Arkansas Lottery vendor Intralot defends its cost | Arkansas Blog

Friday, December 5, 2014

Arkansas Lottery vendor Intralot defends its cost

Posted By on Fri, Dec 5, 2014 at 6:38 AM

The legislature's lottery oversight committee today will take up a consultant's review of lottery operations with many criticisms including high cost of vendor contracts.

The Arkansas Lottery's ongoing negotiations with Intralot, a supplier of on-line games, seems likely to be among the topics of discussion. A Lottery Commission meeting Thursday to vote on a proposed contract extension for Intralot was abruptly cancelled after Sen. Jimmy Hickey, who led the push for a lottery review, suggested to Lottery Director Bishop Woosley that it might be problematic to approve a contract that consultants would later say was too costly.

A couple of things to add to this stew:

1) Under my FOI, the lottery compiled a couple of days of e-mail discussions by Intralot, Woosley and commissioners about the negotiations. You can see them all here. You'll note continued questioning from Commissioner Bruce Engstrom about the cost of the Intralot agreement.

2) As I noted yesterday, Camelot Global's report to the legislature noted that lottery vendor costs were higher in Arkansas than in other states. This has been a persistent complaint. But I've also mentioned before that Intralot has insisted that the cost comparisons aren't fair because they don't consider  differences in startup costs and the economies of scale. I asked the company for more specifics on that argument and received a prepared statement last night responding to the Camelot report. From Intralot:

Intralot is the “online” vendor for the ASL. As such, Intralot owns and operates the technology backbone that runs the lottery games - the computer servers, the in-store sales terminals, the satellite uplinks – and is paid a percentage of sales to operate the lottery games. Intralot has no control over the game selection, retailer recruitment, advertising or marketing.

Intralot’s contract provided an initial 7-year term with the option for ASL to extend an additional 3 years at the same rate, currently 2.49%.

Intralot has been a great partner for the ASL. We were the only company to submit a bid to serve as the online vendor. We believe our competitors declined to bid because Arkansas made cost the most important factor in the RFP and because we are known as a low-cost vendor. We exceeded the start-up deadlines given to us and have continued to meet or exceed the expectations given to us.

Intralot recognizes that lottery sales are down and has been willing to negotiate a rate reduction to help stabilize the ASL. Our current proposal is among the lowest rates for lotteries of comparable size to Arkansas, 2.165%. Our proposal would give ASL around $1.2 million in savings beginning in 2015. There is simply no reason to expect any vendor would be willing to completely reinvent the ASL’s technology infrastructure at the rates quoted

Unfortunately, the states used as “peer states” are not appropriate comparable examples. Larger, higher-grossing lotteries – TN, GA, SC, NC – are able to negotiate lower rates because they do so much more in volume than smaller, lower-grossing lotteries like Arkansas. In other words, they charge a lower rate because they know they’ll make more actual dollars. For example, the 2.06% in GA nets the vendor $80 million vs. the $20 million here. Yes, a vendor has to spend more in a larger state but it’s the same economic concept found in many other industries: the volume discount. The same reason big box stores pay much less per unit for the same item than a local mom-and-pop.

There are also significant differences between the states looked at and Arkansas. OK’s rate doesn’t mention their current contract uses the same equipment from their first contract (i.e.: used equipment) which would naturally result in a lower rate (their original contract rate was over 4%). SC’s rate doesn’t mention that they own their own equipment, a significant capital outlay on their part, but resulting in a lower vendor rate.

More comparable “peer states” would be Wisconsin, Arizona and Missouri. All have sales and vendor rates that are similar to AR’s: Wisconsin $337m, 5.08%, Arizona $484m, 4.045%, and Missouri $768m, 4.405%

With all due respect to Camelot Global, Intralot was not interviewed or consulted for this study to help explain the nature of our services, nor was any consideration given to our offers to lower the online vendor rate during the extension years."

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