Victim of Its Own Success
Gambling and the Law®: By Professor I Nelson Rose
Most casino regulatory systems are either too new or too old.
When a system is new, regulators and lawmakers have freedom to play at being social engineers. New regulators are often inflexible in allowing rules to change to match real-world experience. This is how you end up with docked riverboats throwing all their patrons off the ships at the end of phantom cruises.
But if a system is too old, regulators become captives of the casinos they are supposed to police.
Macau is unique in that it faces the best and worst of having a system that is both too new and too old. And most of the problems this has caused have been ignored up to now, because everyone was making so much money.
This year, Macau casinos will make more than all of the casinos in Las Vegas and Atlantic City combined.
Yet it is hard to even know who owns the casinos.
Macau is the only jurisdiction in the world that licenses operators and not casinos. In 1937 Macau gave the gaming concession to a single company. But the company was not limited to one casino.
After the Portuguese left in 1999, the government of China decided to end the monopoly. It was only fair for those companies winning the new concessions to also be allowed to operate more than one casino.
One of the successful bidders was a partnership between Galaxy Entertainment and Las Vegas Sands, that fell apart. Most regulators would have told the partners, “It’s your problem.” But since concessions were not limited to a single casino, the Macau government allowed Galaxy to have the concession and created a new law, creating a sub-concession for LVS.
The other concessions also had to be given this right. Wynn Resorts, for example, sold its newly created sub-concession to Melco-PBL for $900 million.
The three concessions had now turned into six, with no fixed limit on the number of actual casinos.
Growth has been so explosive that when Macau’s Chief Executive announced a freeze on new casinos and casino expansions on April 22, 2008, after the initial shock, there was a general sigh of relief. No one complained that this is not the way to run a casino jurisdiction.
The Macau government had, without hearings, votes or any public input, simply said these are the new rules. And no one is sure exactly what these rules are.
And continuing a practice that would never be tolerated by a new casino regulator, Macau allowed the six licensees to have revenue-sharing partnership deals with unlicensed individuals and
Like many jurisdictions, Macau has piled on a myriad of separate fees and taxes. But unlike others, Macau taxes its operators at different rates. And the details of the agreements between the casinos and government have not all been made public.
The effective tax rate is about 40% of gross gaming revenue. Not only is this high, it is obviously too high. To get around currency restrictions on high rollers from the Chinese mainland, casino owners have made deals with junket operators: they also get about 40%. Which leaves 20% to cover all of the casinos' expenses and profit.
Meanwhile, the Macau government is making so much money that it sent checks for MOP$5,000 (about US$672) to every resident.
Even Stanley Ho, owner of one of the concessions and one of the richest men in the world, got MOP$5,000.
I wonder if he wrote a thank you note.