Scientific Games Finally Figures Out Lottery Deal Was Fixed

Scientific Games should know that when you lie down with dogs you wake up with fleas. After losing out on a 15-year privatization deal with the Hoosier Lottery to a rival company, GTECH, the company is crying foul. According to the bids the two companies submitted, GTECH promised $1.76 billion in returns to the state during the first five years of the contract compared to the $1.73 billion promised by Scientific Games, a difference of only 1.7%. The Indianapolis Star reports that state lottery officials did not provide an opportunity for the leading bidders to submit a best and final offer, which is typically what the state will do in such deals where so much money is at stake. Scientific Games is also the Hoosier Lottery's largest gaming vendor currently and argues that transition costs would be very minimal as a consequence compared to the costs of choosing an outside firm. From the Star:

The selection process allowed lottery officials to request a “best and final offer” from the bidders. In closely competitive bidding wars, such requests can sometimes generate better deals than those initially proposed.

Lottery records obtained by The Star through a public records request show that GTECH promised the state $1.76 billion over the first five years of the contract, while Scientific Games promised $1.73 billion, a difference of only 1.7 percent.

Still, lottery officials did not provide an opportunity for the two companies to improve their bids through a best and final offer, according to Scientific Games’ protest letter.

James Herbert, a lottery consultant with Rhode Island-based Pure Play Technologies, said governments aren’t usually required to request best and final offers, but it makes a lot of sense to do so if the bids are roughly equivalent.

“If the two vendors were considered to be relatively equal, then it would make sense to do a best and final offer for the people of the state,” he said.

In Indiana, lottery profits help fund public infrastructure projects and pension funds for teachers, police and firefighters. Boosting those revenues has been the main objective of the privatization efforts. GTECH’s promise of $1.76?billion would generate $500 million more than lottery officials projected the state would bring in on its own. Under the deal, GTECH, a subsidiary of Italian company Lottomatica, would receive a bonus for exceeding its promise but would be penalized for falling short.

Al Larsen, a spokesman for the lottery, couldn’t say why lottery officials declined to ask for best and final offers. “I don’t have any clarification for you on that,” he said.
 

The Hoosier Lottery didn't ask for best and final offers because this deal was fixed before bids were even tendered just like every other privatization deal undertaken by the Daniels' administration. GTECH was represented by Barnes & Thornburg's Bob Grand and Brian Burdick. Hello! You know, the same guys that represented ACS in the crooked privatization deal of the state's welfare services that made a mess of things. Scientific Games should have known better since it hopped in bed with GTECH to win a similar contract in Illinois where a Democratic lawmaker accused the administration of Gov. Pat Quinn of rigging the bidding process:

After Chicago privatized parking meters and the Skyway, Illinois sold off the state lottery in 2010 to a private company. State Representative Jack Franks says that deal was fixed, and Franks is calling for a legislative investigation of how Governor Quinn's administration struck the deal. Franks, the state auditor general, and a government watchdog investigation both identified conflicts of interest in the contract process.

"We are very excited to partner with the Illinois Lottery to be your private manager. Our group is the coming together of the world's leading lottery companies: G-Tech and Scientific Games." This from the internal video that Northstar Lottery Group produced to land the Illinois contract in September 2010, with a projected net income of nearly $5 billion over five years.

A year and a half after the panel appointed by Governor Quinn selected Northstar, State Representative Franks is calling for an legislative investigation of the deal.

"The contract was preordained to go to Northstar, because they got the contract before the votes were even counted," said Franks, who represents northwest suburban Marengo.

"He is completely incorrect" replied Gov. Quinn press secretary Brooke Anderson. "We followed the law. The procurement was conducted in accordance with all applicable state laws and awarded to a highly-qualified bidder who made a commitment to the best deal for the state. Northstar presented a bid that, over the first five years of the contract, was $600 million above the other bidder."

Franks, who opposed privatizing the lottery from the beginning, says the governor should rescind the contract until misconduct charted by the state auditor general can be sorted out.

The state investigation concluded that "failure to follow any statutory or administrative processes for a procurement that involves a $2 billion state asset, the Illinois Lottery, increases the possibility that the procurement was not conducted in a fair and transparent manner."

"We saw what happened when the former mayor privatized the parking meters," Franks said. "It was a fiasco, and it cost the citizens hundreds of millions of dollars, if not billions over the term. This is multiplied by 10."

Last month, the Illinois Statehouse News found evidence of irregularities in the state selection process and reported that Northstar and G-Tech donations were funneled to Quinn's 2010 campaign. When asked about the allegation, the governor's spokesperson issued a firm denial.

Of course we now know that the partnership between Scientific Games and GTECH missed its profit targets by $100 million during the first year of its contract with the Illinois Lottery. Nonetheless, a mediator found that Northstar didn't have to pay the penalties Illinois claimed it was owed under the privatization deal when the company failed to meet its profit targets.