Select Committee on Culture, Media and Sport Minutes of Evidence


Examination of Witnesses (Questions 1 - 19)

THURSDAY 9 NOVEMBER 2000

SIR GEORGE RUSSELL, MR TIM HOLLEY AND MS DIANNE THOMPSON

  Chairman: I should like to welcome you. I shall place on record immediately that the Committee visited Camelot headquarters in Watford on Tuesday. We regarded this as an appropriate thing to do to examine the existing Lottery operation. It of course in no way whatever prejudices our view, should and when we arrive at one, on who should get the next Lottery licence. Claire Ward wishes to make a declaration too.

  Ms Ward: I should like to place on record that my register of Member's interests includes the following entry. In my Christmas card competition for children last year, three local companies made a donation towards the costs: one of those companies was GTech. The sum involved was £250. After paying the bills there was a small surplus which was donated to a local charity.

Mr Fraser

  1. When we came to see you the other day we found out that the Lottery terminals open at about seven o'clock in the morning. Is that correct?
  (Ms Thompson) Yes.

  2. The question I was going to ask you at that point but decided to save until today is: if you are trying to win this bid process at the moment and you are trying to impress everybody that you are up to speed, not just technologically, how do you overcome the problem that there are 24-hour shops now and you are in effect holding back on a large chunk of time for people to buy Lottery tickets?
  (Ms Thompson) There are two or three answers to that one actually. The first is that at the moment we need a small amount of time where the systems are not live for us to do systems improvements or load new games or whatever else we need to be doing, some processing time, although that could be overcome with an extra system. There are two more reasons. First, we have done extensive market research over the last five or six years to see what time, what shopping patterns people want. The vast majority of our players actually buy in a very small window of time which is between five and six on the day of a draw. The other major reason is that what we have committed to in the first licence is that we would have a fair split between multiples and independents and in fact 65 per cent of our retailer estate is made up of small independents. Most of those independents do not offer 24-hour trading and therefore we felt that if we kept the systems open 24 hours it would adversely affect the small independents and benefit the multiple traders because it is mainly the multiple supermarkets and garage forecourts which are offering 24-hour trading.

  3. Is that something you are going to review?
  (Ms Thompson) It is something which is under constant review. When we actually go into a second licence period, if we are lucky enough to win the licence, when we have new technology such as the Internet, then there will be people wanting to play 24 hours on different types of technology anyway; a review is ongoing.

  4. Given the fact that we met many of your staff the other day and given the fact that you are currently in quite a precarious position, what will happen to Camelot if you are not successful in your bid?
  (Sir George Russell) Sadly it disappears; it will disappear about a year after we finish because there is a tremendous amount of wrapping up to take place, not least of all is the six-month period where we have to pay out prizes. It will disappear. We do not have enough overseas business to justify keeping Camelot going.

  5. How many people lose their jobs?
  (Sir George Russell) We have 800 people employed.

  6. So in effect, from the day the decision is made, if it does not go your way, those people will be served notice.
  (Sir George Russell) No. We are trying to keep them to the end and the end is a little flexible at the moment in terms of what the Commission has asked of us. We shall give notice when the appropriate time arrives. Once we know how long we have to keep this lottery running, one month, two months, three or four, we shall then look at the notice situation.

  7. Does that not put you in a difficult position if on the one hand you know that people are potentially going to lose their jobs if it does not go your way and on the other hand you still have to fulfil all of your requirements under the current agreement to make sure the Lottery performs as it should. How do you square that?
  (Ms Thompson) It is going to be incredibly difficult, to be frank. The current licence expires at the end of September 2001, we have given an undertaking to take an interim licence and at this point we do not know how long that will be. Our planning assumption is probably a further four months, so that would take us to the beginning of February 2002. One of the greatest challenges facing Camelot as the operator will be how we keep those staff motivated and keep them to the end. We have actually addressed this issue and put various incentives to stay to the end. It will be a great test of the Camelot management.

  8. Are there any other examples you can give around the world where this type of thing has happened in the past?
  (Ms Thompson) There has certainly been nowhere round the world where a change of this nature has actually taken place. There have been changes of operators but not systems; there have been changes of systems and computer software but not operators. Nowhere else in the world has there been a change of this magnitude, if that is what happens here in the UK.

  9. Do you think you have been treated fairly in the way it has been approached so far?
  (Ms Thompson) Obviously we did not because that is why we went to court for judicial review. On 23 August we were told that neither bid was acceptable and the National Lottery Commission had decided to go into a new process to negotiate with one bidder only. We were told that the reason why we were excluded was because of GTech. We felt we had been misled on that because on 28 July we had a letter from the Commission saying that they were satisfied with the improvements we had put in place regarding the GTech situation. We thought it was grossly unfair for our 800 staff because, as you have already identified, if we lose this licence the vast majority of those people will lose their jobs. We felt we had to fight for a fair hearing. We went to court, we won the judicial review quite convincingly, the judge ruling that the Commission had acted with conspicuous unfairness to the point of abuse of power and that we had to be given the same month to negotiate with the NLC as The People's Lottery had been given. That was all we were asking for: a fair hearing. We now have a new independent chairman in Lord Burns and we are delighted with his appointment. We think he is a man of great integrity with a tremendous reputation. He has assured us we shall get a fair hearing in this process and we are pretty confident that we shall.

  10. You are launching a new game on Monday of next week.
  (Ms Thompson) We are.

  11. Given the precarious position you are in, why are you doing that?
  (Ms Thompson) It was always in the original bid that we would launch four online games during the course of the first seven-year licence period and what we have said fairly recently is that we can raise £10.5 billion for the good causes as opposed to the £9 billion we put in our original bid. We have been working on this game for over two years now, which the Commission has been aware of, and made a formal approach to the Commission in November 1999 about launching the game this year. It is about keeping the Lottery healthy. Obviously we want to win the next licence but if we do not win, what we want to be in a position to do is hand over a lottery to the next operator which is every bit as healthy as the Lottery is today. The way to do that and to keep players playing is by introducing new games and keeping it exciting for them. That is why we are doing it.

  12. Can you just tell us what the new game is briefly?
  (Ms Thompson) It is called Lottery Extra and it is what is called an add-on game. Basically the way it works is that you have to play the standard Wednesday and Saturday games, the 6 from 49 first. If you enter that game then by paying an extra £1 you can play a second game where you either play the same numbers you have chosen for the first game or you have a lucky dip option where the computer will randomly generate six numbers for you. It is a jackpot only game and what will happen is that there will be lots of rollovers. We anticipate something like 70 additional rollovers each year, which is what keeps the excitement in the game, gets more people playing. When they have a rollover on average our sales go up by about 11 per cent. When the jackpot is won it will only pay out if you match all six balls. If it does not get won in any particular draw, it will roll over to the next draw and will carry on rolling over until either it is won or it gets to a maximum of £50 million.

  13. Gosh. Thank you very much.
  (Ms Thompson) You are welcome.

Chairman

  14. Setting aside the controversies which resulted from the way the Commission decided to handle considering who should get the new licence, the legal action and all the rest of it, indeed setting aside the entire process which is now going on, I assume that Camelot never operated on the basis that it would automatically get the new licence but there had to be a bidding process and indeed the Labour Party manifesto at the last election, talking about a non-profit organisation for the Lottery, might have indicated, whatever this Government has gone on to do, that it was by no means certain that Camelot would get its licence renewed. That being said, could you tell us something about the contingency arrangements that you made well in advance of the new bidding process and the basis upon which you took on staff, whether when you have been taking on staff during this period you have warned them that under the Act there could be no certainty that Camelot would get the licence a second time?
  (Sir George Russell) At no time did we think we had a freehold on this business. For all sorts of reasons we had a belief that if you set out to do something as well as anybody in the world has done it, it was the best way of getting as near to a freehold as possible. That was all we could say. From the point of view of the Labour Party manifesto it was quite obvious, when we also then got into a fairly difficult dispute about salaries shortly after the Government came into power, that the freehold was very weak, to put it mildly. The big contingency which we took at that time, which I announced after we settled the salary arrangements, was that we would come in with major loyalty bonuses for all staff at the end of the franchise, for those who stayed with us. I have managed change all round the world but at the end of the day this is one of the most difficult changeover systems I have ever had to face. One of the few things you can say to people is that if they will stay with you there is some money for them. It is not that they are disloyal to Camelot, but they have to be loyal to their families first. We have already lost people since the announcement of our demise because they thought it was better to take golden hellos rather than wait for the settlement at the end of the period. That is the fundamental route we have gone. We also set out to honour as best we can the marketing obligations. Part of the reason for launching the new game was that that was what we committed to in the contract and we continue to honour these commitments. We shall be spending well over £50 million on marketing this last year because that is the job. We shall be driving these games as hard as we can and then hand over. It has been a contingency based on virtually one simple thing: create as much loyalty as we can in pride of performance and follow that up with a sum of money for staying.
  (Mr Holley) As an example of the fact that we do not assume that we shall get the next licence, we have put in place with the Commission certain arrangements relating to handover to another operator if they are successful. They relate firstly to the level of co-operation we shall give during a handover period. Secondly, on payment of prizes where there is an obligation to pay prizes beyond the end of any one licence period. Also, we have written to all our independent retailers and said that if they wish to be considered as a retailer for another bidder then they should write to the National Lottery Commission. We have also recommended well-tried phased handover arrangements. All those things have been put in place, discussed with the Commission.
  (Sir George Russell) This was before we lost. This is not something which has just happened.

  15. I was very deliberately setting aside the developments of recent months about re-allocation of the Lottery and trying to look at the circumstances in which you dealt with staff. I understand completely the point Mr Holley has made about relationships with retailers, though presumably, it is not for me to say, whether it is you or it is the other bidder who gets the Lottery there would have to be relationships with retailers. I am concerned, having met representatives of your staff on Tuesday, and these are matters on which I should be grateful for clarification. Obviously 800 people, in some cases with families, could be affected if you were not to get the next licence. When staff have been taken on, ever since you started operating at the beginning, has it always been made clear to them that this is a limited licence, that you of course hoped that it would be renewed but that they should be aware that the licence might end and that that would affect the status of their employment with you?
  (Mr Holley) When people join Camelot everyone goes through a day's induction and process when we talk about the background to Camelot and the fact that there is a seven-year licence. The state of our position is made very, very clear to everyone when they join the company.

Mr Fearn

  16. What would you say are the advantages for the National Lottery of a profit-making private operator rather than a different operator?
  (Mr Holley) It is not really for me to judge necessarily what they are because you can well have lotteries which are run by governments and in many countries they do that and they can have very, very successful ones. What you get with a for-profit operator is a commercial approach. If you look at the latest lottery survey which has been produced it has shown that of the five most efficient lotteries in the world, judged by the percentage handed over to government and good causes, four of them have a for-profit motive.

  17. The Government has said that it is in favour of a not-for-profit operator for the Lottery. To what extent do you think that has affected the competition you are getting for the next Lottery?
  (Mr Holley) I cannot judge the other bid compared with ours. What I can say is that when that was announced by the Government in 1997, Chris Smith wrote to Sir George and made it clear that we would be given full and careful and proper consideration during this process.

  18. In other words he was suggesting that you should be a not-for-profit organisation.
  (Mr Holley) No, that was absolutely not part of what he said to us.

  19. How did you interpret it then?
  (Sir George Russell) As far as I am concerned, because I received the letter, I was quite content to think that we would be properly considered. There are two arguments about two ways to run a lottery. We have shown our way, we have shown what it can be, we have shown the excess of money to good causes as compared with our initial promises and we say that is a good way to run a lottery. It has been the best in the world for six years in a row. What is wrong with that? It is an extraordinary margin incidentally. The total profitability we are likely to make out of this can be lost in one month's shutdown of the National Lottery. If you take seven years of profitability as we have indicated, one month's shutdown pretty well wipes that out. That is how marginal it is in this whole £50-odd billion we are talking about.


 
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