What Are The Odds?

What Are The Odds?

I was thinking about an article that appeared in the May 25th edition of the Variety headlined, “Casino seeks to attract China gamblers” and a famous line from Rudyard Kipling came to mind, “East is East and West is West, and never the twain shall meet”, ( more about that below).

The article quotes an official to the effect – and I paraphrase – that the People’s Republic of China, (PRC) doesn’t readily issue travel documents to its citizens which would permit them to visit the Commonwealth and the Tinian Dynasty Casino in particular, at least at the present time. One of Tinian’s major competitors for the mainland Chinese market would seem to be the Portuguese territory of Macao which will remain under the administration of Portugal only until the end of next year.

Macao is one hour by ferry or 10 minutes by helicopter from Hong Kong and boasts a new airport. The area is one tenth the size of Washington, D. C. with one half million people. Gambling is a major industry and represents 40 percent of the gross domestic product. A recent television documentary indicated the PRC will be spending huge sums to upgrade the area’s infrastructure after the reversion to China occurs. It is my understanding that mainland China was considered to be the casino’s principal market for gamblers. This prompts a second question, why would a $200 million investment be made without first evaluating the facility’s primary market, its principal competitors and something so obvious as restrictions on travel?

Then I was reminded that in Communist led economies, a committee frequently decides to make an investment on the basis of intuition, inspiration or political expediency rather than upon a factual, unbiased economic analysis of the financial viability of a project’s success. Whether this was the case for Tinian I don’t know.

Recent history in countries such as Russia and eastern Europe provide abundant examples of the futility of central planning and the utter disregard for market forces when it comes to governments making investment decisions in enterprises best left to private, profit motivated entrepreneurs who, more often than not, have to answer to stock holders rather that politicians.

This attitude is in stark contrast to that of western investors, many of which would not invest a penny in a project until all elements that impact upon its potential profitability have been scrutinized and analyzed. A process which involves a through review and assessment of such factors as: capital costs, financial cash flows, rates of return, market potential, management capabilities, government regulations, etc. I recall reading about a hotel constructed in Hawaii by Japanese investors where the pro rated room construction cost was $500,000. This included the cost of public space, landscaping, etc., in addition to the rooms and their furnishings. There is a rough rule of thumb that states, for every $1,000 in the pro rated room construction cost the hotel should not charge less than $1.00 for every thousand dollars invested. Thus, in this case the average room rate should not have been less that $500 per night. This hotel was financed and built in a resort area where the competition offered an adequate room for around $125 per night. Needless to say the Japanese investors lost their money and the hotel was sold at fire sale prices.

When I learned of the disposition of this property I suspected that the original investors did not prepare a financial feasibility study prior to investment and construction. Had they done so they might have scaled back the construction plans to lower the cost of construction as thus the facility’s break even point with the result they might still be the owners. There are many instances in the Commonwealth where investors failed to do their home work and invested blindly only to learn after it was too late that they had failed to foresee some unintended, unanticipated consequences that resulted in a negative impact on their project. It is at that point, as we say in the west, they then try to “close the barn door after the horse has escaped.” Should U. S. Immigration laws be imposed on the Commonwealth, and it appears they may be – then a U. S. visa will be necessary to visit the Northern Marianas. Can you possibly imagine that a Chinese millionaire that obtains a visa to the United States of America will remain long on Tinian – if at all. I think he or she will head straight for Las Vegas and NEW YORK CITY where the five doctors are. I certainly wish the owners of the beautiful and well appointed Tinian Dynasty well and I sincerely hope it is a resounding success – if it is, I will never again be skeptical.

In recent years, even before the down turn in the Commonwealth’s economy, many businesses started up and then closed down for one reason or another. The Lone Star Casino, the Lighthouse, Rainbow Dairy, several small inter island airlines and others didn’t make it – some no doubt because of a failure to analyze the situation properly or just simply looking at their project through “rose colored glasses.” But then, some people just like to gamble whether it’s at the roulette table or in business A lot of money has been placed at risk in the islands based on laws and regulations that prevailed at the time. My own estimate is about one billion dollars in foreign investment has been spent in the islands over the past twelve years or so. Such investment is risk capital. Nothing in business is certain and one enters the venture (perhaps adventure is a better word) and takes the risk that the endeavor will be a success and that the investor will be rewarded. The reward for taking the risk is the profit earned. The money which is put at risk is itself a product of thrift, prudence, planning, management and in some cases sacrifice. It is extremely rare for such money to flow into areas where these traits are not respected. In my judgment investment in the Commonwealth has been made because of the confidence inspired by the American Flag and it was made under the impression that the area was safe from any drastic change in the rules.

To inform investors that the rules are now subject to change, at least as far as the ability to control immigration and recruit workers is concerned, not only jeopardizes some of the investment already present but could call into question the investment reputation of both the Commonwealth and the United States and send the signal that the rules for doing business in the CNMI can change as a result of action taken by the federal government almost eight thousand miles away in Washington, D. C. Of course, the casino developers may know something I don’t know – if so – I’m not aware it has been articulated.

The lack of supporting infrastructure, the small indigenous population of only 1,754 U. S. citizens of which only 74 U. S. citizens and other non citizens of an age to be in the work force in 1995 are only two of several constraints for a facility that could require 500 or more employees. There is also the distant market and the difficulty of supply of everything from light bulbs to pillow cases. One can only guess what will happen to this investment if U. S. immigration laws are imposed limiting the entry of both nonresident workers and the number of Chinese tourists if, indeed, that is the proposed market.

This very real possibility, along with an increase in the minimum wage to the present U. S. level of $5.15 per hour, will bring about an increase in the cost of doing business that ultimately must be passed on to the visiting consumer who will have the option of traveling to another, less expensive destination in southeast Asia with many more amenities and vacation diversions to offer than does Tinian. Macao, the Philippines and other areas come to mind.

The casino’s problems are the Commonwealth’s problems as well. If it fails, other potential investors will want to know why more wasn’t done to help it succeed. If it turns out that its failure can, in part, can be attributed to something that was done or wasn’t done by the government – then we can kiss future investors goodbye. One way or the other it can’t be said that the developers, along with the people of Tinian, didn’t try. So, what are the odds? Much better if everyone gets behind the casino to try to make it a success.