The trouble with tenders

| By contenteditor
Selecting the best candidate to run a state lottery can be the difference between hundreds of millions being added to, or missing from, a country’s coffers. But why does such an important process tend to descend into court challenges and controversy asks Jari Vähänen?
The trouble with tenders

States have the right to decide how they organise gambling activities in their territory. Because gambling causes a problem for some consumers, it is regulated worldwide. 

States also have economic reasons to keep gambling in their own hands. In general, the two main tasks of regulation are to protect consumers, such as preventing gambling problems and collecting financial income for the state treasury and good causes.

There are significant differences between European countries in how gambling activities are organised in the countries. For example, in my home country, Finland, the state has ended up with a monopoly over all gambling activities, in which a 100% state-owned company operates all product areas. 

However, in most European countries, operations are based on gambling licenses, which gambling companies can apply for, at least for sports betting and casino activities. Instead, lottery activities are still organised in almost all countries based on a state-controlled and, in some cases, owned monopoly.

Quantative versus qualitative licensing

Sports betting and online casino operations are generally based on a licensing process. The state sets out the conditions that gambling companies must meet to obtain licenses. There is usually no limit to the total number of licenses, but all eligible companies can get one. 

Regulators monitor licensed companies’ activities and can set limits on their actions that everyone must adhere to. The operation of the license-based system is very similar to the free financial competition, where customers choose the company, they like best for gambling.

The criteria for granting licenses are the same for everyone, and the conditions are well known. For companies, the situation is clear, and the permitting process is transparent and fair. The biggest problems with the license-based system are that regulators do not have sufficient practical opportunities to react to the activities of companies operating without a licence. 

The performance of systems in different countries can be measured by the degree of channeling of gaming activities. The channelisation rate of well-functioning gambling systems should be close to 90%, with only about 10% of gambling activity taking place via unregulated sites. 

Unfortunately, in many countries, the channeling rate is much lower. The reasons for this are worthy of a separate column.

As I have already said, states have chosen to organise lottery activities differently from other forms of gambling for one reason or another. The reason for this is undoubtedly not customer protection, as it is known that lottery games cause just a few gambling problems, and there is a massive amount of problematic online casino activity, for example. 

To the best of my knowledge, there has been no transition of lottery games in any country to a similar licence-based system commonly used in other gambling areas. The model of dozens of licensed companies would likely pose significant challenges to the lottery business as a whole, as the interest in lottery games depends very much on the size of the jackpots. If dozens of different lotteries were on offer, the jackpot sizes would decrease, and customer interest could drop.

Unfair competition?

In many countries, the state owns a lottery monopoly company. Many countries also have a system in which the state has granted exclusive rights to lottery games to a particular company, in which the state is involved as a co-owner or is otherwise able to influence the company’s operations. A few countries have a licence-based model for lottery activities, but only one licence is allowed even then. 

The best-known example of such a model is in the UK. The state owns the lottery licence and organises a competition for the operative company, usually run every ten years.

Running a UK National Lottery is a multi-billion pound business annually, and the operating company receives a small percentage of sales, but high monetary profit. Choosing the best possible company is a crucial decision for the state, as good business operations impact at least hundreds of millions of pounds on the state’s annual revenue. Therefore, it is in the state’s interest to seek the best possible company to run the practical lottery operations.

Applying for a lottery licence is an arduous and expensive process that usually takes up to a couple of years. The state has had big challenges in getting companies involved in that process. 

The bidding model for a single lottery licence works well in principle, but there are numerous challenges in its practical implementation. 

The company that manages the current license usually has a clear advantage over other companies because the company has a precise understanding of the resources required to operate, and those resources are already in place. Others have to make a lot of guesses that can cause too much financial uncertainty. That is probably one of the main reasons Camelot, which has operated the lottery since its inception in 1994, has managed to win all the competitions held so far.

The basic idea of ​​public tenders is excellent. The tender aims to increase the process’s transparency and select the companies that best meet the tender criteria. 

However, there are enough challenges in the bidding process – the greater the competition area, the more factors to assess. When there are many variables, it takes time to evaluate each influencing factor. 

On top of all that, a completely neutral score can be made for only a few things to evaluate. At many points, the score ultimately depends on the personal views of the evaluators. There is also the challenge of assigning weights to different components. 

If this emphasis fails, then a company that no one really wants would be chosen. On the other hand, this company has then been best able to answer the questions of its tender.

The basic idea of the public bidding process has been not only to find the best possible solution but also to get rid of a model that favours friends or otherwise familiar companies. However, the challenge for the tender is that only the factors described in the tender documents can be taken into account in the evaluation. 

However, cheating, by answering everything positively for example, cannot succeed because the answers must also be validated. The bidders must provide evidence of their existing capabilities. 

If something significant is forgotten from the competition rules, it is no longer possible to add it in the middle of the process. Still, the options are to continue the process until the end or suspend the competition and start a new one.

All ends in tears

As expected, the UK’s recent lottery licensing competition has received a great deal of criticism. I believe this would have happened even if the competition’s winner had been any of the four companies involved. 

The lottery is such a massive business of tens of billions of pounds that it will be fought for to the end. In general, however, it is unfortunate that in this case the final winner of the fourth National Lottery licence will be decided by the court and not by the organiser of the competition itself. When that is the case, something is wrong with the bidding process. As we well know, this was certainly not the first time a lottery licensee has been decided through litigation.

I got to play a minor role in the recent UK lottery license process, and that’s why I don’t want to say more about the correctness of the result and the winner. However, I know the enormous amount of work that each of the four participants has had to do during the process. 

I’m sure no one voluntarily wants to rewrite about a thousand pages of answers because the process would be poorly implemented. The competition rules should be so clear and correct that the winner would be clear without retrospective disputes. 

Now, however, it seems that as many as two in four entrants will seek redress from the judiciary, even though the decision on the winner should be in the hands of the Gambling Commission.

Despite the challenges of the process, I prefer the model used in the UK to the model used in many other countries where the state decides on the lottery operator without any competition. 

The operator obtained through the tender increases the efficiency of the operation compared to the traditional monopoly system. 

However, the competitive model does not reduce the weight of responsible operations and does not jeopardise other consumer protection. 

I hope and believe that this model will become more widespread in the rest of the world. However, the tendering process needs to be constantly developed to make it as transparent as possible and make the tender a winner without immediately descending into arguments and recriminations.

Jari Vähänen has a long career in the gambling industry. He has mainly worked for the Finnish national lottery company, Veikkaus with responsibility, among other things, for horse and sports betting, digital, product and business development, company strategy, and international affairs. He resigned from the lottery in spring 2020, and established The Finnish Gambling Consultants Ltd, where he is now helping lotteries and other gambling operators and suppliers further develop their businesses.

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