Wednesday, June 17, 2015

Skepticism should be part of every privatization deal

Posted By on Wed, Jun 17, 2015 at 12:45 PM

click to enlarge Lesley Weidenbener
  • Lesley Weidenbener

Then-Hoosier Lottery head Karl Browning said three years ago he could see “no scenario” in which the state could produce – on its own – the revenue and profits that a private vendor promised it could.

Turns out that private firm – GTECH – couldn’t do it either.

In fact, the company fell so far short of those promises that the Hoosier Lottery board on Friday revamped its contract – reducing GTECH’s financial goals significantly. In Fiscal Year 2016, for example, the company will no longer need to achieve $365 million in revenue for the state or face financial penalty. It will now be just $270 million.

“The assumptions as it turns out weren’t valid,” current Lottery Commission Chairman William Zielke said in a story in The Journal Gazette. “What this plan does is reflect more accurately the marketplace based on their two years of experience, their understanding of Indiana.”

And the marketplace is in what lottery officials are calling jackpot fatigue – a phenomenon they say is occurring nationwide.

Last year, the Hoosier Lottery – under GTECH’s management – produced about $250 million for the state. This year, the number fell to $243 million, an amount that includes the penalty GTECH paid for failing to meet its goals.

That’s barely better than the amount the state was producing by managing the lottery on its own. And at that time, a consultant hired by the state had projected the lottery could increase its profits by 40 percent to 60 percent simply by changing some of its own operations.

But in the end, Browning insisted the state would do better by hiring a private company.

“We are not achieving our potential today,” Browning told the commission back in 2012. “We will under this contract.”

Given the numbers, it seems Browning had it wrong.

Of course, we’ll never know if the numbers would have been even worse if the state had retained control of all lottery operations. That’s certainly a possibility, one that commission member Kate Snedeker emphasized during Friday’s meeting.

“To me, the crux of the issue is whether or not we are better off with GTECH,” Snedeker says in The Journal Gazette story. “The answer is clearly yes, we – the commission, taxpayers and state – are better off today than we were before we engaged them.”

But the experience is yet another lesson in turning state functions over to private vendors: Skepticism is warranted.

That’s not to say that privatization is a bad thing. Hundreds, if not thousands, of state functions are handled commendably by private firms and have been for years. And at the Hoosier Lottery, even before GTECH took over, private companies were handling the vast majority of sales and distribution functions.

But often when the state turns to the private sector for especially large projects or programs, the results fail to meet the promise.

After a public debacle, the state eventually canceled its contract with IBM for its part in the privatization of welfare eligibility services, although private firms are still handling much of the job. The state is running into all sorts of bumps after turning charters and some failing private schools over to private firms. And the company that leased the Indiana Toll Road recent filed for bankruptcy and sold, although the highway’s operation has continued.

Hiring private firms may often still be the right call and it might have been in each of these cases as well. But extravagant projections – like the ones GTECH made about its ability to significant increase lottery revenue – must be viewed with at least some skepticism, something that’s too often missing.

Lesley Weidenbener is executive editor of TheStatehouseFile.com, a news service powered by Franklin College journalism students.

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