House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Second Report

4 Public funding for the Games

64. Whereas LOCOG will receive almost all of its funding either from the International Olympics Committee or by its own efforts in securing revenue through sponsorship, ticket sales and merchandising, the work of the ODA will rely upon public funding. The Public Sector Funding Package - drawn up in 2003[136] - envisaged a contribution of £1.5 billion from the National Lottery, £0.25 billion from the London Development Agency, and £0.625 billion from the Council Tax precept on London residents.[137] The Council Tax element will cost a Band D council taxpayer approximately 38 pence per week[138] - less than the price of a Walnut Whip, to borrow the illustration used by the Mayor of London.[139] Nevertheless, even this annual cost, averaging £20, is not negligible, and the imposition of a cost burden on Londoners does not command universal support.

65. The Chancellor of the Exchequer, on behalf of the Government, has underwritten the cost of the Games, as is required by the International Olympics Committee.[140] The Memorandum of Understanding between the Government and the Mayor of London states that the Government would expect to discharge its responsibility in respect of a shortfall "in a sharing agreement to be agreed as appropriate with the Mayor of London and through seeking additional National Lottery funding in amounts to be agreed at the time".[141] This is generally understood to mean that the contributions under any sharing agreement would come from the Mayor of London (through London Council Tax) and the National Lottery and from no other sources.[142] This was also the evidence given by the Secretary of State although the actual wording of the Memorandum is somewhat more ambiguous.

Lottery funding

66. The £1.5 billion to be derived from Lottery income itself breaks down into two equal parts: £750 million to be raised through sale of Olympic-themed Lottery tickets, and a further £750 million to be diverted from the National Lottery Distribution Fund, which is the source of funding for non-Olympic distributors. We address each part in turn.

Olympic-themed Lottery ticket sales

67. The chain from the purchase of an Olympic-themed Lottery ticket by a member of the public to expenditure by the Olympic Delivery Authority of revenue derived from the Lottery is quite extended. Camelot has responsibility for operating games and for ensuring that enough Lottery tickets are sold to generate the necessary revenue; 28 pence from each ticket is paid into the Olympic Lottery Distribution Fund (OLDF); the Olympic Lottery Distributor (OLD), established under Horserace Betting and Olympic Lottery Act 2004, pays grants from OLDF towards purposes specified in 2004 Act; and the ODA, which is the principal instrument working towards those purposes and which is, to date, the only beneficiary of grants from the OLD, uses those grants to meet expenditure.

68. In order to achieve a return of £750 million to the Olympic Lottery Distribution Fund, Camelot needs to generate ticket sales of £2.647 billion.[143] Camelot has set out annual targets for revenue to be paid into the Olympic Lottery Distribution Fund, as follows:

2005-6 £14 million

2006-7 £96 million

2007-8 £113 million

2008-9 £125 million

2009-10 £115 million

2010-11 £125 million

2011-12 £124 million

2012-13 £37 million

Total £750 million

Figures are net of interest and rounded to the nearest £1m.[144]

69. Ensuring the flow of funds to support the Games is, as DCMS has pointed out, "critical".[145] Camelot performed well in raising revenue in 2005-06, exceeding its target by £2.3 million; and Camelot told the London Assembly Budget Committee on 19 October 2006 that it was in "good shape" to meet its target for 2006-07 and possibly exceed it.[146] We note that the National Lottery Commission is confident that targets will be achieved, as is the Secretary of State.[147] However, there is no guarantee, and sales may one day fall short.[148]

70. There is a particular uncertainty in the near future, as the present licence to operate the Lottery expires in 2009 and a competition for the successor licence is well advanced, with the deadline for submission of bids in February 2007 and the licence to be awarded in August 2007.[149] There is a risk that revenue from ticket sales may suffer if there has to be a transfer from one operator to another; Camelot indicated that it would do all it could, during any handover period, to "mitigate" the impact on the National Lottery Distribution Fund.[150] The Olympic Lottery Distributor said that it was "fairly confident" that the National Lottery Commission, which will select the licensee to operate the Lottery from 2009, would look at the ability of any applicant to maintain revenues without a dip in income "that would seriously impede the kind of cash projections that we will be working to".[151] The timing of the competition currently under way to operate the National Lottery, when the potential for disrupting an essential funding stream is so great, is very unfortunate. Although we accept that a decision has been taken, we believe that it would have been better to have extended Camelot's licence beyond the Games. We recommend that the Commission carefully considers risks of a change of operator on preparations for the Olympics when reaching its decision.

71. The Olympic Lottery Distributor drew attention to the importance of liaison between the Olympic Delivery Authority, the Olympic Lottery Distributor, the National Lottery Commission and the operator "so that there is a clear understanding of the projected income and expenditure of the Olympic Lottery Distributor".[152] Camelot told the Committee that it would "work with the National Lottery Commission and DCMS in order to accommodate the Olympic Delivery Authority's revenue phasing requirements", and it expressed contentment with the working relations established between Camelot and other main stakeholders.[153] We were surprised, however, to hear that Camelot had not consulted the ODA about funding requirements before setting targets for income from ticket sales. The ODA said that it did not find this unusual; it maintained that its relationship was with the Olympic Lottery Distributor rather than with Camelot.[154]

72. The OLD warned that Camelot could have difficulty in responding quickly to any short-term cashflow difficulties faced by the ODA.[155] Camelot has the option to introduce new games hypothecated to the Olympic Lottery Distribution Fund, but such games take many months to devise, test and market. Camelot warned that it would need early warning of any requirements outside the phasing of its own funding plan.[156] The OLD is well aware of the constraints under which Camelot would be operating in attempting to meet any extraordinary request for funding, and it sees the main area of flexibility in this regard as being the ability to draw sooner upon other funding sources in the Public Sector Funding Package.[157] It said that this area was being "very carefully watched".[158]

Lottery revenue via non-Olympic distributors

73. Half of the £1.5 billion of contribution from Lottery revenue to the Public Sector Funding Package will come not from the sale of Olympic-themed Lottery tickets but from a diversion of funds from non-Olympic distributors. £340 million will come from sports Lottery distributors, including £295 million from Sport England.[159] The remaining £410 million would be derived from existing distributors according to a formula not yet clarified. This Committee's predecessor noted, in its report Reform of the National Lottery, published in March 2004, that the figure of £340 million to be contributed by sports Lottery distributors appeared to have been determined without prior consultation.[160]

Impact of the Public Sector Funding Package on sports Lottery distributors

74. The £295 million from Sport England will fall under three headings:

— £63 million towards providing a world class environment to host the Games: £40 million towards the Aquatics Centre, £10.5 million allocated to the Velodrome, and £12.5 million for training facilities at Picketts Lock and Portsmouth;

— £49 million already committed to preparation of athletes at elite level before the transfer of full responsibility for elite sport to UK Sport: £10 million for the Athens Games, £8 million for the Beijing Games and £31 million for the English Institute of Sport; and

— £183 million to be invested by local delivery networks for community legacy and "to build capacity within the sport sector and support talent development".[161]

75. Exactly how the £183 million for community legacy will be spent has not yet been determined. As an example of "building capacity" (under the third heading above), Sport England suggested the placing of more community sport workers in community organisations; and it referred to "high quality coaching experiences and club environments" as a way of pursuing the talent development objective.[162] Significantly, perhaps, Sport England states that it "has not established specific Olympic 2012 funded programmes but has identified opportunities where existing programmes and funding streams could be linked to London 2012".[163]

76. The Central Council for Physical Recreation (CCPR) argued that the requirement upon Sport England to contribute £295 million towards the Public Sector Funding Package "would effectively reduce the amount of Lottery funding available to all other aspects of community sport", which would "undoubtedly be detrimental to achieving the lasting legacy of sporting participation".[164] It added that Sport England was being "asked to undertake a whole load of initiatives and projects in relation to London 2012 without any additional resourcing".[165] We question whether the effect would in fact be quite as negative as described by the CCPR. £63 million of the £295 million will fund new training and sporting venues which will have a legacy for elite and community sport (albeit primarily in London); and £183 million of the £295 million will be invested by Sport England's regional bodies to build capacity and support talent development. It is arguable that the inclusion of the £183 million for community sport legacy within the Public Sector Funding Package may in fact be a rebadging exercise for programmes which were going to be sponsored by Sport England in any case.

77. We conclude that the substantial financial contribution by Sport England to the 2012 Games need not necessarily have a major effect on programmes to enhance participation in sport at community level. However, there is a clear risk, if we are not careful, that programmes outside the capital may suffer because of the focus on London and in particular in sports which are either not part of the Olympics or which are not recognised as mainstream Olympic sports.

78. Sport England will, however, suffer in the same way as all NLDF distributors from the diversionary effects of the Olympic-themed Lottery games[166] and from the further transfer of NLDF funds which we discuss in more detail below. Sport England calculated that the funding impacts could in its case be £20 million and £60 million respectively.[167] We have no doubt that the diversion of money from the NLDF to the OLDF arising from transfers already announced will reduce Sport England's ability to undertake non-Olympic-related activity to promote grassroots sport across the country. This will clearly be exacerbated by any further diversion to meet Olympic cost increases.

79. We note that some of the remaining £49 million to be contributed to the Public Sector Funding Package by Sport England has already been spent on preparation of athletes for the Games in Athens (£10 million) and Beijing Games (£8 million). DCMS should justify the inclusion of sums already spent in preparation of elite athletes for the Games in Athens and Beijing as part of the funding package for the London Games.

Impact upon remaining non-Olympic distributors

80. The Memorandum of Understanding agreed at the time that the Government took the decision to support a bid by London to stage the Olympic and Paralympic Games in 2012 envisaged that up to £410 million could, if needed, be derived by changing the shares of Lottery income passing to existing distributors beyond 2009.[168] The Secretary of State confirmed in June 2006 her intention to draw upon that £410 million.[169] In doing so, she confirmed the fears of many in the arts, heritage and voluntary sectors that a further call was being made on the National Lottery Distribution Fund and its beneficiaries, in addition to the diversion of sales towards the Olympic Lottery Distribution Fund which was already having a negative impact on revenues for non-Olympic distributors.[170]

81. The Lottery Forum, which represents Lottery distributors which operate either within England only or across the whole of the UK, has urged DCMS to clarify exactly how that transfer of £410 million from the NLDF to the OLDF will be effected, so that the distributors which will suffer a reduction in income can "plan their future funding programmes" and promote them.[171] We invited the Secretary of State to give more detail of how the £410 million would be raised. She answered that the sum would be top-sliced from the NLDF between 2009 and 2012, adding that "that will have an impact of reducing the amount because it will be shared equally across all the distributors that they have for good causes by about £12 million".[172] She subsequently stated, however, that she "had no recollection of using a figure of £12 million",[173] and our view is that the comment should be disregarded. We are more concerned by her statement that no final decision had yet been taken on how and when to transfer the £410 million.[174] DCMS should explain without delay how it plans to carry out the further transfer of funds from the National Lottery Distribution Fund to the Olympic Lottery Distribution Fund, so that the effect upon distributors is made clear.

Meeting the funding gap

82. The Secretary of State's announcement to the Committee that a further £900 million of extra costs had already been identified[175] confirmed that further revenue will need to be found, and the "sharing arrangement" under the Memorandum of Understanding which we described above (at paragraph 65) will come into play. The Secretary of State told us that discussions on the options available to meet the funding gap were taking place within Government, saying that "what we have to have … is a solution which is seen as fair, proportionate and sustainable".[176]

83. The potential for a further call on the National Lottery Distribution Fund, above the £410 million foreseen in 2003 when the funding package was drawn up, has never been ruled out by Secretary of State. Indeed, she reiterated to the Committee both in July 2006[177] and in November[178] that she would be prepared to draw further on Lottery revenues. Any such transfer would be under an order subject to affirmative resolution in Parliament. The Explanatory Notes provided by the Government to the Horserace Betting and Olympic Lottery Act 2004 state that such an order (under section 25 of the Act) "would be made only in exceptional circumstances". We note the warning from the Lottery Forum that any such requirement for additional Lottery funding "would reduce NLDF distributors' ability to deliver a full and balanced portfolio of activity".[179] We received evidence in our recent inquiry into heritage about the damaging impact on the Heritage Lottery Fund of the reduction in Lottery income;[180] this impact is likely to be equally matched in the arts and voluntary sectors. A further transfer of Lottery revenues from the National Lottery Distribution Fund to the Olympic Lottery Distribution Fund, above the £410 million already identified, would penalise good causes yet further. We believe that any further diversion of money from the Lottery would reduce the money available for each of the good causes, and it is not our preferred option for funding any overspend.

84. It would be possible to raise further revenue for meeting the costs of the Games by extending beyond 2012 the period for which Olympic-themed Lottery tickets are sold. To do so would, however, prolong the diversion of revenue from non-Olympic distributors, and the impact would probably be similar to that arising from any transfer from the NLDF to the OLDF, as outlined above.

85. The Mayor of London has made clear his strong opposition to any increase in Council Tax in London to support an increased budget for the Olympic Park.[181] We note that London will have a distinct share of long-term benefits of the Games: regeneration, improved transport links and a cluster of world-class sporting venues which will host major events over the long term, possibly at the expense of stadia in the regions. London Council Tax payers are, however, already subject to a compulsory levy. An increase in that local levy will increase disparities between the financial impact upon residents of London boroughs at the fringes of the city and that upon neighbouring residents of adjoining counties, not subject to any such levy. Such a disparity will appear increasingly unfair, particularly as the Government stresses the national benefit of the Games. We recommend that a cap should be placed on the liability of London residents to fund any further increase in Games costs via increases in the Council Tax. Beyond that, other means of raising revenue should be used, and the need for further funding from the Exchequer should not be ruled out.

86. As we have already noted, paragraph 17 of the Memorandum of Understanding between the Government and the Mayor of London states that in the event of a shortfall between Olympic costs and revenues not covered by the Public Sector Funding Package, the Government would expect to discharge its responsibility as absolute guarantor of Olympic funding needs "in a sharing arrangement to be agreed as appropriate with the Mayor of London and through seeking additional National Lottery funding in amounts to be agreed at the time".[182] As already noted, although the Memorandum of Understanding is generally interpreted as specifying that contributions to meet any shortfall between Olympic costs and revenues would come exclusively from the National Lottery and from the Mayor of London, through London Council Tax, the meaning is not totally clear. We do not, in any case, accept the principle of such a restriction. We consider below some options for drawing on other sources.

Tax regime for the National Lottery

87. Our predecessor Committee considered in detail the operation of the National Lottery and dwelt at some length on the tax regime applicable. The Treasury applies a 12% rate of Lottery Duty calculated to recover tax revenues lost through diversion of consumer spending from gambling and other consumer products towards the purchase of Lottery tickets.[183] We note the view of the National Council for Voluntary Organisations (NCVO) that a review of Lottery Duty is overdue and that the original rationale for the tax "no longer stands". The NCVO calculated that a 3% reduction in the rate at which Lottery Duty is applied could raise £140.3 million per year.[184]

88. Our predecessor Committee concluded that Lottery Duty, which had raised nearly £5 billion in the period from 1994-95 to 2002-03, represented a "double hit" on money paid by the public for tickets, and it recommended that the Treasury should forego Lottery Duty entirely and divide the released funds between prizes and good causes.[185] Lottery Duty raised almost £599 million in the 2005-06 Financial Year.[186] When we asked the Secretary of State whether she was sympathetic to the idea that the Treasury should forego the revenue generated by the 12% rate of Lottery Duty, as proposed by the Mayor of London, she did not discount it out of hand, but she indicated that discussions at that stage had to remain private.[187]

89. Another avenue would be to move to a Gross Profits Tax regime for Lottery funds, under which tax would be calculated on revenues remaining once prize money had been deducted. Camelot has long advocated such a move, and it reiterated the proposal in its submission to this inquiry, despite the apparent rejection of the idea by the Treasury in the 2005 Pre-Budget Report.[188] Camelot described Gross Profits Tax regime as being "the most significant opportunity to assist in growing overall lottery sales and returns to the NLDF and the OLDF", and it estimated that such a move would generate up to £50 million per year for good causes.[189]

90. We have not examined in detail the case for abolishing or adjusting the tax regime applicable to the Lottery; but we believe that such a move could well be viewed by the general public as the fairest means of securing further funding for the 2012 Games. We recommend that the Treasury should explore options for amending the tax regime applicable to the Lottery, whether on a temporary or a permanent basis, as a means of ensuring the necessary flow of funds into the Olympic Lottery Distribution Fund.

GAINS ON LAND VALUES

91. The Memorandum of Understanding between the Government and the Mayor of London states that "the London Development Agency will meet the costs of required land assembly during the bid period and beyond" and that "income from the sale of this land is at the disposal of the London Development Agency".[190] Once the Games have concluded, the London Development Agency (LDA) "will deliver the commercial and residential elements of the legacy Olympic Park, as part of the wider Lower Lea Valley regeneration plans".[191] If the remediation of the Olympic Park site is as thorough and long-term as Mr Higgins proposes,[192] the land value of the site will have increased significantly after the Games as a result of a considerable expenditure of public money. It would be inappropriate for this to be translated into a straight profit for the site's owners and developers. We note press reports that the Government is considering a "windfall tax" on land values in the event of any overspend on preparations for the Games.[193] The position on land ownership once the Compulsory Purchase Order process has been completed is not entirely clear; but it seems that most, if not all of the land will be owned by the London Development Agency,[194] which stands to make substantial gains on resale. We do not believe that the London Development Agency (LDA) should be the ultimate beneficiary from the sale of land acquired for the Olympic Games. We recommend that the LDA should state how it plans to dispose of land once the Games have finished and should make proposals for distributing any net financial gains which it makes from the land, whether notional or through sales. We believe that the best use for such funds would be to meet any Games costs which are outstanding. Given the regeneration and legacy benefits from the Games, we also recommend that the Government assesses whether the £250 million contribution, within the Public Sector Funding Package, from the LDA is sufficient in the first place.