Memorandum from CIBC World Markets (DGB
150)
BACKGROUND
Over the past two years CIBC World Markets has
regularly provided informal consultation to DCMS regarding the
proposed Gambling Bill. CIBC also hosted two closed door meetings
between DCMS and major casino industry executives from around
the world, one in December 2002, and the second in June 2003.
CIBC has also provided both DCMS and HM Customs & Excise with
financial models of the post reform UK gaming industry CIBC is
recognized as a world leader in advising and financing the gambling
industry. CIBC is a founding member of the Cross Industry Group
and the only financial institution that is a member.
We have reviewed the Draft Bill, and read the
testimony provided to date to the Scrutiny Committee, and as a
result are providing the following supplemental submission that
we hope will help to clarify some of the key remaining outstanding
issues.
DEFINITION OF
CASINO SIZE
We have previously submitted analysis breaking
the new casino market into four categories:
— Large, "Resort" style casinos,
defined as 100,000 or more square feet of gaming space, 40+ table
games, 2,000+ slot machines, and significant food, beverage, entertainment
and hospitality amenities, with total size likely exceeding 300,000
square feet (500,000+ square feet with hotel rooms), and a capital
investment of GBP 200+ million.
— Medium sized "Local/Regional"
casinos, defined as 25,000-60,000 square feet of gaming space,
40 or more table games, 500 to 1,500 slot machines, food, beverage
and entertainment amenities, with total size ranging from 50,000
to 150,000 square feet, and a capital investment of GBP 15-100
million, depending on the level of non gaming amenities provided.
— Small new "niche" casinos
of less than 40 table games.
— Existing "Niche" casinos.
Based on the current draft Bill, we do not believe
that the absolute number of casinos operating in the UK will increase
dramatically from current levels. We believe that the UK market
can support 5-10 "Resort" style casinos and, over time,
70-100 medium sized "Local/Regional" casinos. Note that
the market will likely be further segmented into Local casinos
and Regional casinos. Local casinos would have the minimum number
of tables (40) and 500-600 slot machines, similar to the larger
French casinos, with gaming space of 25,000-30,000 square feet,
and total space of 35,000 to 60,000 square feet including limited
food, beverage and entertainment amenities and back of the house
service areas. Regional casinos would be similar to the U.S. regional
model, with 40+ table games, 1,000 to 1,500 slot machines, significantly
more food, beverage and entertainment amenities than a local casino,
casino space of 40,000 to 60,000 square feet, and total space
of 125,000 to 150,000 square feet.
If the number of "Resort" casinos
is allowed to increase, the number of medium sized casinos will
decrease. We believe that very few if any new small "niche"
casinos will be built, and that many of the existing casinos will
be moved to new locations and expanded. Our model suggests 50-70
of the existing properties surviving with increased number of
machines. These existing properties would be aided significantly
if they have the ability to link jackpots electronically for their
machines. Our model suggests a total casino market of 130-180
casinos throughout the UK five years after implementation of gaming
reform. Those casinos would have 60,000-90,000 total machines.
We are sympathetic to concerns regarding a proliferation
of gaming machines, and therefore recommend that the government
consider initially capping the medium sized casinos at 1,500 machines,
with only the "Resort" casinos permitted to have unlimited
machines. We believe that the Grandfathered existing casinos will
need some additional support in order to be competitive, either
in the form of a modest adjustment to the ratio of machines per
table, or the linking of jackpots, or both. There is precedent
for the linking of machines in progressive jackpots in the current
market. Both progressive stud poker and the Big Game in bingo
are legal wide area progressives operating today in the UK.
We believe that significant confusion exists
over the definition of a "Local/Regional Casino". We
recommend that if the Government wants to prevent a proliferation
of "gaming sheds", it define these casinos with a minimum
and a maximum number of machines, and a minimum amount of capital
investment. We have consistently recommended to DCMS "raising
the bar" with regard to minimum size for unlimited machines,
and are supportive of DCMS' proposals regarding small casinos,
other than the inclusion of the "grandfather" rights
we suggest above. In order further control proliferation, and
encourage significant capital investment, we suggest 500 machines
as a minimum for a casino of 40 or more table games, other than
a "Resort" casino, and 1,500 machines as a maximum,
with a minimum capital investment of GBP 15 million excluding
real estate.
PLANNING
We have noted a significant amount of confusion
and concern regarding the role of planning in the shaping of the
casino industry post enactment of the planned gambling reforms.
We believe strongly that a free market should apply with Local
Authorities, based on guidance from the Gambling Commission, determining
the size and scope of casinos in their jurisdiction. We understand
and agree with the statement that casinos can act as powerful
tools for economic development, job creation and growth. We believe
that the Regional Development Authorities should act in a consultative
fashion with regard to placement of "Resort" casinos,
but should not be involved in the placement of "Local/Regional"
casinos. The most successful gaming markets in the US—Atlantic
City, Mississippi and Nevada—have not placed any restrictions
on competition, but have established certain minimum requirements
with regard to capital investment, amenities and hotel rooms.
ECONOMIC IMPACT
CIBC supports the findings of the Pion Report
commissioned by the CIG. In addition, we have revised our model
to reflect the proposals embodied in the Draft Bill. Our model
predicts that the post reform UK gaming market will look as follows:
— Total number of casinos: 130-180;
5 to 10 resort casinos, 70 to 100 local and/or regional casinos,
and the balance small "niche" casinos.
— Gross Gaming Revenues: GBP 3.8 to
5.0+ billion.
— Gaming Taxes (@ 15%): GBP 0.6 to
0.8 billion, plus VAT.
— Capital Investment: GBP 6.0 to 8.0
billion.
— Job Creation: 50-75,000 direct; 150,000+
total.
We believe that it will take several years to
reach these estimates, given the 1-2 year construction time for
the medium sized and larger properties after all requisite approvals
and consents are obtained.
Key assumptions include:
Taxes: 15%; higher tax rates will hinder capital
investment. A tax rate of more than 20% would preclude many operators
from investing in the UK.
Planning: no planning restrictions other than
as outlined.
MACHINE LINKAGE;
PUBS AND
CLUBS
We believe that the Government should consider
implementing a central determinant system for AWP machines in
order to enhance control, improve tax collection, reduce fraud
and the number of illegal machines, while at the same time leveraging
technology to enhance the entertainment aspects of the AWP product
and reducing costs for the AWP and venue operators. Pub operators
are justifiably seeking 4 AWP machines by right and such a concession
could be counterbalanced by the requirement for a central determinant
system.
February 2004
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