While Tennessee's lottery won uncommonly good rates from two companies vying to sell lottery tickets here next year, those rates were not the lowest offered.
Indeed, they were the highest.
The difference: an estimated $23 million over the seven-year term of the contracts.
That's enough to help put almost 2,000 students through four years of college the intended purpose of the lottery.
Lottery officials say there were good reasons for rejecting the lowest rates. They had concerns about the reliability and accountability of the lowest-priced proposals. And, the officials say, giving the contracts to companies that may encounter problems could end up costing the state, and its students, money.
"If you can't buy a ticket because the system is down, you lose money for education, you don't make more money for education," said lottery CEO Rebecca Paul, who was not involved in evaluating the bid proposals.
Lottery experts outside Tennessee agreed that officials here were right to be cautious.
But they also noted:
" The two companies offering the lowest bids are the leading companies in the lottery field, with reputations for top-flight performance and a vested interest in maintaining those reputations.
" Both companies would have been financially liable if their proposed lottery operations encountered problems and cost the state money.
" Price played an unusually small role in deciding which bids were picked. Each proposal was scored like a test, and only 13.3% of the points on the test covered how much the companies were going to charge.
"I was a bit surprised the lowest bids were not taken," said Ed Stanek, longtime director of the Iowa lottery and past president of the North American Association of State and Provincial Lotteries.
"Both companies do a good job, and the low bidder generally takes precedence, I would think."
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Tennessee officials hope to launch the first lottery games Feb. 10.
These will be instant ticket, or scratch-off, games. Players will buy cardboard tickets and then scratch off an area on the tickets to reveal if they are winners.
Scientific Games International of Alpharetta, Ga., won the contract to print and distribute the scratch-off tickets to thousands of markets, gas stations and other retailers across the state. The company agreed to charge 1.139% of instant ticket sales to perform these services a contract the company estimates is worth $80 million over seven years.
The contract was awarded using a process called a "request for proposal," or RFP, which the state also uses for many contracts. This process allows agencies to evaluate proposals not only on price, but also on a variety of factors, including the marketing plan, security and the companies' experience, background and financial viability.
Each proposal is evaluated and scored. In the lottery's case, the evaluation was done by a committee comprising five lottery executives and a manager from the Virginia lottery. Attorneys from the state attorney general's office monitored the opening of the proposals and were present during the final scoring of the proposals.
Three companies submitted proposals for the scratch-off ticket contract here: Scientific Games, GTECH Corp. of West Greenwich, R.I., and Pollard Banknote Ltd. of Winnipeg, Manitoba, in Canada.
GTECH said it could fulfill the contract for the lowest cost: 1.04% of instant ticket sales. Pollard Banknote's proposal was next lowest: 1.1975% of sales.
Scientific Games' bid was highest at 1.235% although Paul negotiated that down to 1.139% after the company was declared the winner.
In its evaluation, the committee was not comfortable with GTECH's proposal. A major sticking point was the company's plan to use another vendor, Oberthur Gaming Technologies, to print the lottery tickets.
That could create problems because the lottery would have to go through GTECH to communicate with Oberthur, said Andy Davis, the lottery's chief financial and information systems officer and a member of the evaluation committee.
Getting tickets printed correctly and delivered swiftly is "critical" in generating maximum revenue, Davis and other lottery officials said.
"With Scientific Games printing their own tickets and also handling the distribution of those tickets, they are actually in contact with the lottery through the entire process," Davis said.
Pollard Banknote's proposal was spurned because the committee found it had too little experience in lottery startups and in managing distribution and warehousing.
The bottom line: The lottery will pay Scientific Games $7 million more than they would have paid GTECH over seven years.
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But GTECH did not go home empty-handed.
The company won the contract to run the other category of Tennessee's games: those in which customer selects the numbers at the retailer. Known as online games, they will start sometime after the instant ticket games are launched.
For the online games, customers will pick a series of numbers, which are then entered in computer terminals that are hooked into the lottery's central data center. Customers learn after drawings are held if the numbers they picked are winners.
GTECH will install the terminals in stores and other retailer outlets, set up a satellite telecommunications network and data center, train store employees and take care of related tasks. The GTECH terminals also will be used to validate the winning instant tickets.
For these services, GTECH agreed to accept 1.24% of all online and instant ticket sales a contract the company estimates is worth $120 million to $130 million over seven years. (The company initially bid its services for 1.299% but lowered the rate at Paul's behest after it won).
Scientific Games offered to do the same services for a lower percentage: 1.075%.
This time, lottery officials had concerns about the Scientific Games proposal. They were particularly apprehensive about its planned use of cellular technology, rather than satellites, to communicate with lottery terminals across the state during the startup period.
No lottery has used this technology except in the South American country of Peru, they noted.
Lottery officials also were concerned about the company's plan to purchase the cellular service through a third-party vendor that would lease space on cell towers, rather than own them. Additionally, they were concerned that the company wanted to contract with a third party to manage the network center rather than running it itself like GTECH had proposed. This could lead to finger-pointing and delays if something went wrong, Davis said.
Any resulting downtime could frustrate retailers, who might quit selling lottery tickets, and annoy customers, who might get sick of standing in line only to find that the ticket terminal was dead, Paul added.
"They may never play again," she said. "It's not as simple as a person who says this is a higher price, so therefore you are going to lose money."
The bottom line: The lottery will pay GTECH $16 million more than it would have paid Scientific Games over seven years.
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So how valid were the concerns that led lottery officials to pick the most costly proposals?
To help find out, The Tennessean talked with current and former lottery directors outside Tennessee. They agreed that officials here weren't wrong in rejecting proposals they thought would provide less-reliable service. But they questioned how large a risk the lowest bids actually carried.
Ernie Passailaigue, director of the South Carolina Education Lottery, said he could understand the reluctance of Tennessee officials to launch the first instant lottery games with the largely untested cellular technology.
However, he and others said the contracts carry a form of insurance.
Lottery vendors are required to pay damages if they can't deliver the goods as promised under their contracts.
South Carolina, for instance, used such a clause in its lottery contract with Scientific Games when subcontractor AT&T said it would not be able to get the system up and running in the time frame called for under the contract, Passailaigue said.
The state held Scientific Games' feet to the fire, and the company worked hard to find a way around the problem, he said.
"We don't do anything here without some degree of assurance that we think it can perform, but remember, the vendors are legally obligated to perform," Passailaigue said.
And new technology can work out smoothly, said Ralph Decker, former director for the New Mexico, Kansas and Arizona lotteries who also held management posts with the Colorado and Missouri lotteries.
New Mexico chose cutting-edge satellite technology offered by GTECH for its lottery startup in the mid-1990s because it promised more reliable performance, Decker said.
At that point it had been used only by Poland's lottery in Europe. Nevertheless, it worked well, Decker said.
"I wouldn't really be concerned about cellular because the vendors are sticking their necks out and get hefty penalties if they don't perform," he said.
"It would almost destroy them in the industry if it didn't work," he said. "Your reputation is everything in that industry."
Stanek said he would not have been concerned about the GTECH instant ticket proposal calling for another company, Oberthur, to print the tickets. He said Oberthur was a top-notch company.
"They are very credible," Stanek said. "They do business in and outside the United States. They are a large company. They have been very dependable."