Examination of Witnesses(Questions 100-119)|
WEDNESDAY 22 MAY 2002
100. Is this incorrect then, where it says as
a suggestion of how it could be done that ". . . the selection
team could challenge points in bids at the time they arise, require
bidders to defend their bids, and allow them to make changes"?
That implies that that ought to have been done and was not?
(Mr Harris) You are right; these are suggestions the
Commission has made and in the experience of the first process
it would wish to have more scopemuch greater provision
for negotiation would be a good thing. We accept that. What I
was just trying to say is that it was not the case that there
was no provision for us to allow improvements to bids or to make
our views known to bidders. There was provision during the process
and we achieved significant improvements although, unfortunately,
those did not make either of the bids acceptable at that stage.
101. Ms Street, can you say to what extent you
are talking to the Office of Government Commerce about how you
should be going about structuring the bid next time?
(Ms Street) I have initiated a very close strategic
partnership with the Office of Government CommerceI talk
to them about absolutely everything and certainly we will be talking
with them about this and I think the best time for that is when
we see the responses. That is when we want to make sure that the
process for the future is well informed by the OGC.
102. Mr Harris, are you expecting to be involved
(Mr Harris) I would certainly look to use all the
expertise possible, yes.
103. Ms Street, your Department does not seem
to have much luck with the big projects, does it? The Dome? The
Lottery? The National Stadium? God help us when another one comes
along! Could you turn to page 11? Figure 4 tells us key facts
and figures about the National Lottery, and that by September
2001 £32 billion had been spent by the public on lottery
tickets: players had won £6.5 billion; £10.6 billion
had been raised for good causes, and the Government had received
£4 billion in lottery duty, so if you do the simple arithmetic
it ends up with Camelot over the period of the licence making
£900 million which is £130 million per annum. They do
not have a Lottery licence, do they: they have a licence to print
money. Would you agree?
(Ms Street) I would agree that the Lottery overall
has been a considerable money spinner£12 billion to
good causes, a significant return to the Exchequer, half of the
total revenue going in prizes, and Camelot making their profit,
so that is true of everybody.
(Mr Harris) I believe Camelot's profits after tax
over the term of the licence were around £300 million, over
the seven year period.
104. Shame! What a pity. No wonder they are
desperate to get the contract. It is so lucrative that to lose
the contract would have been a disaster for them, would it not?
(Mr Harris) Camelot is a single-purpose company and
all it does is run the Lottery so yes, it would have been disastrous.
105. It would have been the end of this meal
ticket, would it not? Please turn to figure 9, page 30. It seems
to me that the whole success of the Lottery depends on how many
tickets are soldthat is how you deem it a successso
clearly to exaggerate the sale of tickets at the end of the day
would bring lucrative rewards to whoever wins the contract, and
it seems a lot of exaggeration went on. Looking at figure 9, for
example, when it started in 1995 it was clearly at a very low
base. Then within a year it had climbed quite considerably but,
after the initial honeymoon period, ticket sales gradually declined
whereby, by 1998-99, it had declined by something like half a
billion pounds, had it not?
(Mr Harris) From the high point, yes.
106. You knew this, did you?
(Mr Harris) Yes. We knew what the sales were. That
is why when we did our evaluation
107. Did Camelot know that the ticket sales
had gone down by half a billion pounds?
(Mr Harris) Yes.
108. Did The People's Lottery know that ticket
sales had gone down by half a billion pounds?
(Mr Harris) Yes. Those figures are public figures.
109. So they bang in a contract, or a tender
I think the word probably is, forwhat is itsomething
like a billion pounds more than they were actually taking, knowing
that it was going down anyway. That is dishonest, is it not?
(Mr Harris) They constructed game plans that they
believed would support those figures. I must say that the Commission
throughout said that it was extremely sceptical about these figures
and it thought, and it says in its statement of reasons that it
thought, a far more likely outcome was to achieve an annual sales
level at around the £5 billion mark, which was where the
110. So the trend was going down, and they were
saying that they were going to buck the trend and sell a billion
poundsworth more tickets. They were just lying, were they not,
because they knew they could not do it? Could you tell me how
many tickets Camelot are selling now?
(Mr Harris) Camelot's sales have declined slightly.
If one followed that line for the last two years it would continue
in that way so it is about £4.8/4.9 billion per annum.
111. To 2002?
(Mr Harris) Yes.
112. Which clearly proves that they knew all
along and The People's Lottery knew all along really that neither
of these companies were fit and proper to make bids in the first
place because they were blatantly telling lies. They knew they
could not achieve the sales they were saying, yet they were so
desperate to get it. Tell me, why was it that you thenbecause
I find this incrediblewent to The People's Lottery and
decided to go it alone with them, knowing that their bid was as
fanciful, frankly, as Camelot's?
(Mr Harris) Because the Commission had decided at
that stage, in August, that it could not accept either bid. It
took legal advice because it believed it could maintain its timetable
and have a new operator in place to ensure continuity of the Lottery
within a one month period and, having taken legal advice, that
legal advice led it to the view that it could only negotiate with
The People's Lottery and it would be wrong for it to have twin-track
negotiations for a month to try and put things right.
113. But you knew that The People's Lottery
was as far-fetched as Camelot's bid?
(Mr Harris) We knew both bids were extremely optimistic
but we did not turn down either bid on the basis of the optimism
of their figures.
114. But is that not the whole point? We agreed,
because I asked you, that the success of the Lottery depends upon
the ticket sales. You said yes, so they were failing basically,
were they not? Camelot have failed now. Are there any penalties
against Camelot? What did they get their contract awarded on?
On the basis of what sales? Was their new contract based on different
(Mr Harris) The contract is not based on the level
of ticket sales within their bid.
115. What did they say in their second bid that
their ticket sales would be?
(Mr Harris) Their second bid did not change in any
way. They were not entitled to change in any way in the rectification
of their bid what they thought their ticket sales would be.
116. So did you put any penalty clauses in,
for example, to say, "Well, if you do not reach your £1
point something in 2001 and your £8 billion in 2008 then
you pay that money back"?
(Mr Harris) No. The basis of the competition is on
the proportion that the bidders are prepared to pay over from
each ticket sold effectively, so
117. So basically they could say whatever they
(Mr Harris) They could, although the credibility of
their bid is affected accordingly.
118. So why did you not just tell them to get
(Mr Harris) Because at the end of the day we were
still able to evaluate the bids. What we did was we looked at
what we thought realistic sales levels were and evaluated the
bids on that basis, but this is in part why one of our recommendations
for the future is that the Commission makes clear at the outset
what it thinks a realistic level is and bidders have to demonstrate,
firstly, that they can achieve that level and, secondly
119. So why not hold them to that? Why not hold
Camelot to what they have projected their ticket sales to be and
expect them to pay that amount to the good causes?
(Mr Harris) Because effectively that would be an auction
and the amount of funds involved are so high that we think that
would be a barrier to anyone bidding. Firstly, because if they
had to raise money to pay over a fixed amount upfront in order
to get the licence, there would be very significant costs in doing
so and those costs would reduce the return to good causes because
they would have to raise the money on the money market. Secondly,
if they were allowed to take it out of sales you would have a
similar effect to now because if they were taking the money out
of sales and doing very badly they would simply become not commercially
viable and go into administration and if they were doing very
well then they would take windfall profit. So the Commission judged
that its basis was the best, although it did see very considerable
over-optimism on the part of the bidders as to what they might