Examination of Witnesses (Questions 66
- 79)
TUESDAY 20 JANUARY 2004
NATIONAL LOTTERY
COMMISSION
Chairman: Thank you very much indeed
for attending this meeting. It is very nice to see you again.
Q66 Derek Wyatt: Do you think in
a sense that we are losing the plot with regard to the Lottery?
Do you think that it is too confusing and that the confusion is
affecting sales?
Ms Black: I do not think there
is probably a huge amount of evidence for that, although I think
people have been raising that as a potential issue. If we were
to move to multiple licences, I think people have been raising
it as a potential issue. No, we have lots of games now. I think
we have games that probably tend to attract different types of
people, although clearly Camelot can perhaps comment more than
I can on that.
Q67 Derek Wyatt: We shall ask them,
no doubt. Do you feel that in a sense the public are not playing
as much because that is what happens after the first five years
in every lottery, and that therefore we should get used to the
fact that that is going to happen and we should reduce our expectations?
Do you think that is an acceptable position for you?
Ms Black: It is often said that
people tend to play less. I think that we should not forget that
we have a much higher proportion of our population playing here
than other countries, although they tend to play a little bit
less in terms of spending more. I am not sure I can really add
very much. Probably Camelot are better able to answer.
Mr Harris: Certainly the evidence
tells us that the Lottery was very successful when it was launched.
As for maintaining the high degree of sales, there was considerable
enthusiasm in the build-up to the Lottery. Over a period of time,
it is likely that people, because they do not win, start to question
whether or not they should continue to play. The critical thing
is to have both a reasonably broad portfolio of games, not one
that is so broad that it is confusing and all the games eat into
one another but one that meets a range of different players' needs,
and then to put real effort into maintaining the games and making
sure that they are revitalised from time to time, and that is
what we look to the operator to do.
Q68 Derek Wyatt: Do you think it
is the games themselves, the jackpots, that make it successful
rather than any structural changes underneath? Are we back to
front here in trying to change it? Should it be the type of game
played as opposed to bringing in a third lottery operator or changing
the structure or whatever?
Ms Black: There is a lot of evidence
that a big jackpot attracts a lot of people. You have to look
to the Big One in Spain and the other very large ones around the
world, which attract huge numbers of people. I do not think, moving
on to the last point you made there, we would expect to have more
than one operator, if we were given the opportunity to award multiple
licences, offering a very big jackpot. That could well be counter-productive.
Mr Harris: I think there is evidence
that certainly in Lotto games high jackpots are an important part
of those games. Equally, there is evidence that increasingly one
reads people saying that perhaps there should be games offering
lower prizes. There are such games, games such as Thunderball,
and they have a very loyal following and a following that is very
consistent and does generate substantial returns for good causes.
They are not as big as the jackpot game but they are a separate
part, just as scratchcards and other games are separate parts,
of the whole portfolio that represents a range of choice for players.
Q69 Derek Wyatt: Do you think that
the National Lottery Commission can both award and regulate licences
effectively? Are you happy with that role?
Mr Harris: Yes. We believe it
is important that those functions are kept in the same regulator
and we think that there are real risks if those functions are
separated.
Ms Black: If I may expand, it
is very important to remember that we do not just award a single
licence at the beginning after competition; we are continually
awarding licences for other games throughout the period of the
main licence. We are also continually amending licences based
on the regulation that we do as a result of issues that come up.
It is an integrated process.
Q70 Derek Wyatt: Given the changes
to gambling per se, you do not feel that you should be
wrapped into the Gambling Commissioner, so that there is one body
and the public knows where to go?
Ms Black: Given our third duty,
admittedly our subsidiary duty, which is to maximise the returns
to good causes, and that informs everything we do, not just the
licensing but the regulation and the amendments to the licences,
we do genuinely believe that there would be conflicts of interests
if we were within the Gambling Commission, assuming of course
that that duty to maximise returns to good causes was retained,
because the Gambling Commission will also be licensing other bodies
that do not have that requirement. We do not quite see how they
can work even-handedly, on the one hand maximising duties to good
causes for the Lottery and, on the other hand, with commercial
operators not really in a sense caring what they do in that area.
We feel that however you try to split out, put Chinese walls around
the bit that did the Lottery and the returns to good causes, there
is always going to be the perception of bias within that. We do
see that as a real problem.
Q71 Chairman: If I may just intervene
there, in the nicest possible way, may I say to you that people
might say, "Well you would say that wouldn't you?" I
am not arguing the case one way or the other but it could be said
that there was a very strong case, first of all for Oflot, and
now for your Commission, when the Lottery was launched—clearly
it was new, it was sui generis and it had to go ahead,
although there were a number of problems, which is why the Government
decided to abolish Oflot—nevertheless, that was made, understood
and accepted. There is a contrary case and that case is that the
existence of a separate commission simply for the National Lottery
means that the Commission is a proponent of the case for the Lottery
and that arguments put forward by other organisations, like the
football pools for example, arguments relating to allowing people
to bet on the Lottery, arguments relating to the curious relationship
of the Lottery and the BBC whereby the BBC actually pays to be
allowed to broadcast the Lottery results, all creates what is
now not just an egregious but an anomalous situation and that
if all of these things were under one commission, the Gambling
Commission, then the cases that are made—again this curious
thing of taxation neutrality and so on—would be looked at
in a different way. I am not saying that that is my view, but
I think that there are arguments to be considered about that.
Ms Black: I think that is very
fair. We do have to remember that the National Lottery is special;
it was set up to be special; it was set up to raise funds for
good causes; and it can be played pretty anywhere in your local
high street, whereas gambling is quite different and it generally
can only be played on licensed premises. Once the Gambling Commission
has awarded a licence, they do not really care what the operator
does on gambling. Obviously the other difference in the Lottery
is that at the moment we have a single monopoly, private sector
operator, which operates for a fixed term. It is very different
from normal gambling.
Mr Harris: I think that covers
it well. As far as we are concerned, there is a policy that has
been set up for the National Lottery, which is that the National
Lottery should be put in a special and ring-fenced position to
raise returns for good causes. That is why we have a duty to maximise
returns. I think that it is quite proper that those policy debates
happen at government level. We simply implement the legislation
that we are given, whilst seeking to maximise returns to good
causes, which is an important part of our functions.
Q72 Derek Wyatt: Do you think that
when the decision is made for the next licence, it would be best
to follow the DTI's rather clever auction of the 3G licences,
so that the Government can maximise the most amount of money up-front?
Ms Black: I do not know the details
of how that was carried out but it certainly has had a few interesting
ramifications since. People clearly believe they paid far too
much. I am not sure that is necessarily a good bet. Mark Harris
has thought much more about auctions than I have as he was involved
in the last licence.
Mr Harris: We looked at it in
the last licence round. We would certainly want to look at it
again. I do not want to give the impression that we would be ruling
it out. The problem with such an arrangement is that, in order
to guarantee returns, an operator would have to be able to guarantee
at the outset to put forward a very large sum of money. If you
look at the amount that the Lottery raises, £10 billion or
£11 billion over a licence period, that order of magnitude,
in order for the operator to guarantee that amount of money and
guarantee that amount of money in a way that is secure would actually
be very costly. Ultimately, that would add to the cost of bidding
and could well significantly depress returns to good causes, if
indeed the operator could provide that level of guarantee. If,
alternatively, they could not provide that level of guarantee,
and we accepted that they should provide a fixed sum paid for
out of revenues, you run the real risk that if sales are higher
than you expect, the operator could make very substantial windfall
gains. If they are lower than you expect and the operator cannot
finance the payments that they have committed to under the auction,
then the operator will probably withdraw from the licences and
there would be a crisis and the money would not actually be raised.
Q73 Derek Wyatt: I think there is
a quid pro quo; the Government would say, "We are
going to do it that way but we will not take the 12%".
Mr Harris: That is not a matter
for us.
Ms Black: That is for the Government.
Q74 Michael Fabricant: You said that
the main criterion is to maximise money for good causes, but there
is always, is there not, a compromise between the amount of legitimate
profit that the operating company needs to make and of course
the amount of money that the Government takes which, as you quite
rightly say, is a matter for the Government. When you make that
calculation as to how to maximise the income for good causes,
while at the same time ensuring the viability of the operating
company, do you do your own analyses or do you rely on the franchisee?
Ms Black: I will pass that straight
to Mark because he was involved at the time of the last competition.
Mr Harris: In the last competition
we looked very closely not just at what the bidders were offering,
and what we asked them to offer was a proportion of sales after
prizes had been paid, after retail and commission had been paid
and after duty had been paid. The object of that was to make sure
that they had every incentive to maximise returns to good causes.
The more returns to good causes, the better off they were. We
looked very carefully at their projections. We looked very carefully
at their financial position. We also looked very carefully at
projections that we thought that they were likely to achieve.
You may remember, because we presented this to you before, that
the Commission took the view that actually sales were much more
likely to be in the order of around £5 billion, I think it
was, a year rather that the £7 to 8 billion that the bidders
were predicting. We looked at their financial structure on those
sales forecasts and also on lower sales forecasts. We wanted to
be sure that they were capable of financing themselves in lower
sales situations. To sum it up, we looked very carefully at it.
We did not just say, "That is what they forecast. That is
great".
Q75 Michael Fabricant: In opening
his questioning, Derek Wyatt talked about the confusion that may
exist in the minds of those people who play these games. Do you
think we are getting to a stage now where there is a sort of gambling
or good causes fatigue and that there is a natural decline now
going to take place in the amount of Lottery money that goes into
gambling in this way?
Mr Harris: We do not take the
view that the forecasts that we used last time are unachievable.
We believe that sales can be stabilised. Certainly, if you look
at sales across the whole portfolio—and it is important
not just to focus in on an individual game—they can be stabilised
and they can be grown. Part of the growth comes from the expansion
in the portfolio; part of it comes from keeping the product alive
in people's minds, selling the benefits of it, improving it where
it is possible to improve it. That is very much what we are looking
to the operator to do.
Q76 Michael Fabricant: To talk about
expanding the portfolio, do you do that with one operator or do
you rather see there being a number of operators competing with
each other?
Ms Black: If we are given the
flexibly to do so, we certainly see a number of operators potentially.
Q77 Michael Fabricant: Would you
welcome that flexibility?
Ms Black: We would welcome flexibility.
Perhaps I could explain why. We do not see more necessarily than
two or three different operators. I think if there were any more
than that you would potentially be running into the problems of
operators competing with each other. "Do I put my Lottery
money here or do I put it there?" That is not what we want.
We want them to say, "I will put my Lottery money there and
there". There is certainly evidence that some games are relatively
independent of each other. People are likely perhaps to play one
or the other type of game. We would very much welcome that flexibility
because we see, as indeed you yourself have said in a previous
report, that we run a serious risk, if we do not have the flexibility
that we continue with a single monopoly operator. One of the arguments
against that is the advantage of the incumbency just does not
exist and there will be lots of people coming forward to bid.
I sincerely hope they will. If we find they do not, and if we
find that the incumbency advantage is huge, then by the time we
get to that stage, it is going to be too late to do anything about
it. If, having been given the flexibility, we find that we get
to that stage and one company comes up with a bid that for everything
that we are looking to license is the best, then we would expect
to award the licences to that one company. Without flexibility,
we think we may have trouble being able to maximise the returns.
Q78 Michael Fabricant: If you decide,
or you are given the power, to award these different franchises,
if you like—and I come from a broadcasting background so
I am looking at it as the old independent Broadcasting Authority
would have done it—would you be saying, "We will allow
free competition between these different franchises", or
would you regulate it in such a way that you would say that the
games have to be complementary, so that, for example, one franchisee
would have to have one type of game, while another type of franchisee
would have a different type of game so that there was not direct,
head-to-head competition? What would you do about the infrastructure?
Camelot has introduced I think a very effective infrastructure
whereby you have retailers on-line. Would you order Camelot, or
the owner of the infrastructure at any one time, to make it available
to other franchisees or would you say, "No, there would have
to be competing platforms", with duplication of that sort
of technological infrastructure?
Ms Black: A lot of the detail
we simply cannot answer at the moment. We will expect to be able
to answer the detail of that as and when we are able to do the
research and consult and everything else, which is clearly a fundamental
part of it. We clearly cannot do that until the structure of the
Bill is at least a lot clearer by Second Reading. Having said
that, we would not expect to enfranchise, in your terms, two people
who were going to run competing games because that clearly is
not going to be very sensible. There is certainly some evidence
that, for example, the main on-line draw is a market that is relatively
independent from scratchcards. We might envisage the main jackpot
game being, one, licence, and perhaps scratchcards another. That
is possible. We do not know and we have not got that far. In terms
of infrastructure and other issues, that is clearly an issue.
We would not expect to see in your local newsagent, and I am thinking
of mine in particular, the terminals for the main on-line game
going at one end of the counter and, well there is no room for
the others. Clearly, there would have to be some commonality.
Certainly, when thinking about technological developments, that
is going to be very important. If you look at banking and ATMs,
they can service a number of banks at the moment so why should
not a single terminal be able to service a number of different
operators? That again is further down the road. We are five years
off the start of the next licence or licences. Technology will
have changed hugely by then but it is already moving in the direction
where people can work much more together within a single piece
of hardware. Clearly, our regulation, the giving of the licences,
is going to be focused on trying to avoid that counter-productive
competition and getting people to work together, which may be
a challenge.
Q79 Mr Flook: When you regulate the
operator, i.e. Camelot, how do you gauge how well it is doing
financially? What sort of company or types of company might you
look at? I am particularly interested in: do you think they make
an excessive return on capital? I cannot see that they do. How
do you look at it?
Mr Black: We look at it directly,
monthly, in terms of their sales, the various games. In terms
of return on capital, that issue must have been addressed at the
time of the licence because they effectively take a fixed element
of the sales.
Mr Harris: Effectively, the way
the licence is structured is that we rely on the competition that
took place for the licence to demonstrate that the good causes
are getting the best possible proportion of the overall pot, if
you like. What we have not done is put specific measures in place
whereby if the operator is making a better return on capital than
a set amount, we claw back funds in that way.
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