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Japan's entry to shake up Asia's casino market

Operators poised to invest as policymakers try to balance profit, social concerns

Integrated resort Marina Bay Sands includes the largest casino in Singapore. (Photo by Ken Kobayashi)

TOKYO/SINGAPORE Top executives from U.S. and Asian casino operators were in an optimistic mood as they gathered in Tokyo in late February. Speaking at a gathering of investors, each expressed an eagerness to go into business in the world's third-largest economy, to be opened for casino gambling under a law passed in December.

Sheldon Adelson, chairman and chief executive of Las Vegas Sands, called Japan a "country of chance taking," citing its abundance of pachinko parlors, which feature pinball-like gaming machines. His company has invested in Macau and Singapore, and he put potential investment in a Japanese project at $10 billion. "Singapore was a warm-up to this," he said.

CLSA, the brokerage that organized the investor event, estimates Japan's potential annual gross casino revenue at $25 billion, comparable to Macau's current take. It is an attractive opportunity for foreign operators, which have been sounding out potential local partners.

"Japan is a natural next entry point for us," Ian Michael Coughlan, president of the Macau arm of U.S. operator Wynn Resorts, told the Nikkei Asian Review.

"This opportunity is priceless and we'll spend whatever it takes to win," said Lawrence Ho, chairman and chief executive of Melco International Development, which has casinos in Macau, Manila and Vladivostok, Russia.

Ho and other casino bosses lobbied Tokyo for years for legalization, but with little public support, proposals made scant legislative headway -- until the sudden spurt of momentum that culminated in December's vote. If a follow-up implementation bill is passed by year-end, local governments could start bidding next year to host the planned "integrated resorts," though it is unclear how many cities may be chosen. Candidates include Osaka, Tokyo and Yokohama.

Proponents say the developments could give a significant boost to tourism amid sluggish economic growth. Takeshi Iwaya, a legislator representing a district on Kyushu island for the ruling Liberal Democratic Party, said, "Including secondary effects, I expect [integrated resorts] have the power to push up Japan's gross domestic product by about 1%."

The Marina Bay Sands, an integrated resort, is home to Singapore's largest casino. (Photo by Ken Kobayashi)

Opponents are worried about the social impact of casinos, including on crime levels. "Japanese people, including the young generation, are addicted to pachinko and slot machines," said one concerned Osaka resident at a forum organized by local authorities in late January. "Government officials should study more about the negative side [of casinos]."

Recognizing these concerns, Japanese officials have offered assurances that casinos will be closely regulated. Rather than allowing for a cluster of gaming palaces that could magnify the social impact, Iwaya said the government would likely instead approve scattered locations, with gambling limited to a small area of each resort. To discourage frequent visits by area residents of limited means, locals may be charged an entry fee.

Such elements are part of what could be called the "Singapore model" of casino liberalization -- a middle ground between Asian nations like Cambodia that bar locals from their casinos and the open-door policy of Macau and a few other governments. The path provides the potential for building the base of frequent customers that operators count on to invest their billions while curbing the worst spillover effects.

Visiting Singapore's two casino resorts in 2014, Japanese Prime Minister Shinzo Abe said, "I think integrated resorts will be a key part of Japan's economic growth strategy." Iwaya, too, remarked, "We should learn from Singapore."

THE LEES' LESSONS Lee Hsien Loong, Abe's Singaporean counterpart, endorsed casino gambling in 2005 despite opposition from civil and religious groups. His father, Lee Kuan Yew, had strongly opposed gambling during his own long tenure as prime minister but supported the policy change.

"It was a 180-degree turn," recalls Eugene Tan, an associate professor of law at Singapore Management University. The younger Lee, like Abe, argued that casinos could give a lift to Singapore's economy, particularly tourism.

In those terms, most observers count the strategy as a success. The Singapore Tourism Board says the two integrated resorts, which both opened in 2010, now contribute 1-2% of the country's annual GDP. Annual tourist arrivals in the country, which hovered around 10 million until 2009, hit 16.4 million last year. Tourist spending is up too, reaching an estimated 24.8 billion Singapore dollars ($17.6 billion) last year compared with a pre-casino high of S$15.5 billion in 2008.

"The opening of the casino complexes certainly helped to increase the attractiveness of Singapore for visitors and added a coolness factor, as well as vastly increasing facilities for conferences and conventions," said a regional spokeswoman for French hotel group Accor Hotels. "The increased funds and taxes brought in by the casinos has resulted in better tourism infrastructure for the city more broadly, such as restaurants, bars and entertainment."

Singapore was already a leading global host of conferences and conventions before 2010. Policymakers' belief that casinos would enhance the city-state's attractiveness to meeting planners, however, has proven apt. Annual events in Singapore tallied by the International Congress and Convention Association rose from 123 in 2009 to a high of 175 in 2013.

How well Singapore has succeeded in curbing the social ills from casinos is less clear.

An official list of those barred from casino entry, whether by family members, individuals themselves or restrictions covering those in financial difficulty, counted 47,178 residents in June 2011, according to the National Council on Problem Gambling. According to its latest figures, 325,033 people are now blacklisted, equal to some 5.8% of the city-state's resident population, with migrant workers accounting for the bulk of the additions. Casino operators Las Vegas Sands and Genting have been fined several times for failing to properly enforce entrance rules and for breaking regulations against catering to the local market.

Yin Shao Yang, a gaming analyst with Maybank Kim Eng, says Singapore's entry fee for locals has had an impact on casual visits: "The levy does help discourage residents from going to casinos. S$100 is not much for hardcore gamblers, but it is for non-gamblers."

Singapore's overall crime rate actually fell in 2010-2013, though it has since rebounded. However, Dick Lum, executive director of gambling addiction support group One Hope Center, said the number of people seeking help has risen from 100-200 people a year before 2010 to around 400. "A lot of families were devastated, a lot of lives ruined," he said.

For the operators, the Singapore resorts are quite profitable, but their enthusiasm has waned. Local revenues have been sliding, with Las Vegas Sands reporting a 5.2% drop here for 2016 and Genting a 7.2% fall. Genting laid off 400 workers last year. The operators want to offer new features to generate excitement but have been frustrated even trying to expand hotel capacity in the face of government constraints. Now both companies are talking up their prospects in Japan.

PAYING PENSIONS Japan is not the only casino newcomer. Both Vladivostok, a Russian port close to China and North Korea, and Saipan, a U.S.-controlled island 2,600km east of Manila, got their first casinos in 2015.

As in Japan, casinos were legalized in Saipan in a legislative rush in 2014 despite long-standing public resistance. Under the notion that the sale of monopoly rights could plug a public pension shortfall, officials brushed aside previous referendum votes against legalization and the troubled history of casinos on the neighboring islands of Tinian and Rota, part of the same U.S. territory.

Without the benefit of a protected monopoly, the Tinian Dynasty Casino operated for 17 years as that island's largest private-sector employer and dominant source of government revenue but often posted losses. The Hong Kong-owned casino finally closed in 2015 under the impact of storm damage, a $75 million U.S. government fine for violations of anti-money laundering laws and accumulated losses. Rota's casino was short-lived.

Saipan officials awarded their island's monopoly to Hong Kong's Best Sunshine International. A small temporary casino opened in a duty-free mall has since posted eye-catching numbers, generating even higher operating profits than Melco's main casino unit. According to a company announcement, betting volume at the casino's 16 high-roller tables reached $5.59 billion in January alone.

The central district around the temporary casino has flourished. "[Business] hasn't been this good in a long time," said a server at Elegance Restaurant last year. Fast-food chains, rental car agencies and retailers opened new shops. Manuel Sablan, executive director of the Commonwealth Development Authority, said, "We're seeing some marked increased in local [tax] revenue."

But Best Sunshine has run into headwinds ahead of the opening of its $550 million Grand Mariana Casino and Hotel across from its current location. The company had aimed to partly open the hotel by January but did not. "The company still needs to raise additional funds," said Kaven Tsang, a senior credit officer for rating agency Moody's Investors Service, projecting that half of the projected project spending still lies ahead.

In December, local media reported a protest by 146 workers from a construction subcontractor over delayed wages, soon after one worker died on-site. Around the same time, a former manager sued the company for wrongful dismissal, allegedly because he had highlighted violations of anti-money laundering controls. The company has disputed his claims. Some legislators, meanwhile, are proposing to impose new taxes on the casino.

For Russia, gambling is nothing new. Moscow alone featured some 30 casinos until 2009 when Vladimir Putin, then prime minister, ordered them closed over concerns about addiction and the involvement of Georgian organized crime. A new policy framework restricted casinos to designated frontier communities to support their economic development.

Vladivostok was among the chosen. Melco's $172 million Tigre de Cristal casino now draws a stream of high rollers. A second gaming floor and two more hotels are planned. Three other companies are developing casino hotels in the zone, too.

All told, there are more than 200 casinos in and around the Asia-Pacific region. As Japan prepares to join the list, South Korea and the Philippines are busy adding large-scale casinos in hopes of luring more of the region's growing ranks of middle- and upper-class tourists.

Tokyo's expected adoption of the Singapore model may cause other governments, especially nearby South Korea, to relax their rules against letting locals into casinos. Already Vietnam has signaled that at two new casinos, locals will be allowed access, subject to an entrance fee and income requirement.

As competition for gaming dollars heats up, remaining competitive -- and ensuring casinos do not do end up doing more harm than good for society -- will take careful planning and hard work.

Additional reporting by Nikkei Asian Review deputy editor Zach Coleman and contributing writer Alexie Zotomayor

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