House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Fifth Report

2 BACKGROUND

Establishment of the National Lottery

4. The National Lottery was established under the National Lottery etc. Act 1993 and was launched in November 1994. The Act was later amended by the National Lottery etc. Act 1998. These Acts set out the roles of the Secretary of State and the National Lottery Commission (NLC) and provided for the award of a single licence to run the Lottery to a commercial operator. The first licence period ended on 30 September 2001, the second licence runs from 27 January 2002 until 31 January 2009. The key terms of the current framework are that: the NLC will regulate and licence the National Lottery, ensuring the propriety of the game whilst protecting players and maximising returns to good causes; that the income from sales will be split (shown in table 1 below); and funds in and out of the National Lottery Distribution Fund (NLDF) and distributed to five good causes: sport; arts; heritage; charities; and health, education and the environment.

5. The proceeds from National Lottery games are divided according to fixed proportions applying over the seven years of the current licence (i.e. the figures may vary in any one year - figures in brackets below show 1999-2000 outturn). The operator therefore is under an incentive to maximise ticket sales and minimise costs in order to maximise profits.

Table 1:Division of Proceeds of ticket sales

Prizes	Good Causes	Lottery Duty	Retailer Commission	Camelot Retention (Running costs and profits)
50% (47%)	28% (31%)	12% (12.1%)	5% (5.1%)	5.0% (4.9%)

Source: National Lottery Commission information note 9.

6. From the outset, Lottery Duty was set at 12% which was intended to ensure that the Lottery would be "revenue neutral" so that the Government was compensated for lost revenue arising from expenditure diverted to Lottery ticket purchase from other goods and services (that were taxable).

7. Good causes receive, in total, 28% of the total revenues of National Lottery sales. These funds are paid into the National Lottery Distribution Fund (NLDF) (the Lottery's bank account managed by the Office for Debt Management, part of the Treasury). From the NLDF funds for good causes are distributed to the five good causes in fixed proportions. In 2003-03 the total paid into the NLDF was £1,591,781,000.[2] Funds from the NLDF, including interest earned, are distributed by 16 National Lottery distributors (see table 10 later in the Report for further details). These funds are drawn down by the distributors when needed for expenditure by successful applicants. This gives rise to the NLDF 'balance' issue (the amount in the Fund at any one time) which is discussed later in this Report.

Performance of the Lottery

REVENUE

8. Since the first National Lottery draw on 19 November 1994 until April 2003 total Lottery sales have been a huge £41.36 billion.[3] A breakdown of the total revenues since launch is shown below:

Table 2: National Lottery total revenue

Year £m	2003- 2009	2002- 2003	2001- 2002	2000- 2001	1999- 2000	1998- 1999	1997- 1998	1996- 1997	1995- 1996	1994- 1995	Since launch
On-line		-	-	4,124	4,532	4,536	4,713	3,847	3,694	1,157	26,327
Instants		-	-	546	562	669	801	877	1,523	34	5,010
Total	4.5**	4,574.5	4,834	4,983	5,094	5,228	5,514	4,723	5,217	1,191	41,36*

*Up to 2002-03. **Planning assumption - advice from DCMS
Source: National Lottery Commission information note 9 and Annual Report & Accounts 2002-03 (total figures may not add due to rounding)

9. Table 3, below, illustrates the trends in National Lottery tickets sales from its creation in 1994 until February 2004. In this time, the Lottery sales have declined; however there was a period of increasing sales between March 1995 and August 1999.

Table 3:Trends in Lottery product sales

Sample period	No. of draws	Mean sales (£m)	Trend
1994-2004	482	55.0	Declining at increasing rate; rate of decrease per draw at Feb 2004 was £102,000
1997-2004	366	26.7	Steady decline at £22,000 per draw
June 1999-July 2003	213	4.6	Steady decline at £950 per draw
October 2002-July 2003	38	2.2	Rising at decreasing rate, levelling out in July 2003
November 2000-Feb 2004	169	1.2	Declining at decreasing rate; rate of decrease per draw was £3,200 at Feb 2004
November 2000-Feb 2004	165	0.8	Steady decline at £2,800 per draw
March 1995-August 1999	230	17.9	Declining at decreasing rate then increasing; rate of increase was £78,000 at August 1999

Source: Dr Robert Simmons, 2004

10. Table four shows the source and distribution of revenues since the beginning of the National Lottery.

Table 4: Distribution of Lottery Revenues 1994-2003

Category	Total for the period (£m)
Total revenues	41,361
Revenue of National Lottery Game	33,564
Prizes won by players	17,475
Payments to NLDF from ticket sales	10,009
Total payments to NLDF	11,088
Lottery Duty (12% of sales)	4,364
Retailer commission (5% of sales)	1,850
Retentions by licensee	7,083

Source: National Lottery Commission Annual Report & Accounts 2002-03

11. The National Lottery is presented as one of the most successful in the world; ranking as the second largest in terms of both total sales and returns to government (good causes and taxation).[4] Camelot informed us that, at present, 70% of the adult population play on a regular basis and approximately 30 million people have a ticket for the main draw on a typical Saturday.[5]

12. The UK ranks only 40^th in the world in terms of equivalent per capita Lottery spending. The National Lottery Commission says this is evidence that the UK's lottery success is not therefore based on a small proportion of the population playing excessively.[6] The weekly average Lottery expenditure by household is shown in table five below for both Saturday and Wednesday draws and Saturday only. The average over all socio-economic groups was £5.37 (for Saturday and Wednesday) and £2.49 (for Saturday only) in 1999.

Table 5: Weekly average lottery expenditure - by household (May 1999)Table 5: Weekly average lottery expenditure - by household (May 1999)

Socio-Economic Group	A	B	C1	C2	D	E	All
Saturday & Wednesday draws	£5.98	£5.50	£5.35	£6.31	£5.09	£4.13	£5.37
Saturday only	£2.75	£2.65	£2.43	£2.97	£2.25	£1.91	£2.49

Source: National Lottery Commission

13. More recent research suggests that average spending per player is still modest - on Saturdays, an average of £2.60, on Wednesdays, an average of £2.20. Only 7% of players spent £5 or more on Saturdays and 3% did so on Wednesdays. Those with incomes of over £9,500 per annum spent similar sums playing the main Lottery game (up to £2.90 per week). There seemed to be little variation in how much was spent by players with annual incomes above £9,500. Spending on the Lottery dropped sharply for those with incomes below £9,500 pa, down to £1.90 per week for those in the lowest income group of below £4,500 pa.[7]

14. National Lottery revenue is generated through the sale of tickets for a number of different games. Table six, below, provides information about the introduction dates and total sales figures (up to April 2003) for all of the National Lottery games. The table clearly shows that the most popular game is the main National Lottery Game which was introduced on 19 November 1994 as a Saturday draw and to which was added a Wednesday draw from 5 February 1997.

Table 6: Summary of UK National Lottery games

Game	Introduction	Sales in 2002-03 (£m)	Total sales up to April 2003 (£m)
National Lottery Game (Lotto)	Saturday: 19 November 1994 Wednesday: 5 February 1997	£3387	£33564
Thunderball	Saturday: 7 June 1999 Wednesday: 23 October 2002	£280	£956
Lottery Extra (Lotto Extra)	15 November 2000	£89	£263
Christmas Millionaire Maker	November 2001	£25	£169
Scratchcards (incl. Instants)	21 March 1995	£578	£6167
HotPicks	13 July 2002	£216	£218
EasyPlay	September 2003	n/a	n/a
Euromillions	February 2004	n/a	n/a

Source: National Lottery Commission Annual Report 2002-03

15. Out of a total of 850 draws from inception until 14 February 2004 (Saturday and Wednesday), there have been 137 rollovers with an average top-up of £6.05m and an average jackpot pool of £42m. There have also been 59 superdraws with an average top-up of £6.8m and an average jackpot prize pool of £12.8m.[8] These periodic larger jackpots are a key driver for increasing ticket sales.

16. The National Lottery is made up of eight different games, these are: Lotto (The National Lottery Game); Lotto Extra; Thunderball; Scratchcard games (including instants); Christmas Millionaire Maker; Lotto Hotpicks; Lotto EasyPlay (via the internet); and Euromillions. The portfolio of National Lottery games includes two types of game available through retailers: draw-based games and scratchcards. Draw-based games require the player to either fill in a playslip or choose to have their numbers randomly generated by purchasing a Lucky Dip ticket. Scratchcards are an alternative way of playing the lottery through which players can achieve an instant win.[9]

17. The National Lottery is largely "pari-mutuel" in that the games have a prize structure based on predetermined proportions of the prize fund generated for each game by the relevant ticket sales for that game.[10] The exceptions are: the £10 award in the main Lotto game for matching three numbers; and the Thunderball game which has fixed prizes. Sales for each game in 2002-03 and total sales since 1994 are shown in table 6 above.

18. Going into the future, the NLC have recently agreed to the launch of Euromillions and the introduction of playing Lotto on the internet. It has yet to be seen how successful these initiatives will be. There is also the possibility that Camelot will extend the range of scratchcards available and, depending on the success of the London 2012 Olympic bid, there is the potential introduction of new Olympic Lottery games in 2005.[11]

GOOD CAUSES

19. All the money to be distributed to good causes is paid into the NLDF by Camelot. This is from a number of sources (shown below) but the bulk comes direct from sales of Lottery tickets.

Table 7: Payments to the NLDF

Year £m	2002- 2003	2001- 2002	2000- 2001	1999- 2000	1998- 1999	1997- 1998	1996- 1997	1995- 1996	1994 -1995	Since launch
Ticket sales	1,259	1,331	1,376	1,413	1,483	1,554	1,259	1,402	311	10,009
Unclaimed prizes	85	81	76	71	78	74	48	34	0	471
Prize shortfall	9	104	91	88	100	122	130	18	0	568
Ancillary income	1	1	1	1	0	0	0	0	0	4
Interest (trust a/c)	3	5	7	6	10	3	2	3	0	30
Miscellaneous	1	1	0	2						6
Amount	1,358	1,523	1551	1,581	1,671	1,753	1,444	1,457	312	11,088

Source: National Lottery Commission (total figures may not add due to rounding)

20. The division of funding between the good causes at present is shown later in the report (figure 1). These proportions have changed over time as the table below shows, with one good cause expiring and another being created.

Table 8: Division of Lottery funding for good causes

	Arts	Charity	Heritage	Sport	Millennium	Health, education and environment
To October 1997	20%	20%	20%	20%	20%	-
From Oct 1997	16.66%	16.66%	16.66%	16.66%	20%	13.33%
August 2001	16.66%	16.66%	16.66%	16.66%	-	33.33%

21. Recent figures given by the DCMS set out the amounts distributed to each good cause since 1997. The total was given as £13.473 billion. These shares are set for review at the end of the current licence period.