For one firm, it will be something like winning the Powerball: A state government contract worth more than $800 milion that comes along just once a decade in Pennsylvania.
The current contract to provide the gaming system and instant ticket game services that power the Pennsylvania Lottery expires in June 2019. The chance to become the lottery's partner for the next 10 years has the paucity of vendors who do this type of work pulling out all the stops. Two of the major players have hired lobbyists to assist their efforts to win this contract.
To give you an idea of what's at stake, let's look at the state Department of Revenue, which oversees the lottery, says Scientific Games International, the current lottery servicer for online and instant games, was paid from 2006 through April.
For providing the system to operate the games, which includes everything from the thousands of retailer terminals that process the ticket purchases to the communications network that connects them to the central system, Scientific Games received more than $484.1 million, and helped to generate $15.8 billion in lottery ticket sales.
For its instant games services, from printing to warehousing to distributing the tickets, it received $320.4 million. The instant games produced nearly $26.2 billion in ticket sales.
Combined, that's more than $800 million and doesn't even count the $12 million that Scientific Games will be paid for its online platform over the next two years to run the iLottery games (online instant games) that launched last month.
Needless to say, Scientific Games is very interested in continuing its long-standing relationship with Pennsylvania Lottery, which dates to the mid-1970s, when it became a supplier of instant games.
But IGT Global Solutions Corp., based in Providence, R.I., is doing all it can to throw a monkey wrench in that pursuit.
The state issued a request for proposals in March and gave firms until June 13 to submit bids. A couple of weeks before the deadline, IGT filed a protest, saying biases written into the request for proposals slanted the process in favor of Scientific Games.
Scientific Games, a Las Vegas, Nev.-based company, didn't see it that way. A company spokesman says they consider the solicitation provided a level playing field for all potential bidders.
But apparently, the commonwealth wasn't sure, despite the lottery having spent $500,000 preparing for the solicitation. On June 8, even before a hearing could be scheduled to vet IGT's concerns, bidders were notified the solicitation was cancelled.
Revenue department spokesman Jeff Johnson said it pulled the plug on the bid solicitation to ensure the integrity of the procurement process is a "fair and just competition among qualified" bidders, as the state's procurement law requires.
"Based on the solicitation documents, questions and answers during the solicitation process and information contained in a protest, the department determined that some requirements needed additional clarification to allow suppliers to properly respond to the RFP," Johnson said in an email. That response took several weeks to provide because of what Johnson and others said was the sensitive nature surrounding the procurement process and the multiple agencies involved in it.
Lottery director Drew Svitko declined to be interviewed for this story.
No date has been announced for when the state will restart the bidding process, but the drama to date has at least ensured that the cost of a re-do will eat into more of the lottery's profits.
What's at stake here
The Pennsylvania Lottery has one main objective: to generate money to pay for programs and services for older Pennsylvanians.
As more Pennsylvanians are aging into their senior years, demands for services from lottery-funded programs are expected to grow, putting more pressure on the lottery to boost its profits beyond the $1.1 billion generated in 2016-17.
Lottery officials hope that the introduction this past spring of Keno and iLottery — and soon virtual sports games — will draw millennials' interest and money, and drive up profits.
They are already showing signs of doing that.
Keno was launched May 1, and in the first two months generated $11.7 million in ticket sales. The online instant games launched May 22 produced $20.8 million in ticket sales through the end of last month.
If all the online game offerings are counted as a single game, it would be the fourth most popular in the lottery's 18 game line-up. Keno ranks eleventh.
The state's Independent Fiscal Office is estimating lottery profits to support senior programs topped $1.2 billion this past fiscal year and will approach $1.3 billion in 2018-19.
There's little doubt that the lottery officials would like the winner(s) of its next 10-year instant game and gaming systems contracts contest to continue to build on that trend.
The last time the contract was awarded the competition was fierce, drawing protests and lawsuits. And it involved two of the major players competing for the next contract.
Is there a certain coziness at play?
GTECH, now known as IGT, initially was awarded the 10-year gaming systems contract. But during the contract negotiations, a problem arose with the retailer terminals GTECH promised to provide as part of its bid.
Long story short, the Department of Revenue cancelled the GTECH contract and asked the companies that bid to submit their best and final offer. That time, Scientific Games won. GTECH filed an administrative protest followed by a lawsuit, and lost on both fronts.
This time around, in its protest of the cancelled procurement, IGT charged that the bid request would give Scientific Games advantages over other bidders.
Robert Vincent, IGT executive vice president, admits it's only natural to think that an incumbent company does have an edge because it has better knowledge of the operations, the organization and the geographic territory.
"But that doesn't mean that advantage should be reflected in any procurement document," he said. And that, he said, is what happened in the state's now-cancelled procurement effort.
Based on the bid requirements and subsequent information provided by state officials to vendors, IGT claims:
- In the past the lottery required vendors to provide all new equipment. This time around, it allows a vendor to use re-manufactured or equipment first used in Pennsylvania, which IGT claims can only benefit Scientific Games.
- It forces the successful bidder to cover the $21.5 million cost that the lottery is obligated to pay Scientific Games for recently acquired equipment for Keno and virtual sports games.
- It demands the winning company be ready to go live with its system on July 1, 2019. IGT says that would be a challenge for anyone other than Scientific Games, since it can take 12 months or more to swap one vendor's equipment and system for another's.
IGT believes the request for proposals was structured in a way that gave Scientific Games a $60 million to $70 million advantage over its competitors in terms of how much it would have to invest.
"That's remarkable," Vincent said.
IGT in its protest also raises the issue of a "revolving door" of employees between the lottery and Scientific Games.
It names former high-ranking lottery employees who cashed in their lottery experience for vice president or leadership positions at Scientific Games or its subcontractors.
One is Ed Trees, who was executive director of the lottery when the current contract for gaming systems and instant tickets was signed. He left the lottery in 2011.
Another is former executive director Chuck Kline, who left the lottery in 1997.
The most recent former executive director , a subcontractor of Scientific Games.
The "revolving door" doesn't just turn one way, according to IGT's protest. The company notes that several former Scientific Games employees now work for the Pennsylvania Lottery and hold positions "where they may influence the RFP process."
Vincent said he understands the argument that lottery is somewhat of a niche industry with only 44 lotteries operating in the U.S. and fewer than 200 worldwide so anybody who hires will be pulling from a small pool of people.
But he added, "you have to guard against that impacting on the way the procurement is done because obviously on the face of things people are going to look at that and say, 'Oh, that wasn't a fair playing field because the former director is working over there."
To the best of his knowledge, he said, there are no IGT employees in senior leadership positions — vice president or higher — who formerly worked for the Pennsylvania Lottery.
Responding to those issues
Officials from Scientific Games and lottery take issue with the "revolving door" concern.
"It is common for all suppliers to hire experienced employees from within the industry from time to time," said an official from Scientific Games, who insisted on answering questions by email and not being named because of the potential for litigation arising out of the battle for the lottery contract.
That official, as well as Johnson from the revenue department, noted that personnel moves like the ones IGT highlighted are regulated by applicable laws and policies. For example, Pennsylvania's ethics law would bar former lottery employees who go to work for a company that does business with the lottery to have any dealings with the lottery for a year after they leave.
Johnson said personnel moves of this sort "have absolutely no bearing on contract-related decisions."
Scientific Games also disputed the notion it was given any advantage in the way the bid request was structured.
Focusing particularly on the "used equipment" issue that IGT raised, Troy Thompson, spokesman for the state Department of General Services, which serves as the state's purchasing arm, said the intention in the bid request was for the successful bidder to deploy new equipment.
The reference to the used equipment had to do with items that the lottery owns, such as the instant ticket self-service vending machines that the successful bidder could use or choose to replace. He said that is an example of where some clarity in the bid requirements appears to be needed.
The Scientific Games official said using existing state-owned equipment is a standard requirement in lottery contracts. And it's smart business.
"The lottery is able to maximize the amount of funds transferred to the commonwealth as a result of limiting the amount of new equipment all bidding vendors need to include in their cost bids to the lottery," the official said.
As for the other arguments in the protest, Scientific Games said the terms of the solicitation presented a level playing field and that a new gaming system can be implemented in six to 12 months.
Clearing up confusion
The state's procurement process allows for an open forum for bidders to ask questions about the bid requirements and file protests before bids are opened.
Johnson from the revenue department said that "helps the commonwealth to assess how complex RFPs are perceived by interested parties, and whether their perceptions match the commonwealth's intent to be as fair and impartial as possible."
Clearly in this case, the department decided additional clarification was needed — and additional help as well.
The commonwealth announced on July 20 it is hiring a new consultant, Treya Partners of San Francisco, Calif., to assist with this procurement. Its job is to work with the Department of General Services to validate that the bid request is written in a way "to ensure clarity, objectivity and neutrality" and provide independent oversight of the contracting process "to get to an open and fair awarding of the lottery contract," according to lottery spokesman Gary Miller.
Treya's services will cost the lottery $325,000, bringing the amount it has spent on consultants for this particular procurement to $825,000.