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PA Lottery Goes to a Private Management Agreement

Friday, January 11, 2013,  Governor Corbett announced a British firm, Camelot Global Services,  won the bid for a Private Management Agreement over the Pennsylvania Lottery.

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Governor Corbett announced that the deal to outsource the lottery is done, at least for now. He said that Pennsylvania will not extend the Lottery Private Management Agreement bid with British firm Camelot Global. The announcement comes the day before the 11th extension of the bid was set to expire. State Senator Rob Teplitz says Pennsylvania taxpayers were the losers in a failed attempt to privatize the lottery. He says the state spent $4 million trying to privatize, something he’s been against since the process began in the spring of 2012.

“That`s money that should have been going to seniors, the whole purpose of the lottery. and it`s unfortunate that we`ve spent that money as a state but we haven`t ended up further down the line than we were originally,” says Teplitz

The Commonwealth Foundation, a conservative think tank in Harrisburg, says ending this bid was a missed opportunity.

“ It`s a missed opportunity because it would have been a guaranteed increase in revenue that would benefit seniors programs and would save tax payers.Now we`re back to the drawing board, “ says Nathan Benefield, Commonwealth Foundation

The Governor said the deal would have assured about $34 billion in profit that could have been invested in senior programs. This all comes month after Attorney General Kathleen Kane challenged the bid stating it was illegal. What isn’t clear is whether the Governor will continue to pursue privatizing the lottery. He said  in a statement that they will continue to explore ways to enhance the lottery’s success.

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Auditor General Eugene DePasquale today applauded Gov. Corbett’s decision today to abandon efforts to privatize the Pennsylvania Lottery.

“We should always look for ways to make government better,” DePasquale said. “But in this case, our lottery is one of the most efficient in the country. Today’s decision means that all of the lottery proceeds will continue to go toward funding programs and services for senior citizens.”

Earlier this month the Department of the Auditor General issued a report on its review of the contract reimbursement for private firms hired to help manage the lottery privatization effort. That review found the costs for three privatization consultants soared from the original $725,000 to an estimated $4.6 million.

“I was concerned from the very beginning that the benefits from a private management agreement would not meet or exceed what the current, very well-run Lottery could produce in the same time frame,” DePasquale said.

“I am pleased to see that we will be refocusing our efforts on improving the lottery and revenue for senior programs using existing lottery employees to save money that would have been spent on a private management firm.”

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Governor Tom Corbett today announced that the commonwealth and Camelot Global LLC (“Camelot”) will not continue to pursue the Lottery Private Management Agreement, and his administration will continue to fight for the best interests of the Older Pennsylvanians by looking for other ways to grow revenue.

“We have decided not to extend Camelot’s bid for the Lottery Private Management Agreement first reached over a year ago ” Gov. Corbett said.  “As we move forward, we will take what we’ve learned to make our successful lottery even better–expanding the player and retailer base, improving player loyalty, and implementing strategies that will grow our lottery, responsibly and efficiently.”

“I want to thank the teams for the hard work and effort,” Corbett said.  “Our continued goal is to ensure a growing, predictable revenue stream for senior programs to meet the growing demand, and we will continue to work with all stakeholders and interested parties to explore new ways to harness market resources to enhance our Lottery’s continued success.”

In April 2012, the commonwealth began the competitive procurement process to engage a private manager to run the Pennsylvania Lottery.  Last November, it announced Camelot Global, LLC, a global leader in the lottery sector, as the selected vendor and awarded the contract.   However, the process was later challenged by the Attorney General, prompting several extensions of the bid.

Pennsylvania initially pursued a contract for management services to assure a more predictable and growing revenue source for Older Pennsylvanians and to keep up with the anticipated demand for our growing senior population.

Through a competitive procurement, Pennsylvania awarded the management agreement, which would have assured at least $34.6 billion in profit – an increase of up to $5 billion – that could have been invested in senior programs throughout the life of the contract.  This was significantly greater than this year’s profit growth of $6 million, and could have met growing demand for services for senior citizens.

The Pennsylvania Lottery was created in 1971 to generate funds for programs benefitting older adults.  Since 1972, when its first game went on sale, the Pennsylvania Lottery has contributed nearly $23.7 billion to programs that include property tax and rent rebates; free transit and reduced-fare shared rides; the low-cost prescription drug programs PACE and PACENET; long-term living services; and the 52 Area Agencies on Aging, including hundreds of full- and part-time senior centers throughout the state.  The Pennsylvania Lottery remains the only U.S. Lottery that exclusively designates all proceeds to programs benefitting older residents. Learn more at www.palottery.com

(Source: Office of the Governor)

Auditor General Eugene DePasquale today urged the Governor or the General Assembly to take action by the end of this year to resolve Pennsylvania Lottery management privatization contract negotiations with British-owned Camelot Global Services Inc. The privatization initiative will cost taxpayers an estimated $4.6 million, or more than 11 percent of the Lottery’s annual operating budget.

“Enough already,” DePasquale said. “The commonwealth has spent millions on this lottery privatization effort and that number will continue to grow if this contract is not resolved – one way or another – by Dec. 31 when the agreement with Camelot Global Services Inc. expires.

“By the end of this year, Governor Corbett should either resubmit this contract to the Attorney General or drop the whole idea; or, the General Assembly should put the Lottery privatization issue up for a vote.  We must move on and stop wasting money that is intended to provide programs for seniors.”

DePasquale said his review of the contract reimbursements shows that costs for privatization consultants soared from the original $725,000 for three consultants to an estimated $4.6 million. The review followed the Corbett administration’s decision in late October to provide yet another extension on the contract he wants to award to Camelot Global Services Inc.  The state attorney general rejected an initial contract in February 2013.

To assist with the privatization effort, the commonwealth hired DLA Piper, an international law firm headquartered in Chicago; Blank Rome, a law firm in Philadelphia; and Greenhill and Co., a financial advisory firm with offices in New York and Chicago; to provide services connected to the lottery privatization.

To date, the commonwealth paid $2.36 million to DLA Piper; $1 million to Greenhill and Co.; and $123,000 to Blank Rome for a total of $3.48 million.  An additional $1.1 million is authorized through Dec. 31, 2013 under various addendums to the original contracts.

The original contracts called for payments of $375,000 to DLA Piper; $200,000 to Blank Rome; and $150,000 to Greenhill for a total of $725,000.

“The Lottery funds paid to DLA Piper are of concern since the firm claims to have experience in lottery privatization but was unable to develop a contract that could gain legal approval of the Pennsylvania attorney general,” DePasquale said.  “So far, all we know of DLA Piper’s work is that they failed to do what the administration is paying them more than $2 million to do. Taxpayers have a right to know the rationale behind hiring this firm and to see some results for these exorbitant costs. That has not happened.”

The auditor general noted DLA Piper developed the management agreement used to privatize the Illinois Lottery. The firm hired to manage that state’s lottery, has fallen short on revenue guarantees every year in the management agreement.

“Looking at the problems with the lottery privatization experiment in Illinois and the legal expertise hired here makes me wonder how senior programs will fair if we continue to spend money on these advisory services,” DePasquale said.

The auditor general noted that his department’s scrutiny of invoices and receipts for these firms revealed that the majority of the total expenses paid to date were for hourly labor costs at $2.4 million. The balance of the payments were reimbursements for professional services of $1 million to Greenhill and Co. and approximately $50,000 for lodging, food, airfare, parking, and mileage costs for DLA Piper.

“Our review found that the reimbursement charges in the $3.48 million paid so far are rather typical for doing business deals of this type,” DePasquale said. “But, we need to stop bleeding money from senior programs to explore privatizing management of the lottery when current administrative overhead costs for the state to run the lottery are only two percent of sales. If every government-run program were that efficient we wouldn’t have budget problems.

“While some might say that the money allocated for these firms is a small portion of the Lottery’s net revenue of $1 billion per year, the flip side from my standpoint is that this money could have been better spent to benefit thousands of older Pennsylvanians.”

Governor Tom Corbett has determined that revising the Lottery vendor contract with Camelot Global Services in order to provide clarification to the Attorney General is the appropriate next step in furthering the goal of growing and securing predictable Lottery funding for senior programs for decades to come.

The contract with Camelot is a vendor contract, under which the company will provide management and marketing services. The Lottery will continue to be owned and operated by the state.

“This is about providing for and protecting seniors,” Corbett said. “Our goal is to make sure that our dramatically growing senior population will continue to have access to crucial programs and services in the years to come.”

Camelot has committed $3 billion to $4.5 billion of new funding for senior programs over 20 years, and if the profits fell short of that commitment Camelot would reimburse the state for the shortfall, up to 5 percent of profits. Currently, the Lottery has no such protection.

It is anticipated that the Department of Revenue will submit a revised contract in the upcoming months to the Office of Attorney General.  The contract will be available online when it is finalized.

“We believe that predictable and growing funding for senior programs is a vital concern for all Pennsylvanians, and we will work to provide more clarity to the Attorney General in order to assist her review of the revised contract.”

Camelot’s bid has been extended through June 30.

The article above provided by the Office of the Governor.

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A British company gave the Corbett administration an extension on a bid set to expire on Saturday to manage the Pennsylvania Lottery, a Pennsylvania Department of Revenue official said Saturday.

The bid from Camelot Global Services PA, part of the company that runs the United Kingdom’s National Lottery, was set to expire 5 p.m. Saturday.

It’s been extended through Friday.

State Attorney General Kathleen Kane on Thursday rejected Gov. Tom Corbett’s 20-year, $34 billion contract with the company to privatize lottery management.

Kane said Corbett’s office usurped the power of the state Legislature in approving the deal.

The extension gives the governor and Camelot additional time “to determine what next steps will be appropriate,” Elizabeth Brassell, a revenue department spokeswoman, said on Saturday.

Corbett said on Friday that his administration was reviewing its options, only one of which he named: an appeal to Commonwealth Court.

Source: TribLIVE

The Pennsylvania Office of the Attorney General today announced its determination that the proposed Lottery contract with Camelot Global Services violates the Pennsylvania Constitution and is not statutorily authorized.

“The Office of Attorney General conducted a very thorough review of the Professional Management Agreement, the State Constitution, the State Lottery Act, the Gaming Act and applicable case authority and has determined that it cannot approve the contract to allow Camelot to operate and manage the Pennsylvania Lottery,” Pennsylvania Attorney General Kathleen Kane said.

The Attorney General is required under the Commonwealth Attorney’s Act to review contracts for ‘form and legality.’

She gives three reasons for the decision: “The PMA is an unlawful extension of the executive authority that infringes on the general assembly’s powers to make basic policy choices regarding the management and operation of the lottery pursuant to article two section one of the Pennsylvania Constitution.  That authority rests with the general assembly. The contract provides for monitor based or other electronic games such as Keno, which is not authorized by the State Lottery Act, and usurps the authority of the Gaming Control Board with regard to slot machines. The proposed contract provides for proposed contracts by the vendor for indemnification of indirect expenses. Such open and undefined indemnification constitutes an unconstituional waiver of the doctrine of sovereign immunity as set forth in the Pennsylvania Constitution.”

Corbett today issued the following statement on the Attorney General’s review of the Lottery Private Management Agreement: “I’m deeply disappointed. I don’t agree with the attorney general’s analysis and decision, and we will review our legal options. My job is to protect Pennsylvania’s seniors, and we will continue to do that.  We have a growing population where one in four Pennsylvanians will be over the age of 65 by 2017. My goal is to ensure that funding for senior programs keeps pace with that growth.”

Pennsylvania Attorney General Kathleen Kane released a statement today regarding the Pennsylvania Lottery deal. In the statement, Kane says she will review the deal for legality before coming to a decision.

“On Wednesday, January 16, I received the contract for the proposed sale of the Pennsylvania Lottery. Under state law, we have 30 days to review the document for form and legality. We will carry out our duties under the law and report back as soon as our review is completed.” – Kathleen G. Kane, Pennsylvania Attorney General.

Governor Tom Corbett today announced that contracting private management of the Pennsylvania Lottery with Camelot Global Services PA LLC is clearly in the best interest of Pennsylvania’s seniors.

This partnership will maximize Lottery profit to ensure secure, predictable funding for programs benefiting a dramatically growing senior population.

The decision came following nine months of due diligence and deliberative evaluation to ensure maximum growth while protecting the integrity of the lottery fund.

“Our state’s fast-growing population of seniors demands that we act now to ensure the continued strength and viability of programs supporting older Pennsylvanians,” Corbett said.  “This is about providing for and protecting seniors, and nothing else.  Today in Pennsylvania there are nearly 2.7 million individuals age 60 and older, and that number will grow to 3.6 million by 2030.  We have the fourth largest population of older adults in the country, and with that comes significant and costly obligations.”

“This partnership will allow us to add an additional $50 million in the upcoming budget to preserve and improve the system for seniors,” Corbett said. “We will use this new money to address the need and demand for our programs, specifically, I propose to use it for home and community-based services so that older adults may continue to live in their homes.”

The additional $50 million in the upcoming budget proposal will include:

  • $21 million for the Aging Waiver:  The Aging Waiver Program provides in-homes service to 28,000 seniors over age 60 who are clinically and financially vulnerable.
  • $20 million for the OPTIONS Program:  OPTIONS provides care management, home-delivered meals, protective services and in-home services for individuals age 60 and older.  Additional increases in revenue would help decrease the waiting list of 5,400 older adults who are waiting for home support and personal care services to keep them in their homes.
  •  $5 million for Increased Investment in Area Agencies on Aging (AAAs):  Pennsylvania’s 52 AAAs cover all 67 counties and serve as the front door for the Department of Aging services at the local level. The AAAs serve 600,000 people.
  •  $2 million for Senior Center Modernization: This investment will help senior centers prepare for the changing demographics and make them attractive to a younger, aging population.

Combining Forces for Record Profits

Under the contract, Camelot’s annual profit commitments will provide 9.5 percent compounded annual growth over the first five years of the contract and 6.1 percent compounded annual growth over the first 10 years of the contract.  Comparative fiscal analysis against projected Lottery performance shows incremental profit growth of at least $460 million over the first five years of the contract and at least $1.3 billion over the first 10 years of the contract.

Camelot is obligated to provide a minimum of $34.6 billion in profit over 20 years, which is at least $3 to $4.5 billion more than Lottery’s sales projections and its historic performance suggest it could generate over the same time period and under the same conditions as set forth in the PMA.

Since the contract can be renegotiated at year 10 to ensure maximum responsible Lottery growth, these impressive incremental gains may likely be significantly higher over the 20- to 30-year contract term.

“An apples to apples comparison, taking into account Lottery’s own projections for Keno and Internet products, clearly demonstrates that private industry investment and expertise will grow Lottery profits to support a growing senior population,” Corbett said.

Camelot plans to achieve the higher profit levels by expanding the player base in Pennsylvania through marketing changes, retail expansion, enhancement of the retail experience and exploration of a rebalanced Lottery game product portfolio.

“The Pennsylvania Lottery is one of the best Lotteries in the country, without a doubt,” Corbett said.  “We’ve come up with a win-win scenario where we combine one of the nation’s best lotteries with one of the best private-sector lottery industry experts in the world to grow and protect Lottery profits for decades to come.”

While the commonwealth plans to retain about 70 employees under the PMA, Camelot intends to retain and hire under its management all current employees who are committed to working toward increased sales and profits.  Throughout the PMA process Camelot has acknowledged the tremendous asset the Lottery workforce is to its success, and the private manager intends to expand Lottery employment in Pennsylvania over time.

Additionally, the commonwealth has committed to identifying opportunities for employees who do not transition to Camelot to remain state employees, so that not a single employee is left without a job.

Camelot’s Experience

Camelot has managed the United Kingdom National Lottery for the past 18 years, succeeding in attracting more than 50 percent of U.K. adults to play the National Lottery on a weekly basis, compared to 29 percent of Pennsylvanians who currently play the Pennsylvania Lottery on a weekly basis.  That 50 percent demonstrates a greater reach than any other fast-moving consumer goods brand in the U.K.

Beyond the U.K., Camelot was a founding shareholder of the South African National Lottery and has advised the Interprovincial Lottery Corp of Canada, the California Lottery, and the Massachusetts Lottery in North America.

In California, Camelot provided consulting services to help it to increase sales and returns to the state education system.  Camelot reviewed the lottery’s retailer and sales support services, as well as consulted on advertising, promotions and corporate social responsibility. Camelot’s expertise on business planning, as well as sales and marketing support, helped put the California Lottery in a position where per capita sales have increased by over 40 percent and it now expects to generate an additional $2.25 billion in incremental sales, and $780 million more in profit over the next two years.

What Does Not Change Under the PMA

 

“While this is an exciting time of change that will reap tremendous rewards for seniors in the immediate and long-term future, it’s also worth noting what will not change as a result of this private management agreement,” Corbett said.

“The Pennsylvania Lottery will remain the Pennsylvania Lottery – an institution of tremendous integrity and character – and its important mission to fund vital services for older Pennsylvanians will not change.

“Pennsylvania Lottery players will eventually see new games and other exciting changes to the Lottery product line, but the games they know and love will continue to be available to them for the immediate future.

“The Pennsylvania Lottery’s more than 9,100 retailers will continue to receive unparalleled support as our valued business partners and key contributors to the Lottery’s continued success.

“And finally, the commonwealth will continue to own and control all aspects of the Lottery, ensuring social responsibility, quality and integrity of games and the public’s absolute trust in Lottery’s business practices.”

The Process

 

The notice of contract award was issued Friday to Camelot, completing a procurement process that began last April, allowing the Corbett administration the opportunity to disclose contractual and procurement details of the PMA at the Senate Finance Committee Hearing on Jan. 14.

Last spring, the commonwealth assembled a team comprised of individuals from various agencies including the departments of Aging, Revenue and General Services, the Pennsylvania Lottery, the Governor’s Budget Office, the Governor’s Policy Office and the Governor’s Office of General Counsel, to explore the feasibility of a Lottery PMA.

The procurement was conducted in phases.  The first phase was a Request for

Qualifications (RFQ), which initially qualified Camelot, GTECH Corporation and Tatts Group Limited to participate in the process based on financial capability, social responsibility and technical capability and suitability.

Once a pool of qualified bidders was established, the Commonwealth began a multistep sealed bidding process, also known as an Invitation for Bid (IFB). The first step of the IFB was a due diligence process with the qualified bidders, in which the

Commonwealth explored the various ways to maximize revenue; conducted initial probity investigations into each bidder’s character, fitness and suitability for such a transaction; and developed a private management agreement that preserves and sustains the established integrity, value, and tremendous success of the Lottery while maximizing revenues for the benefit of senior programs.

Tatts withdrew from the procurement in August 2012 to pursue other U.S. PMA opportunities it believed to be more commercially attractive.

In the second step of the IFB process, bidders were invited to submit priced bids in the form of binding APCs for the initial 20-year term of the PMA.

GTECH withdrew from the procurement in November 2012, just before final business plans were due, citing a one-sided PMA in the commonwealth’s favor as its top reason for not submitting a priced bid.

Camelot’s priced bid was received on Nov. 16, 2012.  Multiple bid extensions were negotiated to accommodate completion of a probity investigation into Camelot’s integrity and allow additional time for receipt and review of a counterproposal from the union representing Lottery employees.

Risk mitigation firm Kroll Advisory Solutions conducted onsite investigations in all jurisdictions in which Camelot has operated and where individuals proposed to influence Pennsylvania operations have lived and worked. Kroll’s investigation encompassed work in Canada, South Africa, the U.K. and the U.S.  Kroll interviewed more than four dozen individuals, including current and former government officials, U.S. and international regulators, former colleagues and business partners, as well as other individuals with knowledge of Camelot and the individuals.  Kroll did not identify any material misstatements or omissions, criminal litigation or other issues that reflect negatively on Camelot’s or the individuals’ backgrounds or business practices.

After careful review and consideration of the union counterproposal, the commonwealth determined the alternative plan to be lacking in a number of key areas, most notably: a lack of new money as security comparable to the $200 million in security provided for in the PMA; a lack of industry experience in building and balancing a product portfolio to maximize profit, rather than maximize profit margin; and lack of detail regarding plans for expanding the player base, growing the retail network and increasing demand for terminal-based games.

At the conclusion of the nine-month meticulous and judicious process, the commonwealth determined Camelot’s bid was responsive, conforms in all material respects to the requirements of the IFB and proposes the highest responsible commitments for maximizing revenues to support senior programs.

Corbett thanked Rep. Tim Hennessey, Chester County; Rep. Seth Grove, York County; Sen. Bob Mensch, Montgomery County; Sen. Mike Brubaker, Lancaster County; Sen. Pat Browne, Lehigh County; Rep. Stephen Bloom, Cumberland County; Rep. Mauree Gingrich, Lebanon County; and Rep. Kerry Benninghoff, Centre County; along with all the Republican leaders who support additional funding for senior citizens.

The Pennsylvania Lottery was created in 1971 to generate funds for programs benefitting older adults.  Since 1972, when its first game went on sale, the Pennsylvania Lottery has contributed nearly $22.6 billion to programs that include property tax and rent rebates; free transit and reduced-fare shared rides; the low-cost prescription drug programs PACE and PACENET; long-term living services; and the 52 Area Agencies on Aging, including hundreds of full- and part-time senior centers throughout the state.  The Pennsylvania Lottery remains the only U.S. Lottery that exclusively designates all proceeds to programs benefitting older residents. Learn more at www.palottery.com.

The article above provided by the Office of the Governor of Pennsylvania.

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