Korea: what regulatory changes will Lippo/Caesars project prompt?

Published in: Latest Intelligence
The Lippo Group/Caesars Entertainment consortium appears to have stolen a march on rivals, gaining preliminary approval for a $805 million foreigner-only resort on Yeongjong island before legal changes that may make it more difficult to secure a permit.
It’s the first casino license to be awarded to a foreign corporation and the first instance of an award through the “pre-approval regulatory process.”
Foreign corporations have been eyeing South Korea’s casino market with interest, with Genting Singapore recently teaming up with Chinese property firm Landing International to build a $2.2 billion resort on the southern island of Jeju. Las Vegas Sands, Wynn Resorts, Melco Crown and MGM Resorts have also previously expressed an interest in the country.

The market is seen as having considerable potential if it can capture a share of the ballooning outbound China tourism market. Its geographical proximity to northern China makes it an obvious destination.
Combined revenue at South Korea’s 17 casinos was 2.46 trillion won ($2.3 billion) in 2012, the latest available data show, and they attracted 5.4 million bettors. That figure likely rose to $2.5 billion in 2013, according to CLSA and other estimates.
South Korea has plans to attract 10 million Chinese visitors a year by 2020, compared with 4.3 million last year, an increase of 53 percent from 2012, according to data from Korea Tourism Organization. Chinese visitors made up 36 percent of foreign visitors to Korea in 2013.
However, despite the optimism, several analysts and existing Korean operators have warned that the Lippo/Caesar project could saturate the foreign casino market of the greater Seoul area since Incheon is only one hour’s driving distance from the heart of the capital.
For Lippo/Caesars, it was a case of second time lucky with its license application and analysts say it may have benefited from its close ties with the city-owned Incheon City Development Corp., which is heavily invested in the consortium’s Midan City project.
The City of Incheon for many years has been suffering from a financial crisis due in part to the hosting of the 2014 Asian Games set to start in September of this year.
In contrast, a separate application from Okada Holding's Universal Entertainment was asked to wait until South Korea’s Special Act on the Free Economic Zones was amended before applying for a second time.
The act states that international corporations can apply for a foreigners-only casino license after investing $500 million. However, in September 2012, the ordinance was amended by the Lee Myung-Bak Administration to introduce an initial approval process to boost investment in the free economic zones.
Afterwards, foreign companies were able to receive a license by offering $50 million up front with the rest having to be made within four years of receiving the pre-approval.
This “apply to receive” regulation also did not restrict the number of licenses as is often the case in a bidding system.
With the inauguration of President Park Geun-Hye, however, the process came under criticism. Some lawmakers and the Ministry of Culture, Sports & Tourism expressed concern about the risks of capital outflow ('hit and run') and the lack of control on the number of licenses.
Consequently, the foundational law of the regulation, the Special Act on Free Economic Zones, was finally put up for amendment in the National Assembly last year so that initial approvals could be permitted as bidding-only.
Additional licenses could be granted under the pre-approval system, but this may not be easy once the initial approvals have to be given as part of a bid.
The government will decide on a total number of licenses to be given out for a specific area and will put them out to tender. Industry experts say there is a general sense the new process won’t be so easy for foreign bidders and there is no clarity on how the government will determine the total number per area.
The new regulation is likely to be put before the National Assembly as early as June.
The opening up of the market to new casinos appears to have the backing of President Park Geun-Hye, who is eager not to miss out on the revenue potential.
In a March 20th, televised debate the president said: "Japan, Vietnam, Russia, Taiwan and many other countries are moving fast to develop integrated resorts, so the country is at risk of losing out on this market."
"The government needs to analyze the economic and social costs from casinos and integrated resorts and offer counter measures to build a public consensus."
"When we develop integrated resorts, it should be near the beach for example to be maximized with the cruise industry. We need a strategy to develop several integrated resorts to bring in foreign tourists and make significant contributions to the national economy,” the president said.
The government has said the Lippo/Caesars project may add more than 890 billion won in tourism income from new visitors and create more than 8,000 jobs during construction from 2014 and 2018.
However, for many analysts and industry insiders the real game-changer in South Korea would be if the government relented to allow locals into casinos. Although large-scale casino investments, such as the Lippo/Caesar project, are seen as crucial for attracting tourists, for the market to take a step up it needs local participation, industry insiders say.  
 

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