ASSESSMENT REPORT ECHO ENTERTAINMENT GROUP DEVELOPMENT OF THE STAR - Unsolicited Proposal
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STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Redacted version
Unsolicited Proposal
ASSESSMENT
REPORT
ECHO ENTERTAINMENT
GROUP DEVELOPMENT
OF THE STAR
STAG E 2
JULY 2013
1#2
CONTENTS
1 Introduction 4
2 Gambling and gaming in NSW 6
3 Summary of Echo’s Proposal 8
3.2 Commitments sought by Echo 10
3.3 Echo’s proposed commitments 11
3.4 Key Proposed Financial Details 14
4 Assessment of the Proposal 16
4.1 Assessment Methodology 16
4.2 Uniqueness 16
4.3 Value to Government 17
4.4 Whole of Government Impact 18
4.5 Appropriateness of return on investment 19
4.6 Capability and capacity 20
4.7 Affordability 21
4.8 Risk Allocation 22
5 Assessment Conclusions 24
#31 INTRODUCTION
This Assessment Report considers the Unsolicited Proposal Stage 3, whichever of these processes is required (including
received from Echo Entertainment Group Ltd (Echo) that seeks public consultation) will then commence.
an extension of The Star’s exclusivity arrangement post 2019.
This Assessment has been conducted by the NSW Government Unsolicited Proposals must provide
and overseen by an independently chaired Steering Committee unique benefits to NSW
in accordance with the NSW Government Unsolicited Proposals
Guidelines, 2012. Unsolicited Proposals need to provide unique benefits to justify
direct negotiations between Government and the private sector.
This Chapter explains the Unsolicited Proposal process, the The Government’s preferred position is stated in the Guidelines
decision makers and the opportunities for the community and to be testing the market to maximise value–for–money
stakeholders to have their say in the next steps. outcomes and to provide fair and equal opportunities.
Encouraging innovative ideas from the private sector Therefore Unsolicited Proposals are rigorously assessed against
the following criteria:
The NSW Government established an Unsolicited Proposal • Unique benefits of the proposal — such as property
process in 2012 to encourage ideas from the private sector that ownership or intellectual property
could provide benefits to the people of NSW. • Value to Government — including economic benefit,
improved service delivery, whole-of-life costs, risk transfer,
The Guidelines for the submission and assessment of timely achievement of objectives and qualitative outcomes
Unsolicited Proposals sets out a structured and streamlined • Whole–of–Government impact, including opportunity
approach for the NSW Government and the private sector to cost
work together to consider innovative ideas. The Unsolicited • Appropriateness of return on investment obtained by the
Proposal process involves three stages. Proponent given project risks
• Capability and capacity of Proponent to deliver the
Stage 1 — Initial Submission and Strategic Assessment, includes proposal
a comprehensive initial assessment of the proposal to identify • Affordability, and
the potential benefit to Government of further consideration • Appropriate risk allocation.
and development with the Proponent. The Echo Unsolicited
Proposal progressed successfully through this stage in May 2013. The subsequent chapters of this Report assess the Echo proposal
against each of these criteria.
Stage 2 — Detailed Proposal, requires the Proponent and
Government to work co–operatively in the development A robust assessment process has been implemented
and assessment of a Detailed Proposal. This document is the
Assessment Report for Stage 2 of the Unsolicited Proposal A Steering Committee was established for consideration of
process. The outcome of Stage 2 is a decision to progress to Stage the Unsolicited Proposals. The Committee members are Mr
3, or that the Government does not wish to proceed. David Murray AO, the independent Chair, the Director General
Department of Premier & Cabinet (DPC), Secretary NSW
Stage 3 — Negotiation of a Final Binding Offer, involves the Treasury, and the Director General Department of Trade and
finalisation of all outstanding issues with a view to entering into a Investment, Regional Infrastructure and Services (DTIRIS).
binding agreement, should the Government accept the final offer.
None of the above replaces the normal processes of legislation,
development assessment or regulation. If a proposal completes
4STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
The Steering Committee is supported by an Assessment Panel The assessment precedes normal approvals and
with the following membership: consultation
• Deputy Director General, DPC (Chair)
• Deputy Secretary, NSW Treasury A proposal that successfully makes it through the Unsolicited
• Acting Deputy Director General, DTIRIS. Proposal process is still required to go through all relevant
approval processes including:
The Hon. Ken Handley AO QC has provided probity supervision • Parliamentary processes for the change of legislation, if
and advice throughout the Stage 2 process. required
• Planning development assessment approval processes
During the Stage 2 assessment, the Assessment Panel held 20 including community consultation, and
meetings with representatives of Echo to work co-operatively on • Independent licensing process, if required.
development of the Detailed Proposal. The Chair of the Steering •
Committee also met with Echo representatives twice to receive a These processes include consultation with stakeholders and the
briefing on the preliminary final proposal and identify key issues community.
for the assessment.
The process for the assessment of the Echo proposal is
illustrated as follows:
CROWN UNSOLICITED PROPOSAL UNSOLICITED PARLIAMENTARY
PROPOSAL
SELECTED LEGISLATIVE CHANGE
STAGE STAGE PROCESS IF REQUIRED
1 2
DEVELOPMENT
COMPARISON OF STAGE APPROVAL
ECHO UNSOLICITED PROPOSAL
PROPOSALS
3 PROCESS
STAGE STAGE
INDEPENDENT
1 2 LICENSING
STAGE 1 STAGE 2 STAGE 3
Steering Committee Steering Committee Steering Committee Government The proposal is then
agree proposal considers detailed compared mutually decides whether subject to all relevant
meets criteria for proposals and suit- exclusive proposals. to accept a final approval processes,
assessment as an ability for progres- Only the proposal which binding offer. including consultation
Unsolicited sion to Stage 3 best meets the criteria with stakeholders and
Proposal progresses to Stage 3. the community.
52 GAMBLING AND
GAMING IN NSW
The Unsolicited Proposal received from Echo seeks an extension with significant existing and new casino and resort facilities in
of the exclusive arrangement currently in place in NSW that Singapore, Malaysia, Manila, Macau, and Las Vegas.
allows only one casino to operate until 2019.
Echo acknowledges that Sydney has generally underperformed
This Chapter explains the current policy settings and legislation compared with Melbourne since the mid–1990s. Echo has
for gambling and gaming in NSW. A comparison is made estimated that it has and Crown Melbourne of the
between NSW and other jurisdictions in Australia and overseas. latest reported market shares for Australian VIP revenues.
The Star City Casino has exclusivity until 2019 Potential exists for substantial market growth
In December 1994, the NSW Government issued a 99-year The international VIP gaming market is experiencing high
casino licence and The Star City Casino subsequently opened in growth originating in Asia. Accepted estimates are from
Pyrmont with exclusivity until 2006. A payment for $376million $8 billion in 2006–7 to $34 billion in 2011–12. Australia currently
was made to the NSW Government, comprising $256million for has 3% ($1 billion) of this market share, third behind Macau
the casino licence and $120million as pre-paid rent for the first (82%) and Singapore (10%).
10 years usage of the casino site leased from the State.
Casino gaming is also an attractor for China’s growing middle class,
In 2008 the Government extended the exclusivity agreement who value access to gambling opportunities within an integrated
with Echo, the operator of The Star Casino at Pyrmont, until resort that offers a range of leisure and cultural facilities.
November 2019, and received an additional licence fee of
$100 million. The exclusivity agreement imposes penalties on The definition of a VIP player differs
the NSW Government should it permit casino type gaming to be
undertaken at another site before 14 November 2019. In Australia, play is divided for tax purposes into rebate (low
tax) and non–rebate (higher taxed) categories. Lower rates are
Gambling is a large industry in Australia offered to help Australian casinos compete for highly mobile
wealthy customers located in distant markets. Some market
Gambling is a common recreational pursuit in which around participants define these people as ‘VIPs’.
70% of Australians participate. Australia wide, gambling
expenditure is $18.2 billion per annum and in NSW gambling Rebate based players are required to deposit money up front
expenditure is $7.4 billion per annum (2011–12). to access VIP gaming facilities and benefits. The amount of
up–front money in NSW is $75,000 for international VIP
More than half this revenue comes from electronic gaming players and $25,000 for interstate VIPs. NSW residents cannot
machines (mainly poker machines and some from electronic participate in rebate based play in NSW.
versions of casino table games). Casino gaming makes up 18% of
the gambling expenditure across Australia, but only 10% in NSW. Other market participants define ‘VIPs’ to include all individuals
who gamble large amounts of money, irrespective of the
There are now 13 casinos in Australia. The largest casino is Crown applicable tax category. From an operational perspective,
Entertainment Complex in Melbourne. Queensland has four casinos ‘rate’ their frequent players based on their expenditure,
casinos, Northern Territory and Tasmania each have two casinos and ‘promote’ those who gamble more to ‘VIP’ gaming areas,
and the remaining States and the ACT all have one casino. where additional incentives and superior facilities are offered.
The casinos in Australia are not only competing with each
other to attract interstate and international players, but also
6STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
There is also great variation in tax rates and 160,000 adults) suffer significant problems from gambling.
In NSW the prevalence rate is 0.8%. 230,000 to 350,000
Tax is applied to ‘gaming revenue’, which is the difference Australians were identified as experiencing moderate risks that
between bets placed and winnings paid. Tax rates are normally may make them vulnerable to problem gambling.
quoted inclusive of GST.
Electronic gaming machines are the prime source of
In NSW, rebate based play is taxed at a rate of 10% (includes problem gambling
GST) and non–rebate based play is taxed on a sliding scale that
commences at 27.5%, rising to a top rate of 50% (includes GST Electronic gaming machines (mainly poker machines) are the
and Responsible Gaming Levy). Victoria has slightly higher tax prime source of problem gambling in Australia. Around 4% of
rates on rebate based play, and lower rates on non–rebate based Australian adults play poker machines weekly, and 15% of these
play. players are problem gamblers.
Internationally, the extremes are Macau with a tax rate of 35% The average annual expenditure for problem gamblers is
and Singapore with a tax rate of 5% of gaming revenue. To $21,000, 41% of their annual income on average. The social cost
compare tax rates fairly, upfront or ongoing licence fees must of problem gambling is estimated to be at least $4.7 billion per
also be considered. annum in Australia.
Asian tourists are attracted to integrated Problem gambling is becoming less prevalent
resorts that include gaming
Over the last decade Governments have put in place an array
Most casinos are associated with large scale leisure and of regulations and measures to reduce harm to gamblers, with
entertainment destinations and include high–end retail, food varying degrees of success. There are conflicting views from
and beverage, entertainment and cultural facilities, plus large– industry and other organisations around whether the problem
scale convention facilities. gambling prevalence rates have declined but on balance, the
evidence suggest they have fallen.
International evidence supports the appeal of these integrated
resorts and their ability to drive tourism and provide greater Pilot government programs (ACT and South Australia) and
economic benefits than stand–alone purpose built gaming voluntary programs (run by BetSafe Pty Ltd) have reported
facilities. The opening of two integrated resorts in Singapore some measure of success and a growing acceptance of the
in 2010 resulted in a 49% increase in tourism revenue and was value of the third party exclusion programs. Third party
matched by a 20% increase in international arrivals, the majority exclusions allow family members and/or friends (the third
of which were Asian. party) of problem gamblers the right to apply for their loved
one’s exclusion form gambling venues in order to prevent an
Less than 1% of Australians are problem gamblers escalation of their gambling.
Problem gamblers are players that spend more than they can Echo is proposing to create an integrated super–precinct to
afford without the usual capacity of self–control to correct the attract visitors and tourists by expanding The Star casino and
behaviour. improving the physical connectivity between Pyrmont and
the CBD.
The Productivity Commission (2010) has recently reviewed
the social and economic impacts of gambling in Australia and
concluded that less than 1% of Australians (between 80,000
73 SUMMARY OF
ECHO’S PROPOSAL
This section summarises the two options provided by Echo in ECHO’S PROPOSAL — OPTION 2
their Detailed Proposal and includes:
• The commitments Echo is seeking from the NSW Echo recognises the priority that the NSW Government places
Government on the successful development of Barangaroo and proposes an
• The commitments Echo proposes to make, and alternative ‘reduced exclusivity’ proposal that it believes could
• The key economic and financial data, as provided by Echo permit the entry of a limited VIP only operation at Barangaroo,
in their proposal. while it retained exclusivity in the broader market.
Echo’s proposal is available at Echo’s proposed definition of VIP gaming that would be
www.nsw.gov.au/unsolicitedproposals permitted involves:
• Customers could only play as rebate based players, paying
ECHO’S PROPOSAL — OPTION 1 front money of $25,000 for Australians resident outside
NSW, and $75,000 for international visitors
Echo’s preferred proposal involves incremental investment of • NSW VIP players could not participate
$1.1billion to further expand The Star into a large scale globally • There could be no electronic forms of gaming, including
competitive integrated resort that will attract large numbers of electronic versions of table games or poker machines.
tourists from Asia. The investment also includes $130 million
for infrastructure to connect The Star and Pyrmont to Darling Echo proposes that, if granted this reduced exclusivity, it
Harbour and Barangaroo. would commit to implement all but $40 million of its proposed
investment program, delivering almost the same tourism
Echo’s Option 1 also includes a $250million payment to secure benefits of its preferred full exclusivity proposal. However, there
a 15 year extension on the current exclusive status as the sole would be no exclusivity payment made under this option.
casino operator in NSW.
The development includes two additional hotels with
approximately 500 beds which are 5 star or better.
Other proposed features include:
• five luxury villas with private infinity pools;
• a new ballroom and meeting spaces;
• an international food–court;
• new restaurants and buffet,
• outdoor dining and entertainment areas;
• multiple pools and entertainment facilities;
• high–end feature pools on top of the two new hotel towers;
• new health club/spas;
• additional underground parking;
• 3,000 square metres of additional retail space;
• expanded VIP gaming areas.
8STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Construction could be completed by 2017
Table 3.1 below presents the estimated timeframes for planning
and construction. The expected opening date of the hotel
investment is proposed by FY2019, subject to the receipt of all
required approvals.
Connectivity between Pyrmont and Barangaroo
The proposed infrastructure would provide improved
pedestrian access to the Barangaroo area, initiatives to link
to existing public transport mechanisms, and additional car
parking. Specific investments include:
• a footbridge between Pyrmont and Barangaroo, with an
investment of around $75 million
• improvements to the waterfront foreshore walk and
parklands, transformation of the Darling Harbour Precinct
and improvements to accessibility. This would have an
investment of around $45 million, and
• an upgrade to the light rail stop at The Star, with an
investment of around $10 million.
T
dEVELOPmENT STAGE TImE fRAmES
design and approval 9 months
detail design and construction 27 months
Opening after 36 months
93.2 COMMITMENTS SOUGHT Echo commits to a minimum gaming tax guarantee
BY ECHO
Echo’s preferred option would provide a minimum gaming tax
guarantee (with appropriate conditions) based on the principle
Gaming licence exclusivity until 2034 that gaming taxes payable to the NSW Government will be no
less than the level expected in the event that Echo’s proposal
Echo seeks to extend its existing exclusivity for 15 years, does not proceed.
beyond its expiry in November 2019.
Echo seeks the removal of bet limit restrictions
Echo seeks an amended tax regime
Echo’s licence currently permits 1,500 poker machines.
Echo proposes an amendment of the current tax regime for This is not proposed to change. However, it does request the
non–rebate based play. First portion of gaming revenue is removal of regulatory or bet limit restrictions on electronic
currently taxed at 27.5%. The base growth is adjusted to reflect gaming machines anywhere in the casino. Echo would apply
the CPI each year. Above this, a sliding scale of increasing rates operationally deferred bet limits to suit its customers. It is
applies, up to a maximum of 50%. Echo seeks a $250million proposed that the removal of these restrictions would be made
increase in the threshold where the sliding scale starts, to effective in 2013/14, if its proposal was accepted by Government.
commence when development is completed.
Echo ask that the development be ‘State Significant’
As it is expect that Echo’s revenue will have increased to exceed
the proposed top rate by that time, the proposal will therefore Echo requests a Government commitment on relevant planning
reduce the tax payable by $64million pa, as indicated in the approvals – specifically, making The Star development a project
table 3.3 opposite. Echo proposes that a 50% marginal tax rate of ‘state significance’. It also seeks a commitment to agree to
presents a barrier to further investment, but that the growth construction of car parking underneath Government owned
achieved after investment will offset the concession that it seeks. land at Pyrmont. After construction, the park and would be
The total assessed impact of the proposal licence fee, tax change restored and embellished.
and growth is presented in Chapter 4.
TABLE 3.2: 2013 TAXES RATES NON-REBATE
60%
Marginal Gaming Tax
RGL
50%
GST
40%
Tax Rate
30%
20%
10%
0%
$792m
Revenue Threshold
10STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Echo seeks regulatory reform
Echo seeks a review and reforms of The Star’s regulatory
environment. It proposes that this will enhance its
competitiveness and efficiency through streamlining and
modernising the regulatory framework.
Echo requests that review be conducted with two
main objectives:
• to ensure that the NSW regulatory environment and
framework provides The Star with an opportunity to be
competitive with other Integrated Resorts in Australia and
the region; and
• to modernise and streamline the regulatory environment.
It proposes that this review commence after Stage 3, with a
working group constituted from relevant stakeholders.
It proposes that measures to reform regulation would come
into force as quickly as possible.
TABLE 3.3: STAR PROPOSED TAX RATES — FY2025*
* TAX RATES INCLUDE GST AND RESPONSIBLE GAMING LEVY BUT TAX COLLECTED EXCLUDES GST
60%
ECHO:
Proposed
50% Regime
DIFFERENCE BETWEEN BAU ECHO:
AND PROPOSED TAX REGIMES BAU
40% TAX OF
$64M
30%
20%
10%
0%
0 500 1000 1500 2000
Non–Rebate Gaming Revenue ($M)
113.3 ECHO’S PROPOSED Echo commits investment of $1.1billion
COMMITMENTS
A summary of Echo’s proposed investments, should it be granted
full exclusivity, are listed below (Table 3.4).
In return for certainty in relation to the above, Echo proposes a
series of commitments: Echo commits $130million for parklands and
• Total incremental investment of $1.1billion, including connectivity
$130 million of public invested to improve and connect the
precinct Echo has committed to the development of a ‘Bowline’ —
• Ongoing maintenance of the integrated resort a series of parks, art installations and other amenities located
• Installing state–of–the–art air quality technology along the foreshore walk and parklands. Echo proposes that this
according to a regularly updated air quality management will connect the existing facilities to create a unique harbour
plan, and front entertainment district, and be an attraction similar to the
• Ongoing delivery of responsible gambling programs. Highline in New York.
TABLE 3.4 ECHO’S PROPOSED INVESTMENT — OPTION 1
SOURCE: ECHO PROPOSAL 21 JUNE 2013
INVESTMENT COMPONENT PROPOSED INVESTMENT ($M)
Hotels 440
Restaurants 56
Bars 72
Ballroom/meeting rooms 20
Retail shops 25
Connectivity initiatives 130
Car park 60
Apartment repurchase and hotel conversion 30
Main Gaming Floor building works 30
VIP Gaming and PGR expansion 150
Infrastructure works, fees and contingency 110
Total investment 1,123
12STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
The Bowline will connect the International Convention Centre assistance to patrons;
(ICC), the Sydney International Conference, Exhibition • counselling services;
and Entertainment Precinct (SICEEP), Barangaroo, and the • partnership arrangements enabling voluntarily exclusion
proposed integrated connected waterfront resort at The Star. from the casino by patrons, without them having to attend
Its proposed features are listed in Table 3.5 below. the casino;
• a full–time Community Engagement Manager dedicated
Echo commits to continue its to engaging stakeholders in RG; and
responsible gaming framework • a voluntary pre–commitment system which provides
patrons with the ability to set limits on play.
Echo notes that it currently has an extensive and globally
recognised Responsible Gaming (RG) framework, which
includes:
• all staff members receiving comprehensive RG training;
• dedicated Patron Liaison Managers which work with
a team of trained, professional senior staff to provide
TABLE 3.5: COMPONENTS OF THE PROPOSED PRECINCT
SOURCE: ECHO PROPOSAL 21 JUNE 2013
DEVELOPMENT COMMENT
Art A series of sculptures, with concepts designed in partnership
with the Museum of Contemporary Art. Travelling and
permanent sculptures and artwork will be encouraged
through the green space
Parks Three enhanced parks — Pyrmont Bay Park, Baalaarat Infinity
Park, and Metcalfe Mishow Park
Paths Bicycle and pedestrian parks along the Bowline to connect
with existing routes
Connectivity and transport A pedestrian and bicycle bridge to link Pyrmont and
Barangaroo. Could include a trolley car to transport pedestrians
and connect all major buildings along the Bowline
Technology A wireless network and security cameras throughout
Lighting Lights to change colour for seasons, holidays or public events
MiShow Visitors will be able to download an app and use it to design and
program various elements of the Bowline in designated areas
Light rail Upgrades to the existing light rail station
Energy Use of solar, wind and geothermal energy throughout the area
13Echo proposes to extend existing programs and 3.4 KEY PROPOSED
fund responsible gaming research FINANCIAL DETAILS
Echo would also seek to extend existing programs and Table 3.6 below summarises the financial proposal submitted by
initiatives. This could include: Echo. This section provides an assessment of Echo’s proposal in
• an extension of Echo’s current program; and accordance with the Guidelines for Unsolicited Proposals.
• an expansion of the company’s Responsible Gaming
Liaison Officer model to all senior and operational
management.
Echo would also commit to funding a responsible gaming
research facility or initiative at one of Sydney’s leading
universities. This would aim to assist the NSW Government in
setting RG policy in the state, and ensure that NSW is a global
leader on RG policy setting.
TABLE 3.6 ECHO FINANCIAL PROPOSAL SUMMARY
FINANCIAL METRIC RESULT
Total Capital Investment
Licence Fee
Project IRR
Equity Return
NPV
KEY ASSUMPTIONS
MGF EGM Revenue Uplift
MGF EGM Growth Rate
MGF Table Revenue Uplift
MGF Table Growth Rate
PGR Revenue Uplift
PGR Growth Rate
14STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
FINANCIAL METRIC RESULT
Domestic Rebate Revenue Uplift
Domestic Rebate Growth Rate
International Rebate Revenue Uplift
International Rebate Growth Rate
PROPOSED TAX RATES
27.5% + current super tax regime with
Local Gaming
threshold adjustments
Interstate Gaming 10.0%
International Gaming 10.0%
154 ASSESSMENT OF
THE PROPOSAL
This section provides an assessment of Echo’s proposal in 4.2 UNIQUENESS
accordance with the Guidelines for Unsolicited Proposals.
Unsolicited Proposals are required to demonstrate unique
elements. These may include characteristics such as:
• Intellectual property or genuinely innovative ideas
4.1 ASSESSMENT METHODOLOGY • Ownership of real property
• Ownership of software or technology offering a unique
The assessment applies the seven criteria in the Unsolicited benefit
Proposals Guideline to the proposal. The approach to each • Unique financial arrangements
criterion is as follows: • Unique ability to deliver a strategic outcome, or
• The proposal cannot proceed to stage 3 unless: • Other demonstrably unique elements.
—— Uniqueness justifies direct dealing
—— The proponent demonstrates sufficient capacity and The unique elements of Echo’s proposal correspond with
capability to deliver the project ownership of real and intellectual property and the ability to
—— The project is affordable for Government deliver a strategic outcome.
• Performance against the value to Government criteria has Echo holds NSW’s only casino licence
focussed on analysis of:
—— The net economic benefit to the NSW economy, Under the casino model in NSW, Echo is the only party currently
quantified as addition to Gross State Product capable of holding or extending exclusivity arrangements. It is
—— The value of additional licence fee and taxation licensed until 2093, with current exclusivity until November
revenue to the State, expressed as net present value 2019. The assessment agrees that this aspect of Echo’s proposal
—— Other benefits that cannot be readily quantified. These satisfies this criteria.
are described so that they can be taken into account
Location of The Star and unique connectivity and
• Whole of Government impact assessment has focussed integration
on potential social impacts of problem gambling, and
the wider opportunity costs for future competition and Echo proposes that the scale and footprint of the existing facility
casino gaming policy options. Impacts on the surrounding at The Star means that it has a unique capability to develop a
precincts are also considered. large scale Integrated Resort.
• Appropriateness of return analysis has considered Echo claims that it is unique in its funding position and
whether the Government, on behalf of taxpayers, would according ability to invest in tourism infrastructure to the scale
receive a fair share of returns from the project. necessary to drive the forecast taxation revenues.
• Risk allocation analysis considers what risks are proposed
for Government, and whether risks is assigned to the party
best placed to hold it
Once all criteria have been applied, an overall conclusion is
presented. Key residual matters are then also highlighted, with
proposed approaches to resolution.
16STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Echo proposes that it is uniquely positioned to make a the initial investment phase of the project, the ongoing
substantial investment in tourism infrastructure in and around operations and through boosting tourism to NSW.
The Star which would not be economic on a stand–alone basis. Echo expects to directly employ an additional 1,458 people
Echo further proposes that the current location of The Star, across NSW when its new investment is mature in financial year
in proximity to key Sydney tourism destinations, makes its FY2025.
proposal unique.
Deloitte’s assessment finds that the estimated economic benefits
Specifically, Echo believes that its transport investment proposal associated with the project would be an increase in gross state
has the ability to uniquely integrate The Star with ICC Sydney, product (GSP) of $350million per annum for FY2025 (which is
Darling Harbour and Barangaroo. the same as stated in Echo’s proposal).
Enhance attractiveness of Sydney as an events Growth in tax and fee revenue equivalent to
destination $337million
Echo also proposes that it has an unrivalled ability to enhance Echo proposes an exclusivity fee of $250million, paid over 19
the attractiveness of Sydney as an events destination through the years. Echo offers to pay $100million up front if requested.
large-scale Integrated Resort development. Echo claims that it is Deloitte estimates that when combined with proposed changes
unique because the existing facilities at The Star are strategically to tax rates and anticipated growth, the estimated net present
located within the new feature precinct, and because The Star is value of additional payments to the State is $337million (NPV to
one of NSW’s largest leisure and entertainment providers. FY35).
Under its Option 1, Echo has proposed a minimum gaming
tax guarantee for the State to receive no less than the level
4.3 VALUE TO GOVERNMENT expected in the event that Echo’s proposal does not proceed.
The guarantee is estimated on annual escalation of 3.5%, which
The assessment of Echo’s proposal in relation to the second is lower than is forecast by both Echo and NSW Treasury.
assessment criteria of value to Government takes into account Nonetheless, the guarantee does have some utility in the event
the economic benefit, whole of life costs, risk transfer, timely of sharply adverse market conditions (down 40% estimated for
achievement of objectives and qualitative outcomes. FY2025) during Echo’s extended period of exclusivity.
For public infrastructure, a public sector comparator is normally
used to ensure that there is value in direct dealing with the Material costs to Government
private sector. However, in the case of private tourism and
gambling facilities, this approach is not appropriate. The proposal states that the development will not impose any
material costs for the NSW Government. However, one potential
Echo’s proposal includes many components which contribute material cost would be to support the cost of construction of
to overall value to the Government and NSW. For the purposes the proposed bridge, should it prove more costly than Echo has
of a clear analysis, the Assessment Panel has separated these proposed. The Government would not be required to meet this cost,
components into core issues and other considerations. The core but Echo would propose an alternative solution for connectivity in
issues have been assessed in greater detail. this case, and would invest only the costs of the alternative.
The core issues of the proposal in relation to value to The Government would incur additional costs of ongoing
Government include direct implications for Government regulation which could be recovered from Echo.
revenue and indirect implications as a result of broader
economic benefits. They encapsulate the following components Increase to international tourist inflows from Asia
of the proposal:
• Growth of the economy and in employment Echo’s proposal highlights that there is significant scope for
• Increased licence fee and taxation revenue growth in Sydney’s international tourist inflows from Asia, and
• Material costs to Government. this could be bolstered by the development of an Integrated
Resort. In an increasingly competitive global tourism market,
Echo claims that its proposed integrated resort will improve the
1,458 additional jobs and $350million increase to GSP competitiveness of NSW as a tourist destination.
According to the PwC Economic Assessment report, Echo’s PwC modelling examined the incremental impact on tourism of
proposal will primarily impact on the NSW economy through Echo’s full exclusivity proposal, compared to a base case where
17Echo continued operating as the exclusive owner/operator in Harms associated with problem gambling include adverse impacts
NSW, with no additional investment. on people’s health, jobs, finances, emotional state and relationships.
While some of these less direct impacts are difficult to accurately
The modelling found an incremental annual impact on quantify, current estimates of the social cost of problem gambling is
international tourism of approximately 242,000 visitors by around $4.7billion a year in Australia.
FY2019 when construction was completed and 281,000 visitors
by FY2025. There is strong evidence (Productivity Report 2010 and Victoria
Commission for Gambling Regulation 2009) that transfer of
According to Business Events NSW the current Darling Harbour machines from one location to another results in an increase of
Live development combined with the enhanced and connected expenditure of poker machines. This is consistent with Echo’s
entertainment offering proposed by Echo will enhance the ability proposal. The ability to relocate and reconfigure machines
of Sydney to attract additional convention business to the State. in public areas therefore appears to have the potential to
exacerbate the extent of problem gambling for NSW residents.
4.4 WHOLE OF GOVERNMENT The assessment recommends that bet limits should remain on
IMPACT machines that are not located within VIP or other private areas
approved by the independent regulator.
The Echo proposal has been assessed against the impact of the
proposal on the full range of issues including social impacts Echo commits to maintain existing responsible
and an evaluation of the opportunity costs associated with the gambling programs and fund University research
development.
The Echo proposal states that its current responsible gaming
Social impacts of expanded gaming facilities policy has been consistently recognised in the form of a ‘world
leader’ statues in the Dow Jones Sustainability Index. Echo’s
The core potential social impacts of the proposal relate to the proposal states that the continuation of a One Casino model
extension of gaming facilities proposed at Echo. Echo proposes in NSW which promotes responsible gaming, combined with
to extend its high–end gaming facilities, including: its focus on market segments which experience lower rates
• upgrades to some existing high–end gaming facilities; of problem gambling without requiring additional gaming
• a new high–limit area for tables/slots; (including EGM) licences will continue to ensure responsible
• a new junket area at the base of the hotel towers; gaming practices in NSW.
• a new junket VIP room; and
• two new sky casinos. The proposal commits to continuing its current programs
including staff training, specialist personnel including a
Echo also proposes that regulatory bet limits should be removed Community Engagement Manager and Responsible Gaming
on 1,250 of its 1,500 poker machines (250 machines are already Liaison Officers and voluntary exclusion and pre–commitment
unlimited); and that it should have discretion to place these regimes.
machines within the casino as it sees fit.
The proposal includes an additional commitment to responsible
The average expenditure per hour for play at a maximum bet gaming programs by providing funding for a policy–focussed
poker machine per spin is $1200 per hour in NSW, $840 per responsible gaming research project of facility at a leading NSW
hour in Victoria and $600 per hour in Queensland (Productivity university.
Commission, 2010). Machines without bet limits would permit
higher levels. Echo estimates that removal of the bet limits will New infrastructure to alleviate
increase revenue by million per annum. While detailed pedestrian congestion on Pyrmont Bridge
data has not been provided, it should be expected that a large
proportion of this extra revenue will be generated on the main The Echo proposal identifies a need for improvements to
gaming floor, which is mainly used by NSW residents. east–west and north–south linkages and connectivity based
on existing Government planning documentation and forecast
While a comparatively small percentage of the population, demand data. In particular, findings suggest that foot traffic on
problem gamblers experience large losses, which when the east–west connectivity across Pyrmont Bridge will intensify.
combined with the adverse social costs of their problems, Echo’s proposed pedestrian bridge from Pyrmont to Barangaroo
significantly reduces the net benefits of gambling. The majority would help to alleviate current pressures on Pyrmont Bridge.
of problem gambling occurs using poker machines (Productivity Transport for NSW has been consulted on these matters and
Commission Report 2010). supports the proposal for increased connectivity if fully funded
by Echo.
18STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Increased connectivity will benefit the precinct Echo’s financial model has been analysed
The proposal recognises the potential for the Integrated Resort, The Echo financial model calculates the costs and revenues
improved infrastructure and Precinct to help in boosting associated with the development of The Star over a 22 year term.
visitation and connectivity for other attractions in the area, Revenues are calculated based on assumed uplifts in gaming
including: revenue due to the capital improvements, then an assumed
• Australian National Maritime Museum growth rate for the remainder of the forecast period. Costs are
• Harbourside shops, and generally set out as a proportion of revenue or as individual
• Sydney International Convention, Exhibition and assumptions based on experience at the current casino. Echo’s
Entertainment Centre. financial model does not set out the base case level of income for
The Star, only incremental changes in revenue and costs.
Echo also proposed to renovate the light rail station under its
premises. These investments represent further value to the Analysis of rate of return depends on a range of
NSW community. factors
The opportunity costs We have undertaken a sensitivity analysis in order to understand
the relative impact of varying different assumptions in the
Any decision to invest or develop incurs an opportunity cost. financial model. Echo’s returns are heavily influenced by the
This is the cost of missing other opportunities to which the capital cost of the project. As expected, NSW gaming tax revenue
allocated resources could have been alternatively directed. is driven by the revenue growth, win rate and uplift assumptions
In the case of the fully exclusive Echo proposal the, main — Main Gaming Floor Table Revenue and International Rebate
opportunity cost is the potential growth that could flow from a Revenue being the most important drivers.
change away from a one casino policy.
Proposal’s rates of return in context
Although the Crown Limited proposal that is on hand may or
may not be approved, renewing exclusivity would also rule out The Echo proposal has been assessed against the criteria of
any other new entrants before 2034. Should Echo’s proposal appropriateness of the return on investment. The assessment
not be sufficient to realise NSW’s full potential as a tourist has reviewed commercial–in–confidence data and considered
destination in its category, NSW would miss out on potential that the Echo Unsolicited Proposal return is within the
economic growth. range equivalent projects. For the Echo Sydney expansion
phase (‘Project Star’ late 2007— early 2013 for $870 m), Echo
Echo has acknowledged that The Star has underperformed communicated a target return of 14.5%.
Melbourne in growing international gaming related tourism.
Although Melbourne has only one casino, it does not hold
exclusivity. Renewing exclusivity for The Star should be based
on confidence that the proposed new investment by Echo would
redress past performance, and be sufficient to realise maximum
potential tourism growth for Sydney.
4.5 APPROPRIATENESS OF
RETURN ON INVESTMENT
The Echo proposal has been assessed against the criteria of
appropriateness of the return on investment (ROI) estimate
provided by Echo, given the risk of the project. The purpose
of the analysis is to ensure that the Proponent would not be
achieving a disproportionate return at the expense of public
benefit. In this proposal, Echo would be granted a valuable
monopoly privilege by the State on behalf of its citizens, who
should receive a fair return.
19Comparable companies Broker estimates of returns
Table 4.1 below sets out the Return on Equity (ROE) and Return has issued a broker report that estimates the likely
on Assets (ROA) for comparable companies in the gaming returns to Echo for its investment in Pyrmont if the project were
industry provided by recent equity market research reports. to go ahead. This provides an estimate of the market’s view of the
required returns for the project. The report is dated
It should be noted that lower returns are normal for an May 2013 and estimates that Echo’s Sydney expansion could
established company than for a new business as there are generate a project IRR of 7.2%, reflecting the defensive nature of
additional risks around development / construction of the the investment.
facilities and uncertainty over the level of revenue that the new
facility will generate.
With reference to U.S. based gaming companies, care should be
used with any comparisons to Australian gaming companies
due to their significant use of debt in their capital structures.
U.S. companies run with debt/EBITDA in ranges of 2.5-8x,
compared with Echo’s average over the past few years of under
2x. It has been assessed that the indicated project returns for the
company are not excessive.
TABLE 4.1: COMPANY RATES OF RETURN COMPARISON
COMPANY ROE ROA
AUSTRALIAN
Echo Entertainment Ltd 2.4% 1.5%
4.3% 5.8%
5% 6%
Crown Ltd 14.1% 8.5%
16.3% 9.5%
14.1% 11.7%
INTERNATIONAL
Las Vegas Sands 20.9% 6.9%
Wynn Resorts 54.9% 7.1%
Penn National Gaming 11.6%
20STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
4.6 CAPABILITY AND CAPACITY in FY2014 which we assume will be extended into longer
maturities in the normal course of capital management.
The Echo proposal has been assessed against capability and • As reported in Echo’s half year 2013 results, capital
capacity to deliver on the elements of its proposal. expenditure levels are coming down after completion of
Project Star in Sydney.
There are many aspects of the proposal which relate to this
objective. For the purposes of this analysis, these have been An assessment of a stable financial position is supported by a
separated into core issues and other considerations. May 2013 brokers report by , which states ‘Should
Echo also succeed in its Unsolicited Proposal for Sydney, gearing
After reviewing Echo’s proposal, Echo’s financial position has would obviously extend further. The ultimate level will be
been identified as central to Echo’s capability and capacity. This determined by the scale of the commitment it makes, the timing
is examined in the following section. of cash outflows, and the associated investment returns. On our
assumptions, which are outlined in this note, we would see Echo
Echo has a strong financial position gearing peaking at 2.7x in FY18, suggesting capacity to fund both
projects [Sydney and Brisbane]’.
In order to undertake the development, Echo will be required to
finance the $1.1billion in capital costs. In this section we discuss It should be noted that indications are that the investment in
Echo’s financial capacity to undertake this investment based on The Star would be undertaken prior to potential investment
its current financial position. in the Brisbane Treasury casino due to the timing of release
of the Treasury site in Brisbane. This means that any capital
The proposal refers to Echo’s established financial position as an constraints would more likely affect the Brisbane project rather
indicator of its capability and capacity to deliver. In particular, it than the upgrade of The Star.
highlights the following strengths:
• S&P / ASX 100 company with a market capitalisation of Overall, it is our view that Echo’s current financial position and
approximately $2.4billion. management is capable to support the risks associated with
• At December 31 2013: Echo had available cash of the proposed development, particularly as the investment
approximately $200million; committed undrawn bank timeframe for the proposal is spread over several years. In
facilities of approximately $475million; an average debt this regard, it appears to have, with careful capital and project
maturity of 4.4 years; net debt of $717million; and an management, the capability and capacity to deliver the project as
annualised net debt/EDITDA of 1.7x. contemplated.
• The Assessment Panel understand Echo has an
investment grade, Stable outlook credit rating from two of Echo has experience in the design, construction and
the major ratings agencies. operation of hotels and gaming facilities
• The Assessment Panel note that in 2012 Echo successfully
raised $443million in additional equity funds from its Echo’s recent experience in the successful redevelopment of
shareholders, Furthermore, Echo has longstanding the Star provides comfort that its management team has the
relationships with a close bank group and is experienced additional recent experience to implement such a significant
at borrowing in the long dated U.S. debt private placement project as being proposed. This expertise is complemented
markets having raised US$460million from this market in by Echo’s new CEO John Redmond who has extensive career
May 2011. experience with major capital projects while he was a senior
• Through debt reduction from the equity raising, the executive with MGM Grand Resorts in the United States.
Assessment Panel understands Echo has recently Accordingly, with respect to industry experience with tourism
increased its headroom under its financial covenants. Echo initiatives, project management, ramping up operations,
needs head room to provide working capital to support training and staff management programs for new operations,
business growth, fund ongoing capital expenditure, and, working with existing industry partners and suppliers; Echo
and provide a buffer for adverse win rates. In the event has the in–house capabilities.
Echo implements Stage 3, the company will need to
prudently manage its capital position against covenants
and its several sources of capital outlined to comfortably
and optimally fund the proposal (unused debt capacity,
operating free cash flow, institute a dividend reinvestment
plans, additional equity raising if required, and the timing
of alternative capital expenditure projects).
• Echo has $480million of drawn bank facilities expiring
214.7 AFFORDABILITY 4.8 RISK ALLOCATION
The Echo’s proposal has been assessed against the criteria of According to Echo’s proposal, the NSW Government will not bear
affordability for the NSW Government. any substantial risk associated with the project apart from actions
within NSW Government’s control in order to allow the project to
The proposal states that the NSW Government will not be proceed (for example extending the exclusive casino license). The
required to contribute any funding towards the construction of majority of the risk of the project will be taken on by Echo.
the development. However, the proposed works in the public domain, including the
bridge, walkways, parks and the construction of carparking under
Some internal administration costs may be incurred as part of public land will involve interface and other risks for government.
the planning process. Budgets for Echo’s proposed public domain works are capped at
indicated amounts, and should detailed design indicate higher
The costs contemplated in this section are minor when costs, Echo has reserved the right to ask to discuss finding options
compared to the economic and tax receipt benefits to NSW with government, or to find an alternative delivery solution. For
outlined in the Echo proposal. example if funding requirements for a bridge could not be met a
ferry may be considered as an alternative.
TABLE 4.2: RISK ALLOCATION
RISK ALLOCATION
SCOPE AND SPECIFICATION RISK
Scope/specification risk Echo
SITE AND APPROVALS RISKS
Site availability and access risk Echo (and Gov’t for public domain works)
Site condition risk Echo (and Gov’t as above)
Land acquisition risk Echo (and Gov’t as above)
Environmental approvals risk Echo (and Gov’t as above)
Planning approvals risk Echo (and Gov’t as above)
Gaming licensing Echo (and Gov’t as above)
DESIGN, CONSTRUCTION AND COMMISSIONING
RISKS
Design risks Echo
Construction risks Echo
Construction cost escalation risk Echo
Supplier risk Echo
Initial staff sourcing Echo
Initial staff training Echo
Facility commissioning Echo
22STAGE 2 ASSESSMENT OF ECHO UNSOLICITED PROPOSAL
Under Echo’s proposal, government will take risk on the level of The risk allocation proposed by Echo has been set out in its
gaming tax revenue received from Echo. However, as tax revenue is submission. Additional risks to Government have added into Table
calculated from Echo’s gaming revenue, there will be incentive for 4.2 below to note the Government’s exposure to risk in the case of
Echo to maximise the level of tax to the State in order to maximise public domain works.
their returns from the investment. Under Option 1, Echo has
proposed a minimum tax payment guarantee. This benefit of the
guarantee is evaluated in section 4.3.
A fundamental risk is the loss of opportunity for economic growth,
should the Government renew exclusivity but Echo’s project fail
to attract potential visitor numbers or value. Poor or incomplete
project execution also represents an economic and reputational
risk for the State.
TABLE 4.2: RISK ALLOCATION
RISK ALLOCATION
OPERATING RISKS
Echo (Government indirectly through link to tax
Demand Risk
payments)
Echo (Government indirectly through link to tax
Win Rate Risk
payments)
Operating performance risks Echo
Maintenance risks Echo (and potentially Government for public domain)
Operating cost escalation risks Echo (and potentially Government for public domain)
Obsolescence risk Echo (and potentially Government for public domain)
Competition risk Shared (under option 2)
OTHER RISKS
Interface risks Echo [and Government for public domain]
Change in legislation / regulation risk Government
Industrial relations risk Echo
235 ASSESSMENT OF
CONCLUSIONS
THE ASSESSMENT HAS COMPARED ECHO’S TWO The project would also make a significant contribution to
OPTIONS (FULL VERSUS ‘PARTIAL’ EXCLUSIVITY) improving connectivity and the overall appeal of the broader
precinct that includes Pyrmont, Darling Harbour, and
Under the second option, Echo would proceed with its Baranagaroo. This would complement the Government’s
development and casino gaming would be allowed at one investment in the Sydney International Convention Exhibition
additional tightly constrained rebate-only gaming business at and Entertainment Precinct. These outcomes are all priorities
Barangaroo, envisaged as a boutique salon within a hotel. The for the NSW Government.
direct opportunity cost to Government of this option would be
not receiving the $250million licence fee from Echo under its Deloitte estimates that the proposal would lead to an increase of
preferred option, offset by the amount that could be obtained for GSP of $350million pa by 2025. Deloitte’s baseline estimate of
granting a second licence for Barangaroo. A further opportunity the net present value of additional licence fee and tax payments
cost is that the State could not choose at a later time to open would be $337million to FY35.
up the market to greater competition if thought necessary to
facilitate additional tourism investment. Echo’s management team has acknowledged that over the
longer term, the Star has been underinvested and accordingly
Although it is not possible to determine what a second licence Sydney has underperformed in the international gaming market
might be worth at this point, an indication of potential value is compared to Melbourne, although its recent large investments
that approximately up to of The Star’s current total gaming are driving improvement. Echo states that additional investment
revenue comes from the rebate based business. This amount must be made to boost the Star to the next tier of a global
overstates the relative value of this part of its business because integrated resort to realise Sydney’s potential, but that it
rebate play is based on a lower profit margin, applied to a high requires regulatory certainty before it can do so.
turnover. The value of the second licence would presumably also
be discounted because it did not offer exclusivity, or allow for If the Government chooses to retain a single casino market
electronic games. in NSW, then accepting Echo’s proposal would be a way to
facilitate substantial new investment in tourism infrastructure
For these reasons, Option 1 appears to offer better value to and additional tax revenue. If this policy setting is considered
Government than Option 2. appropriate for the long term, Echo’s proposal should be
progressed to Stage 3 which leads to a Binding Final Offer. The
OPTION 1 IS SUITABLE FOR opportunity cost of this approach, however, would be to forgo
PROGRESSION TO STAGE 3 the potential benefits of competition and additional investment
in the gaming market by others prior to 2034.
Echo’s proposal performs satisfactorily against all the criteria
specified in the Guidelines for assessment of Unsolicited If the Binding Final Offer was agreed by the Government, the
Proposals. independent gaming regulator and planning decision–makers
would then need to consider and approve amendments to
Echo’s proposal makes a convincing case that there is a existing agreements and new approvals that would be required.
substantial economic opportunity for NSW to benefit from the These mechanisms would provide the opportunity for public
growing Asian tourism and gaming markets, and that it has the consultation and input before the proposal could proceed.
capability to deliver a large project that is likely to substantially
improve NSW’s share of these markets.
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