Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 20-39)



  20. Which meant that the legislation could in no way have given you access in any circumstances to the processes in relation to this licence.
  (Sir John Bourn) That is correct.

  21. Even with the interim agreement, there was no time. I know you were not there throughout much of this time, accounting officer, but why did it take so long even to agree and which departments were responsible for drawing up the four orders? Were there several departments? Will you itemise which one was answerable for which?
  (Ms Street) I will but perhaps I could also verify with my Treasury colleagues if I make a mistake. I have looked into this because I do understand your frustrations.

  22. Frustration is an understatement.
  (Ms Street) I understand that it has taken a long time and it is almost complete. My understanding is that several gateways were required. One was the Financial Services Authority; one was for the Criminal Justice Act which has been done in two parts, one complete and one about to be complete; Companies Act gateways which will be due to be opened at the end of June and administrative access to Serious Fraud Office papers had to be agreed. Protocols had to be put in place for the handling of these papers, which has been done. It is quite a fair collection of different departments. There are ECHR difficulties about some of the information but that is probably the best account I can give.

  23. The Companies Act is there to regulate companies. Due diligence is a matter of extreme importance. If we look at paragraph 3.2, we are told that the Commission's initial evaluation of both bids was that there were weaknesses. The key concerns relate to the Commission's statutory duties. In paragraph 1.7, these are to run the Lottery with all due diligence and propriety and with the interest of every participant in the Lottery protected. These were its statutory duties and yet, aware of the fact that this was its statutory commitment, aware of the fact that the Commission highlighted as the key weaknesses the inability to find evidence to fulfil its statutory duty, still departments did nothing to implement the legislation in time. Why not?

  The Committee suspended from 16.28 to 16.33 for a division in the House
  (Ms Street
) I have had time to make a rather brilliant pass to my colleague on the right, if you are prepared to accept the answer from my Treasury colleague, because soon after the meeting that you mentioned, my Secretary of State wrote to the Treasury making clear that he would look forward to these matters being resolved. I do stress however that, because it involved a number of departments and primary or secondary legislation to establish gateways to some very sensitive information, this was never going to be a simple matter, but I do not think I am best placed to take you through the negotiations that then followed.

  24. Is it not a fact that on 12 April 2000, a year and seven months before the first order was placed, a whistle blower, a Mr David Armitage, a former G-Tech employee, sent a letter to the Secretary of State which was received also by the Commissioner indicating that G-Tech had made a secret correction to a defect in its software? G-Tech had failed to disclose the fault or its correction to Camelot or to the Commission's predecessor, Oflot, all in breach of established software control procedures. Did not the department get a bit alarmed about that? Did they take on board that they had a duty to look at what this whistle blower had to say, or did they not?
  (Ms Street) Both the Commission and the Secretary of State have a duty to ensure due propriety. What happened in this instance is that the Commission investigated immediately which seemed to be the right course of action. There were no arguments about whether or not something should be done to investigate and no arguments about who should do it. The Commission did take extremely swift action.

  25. Why did it take a whistle blower? What was done to establish how defects and this sort of situation arose? Paragraph 3.9: "Furthermore, the G-Tech executives involved in the software defect cover-up had given personal assurances to the Director General that G-Tech would introduce and rigorously apply a code of conduct. Yet, only four months later, the executives had significantly failed to meet the standards of conduct promised in failing to disclose the fault which went directly counter to participants' interests." Did you question at this stage whether the monitoring process and due diligence process were going to be adequate for the second bid?
  (Ms Street) The process was that the Commission, which is the body supervised by the Secretary of State, was not at fault in any way. The question was how the operator was investigating regulating its suppliers. I do not know whether my colleague wants to add something but at that point the G-Tech flaw was extremely serious and was taken extremely seriously at all levels.

  26. It says in paragraph 3.10 which you signed up to, "The G-Tech senior executives involved in the software defect cover-up had been subject to fit and proper vetting by the Director General in respect of the first licence." It does echo, does it not, the original questions I asked of the C&AG, and he and the previous Chairman and I asked of your Secretary of State as to why on earth power was not given to the National Audit Office to have access to the relevant information because clearly the system was not working and you are dealing with a company you just cannot trust.
  (Ms Street) I can only say that we have always stood ready to make that information available from the moment that we were asked for it, but clearly both the Commission and the department can only act through lawful gateways.

  27. There was quandary in the government now, was there not? They found out they were dealing with a bunch of devious people who did not give any regard to commitments they hade to the Commissioner or the government. G-Tech was almost the only viable source of the hardware. There were two sources identified in the bids but G-Tech was almost the only source available. There was a quandary for the government, was there not? If they took G-Tech on, they could be without the hardware to go into the second round. How do you convince me that there was not a compromise and a risk taken in relation to due diligence, fitness and propriety just to ensure that G-Tech's hardware was available to whoever was the next bidder?
  (Ms Street) I can give you the assurance from the department's point of view that they always looked to the Commission to ensure that bids were compliant. The proof of the fact that the Commission did indeed do that, is that they found both bids non-compliant, even when that was an extremely difficult situation. That suggests to me that there was absolutely no question of compromise with respect to propriety or player protection.

  28. It says here, which you signed up to, "Removing G-Tech as a supplier would put the continued operation of the Lottery at risk." Is it not a fact that had the NAO had the access it wished it could, by its actions in revealing the nature of the people you were dealing with, have led to the situation where G-Tech might have been deemed improper as a partner?
  (Ms Street) It would be helpful to have the chief executive of the Commission's view but my understanding was that it was not the lack of access by the NAO to the papers, regrettable though that was, which was material. I think there was evidence at this point that these particular actions by G-Tech were a matter of serious concern. The question then was not about whether the NAO had the information but whether that in itself, given the action subsequently taken, made the whole outfit either not fit and proper at that point or possibly subject to doubt over the longer term.

  29. If the NAO had underlined the concern of the Commissioner, do you not agree that would have probably materially influenced the court when the case was taken to court and it would have been a relevant issue for the government to have taken into account that the NAO had doubts about the due diligence and therefore the fulfilment of the statutory requirements.
  (Ms Street) The government would always take extremely careful note of any view expressed by the NAO but my understanding is that the decision did not turn on that. The decision was made that neither bid complied with the standards. The People's Lottery did not comply with the player protection standard and the Camelot bid did not comply with the propriety standard.

  30. Each of them was anticipating generating income of £7 billion a year and these doubts existed but they were pushed aside because all that mattered was that the Lottery had to be kept open.
  (Ms Street) The facts are that the Commission turned down both bids. That was not an easy thing to do and demonstrated a very high regard for propriety.

  Mr Williams: My time is up; I will see you in seven years' time.

Mr Rendel

  31. I am going to concentrate my questions on what is going to happen in seven years' time. Why are sales down?
  (Mr Harris) Sales are down at present partly because sales over time tend to decay unless new games and new initiatives are brought in. At the moment, we are in a period after the licensing process, where new games are being developed. We have recently seen the relaunch and we hope that will start to address the gradual decline in sales. Nonetheless, the Commission's view was, at the time that it evaluated the bids, that the most likely scenario is that sales could be kept in cash terms at a level across the life of the next licence and the Commission did not think that a large boost in sales was terribly likely to happen.

  32. It has gone the other way.
  (Mr Harris) It is declining slowly at the moment, yes, but Camelot is now bringing in a range of games. It has relaunched the main game last weekend. This is designed to address and increase people's willingness to play.

  33. Not being a great Lottery player myself, you will have to tell me whether any of those new games has been introduced apart from the one last weekend.
  (Mr Harris) Not since the new licence came in at the beginning of this year but further new games are planned and in preparation.

  34. You are expecting those to increase sales, at least back up to the average of the last licence?
  (Mr Harris) Yes. Obviously it will depend on the market and how successful the launch of those games is, but the Commission believe that, if those games are launched, sales can be put back to a steady state. We would certainly hope that Camelot will put efforts in to increase those sales.

  35. If at some point in the future the Lottery has to have a break for whatever reason, would you expect the drop in Lottery sales that causes to be temporary or permanent?
  (Mr Harris) It is very difficult to project. Because people play on a regular basis, they may well get out of the habit if there is a break. Alternatively, if a new Lottery came along with a big relaunch, a slight gap might give it a chance to achieve similar levels of sales.

  36. What is it likely to be? Would sales go up or would sales go down as a result of a break?
  (Mr Harris) My own judgment is that sales might well go down but a big launch from a new operator may reduce that.

  37. How much would sales go down in your judgment?
  (Mr Harris) I do not think it would be possible to say.

  38. Are you telling me that when the prospect of a possible break came up, because you thought you might not get a new licence operator in place as soon as you were originally expecting when the second licence came up, you did not in your department make any sort of estimate of what this break would mean? I thought part of the point of pushing forward to get a new operator in almost at any cost was because you thought a break would be significantly dangerous to the Lottery.
  (Mr Harris) We certainly thought a break would be significantly dangerous.

  39. Now you are telling me it might not be; it might even go up if you have a break.
  (Mr Harris) I may have misunderstood. Our real concern was that if the Lottery stopped and restarted later there would still be the lost income from all that period. It would be quite an endeavour to get sales immediately back up to the same level, so there would definitely be loss in the period in between stopping and restarting and that loss would be of the order of the current flows that go to good causes at the moment. In that sense, yes, we were concerned and therefore we put effort into making sure that we had tried every avenue and taken every option, consistent with our statutory responsibilities, to make sure that the Lottery did not stop. The Commission was absolutely clear that it was not prepared to compromise those statutory responsibilities just to keep the Lottery going.

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