House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Fifth Report

3 NATIONAL LOTTERY REFORM

25. After the competition for the second licence, and the difficulties surrounding it, a number of concerns were raised about the process used and the implications for any future licence competitions. The previous Committee, the National Audit Office (NAO), and the Committee of Public Accounts (PAC) all reported on the second licence competition and recommended a number of changes to the structure of future competitions.[17]

26. In summary these reports highlighted that: the cost of bidding was significant and the 'all or nothing' result prevented many companies from participating; Camelot held a significant incumbency advantage and there was a need for this to be tackled in the future; and, although competition comparable to that for similar overseas lotteries had been achieved, there was a significant risk of there being no serious competition for a third licence if a similar process was repeated. The PAC in particular recommended: that the NLC should develop contingency plans to deal with circumstances where there was no challenge to an incumbent operator of the National Lottery at any point in the future; and that in future licences the risks involved should be equally spread between the operator and the good causes - rather than allowing good causes alone to suffer if sales forecasts were not met. Our predecessor Committee specifically recommended that the Government carry out a review of the process for the selection of the operator of the National Lottery and of the role of the Commission in that process.[18]

27. The regulation of the National Lottery has historically been separate from the regulation of the rest of the gambling sector. Recently, with the proposed establishment of the Gambling Commission, there have been calls for the National Lottery to come under that body.[19]

28. With these recommendations in mind, the Department for Culture, Media and Sport issued a consultation document reviewing licensing and regulation of the National Lottery in June 2002.[20] This led to the White Paper National Lottery Licensing and Regulation Decision Document published in July 2003 within which proposals were announced aimed at resolving the issues highlighted by the second licence competition.

DISTRIBUTION AND FUNDING

29. As part of a general review of the National Lottery, and accompanying the consultation on licensing and regulation, the Department also consulted on Lottery distribution and funding in July 2002[21]. DCMS published its conclusions in July 2003.[22]

30. A number of concerns over the National Lottery distribution process were highlighted. These issues came to the attention of DCMS through a number of sources, which included over 400 responses to the consultation document (from distributors and many in the voluntary sector, charities and others), further attitudinal research, and consultation with other Government departments.[23] Problems included:

the over-complicated application process;
the inequity of the distribution of Lottery funds throughout the UK;
the lack of support given to applicants and re-applicants;
the over-sized National Lottery Distribution Fund and the need to reduce balances;
the negative image of the Lottery sometimes projected by the press and others;
the need for increased promotion to the public of the good causes that receive funds;
the lack of public involvement in decision-making regarding distribution; and
the effect of the Olympics (both the impact of the Olympic Lottery on overall income for good causes; and the direct call on the sports distributors for resources).

The proposals

31. Since the publication of the DCMS' conclusions[24] some of the Government's proposals have been incorporated into primary or secondary legislation currently proceeding or already passed through Parliament (the Horserace Betting and Olympic Lottery Bill and New Opportunities Fund (Specification of Initiative) Order 2004 setting up a "Youth Fund[25]). The remainder are expected as part of the draft Gambling Bill currently under consideration by a Joint Committee of both Houses. On 3 February the Secretary of State told us that draft clauses relating to the Lottery had not already been published because "of the volume of legislation that as a government we are seeking to get through and, secondly, the resources of Parliamentary Counsel to draft the clauses."[26] We hope that in future, where possible, the scrutiny of draft bills within the remit of the Department will be aided by all the clauses being published in time for the appropriate committees to be able to take evidence from relevant parties on the implications of specific legislative provisions. This, after all, is the point of the pre-legislative process.

32. The Department, through the proposed reforms which are described in greater detail later in the Report, aims to: increase returns to good causes (whilst still protecting players and ensuring due propriety); ensure effective competition for the operation of the National Lottery going into a third licence period; maintain public confidence and support for the National Lottery; and ensure that the National Lottery thrives in light of the deregulation of the wider gambling sector.[27] The primary aim of DCMS is to increase the total resources available to the good causes. We support this objective.

LICENSING

33. The fundamental rationale for a tender process for the licence to run the National Lottery is to maintain and, where possible, increase the return for good causes offered by the operator. Increasing total sales through innovation in the games portfolio, reducing costs, and changing the split between prizes, profits and returns are all relevant factors on which the bid process should exert pressure. However, without credible, or any, competing bids, this strategy must needs fail. The only alternative is the more intrusive 'second-guessing' type of regulation practised of necessity in the utilities sector; particularly the water industry.

34. The Government, therefore, in the licensing and regulation consultation paper of July 2002, asked for views on the following four proposals aimed at inviting bidders to a more attractive 'party':

i. the separation of infrastructure and Lottery products to create competition within the single licence by increasing competition to provide services;

ii. NLC to run the Lottery through the private sector;

iii. maximum flexibility;

iv. the establishment of a state-owned National Lottery operating company.[28]

35. Ten responses to the consultation document were received by the Department.[29] In the decision document, published a year later, DCMS analysed the responses and concluded that there was little or no support for the first, second or fourth options, but there was broad agreement that there needed to be an element of flexibility built into the licensing system in time for the third competition. Although consultation appeared to rule out three of the proposed changes suggested by the Department, we conclude that this does not amount to overwhelming support for the third option which has now been put forward for implementation, namely, the break-up of the single operating licence.

36. Regardless of how the conclusions were reached, the Government has decided on a number of changes to the licensing of the Lottery and these form the bulk of reform in this area. The Department proposes to shift away from a single licence to run the National Lottery and wants to empower the NLC to offer a number of Section 5 licences to operate different parts of the National Lottery.[30] At the same time, the proposals will remove the requirement for each game to hold an individual Section 6 licence (although it is likely that some sort of individual approval will be needed to launch each new game). This will mean that, if the Lottery is split into parts, the operators would have greater freedom over the running of their game or games.[31]

37. Under the Government's proposals the NLC will be able to offer a number of different licences, which could be divided either by type of game or, possibly, by purchase method. The licences might also be varied in the period for which they were valid. The NLC emphasised that the details of the licences that might be offered must be a matter for decisions taken nearer the end of the present licence period when more research had been carried out.[32] At this time, it is assumed that the possibility of one operator obtaining more than one, or all, of the licences would still be feasible within any new process. The proposals, however, do fulfil the Government's desire to create the option of having a number of operators, perhaps of different sizes, running separate parts of the National Lottery for varying periods of time.[33]

38. Whatever form the new licences take, the Department is hoping that this multiple licence regime will stimulate greater competition in the next licence period by creating a more attractive and, crucially, more cost-effective bidding process.[34] The Department also believes that introducing this flexibility at an early stage will create a sufficient lead-in time up to the next competition in 2009 and allow the NLC to research and consult about how to minimise any harmful effects to which the innovations may give rise.[35]

39. There is also likely to be an impact on the role of the NLC (as the body that awards the licence) due to increased demands of managing the process. The Department envisages that it will have to take on a more strategic role, continuously reviewing the National Lottery, and developments across a potentially greater number of operators, to ensure its effective operation.[36]

REGULATION

40. The NLC has regulated the National Lottery since it replaced Oflot in 1999. The remainder of the gambling sector is regulated, at present, by the Gaming Board. However, the draft Gambling Bill proposes the creation a Gambling Commission to take over this role. There have been calls for the National Lottery also to be regulated by the Commission. The Department does not agree and the decision document states that this function will remain the responsibility of the NLC. The Department argues that the regulation of the National Lottery must be separate from the rest of the gambling sector because the NLC has a unique regulatory responsibility to ensure that returns to good causes are maximised. The regulation of the gambling sector gives rise to no such responsibility and this is argued to create the risk that regulation under the Gambling Commission could cause a potential conflict of interests.[37]

41. The decision document does, however, concede that a number of improvements could be made to the machinery of regulation. The Secretary of State will have more flexibility regarding the number of Commissioners that are appointed. For example, she will be able to appoint the Chair of the NLC for a fixed period which can be for longer than a year, and there will be provision for the Chief Executive and one other executive to be appointed as a Commissioner.[38] By these changes the Department hopes to strengthen the position of the NLC, maintain public confidence in the regulation of the National Lottery, and help improve returns to good causes.[39]

42. In relation to contingency planning, the Department proposes to keep the provision for the Secretary of State to be able to set up a Government company to run the Lottery. It stated that this facility would only be used in extreme circumstances.[40]

DISTRIBUTION AND FUNDING

43. In the National Lottery Funding decision document, the Department sets out a number of changes to funding and distribution mechanisms. Unlike with licensing and regulation, the consultation on distribution was not in response to specific problems. However, a number of concerns had arisen through earlier consultations and reviewers. Many of these receive attention in this decision document.

44. The Department's proposals are aimed at building up public confidence in the Lottery through: a more transparent decision-making process; increased public involvement in that process; increasing awareness of what the Lottery does, and making the application process, and the customer care and complaints procedure easier to understand and use. The Government aims to increase accessibility not least by the creation of five new types of funding: open grants (similar to the grants at present offered by the Community Fund); national programme grants (similar to those at present offered by the New Opportunities Fund); transformational grants (big projects of national significance); a fund aimed specifically at young people; and very small grants (£500 or less) intended to be widely and more easily available.[41]

45. The most significant proposed change to the distribution of National Lottery funds is the merger of the New Opportunities Fund (NOF) and the Community Fund (CF) into a single distributor. The new distributor will also take on the responsibilities of the Millennium Commission and will have responsibility for the allocation of about 50% of total resources for good causes. The Department believes that the new single body will provide a more streamlined source of funding, improving distribution by "simplifying the application process, cutting administration costs, and increasing responsiveness to public views."[42]

46. The National Lottery Distribution Fund (NLDF) holds Lottery good cause money until it is drawn down for payment to a project by one of the 16 main Lottery distributors. DCMS wants to reach good causes in a more timely and efficient manner which will reduce the amount held in the central fund at any one time (the balances). It intends to do this by removing any incentives for distributors to build up reserves and by legislating to give the Secretary of State the power to reduce and reallocate excessive balances where appropriate.[43]

47. As stated above, the DCMS aims to increase public awareness of what the Lottery actually funds in the hope that this will have a positive impact on ticket sales. The Department proposes to achieve this aim by creating a single Lottery identity; ensuring that all recipients of funding display a common Lottery logo; establishing the National Lottery Promotional Unit (NLPU) charged with raising awareness of projects; and by creating a National Lottery Day on which a variety of events would demonstrate and celebrate the Lottery's impact on people's lives.[44]

17 First First Report from the Culture, Media and Sport Committee, Session 2000-01, The Operation of The National Lottery, HC 56. National Audit Office, Evaluating the Applications to Run the National Lottery, HC (1994-95) 569. Committee of Public Accounts, Sixty-fifth Report of the Session 2001-02, Awarding the New Licence to Run the National Lottery, HC 881. Back

18 First First Report from the Culture, Media and Sport Committee, Session 2000-01, The Operation of The National Lottery, HC 56, para 126. Back

19 Ev 190, 193 Back

20 Review of Lottery Licensing and Regulation: A consultation paper, June 2002. Found at www.culture.gov.uk. Back

21 Review of Lottery Funding: A consultation paper on Lottery distribution policy, June 2002. Found at www.culture.gov.uk. Back

22 "National Lottery Licensing and Regulation Decision Document" July 2003. Found at www.culture.gov.uk. Back

23 "National Lottery Funding Decision Document" July 2003. p 42. Back

24 "National Lottery Licensing and Regulation Decision Document" July 2003, and "National Lottery Funding Decision Document" July 2003. Back

25 Votes and Proceedings, 21 January 2004, p 143. Back

26 Q 340 Back

27 "National Lottery Licensing and Regulation Decision Document" July 2003. Back

28 "National Lottery Licensing and Regulation Decision Document" July 2003 p 8. Back