City officials are considering a rebid on the controversial lottery contract, marking the first time that the possibility has been acknowledged. The original bid, which was approved by the city in the spring, has been in limbo awaiting council approval ever since—-the winners, the W2I partnership between gaming megalith Intralot and local investors Warren C. Williams and Alaka Williams, have come under fire from councilmembers for certain unsavory connections.

The deliberations have come in a memo [PDF] prepared this week by Jay Young of the D.C. Lottery Board at the request of Chief Financial Officer Natwar M. Gandhi in anticipation of the likelihood that the contract will be rejected by default, seeing as it must be approved by early November or it will expire.

Here’s the money quote from the memo:

The negative impact of such a rejection on DCLB operations will be both extensive and lengthy. The rebid scenarios are fairly unattractive and filled with uncertainties and the prospect of inferior results. Most likely the current vendor contract for the gaming system will have to be extended and the timeframe for implementing a new system is now well into 2010. The net impact of this delay will be a steep decline in DCLB’s operating certainty and potentially a major decline in financial results.

The memo was mentioned yesterday in a scathing Washington Post editorial calling on Council Chairman Vincent C. Gray to bring the matter to a council vote.

What’s the problem with a rebid?

Well, for one, it would set a bad precedent, according to folks in the city contracting apparatus and people supporting the W2I bid, to have a group that won the contract fair and square not have their bid approved by the council. Furthermore, as Young says in his memo, the likelihood is that a rebid will result in a much, much worse deal for the District. Writes Young, “given the political imbroglio and media coverage…future offered pricing will be substantially higher than the previous submissions.”

An Intralot spokesperson told LL in July that his company would not be interested in rebidding, meaning that the likely only bidder would be current contract holder Lottery Technology Enterprises, a longstanding partnership between GTECH and local crony Leonard Manning.

LL’s position, for the record, is that this process has been bunk from the beginning. The conflict is rooted in a District contracting system that for decades has encouraged local and minority partnership with city contracts. It has its benefits, to be sure, but it also encourages mismanagement and cronyism, particularly in an arena as fraught as a lottery. It might be taboo in this town, but LL would prefer to see a rebid without any local participation at all. There’s no reason either Manning or the Williamses need to be involved with this thing.

Young’s memo is after the jump.

MEMORANDUM October 6, 2008

TO: Angell Jacobs Director of Operations OCFO

THROUGH: Jeanette A. Michael Executive Director DCLB

FROM: Jay Young, Esq. COO, DCLB

RE: Contract Failure and Rebid

I. Introduction

The DCLB has been asked to scenario plan and provide summary information to the Executive Office of the OCFO related to the potential rejection of the Gaming System contract (“Contract”) by the District of Columbia Council, If the Council rejects the Contract as currently submitted, I suspect that it will do so on grounds not related to the substance of the offers, the soundness of the proposed solution, or the administration of the procurement process, but rather on the discretionary latitude provided to Council by legislative fiat. Since that discretion is not bounded by any factual predicate, I imagine that the request to rebid the contract will be generic and non-specific. As a result, the DCLB will be free to use exactly the same concepts, materials, background information, architecture, and timelines used in developing the current Contract proposal. Accordingly, the previous Request for Proposal package can be modified by the DCLB to include any new twists available in the marketplace (e.g. ITVMs, wireless delivery, 3rd party games) and the Procurement Department can clarify and validate the previous administrative flaws, inconsistencies and omissions that plagued the previous bid package.

II. Concerns with Rebidding

There are several concerns associated with a mandated rebidding process. First, the previous RFP package only drew interest from two bidders and the information contained in the winning bid has practically been made a matter of public record. The reasons that companies chose not to bid include (1) the perceived flaws in the political environment; (2) the lack of the size and scale of the DC lottery market; and (3) operational constraints including mandated LSDBE participation. Since none of these elements has been eradicated, there is a high probability that fewer than two companies will submit new bids to the same requirements (i.e., the DCLB will only receive one bid). Also, given the financial disclosure that has taken place, it is unlikely that the bids will be as competitively priced as the previous submissions. In fact the possibility exists that given the political imbroglio and media coverage that future offered pricing will be substantially higher than the previous submissions. Further, given that the most senior, experienced, and committed team available was already paneled to serve on the Source Selection Board for the rejected Contract submission, it is unlikely that a similarly situated group can be convened, will be willing to serve, or is available to evaluate a new round of proposals. This is especially true since efforts to reward previous panel members for their extraordinary work were denied. This is not the kind of work that you want to force professionals to participate in. As a result, garnering the necessary skills will be a challenge and may require securing resources outside of the normal channels.

Another issue is that because the previously proposed implementation scheduled has imploded, it is clear that either a contract extension needs to be negotiated, or some other extreme remedy needs to be adopted in order to preserve the option of uninterrupted lottery operations. The current vendor agreement expires in November of 2009 and as presently constituted it is highly unlikely that a system conversion will take place before the existing contract expires. That means a contract extension will have to be negotiated starting early in 2009. Since the incumbent is facing the risk of business loss, it is potentially likely that the cost of the extension will exceed the cost of the current agreement (e.g., 5% vs. 4.2%). Alternatives to this scenario would have to include options not currently in evidence, a new third party agreement, or novel solution not currently being discussed. In either event, a termination remedy of the current contract is not likely to have the desired impact of allowing the DCLB to obtain better technology at a lower cost, while maintaining the level of existing sales.

Furthermore, during the pendency of the delay of a new gaming system, the DCLB will likely suffer a steep drop in operational effectiveness. Indeed, the DCLB is currently experiencing an increase in service outages, software malfunctions, and performance delays. Given the age of the system, the current level of support, and the continual decline of professional expertise familiar with the outdated technology, it is foreseeable that the network will operate within parameters far below those experienced over the past 5 years. In the near future the agency will likely face a major system breakdown, service outage, or malfunction that could take weeks to repair and destroy the public’s trust in the operation. The current technology also limits the release of new games and play styles. The combined impact of these elements indicates that DCLB’s future financial performance is likely to suffer and underperform its stated transfer objectives.

III. Revised Timelines

Because of the elements referenced above it is like that the revised timeline would look something like the following:

Element Rationale Time
Start Rebid Council Rejection December 1,2008
Modify RFP Docs Clean up problems February 2009
Solicitation on Street Notify vendors, etc. March, 2009
Replies Q&A, Amendments, Etc. July 2009
Evaluation Review proposals, site visits October 2009
Award Scoring and reporting December 2009
Implementation and Rollover New work rules, procedures, etc. May 2010

Reasonable minds may differ on these timeframes. However, history has demonstrated that more aggressive schedules rarely if ever occur. Accordingly, extensive discussion about a month or two of savings is not meritorious. Rather several things should be made abundantly clear: (1) the best case new scenarios are worse than the worse case old scenarios; (2) the current view of the time horizons stretch well beyond the planning cycle; and (3) there are no guarantees that if a rebid results in someone other than the incumbent winning the award that we will not be back in exactly the same place in December of 2009.

IV. Conclusion

The current contract proposal may be rejected by Council. The negative impact of such a rejection on DCLB operations will be both extensive and lengthy. The rebid scenarios are fairly unattractive and filled with uncertainties and the prospect of inferior results. Most likely the current vendor contract for the gaming system will have to be extended and the timeframe for implementing a new system is now well into 2010. The net impact of this delay will be a steep decline in DCLB’s operating certainty and potentially a major decline in financial results.