GGB is committed to providing updated news and analysis on our weekly news site,

The Philippine Promise

PAGCOR eyes integrated resorts as the future of the country's gaming industry

The Philippine  Promise

Are the Philippines poised to break out and become a major Asian gaming destination, or will it continue to be a country interminably relegated to serving a predominantly local resident market?

Only time will answer this question, but what is clear is that the Philippines has the innate potential to become a major force in Asian gaming if the stars and the moons align just right. What will it take for that to occur? A retrospective look at gaming in the Philippines will help us see into the crystal ball and the future of Philippine casino gaming.

To Know Philippine Gaming Is To Know PAGCOR

In 1977, modern-day gaming came to the Philippines in the form of legislation. The objective was to clean up a hodgepodge of loosely structured, barely controlled and sometimes illegal gaming enterprises.

This legislation created the 100 percent government-owned Philippine Amusement and Gaming Corporation, or PAGCOR. Its mandate is to “regulate all games of chance, particularly casino gaming in the country, to raise funds for the government’s socio-civic and national developmental efforts, and to help boost the country’s tourism industry.”

The result some 30 years later? In 2006, the most recent edition of PAGCOR’s annual report, PAGCOR declared that it owned and operated 13 casinos, nine VIP slot clubs, and three slot arcades. Casino and casino-like gaming generates approximately 80 percent of its total revenue. PAGCOR also operates and/or oversees bingo, internet sports betting and online casinos in addition to earning income from rent, management fees and miscellaneous operations.

PAGCOR also promotes private company ownership and operation of casinos. There were five private casinos operating in the Philippines in 2006/2007 offering a total of 114 table games and 700 slot machines. These establishments pay a 5 percent franchise tax and 25 percent of what is left of their gross gaming revenue to PAGCOR.

As PAGCOR President and COO Rafael “Butch” Francisco explains it, “We don’t compete with these private casinos. We only grant licenses to private companies when we are sure they won’t compete with PAGCOR casinos. And when a private company gets a license to open a casino, we consider it a PAGCOR casino. There’s no need for us to put up another gaming facility. We’re happy with 25 percent of the gross revenues. It allows us to respond through the private companies.

“Sometimes other private companies want to open casinos in those areas, but we try to keep competition for the gaming market to a minimum. We don’t want to put a PAGCOR casino or gaming facility in an area where a private casino is operating.”

High-limit, third-party VIP rooms are operated in both PAGCOR and private casinos. Regarding PAGCOR VIP rooms, Francisco explains, “We try to compete aggressively in this market. We have served as an alternate venue to Macau or other areas. There are a number of junket operators who come to the Philippines on a regular basis. They cater to their players and we are glad to host them. This is a different environment with different amenities and entertainment than they find in other areas of Asia.”

Unlike Macau, where VIP operators receive a percentage of the money deposited by their players, Francisco says PAGCOR does it differently.

“There is no commission structure in the Philippines,” he says. “To encourage the VIP operators, we provide them with a private VIP room and don’t impose the same cut that we do with private casinos. They pay the 5 percent tax to the government and we collect just 10 percent of their gross revenues rather than the 25 percent we charge the private casinos. It’s an incentive for them to bring in players to the Philippines. Any other arrangements they have with sub-agents or others, they’re on their own. And it’s the operators’ responsibility to extend credit to their players because PAGCOR does not extend credit. And of course, we have strict money-laundering provisions.”

PAGCOR Beneficiaries

PAGCOR announced it earned income of approximately $532 million in 2006 (all financial amounts in this article will be in U.S. dollars unless otherwise noted). Fifty-five percent of PAGCOR’s income went to the government, making PAGCOR the third-largest contributor to government revenue. General revenue, mandated programs and a variety of PAGCOR-inspired programs and operations result in a long list of beneficiaries, e.g.:

• The People’s Government Mobile Action Project, an initiative that brings together local government units, the private sector and non-government groups to execute various social, civic and development projects of certain key government agencies. PAGCOR acts as project coordinator.

• The Bureau of Claims, a unit under the Department of Justice that compensates victims for wrongful detention and prosecution.

• The Early Childhood and Development Program, which provides funds for the construction and maintenance of day-care centers nationwide.

• Poverty alleviation programs designed to encourage the establishment of small to medium businesses in the barangays, the smallest governmental unit in the Philippines.

• Children Staying Away from Drugs campaign, which seeks to educate children between the ages of 6 and 12 on the hazards of drug addiction.

• The Saving Innocents Program, a feeding program for children at risk of malnutrition.

• The National Sports Commission.

• Ad hoc programs when needed to benefit the community, e.g., providing food, medicine and potable water to communities when they were ravaged by Typhoon Reming.

• Support of problem gambling initiatives.

• Income sharing with host cities where PAGCOR operations are located.

• PAGCOR employment of almost 12,000 employees pumping their payroll in addition to the goods and services they purchase into the Philippine economy.

PAGCOR has certainly impressively met and continues to exceed the goals set for it.

Sources of Philippine Gaming Revenue

In 2007, the estimated total gaming revenue from all PAGCOR and private casino-type operations in the Philippines (excluding revenue from online gaming and its derivatives) was estimated at $783 million. Of this total, $572 million or 73 percent was generated by Philippine residents and $211 million or 27 percent was generated by international visitors.

RESIDENT MARKET: Approximately 49 million or 54 percent of the Philippine population is of adult gaming age. In the Philippines, this gross number must be diluted to account for the relatively high poverty, unemployment, low family income, and an uneven wealth distribution. This leads to an adjusted 10 million adults who are “qualified” and capable of gaming. Applying a 19 percent penetration rate (i.e., the ratio of adults who gamble in a casino one or more times in a year) leads to a projected 1.9 million actual players in 2007.

Assuming an annual gaming budget for each of these “players” of $319, this leads to a domestic gaming potential of $613 million. As one might expect, the bulk of the resident gaming revenue is generated by Metro Manila residents (66 percent) followed by the remainder of the residents on Luzon (23 percent), and then the residents residing on the other islands (10 percent). Assuming further approximately $40 million of this total amount was gambled outside the Philippines leads to the $572 million projected domestic-generated gaming revenue shown previously.

Relative to other gaming venues, the metrics used to forecast demand from resident demographics and calibrate to known gaming revenue are low across all of the variables. Applying the “glass is half full” philosophy, these low penetration rates, annual gaming budgets and other metrics indicate the potential for growth in domestic demand if the overall economy improves and/or keys can be found to unlock latent demand.

TOURISM: The Philippines attracted approximately 3.1 million international visitors in 2007. Almost 60 percent or 1.8 million of these visitors came from Asia, the remaining 1.3 million from other countries. Ironically, East Asian countries that are further away generated 55 percent of total tourists to the Philippines while closer ASEAN and other countries accounted for only 4 percent. As can be seen by the chart below, South Korea produces the greatest number of Asian visitors at approximately 1 million, followed by Japan at 0.4 million, and China at 0.2 million.

Tourism-wise, the Philippines enjoys a central location with travel times to most locations ranging from 1.5 to 4 hours with round trip air fares ranging at the low end from $80 per hour to $230-$290 per hour at the high end.

Historically, given the absence of significant casino-centric resort capacity, the primary reason for these international tourists to visit the Philippines has not been to visit a casino. It was therefore assumed that little gaming revenue was driven from this category in 2007, probably in the $10 million range (assumes 5 percent of these visitors visit a casino once during their trip with a $60 gaming budget). This number is included in the projected international gaming revenue of $211 million.

THE DEDICATED, HIGH-LIMIT INTERNATIONAL CASINO PLAYER: The international high-limit player?i.e., the visitor for whom the primary reason to visit the Philippines is to gamble and who makes high average bets?is, however, a substantial market. This market segment is primarily driven by third-party VIP room owners/operators or junket representatives who proactively market and promote these trips to the Philippines on behalf of a local casino in exchange for a commission and other compensation. These players could also be invited by the internal marketing program of the casino, thereby circumventing the middleman. But, in Asia, premium players from other countries are predominantly marketed to and served by third parties.

This market segment was forecast to account for approximately $200 million (rounded) or 26 percent of the total annual Philippine gaming revenue in 2007. Both PAGCOR and the private casino operators compete for this business: in 2007 it is estimated that PAGCOR generated $110 million in total international-player gaming revenue, and the private casinos approximately $90 million.

These players can typically choose anywhere in Asia to play and, in some cases, anywhere in the world. They patronize the Philippines because: (1) the VIP room owners and junket representatives and the players are more highly incentivized by Philippine casinos than casinos that are closer and/or are located in venues with bigger and newer casinos (e.g., Macau); (2) a Philippine casino is a change of pace from the casino they typically patronize; (3) the weather is more favorable during certain parts of the year; and/or (4) a Philippine casino is smaller, personal, more friendly, and offers attractions not available elsewhere.

The Butterfly Is Ready To Emerge From The Cocoon

Just prior to the onset of the financial crises, the Philippines was on the cusp of being a target-rich gaming development opportunity ready to emerge from the cocoon of its first life to be something more resplendent in its second.

The first to recognize the dormant, raw upside potential were those closest to it, PAGCOR. In fact, in PAGCOR’s 2006 annual report, Chairman Efraim C. Genuino said it perhaps best when he stated that PAGCOR “must undertake a paradigm shift from purely gaming to world-class entertainment.”

The gauntlet was laid down, the trial period was over and with the confidence of the start-up years, the government and PAGCOR were now both willing to more aggressively develop its gaming product to better serve the domestic as well as the international tourist and high-limit player. As part of this paradigm shift, PAGCOR began updating its existing casinos to modern standards, building new free-standing, purpose-built casinos under their complete control and, in all, better fulfilling the broader range of gaming, food, beverage and entertainment needs of the marketplace.

The second half of the PAGCOR chairman’s announcement clearly set the scene for the Philippines to compete internationally, “? so the company may dovetail with what the Bayong Nayong Pilipino-Manila Bay Integrated City would have to offer.”

The Manila Bay Integrated City is an epoch new meta-entertainment, resort and lifestyle development that could not only be transforming for PAGCOR and Manila, but also allow Philippine gaming to compete among the best-of-the best in Asia and the world.

At full build-out, estimates are for a total of $15 billion to be invested in this meta-project spread across 2,000 acres (800 hectares) of reclaimed land along Manila Bay in Paranaque City, not far away from the international airport and the central business district of Manila. A true entertainment, leisure, resort and lifestyle destination, only a small portion of the massive development is to be devoted to casino-centric integrated resorts, with the remainder containing a cornucopia of hotels, a theme park, residential condominiums, office developments, commercial center, retirement village and wellness center, plus an array of other minor leisure/entertainment activities.

The stated goals for Manila Bay Integrated City are to: (1) boost tourism, (2) generate employment, and (3) increase earnings for the national government. PAGCOR estimates that when fully built out, the Manila Bay Integrated City project could boost tourism from the current 5 million annual goal to 10 million; directly employ 40,000 Filipinos and create another 150,000 additional indirect jobs; and triple the income generated by PAGCOR from $500 million today to $1.5 billion.

Each casino developer must commit to a total investment of $1 billion and a minimum Phase 1 investment of $400 million. Genuino announced three committed private casino developers enraptured by his vision:

• Travelers International: A joint venture between Alliance Global, a Philippine investment company; and Star Cruises, a subsidiary of Genting Bhd. The project is tentatively planned to include a casino, hotels and a theme park. The first phase is projected to open in mid-2010.

• Aruze Corporation: A major Japanese company known best for its pachinko and slot machines as well as its partnership with Steve Wynn in Wynn Resorts (although Wynn is not involved in this investment). This project is planned to tentatively include a casino, hotel, sports arena and a “Manila Eye” mimicking the famous giant ferris wheel known as the London Eye in London. It is projected to open its first phase in 2010.

• SM Investments: The largest corporation in the Philippines involved in retail and tourism. They are also owners/operators of the nearby Mall of Asia, a retail and entertainment mall containing over 4.4 million square feet (410,000 square meters) that already attracts over 200,000 visitors per day.

• There is one more casino site available for casino development that is currently uncommitted. PAGCOR has held discussions with Melco Crown, MGM Mirage, Harrah’s Entertainment and others, but the site remains available.

Gaming development interest in the Philippines does not stop with the Manila Bay Integrated City, however.

Travelers International also announced plans to open a casino at a 74-acre (30-hectare) mixed-use development near the airport called Newport City. The casino and hotel portion of the development is expected to comprise 25 acres (10 hectares). The opening is expected in 2009.

Elsewhere, Jimei Entertainment, a private casino owner/operator which has already invested $36 million in its Fontana Lesiure Park located at Clark Field, is in the latter stages of investing another $48 million. The facility already includes a casino, golf, guest villas, conference center, restaurants, lounges and water park.

At least two other private green-field casino-resort projects in the $75 million-to-$100 million range have been rumored recently to be in the planning stages at Clark Field. There is room for others. Clark Field has a modern airport served by an ever-increasing number of scheduled and chartered flights. Tourists and players arriving by air can be at the gaming tables literally 10 minutes after departing from the airport, something few other gaming venues in Asia can offer.

Subic Bay is now connected to Clark Field by an expressway and is only 30 to 40 minutes away, and located on the ocean. At one time, two very active casinos operated there, but both closed last year. There is one casino open and operating now. An article appeared regarding a proposed $1 billion casino-centric project ostensibly aligned with Trump Entertainment, but little has been heard about this project since. Subic was the former site of a major U.S. naval base and, like Clark Field, has an airport capable of serving international flights and is only 10 minutes away from the casino-resort area.

Another private owner/operator, Thunderbird Resorts, entered the Philippine market in 2005 and now has two casino-resorts, the first in Rizal and the second in San Fernando at Poro Point. Both began as relatively small resorts with a casino, golf course and boutique hotel, but are pursuing hotel, meeting, restaurant, spa and other resort amenity expansion plans.

Interest by private operators is also being shown in some of the beach and many other exquisite resort areas located throughout the Philippines, albeit small to medium in size. None of these projects seems to have gained sufficient traction to be listed as a viable new project yet.

The Future of Gaming in the Philippines

It is worth noting that three adjunct forms of casino gaming are also permitted, regulated, and/or being tested in the Philippines: online, live video stream, and proxy gaming. The opportunity to complement a bricks-and-mortar casino with an online, online video stream and/or proxy gaming operation could be very attractive for a casino project because they provide the opportunity for marginal revenue and profits.

What might all of this mean to gaming in the Philippines? Well, excluding the Manila Bay Integrated City meta-project and any consideration for online casino gaming and its derivatives, or the current financial crises, one estimate of potential future results is presented below:

Manila Bay Integrated City could, of course, add significantly to PAGCOR’s expected results. For each $1 billion of investment a typical developer would hope to generate $380 million in gaming revenue. Even if only the three announced projects go forward at the minimum investment of $1 billion each, this could lead to over $1 billion in additional gaming revenue, while a fourth casino and/or greater than the minimal investment could lead to $2 billion in gaming revenue.

It is not unreasonable to expect that one of the possible ripple effects of this meta-project could be a greater interest in additional private casino development elsewhere in the Philippines.

To put the future of Philippine gaming into context, Asia and Pacific Rim gaming revenue (including Australia) was estimated at $22 billion in 2007. Pre-financial crises, it was projected to increase to $34 billion in 2010 and exceed $50 billion in 2012. This growth may not occur as fast as thought in 2007, or these limits may not be reached, but this potential still resides within Asia and the Pacific Rim. This potential leaves a large amount of room for the Philippines to earn the relatively small share it needs to achieve the above forecast.

In all, if the stars and the moons align in the Philippines’ favor, gaming revenue in the foreseeable future could reach $2 billion to $3 billion, making the Philippines a major gaming destination in the Asian and world market. Borrowing an oft-used phrase, ultimately reaching these goals is more a matter of “when” than “if.”

Dean M. Macomber, president of Macomber International, Inc., has 35 years of diversified experience in the gaming industry ranging from dealer to president; development to operations involving mega-destination resorts to locals’ oriented casinos in numerous domestic and international venues. Approximately half of his consulting work has involved projects in Asia. Macomber provides high-value, executive-level consulting in the areas of strategic and business planning, feasibility and all other project development phases, restructuring, and pre- and post-opening management and profit improvement engagements. Macomber may be reached at [email protected], office 702-456-6006, and cell 702-682-2229. Also contributing to this article were Stephen J. Karoul, Euro-Asia Consulting LLC; and Scott Fisher, the Innovation Group.

Dean Macomber is president of Macomber International, Inc. With 35 years of diversified experience in the gaming industry ranging from dealer to president, development to operations involving mega-destination resorts to locals-oriented casinos in numerous domestic and international venues, Macomber provides executive-level consulting in the areas of strategic and business planning, feasibility and all other project development phases, and pre- and post-opening management and profit improvement engagements. He can be reached at [email protected].