State Government and Hoosier Lottery and Government & Economic Development and Government and Privatization

Lottery Commission inks contract, losing bidder files protest

October 12, 2012

Hoosier Lottery officials signed a 15-year contract Friday afternoon with private manager GTECH Indiana, which promises to bring the state $1.76 billion over the first five years of the contract.

Meanwhile, the only other bidder in the landmark outsourcing deal, Scientific Games, has submitted a letter of protest. Games, which is the lottery's largest vendor, complained in the Oct. 5 letter that it was not given an opportunity to give a "best and final" offer even though its bid was only 1.7 percent less than GTECH's. The letter, which asked the lottery commission not to execute a contract with GTECH, said the commission also failed to consider the cost savings that would have come from assigning the lottery contract to an existing vendor.

Indiana will be only the second state, following Illinois, to shift all its lottery operations to a private manager. Lottery officials have generally discussed outsourcing as a can't-lose proposition because the private manager will owe a penalty if it fails to meet the income targets set out in its bid, and the state would share in excess profit.

On Friday, however, lottery spokesman Al Larsen noted that GTECH's penalties and bonuses will be limited to 5 percent of the threshold income, as laid out in the bid. That means the state would miss out on some of the promised income if GTECH under-performs by more than 5 percent.

GTECH's bid documents, released Friday, show the company promised to deliver $256 million in its first full fiscal year of operations, ending June 30, 2014.  Then income is supposed to ramp up to $410 million by 2017 and 2018.

GTECH has not yet laid out its business plan for the remaining 10 years of the contract. The Indiana Lottery Commission will keep control over “significant” business decisions and will approve or reject the company’s business plan each year.

The commission chose GTECH, a subsidiary of the Italian firm Lottomatica, at its Oct. 3 meeting.

GTECH Indiana will be led by Connie Laverty O’Connor, who recently oversaw a consortium of private managers in Illinois and held senior management jobs at lotteries in New York and Georgia. “Working hand-in-hand with the Hoosier Lottery, we will build a world-class team aligned around a common goal, a commitment to delivering incremental revenues to the residents of Indiana,” she said in a prepared statement.

GTECH’s bid documents, released Friday, revealed little about its business plan. Most of the more than 1,600 pages were redacted as "trade secrets," including GTECH's plans for draw games such as Lotto, scratch-off tickets, and much of its retailer expansion strategy. Officials said earlier this month that GTECH wants to broaden the lottery's customer base by expanding sales to grocery stores, big box stores and discount stores.

The lottery and GTECH are keeping confidential the “brand transformation and marketing plan.”

The lottery commission requested bids that didn’t hinge on expanding gaming, which the commission defines as the addition of new games like Keno, or an Internet-based lottery. But lottery providers were encouraged to submit an “enhanced bid” describing the outcome of those options.

Should Indiana want to expand gaming, GTECH says it could produce another $233 million over five years with “monitor games,” which would include Keno.

Adding Internet-based games could bring $23 million over five years, and video lottery terminals could produce $920 million over five years.

Hoosier Lottery brought in about $227 million for the fiscal year ended June 30, and expects to generate $221 million next year. Lottery officials predict that a state-run lottery would bring in $4.2 bilion through 2028 but that the private-sector manager could generate $6.3 billion.

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