Oct 22, 2019, 10:18 am
The hunt for a company to service the Pennsylvania Lottery's games and gaming system for the next decade has proven to be a contentious and costly venture.
Two companies are vying for 10-year lottery servicing contracts that would pay close to $1 billion or more over the life of the deal (the contracts could be extended for two to four years). It's one of the commonwealth's most lucrative long-term contracts.
The firms have engaged in a heated battle over the past year and a half as this initially botched procurement process has played out. Behind the scenes each company is trying to discredit the other and hiring lobbyists to help bolster their chances of winning the contract.
More than $1.3 million has been spent so far on consultants to assist with this procurement. The $1.3 million figure is paid out of the state's Lottery Fund that would otherwise go to support services such as low-cost prescriptions, property tax and rent rebates, reduced fare transit, shared rides, and in-home services for older Pennsylvanians.
A gambling company executive from a company not seeking the Pennsylvania Lottery's business explained why the lottery contracts' competition gets so intense.
"These contracts are incredibly valuable," said Marc Crisafulli, president of Twin River Worldwide Holdings Inc.'s Rhode Island operations, which includes two casino hotels in that state. "Once you secure a contract, you can have 10 to 15 years' worth of highly profitable cash flows. That's why people go after them so aggressively."
To illustrate that point, Las Vegas-based Scientific Games International made $707 million over the past 10 years serving as the lottery's partner.
While the commonwealth declines to name the companies that have submitted bids because it is an ongoing procurement process, sources familiar with the issue say the two titans of the government-backed gambling world are battling it out in this competition.
One of the companies is Scientific Games, which is hoping to extend its near half-century relationship with the lottery.
The other is International Gaming Technology, a London-based company with its North American headquarters in Providence, R.I. IGT is trying to muscle in to break up that stronghold Scientific Games has had on the Pennsylvania Lottery.
Both companies confirmed their interest in landing the lottery contracts. Aside from that, the companies' spokespeople said they don't comment on ongoing contract talks. Neither does the lottery's executive director Drew Svitko, who could not comment at this time for that reason, a spokeswoman said.
A spokesman for the state's Department of General Services said there is no specific deadline for selecting a successful bidder. The state bought itself some time this summer by entering into a no-bid contract extension with Scientific Games that runs through March 2021 that could earn that company another $130 million to $140 million.
That is separate from a $49.7 million contract the state is in the process of awarding to Scientific Games for its online platform to run iLottery games for the next 10 years, with the possibility of extending it two to four years.
Seeing $1.3 million so far paid out of the Lottery Fund to identify a lottery servicing company for the instant games and gaming system leaves some uneasy. State Auditor General Eugene DePasquale is among them.
"The lottery is a critical program in Pennsylvania and we want to make sure the money goes to seniors," he said. "That cost itself is obviously concerning because that money could be better spent helping seniors."
What's more, he said having this procurement play out as long as it has is surprising, considering the lottery knew the expiration date and yet waited until deep in the 10-year contract to begin the rebidding process.
GOP strategist and longtime Capitol observer Charlie Gerow said it makes him wonder why General Services needed to hire an outside consultant at all.
"Good grief. They don't have the expertise internally to review these kind of contracts?" Gerow said. "You can do a lot of good for seniors with $1.3 million."
Others too are keeping a wary eye on the amount of money being drained from the Lottery Fund for this procurement.
"AARP Pennsylvania and our 1.8 million members across the Commonwealth are very protective of the PA lottery fund and our focus has always been on ensuring that lottery funding continues to support programs for older Pennsylvanians," said its President Bill Johnston-Walsh.
Rebecca May-Coles, executive director of the Pennsylvania Association of Area Agencies on Aging, had mixed feelings.
"Any money that is not provided to services to benefit older adults, we would be concerned about," she said. "If $1.3 million were to equate to additional dollars and significant amounts of more dollars then I would think it would be worth it."
General Services spokesman Troy Thompson said depending on market conditions, officials are projecting the next contract to generate $45 billion in ticket sales over the next 10 years — $4 billion more than the last 10-year contract produced — and $9 billion in profits for senior programs.
Pennsylvania is the only state in the country that dedicates its lottery profits to senior citizen programs.
Why so costly?
Spending $1.3 million to enlist the services of consultants to assist state officials in choosing a lottery servicer is likely more than state officials expected to spend. After all, they probably anticipated having to go out one time to solicit bids but ended up having to do it twice.
The first time, it cost the Lottery Fund $858,900 for the procurement-related services provided by Lakewood, N.J.-based consultant Gaming Laboratories International. That solicitation led to a protest filed by IGT, which alleged the requirements gave the current vendor, Scientific Games, an advantage. Scientific Games disagreed but the state ended up canceling the solicitation in June 2018.
Another consulting firm from outside the lottery industry, San Francisco, Calif.-based Treya Partners, was then brought in to assist with a second bid solicitation for the lottery contracts.
"Treya is being used throughout the solicitation process and is providing research regarding lottery systems and best practices for these systems and the procurement of them as well as providing consulting services during the evaluation and review of the [bid] responses," Thompson said.
The cost of Treya's services so far: $487,500. And its services are still being used to review and evaluate the bid request responses.
Competing for contracts
When it comes to the competition for these big-money lottery contracts, It often becomes a spectacle. Vendors battle fiercely for them and rarely accept the decision without filing a protest or lawsuit once it is made.
Pennsylvania knows that well. In 2008, IGT, then known as GTECH Corp., was awarded the lottery servicing contracts and then during final negotiations, tried to change the equipment it promised to provide. That led then-state Revenue Secretary Tom Wolf, now the state's governor, to suspend negotiations and ask the bidders to submit their best and final offer. Scientific Games ended up being awarded the 10-year contract. GTECH filed a protest followed by a lawsuit, and lost on both fronts.
Last year, in the initial solicitation for the lottery contracts up for grabs, IGT caused a ruckus again. It filed a protest alleging that the bid requirements were structured to give Scientific Games a $60 million to $70 million advantage.
Further, IGT raised concerns about a coziness it observed between the lottery and its long-time partner Scientific Games, with at least three top executives leaving the lottery to take high-level jobs at Scientific Games. IGT pointed out that the Pennsylvania Lottery's executive director, Drew Svitko, also was once a Scientific Games employee.
An out-of-state lottery consultant, who asked not to be identified since he does work with lottery companies, said that kind of revolving door of executives is not unusual to see in this specialized industry that services fewer than 200 lotteries worldwide. But it's not something that should influence lottery contract procurements.
IGT, incidentally, is not a stranger to doing business with the commonwealth.
During the Rendell Administration, it won the contract to build and operate the central computer system that tracks every single slot machine and video gaming terminal play across the state, a deal that it has now held for more than a decade.
In this latest bid solicitation, it's a situation playing out in Rhode Island, home to IGT's North American headquarters, that has Twin River's Crisafulli raising a red flag for Pennsylvania. He said: "Pennsylvania should take a hard look at the approach IGT has taken in Rhode Island" before considering awarding it the contracts.
Specifically, he is referring to Rhode Island's Gov. Gina Raimondo, who finds herself embroiled in an GOP-requested ethics investigation in that state over an allegation she used her office to obtain financial gain for business associates.
Raimondo has stated her interest in giving IGT a 20-year no-bid gaming contract extension worth more than $1 billion, arguing it would preserve more than 1,000 good-paying jobs the company threatened to pull out of state. Raimondo, who chairs the Democratic Governors Association, named former IGT executive and lobbyist Donald Sweitzer as the treasurer of the governors' association. She tapped him for that post before coming out in favor of IGT getting the contract extension, according to media accounts.
Crisafulli admits he does have a selfish interest in calling Pennsylvanians' attention to the situation playing out in Rhode Island. His company, partnering with United Kingdom-based Camelot Lottery Solutions, wants the chance to compete for that 20-year contract.
Still, others who stand in Scientific Games' corner suggest IGT's strong-arm tactic in Rhode Island should sound alarm bells in Pennsylvania.
The Democratic Governors Association, led by Raimondo, provided Wolf $500,000 to support his re-election campaign last year. Wolf's spokesman J.J. Abbott said that situation is unrelated to the commonwealth's lottery procurement.
Abbott dismissed any connection that the governor has with potential bidders. Further, he said neither Wolf nor anyone in the governor's office is on the team that will be making the selection of the successful bidder for the lottery contracts.
"The procurement system is structured this way to remove any outside influence and DGS is going to great lengths to eliminate even the appearance of unfairness, including hiring an outside entity to ensure greater impartiality and increased scrutiny of the process," Abbott said in a statement provided via email in lieu of answering direct questions about the appearance of a potential conflict of interest.
That failure to respond to questions about this lucrative contract that will outlast Wolf's term in office should be concerning to Pennsylvanians, Gerow said. "When you're stonewalled, it raises gigantic questions and puts up warning flags," he said.
But DePasquale sees no reason to suspect any wrongdoing. He expressed confidence that the governor's campaign contribution wouldn't carry sway with the Wolf Administration in selecting a lottery vendor.
"That type of culture does not exist in his administration," he said. "People can have different levels of criticisms of this [procurement] but I have 100 percent faith Governor Wolf does not allow or tolerate that culture. He doesn't even take bottled water."
A spokeswoman for Scientific Games declined comment on the Rhode Island ethics investigation related to its competitor. IGT's spokeswoman failed to return a message seeking comment about that situation.
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