I. BACKGROUND
On 22 April 2008 Edmund Ho, Macau SAR Chief Executive, made at the Legislative Assembly what was to become a famous and somehow unexpected announcement with regards to the future of the gaming industry. The Chief Executive stated that it would be the policy of the Government of Macau to award no further gaming concessions in addition to the six casino sub/concessions already granted. Furthermore, he announced that no additional land would be allocated for casino development and that no more casino venues would be permitted. Only ongoing casino projects already submitted for Governmental approval would be considered . Macau Chief Executive also mentioned that the Government would not approve any increase of gaming tables at the existing casinos or of the number of tables requested for projects under approval. This may raise many issues, as was we know that the casino business is very dynamic and changes are required on an almost daily basis. We are not aware if this prohibition of increase of the number of table games would also apply to slot machines. Overall the message was that at least for now there should be a freezing and cooling-off period of the gaming market of Macau .

The Macau Government also made known that it intends, in the short term, to submit a new legislative package to impose stricter regulations on a number of sensitive issues, from re-zoning of gaming free city areas (so far gaming can be offered anywhere in Macau), to issuing new regulations to deal with the qualifications of the top management of casino operators (whatever this may imply) and that the commissions paid to the gaming promoters (better known as junkets) should be regulated (which appears to imply imposing a mandatory cap on the commissions paid out to the gaming promoters). It was even suggested that this course of action was in accordance with the wishes of Beijing. This is somehow surprising, since as a matter of principle the policy decisions in question must have been taken by the local Government, as these matters are part of the exclusive regional competence of the Macau SAR . However, it may be that the Chief Executive mentioned Beijing regarding the new land at the Cotai Strip, since reclamations must be approved by the Central Government.
II. POLICY IMPLICATIONS
The reaction of the stock markets to this announcement was nothing but enthusiastic, with the shares of the gaming companies already operating in Macau gaining in value as news of the announcement made by the local regional Government broke . However, this may have been an excessive reaction, as the Chief Executive essentially restated what has been the official policy of the local Government for the last several years (not to issue new casino gaming concessions , at least until 2009) . Indeed, this could have been expected, as the Government of the Macau SAR would certainly be hard pressed to make major policy changes at this stage, as the Chief Executive is reaching the end of his mandate and cannot be reelected (the Chief Executive can only serve two terms (article 48 of the Basic Law of Macau)). It is also becoming more obvious that local politics is increasingly being overshadowed by the backstage maneuvering with regards to the choice of the next Chief Executive. The Ao Man Long case should also be considered here, as it limited the choices that can be made with regards to future land concessions. In Macau, little is more scarce than land, and in the recent past there has been a considerable public investment in the promotion of new casino sites, not only because land has in some cases been leased bellow market price, but because a great share of the new land obtained by reclamation was allotted to gaming projects (namely, the Cotai). This was done because of a deliberate political decision to prioritize and promote the local gaming industry, as such was considered to be in the public interest. But in years to come the use of land for residential purposes will most likely be the new priority, as it becomes clear that more has to be done with regards to provide affordable housing to the population .
III. END OF THE LEGISLATIVE STALEMATE
Worthy of attention is surely the fact that the Government of the Macau SAR appears to be set at finally pushing forward the next big wave of gaming legislation which has been on the pipeline for the last five years . This is good news for the gaming industry as a whole, as a more or less obvious lack of key regulations has been highlighted in the recent past and clear rules are essential to ensure fair competition and the healthy future development of the Macau gaming market. It is still too early to fully understand the legislative agenda and to know what will be the main focus of the legislative reform. Nevertheless, it may be expected that the Macau Government will determine in which areas of the city gaming may or may not be permitted (namely, to avoid casinos near hospital, schools, temples and churches), which so far has not been regulated. A greater mystery has to be what future regulations, if any, may be enacted with regards to the requirements imposed upon the management of the gaming operators. Other issues clearly in need of legislative action are the regulation of slot machines (setting a minimum percentage of return of the betting amounts and regulating the licensing of slot machines in the Macau SAR, as well as their maintenance and other issues; so far the approval of new slot machines is purely discretionary), the regulation applicable for the licensing of gaming vendors in Macau, the enactment of regulations dealing with the administrative fines applicable for breaches of the gaming law of Macau by the gaming operators (which has long been expected to pass) and potentially also some form of basic regulations to start to address problem gambling (so far unregulated in the Macau SAR, but gradually a more visible concern).
IV. REGULATING COMMISSIONS
But almost certainly the most relevant legislative change announced by the Macau Government is the intent to enact regulation dealing with the gaming promotion, which may also include regulating the commissions paid out to the local gaming promoters (junkets). It was suggested that this may imply to put a ceiling on the commissions paid out by the casino operators to the local gaming promoters (namely, by setting a maximum percentage of the monthly rolling chip turnover volumes that can be legally paid out as commissions), which must be understood as a first steep to impose certain mandatory standards and eventually also stricter regulations on the highly competitive premium gaming market .

The main issue here under legislative review is the growing perception of the necessity to regulate and restrain the excessive command and control of the Macau casino premium market by the local junkets. Indeed, not only are the local junkets increasingly organized and are able to impose ever higher commissions , but if this trend persists they will quickly capture the larger share of the gaming revenues generated by the premium market, leaving the local casino operators with shrinking profit margins and becoming little more than a mere suppliers and managers of the casino venues and facilities. It certainly is an unexpected development that the local operators have been allowed to be pushed into an all out price war over the commissions paid to the junkets and that they are shifting more and more of their profit margins to the gaming promoters that they engage.

This is not only unfortunate for the local gaming operators themselves, and naturally their shareholders, but it certainly creates considerable new regulatory challenges to be overcome. The regulatory framework presently in force in the Macau SAR focuses essentially on the supervision and control of the casino gaming sub/concessionaires and substantially less attention is paid to the great number of gaming promoters presently populating the local gaming market . It is currently rather easy to obtain a gaming promoter’s license in Macau, the level of scrutiny that potential candidates have to face to assess of their suitability is low, and one just needs to apply, disclose a series of basic information and comply with certain minimum requirements. It is also obvious that it has been difficult to keep track of all junkets operating in Macau and ensure their full compliance with the applicable regulations. Otherwise the local regulators would have long came to wonder why local gaming promotion companies, that by law have to disclose their shareholders and cannot have other companies as shareholders , are advertised as been transferring most of their profits to public companies listed on the Hong Kong stock exchange . Also here, with the increasing importance of the junkets there must come greater scrutiny by the Macau regulators, as otherwise the Macau Government may well lose control over who is in fact running the local gaming market.

We should also consider that gaming companies operating in Macau are investing billions in the construction and development of resorts, casinos and hotels, they are creating new jobs and they are expanding the business scope of Macau. Moreover, they have signed sub/concessionaires agreements with the Macau SAR which require that large investments must be made and that local companies and local employee should take part in the gaming projects that they develop. Junkets do not have similar obligations under their junket licenses; as a matter of fact, it is rather obvious that the investment of the junkets companies in Macau is almost non-existent.

The announcement that the commissions paid to the junkets may be limited by law was more or less universally welcomed by the local gaming operators , and one can easily understand why. However, it remains to be seen if the legislative intervention now announced will indeed be able to effectively curb the commissions paid out to the gaming promoters or if it will be another case of too little too late. It is obvious that the temptation to break any mandatory limitations on the commissions paid out will be considerable. However, it is clear that this legislative intervention may offer a unique opportunity to put a hold on the destructive commission race that the local gaming operators were engaging in the recent past and give them an opportunity to recapture the lion’s share of the gaming revenues generated by the premium casino market of Macau.

But this will raise another flag. If the Macau Government wants to impose maximum commissions rates to be paid by the local casino gaming operators to the junket, it must also give to the local police forces and regulatory authorities sufficient manpower and clear instructions to ensure that the new law will be fully enforced. There is always the risk that deals under the table will take place, so it is crucial to be prepared.

Junkets companies have a very important role to play in the gaming industry of Macau, so important that they also need to be regulated to the same level as that of a gaming concessionaire. In the long term this will be good for Macau and good for the junket license holders. At the end of the day this may be a win-win situation for the casino operators, the local Government and even for the junkets; since a clear legal framework will help the market to mature, increase revenues and will bring greater transparency. Junkets companies that will be successful under these new regulations will have the ability to expand their market in Macau and also in other jurisdictions such as Singapore, Philippines and maybe in the future Japan or even the US.

Download file - Macau Gaming Update(15May2008) Final.doc (82k)

Date Posted: 08-Jun-2008

Antonio Ramirez is the Managing Partner of Ramirez Law Firm. Member of International Masters of Gaming Law, with years of experience in the Gaming Industry, worked as an in-house counsel for an American gaming operator. He can be reached via e-mail: antonio.ramirez@ramirezlawfirmacau.com or by phone (+853) 2871 6221.
Luís Pessanha is a lecturer on the Faculty of Law at the University of Macau, where he lectures tax and administrative law. He earned his L.L.B. from the New University of Lisbon; he has a postgraduate from the Catholic University of Lisbon and obtained his L.L.M. from the University of Macau. He may be reached via e-mail at luisp@umac.mo