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THE CASE FOR INTEGRATED

By Andrew MacDonald and William R Eadington

THE EVOLUTION OF THE CONCEPT OF “INTEGRATED ”

One of the latest buzzwords that has come into general usage in the world of legal gambling is that of “Integrated Resorts” (or “IR’s” as they are sometimes known). The notion of Integrated Resorts came into prominence with the bid process for the two licenses. The Singaporean government as early as 2004 made it quite clear that what they did not want was “just” or resort facilities dominated by their casino operations, so they mandated that only a very small proportion of the actual physical facilities would be for casino utilization. The rest would be support facilities and consumer oriented amenities that would dominate the developments. The Singapore authorities therefore set up a licensing structure that mandated that less than ten percent of the gross floor area would be for casino use – the rest would be for , theatres, convention centres, theme parks, museums, retail, and food and beverage offerings.

The concept of Integrated Resorts is in reality nothing new in the world of gaming. Singaporeans were requesting international world class developments combining elements already found in other major casino developments such as the Crown Entertainment Complex in Melbourne, Australia; The Venetian and Palazzo in Las Vegas; The Atlantis on Paradise Island in the Bahamas; Genting Highlands outside of Kuala Lumpur in Malaysia; or the Grand West Casino in Cape Town, South Africa, just to name a few.

At present, many operators claim to have the first Integrated Resort in their region, but arguably the mid-20th century Nevada developer Jay Sarno can lay claim to the distinction of being the first to establish this type of facility. Caesars Palace - which Sarno opened in 1966 - ushered in a new era for Las Vegas casino facilities. Caesars acted as a critical catalyst for the more diversified styles of casino resorts that were to follow. Sarno built the Circus Circus Casino which opened two years later as a heavily themed family resort which continued the transformation of the Las Vegas Strip and served as an additional model for future developments. Along with Caesars Palace, it brought about a significant shift in the composition and profile of Las Vegas visitors that has continued over the past four decades. While Caesars and Circus were still principally “casinos,” they were no longer just centred on gambling but also offered much more in the way of non-gaming amenities to their guests.

Today’s concept of Integrated Resort has come a long way since those first resort developments. The Mirage in Las Vegas - which Steve Wynn opened in 1989 – had capital costs of around US$630 million. Many Wall Street analysts and other industry observers felt that this was far too ambitious a project to succeed and would never

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provide a reasonable return on investment. Of course, Steve Wynn proved his critics wrong, as The Mirage demonstrated the attractiveness and revenue generating capabilities of non-gaming amenities to diverse audiences who are interested in more than “just gambling.”

Integrated Resort developments at the present time might cost US$4 billion or more, and include facilities and amenities that create virtual “cities of entertainment.” These new style resorts also change the landscape around them by spurring complementary developments and even enhancing the interest amongst some to have residences in close proximity to them. Thus they can become substantial hubs of economic activity and catalysts for further development.

DEFINING “INTEGRATED RESORTS”

The scale and mix of amenities and assets as well as their ability to act as catalysts that can transform a region’s economy are what makes such developments distinct from traditional casinos and casino- complexes. How should one define an Integrated Resort, and what outcomes can typically be expected when such a facility is developed in a region?

An Integrated Resort is really a euphemism for a very large scale entertainment development based around a casino. The casino component, while physically small, must still act as the primary economic engine which drives overall returns and facilitates investment in other facilities and amenities. Thus the casino element must be of such magnitude and importance that it can generate over half of the development’s annual cash flow. With capital costs associated with Integrated Resorts at, say, US$4 billion, such a facility would need to generate at least US$500 million in EBITDA (Earnings Before Interest, Taxation, Depreciation and Amortisation) to be viable. Even with the casino occupying less than ten percent of the gross floor area, it has the capability to generate a disproportionate contribution to EBITDA so that substantial investments can be made in non-gaming facilities that might not be otherwise sustainable. With the casino as the nucleus, the structure of the rest of the Integrated Resort may be developed. This could include a sizeable hotel development (15 of the 20 largest hotels in the world are affiliated with “mega-casino” projects located within a two mile radius along the Las Vegas Strip) of at least 1,500 rooms and would also likely include significant space for conferences and conventions.

As with any development planned for so many visitors, an array of food and beverage outlets and facilities are needed as complementary amenities. The range and breadth of and lounge offerings create an even greater magnet effect that can enhance the overall appeal of a venue and allows for even more facilities to be added. Other non-gaming assets that might be considered include cinemas, showrooms, nightclubs, golf courses, spas, wild animal exhibition areas, art galleries, amusement parks, and retail shopping malls. A new trend, yet fully tested, is the integration of

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mixed-use tourist accommodation units into Integrated Resort complexes, on the belief that a certain proportion of the population will want to live or have second residences in close proximity to such attractions. Thus, many new Integrated Resorts are incorporating apartments, condominiums, time-share units and other residential hybrids to the mixed-use master planning of such developments.

However, to create a modern Integrated Resort, it must be developed proportionate to the demand that can be generated in the market where it is located. It is important to note that most gambling markets are local; they rely on the demand created from within a catchment of about one hundred kilometres drive time. There are, of course, some exceptions to this guideline, such as Las Vegas and Macau, but for the great majority of gambling markets in the world, their primary clientele are local or regional residents.

PLANNING AN INTEGRATED RESORT

In planning an Integrated Resort, there is little point in just putting a pin into a map and drawing concentric circles to determine the number of individuals who live within three, four or five hours flying or driving time of a location. Dropping such a pin almost anywhere in Asia can result in hundreds of millions or even billions of people being located within the area.

Market and feasibility studies are essential in creating the appropriate sizing of any IR development under consideration. Such studies should focus on those segments of the population who have the means and interest to participate in the kinds of resort activities being contemplated. As the primary economic engine, it is important that adequate attention is given to the casino segment and the returns likely to be generated from this portion of the operation. Gravity models that take into account the local population may be essential to determine base-line revenue generation potential and income contributions from the casino. This modelling should take into account the size of the population over the age of majority, ethnicity, wealth, tolerance to gaming, and likely visitation and spend levels.

Gravity models also take into account the impact of increasing distance from a location on the number of trips made per capita and also the size of the trip budget. It has been found that as distance increases, the number of annual per capita visits decreases so that when distance above a threshold level is doubled - visitation rates drop by roughly three-quarters, when the distance is quadrupled – visitation rates drop by fifteen-sixteenths, etc. At the same time the gaming budgets of individuals who travel long distances to an IR increase dramatically - as such trips are considered more as special purpose gaming trips, so individual visitors budget accordingly.

Defining these models carefully will provide an indication of how many visits a particular location might generate and what level of income the economic engine

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provided by the casino is capable of producing. If this simple base-line modelling does not result in predictions of a gaming market above US$300 million per annum, then it is unlikely that a true stand-alone Integrated Resort could be developed. On the other hand, once that base-line model has satisfied these threshold criteria, then it should be possible to add further business and income streams generated from premium customers and high-rollers.

Once the base-line size of the casino engine has been established, it is then possible to design the remainder of the Integrated Resort. That too depends on the appropriate market and feasibility studies being conducted. However, these become far less important to the overall project, as sensitivities will be driven largely by the success or failure of the casino component. That said, one area where this statement may not be true is the development of convention and conference facilities. Such concepts should not be considered in isolation of what already exists in the market and how the location of the IR is perceived by potential convention and conference customers.

Conventions of substantial scale require accessibility and ease of movement afforded by such locations as Las Vegas or Orlando. Flight access and location of the airport relative to the convention facilities and hotels are high in importance in determining relative attractiveness, as is the overall appeal of the destination. Convention and conference organisers are usually driven by the potential for a venue to maximize attendance for their events. Consistent with this objective is a desire for environments that can accommodate conference needs in terms of size and mix of amenities, as well as offering a vibrant night life for after-hours networking to take place. Furthermore the stock of hotels at or near the location becomes of critical importance. No single hotel can accommodate all the delegates of many major conferences and conventions held today and thus, while an Integrated Resort itself may be sizeable, it will be important to consider the number and style of hotels within the vicinity of the IR that can cater to business travellers.

Overall, this iterative and holistic approach should produce an Integrated Resort model which fits within its location, community and region. While it is important to think of the local catchment area as a critical component of this exercise, contributions to revenues and operating income can also come from more distant visitors, and visitors who are interested in other IR attributes besides the casino. Based on the experience of Las Vegas, when dealing with a true Integrated Resort, it is possible that only about half of the total revenue generated will come from casino operations. The remainder will be driven largely by people staying in the hotels, attending conferences, conventions, events, or theme park activities. Depending on the general attractiveness of the venue and its supporting infrastructure, much of the non-gaming spend at the IR will be derived from people outside of the local catchment area and will support the direct new investment being made into the project.

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To illustrate this point, one can note that the major IR mega-casino resort properties on the Las Vegas Strip now derive around sixty percent of their revenues from non- gaming amenities. The Atlantis on Paradise Island in the Bahamas generates over seventy percent of its revenues from non-gaming facilities. At Sun City in South Africa, seventy percent of total revenues also come from non-gaming sources. In other markets, non-gaming contributions as a percentage of total revenues tend to be less significant. However, the ratio is sometimes skewed by casino revenues that are driven by relatively few international high-end customers who are attracted to the Integrated Resort as a consequence of the grandeur and scale, or because of aggressive marketing strategies in combination with high quality facilities.

Initially the Singaporean authorities - as part of their bid process for the two IRs in Singapore - stipulated that no more than fifty percent of gross revenues could be derived from gaming. This requirement was later dropped in light of the recognition that significant casino revenues could be generated from international tourists. (From Singapore’s perspective, such revenues would be beneficial to the City-State as sources of foreign exchange and “export services, as well as import substitution that would create “net economic impact” for Singapore.)

Thus a successful casino operation as the nucleus of an Integrated Resort is essential to the process of developing a proposed multi-billion dollar development. Indeed it is difficult to think of many resort projects - with billions of dollars invested and at risk - where such an important economic contributor is not included. The failure in the early 1990s of two multi-hundred million dollar non-casino integrated resort projects in Hawaii—the current Grand Wailea in Maui and the Waikoloa on the Big Island of Hawaii—point out the challenges of success without such an engine.

In summary, a reasonable working definition of an Integrated Resort is: A multi- billion dollar multi-dimensional resort that includes a casino that takes up, say, no more than ten percent of the resort’s public floor space, but where the casino generates at least US$300 million in gaming revenues.

ECONOMIC BENEFITS AND THE DEVELOPMENT OF INTEGRATED RESORTS

With any development involving capital in the billions of US dollars there are going to be a number of wide ranging economic benefits and multiplier effects accruing to the region. The first round comes from the construction contracts and the related employment opportunities. The development of a multi-billion dollar resort takes a minimum of two years and is likely to extend to three or more years when planning is included. The extent of local economic impact will be related to the amount of local labour and resources utilized in planning and construction, as well as the extent to which the local region can cater to the demands of those employees and resource owners earning higher incomes from the project. Depending on the construction

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environment, much of the construction budget will be spent locally although there will be some leakage, depending on the materials being used and the capabilities of local construction firms. In general, however, it would not be unusual to see around forty percent of the construction budget being spent locally with seventy percent of that generating local incomes and employment.

If an appropriate income multiplier was around 1.4, the total economic effect of an IR project meeting the above parameters would be about forty percent of the construction budget. In other words, local incomes in aggregate could be expected to increase by about 40% of the magnitude of the entire project over the course of the construction phase. Taking average labour costs into account, it would then be possible to estimate the annual number of jobs created and the impact on full time equivalent labour during construction - both of which can be very meaningful to a local community.

Of course it is the actual opening of the Integrated Resort that generates the greatest flow of economic benefits. Integrated Resorts tend to be labour intensive, requiring large numbers of staff to service the various facilities and activities on offer to customers and guests. This number can exceed ten thousand direct full time equivalent employees, depending on prevailing wage rates and other factors. The casino in particular can be a major contributor to employment with anywhere from five to seven employees per table game. In Asia particularly - where table games are the most popular form of casino entertainment - an IR casino might have five hundred or more table games with thirty five hundred or more staff just in that department.

The diversity of job opportunities within an Integrated Resort can be surprising to outside observers. However, an IR should be viewed as a small township with a multitude of roles required to maintain its operation. It is not unusual for there to be one to two hundred different positions within the entire complex, ranging from accountants and attorneys to, in some cases, zoologists and marine biologists. Direct employment of this magnitude induces a multiplier effect in the local community with additional jobs created to service the employees of the IR. Depending on the extent of economic development in the region, the increase in jobs and incomes deriving from employment at the Integrated Resort can be very large indeed. An employment multiplier of 1.5, for example, would result in an additional five hundred jobs for every thousand full time jobs created within an Integrated Resort. This sort of impact on a local community can be of great significance and should not be underestimated.

There are few industries that can provide quality employment at this level of scale in one location. The Crown Entertainment Complex in Melbourne, Australia is an example of an Integrated Resort casino opened in 1997 that can boast of being the largest single site employer in the Southern Hemisphere.

Another significant impact of IR developments is the amount of consumable items required on a daily, monthly and annual basis to satisfy staff and guests. Operating expenses, maintenance, marketing and cost of goods sold will be substantial cost

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elements of which a significant proportion will be purchased locally or regionally, depending on the conditions prevailing in the regional economy. Supply chain benefits and clustering effects can be substantial in creating new business and employment opportunities within a region.

Perhaps the most significant economic impact from the development of an Integrated Resort is visitor impact. An IR located in a capital city such as Singapore or Melbourne, or even those close to population centres such as Foxwood’s or Mohegan Sun, can generate significant visitor numbers sometimes exceeding ten million per annum (implying an average of upwards of 30,000 visitors per day.) Depending on location and the actual type and range of facilities offered, this may well result in millions of additional tourists visiting the region, resulting in incremental spend in the local communities as these visitors take tours, eat in local and stay at local accommodations (outside the IR) and spend time and money outside the Integrated Resort. At Genting Highlands in Malaysia, for example, it is estimated that approximately three million people visit the country annually specifically to visit the Resort. This represents around fifteen percent of total international visitors to Malaysia.

Singapore, when it decided to establish two Integrated Resorts in the City-State, did so on the basis of the potential visitor impacts and the positive effects they would have on Singapore’s economy as well as its image. Singapore’s goal was to triple its tourist numbers over a period of twelve years and to more than triple the resulting economic impact by attracting higher spending and thus higher value visitors to that country. When they open in 2010 or 2011, the two IRs will be critical in achieving that objective and will likely contribute more than fifty percent to Singapore’s long term goal by 2015.

Another benefit of such developments is the regenerative power successful large scale Integrated Resorts can have on their particular locales. Such effects might include transportation infrastructure upgrades to the venue to cater to the visitors expected to be drawn to the area, as well as improvements in general facilities and amenities for guests as well as locals. A gravity effect of sorts also occurs with complementary leisure and entertainment facilities that might be developed nearby, as well as new hotel and apartment developments at different price points.

Urbanisation in general leads to many mixed-use developments in and around cities, but this can be accentuated around Integrated Resorts due to the extent and range of leisure options that can be afforded under one roof. A multi-billion dollar IR can stimulate billions of dollars of additional developments within the local region as businesses and accommodation options cluster around the site.

An excellent example of this can be found around the Crown Entertainment Complex on the Southbank of the Yarra River in Melbourne. In 1993, prior to development of the A$1.7 billion Crown Complex, the neighbourhood was largely a derelict and

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abandoned industrial area. Within a decade after the opening of Crown, the Southbank had become one of the most attractive commercial, residential, and entertainment areas in all of Melbourne, with capital investments in excess of A$10 billion within two kilometres of the Crown site.

Some casino operators such as MGM Mirage have created master planned precincts such as their CityCenter development on the Las Vegas Strip. In a similar manner, and its majority owner Sheldon Adelson—and some other companies—are developing the Cotai Strip in Macau as a massive series of Integrated Resorts, with aggregate capital investments in the range of US$12 billion in the form of branded hotels, entertainment offerings, and, of course, casinos. Other situations have developed over time to bring about Integrated Resorts in less planned ways. The massive organic growth of Genting Highlands outside Kuala Lumpur in Malaysia which now boast over 10,000 hotel rooms (the largest concentration under single ownership in the world) has resulted in an entertainment complex with indoor and outdoor theme parks, convention and conference facilities, as well as over two hundred retail, food and beverage outlets. While less structured in its evolution than other IRs, it is nonetheless important to appreciate from Genting Highlands what can be developed off the back of casino led expansions.

The positive annual impact from Integrated Resort developments can indeed be substantial. Estimating the economic potential of these IRs will depend on the unique situations established within each locale and legal situation. However, it is often the case that such developments can become the most significant that any locale will have seen from a single activity, and can have impacts in excess of the holding of the Olympic Games or sponsoring a World’s Fair or some other spectacular event of worldwide significance.

It becomes easier for affected parties and stakeholders to understand the changes that the development of an Integrated Resort can bring to a government and community once the quantitative and qualitative impacts are released and understood. These multi-billion dollar developments can generate thousands of jobs, regenerate regions, and stimulate much broader economic activity, as well as bring about substantial returns from gaming taxes, fees and initial license costs. One need only look at the fiscal and economic impacts that have accrued in Macau in several short years to understand these fundamentals, or to analyse what Singapore is achieving and will likely experience in the next few years with the Genting International development at Island and the Las Vegas Sands development at Marina Bay.

CONCLUSIONS

Because of their relative economic and social benefits and costs, the attractiveness to countries and jurisdictions of the strategy of authorizing substantial Integrated Resorts, in comparison to legalizing other forms of gambling, such as gambling-

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centric casinos that do not require other amenities, or convenience gambling outlets such as arcades filled with slot machines, will likely become a popular option in the future. Such efforts will have to be accompanied by specific limitations on the number of licenses issued, as well as other protections against regional competition, which will create an environment conducive to the substantial capital investment levels desired. This will obviously not work well for every jurisdiction that would like to go forward with this kind of strategy, but it can work if the underlying economic, political, and social circumstances permit it.

The major conclusion for national governments, or for states and provinces empowered to authorize casino-style gambling, is to reach the understanding that their policy alternatives are NOT a question of Integrated Resorts versus no gambling whatsoever. Rather, they have a choice between permitting alternative structures, styles and types of gambling industries that have markedly different economic and social impacts. By virtually any measure, the concept of Integrated Resort best harnesses the benefits associated with their alternatives, while (potentially) reasonably constraining the unintended negative impacts. Carefully developed legislation and implementation, which seems to be the case for Singapore, will prove far more benevolent in the long run than the haphazard and opportunistic approaches that have been undertaken by many countries, states and provinces over the past few decades. Such alternatives, such as permitting the proliferation of electronic gaming devices in arcades or bars and taverns (so-called “convenience gambling”), limits the economic and catalytic power that might be associated with Integrated Resorts. Furthermore, the ability to control for excessive or problematic gambling through exclusionary strategies is far more difficult for convenience gambling than it can be for highly regulated and cooperative Integrated Resorts.

It will be interesting to see which countries will be next to accept and act upon these scientific observations, by harnessing the economic potential that Integrated Resorts promise with thoughtful and effective legislation and implementation. Among the candidates to watch in the immediate future will be Mexico, Japan, Taiwan, Thailand, and Vietnam, and even perhaps (but with lower probabilities) Dubai, Abu Dhabi, India, or somewhere in China other than Macau. The high potential of success of IRs in Singapore will no doubt be an important example to other governments and may indeed set the stage for the next major direction in the spread of legal commercial gambling.

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