Lottery license bidding

I have written this text for, and Conor Porter has partly edited it.

Lottery gaming is still based on a monopoly system in almost all countries. At the same time, however, the activities of other gambling verticals are based in more and more countries on a licensing system with dozens or even hundreds of gambling companies. Is the traditional monopoly system based on law already too old-fashioned to conduct lottery activities?

Gambling operations cause significant problems for some customers. It is therefore up to society to restrict this activity. The situation is the same as in alcohol and tobacco businesses. In the area of gambling, states have decided not only to regulate operations but also to own the companies that run the lottery business by themselves. From this background, state lotteries have emerged, in which the state acts as the owner of the companies. In some cases, state lotteries are part of the state administration and do not operate like regular business ventures. In such a situation, there is certainly no attempt to maximize business results.

The interesting question is, why have states ended up controlling lottery businesses in particular? From society’s point of view, the starting point would seem to be the precise regulation of hazardous activities. In gambling, however, the situation appears to be just the opposite. The most problematic activity for players, casino games, has always been in private business in most countries. The next most dangerous area, betting, has also moved into the normal course of business almost everywhere. Of course, states continue to control these gambling areas through legislation and regulation, but there is no longer any state’s direct ownership of these activities – if at all. In contrast, the situation is different for the least problematic gambling vertical, lottery games, the situation is different – why?

The European Court of Justice has outlined the justification of the gambling monopoly system for EU countries. According to court rulings, Member States are free to decide on their gambling legislation as long as the rationale for the schemes is credible. A monopoly system can be a legitimate model for carrying out gambling activities if the primary purpose is to prevent problems related to gambling activities – problem gambling and criminal activities (including money laundering). According to the ECJ, fiscal targets, gambling revenues are not legitimate for a monopoly system. Against this line, it is fascinating to consider how and why rather dangerous casino activities are much less under the control of Member States than reasonably harmless lottery activities.

I’m not even trying to be a lawyer, so I’ll stop legal reflection on this. However, it is interesting to think about how states should organize lottery activities to meet legal requirements while still generating significant revenues for states. I do not favor full liberalization / licensing of lottery activities, although, in principle, I favor a free-market economy. There are usually so many gambling companies in a free competition that the business is decentralized to several operators. In lottery games, this would not necessarily be in the interest of customers because, in lottery games, the big jackpot is the primary motive for playing. In a competitive situation, the size of the jackpots would collapse compared to the current monopoly situation, and I do not consider that to be a good thing for customers.

In my current role as a gambling consultant, I have had the opportunity, for a small part, to be involved in the lottery exclusive license bidding process in a couple of countries. That is, in my view, the best way to combine the monopoly system and the market economy to preserve the legal legitimacy of the system and optimize the revenue on the operation. The bidding process would also avoid the strange situations in which countries have given privately-owned companies the exclusive right to run lottery activities. I have wondered why no one has questioned such cases, which are numerous in Europe, for example.

Bidding for a lottery license is undeniably a very laborious process. The UK is probably the most famous country that uses the lottery license. There, the license is in principle granted for ten years at a time. If I have understood correctly, Camelot UK, which has had the license since the beginning of the system, starts preparing for the bidding about a couple of years before the expiry of the current license. Dozens, unless the hundreds, employees will be involved in preparing tender documents, and costs are indeed very high. I have heard that the tender documents have contained more than 1,000 pages of text per participating company. It is also a tremendous job to evaluate the offers and decide who will win the license.

However, the bidding model seems very good otherwise. The competition will help to preserve the best aspects of lottery activities while at the same time dismantling the dual role of states. The state acts as a self-regulator in a traditional monopoly system, which is not the best possible situation. It is certainly challenging, if not impossible, for states to forget the importance of lottery revenues when making regulatory decisions. In a competitive-based model, this can be expected to be more accessible.

I know that there has also been criticism of lottery licensing in the UK. I think that the participating companies present their estimates of revenue development during the licensing period, which has a reasonably significant weight in selecting the licensee. However, I assume that that return estimate is not a promise of any kind. If the winning company does not produce the amount presented to the state, it will face no financial consequences. Admittedly, there may be some inconvenience in getting the following license.

No system is perfect, but I still see lottery monopoly licensing as a model that other countries should seriously consider. It would be interesting to consider a similar model, based on a limited number of licenses, for other gambling verticals too.