Arkansas lottery execs favor 7-year, no-bid deal

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Firm’s proposed contract extension into 2026 expected to save $2.1M

The Arkansas Scholarship Lottery wants to extend its contract with a Greece-based company by seven years without seeking bids, a move that lottery Director Bishop Woosley estimates would save the lottery about $2.145 million over eight years because the company is offering to reduce the rate it charges.

The lottery's current contract with Intralot Inc. expires Aug. 14, 2019. The proposed extension would stretch that to Aug. 19, 2026, but the company's reduced-rate offer would take effect the first of next year.

Intralot is offering to reduce the rate it charges the lottery on scratch-off and draw-game ticket sales from 2.165 percent to 2.11 percent.

If the Legislative Council approves the proposal, it would mark the second contract extension and rate reduction since Intralot was first awarded the lottery's business in 2009.

The council's lottery oversight subcommittee has placed the contract extension proposal on its agenda for Thursday of next week.

Subcommittee co-Chairman Sen. Keith Ingram, D-West Memphis, said he favors the proposal partly because "I think it is going to save the state some money to put toward scholarships."

Lottery officials have told him that they are pleased with Intralot's work and that the company has been responsive to the lottery's needs, he said.

"I have not heard from any legislators who questioned the wisdom on moving forward on this. There might be one or two who maybe want to question going seven years," he said. "There might be a time we look to bid it, but now is not the time."

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Subcommittee co-Chairman Rep. Chris Richey, D-Helena-West Helena, and Rep. Mat Pitsch, R-Fort Smith, said they plan to seek additional information about the proposal before making up their minds.

Sen. Jimmy Hickey, R-Texarkana, said he doesn't like the proposed extension but that the savings may be large enough to be justifiable under certain conditions. He said he's just "glanced a little bit" at the proposed contract.

The lottery has been selling tickets since Sept. 28, 2009, and has helped finance more than 30,000 Arkansas Academic Challenge Scholarships during each of the past seven fiscal years.

The Legislature has cut the size of future scholarships three times during this period partly because net proceeds fell short of initial projections of about $100 million a year.

The lottery's net proceeds for college scholarships peaked at $97.5 million in fiscal 2012 before dropping each of the three subsequent fiscal years. In each of the past two fiscal years, the lottery's net proceeds for college scholarships has rebounded to $85.2 million.

Aligning contracts

Woosley's estimate of savings to the lottery from the contract extension is based on last fiscal year's annual ticket sales of about $450 million. Information on how much the lottery has paid Intralot in the past few fiscal years wasn't available Wednesday night.

Asked why the lottery doesn't plan to seek bids for this contract extension, Woosley said the lottery's business plan, developed with the help of lottery consultant Camelot Global Services, "requires that we align our lottery vendor contracts so that they end at or near the same time."

In December 2015, "we took the first step in that process by extending the Scientific Games contract for 10 years until 2026," Woosley said. "The next step was to begin negotiations with Intralot in hopes of carrying out the plans set forth in our business plan."

Scientific Games International holds one of the other major lottery contracts, providing instant games and other services.

"Intralot has made an extension offer that provides the lottery with new equipment along with a reduced rate that is effective Jan. 1, 2018, which is over 19 months prior to the end of the current contract," meaning more savings to the lottery, Woosley said.

"By extending this contract as we are proposing, we achieve the goal of aligning our vendor contracts and assure that we will have continuity of our current system," said Woosley, who has been the lottery's director since February 2012.

Extending the contract also avoids a yearlong system conversion that would come with a new vendor and lets the lottery "avoid disruption and inconvenience to our retailers," Woosley said.

"In addition, this extension gives us a rate reduction, a new back office system and new equipment, which is not a certainty should this contract be rebid," he said.

Intralot has held the lottery's contract for "online lottery game services and lottery gaming system and services," including 2,500 retailer terminals, since 2009.

The firm was the only bidder in 2009. Lottery vendor GTECH Corp. of Providence, R.I., opted against submitting a bid, calling the bid process flawed.

The initial seven-year contract, with an option to renew for three years, provided for Intralot to be paid 2.45 percent of the lottery's net sales.

In late 2014, the contract was extended for three years until Aug. 14, 2019, and Intralot reduced its rate from 2.45 percent of ticket sales to 2.165 percent, effective July 1, 2015.

Intralot has similar contracts with the lotteries in the District of Columbia, Georgia, Idaho, Louisiana, New Hampshire, New Mexico, Ohio, Montana, South Carolina, Vermont and Wyoming, according to an Intralot spokesman.

Woosley said Wednesday that GTECH, which is part of International Game Technology, and Scientific Games International "have inquired" about the contract.

"We see vendors at lottery events several times a year, so we get inquiries all the time regarding all of our [contracts] and their terms," he said.

A spokesman for Scientific Games International said the company would consider submitting a bid for the contract held by Intralot if the lottery sought bids, but it's not protesting the lottery's decision not to seek bids at this time.

"We are proud to be a supplier for the Arkansas Lottery, providing instant games and our Cooperative Services Program, and the fact that we are generating 80 percent of the scholarship funds for the students of Arkansas," Susan Cartwright, vice president of corporate communications for Scientific Games, said in a written statement.

A spokesman for GTECH could not be reached for comment by telephone Wednesday afternoon.

Contract terms

Under the terms of the proposed contract extension, Intralot would provide 2,200 new terminals and printers to accommodate "the reasonable needs of the retailer base." The terminals would be deployed on a mutually agreed-upon staggered basis that would begin in August 2019.

At the end of last month, the lottery had 1,934 "active retailers" and about 2,060 terminals in use, Woosley said. The current contract calls for 2,500 available terminals.

Among other things, the contract extension calls for Intralot to provide 1,600 new player advertising displays to be deployed starting after January. Woosley said the lottery currently has 600 player advertising displays.

The proposed extension also includes an option for "a companion mobile app and internet play without the ability for real money gaming.

"Once allowed, and at the lottery's request, additional functionalities will be agreed for a mobile app and internet play with the ability for real money gaming at pricing to be agreed," according to the proposal.

Asked whether that would open a door to online gambling for the lottery, Woosley said "the easiest way to explain that is it is gaming on a lottery app for fun. We currently have that in our players club."

"It's just an option in the contract, if we ever choose to exercise it. It does not allow us to do anything above and beyond what we are allowed to do today," he said.

The proposal also allows an option for electronic scratch-off tickets that Woosley called "digital instant tickets." He said they are common in the lottery industry now.

"We already have this equipment option under our current contract ... for the use or purchase of equipment which could be used if online gaming were ever allowed," Woosley said.

"This clause of the contract is simply an option that allows us to use the most updated, state-of-the-art equipment if we ever undertake such an initiative."

http://www.arkansasonline.com/news/2017/aug/10/lottery-execs-favor-7-year-no-bid-deal-/