Allocation of Gaming Licenses and Establishment of Bid Processes: The Case of Kansas, 2008 and 2009

Stephen Martino William R. Eadington This paper looks at the recent history of allocation of exclusive franchise or limited franchise casino licenses in jurisdictions throughout the world and comments on their strengths and weaknesses as well as successes and failures of various strategies that have been undertaken. The paper then examines the Kansas legalization and bidding process that emerged between 2007 and 2009 as a case study in evaluating the effectiveness of various principles that had emerged via the legislation and subsequent procedural decisions. The authors offer the opinion that many of the principles and processes developed in Kansas were based on those that had been implemented in successful bid processes in other jurisdictions. In spite of the inability or unwillingness by several winning bidders to act upon their awarded bids in Kansas in 2008 and the subsequent thinning of the bidding pool in 2009, primarily related to the severe economic downturn that affected the general economy and the casino industry in particular, the authors suggest the Kansas model provides an excellent template for other jurisdictions to develop and to execute similar processes in the future. Introduction The past four decades have been characterized by legalization of casinos and casinostyle gaming in jurisdictions all over the world following a period where casinos were generally illegal and prohibited. Beginning with the British Gaming Act 1968, country after country and jurisdiction after jurisdiction introduced legalized casino gaming under a wide variety of ownership regimes, market structures, and tax policies during the past 40 years. Indeed, as of 2010, countries without legal casino gaming had become a distinct minority on the global scene. 1 Even in the countries still without casinos, the policy question of legalizing casinos often has been part of the recent political debate. As of the end of the first decade of the 21st century, legal casino gaming had grown globally to an industry with gaming revenues well in excess of US$100 billion. 2 Casino resorts, urban casinos, or gaming arcades and saloons had become a major presence in destination tourist locations (Las Vegas, Niagara Falls, Atlantic City, Macau, New Orleans, Cape Town, etc.) and in many capital and major cities (London, Melbourne, 1 Among the G-20 economies, countries without formal casinos as of 2010 include Japan, Brazil, Mexico, Indonesia, Turkey and Saudi Arabia. All others have introduced casinos in one way or another, many within the past five decades. Japan already has a substantial Pachinko/Pachisuro industry that is very close to casino gaming in character. Mexico has a rapidly expanding gaming machine sector that has emerged from a loophole in legislation banning slot machines. Indonesia has substantial illegal casinos on islands near Singapore. Turkey had had legal casinos, but they were made illegal in the early 1990s. 2 See. for example, "Global Gaming Revenue," Christiansen Capital Advisors, Insight, vol. 3, no. I 0, November 2004, which reported casino gaming revenues of $97.8 billion in 2004. Subsequent to this publication, gaming revenues in most jurisdictions continued to expand (at least until the recession years of 2008-2009), and most notably the Macau casino industry's gaming revenues expanded from about $5 billion in 2004 to over $15 billion in 2009. UNLV Gaming Research & Review Journal+ Volume 14 Issue 1 37 Sydney, Vancouver, Singapore, etc.) In some countries (United States, Canada, South Africa, Australia), casino gaming in proper casinos or in less formal settings (i.e. gambling saloons, community clubs, bars and taverns) had become nearly ubiquitous. A high proportion of those countries' residents presently have relatively easy geographic access to casino-style gaming, either in the form of slot machines (electronic gaming devices) or formal casino settings. Limited Franchise Casino Licenses And Economic Rents With very few exceptions, however, the approach that legislative bodies and policy makers have taken toward changing the legal status of casinos from proscribed to permitted has been either cautious or eccentric. Based on historic concerns regarding linkages between casinos and organized crime, political corruption, or the other "vices", the typical pattern has been to authorize casinos but then constrain the industry so that it is not allowed to expand to the point that the market could accommodate. There is a sense that if a jurisdiction were to do so, negative externalities related to casino gaming, in particular those related to problem and pathological gambling and possible spill-overs into criminal behavior, might be too much for society to tolerate. Jurisdictions where relatively wide-open and unrestricted (casino) gambling is permitted, such as Nevada, Mississippi, Atlantic City, or Macau, typically cater to a high proportion of "foreigners," which has the effect of capturing significant economic benefits through the export of gambling services, but at the same time limiting social costs because of the correlated export of social problems related to the gambling offered. Thus, lawmakers have typically created economic environments where permitted gambling is largely under-supplied relative to potential demand. This can be done in a number of ways, including: • Issuance of a monopoly license for a geographic area, with stipulations as to minimum and/or maximum amounts of gaming and non-gaming amenities provided; Restrictions on the number of licenses and/or the number of gaming stations per licensee; Geographic restrictions on where casinos can be permitted; • Restrictions as to the type of facility that is allowed to offer casino gaming (i.e. riverboats, race tracks); Limiting casino gaming to government-owned or government-owned-and-operated facilities. Examples of each of the above categories can be found in jurisdictions that have authorized casinos and casino gaming since 1968. When casino gaming is purposely under-supplied, or when potential licensees are offered an exclusive franchise to exploit a casino market, the result is often a situation where "economic rents," or excess profits, can be earned indefinitely into the future. 4 The prospects for capturing such economic rents create a substantial amount of rent-seeking behavior among potential licensees competing for such a privileged situation. It also creates an environment where the government, as the entity that creates the rent seeking opportunities, can itself be a major benefactor of such economic rents. One way that government can capture economic rents One way that government can capture economic rents associated with exclusive or limited franchise casino licenses is to subject them to competitive bidding among