Examination of Witnesses(Questions 20-39)
MS SUE
STREET AND
MR MARK
HARRIS
WEDNESDAY 22 MAY 2002
20. Which meant that the legislation could in
no way have given you access in any circumstances to the processes
in relation to this licence.
(Sir John Bourn) That is correct.
21. Even with the interim agreement, there was
no time. I know you were not there throughout much of this time,
accounting officer, but why did it take so long even to agree
and which departments were responsible for drawing up the four
orders? Were there several departments? Will you itemise which
one was answerable for which?
(Ms Street) I will but perhaps I could also verify
with my Treasury colleagues if I make a mistake. I have looked
into this because I do understand your frustrations.
22. Frustration is an understatement.
(Ms Street) I understand that it has taken a long
time and it is almost complete. My understanding is that several
gateways were required. One was the Financial Services Authority;
one was for the Criminal Justice Act which has been done in two
parts, one complete and one about to be complete; Companies Act
gateways which will be due to be opened at the end of June and
administrative access to Serious Fraud Office papers had to be
agreed. Protocols had to be put in place for the handling of these
papers, which has been done. It is quite a fair collection of
different departments. There are ECHR difficulties about some
of the information but that is probably the best account I can
give.
23. The Companies Act is there to regulate companies.
Due diligence is a matter of extreme importance. If we look at
paragraph 3.2, we are told that the Commission's initial evaluation
of both bids was that there were weaknesses. The key concerns
relate to the Commission's statutory duties. In paragraph 1.7,
these are to run the Lottery with all due diligence and propriety
and with the interest of every participant in the Lottery protected.
These were its statutory duties and yet, aware of the fact that
this was its statutory commitment, aware of the fact that the
Commission highlighted as the key weaknesses the inability to
find evidence to fulfil its statutory duty, still departments
did nothing to implement the legislation in time. Why not?
The Committee suspended from 16.28 to 16.33
for a division in the House
(Ms Street) I have had time to make a rather brilliant
pass to my colleague on the right, if you are prepared to accept
the answer from my Treasury colleague, because soon after the
meeting that you mentioned, my Secretary of State wrote to the
Treasury making clear that he would look forward to these matters
being resolved. I do stress however that, because it involved
a number of departments and primary or secondary legislation to
establish gateways to some very sensitive information, this was
never going to be a simple matter, but I do not think I am best
placed to take you through the negotiations that then followed.
24. Is it not a fact that on 12 April 2000,
a year and seven months before the first order was placed, a whistle
blower, a Mr David Armitage, a former G-Tech employee, sent a
letter to the Secretary of State which was received also by the
Commissioner indicating that G-Tech had made a secret correction
to a defect in its software? G-Tech had failed to disclose the
fault or its correction to Camelot or to the Commission's predecessor,
Oflot, all in breach of established software control procedures.
Did not the department get a bit alarmed about that? Did they
take on board that they had a duty to look at what this whistle
blower had to say, or did they not?
(Ms Street) Both the Commission and the Secretary
of State have a duty to ensure due propriety. What happened in
this instance is that the Commission investigated immediately
which seemed to be the right course of action. There were no arguments
about whether or not something should be done to investigate and
no arguments about who should do it. The Commission did take extremely
swift action.
25. Why did it take a whistle blower? What was
done to establish how defects and this sort of situation arose?
Paragraph 3.9: "Furthermore, the G-Tech executives involved
in the software defect cover-up had given personal assurances
to the Director General that G-Tech would introduce and rigorously
apply a code of conduct. Yet, only four months later, the executives
had significantly failed to meet the standards of conduct promised
in failing to disclose the fault which went directly counter to
participants' interests." Did you question at this stage
whether the monitoring process and due diligence process were
going to be adequate for the second bid?
(Ms Street) The process was that the Commission, which
is the body supervised by the Secretary of State, was not at fault
in any way. The question was how the operator was investigating
regulating its suppliers. I do not know whether my colleague wants
to add something but at that point the G-Tech flaw was extremely
serious and was taken extremely seriously at all levels.
26. It says in paragraph 3.10 which you signed
up to, "The G-Tech senior executives involved in the software
defect cover-up had been subject to fit and proper vetting by
the Director General in respect of the first licence." It
does echo, does it not, the original questions I asked of the
C&AG, and he and the previous Chairman and I asked of your
Secretary of State as to why on earth power was not given to the
National Audit Office to have access to the relevant information
because clearly the system was not working and you are dealing
with a company you just cannot trust.
(Ms Street) I can only say that we have always stood
ready to make that information available from the moment that
we were asked for it, but clearly both the Commission and the
department can only act through lawful gateways.
27. There was quandary in the government now,
was there not? They found out they were dealing with a bunch of
devious people who did not give any regard to commitments they
hade to the Commissioner or the government. G-Tech was almost
the only viable source of the hardware. There were two sources
identified in the bids but G-Tech was almost the only source available.
There was a quandary for the government, was there not? If they
took G-Tech on, they could be without the hardware to go into
the second round. How do you convince me that there was not a
compromise and a risk taken in relation to due diligence, fitness
and propriety just to ensure that G-Tech's hardware was available
to whoever was the next bidder?
(Ms Street) I can give you the assurance from the
department's point of view that they always looked to the Commission
to ensure that bids were compliant. The proof of the fact that
the Commission did indeed do that, is that they found both bids
non-compliant, even when that was an extremely difficult situation.
That suggests to me that there was absolutely no question of compromise
with respect to propriety or player protection.
28. It says here, which you signed up to, "Removing
G-Tech as a supplier would put the continued operation of the
Lottery at risk." Is it not a fact that had the NAO had the
access it wished it could, by its actions in revealing the nature
of the people you were dealing with, have led to the situation
where G-Tech might have been deemed improper as a partner?
(Ms Street) It would be helpful to have the chief
executive of the Commission's view but my understanding was that
it was not the lack of access by the NAO to the papers, regrettable
though that was, which was material. I think there was evidence
at this point that these particular actions by G-Tech were a matter
of serious concern. The question then was not about whether the
NAO had the information but whether that in itself, given the
action subsequently taken, made the whole outfit either not fit
and proper at that point or possibly subject to doubt over the
longer term.
29. If the NAO had underlined the concern of
the Commissioner, do you not agree that would have probably materially
influenced the court when the case was taken to court and it would
have been a relevant issue for the government to have taken into
account that the NAO had doubts about the due diligence and therefore
the fulfilment of the statutory requirements.
(Ms Street) The government would always take extremely
careful note of any view expressed by the NAO but my understanding
is that the decision did not turn on that. The decision was made
that neither bid complied with the standards. The People's Lottery
did not comply with the player protection standard and the Camelot
bid did not comply with the propriety standard.
30. Each of them was anticipating generating
income of £7 billion a year and these doubts existed but
they were pushed aside because all that mattered was that the
Lottery had to be kept open.
(Ms Street) The facts are that the Commission turned
down both bids. That was not an easy thing to do and demonstrated
a very high regard for propriety.
Mr Williams: My time is up; I will see
you in seven years' time.
Mr Rendel
31. I am going to concentrate my questions on
what is going to happen in seven years' time. Why are sales down?
(Mr Harris) Sales are down at present partly because
sales over time tend to decay unless new games and new initiatives
are brought in. At the moment, we are in a period after the licensing
process, where new games are being developed. We have recently
seen the relaunch and we hope that will start to address the gradual
decline in sales. Nonetheless, the Commission's view was, at the
time that it evaluated the bids, that the most likely scenario
is that sales could be kept in cash terms at a level across the
life of the next licence and the Commission did not think that
a large boost in sales was terribly likely to happen.
32. It has gone the other way.
(Mr Harris) It is declining slowly at the moment,
yes, but Camelot is now bringing in a range of games. It has relaunched
the main game last weekend. This is designed to address and increase
people's willingness to play.
33. Not being a great Lottery player myself,
you will have to tell me whether any of those new games has been
introduced apart from the one last weekend.
(Mr Harris) Not since the new licence came in at the
beginning of this year but further new games are planned and in
preparation.
34. You are expecting those to increase sales,
at least back up to the average of the last licence?
(Mr Harris) Yes. Obviously it will depend on the market
and how successful the launch of those games is, but the Commission
believe that, if those games are launched, sales can be put back
to a steady state. We would certainly hope that Camelot will put
efforts in to increase those sales.
35. If at some point in the future the Lottery
has to have a break for whatever reason, would you expect the
drop in Lottery sales that causes to be temporary or permanent?
(Mr Harris) It is very difficult to project. Because
people play on a regular basis, they may well get out of the habit
if there is a break. Alternatively, if a new Lottery came along
with a big relaunch, a slight gap might give it a chance to achieve
similar levels of sales.
36. What is it likely to be? Would sales go
up or would sales go down as a result of a break?
(Mr Harris) My own judgment is that sales might well
go down but a big launch from a new operator may reduce that.
37. How much would sales go down in your judgment?
(Mr Harris) I do not think it would be possible to
say.
38. Are you telling me that when the prospect
of a possible break came up, because you thought you might not
get a new licence operator in place as soon as you were originally
expecting when the second licence came up, you did not in your
department make any sort of estimate of what this break would
mean? I thought part of the point of pushing forward to get a
new operator in almost at any cost was because you thought a break
would be significantly dangerous to the Lottery.
(Mr Harris) We certainly thought a break would be
significantly dangerous.
39. Now you are telling me it might not be;
it might even go up if you have a break.
(Mr Harris) I may have misunderstood. Our real concern
was that if the Lottery stopped and restarted later there would
still be the lost income from all that period. It would be quite
an endeavour to get sales immediately back up to the same level,
so there would definitely be loss in the period in between stopping
and restarting and that loss would be of the order of the current
flows that go to good causes at the moment. In that sense, yes,
we were concerned and therefore we put effort into making sure
that we had tried every avenue and taken every option, consistent
with our statutory responsibilities, to make sure that the Lottery
did not stop. The Commission was absolutely clear that it was
not prepared to compromise those statutory responsibilities just
to keep the Lottery going.
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