Philippine online sector sees POGO problems

The introduction of a new layer of online licenses in the Philippines has created confusion in the industry, with an attempt to set up an national online audit system adding to a mounting crisis of confidence over regulation of the sector.

The Philippines is the only country in Asia to provide a licensing regime for online operators and business had been booming. However, since the entrance of President Rodrigo Duterte, the picture has changed with many companies either choosing to relocate, or considering plans to do so.

Up until the end of last year, most licenses had been provided by the First Cagayan Leisure and Resort Corporation as the master licensor for companies, which technically were supposed to be based in the First Cagayan Economic Zone in the remote north of the country. In practice, many were running their businesses out of premises in the capital due to the lack of infrastructure facilities in the remote area.

A similar licensing authority was granted to the Aurora Pacific Economic Zone and Freeport, a special development zone on the country’s eastern seaboard.

However, late last year, land-based regulator the Philippine Amusement and Gaming Authority stepped into the picture, announcing it would begin to offer its own licenses for offshore online companies, to be known as Philippine Offshore Gaming Operators, or POGOs.

The move followed directives by President Duterte ordering that the industry be properly regulated and taxed, or closed down. Pagcor says it has now issued some 53 POGO licenses: 31 e-casino, 13 sportsbetting, 8 e-casino and sportsbetting combined and 1 special class of sportsbetting.

However, many of these companies holding the licenses are thought to be owned by the same ultimate parent. Each of the licensees is able to offer up to 9 sub licenses to their service providers, such as live dealer software, sports betting, other casino software, or aggregation platforms.

It’s a complex and costly system. According to Pagcor’s website, the operating license for an online casino operator is $200,000, together with a $50,000 application fee and a $250,000 performance bond. The price is slightly less for sports betting. In practice, industry insiders say the costs may be more than double this level, forcing many smaller operators out of the industry.

The number of licensees listed by First Cagayan has plunged to just 48, compared with 138 last year, before the POGOs were introduced. They can still legally operate under First Cagayan licenses, but authorities have been clamping down on buildings hosting the operators and the economic zone still lacks the necessary infrastructure to host the high tech businesses.

Some of the Cagayan licensees transferred to POGOs, but insiders in the Philippines say it’s unclear where the remainder may have gone. Some are thought to have left the country, possibly heading for Taiwan, while others are thought to have gone underground and are operating illegally.

Sources, who declined to be named, confirm that operators are trickling away as the Philippines is now seen as being unstable to the point that business is not sustainable.

“It may well be a trickle at this point but as time goes by we fully expect it to be a flood and that will be disastrous for the country in terms of tax revenues and jobs, someone has to get a grip on this now if the situation has any chance of stabilizing and improving.

Insiders said the recent bidding process for contract to set up a new audit system to track revenue generated by the online operations is an example of how the new regulatory regime is causing confusion. Pagcor put out a tender for a contract that would pay out P6 billion ($116.5 million) over ten years, providing potential bidders just weeks to put together their pitch.

“The introduction of  the third party audit platform may provide a precise accounting of all gaming revenues generated by POGO licensees under PAGCOR,” the regulator said in an email, adding at present it can’t accurately calculate revenue.

The bidding documents could be downloaded from the internet and stipulate that the winning company must either be wholly owned by Philippine interests, or a joint venture with at least 60 percent local participation. They state that the company must have been involved in at least three similar audit platform projects in a jurisdiction with similar, or higher standards than the Philippines. Maximum points are given for those involved in setting up nine such systems, though one industry expert points out there are probably only about five in operation globally at present.

If the process comes to a dead heat, with two companies receiving identical marks under a scoring system, the ultimate winner will be down to chance, picking a folded card. The winner is the company with the card that reads “congratulations.”

Experts say it’s not the intent behind the audit system contract that is the problem, as the idea is sound, but the rushed and unrealistic approach has left many dismayed. One said, although the contract is large, most of the risk is pushed onto the consultant. They also point to the wide range of different back office systems in use from countries around Asia and the difficulties in securing access to data, with some likely not hosted in the Philippines at all.

The bid deadline for interested parties to submit their eligibility documents was given as Aug. 1st, with Pagcor looking for the project to be implemented by the end of this year. As of now, Pagcor says no provider has been selected, though a decision is thought to be imminent.

There’s a lot at stake for Pagcor to get regulation of online gaming right. Online gambling is booming across Asia and it has the first comer advantage in the region. It’s also contributing to the economy of the Philippines with about a quarter of a million people employed in the sector.

Online gambling operators are the second-biggest source of demand for office space after the business process outsourcing sector, which is now shrinking. Pagcor points out that the “Philippines is very conducive for online gaming companies due to the availability of office spaces and labor force.”

The regulator claims there is space for the various licensing regimes, though stresses that these businesses need to operate within the licensing jurisdictions.

“We are just following and implementing our laws. It is the operators’ prerogative as to which governing body they would want to be licensed with so long as they will perform gaming activity within the territorial jurisdiction of the governing body which issued its license and within the bounds of responsible gaming,” it says.

Operators say that by making the POGO licenses so expensive, Pagcor is creating an underground market. One told AGB that an independent consultant is needed to help create a new regulatory framework and restore confidence. Otherwise, the Philippines risks losing billions of pesos in business.