THE GAMING INDUSTRY

The Gaming IndustryIn 2015, downward pressure on the global economy and fluctuating international financial markets affected Macao’s economic performance, and resulted in a fall in the gaming industry’s gross revenue for several consecutive months. Another factor was the opening of casinos in neighbouring regions, which led to a reduction in visitors. The gaming industry recorded a gross revenue of 231.811 billion patacas for the year, which fell by 34.3 percent year-on-year, back to the level during 2010-2011. The gross revenue from casino gaming amounted to 230.84 billion patacas, also down 34.3 percent year-on-year. Even though the gaming industry’s gross revenue continued to fall, the figure was still 2.5 times that of Nevada in the United States. Macao remained the largest gaming market in the world.

Macao’s gaming industry has entered an adjustment period. In spite of the adverse economic circumstances, the industry continued to develop infrastructure that would establish Macao as a world tourism and leisure centre. In 2015, two casino projects were completed in Cotai; these included non-gaming components to attract visitors and tourists from countries and regions all over the world.

The History and Variety of Gaming in MacaoGaming in Macao has a history stretching back over three centuries. Legal gaming businesses in Macao, which began in the 19th century, currently include games of fortune, interactive gaming, pari-mutuels (betting on animal races) and lotteries. Types of gaming are divided mainly according to the Gaming Industry Regulatory Framework. Games of fortune form the biggest sector of Macao’s gaming industry. Gross revenues in this area accounted for 99.58 percent of the industry’s gross takings in 2015.

The laws and regulations governing gaming allow the following types of games to be played in casinos: Baccarat, Blackjack, Boule, Dice/Craps, Big-and-Small, 12-number game, Fan-tan, Fish-Prawn-Crab dice game, Lucky 13-card game, Mahjong, Baccarat Mahjong, Chinese Dominoes Mahjong, Pachinko (Japanese pinball game), Chinese Dominoes (Pai Gow), Chinese Dominoes with two stones, Three-card poker, Five-card poker, Roulette, Sap I Chi (or 12-card game), Super Pan Nine game, Taiwanese Dominoes, Three-card Baccarat, Wheel of Fortune, Football Poker, Stud Poker, Tombola, Slot Machines, Q Poker, Casino Challenge, Makccarat, Texas Poker, Fortune 3 Card Poker, Fortune 8, Dragon/Phoenix and Omaha Poker.

Three significant changes occurred in Macao’s gaming industry during the 20th century. The most important and far-reaching of these was the establishment of a syndicate jointly formed by Hong Kong and Macao businessmen Stanley Ho Hung Sun, Henry Fok Ying Tung, Teddy Ip Tek Lei and Ip Hon in 1961 to enter an open bid for a casino gaming licence. The syndicate’s successful bid subsequently led to the founding of Sociedade de Turismo e Diversoes de Macau (STDM) in 1962, which replaced the Tai Heng Entertainment Corporation that had held a gaming monopoly for the previous 24 years. STDM’s exclusive casino gaming concession was renewed four times in the following four decades, and ended on 31 March 2002. Under its franchise concession contract, STDM paid a special gaming tax to the Government. Its rate was revised many times; but as of 2001, it was 31.8 percent of the company’s gross revenue. Meanwhile, the concessionaire was required to

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invest in major infrastructure developments, and fulfil an obligation to benefit the Macao community. Prior to Macao’s return to the motherland, the highest-ever annual casino gaming gross revenue was only around 17.78 billion patacas - a much lower figure than those seen in more recent years.

Horse racing and dog racing are also legal gaming activities in Macao, and are categorised as pari-mutuels.

The histories of horse racing and dog racing in Macao can be traced back at least as far as 1842 and 1932, respectively, although repeated suspensions and resumptions of racing have occurred, due to changing economic conditions. At present, the Macau Jockey Club (MJC) operates Macao’s horseracing activities; while the Macau (Yat Yuen) Canidrome Co. organises dog races.

In August 2003, the Government granted approval for related franchise operators to accept online bets via the Internet. At present, the MJC has approval to simulcast and accept bets on races in Hong Kong, Singapore and Malaysia. In 2010, approval was granted to simulcast races in South Africa.

In addition to casino gaming, horse racing and dog racing, many other gaming activities are popular in Macao. The most popular of these are sports lotteries.

Sports lotteries are operated by Macau Slot Co. (Macau Slot). The Government granted the company a franchise to conduct football betting in 1998 and basketball betting in 2000. Since 1987, Macau Slot has also held the franchise to operate instant lottery tickets, which were launched in Macao in 1984.

Pacapio, a kind of Chinese lottery, is one of the oldest lottery formats in Macao. Pacapio tickets are printed with the first 80 Chinese characters from a book called The Thousand-Character Classic. Formerly, the 20 winning characters were picked at random by a pigeon, later they were decided by a ball-draw system. From the late 1990s onwards, the drawing of pacapio was computerised, and it subsequently became known as “Computer Pacapio”. Since April 2004, the Government has also allowed betting on pacapio via telephone or the Internet. The Wing Heng Lottery Company currently holds the concession for operating Chinese lotteries.

Macao’s long heritage and rich variety of gaming activities has brought it worldwide renown as a tourism and gaming destination.

Decisive Liberalisation and Timely ControlThe gaming monopoly franchise system enjoyed a long history in Macao after it was introduced in the 1930s. In 1982, the Legislative Assembly passed Law No. 6/82/M stipulating that the operation of casino gaming activities would be subject to a monopoly franchise or special concession system. Under the special concession system, concessions were granted to a maximum of four concessionaires. In 1986, the Legislative Assembly passed Law No. 10/86/M, which partially revised Law No. 6/82/M. The amendment stipulated that a maximum of three concessionaires would in future be granted gaming concessions. It indicated that the then administration was considering ending the casino gaming monopoly, though this move was not implemented at the time.

After the establishment of the MSAR, the Government decided to end the franchise contract when it expired on 31 December 2001. In order to bring new momentum to Macao’s gaming sector

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and the entire economy, appropriate competition and modern operating and management models were to be introduced. The Government also expected the new arrangements to create more job opportunities and lay solid foundations for Macao’s sustainable development.

The Macao Gaming Committee was established in July 2000, under the chairmanship of the Chief Executive, in order to look into the future approach to developing the gaming industry.

In late August 2001, the Legislative Assembly approved Law No. 16/2001, Gaming Industry Regulatory Framework. As well as clearly defining “casino” and “gaming”, the framework spelt out regulations governing the number of concessions, conditions and processes for open bidding, and operating models and qualifications of shareholders and concessionaires, as well as issues concerning gaming tax and contributions to charity.

The Chief Executive signed the by-law for Open Bidding for Casino Concessions: the Contract and the Required Qualifications and Financial Strength of Bidders and Concessionaires (By-law No. 26/2001) on 26 October 2001. The by-law stipulated that a bidding committee comprising no fewer than three members be established. It also determined the nature of premiums and the payment method.

On 30 October 2001, the Casino Concessions Committee responsible for coordinating work related to the tender invitation and bidding was established by Executive Order. The eight-member committee was chaired by the Secretary for Economy and Finance, Francis Tam Pak Yuen. The bidding process officially began on 2 November. After a series of procedures including an international tender invitation and tender evaluation, the Chief Executive issued an Executive Order on 8 February 2002 granting provisional casino concessions to Galaxy Casino Company (Galaxy), Wynn Resorts (Macau) (Wynn), and Sociedade de Jogos de Macau (SJM).

In 2002, the Government signed a Concession Agreement on Operating Games of Luck and Other Games in Casinos in the Macao Special Administrative Region with SJM on 28 March, with Wynn on 24 June, and with Galaxy on 26 June. The 18-year concession contract with SJM is valid from 1 April 2002 to 31 March 2020, while the 20-year concession contracts with Wynn and Galaxy are both valid from 27 June 2002 to 26 June 2022. All three concessionaires must pay a special gaming tax of 35 percent. Additionally, SJM must annually contribute 1.6 percent of its gross gaming revenue to a Government-appointed public foundation for promoting, developing and conducting research regarding cultural, academic, charitable and other relevant activities; plus another 1.4 percent to bodies supporting urban development, tourism and social security. Wynn and Galaxy must likewise contribute 1.6 percent of their gross gaming revenues to the foundation, as well as contribute 2.4 percent of gross gaming revenues to bodies supporting urban development, tourism and social security.

The successful granting of the new casino concessions indicated that Macao’s gaming industry had entered a new era. Under the contracts, the three concessionaires were to invest a combined total of at least 17.54 billion patacas by the end of 2009.

According to Law No. 16/2001, a maximum of three casino gaming concessions could be granted.

In December 2002, the Government and Galaxy agreed to amend its concession contract. The Venetian Group was authorised to operate casino gaming in Macao under a sub-concession. With

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the permission of the Government, in April 2005 SJM signed a sub-concession contract with MGM Grand Paradise (hereinafter referred to as MGM), and in September 2006 Wynn signed a contract with Melco PBL Gaming (Macau) (hereinafter referred to as Melco PBL). Thus, a “3+3” market structure was formed.

As a result, there are now six licensed gaming companies in Macao, each of which enjoys the right to autonomously operate casino gaming businesses as an independent legal person. On 1 April 2002, SJM, a subsidiary of STDM, became the first new concessionaire to open for business.

The opening-up of the gaming market has greatly added to the development of Macao’s economy. After the gaming industry had grown rapidly for several years, the Government found the time was right to review the present conditions and future development. On 22 April 2008, the Chief Executive announced new measures for the gaming industry, and decided the number of gaming licences would not be increased in the foreseeable future. In February 2010, the Government restructured the Macao Gaming Committee; it is now chaired by the Chief Executive. The committee is responsible for formulating relevant policies for development of the gaming industry, monitoring the industry’s development and operation, and drawing up regulations and guidelines.

Two casino projects opened in 2015. At the end of the year, there were 36 casinos operating in Macao, of which 20 belonged to SJM, four to the Venetian Group, six to Galaxy, one to Wynn, four to Melco PBL, and one to MGM.

The number of gaming tables increased from 5,711 in 2014 to 5,957 in 2015, a 4.3 percent rise, while the number of slot machines increased from 13,018 to 14,578, 11.98 percent more than the previous year.

At the end of 2015, there were 462 vacant gaming jobs, representing a significant year-on-year decrease of 379 vacancies. These vacancies were mainly clerical, customer services and sales positions; there were no vacancies for dealers.

By the end of 2015, there were 56,217 gaming industry employees, representing a year-on-year decrease of 2.7 percent. They included 24,619 dealers, 4.4 percent less than the previous year.

At the end of 2015, the average monthly wage for full-time paid employees in the industry (excluding incentive bonuses and rewards) was 21,630 patacas, 4.6 percent higher than the 2014 figure. The average monthly wage of dealers was 18,780 patacas, 4.3 percent higher than in the previous year.

LegalRegulationsRefinedandJunketCommissionsCappedTo regulate gaming and related activities more effectively in the wake of changes in the industry, the Government has formulated and promulgated a series of laws and regulations since 2001. They included laws to regulate gaming promoters and gaming-related loan activities.

Since the 1980s, gaming promoters have made great contributions to Macao’s gaming sector. However, they had no legal status until the passage of Law No. 16/2001. This law defines a gaming promoter as a person who promotes casino games and provides players with services such as transportation, accommodation, catering and entertainment, in return for commissions or other rewards from gaming concessionaires.

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By-law No. 6/2002 on the Qualifications and Regulations for Casino Gaming Promoters is the main provision for regulating casino gaming promotion activities. In August 2009, after being amended by By-law No. 27/2009, it was renamed the By-law on the Regulation of Casino Gaming Promotion Activities. It includes detailed requirements for mandatory qualifications and the liabilities of promoters, licensing processes and registration of promoters with gaming concessionaires. The by-law strictly regulates the mandatory qualifications of gaming promoter licence applicants, as well as gaming promoters who serve a company or individual business owner.

Under the by-law, only persons granted a gaming promoter’s licence by the Gaming Inspection and Coordination Bureau (DICJ) are permitted to engage in gaming promotion activities. Gaming promoters must conduct their businesses in accordance with contracts signed in triplicate with related concessionaires. These contracts must be in writing, and the signatures they bear must be notarised immediately. Copies of contracts must also be submitted to the DICJ. The Government began to accept applications for gaming promoter licences on 7 June 2004.

Gaming promoters may select partners according to their business needs. However, the eligibility of their partners is subject to the DICJ’s examination and approval.

As the market competition became more aggressive, the Government decided to set a cap on junket commissions to maintain market order and effective regulation of the industry, as well as safeguard the healthy development of the gaming industry.

On 21 May 2008, the Government held the first joint meeting with the management of the six casino operators, to discuss the cap on junket commissions. After negotiations in several meetings, the Government and the industry operators reached a consensus to cap junket commissions at 1.25 percent. In August 2009, the Government promulgated By-law No. 27/2009, to amend By-law No. 6/2002 concerning the regulations of the commissions or other rewards to gaming promoters. The Secretary for Economy and Finance, Francis Tam, then signed an order to set the upper limit on the junket commissions for gaming promoters from gaming concessionaires; in September, the Secretary signed Order No. 83/2009 to cap junket commissions of gaming promoters at 1.25 percent of bets, and require each gaming concessionaire to submit a monthly report to the DICJ.

Following promulgation of the by-laws, the Government continues to maintain communications, discussions and reviews with the gaming concessionaires and other industry operators. The Government will also listen to opinions from all parties, and introduce more refined and detailed guidelines. The amended by-law came into force on 1 December 2009.

Gaming promoters are legally obliged to pay tax at a rate of five percent on commissions they collect from concessionaires, and other remuneration they receive.

The Government has also made efforts to regulate gaming-related loan activities. The Law on Regulating Credit Related to Gaming and Betting in Casinos or Other Gaming Venues stipulates that only concessionaires and sub-concessionaires are authorised to conduct credit-related business. Gaming promoters and management companies are also allowed to conduct such business provided they have already signed relevant contracts with a concessionaire or sub-concessionaire. The credit provided in accordance with this law is regarded as statutory debt. The law also states principles and conditions governing the signing of contracts, credit activities and other related matters. It defines the granting of credit as being transfer of the ownership of casino gaming chips to a third

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party when the lender is not immediately compensated by a monetary payment. It also clearly defines different types of money.

The Gaming Inspection and Coordination Bureau (DICJ)Restructuring Supervisory Departments to Reinforce Functions

To ensure the effective regulation of the gaming industry, it is essential to enact relevant laws and regulations, as well as establish efficient administrative and regulatory institutions. From the formation of the Gaming Inspection Committee in the 1960s right up to the establishment of the DICJ after the Handover, the functions and effectiveness of supervision in this area have been continuously strengthened. Since the liberalisation of the gaming industry, the Government has restructured the DICJ under By-law No. 34/2003.

The DICJ provides guidance and assistance to the Chief Executive on the formulation and implementation of the economic policies for the operations of casino games of fortune or other ways of gaming, pari-mutuels and gaming activities offered to the public. Its major responsibilities include the following.

Inspecting Assessments of Gross Gaming Revenue

The Concession Agreement on Operating Games of Luck and Other Games in Casinos in the Macao Special Administrative Region stipulates that each concessionaire is liable to pay a certain percentage of its gross gaming revenue in the form of gaming tax. Therefore, the DICJ stations inspectors in casinos to supervise the accounting of gross gaming revenue.

Ensuring the Observance of Laws and Regulations in Casinos

In accordance with relevant laws, the DICJ is responsible for monitoring the daily operations of casinos, including the collection of money and chip boxes, tip boxes, calculation of chips, the banker’s fund, and various types of chips. It also inspects activities on gaming tables, and mediates in disputes between individuals and between gaming concessionaires and members of the public.

Analysing Changes in Gaming Operations

The DICJ must give its approval before any changes may be made to gaming operations. The usual practice is for a concessionaire to submit a plan for the proposed changes in its operations, and for the Inspection of Games of Fortune Department to study the proposal and comment on its feasibility and appropriateness.

Pre-andPost-activityInspection

All pari-mutuels and lottery activities are inspected by the DICJ, which conducts inspections before, during and after each event. In addition, after an event the concessionaire must submit reports and data to the DICJ.

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Preventing, Eliminating and Punishing Illegal Gambling

To prevent, eliminate and punish illegal gambling activities, the DICJ cooperates with other Government departments and community groups to organise education and promotional campaigns; collects information about illegal gambling activities through a variety of channels, and referral of relevant data to the police for further action if investigations confirm such activities have taken place; and identifies offenders and penalises them in accordance with Law No. 8/96/M.

Monitoring Sales of Lottery Tickets and Lucky Draws

The DICJ receives applications for approval of the sale of lottery tickets and lucky draws. Permits for these are issued once the approval process has been completed. It also monitors the entire operation of such activities.

Monitoring of Gaming under New Circumstances

Along with the rise in the number of casinos in Macao, the gaming sector has become increasingly complicated. The DICJ continued to strengthen and update monitoring procedures to catch up with the fast developments in gaming technology. After years of implementation, smoking control in casinos has achieved satisfactory results. The DICJ continued to work closely with other government departments, such as the Health Bureau, to make further progress in implementing smoking bans in casinos.

The Government also paid further attention to social problems arising from gaming. The DICJ continued encouraging implementation of responsible gaming and healthy corporate image building by gaming concessionaires. The DICJ also monitored the appropriate implementation of responsible gaming.

In 2015, the DICJ continued to perform its gaming monitoring functions and to expedite improvements to supervision of the gaming industry. In response to public demand, DICJ accepted a recommendation from the Monetary Authority and the Financial Intelligence Office to issue guidelines to casino operators and gaming promoters, and initiate a review of the relevant laws and regulations. These measures aim to further enhance the transparency of the industry and regulate gaming promoters’ operations. Also, through close communication with and collecting opinions from the industry, the DICJ strived to strengthen supervision and maintain healthy growth of the gaming industry, to elevate its international competitiveness.

The DICJ’s work during the year can be summarised as follows:

1. For promotion of “responsible gaming”, the DICJ continued to follow up on social problems in Macao arising from gaming, especially gambling involving casino staff, the trend of gaming among youngsters and pathological gambling. The DICJ had regular working meetings with six gaming corporations to understand the enforcement of responsible gaming in casinos. Moreover, the DICJ co-organised various activities with the Social Welfare Bureau and the University of Macau, and continued to offer the “Macao Responsible Gaming Instructor” certificate programme to members of the responsible gaming task force and

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front-line management of casino operators. In 2015, a total of 60 participants completed the programme.

2. The DICJ continued to monitor gaming concessionaires, to ensure they post clear notices forbidding individuals under the age of 21 from entering casinos, and demanded that they strengthen inspections at casino entrances. In 2015, 235,647 persons under the age of 21 were forbidden from entering casinos after inspection of identity cards. On the other hand, 156 persons under the age of 21 were found to have entered casinos illegally, representing a substantial decrease of 41.8 percent from 268 persons in 2014. This is evidence of the DICJ’s successful publicity inside and outside casinos, and the enhanced effectiveness of casino operators’ security guards in blocking under-age persons from entering casinos.

3. From 1 November 2012, self-exclusion and third-person exclusion measures were implemented in casinos. The DICJ continued to refine the application process and add more responsible gaming information kiosks, to receive applications for exclusion from casinos. The setting up of kiosks allows residents and visitors to obtain information about responsible gaming through more channels. As of the end of December 2015, the DICJ handled 355 applications for exclusions, 47 of which were made via self-service machines at responsible gaming kiosks.

4. The DICJ continued to audit gambling concessionaires regarding their Minimum Internal Control Requirements (MICR) implementation plans, which was compiled according to the concessionaires’ operations. The DICJ followed up regarding their implementation on a quarterly basis. To ensure all concessionaires met the MICR, in 2015 personnel were also sent to insured areas of the concessionaires, to carry out audits in order to verify they were operating according to the concession agreements, and had met the insurance requirements stipulated in the MICR.

5. For more efficient monitoring of casino operators’ performance of their obligations in the concession contracts, and to urge casino operators to add non-gaming components, in 2015 the DICJ began regularly gathering data and information on non-gaming components and local procurement exercises of casino operators, as well as local SME facilities at casinos and gaming facilities. Through this, the DICJ could help small and medium-sized enterprises to seize opportunities arising from the development of gaming tourism.

6. The money laundering control procedures submitted by the gaming concessionaires under Directive No. 2/2006 were reviewed on a regular basis, especially the revision and updating of procedures according to technology developments and changes to concessionaires’ operations. The Summary Report on Large Transactions was analysed and examined, while relevant information was gathered and transferred to the Financial Intelligence Office for further case analysis, filing and investigation.

7. The DICJ also handled administrative penalties on illegal gambling. In 2015, there were 37 cases of illegal gambling, six percent more than in 2014. A total of 161 individuals were involved, 156 of whom were Macao residents. These cases mainly involved illegal gambling, related to mahjong games. The DICJ would continue to educate the public, while stringently combating and preventing illegal gambling.

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8. Regarding registration of gaming promoters, a total of 142 licences were issued in 2015, representing a decrease of 22.4 percent from 2014. Of these, 122 were issued to legal entities and 20 were issued to individuals. The DICJ commenced a review of By-law No. 6/2002 “Qualifications and Regulations for Casino Gaming Promoters”. The two major directions for the review are: first, to make reference to Law No. 16/2001 “Gaming Industry Regulatory Framework” regarding the qualification of concessionaires and introduce new requirements of capital and shares, guarantee, submission of accounts, accounting, and audit of casino promoters; second, to study a wider disclosure of information on casino promoters – such as list of directors, shareholders, major employees and business partners – to allow stakeholders to verify the identity of counterparty, so as to increase the transparency of the industry and enhance governance of the operation of casino promoters. Moreover, according to By-law No 6/2002, the Government can define a principal employee by the specific duty that person performs. Hence, a senior staff member who is responsible for finance would be regarded as a principal employee, in order to establish the legal status of qualifications for that particular position, and assist casino promoters with establishing a systematic accounting and record keeping system.

The Contribution of Casino Gaming to Macao’s Gross Gaming Revenue during 2015

(Billion Patacas)

Item 2015

Gross revenue from casino gaming 230.840

Gross gaming revenue 231.811

Proportion of contribution 99.58%

Source: DICJ

Gross Revenues of Different Types of Casino Gaming during 2015

Item Gross revenue (Billion Patacas)

Roulette 0.93

Blackjack 2.352

VIP Baccarat 127.818

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(Cont.)

Gross Revenues of Different Types of Casino Gaming during 2015

Item Gross revenue (Billion Patacas)

Baccarat 76.212

Fan-tan 0.309

Big-and-Small 6.347

Chinese Dominoes (Pai Gow) 0.096

Mahjong 0.104

Slot Machines 11.754

Chinese Dominoes Mahjong 0.0069

Three-card Poker 0.147

Three-card Baccarat 0.404

Tombola 0.0017

Wheel of Fortune 0.017

Live Multi Game 2.120

Stud Poker 1.134

Casino War 0.180

Dice/craps 0.095

Texas Poker 0.272

Fortune 3 Card Poker 0.541

Total 230.840

Source: DICJ

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Talent Cultivation for the Gaming IndustryDiversification

Gaming patrons also benefits the consumption of other non-gaming activities, such as hotel services, shopping, entertainment and sightseeing. On the other hand, gaming corporations also offer a wide range of non-gaming services, such as artistic performances, sports competitions, conferences and exhibitions, leisure entertainment, and festive activities, to attract more tourists. At present, the total expenditure of visitors on non-gaming activities in Macao is comparable to that of Las Vegas, in the United States.

According to the research report, Interim Review of Gaming Liberalisation for Games of Fortune in Macao: Economical, Social, Livelihood Impacts and Operating Conditions of the Concessionaires, the development of the gaming industry has increased the added value of related industries, as non-gaming elements have created many job opportunities in non-gaming sectors. In 2014, 44 percent of the employees of gaming operators were non-gaming staff.

The report cites information on six gaming corporations, indicating that in 2014 they generated a total operational revenue of 23.2 billion patacas from their non-gaming projects.

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