As the calendar rolls over into 2019 with still no word from Macau authorities regarding details of the gaming license re-tender process, speculation is quickly mounting as to when we’ll know more and how it might look.
Six months after the Macau government promised to release details of the re-tendering process for Macau’s six gaming concessions and sub-concessions, the big news coming out of the SAR in late 2018 was the absence of any news at all.
Pressed by reporters on a potential timeline for information during a panel session at MGS Summit in mid-November, the Director of Macau’s Gaming Inspection and Coordination Bureau, Paulo Martins Chan, deflected multiple questions on the issue, stating, “You all seem quite concerned about this question but I can’t give any related news. Of course the SAR government will make a decision and the DICJ will also participate in this round.”
Two days later, Macau Chief Executive Fernando Chui Sai On offered similarly little insight on the re-tender issue, adding only that the government was still “studying how to deal with” the early expiration of licenses held by SJM Holdings and MGM China in 2020, coming two years before those of Galaxy Entertainment Group, Sands China, Wynn Macau and Melco Resorts expire in 2022.
This lack of information prompted US brokerage Telsey Advisory Group to issue a note voicing serious concerns over the absence of information regarding the government’s plans.
“We are becoming more and more concerned over the lack of news surrounding gaming concession renewals,” wrote Telsey’s Brian McGill and Alec Cummings.
“In last year’s policy address, Mr Chui had suggested that mid-2018 would be an appropriate time to address this issue. Moreover, last year the Macau government commissioned two studies on the gaming industry concession renewals, both of which were expected to be completed by the third quarter of 2018.
“We are obviously not in the third quarter anymore and we are well past ‘mid-2018’. Given this, and considering the current geopolitical tensions between the United States and China, we are watching this situation closely.”
All of which brings us to the million dollar questions – is the government’s delay in releasing information really cause for concern, and what can we expect from the re-tender process once details are finally revealed?
According to Jose Alvares, a partner at CA Lawyers in Macau, the mere suggestion that there has been a delay is in itself misleading given that SJM’s concession doesn’t expire until 31 March 2020.
“People seem to forget that the initial tender was published on 1 November 2001 and gave interested parties merely a month to submit their proposals,” Alvares points out. “The decision on the pre-selection was then published merely a couple of months later on 8 February 2002.”
MdME’s Carlos Eduardo Coelho suggests that Macau’s government may also be waiting to review and analyze the new legal framework adopted by Japan.
“Because the Japanese market is perceived as having the potential to become the biggest regional competitor to Macau, the government may be assuming a wait-and-see attitude before revealing its own strategy for the future,” he explains.
Of greater significance, however, is the likelihood that the Macau government will start by simply extending the concessions of SJM and MGM until 2022, as allowed under Macau Gaming Law. Not only would this bring SJM and MGM in line with the rest, it would also buy authorities another two years in which to determine the re-tendering process.
If so, then the more pertinent question isn’t so much the timing but what the re-tendering process will look like when it finally does get underway.
It’s worth noting that a simple license renewal for the current operators is out of the question, as there is no stipulation under Macau Gaming Law allowing for such a decision.
A public tender is therefore the obvious scenario, to be kicked off by the release of a tender program outlining minimum requirements of qualification, information the bidders are expected to disclose, mandatory elements of the proposals to be submitted, selection criteria and the criteria to quantify them.
The public tender itself would then be conducted by a special committee appointed by the Macau Chief Executive.
However, Coelho explains that the Chief Executive “is not required to follow the current rules as determined by the public tender regulation” and “may issue (and will likely do so) a new public tender regulation.
“Although I believe that most of the criteria under the previous tender program will transition into a new tender, it is highly likely that the government will want to introduce new criteria and change the relevance given to some of the existing criteria (in particular the obligations of the awardees of a concession under the future concession contracts),” he adds.
The Innovation Group’s Michael Zhu says a “true re-tendering” seems to be a logical direction, requiring all six operators to demonstrate what they have contributed to Macau’s prosperity both financially and socially and how they can continue to do so.
“I believe more focus and attention will be given to ‘diversification’ implied in a few aspects,” Zhu says, including a greater focus on non-gaming amenities, a greater shift towards a sustainable mass market model and development of a more international rather than Chinese-centric customer base.
According to Alvares, a genuine re-tendering stands out as the fairest system for all bidding parties allowing both the current “Big 6” and any new contenders to state their case on an equal footing. However, he suggests that “very significant weight should be given to an application from a concessionaire that has been operating in the market and has been doing it well. The reason pertains to public interest in that we do not want to rock the boat. I think the logic is ‘don’t change horses in midstream’.
“Without wanting to weigh in excessively, all current operators have proven to be quite beneficial to the market despite pursuing their own selfish interest (as with any company/businessman).
“If the said operators are to be re-awarded the concession, the key here will be the Macau Government negotiators ensuring that the said players will continue to bring added-value to the region.”
In a December note, brokerage Bernstein outlined Macau concession renewal as the number one key risk concern among investors regarding the city’s three US-based concessionaires – Las Vegas Sands, Wynn Resorts and MGM Resorts. But analysts were also quick to allay many of those concerns, particularly in regard to the possibility of any current concessionaires losing their licenses.
“If the Chinese government chooses to take away the gaming concession from US operators, the result would be quite counter-effective to China’s attempts to open up the country for greater foreign investment and the negative PR surrounding such action would be detrimental. US gaming operators can also choose to shut down the entire gaming infrastructure in Macau (a nuclear option) by shutting down the non-gaming elements of the integrated resorts. The result would be unemployment, a drop in tax revenues and a chaotic environment in the city – something that we do not believe the Macau or the Chinese governments would want.”
Bernstein adds that long-term land leases held by the Big 6, independent of their gaming concessions, also work in their favor.
“The government can take back control of the gaming areas (which only includes casino floors and tables, representing a very small percentage of square footage of an entire property), but would not have access to areas outside the casino floor (such as hotels, restaurants, bathrooms, common areas etc), making it virtually impossible to operate a casino without the cooperation of the real estate owner (the current concessionaire).
“The land leases do not expire for gaming operators until 2026 to 2038 (depending on the property), but even then are extendable at the option of the lessee through 2049.”
One factor that undoubtedly remains to be seen is the level of input from Beijing and how that might influence Macau’s policy direction. On this point, opinions remain divided.
With US-China trade relations having dominated headlines through the back-end of 2018, The Innovation Group’s Zhu sees considerable potential for China to flex its muscle.
“I won’t be surprised to see more Chinese, Hong Kong, local concessionaires than American ones,” he observes. “At least, they may want to change the current 3-3 balance.”
The legal view is somewhat different, with MdME’s Carlos Eduardo Coelho stating, “I do not expect this to happen given the autonomy and independence of Macau legislative and executive power.”
Likewise, Alvares explains that while the SAR may consult with Beijing, final decisions will ultimately stay local.
“Macau, as a Special Administrative Region of the People’s Republic of China, enjoys a high degree of autonomy in running its own affairs,” he says. “Based on the provisions relating to the re-tender process, any decisions taken in that regard are within such purview of autonomy.”
Bernstein outlines four potential options for how Macau’s gaming industry might look following completion of the re-tendering process.
Most likely, the brokerage says, is maintaining the status quo, with the current six all having their concessions renewed but with higher fees or taxes.
Considerably less likely, according to Bernstein analysts, is all of the above but with no increase to fees or taxes – a scenario it only sees possible should Macau’s ongoing economic recovery suddenly falter.
Rated as most unlikely would be failure to issue new licenses to any of the Big 6, which would be “difficult to implement” and create a highly negative investment environment.
But Bernstein also considers the issuance of a seventh or eighth gaming license as an unlikely option, pointing to problems created by “too many competing interests”, required changes to Macau’s gaming law in order to make it a reality and pressure to reduce current tax levels due to increased competition as working against this additional operator concept.
Ironically, among those to have taken the opposing view by claiming the addition of a seventh concessionaire is a strong possibility is at least one current Macau legislator, Professor Davis Fong, who told IAG in 2017 that “from a society perspective we will welcome everybody who can help Macau achieve the World Centre of Tourism and Leisure.”
“It would need more than just a proposal,” Prof. Fong added at the time, “but whether they are visible, whether they have the potential background or historical records to prove to society that okay, they are not [one of] the six, however they can help achieve the next level.
“I think society will welcome everybody who can help Macau achieve this new position.”
It’s one of many questions that, until now, remain unanswered, but one thing is for sure: however it plays out, Macau’s gaming license tendering is set to shape the future of Asia’s gaming industry.