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Q.& A. | Ales Kulich, QLot Consulting

4 June 2009

By Rob van der Gaast
After nearly four years’ worth of delays, the privatization of Milli Piyango, the government-run Turkish national lottery, recently collapsed.

In mid-May, bids from the Greek monopolist OPAP S.A. and Turkey’s Turkcell were rejected because they fell short of the $1.6 billion asking price.

Hurriyet Daily News reported then that Christos Hadjiemmanuil, OPAP's chief executive, said the starting price was "way above reasonable expectations." The lottery license, viable for a 10-year period, would have given the winner 17 percent of revenue after sales and gambling taxes.

Advisor to the Turkish Privatization Administration was the well-known Swedish gaming expert Ales Kulich, who owns QLot Consulting. Since QLot predicted the result of the path chosen by the authority, last year, they declined further involvement with the process.

In an exclusive interview with IGamingNews, Mr. Kulich candidly discussed the privatization process – and its shortcomings.

How did you get the prestigious assignment for the privatization of Milli Piyango?

    QLot, together with Ernst & Young Turkey (E&Y), were selected following a formal tendering process conducted by the privatization.

And then, you fly to Ankara and you make a contract, and you get introduced to the whole team, including the group of E&Y?

    More or less, yes, except we had already met with E&Y before, while we were selecting our partner for the privatization authority bid.

How did that go?

    The first meeting with the privatization authority? It was an interesting situation, where we met with the authority staff not knowing much about lotteries, but also with the management of Milli Piyango, who in a way were to be re-organized and re-sized as a result of the privatization. The authority directed us to talk to the Milli Piyango management and we did, but it must have been a very difficult and contradictory position for them. After all, it was a preparation for making themselves obsolete.

So what role does, did or will Milli Piyango play?

    Milli Piyango would tentatively become the regulator for the lottery.

After that you had a meeting with E&Y where you laid out what should be done by the three parties involved?

    The distribution of responsibilities with E&Y was very simple and clear. They were responsible for the local activities, e.g. law, language, valuation, etc, and QLot was to handle all lottery expertise. QLot was therefore in the driver’s seat concerning the Scope of Work.

And then what was the time frame?

    Well, the privatization authority was driving that part of the project already from start. It was a classic hurry-up-and-wait. We delivered a lot of work and material very quickly, but the processing time at the receiving end took longer.

Why there were so many delays?

    There were indeed many delays, and long delays. The stated reasons were basically that the law was yet to be “updated and amended.” However, I am not sure if the privatization authority organization was expecting to receive and process the extent and level of documentation required. After all, the privatization of a national lottery is no trivial matter, and the associated tendering process has to meet very high quality criteria, which in turn leads to very industry-specific expertise needed. It is perfectly understandable that the authority did not have, and cannot be expected to have, such expertise in-house.

Even if they did not have such expertise in-house, they had you as the external experts, didn’t they?

    They did. However, the privatization authority was apparently reluctant to accept the input and expertise provided to them externally.

Was there political pressure?

    I am sure there was, but that was and is not something that we were involved in. QLot is a lottery expert, and we focus on things we do well.

So what was the outcome?

    The outcome was, after almost four years of delay, that the privatization authority had set certain procedures, rules and expectations for the procurement.

So you did arrive at an agreed tendering procedure after all?

    Unfortunately, I cannot say we did. QLot provided all relevant input, but the customer is always right, and it was the privatization authority who had the right and responsibility to choose which way to go.

So I take it you were not happy?

    It is not our place to be happy or not, but it is our responsibility to give the customer our very best advice, which we did.

Did you caution them of any shortcomings in their selected procedure?

    Yes we did. In fact, there were several critical aspects that we strongly advised differently.

Such as . . .

    It would be inappropriate to be specific, but in general terms, in any lottery procurement it is important to consider facts such as tender response time, viable bidders, realistic requirements, enabling vendor return on investment, prevailing market conditions, etc, and all this while maintaining maximum competition. But most of all, the number-one consideration is to safeguard the uninterrupted and uncompromised operation of the lottery.

So what caused the failure of the privatization?

    As the bidders have already advised via media, the price tag was unacceptable. That was certainly one of the issues. If an item has a high value, and the Turkish National Lottery DOES have a high value, it may be better to enable as many qualified bids as possible and let them compete for the best price, rather than state a very high fixed price, and thus discouraging some bidders. However, one should also analyze who bid and who did not. And in particular, why qualified vendors did not bid. What were the overall terms and requirements, did the vendors believe in the process, do the vendors believe in the subsequent operating environment during which they have to recover their investment, etc., etc.

What type of privatization model did the authorities have in mind? When did they start and when did they finish?

    The U.K. model has of course been strongly considered by the privatization authority. The start of the project was in 2004, and the project is not finished yet. By far.

Were you also involved in the legal changes. If so, do they now have an independent gaming regulator?

    We did for a long time provide advice and input into the legislation and regulation, but we have not been privatization authority to the decisions.

How come the Turkish authorities for a long time were thinking that 15 serious parties would tender for Milli Piyango?

    Unfortunately, the privatization authority deemed it would be in the best interest of Turkey to have a large number of bidders. While this of course is true in a general case, it is also important to ensure that the bidders are qualified to carry out the business at hand. In this particular case, the lottery industry only has a very limited number of vendors qualified to undertake a project of this magnitude.

What did you propose to prepare for the privatization?

    Again, it is not appropriate to discuss details, but QLot did for sure offer and definitely recommend alternatives to the procedure selected by the privatization authority.

And what were you allowed to arrange and finalize?

    A consultant is just that: a consultant. Our job is to advise, help and recommend. The decision is for the customer to make.

I heard somewhere that the head of the privatization authority even did not want to give the financials to you. Is that correct?

    That is correct.

So, after everything that went wrong, I’m sure they asked you to advise for the correct way to finish this prolonged privatization process.

    The privatization authority definitely has a challenging task ahead of them. A successful privatization of Milli Piyango is not impossible, but it requires significant changes to the approach.

    Since QLot predicted the result of the path chosen by the authority, we declined to be further involved already last year. Unfortunately, we were proven right -- the process was not successful. Should the authority wish to have our advice again, we would certainly consider it, and we have even offered it, but we have not received any such request from the authority. And quite honestly, I understand them. They are not in an enviable situation.

After all the failures and delays of the privatization program, one should think that a change at the helm of the privatization authority would be needed?

    Again, this is a topic far beyond us to comment on. One has to respect the fact that the head of any organization has a lot of responsibilities and considerations to make. We as an expert only need to focus on our specific area. There surely are many things influencing the overall situation, which we have no idea about, and therefore we cannot make any judgments concerning who should lead what organization.

So, what is your ideal scenario for a continuation?

    Ideally, a new cooperation would be established between QLot and the privatization, where the lottery-industry specifics would be part of the overall considerations. I believe that the market has proven that there is a need for a radically different approach. Since QLot, as a part of our previous effort in Turkey, already prepared for such an alternative approach, the relaunch of the privatization process within a short period of time is quite viable.
Q.& A. | Ales Kulich, QLot Consulting is republished from iGamingNews.com.
 

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Rob van der Gaast
Rob van der Gaast