Macau’s mainstay industry and biggest taxpayer is again held hostage to local politics
The suggestion the Macau government will only approve land applications for two out of three pending Cotai casino projects during 2012—essentially because administrators are too busy and the applications are complex—looks like a pretty thin excuse.
It certainly wouldn’t wash in a litigious society such as the United States, where it would most likely expose public servants to a lawsuit for maladministration. Advertising the fact that your bureaucracy is not competent to cope with three admittedly complex land grant permissions in the space of 242 working days in this leap year (net of weekends and public holidays) is hardly the best way of presenting Macau to the outside world. But in Macau, and China in general, that’s not the point. The ‘reason’ publicly stated for a policy or decision is rarely the real reason.
In the context of the Macau gaming market, this public face/private face approach means casino investors and operators are required to nod politely at whatever policy or statement of intent is issued by the authorities, as if it were the Wisdom of Solomon. But they must remember that a bigger political game is being played—namely, controlling the rate of growth of the Macau gaming industry. In that context, the individual twists and turns on issues such as planning permission are mere window dressing. The casino operators need to accept it in order to maintain the face of local officials and politicians, and live to fight another day.
Land grant applications matter in Macau because—in common with city-states such as Singapore or de facto city-states such as Hong Kong—the government is the landlord. You can’t just buy a piece of land privately and then apply to build a casino as you might in the US. So when Jaime Carion, Director of the Lands and Public Works Bureau (known by its Portuguese initials as DSSOPT) reportedly told the local media in early February that two of three Cotai land grant applications “could be approved within this year,” what he was really saying was ‘someone’s going to be unlucky in 2012’. For the record, the three operators that currently have a Cotai land grant application pending with the government are: Wynn Macau; Sociedade de Jogos de Macau (SJM) and MGM China.
In comments reported by the local television news channel TDM, Mr Carion stressed that the approval process of the projects was difficult, especially when it came to the calculation of land premiums, overall construction area and fire safety hazards.
“Fire safety regulations must be followed strictly. There can’t be any loopholes. The gaming operator had some adjustments regarding this, but in the end they made a decision,” he said, as quoted by TDM News.
“In terms of the proposal the operators submitted to the government, they have to be do-able technically, architecturally and legally— then we enter the approval process,” Mr Carion added.
If Mr Carion’s take on things is the settled position of the Macau government (and from previous experience of statements by Macau officials, that’s by no means certain), it does lead to an inescapable conclusion. One of the three casino operators currently with an application for a new resort on Cotai will be put at a competitive disadvantage to the other two, because its land grant permission will be delayed, and by implication its construction project will be delayed.
But is that the correct inference to draw? Let’s break it down. Even if only two of the three pending projects have their land applications approved during 2012, it doesn’t mean the two ‘lucky’ projects will be able to start construction in 2012. Unless the government radically changes its policy on labour importation, there will still in likelihood be a shortage of construction staff in the Macau market. In that context, all Mr Carion is really telling us is that the government plans to give us more of the same; i.e., a policy of drip feeding new casino supply into the system, rather than a second ‘big bang’ of the sort we saw in the first building phase from 2003 to 2009.
Rumours around town that MGM China has been actively recruiting labour for its pending Cotai project doesn’t mean MGM has been given the nod as one of the lucky ones on land permission. It could simply be a defensive posture to garner as many construction staff work permits as possible ahead of its market rivals; given the amount of time it can take to process them (three to six months is not unusual).
The Macau government’s ‘we’re too busy’ defence wouldn’t wash in a litigious society such as the United States, where it would most likely expose public servants to a lawsuit for maladministration.
We must also throw into the mix the fact that Sands Cotai Central—the US$4.2 billion ‘extension’ to Las Vegas Sands Corp’s Cotai infrastructure—is only just concluding its first phase. Arguably, the second phase should be given priority for labour permits over any rival Cotai schemes. This is because the company’s Hong Kong-listed unit Sands China already has land permission from the government for the whole Sands Cotai Central site (a.k.a. Cotai 5 and 6) and is paying a land premium for the whole of 5 and 6, not just the phase one portion (according to a statement on page six of LVS’s 2011 annual report issued recently). LVS has a covenant from the government that it must develop the whole of 5 and 6 by May 2014 or risk losing the unfinished portion, although in reality it’s likely the company will be given an extension.
Another poser is the land grant status of Studio City, Melco Crown Entertainment’s planned second resort on Cotai; which it took on from a deadlocked outside consortium last year. Studio City had already been given land rights and an initial premium had been paid to the government. But there’s now a technical question about whether the Studio City land application process must go back to the starting line if, as seems likely, the construction isn’t completed by the originally mandated date of 2013.
All these factors—and possibly some others that are not yet public knowledge— could combine to result in horse trading between the Government and the industry over timings on outstanding Cotai land permissions and gazetting for building work to commence or (in the case of Studio City) recommence. MGM China, SJM and Wynn all have available to them powerful arguments for special treatment.
“Given the high stakes, we can certainly envision the operators continually enhancing their proposals to include amenities (e.g. room counts and types, amount of expected local employment, scale of non-gaming attractions, total dollar investment, etc.) perceived to be the most likely to result in first approval,” said Union Gaming Research in a note on the news.
Union Gaming adds that if the principle of ‘first come first served’ were applied, then the chronological order would be: 1) Wynn Macau, 2) SJM Holdings and 3) MGM China.
“This jibes with certain operator commentary, with Wynn having already announced an agreement, as well as the land premium payment,” stated Union Gaming.
“SJM more recently noted that an agreement had been reached in principle, although the land premium payment had not been determined.”
MGM China operates on a gaming subconcession from SJM. SJM’s concession— and thus the related MGM sub-concession— expires in 2020, two years earlier than the other concessionaires and sub-concessionaires in the market. The anomaly was created because when Dr Stanley Ho’s original 40-year gaming concession expired on 31st December 2001, and a set of new licences for multiple operators were issued in February 2002, one of the successful applicants—STDM’s successor, SJM—was the only one with inherited casino infrastructure capable of carrying on a casino business. Thus, it had no market competition in the territory until May 2004, when LVS opened Sands Macao. In other words, it effectively got a two-year extension on Dr Ho’s old monopoly. Whether MGM China should face the double jeopardy of an earlier-thanmarket- norm redemption on its gaming sub-concession (because of its tie-up with SJM) and in addition low priority in the Cotai permissions pecking order is a moot point. Were MGM China’s Cotai project permission to be delayed to within seven years of the expiry date of its sub-concession (i.e. the end of 2013), the company might have real problems raising debt for construction costs. Assuming a two-year construction timetable—taking the resort opening date to the end of 2015—would-be lenders might fret that anything lower than a 20% annual return on investment from resort operations might result in them not getting all their money back.
“In our opinion, MGM China can make at least three arguments as to why they should be included as one of the two operators to receive approval for a Cotai project this year,” said Union Gaming Research.
“First, the company has the smallest amount of gaming supply in market; second, the company has no exposure to Cotai; and third, the company’s concession expires in 2020, which is two years prior to four of the other five operators,” said Union Gaming Research in its note.
“Like MGM China, we believe SJM can also make at least three arguments for 2012 approval of their Cotai land application. First, the company has no Cotai exposure; second, the company submitted its Cotai application before MGM China; and third, the company’s concession also expires in 2020, which is two years prior to four of the other five operators.
“Again, we can think of at least three arguments that Wynn Macau can make as to why they should also receive Cotai land approval this year,” added Union Gaming.
“First, the company has no Cotai exposure; second, the company submitted its Cotai application before any other operator; and third, the company has the second smallest amount of gaming supply in the market.”
Ultimately, the whole land permissions and building permissions process is being driven not by the competence or even fair-mindedness of Macau public servants but by the politics of China and the politics of managing the gaming industry. Given that overriding fact, some lyrics by the Scottish pop rock guitar band Del Amitri come to mind when describing where the gaming industry stands in the pecking order:
“Always the last to know/ How you’re feeling/ The last to know/ Where you are/ The last to know/ If you’re happy now/ Or if he’s pleading with you, like I pleaded with you/ If you go, don’t let me be the last to know/ Don’t let me be the last to know.”
