have a favorite child, but do you like one of these two resorts better than the other?
They’ll be catering to two different markets. City of Dreams has its own markets. Your guess is as good as mine if you try to answer which one is better. I think they’ve both exceeded our expectations. First we had Resorts World Manila introducing the concept of integrated resorts as they did in Singapore. Solaire raised the bar. City of Dreams has tried to go a step further. They’re spending a lot of money promoting City of Dreams. They’ve got lots of advertisements on television. Of course, whatever City of Dreams does will have a trickle down effect on the rest of the market. It’s not a standalone property. It has the Crown Towers, it has the Nobu Hotel, it has the Hyatt. It has DreamPlay. And it has Solaire down the street. It’s a destination.
What’s the impact of having Melco Crown as an operator in this market?
It’s a big plus factor for Entertainment City. Melco Crown brings its networking from Macau, its connections with junkets in Macau. We have Solaire, which is a local company, and we have City of Dreams from Macau. There’s efficiency in its preparations to tap into that market. City of Dreams gives us a direct line into Macau.
What are the challenges ahead for completing the development of Entertainment City?
These are highly capital-intensive projects, over $1 billion each. Up to this point, the developers have been able to finance theirprojects. There’s been healthy economic growth in our economy. But another financial crisis could affect the ongoing projects.
What about the situation with Manila Bay Resorts, the project led by Kazuo Okada?
Basically, they’re in material breach of the contract. Based on the contract [which granted a provisional gaming license], they should have been finished by March [last month]. They have given a performance bond [of P100 million]. By not complying with the terms of the contract, they risk forfeiture of the bond.
So far, everyone [else] has been running more or less on time. But Manila Bay Resorts’ time frame is two more years. In that case, the proposition of a $10 billion [gaming] market is unlikely to be hit by 2018. Every year, we still project double digit growth. Off a low base, VIP is up 50% [for 2014], and with City of Dreams that’s a no brainer again this year. Overall growth should be more than 16% [the 2014 growth number].
Where will the growth come from?
Everybody is saying their focus is on the Chinese market. We have a very small attendance from the Chinese market. We’re starting here from a low base. It’s a no brainer that it will double this year. Our foreign tourism overall is growing. We get a lot of visitors from Korea, from Indonesia, from Japan and ASEAN [Association of Southeast Asian Nations], also from China. We’re not competing against Macau. We just want to be in the loop.
How will the accelerating expansion of gaming in the region—in Macau, in Vietnam, in Cambodia and in South Korea— impact the Philippines?
Macau will always be number one. That’s a given. Vietnam is too far to matter in this market. Korea is foreign players only. For visitors, we have so much to offer in the Philippines. We have historical sights in the Philippines, we have beautiful beaches. As the advertisement says, “It’s more fun in the Philippines.” Tourism is showing double digit growth, but from a low base. There haven’t been official figures yet, but the total was about 5 million last year. We’re forecasting 6 million this year.
What changes has Pagcor made as a regulator that have helped create confidence in the Philippines as a gaming jurisdiction?
The first thing is transparency. Everything we do is out in the open. Second, there’s a level playing field for everyone. We have to respect what has been agreed to under the previous regime even though that was done before our team came in.
Between Pagcor and licensees, everything should be win-win. The higher the share for them, the higher the share for us: win-win. There will always be some conflicts. When this happens, it has to be discussed, and we have to look for solutions that are beneficial to all.
Was the decision regarding income-tax an example of that?
We respected the contract. We are responsible for fulfilling the contract. The matter of the tax is still being adjudicated by our Supreme Court. [After this interview, the court ruled in favor of Pagcor’s exemption, but was silent on the licensees’ obligations.] Our decision made us a whipping boy for the media. But it was in the best interests of all involved.
Many international companies—Caesars, when it expressed interest in building a resort in Manila, for example—have said they have confidence in the Philippines as a place to invest and do business because of President Benigno Aquino. But his term will end next year. Do you think that business confidence in the Philippines can survive the change in administration?
Definitely. For Pagcor, and I’m confident for other agencies as well, a lot of nation building measures have been put into place. A lot of changes have been made in the way the government operates. I’m sure everyone will follow what President Aquino’s administration is doing. There have been a lot of good people joining thegovernment and changes in the way the government operates. It’s hard to break that chain of positive developments. I think it will continue under the next president. With the expansion of licensed casinos in Entertainment City, Pagcor has already closed two of its casinos in Metro Manila.
Do you foresee further closures? More broadly, what role is there for Pagcor casinos in a Metro Manila market with five integrated resorts?
In Macau, small casinos continue to operate even though they have huge resorts. There continues to be a place for smaller casinos. We think that will be the case here as well. We’re more focused outside of Entertainment City. That area is for the licensees, and they have their customers. We see Pagcor staying in Metro Manila. We will continue to monitor the situation. We see having some small operations, maybe. Pagcor is still viable, very viable, especially if you look at our operations in the provinces. It’s not competition for Entertainment City. That’s not our role.
Do you favor splitting Pagcor’s casino operations and its regulatory function?
Until Congress changes our mandate, we will continue as a regulator and an operator. It’s a mandate that the agency has to follow. If the Congress says that Pagcor should just be a regulator and separate or sell our casinos, then we will follow that mandate. But they need to make that decision. It’s not up to Pagcor.
If Pagcor was split into a regulator and an operator, which half would you rather be chairman of?
If Pagcor was split, I’d rather not work for Pagcor anymore. I’d like to go back to an ordinary life. I think I did my part. We have 100 million people in the Philippines; let one of them take their turn.