House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport First Report

THE OPERATION OF THE NATIONAL LOTTERY

VI. THE FUTURE OF THE NATIONAL LOTTERY

99. The crucial challenge for the operator and regulator is to maintain the income for good causes without reducing the integrity of the National Lottery. Experience in the United States, which can provide an insight into the National Lottery's future, suggests that revenues expand dramatically after a lottery's introduction, then level off, and may begin to decline. Such "lottery fatigue" encourages operators to introduce new games to maintain or increase revenues.[307]

100. The Commission stated that its best reading of sales levels was that they remained broadly constant during the first licence and had not been affected by the selection process, and it did not anticipate any major adverse effect on sales during the transition to the new licence.[308] Both bidders identified potential growth in Lottery sales.[309] To maintain sales levels, the operator will have to create a portfolio of games that maintain public interest in the Lottery.[310] The operator faces the challenge of launching such games without confusing the public and retailers with a plethora of instructions and permutations.[311] The operator will also have to negotiate regulations concerning games, particularly in relation to their impact on under-16s, low income groups and people with compulsive gambling tendencies.[312]

101. The expectation, based on experience in other countries, is that the operator will have to introduce more aggressive, harder gambling games, which are more attractive to under-age and problem gamblers, to maintain interest in the Lottery.[313] Dr Fisher was particularly concerned that if the United Kingdom followed the American model there would be a trend towards faster and faster games.[314]

102. Worldwide trends in lottery development do not necessarily follow the United States model because of the more restricted gambling environment in America. In the United Kingdom, for example, gamblers who wish to indulge in more immediate gambling or require a skill element to their gambling can choose from a host of high street betting shops or fruit machines in most pubs and clubs.

New Technology

103. Future development of the Lottery will happen in a changing shopping environment. There is a greater reliance on electronic communication, with fewer face-to-face transactions. Consumers are demanding more immediate and self-service retailing. In response to that need, the Commission invited bidders to consider how they would use new technology to sell and promote the Lottery.[315] Internet gambling provides greater player choice in methods of play but has associated security and regulation problems.[316]

104. Bingonet launched a free Internet lottery funded by advertising on the web site. The game is accessed through the Bananalotto web site, which lists extensive rules and restrictions for players. Bananalotto claims there could be a £1 million jackpot winner every day. The site circumvents existing rules governing lotteries by not charging players to enter. Bingonet welcomed the possibility of the National Lottery using the Internet as a distribution channel but mentioned the regulatory difficulties, such as the prevention of under-age or problem gambling.[317] In Austria, which allows lottery sales through the Internet, a "webcard" system is used to provide security and prevent inappropriate or illegal sales. The webcard can be purchased only through authorised outlets where appropriate age checks are made.[318]

105. Games available through such new technology can be more attractive to vulnerable player groups.[319] We were told that Nova Scotia has removed video lottery terminals following an associated increase in problem gambling.[320] Mr Harris, Chief Executive of the Commission, said that it did not expect to see any proposals for the introduction of video lottery terminals and that it did not believe that that sort of game was appropriate to be introduced over the next seven years.[321] He reiterated that the Commission's primary responsibility was the protection of players and that it would maintain that responsibility when considering new game proposals.[322] Camelot stated that face-to-face sales provided some defence against under-age sales and that the introduction of new distribution systems would need to safeguard against under-age play.[323] We are concerned about the possible introduction of harder gambling into the National Lottery and expect the National Lottery Commission to ensure that the imperative to maintain Lottery sales does not infringe its primary task of ensuring the protection of players.

Additional uses for the National Lottery network and terminals

106. Both bidders suggested that new technology would be able to deliver additional services such as housing payments, telephone top-ups, road fund licences and voting.[324] Camelot confirmed that its terminals and communication network could carry other applications, but noted that the company would have to be able to convince the Commission that such additional applications would not have a negative impact on the Lottery.[325] In response to the challenge presented by the Lottery, other sectors of the gambling industry already use new technology, such as the Internet.[326] They would like to have the opportunity to use National Lottery terminals.[327]

107. Retailers were concerned that they should be paid for additional functions added to the Lottery network or terminals. They also explained that the use of terminals for additional functions could present practical difficulties and argued that, because the majority of tickets are sold in the last few hours before a draw takes place, they should be restricted to outside peak Lottery sales hours.[328]

The future of the National Lottery Commission

108. The Secretary of State said that the format of regulation was a very difficult issue.[329] Lord Burns accepted that difficulties were always experienced with the regulation of a monopoly, but stated that there were considerable financial penalties if the operator failed to comply with its licence obligations.[330]

109. The tasks the Commission are set on a day-to-day basis are different from the one that it must perform infrequently in selecting the operator of the Lottery. Lord Burns accepted that it was legitimate to ask whether "the same organisation ... should do both [regulation and selection tasks]. Does it require the same sort of Commissioner, the same set of relationships, does it require the same skills, or does it require different skills?"[331] Unfortunately, Lord Burns had not had the opportunity to consider the answers to those questions. Lord Burns did not perceive a conflict of interest between the two functions, but agreed that others from outside the Commission could usefully assist with that task.[332] We agree with Lord Burns that the Commission's functions of regulation and selection may not necessarily be best performed by the same people. We recommend that the review announced by the Secretary of State considers how the evaluation process for the licence beginning in 2008 can be strengthened. This may involve broader involvement in selection than is necessary for regulation of operational issues.

The selection process

110. Lord Burns said that a competitive process would ensure that the next operator would be at least as successful as Camelot had been during the first licence period and was the best method of assuring the best possible income for the good causes.[333] He asserted that the corollary of a competitive process was that the operator might change, and he accepted that some inconvenience was inevitable if such a change occurred, but he was adamant that the inconvenience was an acceptable price for the benefits of a competitive selection process.[334]

111. Lord Burns said "if one is going to have a single operator who is given a licence to conduct the Lottery ... and there is to be competition for that licence, then the process of deciding who is the winner of that competition is always going to be a difficult and drawn-out process".[335] The Secretary of State said the process had not been particularly "smooth or trouble free".[336] The Commission's ability to consider complex issues of game design and its methodology for this task have been questioned.[337] The Secretary of State said that there had been insufficient experience of the selection process to have usefully amended the 1998 National Lottery Bill.[338] He agreed that the process would have to be examined to ascertain the lessons that could be learned.[339]

112. The Commission accepted the need for other bidders to come forward for future competitions.[340] The People's Lottery believed that the present bidding process would discourage potential bidders in the future.[341] The Secretary of State argued that the number of bids had been constrained by the limited number of lottery technology companies.[342] He considered two bidders sufficient for a competitive selection process.[343] This view was endorsed by the Commission.[344] Mr Burridge argued no one would bid against the incumbent again because of the costs involved and the advantage to the incumbent.[345]

113. The Commission accepted that the risks associated with change gave the incumbent an advantage, but pointed out that the legislation did not allow for "any overt discount to a newcomer in order to give them a better chance to compete".[346] Moreover, Lord Burns said: "It was possible for a newcomer to win this competition".[347] The People's Lottery expressed several concerns about the bidding process giving an advantage to the incumbent.[348] It also stated that Camelot had had an advantage in the first competition as it had been allowed time to sort out details after becoming the preferred bidder.[349] Lord Burns considered it unlikely that, under the present legislation, the process could be made more competitive.[350] He stated, however, that: "My instinct is that one needs more in the way of competition during the licence period and ... one should try to avoid this big bang competition every seven years".[351] The Secretary of State agreed that the review would need to consider the potential advantages of incumbency.[352] He said that "the incumbent is always likely to be in quite a strong position, not an inevitable position, but a strong position".[353]

114. Bidders in future competitions also face the difficulty of discovering all the relevant facts about the operation. For example, The People's Lottery claimed that it had not been given sufficient information about the network and the retail estate, even though it was expected to have a comparable size retail estate from the start of the licence period.[354] Retailers in turn did not think they had been given sufficient information about the bids.[355]

115. Lotteries are a natural monopoly.[356] We consider it very likely that, unless further legislative action is taken, the National Lottery will become a perpetual private monopoly for the licensee. If this situation is to be avoided, it is likely that there will need to be a move away from a single licence towards separate licensing processes for different parts of the Lottery operation.

Transparency

116. The Commission said in evidence to this Committee in 1999 that it wanted to be open and to "disclose as much as possible of what we do".[357] Lord Burns was happy that the process was as open as necessary.[358] He conceded that, although levels of transparency in public bodies were improving, the process might be more open in the future.[359] He said that there was "no reason why the process of teasing out the arguments ... cannot be debated more fully and more openly".[360] However, the Commission does not intend to publish the advice from its consultants.[361] The Secretary of State said that he would welcome progress towards greater openness.[362] In the United States, regulatory proceedings and documents are accessible to the public.

117. We recommend that the Secretary of State require the National Lottery Commission to meet in public unless it is satisfied that, in the case of any particular issue under consideration, the interests of public disclosure are outweighed by the need for commercial confidentiality. With such a need to weigh these factors in the balance, we would not expect all meetings concerning commercial activities to be held in private. We further recommend that regular public meetings take place involving the operator and its suppliers at which they are cross-examined by the Commission.

Competition in the operation of the Lottery

118. Lord Burns considered it might be possible, if the legislation were changed, to inject more competition into the National Lottery.[363] He also considered that it would be possible to give other bodies access to the Lottery's infrastructure.[364] The Lotteries Council proposed the possibility of partnerships between the National Lottery and small society lotteries.[365] Several alternative structures for a competitive National Lottery have been suggested, including having hypothecated lotteries for each good cause.[366] The Secretary of State stated that he had "no plans to change the legislation" with regard to more than one provider or operator of the National Lottery.[367]

Alternative operational structures

119. We discussed possible future structures for the Lottery with Lord Burns who made it clear that he had not had time to consider the issue in detail.[368] However, he said that "there are questions to be asked about whether all of this has got to be a monopoly, whether there are parts of it which could be subject of more competition, and whether there is more that could be done with the common infrastructure".[369] He went on to compare the Lottery to utilities and considered it possible for a public sector company to own the common infrastructure with different parts of the operation run by the private sector.[370] If such a structure were adopted he considered that the competition to operate the Lottery might not need to occur on an all or nothing, once-in-seven-years basis.[371]

120. Professor Walker compared the incentives for private sector and public sector operators and concluded that while, in practice, both would be motivated to maximise the proceeds of the Lottery: "The weakness of the public sector model is that the incentives for cost control are limited, while the weakness of the private sector model is that the operator has to be chosen and then prevented from abusing its monopoly market position".[372]

121. In the United States, 33 of the 38 state lotteries are run as an arm of the state government and the remaining five are quasi-government corporations, which are closely linked to the state government but are permitted to operate more like a private sector enterprise than a government agency.[373] In the United States, there appears to be little impetus to privatise state lottery operators or alter regulatory structures. Most day-to-day activities of lotteries are undertaken by contractors, and retailers selling lottery tickets are almost all private businesses. The Secretary of State considered the prospect of a Lottery "owned by the nation", with individual services contracted out to different suppliers, and said that it was a model he expected the review to consider, but that he remained "agnostic" about the idea.[374] State operation was effectively ruled out in the 1997 White Paper, which stated that "a wholly state-run system provides little incentive to operate efficiently".[375] The Secretary of State said that "it was probably not a good idea for the public sector to assume it could run a major visitor attraction. I step into the idea of the public sector deciding itself to run a lottery with a certain degree of caution."[376] However, the Secretary of State said that the review would consider public sector involvement in the Lottery.[377]

The regulation of gambling

122. Lord Burns rightly told us that the specific arrangements for the National Lottery and regulation of gambling as a whole were a matter for the Government rather than the Commission.[378] Some in the gambling industry have called for all gambling to come under the same Government Department.[379] There is certainly a consensus in the gambling industry that the Lottery should have been considered by the current gambling review and that there should probably be a single regulator for all forms of gambling.[380] The National Heritage Committee recommended a single regulator for gambling.[381] Camelot also felt that a single regulator could be beneficial.[382] The Gambling Review Body, due to report in summer 2001, has been expressly excluded from consideration of the National Lottery.[383] The Gaming Board for Great Britain accepted that there was a rationale for a single regulator. However it expressed concern about such a regulator conducting the selection of the operator and suggested "a separate, time limited, body or committee" could be established when necessary to "invite bids, decide between them and appoint the operator".[384]

123. The Bingo Association regarded "the Government's argument that the Lottery was not gaming, and should therefore be treated separately, as bogus".[385] We accept that there is a distinction between the National Lottery and other forms of gambling. The National Lottery was established by Parliament specifically to raise money for good causes. Other forms of gambling are commercial activities and any contributions they make to charities, although welcome, are incidental to their primary purpose.[386]

124. However, we are disappointed that the Government saw fit to exclude the question of the National Lottery's regulation from the current Gaming Review Body. This issue should therefore be considered by the review of the selection process announced by the Secretary of State.

The review

125. The Secretary of State said that the review would look seriously at the process and whether changes should be made. He said that the review would have an independent element and that it would not take place until all the arrangements for the new licence were completed and the new franchise "absolutely signed and sealed".[387] The Commission would expect to be involved in the review, and said that such a review should not exclude the possibility of legislative changes.[388]

126. We support the need for an early review of the process for the selection of the operator of the National Lottery and the role of the Commission in that process. Such a review should be able to recommend changes to the legislation controlling the process and should report in time for any recommendations to be fully considered by this Committee's successors and for any legislative changes to be in place well before the selection of the operator for the licence beginning in 2008.

127. The review should also take account of the impact of changes on the current operator and consider, if necessary, what remedial action might be taken for the staff of the operator. Camelot should be given sufficient notice of changes that will affect the operation, the company or its employees.

307 Q 11; State Lotteries at the Turn of the Century: Report to the National Gambling Impact Study Commission, April 23, 1999. Back

308 QQ 536-537, 590; see also Camelot Annual Report 2000, p 9. Back

309 Q 157; Evidence, p 24. Back

310 QQ 25, 64, 591-592. Back

311 QQ 167, 590, 592; Evidence, p 40. Back

312 QQ 26, 81, 585. Back

313 Q 456; Evidence, pp 49, 64, 249. Back

314 Q 457-458. Back

315 QQ 592-593. Back

316 Q 473; Evidence, p 5. Back

317 Evidence, pp 243-245. Back

318 See Memorandum from the National Lottery Commission, Annex I, Letter from the National Lottery Commission to the Gaming Board of Great Britain. Back