The changes will be rolled out over the course of the coming year as part of the recent execution of the commonwealth’s most lucrative technology contracts to Las Vegas-based Scientific Games Corporation.
Scientific Games, which has been a lottery partner since the 1970s, will continue to serve as the lottery’s primary supplier of instant tickets and gaming systems technology services across its network of nearly 10,000 lottery retailers over the next decade. Scientific Games offers games and services to 135 lotteries around the world.
Canadian-based Pollard Banknote Limited, a partner to more than 60 lotteries worldwide, will serve as the secondary instant ticket supplier, which will bring a slew of new games to the Pennsylvania Lottery’s portfolio.
The initial estimate puts the combined value of these 10-year base contracts with these firms – all based on a percentage of ticket sales – at more than $607 million.
That is about $100 million less than Scientific Games was paid over the course of its last 10-year contract that ended up getting extended for four years.
Lottery executive director Drew Svitko explained the companies agreed to a lower per-ticket rate than was charged under the current contract. The new rate will take effect once the modernization is complete near the end of next year.
“If we don’t sell any tickets, Scientific Games will not get any money,” he said. “While there are never any guarantees about sales, in our business we expect and work hard every day to make sure that we continue to grow and carry out our mission for funding for those programs that benefit older Pennsylvanians.”
The Pennsylvania Lottery prides itself in being the only state lottery that designates all of its proceeds to benefit older residents. Since its launch nearly 50 years ago, the lottery has generated more than $32 billion in proceeds that benefit senior programs including prescription assistance, transportation, property tax and rent rebates, and other senior citizen care services.
The lottery’s goal is to continue to make more money to support those programs as Pennsylvania’s older population continues to rise.
The procurement process that got the lottery to this point of executing contracts with Scientific Games and Pollard Banknote wasn’t a smooth one. It took two separate bid solicitations, spending more than $1.4 million on consultants,and three years before the contracts were finally executed last month.
But even before that happened, yet another potential wrinkle arose. Scientific Games announced it was selling its lottery business.
A costly procurement
Because of the value attached to lottery contracts, it is not unusual for the competition to get heated. And this one was no exception.
Scientific Games was up against a giant in the gaming world to retain its stronghold on these lottery contracts: International Game Technology, a London-based company with its North American headquarters in Las Vegas and Providence, R.I.
Despite having spent $858,900 from the lottery fund that pays for senior programs to hire a consultant to help prepare the bid requirements, IGT cried foul.
Officials from IGT argued the requirements were structured in a way that favored Scientific Games by as much as $60 million to $70 million. Given the protest, that bid solicitation was cancelled.
The commonwealth then hired another consultant, Treya Partners, to assist with revising the bid requirements to ensure a level playing field and went shopping for a lottery partner again. According to the state Department of General Services, that consultant cost the lottery fund $567,000.
In late May, the lottery announced that Scientific Games and Pollard Banknote’s bids were the successful bidders for the contracts based on their scores for technical, small and diverse businesses, and cost.
Attempts to speak with representatives from both Scientific Games and IGT about the procurement process were unsuccessful.
In a statement about the contract awards earlier this month, Patrick McHugh, lottery group chief executive for Scientific Games, said, “Scientific Games is honored to continue driving maximum proceeds through this outstanding partnership with the Pennsylvania Lottery’s new instant games and gaming systems technology contracts.”
Pollard Banknote co-chief executive officer Doug Pollard said the partnership with his company provides the lottery with access to “unique and innovative products that can be leveraged to infuse further excitement and broaden the appeal of scratch-off games for new and existing players.”
Svitko said the lottery didn’t go into the procurement expecting to retain its partnership with Scientific Games. But he added that is how it turned out “after a careful evaluation by a very formal thorough process designed to ensure fairness and equality for everyone participating.”
The lottery’s partnership with Scientific Games has helped it retain its ranking among the top-performing lotteries in the world, according to La Fleur’s 2021 Almanac.
Last year, the lottery broke a record with its $5.3 billion in total retail sales, netting a high-water-mark of $1.3 billion in proceeds to benefit programs that help senior citizens.
“That’s ultimately the goal,” Svitko said, “and ultimately gets us the best overall solution for us to continue our mission and keep generating funds for older Pennsylvanians.”
Svitko has expressed concern about the lottery’s ability to continue to keep generating funds with Pennsylvania’s plethora of gambling options. He told state lawmakers last year his particular concern about the impact on the lottery as it relates to skill games that are showing up at lottery retailers. He said last year some retailers that have skill games are taking a pass on expanding their lottery offerings to include Keno and Xpress Sports.
“Unless something’s done about it, the impact is going to get worse and worse and worse,” Svitko told lawmakers.
But Pace-O-Matic, which creates skill games that are distributed by Miele Manufacturing of Williamsport, said the lottery’s record profits indicate otherwise.
The added wrinkle
Negotiations with Scientific Games to iron out the 10-year base contracts that can be extended up to four years at a lower per-ticket rate were underway for less than a month. Then the company announced at the end of June it intended to divest its lottery and sports betting businesses.
Svitko said that announcement by Scientific Games didn’t impact negotiations.
“We have a contract, a very big, long, detailed contract and we don’t expect it to affect us at all,” Svitko said. “I would expect Scientific Games to live up to the contract. That’s why we have contracts.”
That response about entering into a 10-year relationship with a firm that is selling its business didn’t placate Rep. Jason Ortitay, R-Allegheny County.
“It just seems like there’s a potential for a major problem,” Ortitay said. He chairs a House subcommittee on procurements that has begun looking at ways to tighten up the state’s purchasing processes to provide more checks and balances.
But Svitko said the lottery has “a great relationship with Scientific Games and we are very comfortable with them as a company and especially the local team. So in that regard, we don’t expect anything to change. It doesn’t give me any reason to be nervous.”
Just in case, though, he said, there is an “out” clause that is built into all commonwealth contracts.
This lottery procurement was “a shining example of government that works,” Svitko said. “It is a humongous contract, multiple years and it really is reinventing our 50-year-old business.”
About approaching that half-century milestone, Svitko promised a big deal with be made of it, come March. Wanting to keep it a surprise, he would only say the lottery plans to have some fun to celebrate the occasion.
“The business has grown so much,” Svitko said. “We’re really proud of and grateful for the opportunity to work on behalf of older Pennsylvanians to responsibly generate the money. We don’t determine how that money is spent but our job is to responsibly generate the money. And we’re proud that we’re able to have done so much good over the 50 years.”
https://www.post-gazette.com/business/pittsburgh-company-news/2021/10/27/Pennsylvania-Lottery-awards-contracts-modernize-business/stories/202110270118