1 Nov 2012

Are Casino Benefits A Gamble?

By Lawrence Bull
James Packer has got the green light for his Barangaroo casino and he's promised it will give NSW an economic boost. But will a new VIP casino and hotel be good for the state? Lawrence Bull reports
In August this year, a world-class publicity campaign serenaded New South Wales. A six star hotel; a high rollers casino; millionaire Asian tourists; hundreds of millions for the state economy.

James Packer told ABC radio that there had never been a casino like it. The development might be without precedent, but Packer has made it look easy. His company, Crown Ltd, promised $300-440 million a year to the NSW economy. The numbers came from a report they commissioned by the Allen Consulting Group.

Acting Premier Andrew Stoner repeated the "hundreds of millions" figure as fact when he promoted the idea through the media. When New Matilda asked to see the report that published the figure, we received a reply from Crown's Executive General Manager of Corporate Affairs, Karl Bitar, saying it wouldn't be made public.

Bitar was a NSW Labor Right powerbroker and the party's National Secretary, accused of involvement in rolling three premiers and a Prime Minister. He left the ALP after their NSW defeat, establishing himself as a corporate consultant and a lobbyist of the NSW, Victorian, WA and federal governments. Now he works for Crown.

He said the multimillion dollar figure represented money that would be spent at the Crown complex, with "flow on effects" for the rest of the state, but wouldn't say whether the report had been verified by anybody outside their employ.

So is this a good return for NSW? What makes a good value "state significant" property development anyway?

New Matilda asked two experts how to window shop for a billion-dollar building.

Chris Terry is an Associate Professor of Economics and Finance. And Tony Griffin is a Senior Lecturer in Tourism Management with experience in urban planning. Both work at the University of Technology Sydney.

Does investing a billion improve the economy?

Barry O'Farrell: "Any premier would be a mug if people are saying we want to invest a billion dollars in NSW not to at least hear those proponents out."

Karl Bitar: "Gross State Product ... is expected to increase by $300-$440 million per year..."

"The contribution any industry makes to the economy is judged or measured by its 'value add' ... equal to the value of its output less the value of other industries it has used," Terry says.

"I haven't seen what he's put out, but every industry does it that way... They don't use the correct measure of GDP. Gross Domestic Product is the sum of the value added by each firm or each industry. What they will do is quote the value of the output or, in some cases, the total value of the amount spent, and so that's not truly its value to the economy."

Will the Casino's flow-on effects be worthwhile?

Acting Premier Andrew Stoner: "The creation of a hotel of this stature would deliver new jobs in construction, off-site manufacturing and the tourism industry, along with hundreds of millions of dollars for the state economy each year."

Karl Bitar: "...$300-$440 million per year driven by the spending of visitors to the complex, especially overseas visitors, and the consequent flow-on effects to other industries in the State."

What is a "flow-on effect"? Does casino money really end up in our pockets?

A "multiplier" is the "flow-on effect" of wages being spent that Bitar refers to above. Terry says multipliers tend to be grossly exaggerated by lobbyists and industry:

"If every industry's multiplier were correct, the value of the economy would be about three times bigger than it actually is. If one industry gets a bit bigger, and the economy is fully employed or thereabouts [such as Sydney], then it only makes sense that other sectors will have to wind back."

"So the mining industry gets bigger, has to hire more people and so that pushes up wages, say. So a number of firms in Melbourne that have nothing to do with the industry, they contract or firms go out of business because of the mining boom. So the mining industry will say 'look how wonderful we are,' but they won't refer to all the negative consequences."

Terry regards mining as a good use of resources because the materials generally benefit people's lives. But he says a casino only benefits a portion of its gamblers and those employees and contractors who might otherwise not have as much work.

"So I'm sure they could have positive impacts on the local economy, but it's very incremental impacts, it's not gross impacts."

Can we have the hotel without the casino?

Packer: "My desire is to build the best hotel in the world in Sydney. But it needs a VIP casino in it, otherwise it is simply uneconomic."

O'Farrell: "As you'd expect from someone involved with the sector, just about every time I see Mr Packer he expresses interest in running a casino in Sydney and offers other suggestions on boosting tourism."

"It's just simply saying ‘I can take something that's not viable and add something that maybe is viable and put the two together'," Terry says. "If the hotel is not viable without it [the casino] — it's not viable."

"Industries are always trying to accrue income for themselves. In economics we call that 'rent seeking'. So they're constructing arguments as to why they should be allowed to do that. If the numbers don't stack up, logically you'd have the casino and not the hotel."

But the numbers do stack up for a new hotel in Sydney, says tourism expert Tony Griffin, because Sydney's hotels are experiencing record-breaking success. "In three years time it would be opening at an occupancy rate of close to 90 per cent," he says. "Historically, hotels have operated at about 70 per cent."

The reasons for the current high demand hark back to the late eighties, when Sydney experienced a tourism boom that made hotel developers overexcited.

"It was a building frenzy. You had Japanese investors looking to put money in them at that time, and it all got out of hand. They built too many too quickly. The result was an oversaturated market and occupancy rates dropped into the forty per cent range," Griffin says.

"So that's why developers have now tended to steer away from them."

He says only one significant hotel has been built since the Sydney Olympics, and demand will continue to rise.

"If supply doesn't rise then it's a no brainer — it's going to do okay because it has to do okay. It has rooms that people need.

"At the moment, you don't need a casino to make a hotel pay. Having said that, Barangaroo is an uncertain location. You don't know how it's going to develop and whether people are going to want to stay around there. It should be an okay location for the business market, but it could take a while to establish itself in that regard."

"They might have to basically offer the site at a heavy discount to get the investor in."

Lend Lease told New Matilda other hoteliers withdrew their bids when the hotel site was moved from it's original proposed location above the water, to alongside the dense high rise precinct.

What effect do investments like Packer's have on the wider community?

Productivity Commission report: Only 15 per cent of Australians surveyed agreed with the statement "gambling does more good than harm". 70 per cent disagreed. [1999]

Melbourne University study: "Gambling is the biggest motivation for fraud in Australia and New Zealand."

NSW Bureau of Crime Statistics & Research: 127 incidents of fraud have been reported at Sydney's casino in the past 12 years.

What about the casino's other flow-on effects, or "externalities" — spillover not on the casino's books that might affect other uninvolved parties.

"A hospital, it has positive external effects — it should improve the health of the community. Whereas a casino, as we all know, doesn't have normally positive external effects," Terry says.

Crown's secret report claims hundreds of millions for NSW; in 2009 a consortium of every casino-owning company in Australian and New Zealand commissioned the same consultants to produce a report titled ‘Casinos and the Australian Economy'.

New Matilda asked Terry to glance over its findings. He said the report redefined the concept of "externalities" to dismiss the bleak analysis of gambling's social costs by the Productivity Commission (the most comprehensive investigation of gambling in Australia at the time).

"While the social costs of gambling per se would be more severe than the social costs of a high-roller casino, the social costs would include the sorts of problems — absenteeism, depression, etc — listed in the Commission's report."

Is there an alternative?

James Packer: "A Crown integrated resort at Barangaroo would boost the economy."

It's true, a casino would attract international visitors. But how does it compare to the alternatives? How much better or worse would it be than a national monument? Or an indoor ski field? Or the world's largest aviary?

Professor Terry says a casino can only be labeled "good" if it's better than the alternative.

"Business lobby groups... always talk about the gross numbers. They never look at why this is better than something else."

A new luxury hotel — good for the economy?

Griffin says a hotel will likely be built at Barangaroo regardless of Crown, because the previous state government mandated it.

"Neither of the major bidders [Lend Lease and Multiplex] were building the hotel because they wanted to... both of them worked very hard to reduce the required floorspace that was devoted to anything other than office space," he says. "Office space is more predictable than hotels."

And despite Terry's skepticism, he believes the advantages of a six-star hotel may outweigh the disadvantages — even though only "a few people within the city of Sydney" would benefit.

"They don't actually have to show that the thing's worth $5 million or $2 trillion, or whatever, they just have to show that it would be economic and that there would be some benefits generally to activity within the economy," he says.

"It's a bit difficult for me because... I can't see what they are claiming."

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Dr Dog
Posted Thursday, November 1, 2012 - 13:35

Well if Karl Bitar's word isn't good enough for you Lawrence then I really feel sorry for you. What is the point of Karl developing all that moral flexibility if he can't use it?

The very suggestion that Packer and his high flying cronies won't ensure the flow on effect by flicking their hired serfs a substantial tip misrepresents the high roller concept.

For example they will need their shirts laundered while Crown launders their money.