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By Willie Weerasekera FAIM, AFAMI
Decades ago governments around the world willingly permitted the marketing of tobacco and alcoholic products and enjoyed the increasing tax income to balance their budgets. Today, the very same nations are spending large sums of money to overcome their ill effects. It is therefore important that Sri Lanka policy makers take such learning into consideration and take decisions on the legal gambling issue, not on the basis of short-term budgetary consideration but importantly on the longer-term interests.
Important criteria
Whilst the matters raised relating to negative social impacts, religion and tax related matters are very relevant, even if such factors did not arise, unless the proposed Integrated Resort (IRs) met the key characteristics on which the IR concept was designed and was capable of delivering on the primary objective of developing the tourist industry, one may ask the question – are we developing the tourist industry or the casino industry?
What is an ‘Integrated Resort’ (IR)?
According to Andrew MacDonald and William R. Eadington (Nov. 2008) the key attributes of an IR are:
An Integrated Resort is really a euphemism for a very large-scale entertainment development based around a casino.
The casino component, while physically small, must still act as the primary economic engine, which drives overall returns and facilitate investment in other facilities and amenities.
Therefore the casino element must be of such magnitude that it can generate over half of the developments annual cash flow.
Even if the casino occupies less than ten percent of the gross floor area, it has the capacity to generate disproportioned earnings so that substantial investment can be made in non- gaming facilities that might not be otherwise sustainable.
Google Wikipedia note that an IR can be identified as being a Singaporean based vacation resort and that the term ‘integrated resort’ is a euphemism used because of opposition to casinos.
An IR is casino centric
Therefore, despite some trying to camouflage the aspect of a casino within an IR as being an incidental part of the project, it is central to the IR business model.
Can the IR maximise tourism development?
Tourist destinations target different consumer segments. Therefore there must be a match between the segments a casino will attract and the segments a tourist destination is trying to attract. A basic premise of business strategy is to create a product that generates value for a target market. By knowing the needs of the players, casinos can develop its products that will attract and retain its target market.
Equally, the IR must incorporate products that will attract the segment the tourist destination is trying to attract – the high spending leisure tourists. This is where the concept of integration comes in. It’s an integration of two business models, one being the casino and the other being tourism.
The casino attracts the gaming segment. As much as the gaming segment acts as the primary economic engine that drives overall returns to the IR investor, it will also generate the larger share of the tax income to the treasury.
Iconic non-gaming facilities are meant to attract the ‘non-gaming’ clients. Here the expectation is that when families book into these ‘luxury resorts’ for leisure purposes, the adults could be enticed to visit the casino whilst the children enjoy the resort facilities available to them. Equally, they could cater to the local community and the MICE segment.
The iconic nature of the non-gaming facilities is expected to revitalise the destination and draw more non-gaming leisure tourists to the destinations other hospitality establishments as well. Thus the IR creating a ripple effect as a catalyst in drawing in more tourists.
Therefore though an IR is casino centric, it’s not traditional casinos or casino hotel complexes. In that context Sri Lanka should give serious consideration to the following observations of Winthrop Professor, Entrepreneurship, Marketing and Strategy at University of Western Australia Tim Mazzarol and others:
“For Australia the economic development potential of integrated resort casino developments is significant. …. However, the success of developments such as Singapore’s casino is due to the strategic vision that lies behind the design. As ‘integrated resorts’ these casinos must emphasise more than just a venue for gambling…
“The focus of a successful tourist destination should be on the word ‘integrated’ in an integrated resort casino. Singapore’s approach to its casino development was strategic…
It is still too early to pass judgment on the nature of the casino development being planned for Queensland. “To date no Australian casino development has reached the same standards as that of Singapore, and none can be truly classified as representing integrated resort models.”i
The message is clear, if the proposed IR is to be based on a genuine IR model they must stand the test based on the Singapore model. This question is of vital importance because if it is not, it fails to serve the primary objective of developing the tourist industry. The question then quite rightly is – are we developing the tourist industry or the casino industry?
The Singapore IR concept
MacDonald and William R. Eadington writing on the evolution of the concept of ‘Integrated Resorts’ note that as early as in 2004 the Singapore government made it quite clear that: What they wanted was not ‘just’ casinos or resort facilities dominated by their casino operations.
Thus they mandated that only a very small proportion of the actual physical facility would be for casino utilisation. The rest would be support facilities and consumer oriented amenities that would dominate the developments.
Equally, as Gwo-Jiun et al (2012) points out the Singapore Government legalised casino resorts not to overtake Las Vegas as a Gambling Destination. The Singapore Government was not thinking of setting up a casino, but an integrated resort – leisure, entertainment zone in which the casino is only a small part of it.
How Singapore worked towards its objective
Singapore therefore set up a licensing structure that mandated that less than 10% of the gross floor area would be for casino use – the rest would be for hotels, theatres, convention centres, theme parks, museums, retail, and food and beverage offerings. As a matter of fact the gaming area is reported to be less than 3% and 5% of the total floor area allowed in Bayfront and Sentosa respectively.
The Singapore strategy is also reflected in the fact that the IR licenses are reported to be how well they develop attractions that are not related to gambling and also linking the future revision of casino licenses to the adherence to established norms and state regulations. On 8 January 2013 Reuters reported that a panel would also be set up by the Trade Minister to help the Singapore Casino Regulatory Authority to determine how attractive the resorts are as ‘Tourist Destination’ – an assessment that will apply to the renewal of their casino licenses from January 2015.
Similarly, though 19 bids had been received for establishing IRs, only two casino licenses were issued. The objective was to act as a carrot to require them to conceptualise and build world-class, iconic integrated resorts, and to provide competition and critical mass. Even the selection of the two locations was in sync with the overall longer-term tourism development strategy.
“Therefore, in addition to theatres, shopping and convention facilities, Singapore’s resorts featured large and all-ages attractions like theme parks, marine attractions and museums to boost tourism and make Singapore a fun global city to work and live in.” (Emphasis added)
Resulting iconic non-gaming attractions
Marina Bay Sands resort complex covers 15.5 hectares and has 581,400 square meters of floor space. Only 3% of this is devoted to the casino. It has three 55 story hotel towers connected by a one-hectare rooftop deck that overhangs the east tower, creating a striking new vista in the Singapore skyline as well as a great vantage point to view the city. The resort also has a lotus-shaped museum, a million-square-foot convention centre, and a glass enclosed shopping mall.
Genting Resort World Sentosa features Southeast Asia’s only Universal Studio theme park, and a multimedia, interactive, indoor/outdoor maritime museum soon to be linked to the world’s largest aquarium. Both destinations have celebrity chef restaurants, destination spas, and tens of millions of dollars in artwork inside and out.ii
According to a Singapore Tourism Board survey last year, Sentosa and Sands’ Skypark, a huge observation deck and recreational area with an infinity pool on the 57th floor, are among the most-visited paid attractions for foreign tourists to the city-state. Thus it is relevant to appreciate that though the percentage income from the two casinos within the IRs in Singapore was much greater than that from their non-gaming segments, the nature of the iconic luxury non-gaming attractions have played an important role in re-vitalising and increasing its overall image as a tourist destination and attracting more leisure tourists.
Does the proposed IR meet these criteria?
The question is – does the proposed IR in Sri Lanka include iconic world-class attractions that are capable of attracting the families of high spending ‘non gaming’ leisure tourists or even the families of the gaming high spenders? Is the proposed model more in line with the Australian casino hotels which to date are reported not to have reached the same standards as that of Singapore and cannot be truly classified as representing the integrated resort?
Casino income dominates
A review of the revenue split between the two income generating segments has shown the dominance of the ‘gaming-segment’. Around 75% of the combined revenue of the two IRs in Singapore (Qtr. Ending June 2013) is reported to be from the ‘casino segment’. The casino or gaming segment revenue of the casinos in Macau are reported to be around 90% of their combined revenue.iii
Even in the case of Sands China, which operates the Venetian Macao, which includes 93,000 square meter shopping mall, an even larger convention centre, 3,000 hotel rooms, Cirque du Soleil’s, and a 15,000-seat arena its non-gaming revenue tops out at only 16% of total revenue. Other operators in Macau are reported to be struggling to reach double-digits in share from the non-gaming revenue.iv However, all these IRs are reported to be very profitable. Given this scenario it is important that we comprehend the following realities:
Being their core business, IR operators’ primary focus could be earnings from the casino.
As in the case of Singapore and Macau the gaming segment generates sufficient profits for the casino operators.
Thus an IR could be viable for the investor if it could attract sufficient ‘gaming tourists’ even if they fail to attract increased numbers of ‘non-gaming’ tourists.
If this becomes the ultimate outcome, Sri Lanka will end up with earnings from the casino generated tax income (depending on concessions granted), the negative impacts of casino operations to the community, and no meaningful increase in ‘non-gaming’ tourist arrivals.
If the IR does not establish iconic world-class competitive leisure facilities and does not help enhance the overall image of the destination, it will not contribute to the expected ripple effect to draw in more non-gaming leisure tourists.
In the above scenario, the ‘casino hotel’ would take share from other existing establishments
Macau’s success story and lessons for Sri Lanka
Some appear to refer to the success story of Macau and speak of the prospects of Sri Lanka being the South Asia’s casino hub. However, a deeper analysis of what is behind Macau’s success story will provide the reasons as to why it is unlikely to be duplicated in other destinations as well as the dangers Sri Lanka could be exposed to. In that context the observation of the Economist (Dec. 10 2011)v is very relevant. It noted that: Macau’s success has not been built purely on the Chinese love for gambling. It is also fuelled by a stampede of nervous money fleeing the mainland.
Why Macau is the Chinese gaming destination of choice
Macau has become the Chinese gaming destination of choice due to geographic and gaming and foreign exchange regulations in the Mainland. To begin with gambling is illegal on the Mainland but is permitted in Macau. Equally, Chinese are not allowed to take out of China more than 20,000-Yuan, which is about US$3,150 in cash. This is less than $25,000 in Hong Kong dollars, which is considered a typical bet in a high-roller room in the Macau casino. Exchange control regulations are also in place that enables a paper trail of any funds taken out above that.
Another important factor is that as Prof Nelson Rose (2013)vi one of the world’s leading experts on gambling law observes, because gambling debts are not legally enforceable on the Mainland, casinos are extremely reluctant to directly lend money to players. How then does the money flow?
Junkets
As the Economist observes, it’s the islands idiosyncratic “junket” system that helps to bring rich Chinese to Macau. VIP junket operators, also known as VIP room promoters, act as facilitators for Macau’s billion-dollar casinos, guaranteeing a certain amount of revenue from China’s wealthy gamblers, luring them to Macau with free accommodation, travel and other perks and lends them money.
The VIP junket operators have a network of agents, known as sub-junkets whose job it is to select VIP patrons to gamble. Sub-junkets or agents are usually localised groups around China and familiar with the credit history of their clients. They receive commission from VIP junket operators for giving credit to gamblers and are responsible for collecting debts, which they do back in the Mainland.
Macau has two types of remuneration models for paying VIP junket operators. The commission model is a fixed rate of 1.25% of VIP rolling chip turnover and the casinos remain responsible for gaming taxes. The win rate model is when junket operators split the gross gaming win with the casino and also share the downside risk. Whilst Macau is reported to have around two hundred licensed junket operators Singapore having received 14 applications approved only two and that too only last year. Equally, they are designated International Market Agents which the Singapore Casino Regulatory Authority describes to be a more accurate description of what these agents do – bringing in high rollers and they will not target locals. These marketing Agents are based in Malaysia, not China or Macau and their licenses are granted only for one year.
(The writer has been associated with Sri Lanka Tourism in an honorary capacity since 2001 when he facilitated the first ever joint effort by the Sri Lanka Tourist Board and Industry stakeholders to develop a marketing plan for SLT. In 2002 at his own initiative he developed a marketing strategy for SLT including a destination brand strategy. Though the proposition was adopted in 2006 he was sorry to see it change course in the implementation phase. He is a Fellow of the Australian Institute of Management, an Associate Fellow of the Marketing Institute of Australia and is a past president of the Sri Lanka Institute of Marketing. Recording a successful international management career as a CEO of several multinational operations with a wide experience in global marketing, he retired as a Regional Director of SmithKline Beecham Int.)
Footnotes
i http://theconversation.com/casino-precincts-and-tourism-gambling-our-way-to-prosperity-19558 (6 November 2013)
ii Asia Times July 3 2012)
iii http://www.reuters.com/article/2013/09/24/us-singapore-casinos.
iv Asia Times (June 30, 2011)
v (http://www.economist.com/node/21541417
vi http://www.gamblingand the law.com/index.php/columns/327-chinas-gambling-problem)
