The "decisive factor" in the recommendation of the independent steering committee headed by David Murray that James Packer’s Crown Ltd’s application to build a new VIP casino complex in Sydney should be preferred over Echo Entertainment’s continued exclusivity, is one that turns conventional wisdom on its head.
In recommending that Crown’s proposal should progress to stage three of NSW’s 'unsolicited proposals' process for major projects the committee determined that while both Crown and Echo’s proposals offered valued to NSW "the decisive factor was the opportunity to introduce competition into the market".
It has been a long-held orthodoxy that the 'one casino' or monopoly model maximises government revenues, minimises social harm, makes it easier to manage probity issues and, by avoiding fragmentation of gaming revenues, enables continuing investment in casino facilities.
That’s an argument Echo made to the committee and one that, until Crown decided to try to gate-crash Echo’s Sydney monopoly with its proposal to build a six-star VIP complex at Barangaroo, hadn’t really been challenged in this market.
The committee, however, didn’t just decide otherwise but did so with a conviction that a competitive model could be constructed that offered no downside to government revenue, only upside, and one that would lead to competition and new investment not just from the new entrant to the market but from the incumbent as it was forced to compete for the high-roller dollars.
Crown’s offer of $100 million of cash upfront, more than $1 billion of investment, a guarantee that the government would get at least $1 billion of revenue from the upfront fee and gaming taxes over the next 15 years and its demonstrated success in attracting high-rollers to its existing casinos won the day.
The committee did, however, reject its proposed tax rate of 27.5 per cent in favour of the 29 per cent Echo faces on VIP gaming revenues in order to preserve tax neutrality between the two operators.
While Crown does still have to get through phase three of the process – the planning process – the logic of the steering committee’s decision will intrigue other cash-strapped state governments because of its potential to generate more revenue and investment without downside.
There was another element in the steering committee’s thinking that helped it reach the conclusion that competition could generate both bigger taxation streams and broader economic benefit from the investment and from increased tourism – Echo’s underperformance, relative to Crown, in the VIP market.
Some of that stems from the nature of the facility originally built by Showboat in the 1990s and the reality that until Echo was demerged from Tabcorp in 2011 there hadn’t been enough investment in what was a very ordinary complex. Echo has subsequently invested the best part of $1 billion in The Star and would have invested another $1.1 billion had its proposal been preferred.
It was Echo’s underperformance in the VIP segment and its struggle to generate better returns from its existing business that both created a competitive opportunity for Crown if it could get into the Sydney market and ultimately helped convince the steering committee that a competitive model would encourage Echo to lift its game and compete for high-rollers against Crown, helping to further expand that market.
The Queensland government is currently reviewing its casino policy. While Echo operates the Brisbane and Gold Coast casinos its licences aren’t exclusive and Crown has made no secret of its interest in entering that market which, like Sydney, has the natural attractions to appeal to high net worth tourist gamblers.
If the Queensland government were to accept the logic of David Murray’s committee, Crown’s prospects of obtaining a licence to compete with Echo in a second market would strengthen considerably, although the Queensland government has indicated that if it were to grant a new licence it would probably put it up for tender to all comers.
As in Sydney, Echo’s Queensland casinos have experienced underinvestment and underperformance relative to Crown’s Melbourne and Perth facilities and therefore the same arguments about government revenues, investment and tourism could be made, whether by Crown or a well-credentialed third party.
Crown itself could be open to similar arguments in Melbourne and Perth – except that its record of major and continuing investment in its facilities, the performance of its casinos an its success in building a VIP gaming business closes off that avenue of attack.
Despite Melbourne's undoubted 'liveability', it is also the case that it doesn’t have quite the same appeal as a primary destination for international tourists as Sydney or Queensland, so the opportunity for a second operator isn’t as obvious.
Strategically, it would make sense for Packer to beef up his relatively stable Australian business by adding a Sydney and Queensland presence to balance his higher-risk expansion into Asia, building on the Melco joint venture in Macau by entering new markets like Sri Lanka and the Philippines.
With the $1 billion he extracted by selling his controlling shareholding in Consolidated Media to News Corp last year he has the ability, if needed, to contribute his share of any funding Crown might need to raise to pursue its expansion plans.
Thanks to the Sydney process and the 'win-win' competitive model for the state that the steering committee produced, Packer now has a template that he can put to the Queensland government to make his case that the 'one casino' model isn’t necessarily the best way to structure the local industry that it was previously thought to be.