A voter initiative that legalizes casinos for the first time on land controlled by Taiwan will increase the already strong flow of gambling tourism from China into other parts of Asia, in turn attracting world-renowned gaming operators. According to observers, the approval of casinos indicates that Taiwanese citizens, in the interest of making money, are willing to accept the risk of gambling-related crime, and are open to an influx of visitors from Taiwan’s old political enemy, mainland China.

On July 7, voters on the rugged and barely developed islands of Matsu passed a referendum to let the government in Taipei issue casino permits. Matsu sits within eyesight of the mainland, and tour groups from the other side already come over for common sightseeing. Taiwan officials decided in 2009 to let outlying islands approve casinos following local votes, and Matsu is the first to follow through.

Casino developers from Nevada to Macau to England closely followed the Matsu vote with hopes of landing a resort that would capture Chinese gamers from the well-off southeast China coast that is closest to Taiwan.

Some, such as a company run by former Sands Corporation president William Weidner, have said publicly they hope to build on Matsu despite a lack of existing infrastructure, according to gaming analysts who followed the referendum.

Other casino giants hope the Matsu initiative increases pro-gambling sentiment in the Taiwan Strait archipelago of Penghu or in Kinmen, a group of Taiwan-controlled islands just off the swanky mainland city of Xiamen. Kinmen and Penghu have better infrastructure than Matsu, including bigger airports, meaning less investment and easier returns for any casino operators. Penghu voters turned down a casino initiative in 2009, due to fears that criminals would be drawn to the new resorts. The archipelago’s voters can try for a new referendum as early as September this year.

Luring Chinese Customers

China does not allow casinos, despite a mass cultural enthusiasm for betting. Those with money to gamble typically go to Macau. The southern Chinese special administrative region once held by the Portuguese is the world’s top gaming city, with US$33 billion in annual casino revenues. “A significant portion of that is from China and mostly from regions just across the border,” says Marcus Clinch, a lawyer with Eiger Law in Taipei. The law firm represents clients in the gaming and lottery industries. “The attraction for Matsu is significant foreign investment from overseas as well as from China, including tourism from the mainland,” Clinch adds. “It’s in need of investment. The jobs will be very welcome.”

Chinese customers are also shaping business at two casinos in Singapore, where gaming revenues are nearly equal to those of Las Vegas, with its dozens of casinos. Officials in the Philippines also expect a boost from Chinese gamblers as they work toward the expected 2013 opening of Bagong Nayong Pilipino Entertainment City in Manila. Total investment in the four casinos will reach US$5 billion, the Philippine government has said. About 30% of the country’s gambling business, which was legalized decades ago, already comes from overseas. China and South Korea are in the lead, according to government figures.

In another indication of gambling’s popularity in China, legal lottery income in the country comes to US$2 billion to US$3 billion per month, Clinch notes. A few Chinese bettors even try their luck at casinos in the special economic zones of North Korea — located conveniently close to China.

Chinese nationals enjoy gambling because the pastime has long been part of their culture, and the sheer number of people in China has fuelled casinos around Asia, according to William Bryson, partner with the Jones Day law firm in Taipei.

Taiwan officials anted up in 2008 under newly elected President Ma Ying-jeou. That year, the administration that pledged stronger economic ties with the mainland began letting in regular flows of tourists from the other side of the Strait to prop up a lackluster service sector at home. They have given Taiwan’s tourism sector profits of US$5 billion, China’s official Xinhua News Agency reported in January.

Previous presidents in Taiwan feared that any influx of mainland Chinese would lead to spying or visa overstays. Since the Chinese civil war of the 1940s, when the Nationalist Party’s Chiang Kai-shek fled to Taiwan and set up a rival government that remains intact today, China has claimed sovereignty over the island. That political tension had stopped all but a trickle of mainland Chinese from visiting Taiwan.

“For any casino in Matsu or Kinmen, China would be the customer base,” says Bryson, whose firm works for the Nevada gaming industry. “Gambling is something that a lot of Chinese grow up with, whether it’s mahjongg or liar’s dace. A lot of recreational and family-based gambling goes on in Chinese culture.”

People from the region of China closest to Taiwan, mainly Fujian province, will be most likely to gamble on future casinos in the outlying islands, said Anita Chen, Taipei managing director with the New York-based lobbying firm Park Strategies. That population comes to 80 million people with average annual per capita income of US$3,820. Those gamblers will not take customers away from Macau, which is further south and relies largely on China’s adjacent Guangdong province, Chen notes.

“I think a future Taiwan casino, whether it’s on Matsu, Kinmen or even Penghu, will be eyeing the ‘untapped’ Chinese gaming market, as opposed to competing with the existing market that Macau has,” Chen says. No one in Taiwan’s travel industry has estimated the number of Chinese tourists who would come primarily for gambling on an outlying island, says Anthony Liao, standing supervisor with the Taipei Association of Travel Agents. Group tours from mainland China, which brought 1.79 million people to Taiwan just last year, tend to attract traditional sightseers and those seeking a sense of Taiwan’s political history, Liao notes. Their average age is 52. Non-group travel from China, allowed by Taiwan since June 2011, hasn’t reached any “scale” yet, he adds.

Matsu would do well if today’s mainland China tourist headcount of around 4,100 per year rose even 10%, Liao said. “But Matsu’s example could extend to Penghu, and that would be more suitable because of transportation and other supplies to meet demand,” he notes. “Matsu’s air traffic situation is not so convenient.”

Taiwan, Post-casinos

Taiwan has not said how many casino licenses it would give to Matsu, where about 10,000 residents now live off fishing, military outposts and tourism. Officials in Taipei said prior to the Matsu referendum that they would pursue a gaming model like that of Singapore, which carefully regulates its two casinos. Those operations are family-style resorts, which Taiwanese officials say could be designed to reduce any appeal to gangsters or prostitution rings that opposition voters on Taiwan’s islets fear would find their way to local casinos.

But Taiwan’s transportation ministry, charged with issuing casino licenses, has said the number of permits and the scale of any casinos in the outlying islands are still under study. That uncertainty cast doubt on the July 7 referendum, especially as anti-gambling groups campaigned against pro-casino advocates.

Matsu voters decided they needed to take the chance, says Chen. “We are desperate and have nothing to lose,” she notes, summarizing what she saw as the view of majority voters. “At least we have a chance to see if casinos work for us.” Much of the desperation rests on feeling stuck on the islets, she points out. Half-hour flights from Matsu to Taipei book fast in the summer tourism peak season, and at other times of year, fog or winds ground them altogether. “For a very long time, people in Matsu have faced the problem of getting in and out of Matsu because of the lack of transportation links to Taiwan proper,” Chen said. “The county magistrate sees [the prospect of casinos] as a ticket to upgrade Matsu’s transportation links. Even if the proposal does not materialize, they feel the worst scenario is going back to where they are right now.”

Matsu voters may also have been inspired today by China-reliant casinos elsewhere in Asia, and mindful of losing out to fast-evolving competitors elsewhere in Asia. “Taiwan sees the phenomenal success of Macau, they see Singapore very quickly making great money, and then you have these other areas,” says John Bruce, operations director with the Hong Kong-based risk consultancy Hill & Associates. “You have Cambodia. You have Laos, you have Vietnam moving closer; you have Korea making consideration of more casinos. Locals see it as a great revenue generator.”

Still, the 57% voter majority favoring casinos was never assured. The referendum’s core opposition group Taiwan Alliance Against the Legalization of Gambling alleged that the county magistrate in Matsu broke fair election rules by teaming up with Weidner to back the referendum, in some instances giving away consumer electronics to voters, Taiwan’s Next Magazine reported in June.

Once casinos are in the pipeline, other businesses from Taiwan and China will build up Matsu’s service economy from a handful of seafood restaurants and boutique guesthouses in existence today, Bruce forecasts. Those entrepreneurs would open stores, build hotels and add ferry routes. “The local economy will benefit from construction,” he says. “In Macau, the local population made an adjustment [to accommodate casinos], but per capita income has definitely increased and trickled down.”

World Operators Ready

So far, there’s no timeline on who will get the first Matsu permit. Weidner’s offices overseas were not available for comment, but gaming analysts and mass media in Asia say he hopes to build a resort-casino of at least 100 rooms as well as related infrastructure, such as a first-ever bridge between Matsu’s two main islands and possibly a new airport.

Other casino operators have not publicly expressed interest in Matsu despite intense industry interest ahead of the vote. But someone is sure to make a move, and experts point to operators in Macau. That could mean Sands China, Wynn Macau — part of Steve Wynn’s operations in Nevada — or SJM Holdings, a casino chain founded by Stanley Ho. There’s also Galaxy Entertainment Group, which calls greater China, including Taiwan, its chief source of clientele. Two operators from Las Vegas, MGM Resorts International (MGM) and Caesars Entertainment, are also studying Taiwan as a place to site casinos, according to analysts in Taipei and local press reports.

Casino operators in Asia, unlike in Nevada where Native American gaming has eroded profits, have already won the confidence of investors. Las Vegas Sands share prices have climbed with little incident since its Singapore casino opened in 2010. It runs 740 tables plus 1,254 slot machines in Macau, as well. Stocks in Galaxy, SJM and Wynn Macau also have gained since 2009, reflecting investor confidence.

Share prices of the Genting Group, a Malaysian firm behind Resorts World properties in Singapore and the Philippines, have increased overall since 2010. Resorts World will build the largest of four casinos, about 5,400 slot machines and 800 game tables, at the Entertainment City complex in Manila.

One of the first to strike in Taiwan may be the lesser known British firm Claremont Partners. The firm was formed via a management buyout of AMZ Holdings, which had initially bought land in Penghu ahead of the failed 2009 referendum. The company’s management “remains optimistic” that the next Penghu referendum will pass as it prepares for an IPO in August, a Taipei-based shareholder in the firm said.

Taiwan amended its Offshore Islands Development Act in 2009 to give Kinmen, Matsu and Penghu a way to build up local tourism by integrating casinos with resorts. The islands lack industry, and soldiers once stationed there to guard against any attacks from the mainland have slowly been moved out as relations improve.

But Taiwan’s Ministry of Transportation and Communications, which sets gambling rules that supersede those of local governments such as Matsu’s, says it is not ready to issue casino permits until at least the end of the year.

The ministry’s Tourism Bureau is working out rules on how to accept and review bids for casinos, with a final version due out by late 2012, a ministry official said. The ministry is also working with more than 20 other government agencies on the Gaming Law, which outlines who can operate what types of casinos on any jurisdiction under Taiwanese control. That law must proceed to parliament, where opposition lawmakers have loudly protested other casino-related measures. There is no timeline for submitting the bill to lawmakers ,and no estimate on when it would be passed.

“The voters in Matsu just said it’s OK to set up casinos, but they didn’t say when,” said the ministry official, who declined to give a full name. “We need to use a fair and transparent method to let operators make bids. We want those from in Taiwan and overseas to understand the process first.”