Crown faces casino D-Day

NSW Premier Barry O'Farrell will announce on Thursday whether he is going to make James Packer's multibillion-dollar gaming empire even bigger by awarding Crown a casino licence in Sydney or make a formidable enemy.

It's not a slam dunk but Crown is considered the favourite.

The decision on whether to allow Crown into the Sydney market or allow the existing operator, Echo Entertainment to extend its exclusive rights for another 15 years shouldn't be a tough call.

The government and its panel of experts, headed by former Commonwealth Bank boss David Murray, have one overarching criteria - and it's financial. The question the panel needs to answer is which of the competing proposals brings in more tax and tourism revenue to the state. If the social cost of either of these two proposals is also taken into account we move into murkier waters, but more on that later.

At this point (from the limited information we have) Echo's proposal comes up trumps. First, this is due to the way casino tax payments are structured. As gaming revenue ramps up, the percentage of tax paid on this revenue increases. This model favours retaining a monopoly operator.

The second financial advantage for Echo's (The Star) proposal is that it involves developing bigger tourism-based infrastructure. More tourism equals more revenue flowing through the local economy.

Last, the Echo deal includes a $250 million fee for exclusivity that goes directly into NSW coffers. So why is Echo still considered the underdog? Because Packer may have tricks up his sleeve we are not yet aware of.

From the limited information provided by Crown, we can see a tower that appears to contain a smallish six-star hotel, relatively large gaming space and luxury apartments. The biggest X factor is whether Packer's proposal will also include a one-off, fee-type payment that will alter the financial dynamics of the competing bids.

Clearly Packer is hell-bent on winning the Sydney prize but he is financially astute enough to avoid blowing Crown's returns to overspend on obtaining a NSW venue. The Crown camp has waged an undercover campaign against Echo for the past two weeks, saying that it cannot afford to fund Star's $1.1 billion development.

But more importantly Crown has been questioning how Echo will make a favourable return on its investment - particularly when it hasn't yet reached an appropriate level of return on the previous Star development.

From what we can see of Crown's proposal, returns will be enhanced by selling the apartments. And the larger the gaming floor the better the payback on the overall development. Packer said from day one the Barangaroo hotel development wouldn't stack up without a casino so a hotel-only proposal was never considered by Crown. That is an important variable for Packer but it shouldn't really factor into the NSW government's thinking. Fairfax Media has learnt there were numerous hotel operators that had put in proposals to operate a hotel (which would be built by Barangaroo's master developer Lend Lease).

Clearly it suits Lend Lease to have Packer build and operate the hotel but this should not be a concern for the government. O'Farrell's job is not to look after the financial returns for Echo or Crown.

The social costs of gaming are, in theory, not factored into the equation. But given the arbitrator is the government, it is hard to see how they can be ignored. Packer's bid seems to go some way to address community concerns about problem gambling and having the proceeds of gambling funding infrastructure.

Crown has said much about its Sydney casino being a VIP invitation-only affair. That certainly goes in its favour as long as the VIP club is exclusive enough that it weeds out most of the public. This comes down to a definition that is not clear yet. Packer's other advantage is his team has been working on this for a long time. He won the support of O'Farrell to build Barangaroo many months before Star entered the competition. He definitely had a head start.