Examination of Witnesses (Questions 100
- 119)
THURSDAY 9 NOVEMBER 2000
SIR RICHARD
BRANSON, MR
JOHN JACKSON
AND MR
SIMON BURRIDGE
100. What makes your team better qualified than
Camelot? What is it?
(Mr Burridge) There are several areas. On the technical
side we are able to match them in a whole host of ways in terms
of the telecom network. We believe we have superior terminals
and we have a lottery operator on better form, if I may use that
expression, than GTech, Camelot's current suppliers are. Principally
the difference is the flair and imagination with which we would
both devise the game and create the appeal of the National Lottery
to be much more inclusive and embracing of all members of society
than Camelot have currently been able to do.
101. Given the battles you have had in the past
with other organisations and the fact that you are a man who likes
to see fair play, did you not think it a bit strange that at one
point you were given a clear run at this without Camelot being
considered? Did you then complain and if you did not, why not?
(Sir Richard Branson) There is an argument to say
that if the Lottery had been decided as it was seven years ago
we would have been given the licence and Camelot would have been
told they were no longer in the game. The detail we had to sort
out was the kind of detail that Camelot were able to sort out
after they were given sole bidder status seven years ago. Generally
speaking one person is told he has the licence but this detail
must be sorted out; the other person is told he is out of the
running. What was slightly strange was the way it was done, that
both of us were told that we had failed, but we were told to sort
out the detail. That gave the Commission a big headache and the
courts decided in the way they decided. If based on precedent
that had taken place seven years ago, we could argue that we ought
actually to have been given the licence then and there.
102. When that situation happened and you were
asked to sort out some aspects did you think at that point you
had an advantage?
(Sir Richard Branson) A bit like in the election today,
like Mr Bush last night, yes, we thought we were going to be running
the Lottery. In part we interpreted it as a different way of doing
effectively the same thing as had happened last time when Camelot
were given the licence and told to dot the "i"s and
cross the "t"s. We felt that effectively the sole bidder
status we were awarded constituted the same thing. We also knew
that 6.9 per cent from our bid was going to good causes, more
than Camelot, which equated to over £1 billion extra money.
That is the principal reason for the Lottery Commission to decide
who runs the Lottery and therefore we thought on that basis that
the situation was fair and clear.
103. Given the technology, and we have heard
a little about that this morning, and the other day we visited
Camelot and heard from them about how different aspects of technology
can be applied, what other products and/or services would your
People's Lottery sell downline to the customer given the opportunity?
(Sir Richard Branson) A principal job of running a
lottery is to maximise the money for the good cause fund. We would
not do anything which distracts from that. The equipment we are
installing enables us to do a whole mass of things which could
be for the good of the public and it would be up to the Lottery
Commission to decide whether that would distract from the sales
of Lottery tickets. To give you some ideas ...
(Mr Burridge) We have included in our bid a number
of ideas. These ideas are subject to further discussions with
the Commission in the event we were to be awarded the licence.
They included such things as housing payments, telephone top-ups,
road fund licences, parking permits, all forms of voting; be they
for council elections, general elections you can use the terminals
to do that—and we promise to get the holes in the right
places. There is a third area which is quite interesting which
is the whole idea of the electronic purse and allowing the "Unbank",
a sort of universal bank, to come into the world of credit through
transmitting signals down through terminals. If this were ever
to be proceeded with, we would imagine it would be done principally
through the post offices whereby they could provide a valuable
source of income, particularly to those post offices in outlying
areas which are somewhat beleaguered at the moment. It has the
ability to revolutionise a whole number of different aspects but
the most interesting is the potential for the whole benefit payment
system to be included on the electronic purse, alongside a management
system which effectively takes direct debits to make sure their
various payment obligations are met and not all squandered between
receiving it through a terminal and going to an ATM to withdraw
the cash.
(Sir Richard Branson) It is worth adding that on the
quiet days of the week you try to direct people to use it for
those purposes. Secondly, because we do not have shareholders,
any profits which came from offering those services would go towards
the NLDF or we could offer those services without profit but it
would not be shareholders who derived profit from offering those
services.
104. So there is an absolute guarantee that
you would not come forward in the future with a Virgin Bank concept,
where you can download money from the system, or you will not
sell insurance or airline tickets? You have absolutely no intention
of putting forward plans where in effect a not-for-profit concept
becomes for profit by default.
(Mr Burridge) Absolutely not.
(Sir Richard Branson) Our reputation is everything
and yes, there is absolute assurance.
(Mr Burridge) The way in which The People's Lottery
has been constructed, both constitutionally and in terms of its
suppliers has been that there is no relationship with Virgin or
any of the Virgin subsidiaries and indeed none of the financing
for The People's Lottery other than from the personal generosity
of Sir Richard has come from anyone connected with the Virgin
empire.
Mr Fearn
105. The People's Lottery is described as not-for-profit
and most of the conversation so far has been on that word "profit"
which is sometimes suspect and sometimes not. When you say it
is not-for-profit, does that not remove the incentive for cost
control and efficiency? Or are you so efficient?
(Sir Richard Branson) The difference between ourselves
and Camelot is that I have used my business skills to find an
excellent team of people to run the Lottery. Those people would
be properly paid and their incentive for running the Lottery is
the fact that they will be trying to build it into the most successful
lottery in the world and they will have the incentive of knowing
they are generating something like £15 billion over the seven
years for good causes. The only difference is that instead of
having a level of shareholders between the good cause fund and
the people running it there will not be a level of shareholders.
There will be a board of seven directors with an equal one share
each who will make sure that the people we appoint to run the
Lottery run it well. Otherwise those individuals' incentive will
be the fact that they will be extremely proud of running hopefully
the best company in Britain doing the most good in Britain.
(Mr Burridge) You mentioned the word "incentive".
There is a direct correlation between the amount of money you
can drive down in cost and everything that is saved through that
is then added to the good cause contributions in the absence of
profit. From the motivational point of view, if you were working
for the National Lottery and you were able for example to save
£100,000 or to make another £100,000, the knowledge
that that went directly additionally to good causes rather than
being distributed to some shareholders merely for their ownership
status is considerably more motivating. If that were not enough
we have also put within our bid an incentive payment scheme which
rewards all the staff in the event not just that sales are increased
and therefore the contributions to good causes are back once again
in growth after a relative fallow period.
106. Incentive payments take away from profit,
do they not?
(Mr Burridge) They do take away from profit.
107. It depends how big they are.
(Mr Burridge) They are not particularly big and the
interesting issue is the leverage effect. For every pound you
pay in incentive payments there will be an extra £10 million,
£20 million received in good cause contributions. The leverage
effect is an important one.
(Sir Richard Branson) It is worth mentioning that
in every other country in the world lotteries are run on the basis
of what we have proposed. There is a difference between running
a lottery and running an airline or another business in that a
lottery is a monopoly; there is no competition. It is a licence
to print money, no risks are involved in running a lottery. It
is a massive generator for good causes. Therefore we just felt
that originally it was fundamentally set up in the wrong way,
that it should have been set up with 100 per cent of profits pledged
for good causes originally. In Labour's election manifesto they
also stated that they felt that was the way it should be done
and the public believe that as well.
(Mr Jackson) Picking up on your question about incentives,
they only come in if we exceed our forecast which we put into
the Commission. They have to exceed the forecast to deliver £15
billion, then over and above that the incentives come into play.
108. What about your suppliers and your partners?
Can they inflate their profits as well?
(Mr Jackson) On that we have been very extensive in
the selection of our suppliers.
109. Have you already done that?
(Mr Jackson) Yes, we have done that, all the contracts
and the prices have now been agreed. Most of them are fixed price
contracts. We have driven down cost to less than three pence,
excluding retailers where it is 2.8p. The current operator is
nearer four pence, so we believe by being very efficient we can
drive a difference of one pence which is equivalent to over another
£1 billion for good causes.
110. Whatever you get in, and the 6.9 per cent
you have quoted as going to good causes depends on how much comes
in, you are going to increase the numbers on the balls from 49—which
is the only one which has ever come up for me in seven years—to
53 yet they did this in Florida and the profits went down.
(Sir Richard Branson) It sounds as though you have
been talking to somebody else before us.
111. No, I have not.
(Sir Richard Branson) Well Camelot were here before
us.
(Mr Burridge) That is not the case. Florida did move
from 6 from 49 to 6 from 53 and they saw their sales rise significantly
over the period. What is true is that that was not the only move
they made. When you are changing the game matrix size, it is important
simultaneously to make some other significant changes which carry
it through. Otherwise, for those lottery operators who have changed
their game matrix and done nothing else in addition, you will
be looking at a loss of about 10 per cent. The other interesting
thing which you need to consider in terms of the game matrix size
is that if you look at lotteries around the world and the populations
of those jurisdictions, they tend to match the actual field size,
the 6 from 49 or 53 of whatever, that they are playing. Six from
49 has a distinction of being the most popular game matrix in
the world. It is principally used by the smaller jurisdictions,
jurisdictions like Massachusetts with a population of four million.
We of course have an adult population of some 46 million. If you
take the case of Florida, Florida had a population between 14
and 16 million and therefore the lengthening of the odds from
14 million to one to 23 million to one is a much more risky thing
to do in Florida than it would be within the United Kingdom, nevertheless
it has been a successful move and the Florida State Lottery, to
whom we talked in developing our plans, are thrilled at the results.
112. Who is putting in the capital at the beginning?
The profits or income are not going to be there if you take a
lot out of the capital in the initial costs.
(Mr Jackson) The initial bid costs have come from
Sir Richard and that has been financed right from the beginning.
We are a debt bid so the capital comes through on loans through
the banks, J P Morgan being one. Those loans, when we achieve
the sales which we believe we will do, get repaid in a fairly
short period of time.
113. With interest?
(Mr Jackson) Yes, with commercial based interest;
we shall pay just one per cent above.
114. That is quite a sum.
(Mr Jackson) The total cost to the day before we launch
is in the order of around £129 million. Those £129 million
will be repaid within 18 months according to our principal forecast.
(Sir Richard Branson) That is taken into account when
we are talking about £1 billion extra to good causes. It
is £1 billion after the interest to the banks.
Mr Maxton
115. How do you get your money back, Sir Richard?
(Sir Richard Branson) If we are successful I shall
get my bid costs back with no profit. If we are not successful,
as last time, we lose it.
116. Seven directors without any shareholders
for the board. Who is appointing those seven directors. Who are
they?
(Sir Richard Branson) For the seven directors we have
appointed so far, we have been out and asked people we feel are
well respected in the community, people like Don Cruickshank,
Lord Blakenham, to see whether they would be willing to give up
some of their time to come to work with us. They have said yes.
117. They do not represent in a sense your partners
within the Post Office or anybody like that.
(Sir Richard Branson) No, we do not have partners
as such. Unlike Camelot we have suppliers who have quoted to do
certain different functions, so we do not actually have partners
as such.
118. You are using the Post Office as your major
outlet, are you not?
(Mr Burridge) Yes.
119. Obviously some of the present retail outlets
will also be sub post offices and presumably you will be part
of that chain as well. What about those retailers who are not
sub post offices? Do they simply lose the business if you win?
(Mr Burridge) No, on the retail side one of the anomalies
of this bid process in this country as opposed to any other country
is that all the information belonged to Camelot rather than to
the National Lottery Commission. We were in the position therefore
where we had no data of sales by outlet, by game, by week, for
any of the retail outlets, in fact we were not even given access
to the list of retail addresses of the current retail estate.
On the basis of that lack of information we felt it would be invidious
were we to penalise any of the retailers for an important part
of their income stream just on the whim of a map. The proposal
we have put within our bid is to retain absolutely the retail
estate which Camelot would leave behind. Within that we have had
a separate negotiation with the Post Office where we have guaranteed
that we would not diminish the number of post office outlets currently
contained over the period of the time without their permission.
But what we have said to the retail trade about the remaining
retail outlets is that we would then evaluate their performance
over the period of six to nine months and on the basis of that
if there were people underperforming against the criteria we had
laid out, we would then seek to make alterations. However, within
that we have recognised quite strongly that there are several
retail outlets, particularly in the more outlying rural areas,
which are performing a function and a value above and beyond their
retail sales of lottery products. We have no intention of removing
them.
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