The rise of the Philippine casino industry

SUITS THE C-SUITE By Loubelle V. Mendoza and Flint C. Richardson

Business World (04/20/2015 – p.S1/4)

Gambling has been part of human civilization for thousands of years, and continues to thrive in the vast majority of countries worldwide. Asians are perceived to be among the world’s most avid gamblers, an image supported by the explosive growth of gaming in Macau and other Asian economies over the last 15 years.

The Portuguese authorities legalized gambling in Macau in the 1850s, and to this day the territory is the only place in China where casino gambling is legal. Macau’s gaming was largely limited to traditional Chinese games until 1962 when a monopoly license was granted to Sociedade de Turismo e Diversoes de Macau (STDM). STDM introduced Western-style casino games to Macau and developed transportation links between Hong Kong and Macau. In 2002, the monopoly in Macau ended, which resulted in the emergence of integrated casino resorts from the West and elsewhere in Asia. Six new licenses were granted.

Gambling tourism is Macau’s biggest source of revenue. Following the entry into Macau of large foreign casinos from Las Vegas and Australia, the region was able to overtake the Las Vegas Strip in terms of gaming revenues in 2007. In fact, Macau has demonstrated explosive growth with a compound annual growth rate of 27% over the last 10 years. In late 2014, however, this began to change as Beijing stepped up its anti-corruption efforts, clouding the prospects for Macau casino operators.

It is no wonder, therefore, that more Asian countries are competing for a share of the region’s gambling revenue. This includes Singapore, which has two casinos — the Marina Bay Sands developed by the Las Vegas Sands and Resorts World Sentosa developed by Genting Singapore.

Similarly, the Philippines is hoping to become one of the major players in the worldwide casino industry. Manila is in the midst of various casino openings, expansions, and construction. Investment bank Credit Suisse forecasts the Philippine casinos to generate gaming revenue of $6 billion by 2018, potentially making the country one of the top four in the world by this measure.

Gambling in the Philippines has been regulated by the Philippine Amusement and Gaming Corporation (PAGCOR) since 1976. PAGCOR serves three crucial roles: (1) to regulate and operate all games of chance, particularly casino gaming; (2) to generate funds for the government’s infrastructure and socio-civic projects; and, (3) to boost local tourism.

Previously, PAGCOR operated most casinos under the Casino Filipino brand. With the grant of PAGCOR licenses to private entities, recent years have seen the rise of luxury casino hotels and integrated resorts located in Newport City and Entertainment City.

In 2009, Resorts World Manila, the first Philippine integrated resort, was built across NAIA Terminal 3, following the grant of a PAGCOR license to Genting group.

In March 2013, Bloomberry Resorts Corp.’s Solaire Resort & Casino (Solaire), opened in Entertainment City.

In December 2014, City of Dreams Manila opened. It is operated by Melco Crown (Philippines) Resorts Corp. in collaboration with Manila’s Belle Corp.

PAGCOR has also granted licenses to two more operators in the Entertainment City — Kazuo Okada’s Tiger Resort Leisure and Entertainment, Inc. and the Andrew Tan-led Resorts World Bayshore City, Inc., which are expected to open in 2015 and 2016, respectively.

This recent surge in casino operations in the Philippines has sparked speculation that Manila could soon rival Las Vegas in terms of the sheer number of casinos built along a designated gambling “strip.”

This interest in expanding the Philippine casino industry becomes more evident in light of the decrease in Macau’s VIP gambling business since the last half of 2014 due to the government crackdown on money transfers, the newly imposed transit visa restrictions for Chinese visitors, and recent comments warning of further sanctions to come.

Macau is also now facing increased regional competition for international VIPs, with new or expanding projects sprouting in Australia, the Philippines, South Korea, Cambodia, Vietnam, Russia and potentially Japan, should gaming legislation be passed in 2015.

Investment banker UBS issued a report in September 2014 saying other jurisdictions could generate VIP revenue of US $1.1 billion in 2015, with Macau’s VIP revenue seen to be shrinking between 4% and 5%. Regional players are, of course, hoping to pick up the VIP business lost by Macau. Given the high-quality experience to be found at Philippine integrated resorts, it is reasonable to expect that a significant portion of this business will land on Manila’s gaming tables.

Of course, the growth in the country’s casino industry comes with challenges, which include the need for infrastructure improvements. Credit Suisse sees the country’s casino industry receiving an added boost from several key infrastructure projects in the pipeline that will improve access to the Entertainment City. These projects entail massive upgrades in road, rail and airport infrastructure including construction of a skyway that will link the state-of-the-art complex to Manila’s international airport.

Casino operators should also consider that one of the keys to the sustainability of the casino industry is their contribution to national development as good corporate citizens. Indeed, corporate social responsibility should be a crucial driver of the policies and procedures of the members of the industry. Operators should also be mindful of reputational risk, since there are regulatory challenges such as licensing and compliance, information sharing and observing gaming standards. As in all matters, integrity and willingness to cooperate with regulators should be the cornerstone of any gaming business.

On an economic level, revenue from the casino industry will contribute significantly to PAGCOR’s ability to support high-impact education and grassroots sports initiatives. Opening up the industry to more operators will also further support the government’s drive to attract more foreign direct investment as well as help redefine the Philippines as a world-class gaming tourist destination potentially rivaling Macau.

A vibrant gaming industry, while undeniably contributing to the country’s economic growth, will have its attendant social costs which must be managed carefully. The increase in the number of pathological gamblers is a troubling issue that comes with the growth of the industry. Pathological gambling, or the inability to resist the impulse to gamble, may lead to severe social or personal consequences that include health, financial, social and legal problems. The “social costs” of the growth of gambling can be minimized once regulations are properly enforced as they are in Singapore, where integrated resorts require a S$100 entrance fee and are authorized to bar anyone from their premises on their own initiative or upon the request of a family member. Indeed, while there are numerous economic benefits related to economic stimuli that gaming operations bring, including increased tourism, the social consequences need to be weighed as well.

Loubelle V. Mendoza is a Senior Director of SGV & Co. and Flint C. Richardson is a Senior Manager of Ernst and Young’s Global Gaming Practice in Las Vegas.