Mai Chen: Casino taking a $400m punt on its luck

A change of government could leave SkyCity stranded without compensation. Photo / Sarah Ivey

SkyCity has gained big concessions in the convention centre deal ... but it could lose them just as easily.

In signing a heads of agreement to build a $402 million Auckland convention centre SkyCity has taken a bold gamble worthy of its most adventurous customers. This is because the quid pro quo, an extension to its casino licence until 2048, an increase in the number of poker machines and gambling tables, and a loosening of restrictions on cashless gambling, is by no means assured if the government changes.

Dealing with the government is like dealing with no other business or individual, because the government can usually muster the numbers to make law - and legislation trumps all, even contracts which say the government will pay compensation if it is breached.

For an example, one has only to look at the Gambling Act 2003 which introduced the ban on new casinos and on future expansion of casino gambling and specifically ruled out any compensation for losses caused by imposition of the bans.

If parties opposed to the SkyCity Convention Centre deal get into government in 2014, they could also pass legislation specifying no compensation for breaches of the SkyCity contract. There will be more than a dozen general elections before the end of the licence extension in the heads of agreement SkyCity has signed, so the prospect of an unsympathetic government over such a long period is likely.

Parliamentary sovereignty means just that - Parliament is sovereign in law-making and can make (and unmake) whatever laws it wants.

One option would be to entrench the compensation clause. Entrenchment means amendments can be made only by an extraordinary majority (75 per cent) of all MPs or a majority at a referendum. But Parliament's standing orders require an extraordinary majority to entrench provisions. For obvious reasons the Government did not suggest this - it cannot muster such a majority. So a majority of one will be all that is needed to amend any statutory provision promising compensation.

When the Government renationalised ACC in 2000, the Accident Insurance (Transitional Provisions) Act 2000 ruled out compensation to insurance companies which had entered the market. And when the Government banned the logging of native forest on the West Coast, that act ruled out compensation.

The Public Works Act 1981 does provide a statutory right to compensation for land that has been acquired for or damaged by public works, but there is no right to compensation because legislation has affected you or your business.

Some countries have "takings clauses" in their rights protection legislation, enshrining the principle of compensation for the taking of "property" in statute. Even then it is unclear that such a provision would guarantee SkyCity the right to be compensated for losing a favourable regulatory environment.

It may be that the investor-state dispute resolution provisions in the proposed Trans-Pacific Partnership Agreement could provide recourse for SkyCity's shareholders through international dispute resolution procedures. Tobacco companies' proceedings against the Australian Government for implementing plain packaging are a precedent for this.

But the TPPA has not yet been signed and it is not clear when that will happen.

If a subsequent government did legislate to repeal a compensation clause for breach of contract, it could scare off further foreign direct investment.

Against this risk are the benefits - the casino will be able to expand its gambling opportunities by adding 230 extra poker machines, 40 extra gaming tables, 12 automatic gaming tables, having 17 per cent of its machines able to accept notes bigger than $20 and the introduction of cashless gambling.

SkyCity also gains the certainty of its casino licence being extended by 27 years until 2048, and it will be entitled to compensation if any of its regulatory concessions are changed in the next 35 years.

It will spend more than $400 million on a convention centre, but analysts at KordaMentha calculate a 12 per cent return on SkyCity's investment. And the response of the share market to the deal suggests shareholders think this gamble is worth it.

The fact remains, however, that the Parliament that alone can give SkyCity the benefits it seeks is also the institution that could take those benefits away without compensation. But calculating odds is SkyCity's business.

Mai Chen is managing partner of Chen Palmer lawyers and an adjunct professor at the University of Auckland Business School.