Kentucky state lottery taps Camelot advice

Kentucky's state lottery is recruiting UK operator Camelot to advise on how to revive ailing sales, the latest US state contemplating British-style privatisation to stimulate gambling activity.

UK-based Camelot, owned since 2010 by the Ontario Teachers' Pension Plan, has already advised California, Massachusetts and Texas, and was commissioned by New York in January to draw up a five-year turnround plan.

Arch Gleason of the Kentucky Lottery Corporation, said Camelot would help "identify priorities, issues and opportunities to increase sales, better serve retailers, improve efficiencies, reduce costs and increase net revenues for public benefit".

Camelot has run the UK lottery since its inception in 1994, adding successful games such as EuroMillions and growing sales through online platforms. Its current licence runs until 2023.

In April, it announced it was creating Camelot Global to win international consultancy deals. The far bigger prize is to turn these consultancies into long-term tenders to operate or help run lotteries around the world.

But though it won the tender to run Ireland's state lottery, the quest to win licences to run US state lotteries is harder because of the complexity of each state's regulatory issues and political resistance.

There is much at stake - nearly every US state operates a lottery, collectively worth between $60bn and $70bn annually, according to estimates.

Many lotteries, which rival the commercial gambling sector in size and provide 60 per cent of all state gambling proceeds, have seen revenues stagnate through competition and other forms of gambling.

Privatising operations offers an attractive solution. "Everyone is essentially looking for a magic bullet to increase revenues," said Victor Matheson, a professor at Holy Cross University who has studied the economics of lotteries.

"The question is what are these companies doing that is so much better than what state-run organisations do."

Private owners like Camelot's OTPP, with net assets in excess of £130bn, provide the financial muscle to tempt state lotteries into doing business.

A Camelot consortium won the 20-year Irish lottery licence with an upfront bid of €405m.

But the political hurdles are considerable. Pennsylvania last year sought to hire Camelot to manage its lottery - a deal that would have guaranteed the state $34.6bn in revenue over 20 years.

Camelot offered Pennsylvania $150m upfront and a $50m letter of credit. But the plan was abandoned because of a political firestorm fuelled by pushback from labour unions and convenience stores and lack of competitors to Camelot.

Alex Kovach of Camelot Global said: "We are a relatively new entrant into the US market - a highly-regulated, political market that needs to be viewed and approached on a state-by-state basis."

States are obliged by law to operate lotteries themselves but can contract out day-to-day functions to private firms. The most important of these is online integration.

"Most of the lotteries realise that the future is going to be online," said Richard McGowan, an expert on gambling at Boston College, who points to a 2013 Justice Department ruling that allowed lotteries to offer interactive games over the internet.

States lack the online know-how. Their typical lottery players are in their late 40s or 50s. So European operators such as Camelot and GTech - owned by Italy's Lottomatica - are advising on how to appeal to younger, more tech-savvy audiences.

But the initial courtship of the private sector is coming under strain.

In 2010, Illinois became the first state to contract out its lottery operations when it hired a GTech-led consortium to expand its customer base and increase profits. GTech would, in turn, receive up to five per cent of net revenue.

The move resulted in more headaches than windfall gains. The consortium's sales have fallen short of expectations and are likely to miss its target again this year by $200m.

A public feud has broken out over how much the state should be compensated for the loss. GTech argues the state imposed restrictions that prevented it from completing its business plan.

Still, GTech, which is in talks to acquire International Game Technology, has made the furthest inroads into lottery contracting. It has long-term contracts with 26 state lotteries - including integrated services contracts in three states, such as Illinois.

GTech said privatisation should appeal to states running traditional lotteries with traditional bureaucracies.

"Policy makers look at it and say 'Why are we involved in that?' State governments are saying why not transfer the performance risk over to the private sector and instead play the role of regulator?" said GTech.

[email protected]

Twitter: @rogerblitz

.

© The Financial Times Limited 2014. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation