Integrated resorts in Europe, take two By Andrew Tottenham, Managing Director, Tottenham & Co July 3, 2019 at 2:45 am A while ago I wrote a short piece on why there are no integrated resorts in Europe, to date. That article focussed on the problems with financing. This article will take a look at the political and administrative dimension in developing large-scale projects. On the political and administrative dimension, the reason for the absence of integrated resorts is quite obvious: it is very, very difficult to get permission to build them. With so many component parts that have to be achieved to enable a resort, it is a wonder that any have been built at all, anywhere in the world. A large integrated resort, which includes a casino, will usually require a change of law and often a reduction to the gambling tax rate. Changing laws are fraught with difficulty. It is particularly hard to get politicians behind gambling initiatives; there is very little upside for them. Politicians respond to voters, or at least to what the media is telling them voters think. In today’s economies, the arguments of more jobs and taxes do not resonate so well, with the general public becoming blasé about the promises of better times ahead. Businesses and politicians make promises that are too often not kept. Trust in our political institutions is at an all-time low.It is not surprising that it took a pair of leaders like the father of Singapore, Lee Kuan Yew, and his son, Lee Hsien Loong, to push through the legislation to allow for two of the most successful integrated resorts in the world. When it comes to public opinion about gambling, there are, and I generalise here, three broad, roughly equal-sized groups of the public at large. The first group, the “Opposers,” are completely against gambling in all its forms, although I suspect some buy lottery tickets or have the occasionally bet on big races like the Grand National, the Arc de Triomphe, or the Kentucky Derby. The second group, the “Neutrals,” don´t really have any opinion about gambling one way or the other. The third group, the “Gamblers,” like to gamble and do so. The challenge is that the Opposers are motivated and very vocal in their opposition, are highly organised, and can be quite media-savvy. They run very good campaigns, know how to use social media, get airtime and column inches, and are adept at getting their messages across.By contrast, the Neutrals and Gamblers groups are not very motivated and so mobilising any support for a new gambling initiative is practically impossible. Using media campaigns is not going to convert anyone in any of the groups to suddenly become an evangelist for gambling. It is therefore left to the promoter to argue the case for an expansion, change of law, or whatever. This is what is being seen in some of the cities in Japan. Polls show that only about 30% of the population support gambling, with 30% opposed, and yet it is those that are against gambling that get all the media attention. While work is going on to gain the political support necessary to get the law changed, the promoter will have to find a location and then option the land for the resort. Integrated resorts require large and, if possible, flattish sites, which presents a challenge if the promoter wants to be close to an urban population. In Europe, land ownership near urban centres is fragmented, so accumulation is the name of the game. What was last week a turnip field selling for €10 a square metre, which the owner would have been happy to get rid of for a 20% premium, will become a figurative gold mine that the owner will not sell for ten times the value, should it get out that the potential buyer is a casino operator. Hold outs are not uncommon. Gambling tax rates in Europe are high and mitigate against large-scale casino developments. But casinos are the engines of integrated resorts, where the exceptional return on investment is made that supports the other elements of the resort. Those other elements may barely make any money, but are a must-have if the resort is to have the scale and quality to attract people from large distances. European law has a concept called State Aid, which is generally frowned upon by the European Commission, so much so that in most cases it is illegal. A simple explanation of the rules regarding State Aid is that it is okay to grant tax breaks or reductions (that is, these are not State Aid), provided they do not confer a selective advantage on one particular entity. In other words, you cannot reduce the gambling taxes for a new casino-resort without reducing taxes for all of the casinos in the country. The Government of the day has to make a calculation whether the loss of existing casino tax revenue will be made up for by the additional taxes from the proposed resort and the additional employment. Cash-strapped governments may find this an easy decision to make: losses are certain while additional revenue is speculative. The promoter may need infrastructure improvements, such as lengthening a rail line and a new train station. To reduce the risk and boost the return, the promoter may ask that the State pay for these enhancements. The State may agree, but should it turn out that the only users of that rail extension or station are visitors to the resort or its employees, this could be considered State Aid and would therefore be illegal. The consequences of State payments being found to be illegal are that the State has to claw them back from the beneficiary. In countries where casino licenses are restricted, a public tender must be held to issue a new license. For large-scale projects, governments have to develop the tender process and the tender requests. Governments will want to get the best out of the process and the largest number of qualified bidders. This requires quite a considerable amount of effort from civil servants to produce documents and propose regulations that are going to produce responses that meet their Government´s policy goals. Potential bidders have to invest time and money to get to a point where they can submit a compliant and compelling bid. Urban planning is a nightmare in most jurisdictions around the world; in Europe we have developed it to a fine art. The planning process is expensive and time-consuming, and the outcome is unpredictable. It is not unusual for large shopping centres to be ten years or more in the planning stages. Some cities have very prescriptive urban plans, with the uses of each plot clearly defined, even if today they are fields of grass; to develop anything else requires a change to the urban plan. In one Central European country, when I asked how difficult this was and how long it might take, the response was a simultaneous sucking of teeth by all the officials at the meeting. I guessed that a tooth suck was an extremely long time. To gain permission to build, the promoter has to undertake an Environmental Impact Assessment (EIA). What are the potential impacts of the development on the site and its surroundings and what can be done to mitigate those impacts? The results of these assessments have to go through a public consultation process and are usually met with objections from concerned local residents and environmentalists. Hopefully there are no rare birds nesting on the site, or that it is a breeding ground for an endangered species of newt; if so, you can kiss your project goodbye. If the EIA is approved, the objectors can appeal, and as a last resort go to the courts for a judicial review, a process that examines how the decision was made. The word “judicial” means “more lawyers are involved”; more lawyers means even more money (and time). The Hard Rock BCN World project in Tarragona, Spain, was first announced by the Catalan Government in 2012, and has since been hit by delay after delay. The political cycle has not been kind to this project. Seven years later, it is still in the early stages of the planning process. The last hurdle is getting building plans approved and obtaining the permit to build. This is not as straightforward as it may appear. Building codes in Europe do not envisage large-scale casino-resort developments. Fire regulations usually do not allow 10,000 square metre or more voids with 15-metre-high ceilings and no fire walls. These regulations will have to be changed, which takes even more time; meanwhile the promoter has all of their investment at risk. It is possible to speed things up and do some of these workstreams simultaneously, but that means capital is spent at a faster rate and more money is at risk at any of these decision points. In theory, then, if the promoter lives long enough to get through all of this, they can start to build their shiny new integrated resort! But it always makes me laugh when I hear people state that if they win a tender, they will have their project open in four years. Hah!