House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport First Report

THE OPERATION OF THE NATIONAL LOTTERY

III. A NATIONAL LOTTERY FOR THE UNITED KINGDOM

14. In March 1992, the Government published a White Paper setting out its proposals for a National Lottery.[35] That paper considered the merits of a National Lottery and established the principles that the proceeds of such a lottery should be spent on good causes and that lottery funds should be additional to the main areas of public expenditure.[36] The following year, the National Lottery etc. Act 1993 prescribed that the National Lottery would have a private sector operator and established the Office of the National Lottery (Oflot) as the regulator, and the National Lottery Distribution Fund (NLDF) to hold the proceeds to be dispensed by the designated distribution bodies. The Director General of Oflot was charged with maximising proceeds to good causes, protecting players and ensuring the probity of the operation. In addition, the regulator was required, with the help of a panel of selection, to select the operator.

Competition for the first National Lottery licence

15. Seven companies tendered bids for the original United Kingdom Lottery licence. On 25 May 1994, the seven-year licence for the operation of the National Lottery was awarded to Camelot by the Director General of Oflot, based on its predicted income for the good causes. The process was generally welcomed as robust. The National Audit Office concluded that it was "comprehensive, consistent, logical and properly controlled".[37]

16. The conduct of the Director General came under increasing scrutiny following the award of the licence. He was criticised by the Committee of Public Accounts for his acceptance of free travel from GTech during the first competition and for being less "active and vigorous" in his dealings with Camelot than might be expected of a regulator.[38]

17. Oflot was replaced by the National Lottery Commission (NLC) in April 1999 under the provisions of the National Lottery Act 1998, although that Act did not change the fundamental structure of a private operator or the duties of the regulator to ensure the propriety of the Lottery, protect the interests of participants and maximise the returns to the good causes. The National Lottery Commission's functions are to select the operator, license games and enforce the provisions of the licence.[39]

The National Lottery Commission

18. The National Lottery Commission comprises five members, who are appointed by the Secretary of State for Culture, Media and Sport.[40] This Committee previously welcomed the establishment of the Commission, which we considered an improvement on a single Director General.[41]

19. The Commission has been criticised for its dual roles of day-to-day regulator and promoter of the National Lottery.[42] The Commission does not perceive a conflict between those tasks, which it considered it had carried out satisfactorily.[43] Lord Burns, Chairman of the National Lottery Commission, said that he was "not aware of any serious conflicts of interest" between regulation and promotion of the Lottery.[44] He regarded the framework in which the Commission worked as adequate and any changes to its responsibilities to be a matter for Government and Parliament, not the Commission.[45] Lord Burns acknowledged that the day-to-day regulation of the Lottery and the selection of the new operator were different tasks and that it was legitimate to ask whether those two tasks should be performed by the same organisation and the same Commissioners and required the same skills.[46]

Division of Lottery income

The prize fund

20. Over the course of its first seven-year licence, Camelot is committed to returning 50 per cent of sales income in prizes.[47] That 50 per cent is divided into approximately 45 per cent returned in prizes for each main draw, and approximately 5 per cent that the operator may reserve for future Super Draws. Approximately 60 per cent of Instants sales are returned as prize money.[48] The actual proportion of sales paid out as prizes each week varies depending on the sales of the various games in the National Lottery portfolio.[49] The main jackpot comprises 52 per cent of the prize fund. The average winning jackpot ticket has been £2,033,784 per individual ticket, and the average individual jackpot win has been £607,284.[50] Prizes less than £200 are described as "chatters", in that they stimulate discussion and excitement amongst players. Prizes below £10 are known as "churners", because the operator assumes that players will reinvest all such small prizes straight back into the Lottery.[51]

The National Lottery Distribution Fund

21. The operator transfers funds to the National Lottery Distribution Fund account twice weekly. The sums transferred are checked by both the National Lottery Commission and the Department for Culture, Media and Sport. The operator transfers between 28 per cent and 30 per cent of sales to the Fund. The precise figure depends on sales. As sales rise the proportion of sales transferred to the Fund increases.[52] The National Debt Office, which is administered by the National Investment and Loans Office, invests money on behalf of the Fund in "safe" securities.[53] The annual return on the Fund during the first five years of the Lottery has ranged from 6.43 per cent to 7.22 per cent.[54] The Treasury is content with the National Debt Office's prudent management of the National Lottery Distribution Fund.[55] Interest earned by the Fund is paid into the account for the benefit of the good causes, as is interest earned on money held by the operator for future prizes and a proportion of the profits generated from the sale of National Lottery merchandise.[56] The distribution bodies draw down sums from the account monthly.

22. Initially, the National Debt Office invested National Lottery funds in cash-based instruments, such as Treasury Bills and loans to local authorities. It has subsequently become apparent that the balance in the National Lottery Distribution Fund would be sufficient to invest in longer-term, two to three year gilts, which should increase the rate of return.[57] The distributors welcomed this change to the management of the Fund.[58] We welcome the National Debt Office's moves to improve the returns to the Fund within the restrictions of its directions. However, Lottery proceeds are held in trust and it would not be appropriate for them to be placed in high-risk investments in an attempt further to improve the returns for good causes.

Lottery duty

23. Lottery duty was set at 12 per cent, which was intended to ensure the Lottery would be "revenue neutral", so that the Government was compensated for revenue lost from expenditure diverted from other goods and services that are taxable to the Lottery.[59] The Treasury conceded that it was difficult to calculate the exact level of Lottery duty that would ensure neutrality, but stated that 12 per cent remained "in the range of revenue neutralising rates".[60] The Chief Secretary conceded that "there is an element of course of judgement and statistical assessment here".[61] The Treasury stated that it occasionally recalculated the computations on which the level of Lottery duty is based and had not found sufficient deviation to justify a modification in the tax rate since the introduction of the Lottery.[62] We recommend that the Government commission and publish an independent scrutiny of the tax income lost as a result of the Lottery to ensure that tax neutrality is a valid concept.

Operating costs and profits

24. Retailers receive 5 per cent of the proceeds of sales at their outlet plus an additional 1 per cent commission for paying out prizes between £10 and £200. The average annual commission has been about £8,000.[63] That income has been crucial for the survival of many small retailers, who do not contribute to the cost or maintenance of terminals or the network.[64] We consider the sale of Lottery tickets through retailers to have been a success. We welcome the much needed additional income to independent retailers provided by Lottery sales.

25. The operator receives 4 per cent of the proceeds of sales to cover operating costs and 1 per cent of sales as profit. The precise proportion of sales taken as profit has varied during the course of the licence and was higher at the start of the period, principally to cover Camelot's initial costs.[65] Camelot's operating costs and profits since the Lottery's launch are £1,585 million.[66] Profit for 2000 was £38.5 million.[67]

26. Camelot was criticised for the amount of profit it was taking from the operation of the Lottery, and in particular the payment of bonuses to senior managers in the organisation. Sir George Russell, Chairman of Camelot, accepted that the timing of the bonuses could have been handled better, but did not believe that any of the senior managers had been paid too much.[68] According to Camelot its profits during the first licence period were justified because of the risk to shareholders through the costs of setting up the Lottery as a going concern. The profits were capped and equated to one month's operation of the Lottery.[69] Camelot's profits were higher than expected because sales were higher than expected.

35 A National Lottery Raising Money For Good Causes, Cm 1861, March 1992. Back

36 Cm 1861, pp 1-2; For a fuller description of the creation of the National Lottery see The National Lottery Bill [HL] 1997/98, Bill 148, House of Commons Research Paper 98/41, 2 April 1998. Back

37 Q 111; Evidence, p 3; also see Evaluating the Applications to Run the National Lottery, HC (1994-95) 569, National Audit Office, 7 July 1995. Back

38 Forty-first Report from the Committee of Public Accounts, Evaluating the Applications to Run the National Lottery and the Director General's Travel and Hospitality Arrangements, HC (1995-96) 96; Twentieth Report from the Committee of Public Accounts, Payments to the National Lottery Distribution Fund, HC (1996-97) 99. Back

39 Evidence, pp 105-107. Back

40 Evidence, p 106, also see Memorandum from the National Lottery Commission, Annex L Biographies of National Lottery Commissioners. Back

41 HC (1998-99) 506-I, para 29. Back

42 Q 197; Evidence, p 48. Back

43 QQ 288, 292-293, 295. Back

44 Q 288. Back

45 QQ 290-291. Back

46 QQ 294-295. Back