In an effort to scale back cut-throat competition for high rollers, the Macau government said yesterday that it would mandate an across-the-board cap on the commission rates paid by casino operators to VIP junket agents as early as next month.
The announcement by Secretary for Economy and Finance Francis Tam Pak-yuen is likely to provide casinos with a relief from shrinking profit margins. It came after a second meeting in as many months between the government and representatives from each of the city's six licensed gaming operators.
'After months of communication with the industry we decided during the meeting to use administrative orders to regulate commission levels,' Mr Tam said. 'If any casino company disobeys the regulation, it will constitute a violation of the administrative order.'
Violators would be fined and breaches made public, he said.
Mr Tam and sources familiar with the talks at yesterday's meeting said the government would cap junket commissions at 1.25 per cent of VIP chip sales, inclusive of 'comp allowances' for room, entertainment and food and beverage expenses incurred by junkets on behalf of customers.
The cap represents a 16 per cent decrease from the up to 1.5 per cent now being paid by casinos in Macau to VIP junkets - the middlemen who bring in players, issue them credit for gambling and collect their debts.
Alternatively, the sources said, casinos that compensated junkets using a revenue-sharing model would be limited to offering a maximum 40 per cent of winnings to their junket partners, plus a comp allowance equal to 0.l per cent of VIP chip sales.
The government intervention may take market share away from older or poorly performing properties that have been paying higher commission to boost business.
'It means you won't be able to compete on price anymore,' said one casino executive. 'The competitive landscape will be based on products and services.'
As the cap is imposed through an administrative order, the proposal will not require approval from the local legislature. Instead the measure will be discussed by the executive council, then signed by Macau's chief executive, which Mr Tam said could happen as early as next month.
The cap will come into effect upon being published in the territory's official government gazette.
Industry executives and observers have said that enforcing a commission cap will prove difficult, while analysts have questioned its positive impact on profit margins, as casinos are likely to compete instead by issuing more credit to junket agents in an attempt to fuel lending to players and drive up winnings for the house.
'We do not think the proposed commission cap will drastically improve the economics of the VIP business,' UBS Securities wrote last month in a research note.
'As credit extension becomes the dominant competitive tool, most of the 3 to 4 per cent margin enhancement from the commission cap would likely be reinvested into bad debt provisions.'