Friday, December 17, 2004

Finally, a voice of reason! And from the Director of Economics and Strategy at the Government of Singapore Investment Corporation (GIC) and Vice-President of the Economic Society of Singapore (ESS), no less.

The Straits Times, Dec 17, 2004

Casinos: Economic costs as big as any benefits

By Yeoh Lam Keong
For The Straits Times

THE integrated casino resort project (ICR) has been proposed principally to re-energise Singapore's flagging tourism industry.

On its surface, the model looks seductive. Only 30 to 50 per cent of the project is supposed to be centred on gaming. The bulk of the revenues from the $2 billion investment, we are told, should, as in Atlantis or Las Vegas, come from an alluring infrastructure of high-end hotels, world-class entertainment, restaurants and convention facilities that would also synergistically benefit tourism as a whole.

Surely, the argument goes, if through ingenious regulation we can contain the worst excesses of the ICR's acknowledged social ills, we should be willing to step outside the box of our traditional caution and give it a spin?

The fact that Thailand, Korea and Macau are all planning to deregulate and/or further attract investment in this area gives added urgency to the project. Do we want to be left behind? Should we not, as Associate Professor Winston Koh of SMU, and others, have argued, also establish ourselves as serious players in the mega gaming/tourism sector?


LIKE its high rolling namesake, the ICR project looks tempting. A much darker picture, however, emerges if one looks at its economic costs.

First, while the benefits are potentially large (Prof Koh estimates the ICR can add 0.3 to 1 per cent of GDP), the costs are equally big. Cost benefit studies of Australia's experience in gaming estimate a sum of between A$1.8 billion (S$2.3 billion) and A$5.6 billion on both the benefits and costs sides of the ledger.

Australian Productivity Commission (APC) listed the following among the main costs: Bankruptcy, loss of work productivity, job losses, police incidents, court cases, divorce and violence. The impact on family dysfunction and breakdown is obvious.

The APC found that 96 per cent of problem gamblers suffered from depression, 58 per cent have considered suicide and 14 per cent had attempted it. Half spent over 50 per cent of their income on their vice.

Problem gamblers may constitute only a tiny minority - typically, 1 per cent to 2 per cent of any population, according to Australian and American studies. But the multiplier effects of their pathology can be large. In Singapore, potentially 40,000 to 60,000 people may become problem gamblers. But between 120,000 and 180,000 family members may be indirectly harmed by their vice.

Economist call such impact 'negative externality'. The market is ill-suited in valuing 'non-price goods' or in regulating the negative social effects of certain kinds of economic activity. We know, for example, that it cannot satisfactorily price the benefits of 'clean air' or a 'green environment' or prevent pollution reaching excessive levels without regulation.

Similarly, the market cannot adequately price or limit the impact of gambling-related depression, poverty or suicide on a family. What is the true cost of family dysfunction and breakdown? The counselling charges paid by pathological gamblers hardly captures the full cost.

For this reason, economists who have done cost-benefit analyses of gaming have argued that its costs have been badly understated. Most analyses, using conservative estimates, have found the costs outweigh the benefits.

Can regulation reduce these costs? Can limiting access to casinos to high-rolling tourists or to rich citizens, for example, reduce the number of problem gamblers? Can't Singapore have its cake and eat it too?

Unfortunately, the economics of the gaming industry work against this.

To begin with, the bulk of most casinos' clientele tend to be local residents - usually 70 per cent to 80 per cent even in tourist-intensive locations like Australia or Genting, in Malaysia. Atlantis and Las Vegas, which rely principally on non-residents or foreign tourists, are not at all typical examples.

In Singapore's case, the greater the regulation of locals, the greater will be the implicit 'tax' on its ICR as compared to less regulated regional gaming establishments. Over time, the more intense the regional competition gets, the more financially unviable will local regulation become. After sinking more than $2 billion into such a project, there is likely to be increasing pressure to relax or dilute restrictions on local clientele so the ICR can be competitive with other casinos in the region, subject to fewer restrictions. The financial viability of the local casino may require the acceptance of high levels of local misery.

Unseen threat

IN ADDITION, the ICR, by its very nature, will pose an unseen threat to the very tourism infrastructure it is designed to energise. This is because ICR-type operations typically subsidise the hotel, entertainment and other facilities attached to the casino. Often, such facilities barely break even or may even lose money, but the project as a whole is supported by the gaming profits from the clientele that such facilities draw.

If the ICR is extremely successful, there may be a positive spillover into nearby hotels, restaurants, pubs or entertainment venues. But this would be the rare and lucky case. Statistically, 30 to 40 per cent of gaming facilities fail, with a large proportion surviving, but not very well.

It is in these more common cases that the ICR could become a Trojan horse, with a potentially destructive impact on the local hospitality industry because of its massive non-gaming infrastructure. Being heavily subsidised, these facilities could damage surrounding hotels, entertainment venues or convention places. Around Sky City, Auckland, for example, hotel rates have fallen around 10 per cent due to competition from the casino's cheap subsidised hotels.

In a booming hospitality industry with already high occupancy rates, this negative impact might be small. But with significant excess capacity, flagging tourist arrivals and already thin profit margins, the effect could be a harmful diversion of trade, loss of existing jobs and bankruptcies. Unfortunately, this is likely to be the situation we face today.

More worryingly, the subsidised infrastructure of the ICR could act as a distorting barrier to entry and investment in the high-end segment of the hospitality and convention industry that Singapore is seeking to develop further.

Such potential negative impacts typically do not feature in standard cost-benefit analyses. They are, rather, hidden financial and economic risks that are inherent in the nature of the ICR project itself.

Given these risks, to describe the ICR as an 'option' that Singapore might like to buy, as some of its defenders have described it, may be misleading. Instead, the project is perhaps more accurately characterised, in financial market parlance, as the selling of an 'uncovered option'. Besides the certain social costs and the big initial investment involved in purchasing this 'option', the total losses to the economy as a whole could be unexpectedly large, open-ended and extend over an indefinite time horizon, as in the case of the sale of an 'uncovered option' gone wrong.

Considering these risks, the question of whether there are alternative projects that could fulfil the same tourism objectives as the ICR naturally arise.

Here, one cannot help but feel that Hong Kong has chosen a better direction with its West Kowloon Cultural District (WKCD) development project.

The proposed mega development will cost $5 billion and is designed to enhance Hong Kong's position as Asia's premiere centre for the arts, culture and entertainment. The WKCD is also expected to generate 8,500 permanent new jobs.

That is better than the 1,500 to 4,000 jobs that the Singapore ICR is estimated to provide, with positive rather than negative social effects and genuine benefit to related service industries.

Just as importantly, together with Disneyworld, the WKCD could help brand Hong Kong as the leading family-friendly, sophisticated Asian international tourist destination. By comparison, what impact on Singapore's branding would the ICR have?

Would we not be diluting our tourism branding by moving closer to the niches occupied by gaming cities like Las Vegas and Macau? Is this what we want as a key part of our tourism strategy, let alone in setting the tone for Singapore's social policy?

ICR proponents argue that gambling of all sorts is already rampant in Singapore. Professor Peter Collins, Director of the Centre for the Study of Commercial Gaming in Britain, estimates that gambling per capita in Singapore is already among the highest in the world.

Establishing an ICR, its proponents argue, could capture some of the business now lost to cruises and foreign casinos, and raise tax revenues that can be used for social good as well as to rehabilitate the worst effects of problem gambling.


FRANKLY, I find this argument rather weak. The existing scale of gambling is primarily determined by social policy and regulation rather than dictated by local consumer taste.

In regulated France, for example, spending on gaming forms only 1.3 per cent of GDP. Compare this to a similarly rich, but less regulated country like Japan, where 'pachinko' gaming turnover alone forms a whopping 6.7 per cent of GDP.

Unlike Japan, Singapore is not desperate for alternative fiscal revenues.

To my mind, the admittedly high existing per capita spending on gambling in Singapore is not an argument for establishing yet another gaming venue in the form of a legal high-end casino.

Rather, it is a much stronger argument for a careful review of regulation of existing gaming facilities - including legal 4D, 'football clubs' with their gaming machines and illegal gambling - as well as of the adequacy of counselling, education and community support for existing problem gamblers.

Although superficially compelling, the ICR project, with its dark and hidden costs, is a Faustian bargain. And as with most such bargains, the devil lurks in the details.

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