Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 560 - 579)



  560. When you were in America, how many state lotteries did you visit that in mid-stream had changed their lottery operator and what consequences did you find when they had?
  (Ms Spicer) We visited two for sure where they did. The strongest message I received from them was that the change-over was more risky and needed more time and more money in every case than any of them had anticipated. Thereafter, the strongest message I received was that, once you had achieved, by the application of extended time frames, certainly in two cases, further funds, you were greatly influenced in your public perception, to take the point you made earlier of the Lottery, as to how the game went. That is obviously where the public have their greatest concern: what is happening to the dollar they bet. For instance, in Florida where they changed, they were very concerned to have big, roll-over jackpots because they had increased their odds and they wanted to do the biggest possible showboat kind of a draw. That did not happen, and they were very distressed by that. Then they had to wait. So there were those two things, and the first one I would like to reiterate because risk has been raised, that every hand-over has been more extended, more costly and more complex than anybody anticipated. If we had turned to any of the people on the ground and said, "What would you like if you were to do this again?", they would all have said "more time and more money".

  561. Remind me of when you went to America?
  (Ms Spicer) June.

  562. Despite that, the decision was made in September almost to kick-start the Lottery?
  (Ms Spicer) I am not quite clear how you are putting those two things together.

  563. If change is the biggest risk and you need more time, clearly that favours the incumbent?
  (Ms Spicer) At the time that we were holding the view of the inappropriate, if I may call it that, single negotiations, we were working under what we subsequently discovered was a misapprehension that one of the bidders was no longer eligible. That was not a choice. We did not wilfully say, "I have got this". We had excluded, on the grounds of propriety, one of the bidders totally. So our decision-making was with a single bidder: did we consider that TPL was an eligible, single track candidate? Yes.
  (Lord Burns) I may say that we have come to the same view this time, that both could do this job. But we came to the view that, in terms of a competition between the two, we preferred one over the other. We were not saying that one was not capable of doing it.

  564. It does seem unlikely, and we found the same evidence—and we saw different lotteries than you did—that if you do not change it is very dangerous to introduce change. That was a clear message that we also got. It is interesting that you found that.
  (Lord Burns) You cannot go on the basis that there cannot be change because, if you do that, you have no competition and, if you have no competition, you will not get a good deal. I spoke last time about some of the costs that have to be borne sometimes in order to get to competition.

  565. We saw the AWI technology and it was clearly superior, fundamentally superior, probably 18 months to two years better, and it could offer a whole range of different options for the public too. Now it is GTech which is cumbersome and clumsy. What other developments do you expect GTech to introduce, not GTech itself but the technology that Camelot has, to be able to deliver beyond just the Lottery? How much pressure can you put on them to look at the driving licence or the payment of the BBC licence fee or all those sorts of other public things that a grid can do?
  (Lord Burns) First of all, in broad terms what you say about the two systems is reflected in our statement of reasons. Obviously we have accepted the Camelot bid on the basis of what it is that they are offering, which is an upgrading of their present systems but nevertheless not to the extent that they operate in some jurisdictions. We will obviously have ongoing discussions about what it is they do but we have accepted the bid on the basis it was put forward.

  566. It is just delivering lottery tickets. Is there not any other development we can expect through the terminals?
  (Lord Burns) Our responsibility is about delivering the National Lottery. It is about returns to good causes. Clearly if there are large amounts of revenues to be had from other sources and other activities, that is something we would want to take into account. But the Commission has statutory duties about how they look at it, rather than taking on additional duties which they have not been given.


  567. On this question of switching, you made the argument when you decided to award the licence to Camelot about the risks of the change and we were told by one of the world's leading experts on lotteries that the risks of change were always very great and that it was his view that the argument was always in favour of retaining a successful operator, even if somebody was claiming to be able to operate even more successfully because the risk of switching was so great. You have just made the point that you cannot eliminate the possibility of change because otherwise it is a gift in perpetuity. How do you deal with that dilemma?
  (Lord Burns) I think it is important to look across the whole range and all the aspects of the bid. Clearly there are risks that are associated with change but, as I said, in principle, and I think as we say in the statement of reasons, we think that those are manageable. You have to look at those risks alongside the other risks that are associated with it that maybe the bidder itself introduces into the proposal. The statement of reasons talks about some of those additional risks. You are now allowed, I do not think, under the terms of the legislation, to make any overt discount to a newcomer in order to give them a better chance to compete. It seems to me that it is inherent in the legislation that the risks involved in that are not of a scale that do not allow you to make a change because, if you did rule out a change, then you have exposed a basic flaw in the design of the structure. Our view was that those risks that were associated with the change in, say, the first 12 or 18 months of this process, were not on their own decisive. The argument that there could not have been a change is not a correct one. That is not my interpretation of it. It was possible for a newcomer to win this competition.

Mr Keen

  568. How was it possible to make a change? How was it possible to come to a decision to make a change? We have discussed this at length privately. I speak for myself. Personally, I was obviously in favour of a not-for-profit lottery, as the Labour Government in its manifesto was in favour of a not-for-profit Lottery operator. Speaking for myself, it became more and more clear that any individual, myself included, would find it very difficult to take that risk, despite the fact that I was heavily biased in favour of a not-for-profit operator. It is difficult to say that, never mind make a decision on it. We have reached a stage now where, even from the discussion with you this morning, it is clear that the legislation needs to be changed. Do you not agree with that? You mentioned the history over the last 20 years of utilities where the previous government made these decisions that would transfer the ownership over in the way in which the Lottery was legislated. That is following the same trends you mentioned a few minutes ago. We have to change that in order to get competition. Let me ask the question and get an answer to it. Is there any alternative to changing the legislation in order to get competition next time?
  (Lord Burns) I hesitate again on this because I know from my previous background that suggesting that there needs to be legislation is never a very popular thing to say to anyone. Obviously there is always a lot of competition for legislation. My preliminary views are that it would be quite difficult to get any more competition into this process without having some change in the legislation. For example, the extent to which there is competition in terms of Instants: at the moment it is a requirement not only that the Lottery Commission agree to it but also that the main operator agrees. One could readily see how that could be changed. Obviously there were good reasons for putting it in at the time. There is also the question of whether or not you can give other people access to the same infrastructure. All of these things will require some changes in legislation. I would start at this stage by saying that it is not inevitable that there have to be changes in legislation but I think, if one is going to conduct a thorough review of this, there has to be the possibility of changes in legislation. If one starts from the view that there cannot be any changes in the legislation, it will restrict the options.

  569. I know in the very early stages you had to put every concentration into making the decision which we have discussed at length this morning and it was very difficult to come to that decision, other than saying, "Let us not take a risk and therefore that is the decision". I know all your concentration was on that. Really, it is the duty of us all to look to the future. Taking all that into account, if you were forced to give us two or three minutes on the future, would you say it is almost inevitable that we have to legislate in order to get these changes so that we get competition on the delivery of the various services that the Lottery operator would have to oversee—the technical equipment, the terminals and what the terminals can produce in addition to that? Inevitably do you think it has to go to that sort of system whereby there is some sort of public control, the Commission if you like, running the Lottery so that the delivery of the technology can be competed for by different companies at the time, rather than waiting seven years and then to have a complete change? I am putting words into your mouth but you can say yes or no?
  (Lord Burns) There is an issue between whether you have an asset company with other companies providing the services to it or whether you have this integrated bid which then works for the whole of the seven years. There is a second question as to whether that asset company, let us call it, which owns the infrastructure, should be a public sector activity or whether it should be some other model, such as a not-for-profit company. I am involved in debate at the moment about this kind of model with regard to water in Wales. I have a small conflict of interest in debating these issues. Both of those options can be debated. Then there is the question as to whether you can have competition for some of the outsourced work on a more ongoing basis, rather than having this all-or-nothing situation as we do at the moment. Personally, I am quite reluctant simply to say that we should go back to a public sector model for this—that is not the way that I naturally turn—and to say that that is the only way of conducting these activities.

  570. I would agree with what you say. That is not the only model.
  (Lord Burns) I am actually going further than I intended to do when I came here and I would like to think rather longer about this. My instinct is that one needs more in the way of competition during the licence period and that, in so far as one can, one should try to avoid this big bang competition every seven years. I do not know whether it is possible to achieve those things, and there may be very good reasons why it is not possible. That is my instinct, as it is also to see to what extent one can get competition by giving other people access to the same kind of infrastructure, as has been done with some of the other utilities, such as telecoms. This is all very much blue sky thinking. One has to think quite carefully before making any fundamental changes to something which, I repeat, I regard so far as having been a success.

  Mr Keen: We are very grateful to you for extending your views to us when you were reluctant to do so.

Mr Maxton

  571. Can I start by following on from Mr Wyatt's questions? When you were in America, did you actually visit AWI and GTech and see demonstrations of the new technologies?
  (Ms Spicer) The demonstrations took place in London. We did visit Rhode Island, the GTech headquarters, and had very specific and lengthy discussions, particularly on the matter of security with them. We did not visit the AWI headquarters.

  572. Who else did you visit? I am not in any way criticising you. It was interesting that throughout our visit we saw four state lotteries and went to AWI and to GTech and spoke to other experts. We did not actually come across anybody who had spoken to you. Maybe that was just accidental.
  (Ms Spicer) We went to Florida and to Hoosier Lottery in Indiana. We went to Massachusetts, which we chose specifically because it has "instants", and we went to Phoenix, Arizona.

  573. You obviously had more money to travel than we had!
  (Ms Spicer) That was also constrained by even-handedness as to who used which operator, so we could balance it in that way. It was a very carefully constructed list.
  (Mr Harris) It was constructed to pick up the series of things the Commission wanted to see, first in terms of handovers between operators and also in terms of handovers between technologies from one operator. Even if one has AWI or GTech, there can be major changes in terminals or changes in the central systems. It was carefully selected to get a sense of those different things. I should also say that the Commission visited Norway as well in order to gain a European perspective.

  574. Can I switch to the future rather than dealing with what has happened? First of all, do you think it is right that we should have the same organisation selecting the licence holder and then regulating the licence holder? Is there a case for separating these two out?
  (Lord Burns) I am not sure that there is any innate conflict of interest here. I have thought about this since the question was put to me last time. I am not at this stage worried about that, although again I will consider it. I think where there is a problem is that the tasks and roles of the Commission through the other six years of the licence period are rather different to the tasks and the roles in the years that they select a new operator. It may be that there should be some combination of the existing Commissioners with some other people from outside who come in with different skills and a different background and who would be brought in just for that period. The weight and style of the work is very different, in terms of conducting the competition, to the normal process of regulation, as I understand it. I am not aware at this point that there is any real conflict of interest between the job of the ongoing regulation and choosing the operator.

  575. What is the time scale for Camelot producing their new technology? When does it happen?
  (Lord Burns) They will have a 12-month period from now to prepare for that. A new licence will begin actually in the final days of January 2002. They have between now and then, which is basically a 12-month period.

  576. And they must introduce it on 1 February?
  (Lord Burns) Oh, yes.

  577. That is because they are the existing holders and there is no reason why they should not roll on with their existing technologies?
  (Lord Burns) The new terminals have got to be in place.
  (Mr Harris) The commitment was to put the new terminals in place and we require that to happen.

  578. The problem with regulation in a monopoly situation is what happens if they say, "Sorry, we cannot get it done in that time scale"?
  (Lord Burns) There are financial penalties and they are considerable.
  (Mr Harris) They are calculated on a formula based on the number of terminals that they are short, the number they have committed to put in place and the time for which they are short.

  579. Eventually, if they just turn round and shrug their shoulders and say, "We are sorry, we are neither paying penalties nor can we get things installed in time", there is not really anything you can do about it, is there? You cannot revoke the licence because then you will not have a lottery.
  (Mr Harris) But the Commission can seek to enforce the licence through the courts.

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