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Wednesday, February 28, 2007

Indiana Senate approves lottery privatization

Sorry it's been a while since my last post - it's been hectic. I'm gonna get back into the swing of things though....

Yesterday, the Senate here in my homestate approved a measure that would privatize the State lottery system. The question is, is this a good idea?

The benefits are obvious: efficiency gains, immediate monetary reward to the State for "selling" the lottery system which could be used for a whole host of things. Note that "selling" is in quotes because the lottery would technically just be contracted out - not necessarily permanently so.

Besides, there are good reasons government might not feel it is ethically appropriate to be offering what some deem to be addict-creating behavior.

The cons however are not inconsequential. Most certainly, with privatization would come a more focussed marketing campaign and a greater output of lottery services. If we assume lottery to be a "sin," or a creator of some amount of negative externalities, then privatization - which would strip most all government meddling - may not be the best thing.

The Indiana lottery bill would give my State $1 billion upfront and royalty payments of $200 million annually. The great thing about the bill, which critics overlook is the following clauses:

"Specifies that the management agreement may require the manager to pay an additional royalty payment each year if the manager's gross revenues from the sale of lottery tickets in a year exceed the commission's gross revenues from the sale of lottery tickets in the twelve months preceding the date of execution of the management agreement. "

"that the management agreement must require that, beginning with the second full state fiscal year after the execution of the management agreement, the manager must make payments to the state lottery commission if the manager's revenue growth for a state fiscal year exceeds a baseline growth percentage equal to the average annual growth in revenue from the lottery during the last five state fiscal years preceding July 1, 2006."

"Provides that advertising of the lottery must be approved by the state lottery commission. "

Basically, that clause can help ensure that the money received from privatization would meet or exceed the net present value of expected revenues had the State decided not to privatize. It's not perfect, but it's a great check. It also helps ensure that other checks are in place such that the games offered and the marketing done by the private entity is in check by Indiana. There are tons more of these clauses in the curren legislation - all of which I think helps address the "cons."

Just like the leasing of the Indiana toll road, the legislation has been written in a way that provides our State with large upfront benefits, yet allows the government to maintain a fairly strong regulatory grip on the system.

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