Examination of Witnesses (Questions 1260
- 1279)
TUESDAY 3 FEBRUARY 2004
MR MICHAEL
GRADE, MS
DIANNE THOMPSON
AND MR
PHIL SMITH
Q1260 Lord Faulkner of Worcester: Why
do you bother with scratch cards at all? Why do not leave that
to the society lottery market?
Mr Smith: Our scratch card business
is enormously successful and a very large business. We will sell
over £630 million worth of scratch cards during the course
of this financial year. That number is growing quite solidly and
it returns a very respectable amount to the good causes and to
the Exchequer, so for us it is an important part of the business.
Q1261 Chairman: This is part of the
mix that was mentioned in respect to Mr Meale's question.
Mr Smith: Out of the 30 per cent,
which is growing, about half of that is our scratch card business.
It has really helped us to offset some of the 4-5 per cent decline
we have seen in Lotto.
Q1262 Lord Wade of Chorlton: You
run a six out of 49 ratio. What is the significance of that as
against other options? I believe your competitor works on a different
ratio. I would be interested on what is the significance of the
ratios in bringing both profit to you and returns to the good
causes?
Ms Thompson: You are absolutely
right that our competitor for the second licence was proposing
a six from 53. We launched with six from 49, and our research
shows that in fact the vast majority of our players like that
six from 49 still, nearly 10 years on. It is our tenth anniversary
this year. About 60 per cent of our players play the same numbers
they have played from day one and do not want to see a change,
but we do research it from time to time. In terms of profit, I
think it is important to get Camelot profit into context. For
every pound in profit that we make, retailers are making £10
of profit; the Government is getting £26 back to the Exchequer;
good causes are getting £56 back; and our players are getting
£100. Our profit is absolutely minute. I would argue, however,
that the profit motive, and one of the things that Mr Burridge
did say which did not come out quite clearly in the NLCs earlier
evidence session today, he was not saying they would not bid under
the status quo; what he was saying was he believes it should
be a not-for-profit lottery. I disagree with that. I would do,
would I not, because I run a for-profit lottery; but I believe
it is the profit motive, despite the fact we only make ½
per cent profit, which has kept this organisation lean and mean
and made us the most efficient lottery in the world for four out
of the last five years. If you look at the operating costs in
Europe, the average operating costs for European lotteries is
14 per cent, ours is actually 4.8 per cent including profit. If
you look at the state-run organisation in Belgium theirs is 23
per cent. The profit motive, I think, has delivered the most efficient
lottery in the world.
Q1263 Lord Wade of Chorlton: Not-for-profit,
but that does not mean they do not take all their expenses out
of it, does it? Nevertheless, at the end of the day I agree with
your point.
Ms Thompson: It is very difficult
to define what "not-for-profit" is. The other point
is, which the Chairman of the NLC made this morning, under the
new regime that they have, they have the ability to fine us if
we do not actually comply with certain areas of the licence; and
we have had a couple of very small fines. If you are not-for-profit
you never face fines. The only pot of money is the good cause
pot.
Q1264 Chairman: Or the money that
goes to the Exchequer? Is this 12 per cent tax too high?
Ms Thompson: We think so!
Mr Smith: It is not a question
of the level for us; we think it is a question of the method of
application. We think that the application of a sales tax is not
in the best interest of the National Lottery when it comes to
the maximisation of returns for good causes, because the first
beneficiary of any extra sale that you make as a result of increasing
prize payout is actually the Exchequer, and not necessarily the
National Lottery distribution fund. We are in the middle of discussions
now where we would like to be in a position where we could move
to a gross profit tax regime in line with the rest of the industry,
albeit we would be happy to pay at the levels which we currently
pay.
Q1265 Chairman: Given that you say
your profits are fairly small, but moving to a gross profit tax
would presumably mean a combination of more money for good causes
and more money back in returns to the players to deal with some
of the concerns you have raised?
Mr Grade: At least neutral for
the Treasury, yes. We believe that the ability to increase the
prize payout would increase sales, and there would be a virtuous
circle.
Q1266 Chairman: Like many members
of this Committee, Mr Grade, you enjoy a visit to a racecourse
from time to time. You will have observed that the abolition of
the off-course tax resulted in a substantial increase in betting
shop turnover. Do you have a similar feeling if this were addressed
that there would be an increase in ticket purchases?
Mr Grade: We are in no doubt about
that.
Mr Smith: We believe certainly
with some games and with some styles of play, for example on the
internet, there would be substantial increases in sales as a result
of the application of a gross profit tax, which would result in
increased returns to good causes as well as an increase in returns
to the Exchequer. We have had an independent study commissioned
by us from the Henley Centre, which suggested that as much as
£500 million could be the additional pot to be shared between
the relevant parties during the course of this licence.
Mr Grade: I think historically,
as I understand it, the Lottery duty was designed to compensate
the Treasury for a lowering of receipts it would get from the
Pools as a result of the introduction of the Lottery. I think
it is fair to say everyone I have spoken to at the Treasury suggests
that the receipts were far in excess of anything they expected.
Q1267 Baroness Golding: How effective
do you think changes to the licensing process will be in ensuring
effective competition for future licences?
Mr Grade: Quite the contrary,
we believe that the evidence that is beginning to emerge in the
responses from other interested parties (not just Camelot) to
the multi-operator approach suggest that the only support for
this idea lies within the NLC, and we think it is an idea that
has not been thought through. We think it leaves a much greater
degree of discretion to the regulator than Parliament has ever
offered before. It is an idea that simply will not work. It will
fall apart in the execution. It is a very, very high risk strategy
for Parliament, in my view, to effect something that everyone
is convinced will not work to the discretion of the regulator,
and ultimately have the effect of making the regulator the de
facto operator of the Lottery because of the conflicts it
will set up between the operators. It is an absolutely disastrous
idea.
Q1268 Jeff Ennis: How do you think
it should be regulated?
Mr Grade: The single model has
operated efficiently and effectively. It has always produced competition
in the past. As Dianne has explained, the incumbency advantages
have been removed in the second licence to smooth the transition
from the second licence to the third licence. By far the most
attractive proposition for people getting interested in bidding
for the National Lottery is the single operator option.
Q1269 Jeff Ennis: Do you think that
the National Lottery is the most appropriate?
Mr Grade: I think it will depend
entirely on what the shape of the third licence is likely to be
through the process of this Committee and so on, and when we see
the clauses and when we see the ultimate Bill. If we are going
to be stuck with this multi-operator approach I have to say I
do not think either the Gaming Commission or the NLC is the appropriate
body to regulate and be the de facto operators of the Lottery.
I think it is going to take a very, very serious re-examination
if you are going to go the multi-operator approach. If you stick
with the single operator approach by and large, after many, many
debates internally at Camelot, we see no reason not to have the
NLC; but at the end of the day we will live with whatever Parliament
decides is the most efficient and effective way to maintain returns
to good causes in the future.
Q1270 Jeff Ennis: Could I ask a supplementary
to an earlier question from Lord Wade that betting companies are
not allowed to take bets on the National Lottery, but they do
take bets on the Irish Lottery I was just wondering what amount
of seepage we had from the good causes because of the fact that
bookmakers can take bets on the Irish Lottery?
Ms Thompson: I am not sure we
can answer what the total impact on the UK Lottery is. What I
can tell you is that side-bets being taken on the Irish Lottery
caused the Irish Lottery sales to fall by 20 per cent; which is
one of the reasons why we fought so hard to try to prevent side-betting
with the UK National Lottery. It is difficult to tell how much
the Irish side-betting has actually impacted; I am sure it is
impacting some. To be frank, if you look at our player base—and
no doubt we will get on to the areas of excess play and all those
sorts of things in a moment—70 per cent of our players actually
do not bet on anything else, not even a flutter on the Grand National,
and they would be mortified to think of themselves as gamblers;
they see it as a harmless flutter and the standard quote is that
"It is a pound to dream". It is the remaining 30 per
cent of our market where the competitive environment we are in
is actually impacting the National Lottery and is very difficult
to quantify.
Mr Smith: As part of the submission
in response to the Budd Report we commissioned reports from PricewaterhouseCoopers
and from the Henley Centre. On the issue of side- betting both
of them independently estimate that the loss to good causes would
be of the order of magnitude of some £400 million during
the course of the licence.
Q1271 Jeff Ennis: Do you think there
is a case to be made to abandon all side-betting on all lotteries
in this country?
Mr Grade: I do not think we want
to interfere with something that is popular with a certain part
of the public. It is an established form of betting for people
who like a particular niche gamble. I do not think we should be
in the business of arguing against something that is not materially
affecting returns to good causes.
Q1272 Lord Brooke of Sutton Mandeville:
Is my recollection correct that the last National Lottery
in this country, before the present one, came to an end in 1826
because of corruption in the secondary market rather than the
primary market?
Mr Grade: I think that is correct!
Q1273 Lord Donoughue of Ashton: You
said that if Parliament and the Government decide that the Lottery
Commission continues as the Regulator you can live with that,
could you equally live with it if it decided that the new Gambling
Commission should be the Regulator?
Mr Grade: Yes, we would have to.
Q1274 Lord Donoughue of Ashton: I
know you have to but do you have any preference between those
two?
Mr Grade: If we are talking about
a single operator I think we would prefer to leave things as they
are. However, what we would like to see is perhaps the Chairman
of the NLC sitting ex officio on the new Gaming Commission
just to be present and to argue the case where there is conflict
between non-Lottery and the other gaming products. It is very,
very important that if we do have separate regulators that the
interests of the good causes are properly represented in a way
that is defined by statute in the Gaming Commission.
Lord Donoughue of Ashton: Thank you.
Q1275 Chairman: How would you feel
if the Gambling Commission assumed responsibility for the social
responsibility issues and the National Lottery Commission carried
on doing everything else?
Mr Grade: We would have to work
with it.
Q1276 Chairman: It would get round
this conflict, would it not?
Mr Grade: I am not sure that it
would, Chairman, I am not entirely certain that it would. I am
not sure that as a principle any single organisation facing two
regulators, where inevitably there is some blurring of the boundary
between responsibility, would. It is difficult enough having to
deal with a single regulator who only has one client in Camelot—correctly
so for the right reasons—to ensure that when the Lottery
was established it was terribly important that Parliament recognised
that the probity and the integrity of the Lottery was paramount
and the single regulatory structure of the NLC has carried that
duty out with tremendous success and are to be applauded for that.
Anything that blurs the lines between competing regulators regulating
one business could be a recipe for conflict.
Q1277 Mr Meale: Going back to the
answer you gave to my colleague Jeff Ennis that you were not really
concerned with interference with Eire, the Irish Republic, and
their Lottery, surely it is not the same case with other lotteries
that land on people's doorsteps or are advertised elsewhere in
this country where there are a lot of people being misled on things
like false lotteries from Canada and lotteries from South Africa
and Spain, and so on. Are you maintaining your strict opposition
of such measures?
Mr Grade: Absolutely. There is
a tremendous amount of marketing and expertise which goes behind
the public's general trust in the National Lottery, and that has
to be preserved, and we would want to distance ourselves by any
means possible from those who wish to exploit the vulnerable with
shady products.
Q1278 Mr Meale: In terms of your
approach towards the Irish Lottery is that not the same, is that
not the start of a process which may then worsen?
Mr Grade: If it is going to be
a growing problem and is going to materially dilute the returns
to good causes then obviously we would make representations through
our Regulator to Parliament to say this is what is happening,
are you prepared to live with the consequences of this or do you
wish to stop it? At the moment we would not want to be in a position
of standing in the way of competition where it does not materially
affect the return to good causes.
Q1279 Baroness Golding: On that subject,
I have asked a number of times for evidence on the effects of
side betting on the National Lottery, at least three times, and
I have been promised it three times and I have never had it. I
wonder if at some point it could be sent to us?
Ms Thompson: I do apologise. We
will make sure that you get that.
Mr Grade: Whatever we have you
will have.
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