Select Committee on Public Accounts Minutes of Evidence


Examination of Witnesses(Questions 140-159)

MS SUE STREET AND MR MARK HARRIS

WEDNESDAY 22 MAY 2002

  140. The reason I am trying to establish that none of you had any experience in the lottery market is that it seems to me the key determining factor in awarding the Lottery to Camelot was the Commission's forecast of sales, am I right?
  (Mr Harris) The Commission looked at its own forecast for sales in order to calibrate the bids but obviously it just did not impose its own forecast; it looked at the judgments made by the bidders and the whole detailed bid and the game plan and used judgments on those.

  141. If you look at appendix 8 on page 43, it has the various sensitivity tests applied by the Commission to the various bids and, as far as I can work out, tests 1-6 which were based on common forecasts all showed that The People's Lottery would generate more revenue for good causes: tests 7-20 all showed that Camelot would produce more revenue for good causes: and those sensitivity tests 7-20 were all based on Commission forecasts, so the Commission forecast was absolutely crucial in the decision to award Camelot the licence.
  (Mr Harris) The forecast used by the Commission was an important part of that but it was based on a full analysis of the two bids, not just simply a forecast of what the Commission judged the bids would do, and that was supported fully by the Commission's consultants who advised it in assessing how the bids would work.

  142. Maybe we can have an idea of how good the Commission's forecasts had turned out to be. What was the Commission's forecast of how many sales Camelot would have last month, say, and what are the actual sales? Not what Camelot was projecting but what the Commission forecast Camelot would be selling in April 2002 and what they actually sold in April 2002.
  (Mr Harris) The Commission did not produce or monitor a month-by-month forecast in that way. What it did was to look at the bids. The Commission's judgment was based on a range of risks and possibilities that led it to more general judgments. These were forecasts done by the Commission's consultants on its behalf to understand the different effects of assumptions that were made within the bids and, if one varied those, what effect it had on the relative performance of the bids.

  143. There must have been a forecast for sales. I do not know whether it is broken down monthly, quarterly or yearly because, as it makes clear, although the return for The People's Lottery was higher in terms of good causes for every pound sold, you did predict that Camelot would make more sales, so you must have had some forecast of the sales?
  (Mr Harris) Yes. The forecasts that were used are those set out at appendix 8.7 which are the forecasts put together by the Commission's advisers so that was an important part of it, but obviously all the Commission could do was to amend the forecasts that were provided by the bidders and those depended on all sorts of things like when they would bring games forward, when they would launch them—

  144. But the end process must have been a number—X million sales as a result of all these factors as opposed to Y million?
  (Mr Harris) That figure there at 8.7 was produced over a period of time, but it depended on the assumptions bidders made considerably earlier about when they would be bringing games forward and so on and so forth, so it does not reflect what has happened at the end of the day. What the Commission did was use this as a tool to help it understand more broadly how this would work.

  145. But the bids, reading from this and given the way the process went, were very finely balanced between the two bidders, and it seems to me a swinging factor was the Commission's forecast that in the end The People's Lottery could not generate the sales that it was said it was going to, and that Camelot were likely to have more sales and as a result generate more revenue?
  (Mr Harris) The view that the Commission reached was that on balance it believed that Camelot would produce more sales and more returns for good causes. The Commission recognised it was making judgments and, at one extreme, that if everything that The People's Lottery had identified it could do came off and it achieved that topline curve, then the top of the appendix shows that they would have produced more for good causes. But the Commission judged all the risks and all the problems it had with assumptions that were made within that bid, as it did for Camelot, and it brought both bids down significantly but it concluded at the end of the day on balance that there was more risk and more uncertainty, and so more likelihood that The People's Lottery would produce less. That was the judgment it made and that was the judgment that I think the NAO has been through—

  146. But you cannot tell whether the model turned out to be accurate or not? The only way you would ever be able to test this is if you had The People's Lottery running in some parallel universe but what I am trying to get at is that you produced a model and you awarded a contract based on the figures produced by the model; was the model accurate?
  (Mr Harris) I understand exactly what you are asking—

  147. It is a pretty basic question, because you are going to have to award this licence again.
  (Ms Street) The revenue that the Commission thought it would probably get from this is around £5 billion and so far as we can judge it is running at £4.9 something. Now, I cannot say that is always going to be the case.

  148. In paragraph 4.15 of that Report at page 29 it says, ". . . the Commission's staff and consultants developed forecasts of sales for the period of the second licence. . . The Commission considered that these forecasts were unduly pessimistic". Am I getting that right: that your staff or you perhaps produced these forecasts and then the commissioners thought they were unduly pessimistic?
  (Mr Harris) These were forecasts that were derived independently by our consultants with some members of staff who had had the involvement in these areas, and the commissioners looked at the forecasts and said, "There are a range of places where you have discounted the bids and put lower levels and those all add up to a low level and we think, cumulatively, it is likely that the bidders will not perform to that low level on all those things and, therefore, we think it would a bit higher than the levels you have set but—"

  149. Was that just a hunch on their part, to secondguess?
  (Mr Harris) It was a judgment after long discussions with the consultants as to the assumptions they had made and the belief they had, and the Commission came to the view—

  150. So who has proved to be right? Your staff or your commissioners? That is a tough question!
  (Mr Harris) The answer is we will not know for two reasons—firstly because it will take considerably longer than the short time the licence has been running but, secondly, one can only tell if Camelot implements a game plan that is exactly the same, where everything happens to the same degree and to the same point as was included in the bid and, just as markets conditions change, so the game plan will not be exactly the same.

  151. It seems very odd—why were the huge overestimates in your view that the two bidders made in terms of sales, the original estimates I mean, so similar? It seems odd that they both overbid and bid with remarkably similar figures. Was there any evidence that they knew what each other was up to?
  (Mr Harris) I have no reason from where I stand to believe they did, although I know that both of them in the run-up to submitting their bids made public statements about what they expected to pledge and how they expected their games to work. I do not know whether they were able to take anything from that or not.

  152. Looking at table 9 on page 30, which is their projections, they are very similar. They have a slightly different shape and they turned out to be both wildly over-optimistic anyway as events have subsequently proved, but you did not investigate whether they were really matching each other since they knew there was no-one else in the process, by then there was nothing?
  (Mr Harris) We did not carry out an investigation, no. Our concern was to make sure which was the best bid.

  153. One of the jobs of civil servants is to implement the manifesto commitments of governments. The Labour Government in 1997 had a manifesto commitment to seek a not-for-profit operator, and I do not understand why, when the statement of principles was produced in 1999, the not-for-profit element was included in that statement.
  (Ms Street) As you say, the manifesto did say, "We will seek an efficient not-for-profit operator to ensure that maximum sums go to good causes". The White Paper issued by Government said very clearly, "We do not intend to prescribe the nature of the operator", and it was very important that the Commission should run the competition.

  154. Finally, can I ask you both whether you think it is possible realistically for someone to mount a bid against the incumbent Lottery operator? In terms of the enormous expertise that Camelot by then have had in running the Lottery and given that the Commission has had this duty to maximise revenue for good causes, can they ever realistically take the risk of going for another operator? Does not the way the whole thing is set up mean that the encumbent now is in place for ever?
  (Ms Street) My view would be that an enormous amount rests on the consultation which the government is about to launch and on the way that the market develops, both in terms of the technology and in any relaxation of the gambling laws, so I think we would be looking at the different market. Within the terms of the present position, there are already, as my colleague has said, a number of things that could be done to generate an effective competition but I think there will be room for a lot of innovation in how we should run these matters in the future. Specifically one wants to look at the section 5 and section 6 constraints currently in the law and there are ways of doing that differently, so I think we would appreciate quite a lot of help including from this Committee on that.

Mr Field

  155. Can I concentrate on the letter Sir John Bourn sent to Mr Alan Williams? Sir John, if you had carried out your Report as you would have wished to have done you would have concentrated on reporting the competition side of awarding the licence and whether the characters were fit and proper persons, have I got that right?
  (Sir John Bourn) I would have reported on the fit and proper aspects of the people. The Report itself is a report essentially on the competition process that led to the decision to award the contract to Camelot.

  156. And, Permanent Secretary, the reasons why the Comptroller & Auditor General could not carry that out was, as you described it, that there were some difficulties to the gateways to this information, which appear to some of us to be rather like drawbridges, and the gateways were that certain Acts of Parliament forbade you to give him the information which you have collected under the four Acts, is that right?
  (Ms Street) We were advised that there was not a safe lawful passage from me to the Comptroller & Auditor General and we regretted that. I certainly regret the time that it has taken to put it right but, yes, that is correct.

  157. So you have in your possession information gathered under the Financial Services and Markets Act, and you have information under the Companies Act, the Financial Services Act and the Criminal Justice Act, which because three of those orders have not been made you cannot provide to the Comptroller & Auditor General?
  (Ms Street) I understand the Commission holds the relevant material.
  (Mr Harris) The Commission has these papers because the relevant gateways are open for the Commission to receive this information from certain agencies, but for the Commission to disclose that information to any other person is a criminal offence. The solution is that, if the same gateways are opened for the Comptroller & Auditor General, then we would be able to open our files and allow the Comptroller & Auditor General to see all the information which I quite appreciate he must be able to see in order to ensure that our vetting processes are working properly.

  158. But when you read the information, did that information from any of those four sources cause you trouble and help you to explain the movement from one group to another which other colleagues on the Committee have described, and which is certainly a more rational approach to your behaviour than one of really flapping around in the wind?
  (Mr Harris) The vetting information we received did not affect the Commission's decisions about either the fitness and propriety of GTech or the all due propriety test going forward, no. That information told us about people's past records and whether they declared them properly and rightfully.

  159. So when you hand that information over to Sir John, you would expect him to report very quickly that all the players were fit and proper?
  (Mr Harris) Sir John would then be able to reach a view on our processes and whether they worked properly, and whether or not the information held on the files demonstrated that we had operated the processes properly, yes.


 
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