The Philippines Inland Gaming Operator scheme in review

Introduction

The Philippines onshore gaming and gambling industry generated GGR of around US$3 billion in 2017. The industry employed 132,000 direct hires in 2019 and contributed more than US$1.5 billion in tax revenues. Revenues are split into three unequal parts with non-junket casino GGR of US$1.18 billion, junket casino GGR of US$828 million and slots GGR of just over US$1 billion.

The regulator, the Philippine Amusement and Gaming Corporation (PAGCOR) is the largest contributor of revenue to the government after the Bureau of Internal Revenue and the Bureau of Customs. Indeed, PAGCOR has as its primary remit the generation of tax from gaming operators. Despite a thriving venue-based industry and evidence from the popularity of unregulated offshore operators, PAGCOR has been reluctant to countenance expansion by operators into online gaming and gambling.

The Philippines reacted to the outbreak of Covid-19 in similar ways to other jurisdictions: non-essential retail outlets were closed and tourism suspended, which had a devastating impact on the country’s gambling industry. Compared to the previous year, PAGCOR revenues declined by 60.41 percent to US$624 million, the lowest for seven years. Income from Philippine Offshore Gambling Operators (POGOs) was the least affected by the decrease declining 18 percent to less than US$97 million while income from junket gaming operations was halved compared to 2019.

In an attempt to provide business continuity to operators and plug the hole in tax revenues, PAGCOR launched a new scheme, the Philippines Inland Gaming Operator (PIGO) scheme and started issuing licenses in late 2020.

PIGO permits are different from the now widely defunct POGO (Philippine Offshore Gaming Operator) licenses which authorize their holders to provide gambling services to players overseas. When the scheme launched, PIGO services were aimed exclusively at VIP players already on PAGCOR’s player database. Whilst this was subsequently amended, Philippine casino operators are still only allowed to offer online gambling services to residents of the country. In a further set of restrictions under the PIGO scheme, VIP players wishing to engage in digital gambling are required to deposit funds at the physical casino where they usually play. They also need to visit the casino in order to withdraw funds. These visits are deemed necessary for “regulatory purposes”, namely KYC.

Despite the limitations of the scheme, 21 PIGO licenses have been issued and it has been hailed a success. As pandemic restrictions have been lifted, operators have seen their venue-based business start to return to pre-2020 levels without any downturn in remote activity. This suggests that PIGO operations have been a marketing boost and adds further weight to the claim that there is unmet demand for a digital offering.

 

PIGOs in operation

The PIGO scheme was set up to do three things: provide a source of revenue for Philippines’ land-based operators, generate much-needed tax revenue for the government and tackle illegal offshore gambling which had proliferated in the face of lockdowns of onshore venues. The scheme allows operators to offer games online whether table games, slots, sports book or the ever-popular e-sabong. While the user experience may be similar, it should be said that PIGO operations are not true online gaming: they are remote versions of the product offer available at the venue-based operation. Those operators who were able to move quickly to a remote gaming platform were those, like DFNN and Philweb, whose brick and mortar infrastructure was built on internet casino software.

Since launch, operators have moved rapidly to expand their offer with many adding sports betting through joint ventures with specialists in the market such as Jade Entertainment. The scheme was initially limited to local, pre-existing VIP players, a restriction which left many operators frustrated. This was quickly changed, however, to allow mass market players to register and the response was much more encouraging. Operators remain subject to restrictions limiting the marketing options they can engage in. Marketing via text message and email are restricted although social media marketing is permited.

From a standing start in late 2020, the program has evolved from one which allowed operators the chance to make some revenue when retail was shuttered, to an extension of the gambling offer in the country. Remote gambling has become a way to extend the playing time of casino customers, but it has also allowed operators to reach beyond the immediate vicinity of their premises. As a country consisting of over 7000 islands, vast areas were unserved by the retail market and operators are still exploring the extent of this previously untapped market. When taken together with an estimate for the grey and black markets, the total size of the Philippines market is considerably larger than previously thought, and this has generated a lot of interest among foreign investors attracted by the opportunity the country may represent.

Of the three stated objectives of the PIGO scheme, the first two, a lifeline for operators and a replacement for lost tax revenues, seem to have been achieved to a greater or lesser extent. It remains to be seen whether the third objective, tackling illegal offshore gambling, has been realized to any significant degree but industry insiders counsel that these are early days.

Calvin Lim, President and CEO of DFNN told a recent Asean Gaming Summit webinar: “Regulators came up with an industry and job-saving strategy with the RGP remote gaming platform. It’s not been easy and challenges remain, but it has got us through a very challenging time. It takes time for regulation to be in place and enforced. Enforcement is the responsibility of a different government department and it takes time to get these things embedded. It’s not as simple as blocking all offshore online operations – there are also things like trade agreements with other countries to consider.”

 

Limits on growth

The KYC requirement that players should be tagged to a physical retail operation may appear to be big barrier, but there are other factors limiting the growth of remote gaming. The biggest of these is not related to gambling regulation as such: facilitating payments is the biggest source of friction in the emerging remote gaming industry. It remains difficult for operators to establish commercial banking arrangements when compared to unregulated players. The country’s presence on the FATF grey list due to AML deficiencies means international banks are likely to remain hesitant. Banking and payments are overseen by the Philippines Central Bank and they would have to come together with PAGCOR to align objectives. That said, PAGCOR’s remit to deliver government revenue from gaming should see a convergence between the interests of the private sector and the Central Bank. Extending the umbrella of payment gateways to remote onshore operators would go some way to levelling the playing field. Requiring the unregulated sector to register for payments would also provide a boost against the regulated industry’s most aggressive source of competition.

After payments, the next most commonly cited barrier to growth is limits to marketing. Whilst venue-based operators have the benefit of a physical presence from which to promote themselves, they have been slower to take advantage of online marketing opportunities. They are also subject to restrictions on the promotions and incentives they can offer which offshore competitors can ignore. That said, PIGO operations have boosted the onshore market overall.

Payments and marketing may be the biggest brakes on expansion among existing operators, but there appears to be considerable headroom for new market entrants. There have been 21 PIGO licenses issued and the market has a long way to grow, but margins are slim. In the short- to medium-terms there is likely to be some consolidation in the sector. The Philippines is electing a new administration in May and this is also likely to bring some changes. The need to raise revenue remains, however, so most commentators are not predicting significant tightening of market conditions. In fact, some are forecasting an expansion in the regulated sector and a crackdown on revenue leakage offshore.

 

A taxing question

The biggest barrier preventing local operators from competing more effectively with their offshore competitors is tax. Depending on the vertical, PAGCOR levies tax of 47.5 percent or more of GGR and an additional five percent franchise tax is payable to the country’s Bureau of Internal Revenue. A remote gaming license is part of a venue-based gaming license so they too have to earn their part of GGR (currently 25 percent). There are also Local Government Unit (LGU) taxes which vary according to location. In total, this means an effective tax rate as high as 90+ percent meaning some verticals are unattractive to operators.

Electronic bingo is a good example of a vertical where there is proven demand but zero takeup under PIGO. It is a popular land-based game, but a remote provider would pay 55 percent tax on GGR and 25 percent on land-based GGR meaning profits are slim. LGU taxes, the costs of software and hardware plus KYC etc. effectively rule out e-bingo as a regulated activity. Where there is over-taxation the market is ripe for illegal activity.

Taxation on remote sports betting is currently 25 percent with Integrated Resorts which provide electronic games paying 47.5 percent up to US$2.5 million and 27.5 percent above that figure. For virtual sports it’s 47.5 percent but table streaming is much lower, especially VIP table streaming which is taxed at just 15 percent. As with experience in other jurisdictions, reducing the tax rate doesn’t necessarily translate into less revenue overall for the government. Tax reductions can allow onshore operators to combat illegal bookies more effectively and, if their revenues go up, more tax is paid over.

The other impact of tax variability by region is the barrier it presents to scaling up nationwide. Operators wanting to expand their physical locations need a letter of no objection from local authorities in each area before they can open. Adding, for example, sports betting to a casino offer requires a further letter of no objection making the scale challenge even greater.

PIGO a Southeast Asian model?

Southeast Asia is a unique and conservative region. In countries like Thailand and Malaysia online gambling is illegal for cultural or religious reasons but there is evidence they are looking at the Philippines PIGO program as a model. Two main factors are driving this interest: illegal offshore gaming and the appetite among their young population for digital-first entertainment. Some have experimented with fantasy games or mobile games as a soft entry to the market before taking the next step.