After more than a decade of referendums and discussion regarding the possibility of legalizing gaming in Taiwan, it appears that 2009 will be the year when voter and legislative approvals, at least at some level, will finally be granted.
On January 12, Taiwan’s Legislative Yuan passed a bill to decriminalize casino gaming on offshore islands, with the goal to increase demand for tourism to the islands to shore up their economies. The legislation was supported by President Ma Ying-Jeou, who took office in 2008. Ma pledged during his campaign that he would consider legislation for casino gaming, thus setting up a positive political climate to consider the measure.
Passage of local referendums (by a simple majority) later this year will be required before casinos will be permitted. This is in stark contrast to the National Referendum law, under which previous efforts have stalled due to a requirement that 50 percent of all eligible voters partake in voting. Previous polls were taken during the harsh winter months when less than half the population remains on the islands. As such, even with a majority of poll-casters voting in favor, low voter turnout made passage impossible.
This legislation reflects a major revision to the Offshore Islands Development Act, which has historically provided subsidies to the islands. Year-round indoor tourist activities (such as casinos) would diversify the now-summer-only economy, in turn making the economies more self-sufficient and (hopefully) helping end the flight of the younger generation forced to move to the mainland for more stable and permanent job opportunities.
The bill allows for a referendum on legalized gaming on all offshore islands, including Penghu, Kinmen (also known as Jinmen or Quemoy), Matsu and Lamay Island in the Taiwan Strait and Orchid Island (also known as Lanyu) and Green Island off the east coast. Some say that only Penghu and either Kinmen or Matsu are being seriously considered as sites for casino resort development due to their locations, size, population bases, accessibility and comparative infrastructures.
Penghu County, comprised of 64 islands, is located halfway between the China and Taiwan mainland. In contrast, Kinmen and Matsu are located just off the Fujian Province, China coast. Kinmen is an archipelago of 15 islets, and is less than two kilometers from the city of Xiamen. Penghu and Kinmen both have land areas in excess of 100 square kilometers, and local population bases in excess of 80,000. Matsu is considerably smaller in both regards, but is already a popular tourist destination, easily accessible from China.
The islands off the east coast of Taiwan and Lamay Island are very small in both size (less than 20 square kilometers) and population base (less than 5,000 residents for the islands to the east, and less than 15,000 for Lamay Island), and thus are unlikely to be able to support large-scale resort development.
While casino gaming has now been supported by the legislature, the intention is for the industry to be small in comparison to Macau, with only two or three licenses anticipated in Penghu. Total investment budgets are also expected to be just a fraction of the Singapore budgets. Among all the islands, it is believed that no more than five casino resorts in total will be considered, with possibly as few as three.
Despite the intention to develop moderate-scale casino resorts, the market potential could be deeper, assuming gamers find accessibility not to be a challenge. Penghu is a 50-minute flight from Taipei, and a 30-minute flight or one-hour ferry from Kaohsiung, so given that gaming will not be permitted on the mainland, Penghu should be a popular alternative to gaming in other countries.
From an eco-demographic standpoint, Taiwan has a population base of approximately 23 million, and has a GDP per capita of approximately $30,000, slightly below that of Hong Kong and Japan. Together with the potential demand from Fujian Province and from gamers of other countries, properly sized facilities could be very successful in this market, particularly given the government’s primary focus of jobs and tourism-boosting rather than tax revenue generation.
In 2008 the central government gave the Council for Economic Planning and Development the task of developing guidelines for the gaming act; in December, CEPD returned with recommendations for its framework such as locations and tax rates, which will form part of the regulatory guidelines. The casinos will need to be part of a defined International Tourist Resort, which must contain non-gaming facilities including international conference/tourist hotels of four- to five-star standards, exhibition space, retail and other tourist amenities, essentially based on the Singapore IR model.
The government must still arrive at a gaming tax and license fee, which will be legislated under a separate bill. Preliminary discussions have unofficially mentioned several levels of taxes, which may put the total burden in the 10 percent to 15 percent range. The criteria for development and regulations are likely to be provided in either 2Q or 3Q 2009, with local referendums expected sometime in the early summer.
The RFP process is expected to start in 4Q 2009, at which time bidders will need to submit their plans to a central government agency responsible for tourism affairs. Assuming a process similar to Singapore, if licenses are awarded in mid-2010, resorts could potentially be operable by 2013. This would require that the selected sites are nearly ready for development, which may be a major assumption.
Another notable requirement in the draft recommendations is that the resort must have a minimum site size of 10 hectares, or 100,000 square meters. This could become a major challenge for proposed developers, as there are few sites available of large contiguous size, and zoning changes would likely be necessary for most who try to assemble parcels that would likely currently be agricultural lands. Land reclamation may be possible, though this would also result in significant delays in project development.
With these considerations, it appears at this juncture that the best-positioned location of all is Penghu, but even there, the proposed requirement of a minimum $1 billion initial investment by individual operators may be tough to expect in the current economic environment. Instead, the more attractive concept for Penghu or any other location selected would seem to be phased development with key milestones monitored by the government.
There is one operator, AMZ Holdings, which has been present in Penghu for eight years, and has acquired a sizable contiguous parcel of land. It has obtained all necessary permits to develop a resort, with the obvious exception of getting permission for gaming. AMZ Holdings now has a 10.7-hectare (26.6-acre) site zoned for commercial development and approved to build an international tourist resort. The site is approximately 15 minutes from the airport, 20 minutes from the ferry terminal, and a third of a mile from the harbor, where additional ferry access may be possible.
AMZ has had the opportunity to develop a hotel on its site for several years, but is waiting to develop a more substantial property, which would be made possible with the gaming license. AMZ’s team of directors includes Larry Woolf, president of Navegante Group in Las Vegas, and a veteran operator of major casino resorts both in the U.S. and abroad. AMZ has announced that it would bring in at least one major international operator to co-develop and operate the resort.
AMZ Executive Vice President Carl Burger is optimistic about his group’s prospects in the region.
?It has been years of complicated land assembly, zoning and resort design to obtain the International Tourist Resort approval which is the requirement for a gaming license,? Burger says. ?We are now set to participate in the emerging tourism gaming opportunity for Penghu.?
There are other potential development sites in Penghu being considered, including one currently held by the Great Penghu Company. Great Penghu’s site is only 7.06 hectares, and permits have already been obtained for construction of a 320-room international tourism hotel and duty-free shops. The size of the site is below that which is expected to be mandated by the government, though it may be possible either to get a waiver or to expand the footprint of the property.
Other competitive sites, which would require large land areas for potential development, could become available through reclamation, or may be sold by the government in a fashion similar to that of Singapore. With the exception of the AMZ site, however, the ability to do this in a short time frame may be difficult, as it is not possible for the government to exercise eminent domain to obtain an attractive site for this type of activity.
While his company may be viewed by many as having the upper hand in a licensing process, Burger points out that Taiwan will seek to attract the gaming brand names first.
?We recognize that we will probably have to do a deal with a major name, who will then apply for the license,? he says. ?This provides Penghu, which has land issues for all the licenses, and the operator with a quick start to operations as all the preliminary project work has been achieved.?
There have been no major announcements as yet for potential bidders for Kinmen or the Matsu Islands, and the proximity to the Chinese mainland could be either a blessing or a curse.
Resort developers in these locations will not be able to solely or even primarily rely on Taiwanese gamers for project feasibility, due to the distance and lack of ease of access from the Taiwan mainland. Rather, it will require a steady stream of Chinese tourists and gamers for projects on these islands to be successful.
Neighboring Fujian Province is relatively sparsely populated by Chinese standards, but still has a population base of over 35 million. Based on evidence from Macau, however, the People’s Republic of China central government could choose at any time to curb the volume of travel, and in so doing compromise the viability of gaming on these islands.
This scenario appears very likely, meaning that Penghu would have the only real possibility of allowing casinos. However, if this does not occur, Taiwan and Fujian have a combined population base of nearly 60 million, which is certainly a figure that could support several large-scale casino resorts.
The challenge may be attracting population to the islands in large numbers, however. From a development standpoint, there will be numerous obstacles, both in terms of economics and infrastructure.
The economic issues are numerous, and for the most part obvious. Several years ago, the capital markets were strong, and Macau looked like the model of bottomless riches in the Asian gaming world?one that could easily be replicated in other jurisdictions, particularly one with an attractive tax rate.
But the past year has certainly tarnished the image of the industry as a cash cow for tourism, tax revenue and job generation. There are critical issues on both the supply and demand sides. Globally, the timing is tough for even the world’s largest gaming companies, which the Taiwanese government has publicly stated it intends to seek as operators, to access capital markets for large-scale investments. Divestment seems to be more the expected modus operandi than investment for the near future, to relieve some of the current debt burdens.
As a result, it may be difficult to propose developing something to the scale that the government would like to see. From a demand standpoint, year-over-year declines in Macau have been attributable more to declining fortunes in the Chinese economy than changes to the individual travel visa scheme, and with other gaming markets opening or expanding elsewhere in Asia, the combination of base demand contraction and market dilution should make developers and the government think conservatively about the scale of what needs to be built.
Michael Chen, president of Caesars Asia Limited/Harrah’s Entertainment, Inc., is among those closely monitoring developments in the market.
?We are enthusiastic about the prospects in Taiwan,? Chen says. ?However, the ultimate attractiveness of the market will highly depend on the framework that is implemented. Tax rates, exclusivity for outer islands and open access are all critical issues which, if implemented correctly, could make Taiwan very attractive.?
Chen also recognizes that the timing of the approvals may prove significant, adding, ?Taiwan’s unique issues are particularly acute when we are faced with a global liquidity crisis. For Taiwan to have an internationally competitive leisure product, it must make the conditions highly attractive for investment. We look forward to seeing the outcome of the legislative debate.?
Infrastructure is also a major concern for the outlying islands. Penghu has an airport capable of landing Boeing 757s, and is currently much larger than capacity. Penghu also has provincial, county and rural highways, and the county has committed to linking supporting roads to project sites as they initiate.
Major desalination efforts will need to be undertaken to support any property, and power grids will need to be developed to accommodate tourism growth, which currently stands at approximately 500,000 per year. Another consideration is adequate food supply for the additional tourists, which could impact the Straits’ fisheries. These infrastructure issues all can be overcome, though the timing and cost are still uncertainties.
Several years ago, the level of risk tolerance was comparable to the size of resort projects?very large. With risk tolerances now much lower, phasing projects to market potential, and expanding as the market grows, may be the only way to get a project financed for Taiwan. There will need to be infrastructure improvements ongoing on the islands, likely through the middle of the decade or beyond, and as such the level of demand several years into operation may well exceed initial volumes.
Thus, as the ability to accommodate tourism expands, so too should the resorts, but not well beforehand. The importance of this issue is the CEPD’s recommended minimum US$1 billion development cost. This may be a reasonable sum over the course of a phased project, but consideration should therefore be given, both by bidder and the government, to allowing (or even recommending) development in phases with specific milestones required to commence additional phases.
Scott Fisher, Ph.D. is managing director for gaming consultant The Innovation Group. Fisher assesses international markets, from their cultures and growth potential to the unique industry regulations and competitive threats. He can be reached at the company’s New Orleans office (504-523-0888) or via email at [email protected]