Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses(Questions 1-19)

MS SUE STREET AND MR MARK HARRIS

WEDNESDAY 22 MAY 2002

Chairman

  1. Welcome to the Public Accounts Committee. Today, we are looking at the Comptroller and Auditor General's Report into awarding of the licence to run the National Lottery. We are delighted to welcome back Sue Street, who is Permanent Secretary for the Department for Culture, Media and Sport. We are also very pleased to welcome Mr Mark Harris, who is Chief Executive and Accounting Officer at the National Lottery Commission. Mr Harris, can I start by asking you why there is no guarantee about the amount of money that will be available to the good causes?

  (Mr Harris) The basis of the competition that the Commission decided to run was that it asked the bidders to commit a proportion of the proceeds that they raised from sales, less the prizes won and less Lottery duty, and to commit to pay that proportion over to good causes. That proportion was part of the licence and therefore is a commitment and can be enforced.

  2. The truth is that under the procedures that we have, if the National Lottery fails to deliver—and there has been various speculation that Camelot may not perform as well as it has done in the past—the risk is not borne by Camelot; it is borne by the good causes, is it not? Would it not be worth looking at some kind of threshold that they have to commit to deliver, particularly in any review for the next round of licences?
  (Mr Harris) The Commission looked carefully at the basis of competition before it started the competition and it did consider whether or not one of the options might be to undertake some form of auction. However, the Commission was concerned, firstly, that the effect of doing that would be to pass so much risk to the bidders that the bidders would have an incentive to bid lower so that they were protecting themselves against the risk. The Commission was also concerned that the bidders might well not be able to raise that amount of money to pay up front and would in any case have to meet their commitments from sales as sales progressed. If they under-performed, they would then be driven, effectively, into administration because they could not find the funds to meet their commitments and there might then be a break in the National Lottery. Alternatively, if they over-performed, they would obtain all the benefit from that over-performance. The Commission believed that in the long run it placed quite a high risk on the NLDF to follow that basis.

  3. Can we look at the history of what went on, particularly in August 2000. Mr Harris, can I ask you to turn to page 21 and look at paragraphs 3.15 and 3.17? I want to know why did the Commission decide to negotiate with the People's Lottery alone when you had received legal advice that this would carry a significant risk of legal challenge and indeed that is precisely what happened?
  (Mr Harris) At that point, the Commission was in the position of having decided to reject both bids. It had decided that part of the reason it rejected the Camelot bid was that it did not believe that Camelot could rectify its concerns about propriety within the one month period it believed it had available to negotiate a successful solution to the concerns it had about either bid. The Commission therefore looked at both bids and indeed asked whether it could negotiate with both bidders or with one bidder alone. The advice the Commission took and received was that, although there was a risk of challenge if it proceeded only with one bidder, in effect there was a greater risk if it proceeded with both bidders in dual track negotiation, because the Commission had already decided that Camelot was unable to rectify its bid within the one month period. Therefore, it would have been entirely inconsistent for the Commission to have gone forward with the Camelot bid with only one month available.

  4. This has been described to me as a cock up with the correct result in the end but could you explain exactly why things happened in the way they did? First of all, why did you come to make such an about turn? First of all, you decided to negotiate with the People's Lottery alone and, at the end of the day, you awarded the licence to Camelot. How did all this transpire? Could you not see this coming?
  (Mr Harris) At the time the Commission decided to negotiate solely with the People's Lottery, it was in a position where it believed that that was the only bid available to it. It believed that the Camelot bid could not be rectified other than within a three month period. As the judicial review demonstrated, the Commission made a false assumption that it very much regrets that led to the single negotiation process, but nonetheless that was the position the Commission was in. It believed that that was the one bid that it could go with and it therefore sought to convert that bid into an acceptable bid. As a result of the judicial review, the court instructed the Commission to carry out its evaluation afresh and it was able to do so with two bids, both of which it was able, after a month's negotiation with each, to make compliant and it therefore had a full choice between the two bids.

  5. Ms Street, can you tell us what was going on in your department during these difficult events? What were you doing to avoid a break in the Lottery because this was something that could have happened. Was the Commission in an impossible position, given the timescale under which they were operating, and the need to avoid a break in the Lottery and did the Commission effectively have to make one of these bids work.
  (Ms Street) At the outset, the department and the Secretary of State took the view at the time of the invitation to apply was made that it had an arm's length relationship with the Commission and, as set out at paragraph 1.8 of the report, the Secretary of State essentially looks to the Commission as the sole actor in awarding the licence. Come August, the position was indeed extremely difficult and, at that time, the view of the Secretary of State was that his overriding duty under the Act was to look at due propriety and the protection of the players. Since one bid failed on one count and the other failed on the other count, there was no question of instructing or directing the Commission to make an award if it did not meet the statutory conditions. Therefore, what went on in August was a look at what other possible solutions might be reached with the interim licence emerging as the practical option.

  6. Can I ask the Treasury about paragraph 1.15 on page 14? These are documents which are provided to the Commission about the vetting of the fitness and propriety of applicants to run the National Lottery. Can I ask you when the Comptroller and Auditor General is going to have sight of these documents.
  (Mr Glicksman) It is necessary for some statutory orders to be made. Two of those orders have been made and we hope the others will be made within the next few weeks and the Comptroller and Auditor General will be able to have the documents as soon as that has been done.

  7. Ms Street, what are you doing to assist the process?
  (Ms Street) In February, I pressed the Home Office to open the Gateway. They have opened part of it and the next part will be open within a matter of days. It has always been the position of this department that any papers we can lawfully make available to the Comptroller and Auditor General we would be not only ready but willing to.

  8. Can I turn briefly to what is going to happen in seven years' time? Mr Harris, can you tell me why there was not more interest in the licence? After all, only two people came forward. I want to lead on to what is going to happen in seven years' time and whether we are going to get a more serious bidding process. Can you give us an explanation for why you think this is such an inherently risky prospect that the market place does not appear to be working very well?
  (Mr Harris) Part of the reason is that there is an incumbent and, under the present structure, one has to put together a whole arrangement to challenge that incumbent. It is quite expensive to put a bid together and there are relatively few suppliers of the specialist software and expertise that support lotteries. Those are the sorts of reasons why other organisations were not particularly keen to come forward. Relatively low numbers of bidders is quite common in other jurisdictions who have sought to have competition of the type that we have.

  9. If we are looking at this process which is going to come round in seven years' time, by then Camelot will have had this contract for 14 years. Is there a prospect that nobody else might come forward? After all, you have to put up £3 million or £4 million to get into this process, do you not? What are you doing about it?
  (Mr Harris) There may well be a prospect in seven years' time if we do not take action. I know the department will be consulting more widely but the Commission has spent some time thinking this through and has raised a number of issues, which are set out in the Report, as to how it might encourage competition within the existing constraints—arrangements such as paying bidders' costs as long as that is done in a properly controlled way; trying to reduce the information and burdens on bidders and trying to make it more straightforward for them to bid and also, if possible, finding new technology—changes in technology in seven years' time may help to do that—whereby the limited number of suppliers in the market may become less of a constraint.

  10. What would you do if there is only one bidder?
  (Mr Harris) If there is only one bidder in seven years' time, we would have to negotiate with that bidder but in a way that enabled us to be sure that we were satisfying our statutory duty to generate the best possible return for good causes. Although the Commission has not gone into great detail about how that might be done yet, there are lessons from other regulatory models, particularly the utilities models, where it may be possible to base returns to the operator on capital employed or on some form of profit control or something like that. We believe there are other options available, which we would definitely want to look at if we found ourselves in that position, but the key thing is to try and generate competition as we worked very hard to do this time, so that we do not get in that position.

  11. Ms Street, can you say a word about this? There are ideas of setting up a lottery company so that a bidder would not have to create an entirely new infrastructure. You would have a lottery company and people would bid to run it. Can you share with us some of your thoughts on the review process?
  (Ms Street) I will do my very best, bearing in mind that ministers have not yet issued a consultation document. We hope that will be next month. The purpose of the consultation document—and we are now six and a half years before the next competition; we are conscious that although that is quite a long time it can reduce very quickly if we do not have the right steps taken—is to generate effective competition. It takes into account the extremely helpful comments from the NAO in its Report and the Commission's comments in table three about things that could be done. They range from some quite minimalist changes which would not require legislation, like for instance helping with bidders' costs or being clearer about sales targets, to some more radical options. One, as you have described. Another would be to separate section five, which is the section that is currently held by Camelot to run the whole thing, into, for example, one owner of the infrastructure and one company who does the marketing and other parts. There is already an obligation on Camelot to try and bring other interests into section six, which is the sub-licence. There are a number of things that could be done. The real aim now is to throw it open to consultation. Bear in mind that it is quite difficult to make commitments to any detailed mechanisms now because we expect the market to be quite different in six and a half years' time, both because of the technology and also because if the government finds legislative time for its response to the Budd Report on gambling one will have a pretty dynamic market and the exact processes and detailed mechanisms should take account of that.

Mr Williams

  12. Can I establish a few background facts before I ask my questions? I need the cooperation of the National Audit Office here. When we first looked into the issue of the first licence, G-Tech clearly came with a substantial track record of running very close to the edge of the law. At the hearing, I established that the regulator, Mr Davis, accepted the use of G-Tech's private aircraft while he was in the United States and he failed to see this as a conflict of interest. That is accurate as far as it goes, is it, Sir John, as a recollection?
  (Sir John Bourn) Yes.

  13. Not to put Mr Davis in the wrong, I do not think he is a dishonest man but his judgment is a different matter. The first licence had already been given but did the regulator then not subsequently give other licences to G-Tech after he had had the use of the aircraft?
  (Sir John Bourn) Yes, he did conclude commercial arrangements with G-Tech after his personal links with the company.

  14. G-Tech has haunted this process from before its beginning and ever since. After that situation, I wrote to you as an individual member of the Committee drawing attention to the fact that doubts had been expressed about the due diligence processes applied by the then regulator and by Camelot. That is correct, is it not?
  (Sir John Bourn) Yes.

  15. You indicated that you had no powers to look into these. Did you ask either the regulator or Camelot if they would voluntarily allow you access to the information?
  (Sir John Bourn) We did discuss this but the regulator's view was that he did not have the power, as the witnesses have said, to make this material available to me. He was confined as far as information relating to United Kingdom citizens was concerned by the law and he was confined so far as United States citizens were concerned by the fact that the information that he had received from the FBI had been given to him on the basis that he did not share it with anybody else.

  16. On the basis of that, because he felt he did not have the powers and you felt you did not have the powers, I raised it in the Committee and with the Chairman and I cannot remember whether you came with us.
  (Sir John Bourn) Yes, I did.

  17. Can you tell us the date on which we then saw the Secretary of State to make representations that the appropriate power should be given either to the regulator or to you to enable you to have access to the due diligence process?
  (Sir John Bourn) Yes, it was 28 July 1998.

  18. I have a letter from you which I have given to other members of the Committee in which you say that, even on this report on the second licence, we are not able to examine as part of the report how the Commission carried out its statutory duty to satisfy itself that applicants to run the National Lottery are fit and proper. That is quite an important consideration in the public eye. Subsequently, over a year ago—this was some time in 2001—three years after you, the previous Chairman and I first took this up with Ms Street's department, an agreement was reached that disclosure would be made but it required legislation. That being just over a year ago and your letter being dated 8 May, that would be approximately six months before the new licence was due to come into operation as originally scheduled. That is so, is it not? 30 September?
  (Sir John Bourn) Yes.

  19. At a stage when it is too late effectively to implement any legislative back up or almost too late, the deal was done but, at the time of your letter, 8 May, although that agreement was reached a year ago, and although four orders were required, only one of them had been implemented. We now gather the second one has been implemented. The first was in May 2001 according to your letter which is one month after the second licence was due to come into effect. Is that correct?
  (Sir John Bourn) Yes.[1]



1   Note by witness: The first order was made in November 2001, one month after the second licence was due to come into effect in October 2001. Back


 
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