Lottery Giants Circle Illinois Management Bid
18 May, 2010
The Illinois Lottery said last week it still expects to award a private management contract – the first of its kind to the United States – to an operator before the end of the year after it called for formal submissions of interest from parties that will be expected to include both domestic and international firms.
Illinois’ plans to privatize the management of its state lottery have been described as a “game-changing concept” in the US lottery market.
State governments typically award a series of separate lottery contracts each covering services such as systems management, instant scratch-cards and marketing.
Under Illinois’ proposals, the state government would issue just one single, management contract to a private company. The operator would be entitled to a maximum of 5 percent of total annual sales in return for its management of the lottery’s overall operations for a contracted period of up to 10 years.
The contract would allow the state government to step into more of a regulatory role than an operational one, similar to the way the National Lottery is handled in the United Kingdom.
Lottery officials believe it will increase efficiencies and ultimately boost state revenues.
“The Illinois Lottery is a state asset and a revenue stream, but is the state government the best store for that business?” the lottery’s acting superintendent Jodie Winnett told GamblingCompliance in an interview last year.
“We have been looking for a way to maximize this asset that we have and give it the operational flexibility and nimbleness and the expansive and innovative thinking that it needs.”
First approved as part of a major state investment program passed last year, the Illinois contract is known to have already piqued the interest of US lottery suppliers GTech, Scientific Games and Intralot.
But UK National Lottery operator Camelot is also expected to make a bid, with the Watford-based company’s North American division having contracted lobbyists at a Chicago law firm to monitor the situation, according to official state records.
In addition, Camelot’s new owners at the Ontario Teachers’ Pension Plan are known to have been interested in Illinois when a possible full privatization of the state lottery was first floated under Illinois’ now-disgraced former governor, Rod Blagojevich.
Illinois was one of a number of US states that just a few years ago were considering leasing their lotteries to private companies under long-term deals that would have invited large upfront payments to the state.
Since then, however, it is the term ‘private management’ now being pioneered by Illinois rather than ‘privatization’ that has become the dominant currency in discussions over future reform of the US state lottery sector.
The September 2008 collapse of Lehman Brothers and the resulting global economic recession all but destroyed the ability of private groups to invest billions of dollars in down-payments on lottery lease contracts.
Then, just one month later, the US Justice Department also weighed in to suggest that federal laws would require state governments to retain “actual control over all significant business decisions” made by their lotteries as well as “all but a [minimal] share of the equity interest in the profits and losses of the business.”
The model now being championed by Illinois is being seen as an effective solution to get around both the financial and legal complexities of privatization – though it is certainly the former rather than the latter that is seen by most observers as the bigger concern.
“It was definitely more the recession,” said Margaret DeFrancisco, president of the North American Association of State and Provincial Lotteries (NASPL), of the collapse in interest in lottery privatization in the United States.
“Suddenly, there was no more money to pay forward,” she told GamblingCompliance.
DeFrancisco’s is an opinion shared by the potential private operators of state lotteries themselves.
“Given the overall markets and the exorbitant expectations that we saw two or three years ago in place like Illinois, I think that privatization per se... is not something we see as a strong and likely outcome,” said Scientific Games CEO Michael Chambrello in a recent analysts’ call.
“I do believe, however, that the Illinois model of ‘outsourcing the management’ of the lottery would be a very significant development without the upfront costs.
“[The Illinois model is] something we could see as an evolving trend and model in the market.”
Illinois is the only US state to have adopted a private management model so far, but others are known to be watching.
A similar bill to Illinois’ to appoint a private manager for the Florida Lottery was passed in the Sunshine State’s Senate Committee on Regulated Industries in mid-April only to die in another Senate Committee at the expiry of the Florida Legislative session at the end of the month.
Elsewhere, state politicians or advisors in both Ohio and New Jersey have also floated private management or privatization plans in order to bolster their state lotteries.
Still, the actual outsourcing process in Illinois is anticipated by some observers to prove problematic.
The Illinois law passed by the state’s General Assembly last December requires Gov. Pat Quinn to appoint a private lottery manager by September 15 this year, following the selection of a final two candidates in August.
That September date would be less than two months before November’s bitter gubernatorial vote that will see Quinn, a Democrat, seek re-election against his Republican opponent, Bill Brady.
And the lottery timeline is already slipping back from the one first envisaged that would have seen a formal Request For Proposals (RFPs) sent to potential bidders by this spring.
Illinois’ call for expressions of interest was sent out on May 12. It asks for parties to give their feedback to help shape the precise terms of the management agreement that will be awarded via an RFP.
US lottery procurement processes have caused controversy on several occasions in recent years with disputes among parties breaking out over contracts awarded in states including Ohio and Texas.
In Texas, a bid for a major lottery systems contract has already been pushed back this year after parties cited an alleged conflict of interest involving GTech and an advisory firm that had been working both for GTech itself on an unrelated project as well as for the Texas government in drafting its lottery tender process.
The Illinois Lottery has contracted a team of advisors to assist it with the private management bid, including the New York-based duo of management consultancy firm Oliver Wyman Associates and Christiansen Capital Advisors.
Illinois’ request for expressions of interests requires would-be bidders to issue their submissions by May 24.
A formal RFP is not expected now until July, according to Jaymin Patel, GTech’s CEO.
“The expectation originally was the governor would sign a private manager contract with an operator by the September-October timeframe,” Patel told analysts last week.
“Given where we are today, that looks a bit tight. I think it will be a bit later than that.”
As it moves towards private management, the Illinois Lottery is also expected to be a pioneer in the expansion of US lotteries towards internet games.
The lottery law signed by Gov. Quinn last December included a provision requiring the winner of the private management contract to conduct a pilot scheme to sell state lottery tickets over the internet, within the state of Illinois, pending approval from the Justice Department.
Speaking last week at the Global Interactive Gaming Show and Exhibition (GIGSE) in Montreal, Melissa Riahei, the general legal counsel for the Illinois Lottery, told delegates that the development of internet sales was very much “an ongoing process.”
She noted that the lottery, “firmly believes its pilot program is consistent with federal law. Our approach to the DoJ is to get their input and review.”
Riahei also indicated that, with their management contract still to be settled before internet ticket sales could begin, the debut for online sales was likely to be at least twelve months away.
Illinois’ plans to privatize the management of its state lottery have been described as a “game-changing concept” in the US lottery market.
State governments typically award a series of separate lottery contracts each covering services such as systems management, instant scratch-cards and marketing.
Under Illinois’ proposals, the state government would issue just one single, management contract to a private company. The operator would be entitled to a maximum of 5 percent of total annual sales in return for its management of the lottery’s overall operations for a contracted period of up to 10 years.
The contract would allow the state government to step into more of a regulatory role than an operational one, similar to the way the National Lottery is handled in the United Kingdom.
Lottery officials believe it will increase efficiencies and ultimately boost state revenues.
“The Illinois Lottery is a state asset and a revenue stream, but is the state government the best store for that business?” the lottery’s acting superintendent Jodie Winnett told GamblingCompliance in an interview last year.
“We have been looking for a way to maximize this asset that we have and give it the operational flexibility and nimbleness and the expansive and innovative thinking that it needs.”
First approved as part of a major state investment program passed last year, the Illinois contract is known to have already piqued the interest of US lottery suppliers GTech, Scientific Games and Intralot.
But UK National Lottery operator Camelot is also expected to make a bid, with the Watford-based company’s North American division having contracted lobbyists at a Chicago law firm to monitor the situation, according to official state records.
In addition, Camelot’s new owners at the Ontario Teachers’ Pension Plan are known to have been interested in Illinois when a possible full privatization of the state lottery was first floated under Illinois’ now-disgraced former governor, Rod Blagojevich.
Illinois was one of a number of US states that just a few years ago were considering leasing their lotteries to private companies under long-term deals that would have invited large upfront payments to the state.
Since then, however, it is the term ‘private management’ now being pioneered by Illinois rather than ‘privatization’ that has become the dominant currency in discussions over future reform of the US state lottery sector.
The September 2008 collapse of Lehman Brothers and the resulting global economic recession all but destroyed the ability of private groups to invest billions of dollars in down-payments on lottery lease contracts.
Then, just one month later, the US Justice Department also weighed in to suggest that federal laws would require state governments to retain “actual control over all significant business decisions” made by their lotteries as well as “all but a [minimal] share of the equity interest in the profits and losses of the business.”
The model now being championed by Illinois is being seen as an effective solution to get around both the financial and legal complexities of privatization – though it is certainly the former rather than the latter that is seen by most observers as the bigger concern.
“It was definitely more the recession,” said Margaret DeFrancisco, president of the North American Association of State and Provincial Lotteries (NASPL), of the collapse in interest in lottery privatization in the United States.
“Suddenly, there was no more money to pay forward,” she told GamblingCompliance.
DeFrancisco’s is an opinion shared by the potential private operators of state lotteries themselves.
“Given the overall markets and the exorbitant expectations that we saw two or three years ago in place like Illinois, I think that privatization per se... is not something we see as a strong and likely outcome,” said Scientific Games CEO Michael Chambrello in a recent analysts’ call.
“I do believe, however, that the Illinois model of ‘outsourcing the management’ of the lottery would be a very significant development without the upfront costs.
“[The Illinois model is] something we could see as an evolving trend and model in the market.”
Illinois is the only US state to have adopted a private management model so far, but others are known to be watching.
A similar bill to Illinois’ to appoint a private manager for the Florida Lottery was passed in the Sunshine State’s Senate Committee on Regulated Industries in mid-April only to die in another Senate Committee at the expiry of the Florida Legislative session at the end of the month.
Elsewhere, state politicians or advisors in both Ohio and New Jersey have also floated private management or privatization plans in order to bolster their state lotteries.
Still, the actual outsourcing process in Illinois is anticipated by some observers to prove problematic.
The Illinois law passed by the state’s General Assembly last December requires Gov. Pat Quinn to appoint a private lottery manager by September 15 this year, following the selection of a final two candidates in August.
That September date would be less than two months before November’s bitter gubernatorial vote that will see Quinn, a Democrat, seek re-election against his Republican opponent, Bill Brady.
And the lottery timeline is already slipping back from the one first envisaged that would have seen a formal Request For Proposals (RFPs) sent to potential bidders by this spring.
Illinois’ call for expressions of interest was sent out on May 12. It asks for parties to give their feedback to help shape the precise terms of the management agreement that will be awarded via an RFP.
US lottery procurement processes have caused controversy on several occasions in recent years with disputes among parties breaking out over contracts awarded in states including Ohio and Texas.
In Texas, a bid for a major lottery systems contract has already been pushed back this year after parties cited an alleged conflict of interest involving GTech and an advisory firm that had been working both for GTech itself on an unrelated project as well as for the Texas government in drafting its lottery tender process.
The Illinois Lottery has contracted a team of advisors to assist it with the private management bid, including the New York-based duo of management consultancy firm Oliver Wyman Associates and Christiansen Capital Advisors.
Illinois’ request for expressions of interests requires would-be bidders to issue their submissions by May 24.
A formal RFP is not expected now until July, according to Jaymin Patel, GTech’s CEO.
“The expectation originally was the governor would sign a private manager contract with an operator by the September-October timeframe,” Patel told analysts last week.
“Given where we are today, that looks a bit tight. I think it will be a bit later than that.”
As it moves towards private management, the Illinois Lottery is also expected to be a pioneer in the expansion of US lotteries towards internet games.
The lottery law signed by Gov. Quinn last December included a provision requiring the winner of the private management contract to conduct a pilot scheme to sell state lottery tickets over the internet, within the state of Illinois, pending approval from the Justice Department.
Speaking last week at the Global Interactive Gaming Show and Exhibition (GIGSE) in Montreal, Melissa Riahei, the general legal counsel for the Illinois Lottery, told delegates that the development of internet sales was very much “an ongoing process.”
She noted that the lottery, “firmly believes its pilot program is consistent with federal law. Our approach to the DoJ is to get their input and review.”
Riahei also indicated that, with their management contract still to be settled before internet ticket sales could begin, the debut for online sales was likely to be at least twelve months away.