Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 100-119)



  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 scope—much 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 Commerce—I 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 yourself?
  (Mr Harris) I would certainly look to use all the expertise possible, yes.

Mr Steinberg

  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 sold—that is how you deem it a success—so 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, for—what is it—something 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 period ended.

  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 then—because I find this incredible—went 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 ticket sales?
  (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 liked?
  (Mr Harris) They could, although the credibility of their bid is affected accordingly.

  118. So why did you not just tell them to get lost?
  (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 achieve.

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Prepared 6 December 2002