China crackdown puts spotlight on political risk in Asia

Beijing’s crackdown on corruption amongst its senior officials, which is now extending to other sectors of society, has had a devastating impact on casino revenue in Macau.
The China example serves to highlight some of the political risks casino investors need to assess when considering multi-billion dollar projects in promising, but unpredictable markets around Asia. Democracies are often fledgling and gambling legislation is either non-existent or under debate.
“No one could have predicted these events in 2003 when the recent wave of casino development began,” said Andrew Klebanow, a partner with Global Market Advisors, referring to the impact of China’s anti-graft drive on Macau.
Some of the most eagerly eyed markets at present include Taiwan, South Korea, Japan, Vietnam and Russia, which all present their own risks, along with the potential rewards.
Japan is seen as one of the biggest prizes, though the ongoing delays in passing casino legislation has created risks for those companies counting too heavily on building a presence there.
Japan has been considering opening up to casino gambling for more than 15 years in a move that could create the world’s second-largest gambling market. However, there is again a good chance that the legislation will not be passed this session. Even when it does the operating environment may prove challenging for foreign operators.
“Once the legislation is passed there could be other development risks which include the lack of  transparent and open operations of the government and the culture within Japan,” said David Rittvo, chairman and CEO of the Innovation Group.
At present the bill seems to have fallen victim to a decline in political capital of various champions of casino gambling, including Prime Minister Shinzo Abe.
In South Korea on the other hand, the government has regulations in place and is in the process of issuing multiple licenses through an RFC process. It is a very transparent process from both a political and regulatory point view.
Seoul also enjoys friendly relations with giant neighbour China, which is expected to be the main source of visitors for the country’s casinos.
“I do not see the potential for political interference in South Korea similar to Taiwan or Macau. The relationships between South Korea and China is positive and very different than China and Macau and Taiwan,” Rittvo said.
However, the main risk will come from policy restrictions, with the likelihood Korea will maintain its ban on locals gaming, threatening the economic viability of projects.
The main political risk for South Korea comes from its neighbour to the north. The country is still technically at war with Pyongyang, which is regarded as one of the most unstable and corrupt regimes in the world, meaning the political temperature can rise rapidly.
Casino operators desire a sound regulatory authority, stable gaming tax rates, reasonable limits on competition and government’s commitment to improve infrastructure.
As a result, some smaller developing countries, such as Laos, Cambodia and Myanmar are seen as mostly off the radar for bigger international casino operators until regulations are in place and the development process, both politically and regulatory is more transparent.
“The casino developer faces numerous risks when entering into a new jurisdiction,” says Andrew Klebanow.  “As a holder of privileged gaming licenses, a casino operator risks putting a license in one jurisdiction in jeopardy if it enters another market that does not have a robust regulatory regimen.”
Vietnam may be one such jurisdiction. The country has stirred considerable foreign investor interest, however there too, the legislation that may add more certainty to major casino investments still is not in place.
The government is working on a draft gaming decree that would establish regulations for the entire country and all casinos that operate there. This was supposed to be passed in the first quarter of 2015, but this legislation is still pending and is creating uncertainty in the marketplace.    
“Until this legislation passes, the operators and developers are experiencing uncertainty in their operations having to operate under different guidelines and rules. This represents a large risk for any potential operator that is licensed in other jurisdictions as it could jeopardize their operations,” Rittvo added.
There is also political risk. Many of Vietnam’s casinos are seeking to woo Chinese visitors, yet a spat over a Chinese oil rig placed too close to the Vietnamese shore last year triggered a wave of anti-Chinese protest, threatening visitation.
Similarly, the Philippines has seen tourism from China suffer from perceived anti-Chinese sentiment in the country and an ongoing dispute between Manila and Beijing over disputed islands in the South China Sea.
However, there are ways of helping to combat the risk, Rittvo says.
“I think that investors, operators and developers can offset their risk by completing any and all of due diligence on the market and making an informed decision. There are opportunities to build caveats into any development contract and agreement with the governments that would provide outs should the government or other stakeholders not live up to their end of the deal,” he said.
Russia is another jurisdiction where the operating environment can change suddenly, leaving little recourse.
President Vladimir Putin effectively shut down the country’s gambling industry with a 2007 decree, moving all casino gaming to one of four relatively remote locations around Russia. He has since opened further zones, in the Crimea and Sochi to help boost tourism, but also created uncertainty about the fate of Azov, one of the original locations.
“Russia has long been and continues to be a difficult place to do business. Given the changing political climate between Russia and the west, it is not expected to get much better in the near term,” Klebanow said.
“There is certainly risk associated with developing and operating a casino in Russia but that risk can be mitigated to a certain extent by choosing a good local partner and building relationships with the regional government,” he said.
Despite that risk, the Vladivostok region is also seeing a resurgence in investor interest, with two major operators planning projects there.
Corruption around Asia is a further potential limiting factor when considering entering one of the region’s markets.
According to Transparency International’s 2014 survey, 64 percent of countries had a score of less than 50 percent on their perceived corruption index, with 0 being seen as the most corrupt and 100 the cleanest.
Cambodia had a score of 21, China 36, Vietnam 31, Russia 27 and Laos 25.