Pennsylvania bets on $70 billion in cash flows

January 15, 2013


A big brawl is going on in Pennsylvania over the way that Republican Governor Tom Corbett has been maneuvering to privatize the state’s successful public lottery. The governor held negotiations in secret for months before announcing in November, 2012 that he had chosen a single bidder, the UK’s Camelot Global Services, to be awarded a 20-25 year contract to operate the lottery.

This announcement, made while the Pennsylvania legislature was in recess, was intended to move the governor’s process to conclusion before the legislature came back into session. Public outrage caused Corbett to initially delay the contract, but in a move that seemed to show contempt for the state’s legislators, his office gave Camelot a “Notice of Award” late last Friday; just before the Senate Finance Committee was to hold a hearing on the details of the contract.

In many ways, this debate is the Maginot Line of the privatization story. Although the Pennsylvania lottery is one of the best run and most profitable in the nation, Governor Corbett has claimed that by outsourcing it, greater profits can be achieved. This really doesn’t make sense, because substantial management fees and profits will have to be paid to Camelot. Others have argued that in fact by paying these fees and profits to an outside firm, it will actually diminish the revenues from the lottery that Pennsylvania can use for purposes such as supporting senior citizens.

To achieve higher profits, Camelot has offered to restructure the current lottery arrangement and make two major changes: expand the number of games offered (which the current public management does not have the authority to do), and transfer a reduced amount of revenue to the state (3 percent less). The Patriot News explains:

To hit its profit commitments, Camelot intends to introduce Keno and online lottery games to the lottery’s line-up and have the state’s guaranteed profit requirement remain at 27 cents on every dollar the lottery receives going to fund programs for senior citizens. That requirement is set by law and is expected to rise to 30 cents on every dollar in two years.

Since the deal has been negotiated with minimal transparency, it’s somewhat difficult to assess Camelot’s contention of increased profits. The progressive group Keystone Research did a model of what additional profits Camelot would guarantee to the state. You can see in Keystone’s chart that an upfront blast of increased profits lasts for about five years, but then the increase in profits barely keeps up with the average inflation rate for the balance of the 20-year contract.

The lottery under public management has been consistently profitable for decades. Although it suffered revenue declines from 2007 to 2009, it had record profits last year.

Legislators at the Senate Finance hearing on Monday wanted to know how Camelot would increase usage of the lottery. The AP’s Marc Levy captured the exchange (emphasis mine):

Besides those legal hurdles, Camelot’s big challenge will be to persuade more people — perhaps even double the number, or more — to play the Pennsylvania Lottery.

Senate Finance Committee Chairman Michael Brubaker, R-Lancaster, asked whether such a strategy is realistic. [Camelot’s] Kovach insisted his company has carried out research that gives it confidence.

“The research would indicate to us that there are infrequent, lapsed and non-players, and there is a market that currently is not being focused on by the lottery,” he said. “And some of the things the lottery has done has been very successful with the core player, but actually presents some barriers to infrequent or lapsed players playing.”

Sen. Pat Vance, R-Cumberland, told Kovach he was being vague and pressed him for details.

Kovach responded that Camelot has marketing techniques and ways in which it designs and presents games and terminals that make them friendlier to the uninitiated or unfamiliar.

“The use of language, the complexity of the game can sometimes put off people who might play, but just find it a little too difficult, the barriers to actually playing a little too intimidating,” he said. “And we would look to reduce those barriers.”

Excuse my cynicism, but lottery games are not very challenging to play. It sounds as if Camelot wants to target the least common denominator to bulk up lottery revenues. I’m ambivalent about gaming, but this sounds predatory on the part of Camelot, and sadly, it seems to be supported by Governor Corbett. Numerous legislators in the hearing on Monday decried the need to spread gambling further to the population.

Governor Corbett’s entire proposal happened with almost no oversight and no transparency on the financials. It would be a shame if the governor finalized this contract without further public vetting. It would tie the state’s hands for 20 to 25 years. And that would be betting a lot.


Patriot News: Pennsylvania Lottery on track to beat last year’s record profits

Patriot News: Lottery privatization: Auditor General-elect Eugene DePasquale wants more information about this outsourcing

State of Pennsylvania: Notice of Award to Camelot Global Services

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