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provincial finances

A clerk issues a Lotto 6/49 ticket at a convenience store in Scarborough, Ont.Kevin Van Paassen/The Globe and Mail

Ontario is taking steps to privatize the operation of its lucrative lottery business in hopes that the move, which would be a first among Canadian provinces, will rake in even more revenue to support public finances.

The first step of the bidding process is already under way, with plans to award a contract by the end of 2013. According to sources close to the process, one of the parties interested in bidding for the 10-year contract is Camelot Group PLC, which operates Britain's national lottery and was bought by the giant Ontario Teachers' Pension Plan about three years ago.

The stakes for the province, which faces a deficit last estimated at $11.9-billion, are huge. The Ontario Lottery and Gaming Corp. brought in $3.2-billion in revenue last year and delivered $1-billion in profit to the province, making it the largest lottery business in Canada and the eighth largest by revenue in North America. In 2010 Canadian provinces and territories received revenue of $13.74-billion from government-controlled gambling, including lotteries, casinos and video lottery terminals, according to Statistics Canada. About $3.7-billion of that amount came directly from government-controlled lotteries.

But the industry – faced with changing demographics as players age and younger people turn to other diversions – needs to rethink itself, said Rod Phillips, OLG's chief executive officer.

In an interview with The Globe and Mail, Mr. Phillips said the current system relies on an aging and expensive closed network of about 10,000 "blue box" terminals, located largely at convenience stores.

At a time when most Canadians do banking and other secure transactions online, he said there is no reason to keep requiring customers to visit specialized stations to buy lottery tickets.

"We just can't afford to say to customers in 2013, you have to go where we want you to because some of those folks want to be able to buy a ticket on the Internet or pick one up with their Tim Hortons coffee – those are things that are potentially possible," he said.

The move to privatize operations follows an effort by the lottery and gambling agency to overcome two separate accountability stumbles. The OLG came under fire in 2007 after a series of insider wins came to light – ticket retailers themselves claiming millions in prizes, some of which were supposed to have gone to ticket buyers. Then, in August 2010, the Liberal government fired the OLG's then-CEO Kelly McDougald and replaced the board of directors after reports that some managers had reported personal spending as expenses. Rules about expenses were made more stringent under new chairman Paul Godfrey.

OLG, which by law must continue to own the business and oversee it, has been running lotteries since 1975 and is aware there is room for improvement. "OLG has not kept pace with changing customer entertainment options and evolving shopping patterns," it says in a request for prequalifications document that it released for potential bidders in December. "As a result, the lottery-playing population has stagnated, not keeping up with the population growth in the province and is at risk of decline giving the aging player base."

About 80 per cent of adults in Ontario have played lotteries in the past year, with about five million playing at least every two months and two million playing at least once a week, according to the document. Regular players are generally between 34 and 54 years old with slightly higher household income than non-players.

OLG believes it could be earning significantly more revenue from 18- to 44-year-olds, and from women. Other opportunities to bolster profits include new online or mobile sales, and improving the way lottery sales work in stores.

"Around 90 per cent of adult Ontarians shop monthly at grocery and drug stores yet only 9 per cent and 7 per cent, respectively, of OLG lottery revenue is generated through these channels," the document states.

The first stage of the bidding process, which will produce a shortlist of qualified candidates, closes April 4, and Mr. Phillips expects the contract to be awarded by the end of the year.

Ontario's hope of modernizing its gambling revenue mirrors changes in Britain and Australia, Mr. Phillips said, noting that lottery tickets have been sold on the Internet in British Columbia for five years. OLG also is beginning to experiment with things like an Internet gaming site.

Among the potential bidders for the contract, Camelot boasts on its website and in news releases about its technology, saying it conducted what it deems to be the largest and fastest lottery upgrade of its kind in the world when it rolled out a network of new terminals, media screens and satellite dishes. It also says it created a "world first" fast-pay service that allows players to save their game preferences on a reusable card and play games at the checkout.

Other companies that potentially could be among the bidders for Ontario's lottery operations include Gtech, a U.S.-based gaming technology and services firm, and Scientific Games Corp., a publicly-traded lottery product and services firm whose stock trades on the Nasdaq Stock Market.

With a report from The Canadian Press