Taking lessons from the previous tender for Macau gaming concessions 20 years ago, former advisor to the Macau government David Green explores what it might take to win a license this time around.
More than two years ago, when I was advocating for an extended delay in the re-tender of Macau’s gaming concessions, I wrote the following:
While it remains unknown what the SAR government’s expectations are for the outcomes of the second tender process, as recently as April last the Secretary for Economy and Finance was implying that the government would expect more from the second round than it achieved from the 2002 process:
“Gaming liberalization in 2003 (sic) and the re-tendering in 2022 are two different discussions at different levels,” he said. “In 2003, Macau did not have enough conditions to make a choice, today we have more spaces and conditions to decide the direction of the gaming industry.”
The recent opening of the tender and subsequent release of the tender requirements has confirmed that the government’s expectations of bidders likely far outweigh those bidders’ appetite for, and capacity to meet them.
In 2001/2002, the expectations of the government were largely confined to the maximization of tax revenue from casino operations. That was why the scale of the proposed investment in new properties, and the experience of the tender respondents in delivering large, casino-oriented developments, were accorded the greatest weight by the then Tender Commission in scoring the offers received.
Twenty years on, revenue remains important, the more so since the advent of COVID and the remorseless pursuit of the elimination of the virus from the SAR. As the government has depleted its coffers, it is seemingly intent on migrating at least some of its core functions to the future casino concessionaires, without any offsetting reduction in tax. For their part, the existing operators are running on fumes, increasingly reliant on the optimism of their controlling shareholders and patience of their lenders to see them through to better times.
It must be galling for the concessionaires to look at the treatment accorded local airline Air Macau, which in May 2020 had its exclusive concession extended by three years when it was due to expire in November of that year. The ongoing existence of that concession is now a significant constraint on the development of major new markets for Macau’s casinos. In fact, as long ago as 2008, the SAR government announced its intention to not renew the concession and promote liberalization of routes. Given the reason for the extension was largely “to maintain the stability of the industry operations currently affected by the outbreak of the Novel Coronavirus Pneumonia”, one may well ask why the government has refused to delay the re-tender and to extend the casino concessions for more than six months?
As the saying goes, the situation is what it is. So, how does one go about framing a winning bid? Incumbency will be a distinct, though likely not quantifiable advantage, of course, in part due to the compressed time frame for the entire process. While the government has said that the tender process will offer a level playing field, it is not obvious what that means. In 2001, the Tender Commission developed its own scoring weights, which were not disclosed to the bidders, and only became known when the Commission’s comprehensive report was released subsequent to the award of the 3 concessions. Incumbency is disclosed in that report as justifying a scoring “bonus” for SJM, as the corporate successor to STDM, which had held the pre-existing monopoly casino concession.
Assuming the Tender Commission this time around similarly keeps its scoring criteria and weights in camera, bidders are left to speculate about which of the 11 articulated objectives will be accorded the highest value in the scoring process. Rather than try and cover all bases, a more productive approach may be to consolidate the criteria and focus on two or three of those objectives. Increasing international tourism is clearly a significant objective, under which head can be subsumed a number of other criteria, such as MICE, entertainment, major sporting events and gastronomy. To develop each segment requires establishing the baseline data starting point, assessing the perceived value proposition that Macau represents for each segment, and contrasting that proposition with the market leader in the segment. This is most challenging for markets outside mainland China, as the perceived value for Mainland visitors already assures Macau of close-to-market leadership once travel is reinstated.
It seems safe to assume that the government will look to how well bidders identify the gap which will undoubtedly exist between segment leaders and Macau. The issue then to be addressed is how to close the gap, and the anticipated cost of closing it. Some assumptions will need to be made here, especially when it comes to government-funded infrastructure. Unfortunately, the delivery of large-scale infrastructure projects on a timely basis has not been an SAR government strong suit in the past – remember Pac On ferry terminal and the Light Rail project? An important assumption may well be the expansion of the existing airport passenger movement capacity, though given current policy that is unlikely to be critical until zero-COVID is confined to the rearview mirror.
An outcome which any analysis needs to demonstrate is the likely return to government, in the way of tax revenue, private direct investment (in conjunction with, or substituting for public expenditure), reduced transfer payments (for example, unemployment or small business support programs) and the macro-economic multipliers of non-gaming spend. As the first Tender Commission pointed out in its 2002 report, the fundamental principle behind concessions is the enhanced generation of revenue. If it cannot be enhanced by the grantee, there is no point in government conceding the rights to exploit the activity.
Sensitivity analysis which flexes and tests key underlying assumptions will be critical. It will be beneficial to make supporting modelling as user-friendly as possible. When Singapore tendered its casino licenses in 2005, models were required to be sufficiently functional to allow various scenarios to be run through them as part of the tender evaluation. While there may be no requirement to do that in Macau, it would suggest confidence in the robustness and achievability of what a tenderer is offering, and of course transparency.
Since the term of the new concessions is to be 10 years, it is doubtful that any of the desired outcomes will be more complete than a work-in-progress when they expire. That is the reality, and one that the Tender Commission should be cognizant of. Building a house that will stand long into the future requires investment in its foundations long before it needs a roof.
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