TUESDAY 6 FEBRUARY 2001 _________ Members present: Mr Gerald Kaufman, in the Chair Mr David Faber Mr Ronnie Fearn Mr Christopher Fraser Mr Alan Keen Mr John Maxton Mrs Diana Organ Ms Claire Ward Derek Wyatt _________ MEMORANDUM SUBMITTED BY H M TREASURY EXAMINATION OF WITNESSES RT HON MR ANDREW SMITH, a Member of the House, Chief Secretary to HM Treasury, MR DAVID KNIGHT, Head of Gambling Duties Policy Team, Customs and Excise, MR IAN PEATTIE, Comptroller General of the National Debt Office and Director of the National Investment and Loans Office, and MS HELEN JOHN, Head of Treasury spending team responsible for the Department for Culture, Media and Sport, HM Treasury, examined. Chairman 602. Chief Secretary, I would like very much indeed to welcome you here this afternoon. We appreciate not only the fact you have agreed to come here yourself as a witness when this is not related to your own departmental responsibilities, we are also grateful for the fact you have taken some trouble to make yourself available and therefore our appreciation of your presence is enhanced by that. Our practice is to open up the questioning right away but if you have prepared an opening statement in view of your courtesy in being here, then we will take that from you. (Mr Andrew Smith) Thank you very much for those kind words of introduction. I merely wanted to introduce the people I have with me. On my right I have Helen John, who is the Head of the central department's team which is responsible for DCMS spending issues in the Treasury. On my far left is Ian Peattie, the director of the National Investment and Loans Office and Comptroller General of the National Debt Office, and on my immediate left, David Knight, who is the Head of Excise Policy at Customs and Excise. Chairman: That is a very, very powerful team you have brought with you, and we appreciate you having done that as well. Perhaps I should explain, some of the members of the Committee are on a Standing Committee and are moving backwards and forwards, and others will be coming in presently. Mr Fearn? Mr Fearn 603. Good afternoon. Do you accept that Lottery funded sectors such as Heritage which have seen a decline in Exchequer funding since the Lottery was established, find it hard to believe this is a coincidence? (Mr Andrew Smith) I think this raises the general question of additionality which I know the Committee has taken a close interest in. I would just underline, as Chris Smith did when the Lottery Bill was in Parliament, that we adhere very closely to the principle of additionality, that Lottery money must not replace Exchequer spending, so the test really is if the money were not provided through the Lottery would it have been provided through the Exchequer, and the answer is no. 604. That is an emphatic no. (Mr Andrew Smith) Yes. 605. There are no circumstances whatsoever where that has been breached? (Mr Andrew Smith) No. We do have very close regard to it. There is a difficulty here which anybody looking at the matter carefully can see, that you are comparing an actual, a distribution of resources through the Lottery and distribution through the Exchequer, with a hypothetical, what would have happened if this money were not available. In that sense, it is harder to provide a rigorous arithmetical proof than it is to adhere to the spirit of the principle. What I am saying is we do adhere to the spirit of that principle and moreover in the procedures we apply, for example in the way I conducted the spending review last year, close regard is held to that principle. 606. Do you think the National Lottery will necessarily continue to fund specified good causes then in the future? (Mr Andrew Smith) I very much hope so. I would say I think we are getting into the issues which are very much ones for Chris Smith. I am very conscious in the discharge of my responsibilities that responsibility for the Lottery and for the New Opportunities Fund are matters for Chris. 607. Is all the money in the National Lottery Distribution Fund allocated to the Lottery distribution bodies, or have you got a contingency fund? I imagine you have. (Mr Andrew Smith) That is not a matter for me, I am afraid. 608. Not at all? (Mr Andrew Smith) The policy on the use of the National Lottery Distribution Fund is something you would have to ask Chris about. Mr Fearn: That sort of flattens my question on that. Thank you. Derek Wyatt 609. Good afternoon. Chief Secretary, we have had quite a bit of correspondence, fairly friendly and amiable, about what "revenue neutral" is, and I wonder if we could go over that again. Currently taxation is 12 per cent of the Lottery and in the debate in the House, at which there was a Conservative Minister, there was a note to say the Lottery was, I think it is called, "revenue neutral". It is something I do not really understand because, as far as I can make out, most Lottery terminals are in small shops and their trade has gone up, and there is no VAT on many things like food, chocolate and newspapers in these shops. So what is revenue neutral? Chairman 610. If you cannot explain, I will. (Mr Andrew Smith) All I can say is that I am advised by the statisticians that the Lottery duty equates to the loss of revenue from the taxation on the bundle of goods and services on which that money would have been spent had the Lottery not been in existence. That is the aim of the neutrality. Derek Wyatt 611. I understand what it is, but I am saying that in practice it is not revenue neutral, that in fact there has been an additional opportunity for people to spend on the Lottery, in addition to the fact that if you look at all the sales of food and newspapers and chocolate, which I have already mentioned, in the shops, they have not gone down, they have gone up. So it is not revenue neutral in the terms of the statisticians, it is actually a huge windfall tax for the Treasury. (Mr Andrew Smith) I certainly would not describe it as a windfall tax for the Treasury. As I say, the aim is merely to compensate for the duty and tax which would have come in on the spending which the Lottery displaced. Chairman 612. Can I come in there? I am a bit baffled and maybe I have been labouring under a misapprehension for several years, which would not be the first misapprehension and it would not be unusual for it to have been that number of years, but I was under the impression when we had these discussions in the last Parliament and our initial inquiries on the Lottery, the purpose of it being revenue neutral was to compensate for the speculatively assessed loss of revenue from other forms of gambling which it was assumed would go down because of the creation of the Lottery and the attractions of the Lottery. I have to tell you I always took the view that the Treasury very remarkably was being too modest and ought to have taken a great deal more from the Lottery since it generates such large amounts of funds. Chief Secretary, if you are telling me I have been wrong all these years, I shall just have to correct it in my mind, but I would be very interested to know. (Mr Andrew Smith) I would hesitate to express it in those terms, Chairman, but my very firm understanding is that it is to compensate. Yes, there is an element of course of judgment and statistical assessment here, not merely for revenue foregone through taxes on gambling but revenue foregone more generally from the expenditure which is thereby displaced. Derek Wyatt 613. Your own evidence states, paragraph 2, page 63, "It has been difficult to determine whether this intention has been delivered" in respect to it being revenue neutral. If it is difficult, forgive me, how do the statisticians know it is or not. I am confused. (Mr Andrew Smith) As I said, of course, there is a matter of judgment and statistical assessment there. All I can say is that that is the best advice that I have. I do not know whether David Knight from Customs & Excise can add anything to that. (Mr Knight) I am not a statistician myself but my understanding is that the range of revenue neutrality was calculated at between 12 and 15 per cent, and the judgment at the time was to set the figure at the lower end of that range. It is a recalculation which has been done from time to time to see if it holds good, and there has been remarkably little fluctuation over the time since the Lottery was introduced. The point about whether you can see definitively post facto that revenue neutrality has been achieved is simply the fact that of course nobody can know exactly what the spending on the Lottery has substituted for. We can only do it on the basis of a basket of alternative goods. 614. I will be corrected but I think the total spend on the Lottery is about œ5 billion. That is not winnings, that is on projects right across the board for the five or six commissions, and they all pay VAT on that work, whether it is the Dome or the Kew Gardens Seed Bank, so you get a huge amount of revenue on top of the revenue neutral element. Are you saying that the VAT is not part of the revenue neutral or is part of the revenue neutral? (Mr Andrew Smith) I think that is a fallacious deduction because the expenditure which was displaced would also have been spent on other things which would also have incurred VAT or other taxes further down the chain. So you have to compare like with like. 615. Except the 5 billion comes out of people's ticket prices. The Government would not have spent œ5 billion on a more or less Keynesian bit of economics, it would not have spent that money - it would have spent it and is spending it on schools - this is additional money, so your VAT is additional. Am I being really dim here? (Mr Andrew Smith) As I say, the duty is calculated on the basis of what you need to take in to compensate for the revenue foregone elsewhere, and in that sense it should be neutral. 616. I would love it, Chairman, if the statisticians could deliver this in a way I could understand it, because I have to say I am not at all certain it is revenue neutral. (Mr Andrew Smith) I would be very happy to give you whatever further statistical calculations and the evidence on the baskets of goods and services on which it is computed, to try and satisfy your point. 617. Thank you. Do you feel, as you do take 12 per cent, which is a large amount of money, that it ought to be hypothecated and spent back with the five commissions? (Mr Andrew Smith) I do not think there is any stronger case for hypothecating the expenditure from that tax than there is from any other tax. 618. So that is a no? (Mr Andrew Smith) Yes. 619. Okay. On projects in the New Opportunities Fund, which Ronnie Fearn has mentioned, there are some cancer projects and what has worried us is that in three years' time, without continuous funding of those cancer projects, those cancer projects will stop, and yet it is one of the Government's prime aims in their health philosophy to help cancer and heart first. We are slightly confused as to whether that is strictly additionality or not, but more worrying is that in three years' time if that money is not made available by other means, then people with cancer will suffer again. (Mr Andrew Smith) As I said earlier, I think the hard test of additionality here is not whether particular facilities or services could have been funded from the Exchequer, it is whether they would have been funded from the Exchequer, and it is that which I answered with a clear no in the previous question. I understand of course why you are probing this particular point, but I think there are two things we have got to bear closely in mind here. First of all, in areas like palliative care there is a very strong tradition of voluntary funding and fund-raising so to imagine that simply because something is so important, and it is an incredibly important service, it is not right to presume that it is therefore necessarily best placed looking to the Exchequer for funding. I have followed the progress of the Helen House Hospice in my own constituency closely and because of that very concern and support which the public has for such facilities they have been prepared to give very generously. In many cases, especially where it is innovative care that is being spoken about, the flexibility that gives the service is something they appreciate. I do not think that is in principle any different from funding from the Lottery. The second thing that I would say is that I think in the round we do have to take account of what we think the public at large thinks is an appropriate use for these funds. I think there is ample evidence, not least the BMA opinion survey which was published if I recall correctly last August, which showed very strong public support for funding from the Lottery going into these areas. I think judged against those two tests it is a perfectly good and reasonable use of funds and of course, like you, I hope that funding by one means or another will be sustained in the future to enable these facilities to continue. 620. As I understand it, since polling started on what the public would like from the Lottery in 1996, overwhelmingly they would like it spent on health and education which is a dilemma if you continue with the additionality. You do understand the complication here? We saw in America, where there is no additionality, that politicians would sit on the shoulder and say, "I need some schools to be built. You had better hurry up and raise some money because I will not be elected as the Governor of the State." The Committee did not like that inference and that interference but does the Treasury have a view that if that principle was to go how the Lottery might work? Do you think it should be run by the government as opposed to run by Camelot? (Mr Andrew Smith) First of all, I do not think the application of the principle of additionality is any different in relation to health, or for that matter education, than it is, for example, in sports or arts. It is the same question, the same test that has to be applied: if this money were not being provided through the Lottery would it have been provided through the Exchequer? Unless we are careful we can get into a perversely paradoxical situation here - I am not suggesting you are arguing this - but some of the commentary on the application of Lottery proceeds can almost suggest that something is too important to be funded through the Lottery. I think that would be a curious concept to the public who, after all, are buying the tickets. I think at the end of the day people do support a range of different sorts of projects and I think they have no problem, indeed some enthusiasm, for those including health and education. Obviously to the extent that those payments are for one-off or special initiatives, then I think that is more readily accommodated within the Lottery funding framework. Derek Wyatt: Thank you. Chairman 621. I would like to follow up some of the lines of questioning that Mr Wyatt was starting, perhaps in a rather heretical way. Mr Wyatt talked about the very large take of the Treasury from the Lottery in taxation. I wonder whether it is large enough. After all, here is a source of revenue that is new. My own view, and maybe I am wrong, is that the public really do not care how heavily the Lottery is taxed provided that they do not feel that that rate of taxation is liable to detract from their ability to win a prize. On a number of these issues that we have been discussing this afternoon this Government is very much carrying on the concepts that the previous Government started. I am not saying that what the previous Government started was wrong, after all they started the Lottery and everybody now agrees that is a very important and worthwhile initiative, but just because something was so when the Act went through Parliament, four years on, ought not the Government be looking at asking itself the question is this really the way we need to continue? I ask the first of those about the rate of taxation and the revenue take out of the Lottery. (Mr Andrew Smith) You present the hypothesis that the public might be prepared to tolerate a higher level of taxation as long as it did not affect their chances of winning a prize. I wonder about that. Of course, even if it were the case that they would tolerate a higher level of taxation if it did not affect their prospects of winning a prize, that does not mean they want a higher level of taxation. I rather suspect they do not and there would indeed be public resistance to the idea of the Treasury or the Government taking a disproportionate slice of the cake. I think therefore the justification that we have given in terms of seeking to achieve this revenue neutrality and, by all means, re-examining the evidence on that as we were prompted to earlier, is a reasonable way of proceeding. 622. I would like then to come to the --- (Mr Andrew Smith) There was a second part to your question which was really saying is it time for a more fundamental re-think. We did make quite a fundamental change in accordance with our Election Manifesto with the introduction of the New Opportunities Fund. As I say, I think that has been generally warmly welcomed. I do not see this is a case for more radical change at this stage. 623. I would like to come to that. (Mr Andrew Smith) But in saying that I am stepping outside my ministerial brief anyway. Chairman: And a good thing too, after all we have Ms John here today whose title seems to revolutionise any approach of the Treasury - the Head of Treasury Spending Team! Mrs Organ 624. Small but perfectly formed. (Mr Andrew Smith) It is not a contradiction in terms; we do spend quite a lot of money. Chairman 625. I would like to come again to this question of additionality. This Committee and the National Heritage Committee before it has been conducting inquiries on the National Lottery for around eight years and successive Secretaries of State have come before us, and have all avowed as to the integrity, not to say sanctity, of the additionality principle and representatives of the Treasury, including yourself this afternoon, have all endorsed the sanctity of additionality principle, but why should there be such sanctity? In the United States, as my colleagues have pointed out, they regard their lotteries as a very useful source of revenue for expenditure, sometimes including core expenditure. Again, without criticising the previous Government for the way in which they started this thing off, provided that you are not using revenues from the Lottery in order to cut core expenditure, is there any real justification any more for the additionality principle and in a moment I will come to the categories. I know that all government departments hate the Treasury and feel that unless what is allocated to them is protected the Treasury will raid everything that they can get their hands on (and of course the Lottery is a great thing for the Treasury to raid) but if you are willing to be heretical this afternoon, Chief Secretary, is there really anything so sacred about the additionality principle? (Mr Andrew Smith) We adhere to it for the reasons I set out earlier and in considering this I put myself in the position, I am in the position of the person going to buy a Lottery ticket and I think people are happy, comfortable and enthusiastic about the notion that a good part of what they are doing when they are buying that ticket, as well as standing a chance of winning a prize, is giving something extra and it is that that is extra. If they felt they were simply substituting for expenditure out of taxation which in a sense, as you say, crudely might be defined as allowing that expenditure to be cut, I think they would feel somewhat aggrieved. Judging whether we are adhering to it, you can also look in the round at what has happened to Exchequer funding of some of the things which the Lottery has supported since the General Election, or for that matter since the Lottery started. It is just worth pointing out that arts spending since 1997-98 will have increased by 18 per cent in real terms and spending on sport by four per cent in real terms under this Government, and if you take it from when the Lottery first started to the end of this forthcoming spending review period in 2003-04, the increase in arts spending in real terms will be no less than 32 per cent and in sport 99 per cent. What I am saying is that we as a Government are putting extra into these areas and the Lottery is adding a very considerable amount extra on top of that. I think that is something that the public is happy with and I certainly would hesitate before seeking to change it. 626. But Mr Wyatt was talking about, insofar as one knows the public's views on this and so on, what the public wants. Again my guess from the evidence that is available is that, okay, the public buys tickets in the end to win a prize but they also look at what the revenues from the Lottery go to in terms of good causes. I have a feeling that, given the choice, the public will be perfectly willing for huge chunks of money from the Lottery to go, for example, to reducing cancer waiting lists or going into cancer wards because cancer is, very understandably, a highly emotional subject. If you ask members of the public would they like œ70 million to go to the Royal Opera House or go to the cancer wards in Christie's in Manchester, they would say in language which we do not often use in Manchester, and which I will not use here, they would say in very strong terms that their preference would be for the Royal Opera House never to get another penny and for the money to go to cancer wards not simply in Manchester but anywhere. What I am saying, Chief Secretary, is that if people had their way and were really consulted, if there were referendums on this, I think it is a fair guess that people would say, "We do not care about this additionality principle, if it can provide more computers for schools, if it can help deal with students who cannot afford fees at university, we do not really care about this additionality principle, we would like to spend this money on things that mean a lot to us." So not only for the question of should the additionality principle go on being sacred but the other part of it too. The previous Government, when it created the Lottery, created what were then five categories for awards for distribution from the Lottery and this Government has added the New Opportunities Fund. Why is the Government so utterly preoccupied with those categories? Okay, it has changed it a bit but is there not a case for saying that was then, that was good, we are not criticising it but there is nothing sacred about those categories. Would it not be better to spend more money on health, more on education, perhaps give money to overseas aid? If the Lottery was now to announce it was giving œ20 million to the Indian Earthquake fund, I think a lot of people in this country would say "That is a good thing". What I am saying is, this is a very, very traditional Government in the sense that it does not seem to be challenging concepts that are something like ten years old. (Mr Andrew Smith) With the greatest respect, I think part of what you are saying there is confusing the concept of additionality, whether spending is not substituting for that which the Exchequer would otherwise have provided with the question of relative priorities, why should we not give more money to things that the public considers important. As I said earlier, I think we can, through the Lottery, make money available to things which are important without infringing the additionality principle. When you challenge me on the overall distribution, again I just have to enter the caveat that in terms of ministerial responsibility these are very much more matters for the Secretary of State for Culture than they are for me but I would say there are a number of considerations. One, if you ask people what they want money spent on, yes, a lot will say on health or on education or the environment, I think those were the three which came at the top of that BMA poll but there will be very substantial numbers, including very many Lottery players who want to see money also spent on arts and sport and other things as well. I think there is merit here in having a plurality of good causes which are supported. Moreover, having enunciated a principle and saying that we would be guided with and we would stick with additionality, I think it is right that the Government should do so. Moreover, of course, there are those who have come to look to the Lottery as an appropriate source of funding and I think they would question the fairness if there was an abrupt change of policy which adversely affected important activities which they are involved in. Chairman: Thank you. If there is a minute or two before your session is over, I may come back to this but meanwhile I will ask Mr Faber. Mr Faber 627. The previous Government founded the National Lottery with a mechanism such that the distribution bodies were to be kept at arm's length from ministers, removing the responsibility effectively from ministers making important grants. The thinking behind this was very often those bodies were specialised bodies who understood better than perhaps ministers might where the funding might go. This Government has carried on that principle. Is that arm's length principle one that you support? (Mr Andrew Smith) Yes, it is. 628. As far as you are aware the current Government has no plans to change that? (Mr Andrew Smith) Yes. 629. What would you say are the strengths of the arm's length principle? (Mr Andrew Smith) What they want to know is that the money is being allocated genuinely in response to sound applications for good projects that are going to be properly run. I think they want to be assured that the distribution mechanisms are not susceptible to political manipulation for political ends. Those are the strengths of that measure of independence, also having people involved in that stage who have particular understanding of the areas which are recipients. 630. That really does follow on from the previous Government's view. Would you also agree that public perceptions of the Lottery are affected if subsequently people see that funds which have been allocated are allocated to projects which perhaps do not have long term viability. Mr Wyatt touched on it in a sense in terms of cancer treatment but perhaps more so with capital projects. Capital projects, the most obvious is the Dome, I am not here to talk about the Dome but if you look at capital projects all over the country which sometimes are not perceived in the local community as having a long term viability, would you agree that as well causes problems to public perception of the Lottery? (Mr Andrew Smith) Where projects turn out to be non viable, it is going to be problematic. No resource allocation process is going to be perfect. Obviously it is up to those judging the viability of proposals to take into account all the relevant factors when they are making their assessment. 631. That is a job for the distribution bodies rather than for individual Members of Parliament to make. Very often individual Members of Parliament try very hard to lobby on behalf of individuals for projects in their areas. What you are saying is the arm's length principle really protects them from having to do that? (Mr Andrew Smith) Yes, it does. I am sure that representations made by Members of Parliament are considered on their merits by the relevant people, just as other representations will be. I think the public has confidence in a mechanism that maintains a measure of insulation between the political process and the distribution of Lottery proceeds. Chairman 632. Mr Faber has mentioned something which perhaps I can use in the remaining moments to ask you something else. As a result of the Lottery there has probably been, in the last few years, the greatest wave of more or less simultaneous building and major construction projects for public use, probably in the history of this country. It is an extraordinary efflorescence of construction and all kinds of major public facilities are being provided which otherwise might never have been existed. A lot of those inevitably have revenue spending consequences. The Tate Modern, for example, which you had better make sure goes on being free. All over the country art galleries, theatres and all the rest of it, it is an incredible period in our lives this but quite a lot of them must have revenue expenditure consequences which cannot be borne by the Lottery and will be borne either by local authorities or by the Treasury. To what extent are those consequences taken into account when you are considering the potential taxation proclivities of the Lottery? (Mr Andrew Smith) First of all, I join with you in celebrating the scale and the diversity and the richness of the investment which Lottery funding is making available. As I was saying in answer to the previous question, I think on each individual project there has to be an assessment of its viability and prospects for revenue funding and so on but set against the very substantial increases in public spending which we announced in the spending review, which will take us on the figures I gave a few moments ago in sport to a 99 per cent real terms higher level of sports funding by 2003-04 than there was when the Lottery began and a 32 per cent real higher level of expenditure in arts, and of course there will across that period have been a very substantial uplift in the income to local authorities as well. So I give those as examples of where the revenue to maintain and carry forward the work of these wonderful facilities can be sustained. Of course, the users make an important contribution as well. 633. A proud credo for the Treasury to end this session on. Thank you very much indeed. (Mr Andrew Smith) Thank you. I have enjoyed it. Chairman: Thank you for coming. MEMORANDUM SUBMITTED BY THE DEPARTMENT FOR CULTURE, MEDIA AND SPORT EXAMINATION OF WITNESSES THE RT HON CHRIS SMITH, Member of Parliament (Secretary of State for Culture, Media and Sport) and MR JON ZEFF, Head of National Lottery Division, Department for Culture, Media and Sport, examined. Chairman 634. Secretary of State, I would like to welcome you and your official here this afternoon. We much appreciate your making yourself available to us. People have been coming in and out in the Committee, one of the reasons for that is that several are on the Committee of a Bill next door. So if you see people arrive that is because of the attraction of your presence but if you see them leave it has nothing to do with the fact that it is you who are here. (Mr Chris Smith) I quite understand, Chairman. Chairman: Thank you. Mr Fraser. Mr Fraser 635. Secretary of State, can we just go back over some of the decision making process. When the Lottery Commission announced its decision initially to exclude Camelot on 23 August last year, a decision that was ruled at the time as being unlawful and conspicuously unfair by the High Court, you welcomed that decision by the comments that you passed at that time. I will not go through it because I am sure you remember what you said. Do you now regret the haste in which you came to that decision to welcome what had happened? (Mr Chris Smith) Well, first of all, of course, Mr Fraser, the decision was ruled unlawful about a month later, after the appeal had been lodged with the Court and the Court had made its decision. It was not obvious at the time that was likely to happen. Secondly, I seem to remember my remarks at the time were welcoming the fact that the regulator had been robust in reaching its conclusion that neither of the two bids as they then stood were right for the running of the future franchise of the Lottery. I was not obviously in a position at the time to make a specific judgment about the decision that they had made to negotiate with only one of the two bidders. It was that point that the Court subsequently found to be unlawful. The decision that neither of the two bids were at that stage acceptable was indeed regarded as perfectly right and proper for the Commission to take by the Court. 636. At that time, part of what you said was that you looked forward to a speedy and constructive conclusion. (Mr Chris Smith) Yes. 637. Then on the 19th December there was another announcement but at that time you were conspicuous by your absence in terms of commenting, why was that? (Mr Chris Smith) When the Court made its decision it was obviously a formal legal decision and it was not the place of a Minister to question what the Court had decided. 638. Or could it have been that you suddenly realised that you had made a bit of a hash of coming forward so quickly before and thought better of it this next time round? (Mr Chris Smith) No, because as I say the first time round I was attempting to make clear my view about the decision the regulator had taken in relation to both bids rather than the decision that they had taken simply to negotiate with one. 639. Okay. On 10th January this year, and correct me if I am wrong with these dates, please, on the Jimmy Young programme, which I remember hearing, you passed several comments about the selection process saying that it was flawed and gave an unfair advantage to the current operator and should be reviewed. If, Secretary of State, you were unhappy about the flawed process, why did you not rectify the 1998 Lottery Act? (Mr Chris Smith) At the time, of course, when the 1998 Lottery Act was passed we had not been through the process of selection of the new operator. The only experience that anyone had of the selection of an operator was the first time round exercise which had happened seven years' previously. What we now know, I think anyone looking at the process would agree, is that it was not a particularly smooth and trouble free process. The point that I have made consistently since the decision was finally made is that I think we do need to have a look at the way in which the process operated, whether there are lessons to be learned and whether there are changes that ought to be made. That is not a series of questions or decisions that I believe should be rushed into, I think it is something we should only remark on once all the details of the new franchise are absolutely signed and sealed, but at that stage I think it would be sensible for the Government, together with independent advice, to talk with all the people who were involved in this process, regulator and bidders, to see whether lessons can and should be learned. 640. There is nothing specifically you can tell us today that would help that process? (Mr Chris Smith) I think there are a number of questions that need to be asked. One, for example, and I stress this is simply an example, that I think perhaps needs to be examined, is the fact that in the running of any major Lottery of this kind there are currently only two companies worldwide who can provide the software for the computer systems that are required to run it. One is GTech and the other is AWI. When you have a situation where you have only two companies capable of providing that software, where each of those companies has signed an exclusive agreement with a particular bidding operator, you inevitably end up in the situation that you have only two bids in front of you and that was the situation that we faced. Now, two bids does provide you with good and strong competition but I think a question can legitimately be asked about whether that is an ideal situation. There are questions of that kind that I think need to be asked and looked at. I have no instant answers to those because I think this does need to be a careful process. 641. On 11 October, taking you back slightly, you told the BBC's Today Programme that "It is not a mess. I intend to make sure the process delivers a proper result within the time period". What specifically did you do to make sure that the process delivered a proper result? (Mr Chris Smith) Of course, the most important decision which it fell to me to make was the appointment of a new member of the Commission and then, by decision of the Commission, appointment as Chairman when Helena Shovelton resigned. That was a decision which I regarded as being important. We had to secure someone who was of unimpeachable integrity, someone who would have real strength in getting to grips with the detailed and complex portfolio of issues very rapidly and someone who would command public confidence. I think in Lord Burns we found precisely such a person. We made that appointment very quickly. That I regarded as the most important role that I had because, of course, I had no direct role in any of the decisions that the National Lottery Commission itself made. However, I would add that when Lord Burns was appointed, I did emphasise to him that I hoped that he would encourage the Commission to address the outstanding issues as rapidly and as fairly as possible and that he would seek to ensure a smooth transition from the first Lottery franchise to the second and, indeed, he proceeded to put measures in place, whoever had been chosen as the operator, to ensure that that happened. 642. You mentioned about the departure of Dame Helena Shovelton. In your opinion was she right to resign? (Mr Chris Smith) I did not seek to encourage her to resign at any stage. Indeed, I regretted the fact that she had decided because of the pressure that had come on her, particularly in the media, that she had no alternative but to resign. I respected her decision, I could see entirely why she wished to step down. In my view she had done nothing wrong other than participating in the flawed decision that following the court judgment we know the Commission had made, but they made that decision in good faith. I would not have sought to hold that specifically against her. 643. With hindsight you think it was the right decision? (Mr Chris Smith) With hindsight it was obviously the right decision for her from her point of view. 644. It is what you think. (Mr Chris Smith) In relation to the decisions of the National Lottery Commission, if she had carried on as Chairman I would have had equal confidence in the Commission being able to continue the process, as indeed the judge himself did when he made his judgment. He said very clearly that he had confidence in the Commission as a responsible public regulator to see the process through to its conclusion. I would have had that confidence if Dame Helena had remained as Chairman. The fact that she decided to resign and the subsequent appointment of Lord Burns made me, in terms of Lord Burns' role, every bit as confident. 645. Do you think your input into ensuring that the process was delivered properly was hampered by the fact that you had the manifesto pledge for a not-for-profit Lottery operator? (Mr Chris Smith) No. What we said in the manifesto before the election was that we would seek an efficient not-for-profit operator and, indeed, we made it very clear throughout the preliminary processes that we would welcome bids from operators on a not-for-profit basis. However, we also consistently made it clear that the key test was the raising of the maximum amount of money for the good causes. That was the test against which any bid, be it not-for- profit or for profit, would be judged. 646. So you have not fulfilled your pledge? (Mr Chris Smith) No, I would argue we did fulfil our pledge. We sought and welcomed not-for-profit bids. That did not give a particular bid an automatic right to be selected simply because it was on a not-for-profit basis, it had to be tested against that crucial test as set out in the legislation of the raising of money for the good causes. Mr Fraser: You also passed another comment I might remind you of on 10 January ---- Chairman: Mr Fraser, could I interrupt you. The last thing I want to do is to make you feel that I am somehow preventing you from asking questions but you have been on for a quarter of an hour and several other colleagues want to ask questions. I do not want to stop your flow, I think you are right to be asking questions, but a bit more succinct. Mr Fraser 647. And some succinct answers would be great, thank you. You passed comment about Sir Richard Branson setting up an independent Lottery at the beginning of January this year. Do you agree that it is illegal under the current law to set up such a Lottery? (Mr Chris Smith) It is not illegal to set up a Lottery provided you get permission in the usual way and it is not a Lottery seeking deliberately to rival the National Lottery. If it is an ordinary charity or society Lottery you are perfectly capable of doing so and that was why I said to him, I think the phrase I used was "good luck to him". It was entirely up to him to make a decision as to whether he wished to do that or not. 648. But, once again, do you not think you did it in haste and regretted it at leisure because you seemed to be saying things and later on saying nothing. (Mr Chris Smith) Not at all, I was very clear in what I said. I was asked a question about whether if he sought to set up a Lottery, not - note - specifically a rival to the National Lottery, what would my view be and I said "good luck to him". That seems to me a perfectly rational and reasonable response. 649. You are committed to a single Lottery provider? (Mr Chris Smith) I have no plans to change the legislation on that matter at all. Mr Fraser: And, finally, what plans do you have ---- Chairman: Generally "finally" leads to three more questions. Mr Fraser 650. What plans do you have to change the law regarding a single Lottery operation? (Mr Chris Smith) Again, I have no plans to do so. Clearly when we do take a careful look at the process for the selection of the Lottery operator these are questions that may emerge and may conceivably need to be considered, but at this stage I would not envisage wanting to make any changes. Mr Fraser: Thank you. Chairman 651. I will ask one question consequent on the extremely interesting and stimulating questions Mr Fraser has been putting. As somebody who would very much like to see the Labour Party election manifesto carried out, as I have said a number of times on the floor of the House, may I put it to you that if you had, in fact, intervened in the processes of the decision of the Commission in order to get the Labour Party election manifesto commitment fulfilled, you would have been open to the criticism that you were interfering in the processes of an independent Commission for party political reasons. (Mr Chris Smith) Chairman, first I would point out that the manifesto commitment was to seek a not-for-profit operator, not necessarily to appoint. But, having said that, if I had at any stage intervened in the decisions of the Lottery Commission in making their decision on who should run the Lottery I most certainly would have been not just open to criticism but I would have been acting illegally because the legislation very clearly spells out - always has - that the Secretary of State must not intervene in what must be an independent decision. I made it very clear to everyone throughout the process that I was going to abide by what the law told me to abide by. Chairman: If there is time I will come back to some of these things when others of my colleagues have asked questions. Mr Fearn 652. Some time ago in this Committee I did raise the question, because I myself was not certain, of the backgrounds of the other Commissioners who sit on the Commission itself. This was prior to the resignation of the Chairman. I queried in a way their backgrounds as to why they were sitting on the Commission anyway, and those Commissioners were chosen through your process of course. Do you have every confidence in the ones who remain and do you know what backgrounds they have? (Mr Chris Smith) Yes, indeed. It is worth noting, for example, that Brian Pomeroy was a senior partner of Deloitte Consulting, Rosalind Gilmore was a Director of Allied Zurich and Harriet Spicer was former Managing Director of Virago. So those who have said they cannot make a decision of this kind because they have no business background or experience have not themselves looked in detail at the backgrounds of the members. The members were appointed following a process of advertisement and interview, entirely a normal way for these matters. When the appointment was made of Lord Burns to succeed Helena Shovelton, I am afraid because of the urgency of the matter we had to truncate the process to a certain extent, so we did not go out to outside advert, we trawled the Civil Service database for names of people who had put themselves forward for public appointment. We selected two or three names and we then had an independent panel assess and advise on their suitability. That was a slightly different process simply because of the urgency of the matter at the time. 653. When do you actually review that? Do you review that yourself or do you leave it to the Chairman to review, if he wanted another member to leave? (Mr Chris Smith) Obviously we would take very careful consideration of any particular proposals that the Chairman might himself make about possible candidates. If a number of vacancies were to occur in the course of the next year or so it is my view that we would wish to go through another open advert procedure because it should be as transparent as possible. 654. And the timetable? (Mr Chris Smith) I am just getting a useful note from my official here. Just for the sake of completeness, Rosalind Gilmore was, of course, appointed not at the outset, as indeed Lord Burns was. She was a replacement for Robin Squire, who had been one of the original appointees and who stepped down. She was not appointed by outside advert because we went back to the original applications and the original responses and the original interviews and appointed arising out of that because the timescale had been relatively short since those interviews had taken place. I just say that for the sake of completeness. 655. You say that you are conducting an ongoing review all the time, or now you are anyway, of the Lottery itself and how it operates. What is the timetable for that? Sir Richard Branson made it clear that he does not intend to bid again, so within that process of review are you looking at whether that process as well should be amended, because if not we will have a monopoly from here on with the same operator, will we not? (Mr Chris Smith) One of the issues that any such review would need to consider would be the potential advantages which incumbency gives in a system such as we have at the moment. That is something on which we would wish to take views and to take evidence. As I indicated in my answers to Mr Fraser's extremely interesting questions, the process of looking at how the system operates is not something that I think we should rush into in haste, much better to get the new franchise absolutely signed and sealed so we know exactly what is happening and when and how and, once that is under everyone's belt, then I think would be the time to have a look seriously at how the process has operated and whether there are changes that ought to be made. I would have thought that at that stage - we have not any specific proposals yet to make because we are not at that stage yet - we would have an independent element in that review so we could get the widest possible range of thought and opinion and experience coming to bear on the issue. 656. I listened carefully to what you were saying about a not-for- profit operator and your original promises but it is impossible, is it not, to have a not-for-profit operator unless the Government do it themselves? (Mr Chris Smith) No, I would not agree that it is impossible. I would have thought it is perfectly possible. Indeed, it is very clear from the analysis that the Commission made of the two bids that were in front of them that a not-for-profit proposal very nearly made it. In the final analysis they decided that it was not the best of the two bids for the good causes. They certainly were not ruling it out simply because it was a not-for-profit bid. 657. They obviously looked at the operation costs of the Branson schedule that he put forward, there were enormous costs there lying behind as to how you run a Lottery anyway. I asked him about the interest on the loan and that was enormous. Whether it is not-for-profit or not, I do not know, there can be enormous costs and still you would accept the fact that it could have been not-for-profit, would you? (Mr Chris Smith) Of course it was up to the Commission to make a judgment about the costs, not up to me. A commonsense observation would lead one to accept that running a Lottery of this scale and size is bound to involve very substantial costs, particularly in any refreshing of the hardware that delivers the system around the country, the computer terminals, the software systems as well. These things are going to have to be upgraded at some stage in any process of a seven year roll-on of a franchise and that is going to involve very considerable costs. It is up to a bidder to explain how they are going to raise the money to do that and how they are going to seek to pay it back. Mr Fearn: Thank you. Derek Wyatt 658. Good afternoon. Just looking at it from our perspective I think, I do not know, I have not done a poll around the table, we felt in the end that it had to be Camelot for different reasons. In our analysis we both felt that the AWI software was better and in our analysis of the marketing we probably both felt that the People's Lottery was sharper than Camelot. What we have now got is a Lottery but we have not got the best of what was available. In looking at that from that perspective and looking at the 37 or 38 state lotteries in America, the most capitalist seeking country in the world, all of those 37 or 38 are state lotteries run by the state. It seems to me that is now the only solution left. If you want the best product, as it were, like Channel 4, the Government should own it and run it and break up the bits. How are you reflecting on that sort of argument? (Mr Chris Smith) Of course, my concentration up to now has been very largely on seeking to ensure that we manage the process of change for the next seven years as smoothly and efficiently as possible, and that will be on the same basis as the first franchise was done, which is the operator itself then chooses who supplies particular services to them. A crucial change, of course, between August and October was that Camelot had resolved the propriety issue as far as GTech were concerned by effectively buying out GTech and running the GTech operation themselves. That was an absolutely crucial change without which, I suspect, the Lottery Commission would not have been able to give the consideration they did to the Camelot bid. In relation to your general question it has been said to me by quite a number of people now that an option could perhaps be to see a Lottery that is effectively owned by the nation through the Government, but that each individual service for the running of that Lottery is contracted out to different suppliers. That is obviously a model which works in some other parts of the world; it is a model that I am sure when any review of the whole process of awarding Lottery franchises takes place will need to be considered by that review. At this stage I remain agnostic on the question. 659. In a sense, when you look at the delivery and collection means, if you take the DVLA which is a dreadful organisation in Swansea - they are behind forever on tax discs; months and months behind - if you take a broadcasters TV licence, we have two separate organisations collecting as it were different bits of a poll tax or tax, do you think we missed a trick by not saying the Lottery terminals could deliver substantially more and that our thinking was analogue rather than digital two years ago and, as a consequence, we shall not be able to have digital Lottery operating facilities right across the country? (Mr Chris Smith) As far as I understand it, Camelot have made it very clear that they do envisage the possibility of all their terminals being able to be used for other things than just the running of the Lottery. It will of course be entirely up to them and any service that wishes to do a deal with them to decide whether a specific proposal comes forward. 660. You do see my point, we could deliver part of the Smart economy principle. (Mr Chris Smith) I understand the point certainly. 661. There have been a couple of Ten Minute Rule Bills, there has been one by Ian Gibson and one by myself, and Ian Gibson's one is about whether the Lottery can top up trust funds, and mine was about whether it would be much fairer if the community could keep 10 per cent of the total Lottery expenditure in the community, instead of having to bid for œ500 or œ1,000 little bits, so that if a football team wants shirts, if you want a scanner in the hospital, the community could come up and decide. Do you not think that both those principles are much fairer than the current way the Lottery works? (Mr Chris Smith) The proposal that Ian Gibson is putting forward is I believe very much arising from a particular East Anglian issue which he has been pursuing very vigorously together with some of his East Anglian colleagues, and indeed he came to see me on the subject a few weeks ago. I think he may well be considering putting forward a Private Member's Bill to try and achieve the change that he desires. I believe it looks as if it would be a sensible change. I obviously want to look at the detail of what he is proposing but the principle seems to me to be a sensible one. In relation to the earmarking of particular funds for communities, I have to say, as always with any proposals emanating from yourself, it is an attractive sounding proposal. I think we would need to be quite careful about how one defines the community and who actually makes the decisions in this respect, but there is actually quite a lot we can learn from the success of the Brass for Barnsley initiative which the National Lottery Charities Boards undertook where, prior to the initiative coming into being, there had been very, very low take-up of Lottery funds from the Barnsley area, clearly an area of considerable need. Following the earmarking of œ3 million very specifically for Barnsley, the applications came in in very great numbers, very good applications, and all the œ3 million has now in very short order been able to be allocated. So that scheme was a very considerable success. One of the things we are certainly looking at is whether the lessons from that can be learnt and applied elsewhere as well. 662. I would like to push you on the community idea because I am bound to say if you come from a poor community, as I do, people actually ironically spend substantially more on Lottery tickets than elsewhere but they do not have the ability to get groups together, to put bids together, to win the money back. So in fact we have only won about 30 per cent of the money we have spent on the Lottery, and I think this is a way of redefining the Lottery and making people realise if they do spend money it will come back immediately. Let me push you on that separately. On additionality, which we have also looked at with Mr Faber, again in my constituency, in Sheerness, we have just won œ900,000 which we are absolutely thrilled about for a Healthy Living Centre, which we would not have had before. However, when that funding dries up in three years' time, there is no way my local authority will be able to afford to run it and therefore either it will close, which would be a great shame, or it will be landed somehow on the local taxpayer regime which does not seem to be fair either. This is a growing concern and David Faber mentioned it earlier in conversation about the capital cost, and I just wondered what sort of study you have done within the Department to look at these issues and what your findings are? (Mr Chris Smith) Just briefly, if I may, on the first point, it is worth remembering of course that 30 per cent is actually the amount of the total 100 per cent of Lottery funds which comes to the good causes anyway. So the comparison is not necessarily a poor one as far as your constituency is concerned. In relation to the three year point, inevitably because of the nature of Lottery funding, Lottery money has to be a one-off intervention. Where we I think have made considerable progress in the last few years is in ensuring that Lottery funds can be used for revenue support as well as for capital work, and in seeing two or three year tranches of funding being made available, particularly at the outset of a scheme such as a Healthy Living Centre or a school club. That is welcome. It does not resolve the problem of what happens at the end of that two or three year period, and I know that NOF do go to quite considerable effort to try and make sure that arrangements are either in place or that there are plans in place for them to have continued funding beyond that initial period. It will vary from place to place and from scheme to scheme, there is no one simple solution, but we are certainly very much aware there is a potential issue here. Derek Wyatt: Thank you. Mr Keen 663. I am sorry, Secretary of State, to return again to the not- for-profit argument but can you rehearse the reasons why the Labour Party put it in their manifesto to have a not-for-profit Lottery? (Mr Chris Smith) It was not the field I was responsible for, of course, at the time, but as far as I understand, I think the impetus came from a not unjustified feeling that the profit levels which were attached to the original bid that won the first franchise were perhaps on the high side, and as a result the impetus for saying let us see if we can find a good bid that will operate on a not-for-profit basis was understandable in those circumstances. As I pointed out earlier, that did not of course remove the crucial criterion of who is going to raise the most for good causes. One thing which I note with some degree of pleasure is that the bid which Camelot did submit and have now won for the new franchise has profit levels something like half of the profit levels of the first franchise. 664. If it had been 25 years ago the reasoning would have been, "If it moves, nationalise it", and we can all remember those days. Was one element of it now that it was felt damage was being done to the reasons why people would buy Lottery tickets if they felt a lot of profit was not going to good causes but to a private company? That was probably the main reason, was it not? After the general election, was any advice given by the Lottery Commission or from your own Department, or did we talk to focus groups, to find out whether in fact it was likely without making any changes to the law that the same Lottery operator would be chosen again? Because I have to say, if you did a survey in the room now, one in a hundred or one in fifty would say, "I will take a risk and go for a not-for-profit operator and dump the present operator". Was there no advice given straight after the 1997 election that if we were going to deliver the manifesto we would have to change the law? Some laws were changed. Not to get off the subject, but some good changes were made, like allowing the distributors to be proactive - and this is answering the now missing Derek Wyatt's question - and distributors were able to say, "We will need to put some money into this area because they are being treated unfairly". Did anybody give you any advice that if we did not change the basic rules on the choice of operator, nobody would be able to change it because they would be frightened to change it? (Mr Chris Smith) The advice was very clear at the time because I obviously asked the question, can the present process deliver a not-for-profit operator. The answer very clearly was yes. Indeed it is perfectly possible for the present process to do so. The issue becomes when you have two bids and only two bids in front of you, one of them on a not-for-profit basis and one on a for-profit basis, and the Lottery Commission is charged with looking at those two bids and assessing which is going to deliver the most for the good causes. There will be a lot of considerations about strength of marketing, likely levels of sales, return to good causes as well as the profit element which they are going to have to take into account. As long as you have a system of seeking a private sector operator for the Lottery, those are always going to have to be the range of considerations you take into account. Chairman 665. But, Secretary of State, why do we have that system? We were in the United States and we were told every single state Lottery, which is something like two-thirds of the states in the United States, is state owned. There is no controversy about it. When we asked people who ran some of the state lotteries we met, who were overt, active and politically appointed Republicans, why in the home of capitalism they had not privatised their lotteries, they said it had never occurred to them to have anything other than a stated owned lottery, and nor were they ever going to think of not having a state owned lottery. Here we have a Labour Government in Britain which is less socialist than the Republicans in the United States. (Mr Chris Smith) Chairman, I understand the point you are making. 666. I made it pretty clearly! (Mr Chris Smith) However, we have said, and I think rightly said, in the course of the last few months that it was probably not a good idea for the public sector to assume it could run a major visitor attraction. I step into the idea of the public sector deciding itself to run a lottery with a certain degree of caution. However, as I indicated earlier on, these are clearly some of the issues which a thorough review process of what has happened and what the problems are, what the advantages and disadvantages of the present system are, is going to have to look at. Mr Keen 667. To repeat my question, if I was in your position, Secretary of State, after the general election - and I know it is okay to be wise after the event - because all of us, despite seeing AWI thinking their equipment was better than Camelot were providing, we still, taking a straw poll, all felt the risk of changing was probably too great. It is alright being wise afterwards, but it was not after, we were wise just before the event. Should not your advisers have been wise three years before the event and should they not have come to you and said, "Secretary of State, we have talked to people taking surveys and no-one is going to take the decision to change from existing policy because they are going to be terrified of taking all the blame for making that mistake." You were lumbered with a manifesto commitment and it is going to be one of the few that we have not been able to deliver out of so many. I would be furious if I were in Opposition that my advisers, who are paid presumably a lot more money that we get paid as backbenchers, did not come to me and say, "We have carried out a survey, we have had focus groups around the country and hardly anybody will say, 'Yes, we will take that risk of being œ5 billion down at the end of the year by making the change.'" I would be furious if nobody came and advised me that that was the ultimate decision, that Camelot were going to get the award anyway. (Mr Chris Smith) Let us leave on one side the fact that I would not agree we had completely failed to implement our manifesto commitment. We did seek and welcome not-for-profit bids. Having said that, however, your central point, which is that there is an inevitability about not wanting to take a risk on anything other than an incumbent in these circumstances, I am not sure I accept because in order to take that view you would have to assume that the risk is always going to be too great in such circumstances. What I think the process that the Lottery Commission went through does reveal is that although the risk was ultimately one of the key factors which, it would appear, decided the way in which they finally came down, nonetheless it was certainly not inconceivable that they could have made a different decision. So I would not accept that it was inevitable that they were always going to go for the incumbent. Having said that, clearly the issue of risk on anything other than the incumbent is one of the factors in the process which means that the incumbent is always likely to be in quite a strong position, not an inevitable position, but a strong position. Whether it is right to have a process that has strength on the side of the incumbent is one of the questions which I would hope the review process would have a serious look at. 668. Another idea that presumably nobody came along to advise you on - and nobody would say the retailers make a profit out of the Lottery, they take in Lottery money and they make any commission - was, "Why do we not change the system slightly and give Camelot commission and then they would not be making profit, they would be taking commission for all the work they did." It would not be profit but paying somebody commission which would be quite legitimate, like we pay the retailers that operate the terminals. That would be a way of getting a not-for-profit Lottery operated. (Mr Chris Smith) Effectively, the profit mechanism which is enshrined in the original Camelot contract is a commission because it is a percentage basis of the overall sales which are achieved. So I am not sure that changing it to calling it a "commission" would make any real practical difference. As far as the retailers are concerned, the commission that is in place is a major benefit, for small-scale retailers particularly, up and down the country. It keeps a more or less regular flow of income coming in. It brings people into their shops. In some cases it has been a lifeline. I very much hope that is going to continue. 669. But my unhappiness with it was obviously with the bonuses that Camelot paid and the fact that it was for profit. I am sure it could have been changed slightly if we could not get it a completely not-for-profit operator as we originally intended. Why was the second offer to Camelot for the repeat operators's contract not changed to modify it so that it was not an out and out profit? (Mr Chris Smith) The profit level that is in the new franchise is very considerably lower than the profit level in the first franchise. As far as I understand it, I think the bonuses envisaged for successful operation for senior executives are also very considerably lower than they were in the first contract. Both of those things I very much welcome. I think they do show that the pressure that has been brought to bear from the outside world and the disapproval which a lot of the public felt some years back in relation to the Camelot bonuses particularly, has had its effect. Mr Keen: I think that is true. Thank you. Mr Faber 670. Secretary of State, your former Minister, Mr Banks, when he used to appear before us, was always quite open with us, both in his time as a Minister and subsequently, that he disagreed strongly with the arm's length principle of the distribution of Lottery funds. He always felt that politicians knew best and should be the people who distributed the funds. Your colleague, the Chief Secretary, a moment ago gave a ringing endorsement of the arm's length principle and I assume you agree with him rather than Mr Banks on that? (Mr Chris Smith) Yes. 671. Can you tell us why? Can you tell was what you think the strengths are of the arm's length principle in distributing through various bodies rather than direct by government? (Mr Chris Smith) I think firstly because the level of detail and the overall scale of decision-making which has to be taken by the Lottery distributers are not ones which would sensibly end up on a Minister's desk, so having an independent body being able to take decisions at that level of detail is sensible. Secondly, it does enable expertise to be developed and brought to bear in a way which is not necessarily possible, not just with Ministers, but not necessarily in relation to the work of civil servants either, because in some of the distributing bodies you have people who build up expertise over a four, five, six-year period and that is very valuable and enables sensible decisions to be made. The third reason, of course, is that having independent bodies taking these decisions means that there cannot be any suggestion of political influence coming to bear on the decision-making process and that, I think, particularly when we are all (rightly) well aware of the need for such decisions to be made impartially, is quite important. 672. I would agree with all of that and that is exactly what the Chief Secretary said. He also agreed with me that it provided a measure of insulation, as I put it, for MPs as well who were always seeking to promote a particular organisation or project in their own constituency. (Mr Chris Smith) It enables individual MPs who have a particular project that they wish to support to do so. It enables them to argue vigorously on behalf of their constituents. It means, though, that they cannot say, "I have a direct line to the Minister and therefore I know I can get this project approved." It does mean that the project will be assessed bearing in mind their representations but on impartial criteria. 673. Can I give you an example. I dug out today an application for Lottery grant from Westborough United Football Club, which is in my constituency, for an all-weather pitch. The application is the size of a small telephone directory. They made an application for œ60,000 and received a three or four paragraph letter back telling them "thanks, but no thanks". If I had written to you asking you to intervene on their behalf what would you have done? (Mr Chris Smith) I would have passed on your enquiry to Sport England, which I presume is the Lottery distributer to whom they have applied, and I would have asked Sport England to respond to you accordingly. 674. I have listened very carefully to what you have said up until now and I agree with every single word you have said, so can you tell us why you personally have abandoned every single tenet of the arm's length principle in distribution of funds when it comes to the funding of Picketts Lock? (Mr Chris Smith) I would say that I have done no such thing. I have certainly encouraged Sport England to see the national importance of ensuring that we can host a good and successful World Athletics Championships in 2005. The decision about allocating the feasibility money, and the eventual decision (which I hope will be taken) to allocate the actual funding for the construction of the stadium will be entirely up to Sport England to make. 675. You have regularly and persistently said on the floor of the House, and both you and your junior Ministers in written answers have said that Picketts Lock will be built. You have said that œ60 million of Lottery funding will be available. This is before the Lottery application has been made to Sport England before Sport England have even been consulted. At the weekend in Sunday Business you said: "I will do my damnedest to ensure that there is a world-class centre for athletics at Picketts Lock." Why will you do your damnedest for Picketts Lock and not for Westborough United? (Mr Chris Smith) I will certainly do my damnedest for Picketts Lock if that is not unparliamentary use of language --- 676. It is in inverted commas. I know that does not always mean a lot in newspapers --- (Mr Chris Smith) --- Because I believe it to be an important national project, but I cannot and would not seek to instruct Sport England on the matter. It is their decision and their Lottery Panel's decision. The statements on the floor of the House about our expectation that the stadium will get built and that the money is there is based on a decision which Sport England themselves took to have an in principle allocation of œ60 million in mind for the Picketts Lock stadium. 677. I would like to talk about that in a little more detail. As we know, initially the feasibility study for Picketts Lock suggested a œ95 million budget. Many people think that is optimistic but œ95 million is where we are at at the moment. That is divided into three tranches of funding. The first tranche of funding is œ20 million and that is to be returned by football, the FA in effect, to athletics because of athletics coming out of Wembley. That decision was taken according to a written answer from your Minister. I think the exact expression that was used was "in the margins of a meeting at Number 10". Sport England were not represented at that meeting, were not consulted about that meeting and were not informed of the outcome of that meeting. The meeting at Number 10 Downing Street was to discuss the Football Foundation and David Richards, the Chief Executive of the Premier League, agreed to this apparently at the time. Sport England was not consulted at any stage. This was a major change to a Lottery funding agreement with no reference to either the Lottery funding body, Sport England, or to the recipients of the money, WNSL. (Mr Chris Smith) The decision on the proposed return of œ20 million, which has subsequently been confirmed by the Football Association, was taken at a meeting that I had with Ken Bates very shortly before Christmas 1999, I cannot remember the exact date, but it was about 22nd or 23rd of December, and he agreed. He said that he had the authority of the FA Council whom he had met just a day or two before, to make the offer and I agreed with him that this was a sensible offer and offered a way forward. That was when the decision was taken. I certainly do not know of any discussions which may or may not be claimed to have taken place at 10 Downing Street. 678. It was Mr Bates' evidence to us on 12 February when he told us that Dave Richards had discussed the launch of the Football Foundation at Number 10. He had subsequently received a phone call from the Chairman of the FA basically telling him that he had had similar conversations with officials at the DCMS and that he was therefore to negotiate with you. He then came to see you. Did you discuss with Sport England before he came to see you what you were going to discuss? (Mr Chris Smith) We had quite a number of discussions prior to the crucial final meeting with Ken Bates between my officials and the Football Association and also with Sport England. The final decision, however, was taken at that meeting that I had directly with Ken Bates. 679. Which Sport England played no part in so again, as I am saying, a major change to the Lottery funding agreement. Where is the arm's length agreement? (Mr Chris Smith) As I said, there had been considerable discussions leading up to that with both the Football Association and with Sport England. 680. At that meeting with Mr Bates, in return for the œ20 million, did you agree that Wembley would enjoy relaxation of the marketing rights at the ground, in particular with relation to naming rights in and around sponsorship, naming rights in around the ground? (Mr Chris Smith) No. 681. You did not subsequently confirm that decision in a letter to the Chairman of the FA or to the Chairman of WNSL? (Mr Chris Smith) No, what I confirmed in writing to all the parties concerned was the agreement for the return of œ20 million. 682. Are you concerned that it now looks as though opinion has hardened on the board of WNSL and there is a very good chance that they will not be paid the œ20 million? (Mr Chris Smith) The latest information that I have from the Chairman of WNSL is that they stand by the commitment to return the œ20 million that they made. 683. Has anything been paid yet? (Mr Chris Smith) No, because certainly it was not envisaged in the agreement that it would be yet paid. 684. I thought œ3 million was supposed to have been repaid in 2000? (Mr Chris Smith) I would need to check the agreement but it was as the money began to come in to WNSL and the Football Association from the onward sale of some of the corporate facilities at the ground. 685. Does not looking very likely at the moment, does it? (Mr Chris Smith) That was the basis on which the agreement was reached. 686. If you would just indulge me for a moment, Chairman. That is the first tranche, the œ20 million. The second tranche is the œ40 million which is the return the Lottery is supposed to supply, and we will not rehearse the arguments about the athletics, and the warm up track. Where is the further œ35 million conservative estimate going to come from? (Mr Chris Smith) It is a matter entirely for debate at the moment as to whether the œ90 to 95 million approximate figure is an accurate figure. We will know a lot more as soon as the feasibility work that is currently under way is done. 687. Have you ever known of a major feasibility study where costs do not subsequently go up afterwards? (Mr Chris Smith) I am aware of quite a number of stadia that have been constructed around the country in the course of the last five years which have seat for seat been considerably cheaper than the œ90 to 95 million which is currently on paper. However, in addition to the œ60 million which has been in principle committed by Sport England, there are further sums which have been committed by both the Lea Valley Authority themselves and by the UK Sports Institute for the ongoing centre of excellence work at the ground. There is a lot of work currently under way by the Borough of Enfield, together with companies in the private sector, to seek private sector support. I gather that those discussions are very encouraging. Everyone involved in both the borough and the Lea Valley Authority is confident that the funds needed to build the stadium will be found. 688. If Sport England and the Sport England Board was to turn around at the end of all this and say it does not offer value for money, it is not the right place, it is not the right site, there is not a long term structure in place to finance the stadium, and they refuse to pay the grant to the Board, what would you do then? (Mr Chris Smith) Obviously they would have a right to take that decision because they are an independent body. However, I would certainly very much hope that they would not seek to do so. 689. You are basically putting as much pressure on them as you possibly can? (Mr Chris Smith) I have urged them publicly and privately that I hope they will take into account both the value of the 2005 championships for the nation and also the importance of the legacy for athletics but those are decisions which ultimately are for them to take. 690. Even though you had consistently over the past year been giving everyone the impression that it was a done deal? (Mr Chris Smith) I rely on the in principle support that they have given. That is valuable support and they have indicated to me on quite a number of occasions that they hope to be able to stand by that. 691. Finally, Chairman, you said also on Sunday Business a couple of days ago "Obviously there is a General Election between now and then and that might change my position a bit". What did you mean by that? (Mr Chris Smith) Well, the fairly obvious point that has to be made is that the outcome of a General Election is not a foregone conclusion, Chairman. I would not wish anyone to think that it was. Chairman: That is the first time I have disagreed with you, Secretary of State. Ms Ward 692. Secretary of State, my apologies for being late and I hope you have not already dealt with this issue. The process by which the Lottery operator was selected for a second term was ultimately a bit of a shambles with the delay and with the problems of announcements and court action and all of that. It certainly would not have been what, I am sure, either of us would have wanted to see. Given that, you made comments at different points during that process and yet did not make comments at other points of the process. What do you consider to be your role in now reviewing that process? (Mr Chris Smith) Well, I have already touched on some of this in answers to previous questions, but certainly the process that was gone through was not the smoothest of operations. I think there are obviously some lessons to be learned from this. I do think that it is sensible to review the process to see whether changes are required. That review is one that I would not wish to rush in to because I think we need to make absolutely sure that the new franchise is absolutely signed and sealed and everyone knows exactly what is going to happen when. Once that is all known, then I think will be the time to establish a review to look in detail at what happened, why things went wrong where they did and also to talk with everyone who was involved in the process, both the regulators and the bidding organisations, to see what recommendations they have as well. I am sure the deliberations of this Committee will also form a major part of any such consideration. 693. Do you accept that in making comments in support of the Commission on their first decision, and not making comments after the second decision, may have been unhelpful? (Mr Chris Smith) No, the comment that I made the first time around was in relation to the decision which the Commission took that they were unable to award the franchise to either of the two operators. In the case of Camelot because they were worried about the propriety issues in relation to GTech. In the case of the People's Lottery application, because they were worried about the protection of players and the financing of the bid. Now in those circumstances they had taken the decision to say publicly that they were unable to appoint either of the two operators. At that stage I did say that I welcomed the robust way in which they had examined both of those two applications. That I think was an entirely legitimate thing to say. What we now know, of course, is that the concomitant decision that they took, which was to commence detailed negotiations with only one of the two bidders, was not a sensible and right decision. The Court made its judgment on that. It was not up to me to make a comment on any decision that the court had made because I would not seek to question the judicial process. 694. Do you think you should now review the membership of the Commission? (Mr Chris Smith) The membership of the Commission I think proved themselves during the course of the consideration that they gave in November and December as to the two bids that were in front of them. They reached a decision, which has now been accepted by all parties involved. They clearly have strong leadership in the form of Lord Burns. It may well be that members of the Commission themselves will decide that they have had a good stint and want to stand down in due course, that is a matter entirely up to them. 695. In the future, if with a new operator there might be issues of public concern, perhaps the sort of problems we have faced in the past, would you consider it to be your role as Secretary of State to make public comment and to intervene or do you now think this is purely a matter for the Commission and the chair of the Commission? (Mr Chris Smith) On the whole, of course, it will be very much up to the Commission to make decisions and to monitor exactly how the operator is going about putting the new franchise in place than operating it. If at any stage there is a question about the actions of the Commission then of course it would be a matter for me to consider because ultimately the Commission are answerable to me for the propriety with which they go about doing their job. At present I see no reason to intervene in that way. 696. In relation to what I understand to be an application by the People's Lottery for some form of compensation for their bid, do you have a comment on that? (Mr Chris Smith) That is entirely a matter for the Commission to make a decision on. 697. You will certainly not be providing any additional funding to the Commission to be able to deal with that matter? (Mr Chris Smith) No, that is a matter entirely for the Commission. 698. But the Commission clearly will have a decision to make and as you just said the Commission are responsible to you ultimately. Surely you would be willing to comment at some point? (Mr Chris Smith) I have every confidence in the ability of the Commission to come to a sage judgment on that matter. Chairman 699. On these questions of regulation, has it not emerged, Secretary of State, that every formal regulation, however well intentioned, is seriously vulnerable? The previous Government when it set up the Lottery created Oflot and appointed Mr Davis. They did that from the best of intentions, they did not want themselves to be involved in any major decisions about the Lottery once legislation had been passed. That was found to be seriously vulnerable. This Government then changed it by creating the Lottery Commission. It has emerged from questioning this afternoon, that turned out to be seriously vulnerable, without any reflection whatsoever on the integrity of anybody on the Commission. The Commission clearly made a very bad mess of that, which resulted in the litigation which resulted in the resignation of one of the revolving Chairman/woman and the arrival of Lord Burns who did a very, very good job as professional trouble shooter but made it reasonably clear to this Committee that he intends to move on after a decent interval. He will do a year and then go. If one looks at other forms of regulation, the ITC made an appalling mess of the whole News at Ten issue which has resulted in not only a mess on the news on television on Channel 3 but also a mess on the news on television on Channel 1. That is the result of regulation. If one looks at the British Museum and the admitted mess over South Portico and Portland Stone versus French stone, that was done with the best of intentions by the trustees of the British Museum, another form of regulation. If one does not have to, and I would not in any case, cast any reflection whatever on the integrity of any people involved in all these decisions, they have been seriously flawed decisions which in some cases have been adverse to the interests of the taxpayer. Clearly this is a very, very difficult problem because governments of both political parties have found themselves assailed with difficulties as a result. Is it your belief that we need to assess this whole business of regulation because if you get an effective regulator, as clearly in the case of Lord Burns you got in the end, things work well, but if you do not get effective regulators, as appears to be the case in all of the other examples I have quoted, then you can be in a lot of trouble and, although the regulators have the job, the Government of the day of whatever party is in power in the end carries the can. (Mr Chris Smith) You touch, Chairman, as you say, on a very difficult issue about what the best format of regulation is likely to be. You are always going to have areas of public life, areas of public service, where you require regulation of some shape or form, so how best to deliver that regulation. The two models that have tended to be in place up to now, either the single person regulator or the board of non-executive lay people regulator, have both in some cases delivered effective regulation, in some cases have not delivered effective regulation. I think we need to give some careful thought particularly in relation to another inquiry that you are conducting at the moment in relation to the precise structure of OFCOM into how to get that structure right. In relation to the National Lottery Commission I would say, however, that they made one very major mistake, they made it in good faith, ---- 700. Is that not the worst kind of mistake? A mistake made in ill faith for personal gain at least has got that motivation but decent people who are not up to their job, that is a very different matter. (Mr Chris Smith) Far be it for me to suggest to any regulator that they should make decisions in ill faith. They made one serious mistake which, of course, the court then subsequently rectified. I think it would be foolish for us to assume from that that the entire nature of such a regulatory body is bound to be disastrous. I think we need to look very coolly and carefully at what works and where and why and whether it is very specifically a case of getting the right people rather than the right structure, or whether structures being got right can help you to get the whole nature of regulation right as well. 701. Would they not be assisted, whatever form you get, if we in this country were to adopt the practices they have in the United States of transparency? We have an extraordinary culture of secrecy in this country in which a very great number of major decisions, in which people are interested, are taken behind closed doors. When this Select Committee a couple of months ago visited the United States to meet a number of lotteries, we were told, for example, by the Lottery Commission in Maryland, who run a very successful lottery, that all the meetings of the Lottery Commission there are held in public, on the record, with members of the public able to attend and the press there. Why can we not encourage, or indeed require, except when matters of serious commercial confidentiality are being discussed, these regulatory bodies, whether it is the Lottery Commission, whether it is the ITC, whether it is - God help us - the BBC Board of Governors, to meet in public? After all, the public finances all of this. The Government that has introduced the Freedom of Information Act, should it not now in these reviews you are talking about bring in a culture of transparency so that people can actually see for themselves the decisions being made in their names? (Mr Chris Smith) The first thing to say, Chairman, is from my recollection of the Freedom of Information Act, I think quite a number of these bodies do themselves fall under the Freedom of Information Act and, therefore, there is access to certain numbers of documents. Secondly, there are a number of regulatory bodies that have already, with my encouragement, taken steps towards greater openness. A very good example is the Radio Authority which is now much more open about the decisions it takes, the discussion leading up to those decisions, the publication of minutes and such like, than they were in the past. There are clearly some issues, particularly where regulation is occurring in a very sensitive commercial market, where issues of commercial confidentiality will inevitably mean that there has to be some private discussion. The progress that could be made towards greater openness is certainly something that I would welcome. 702. We have held discussions, and for example Mr Wyatt referred to the competing merits of GTech and AWI, with GTech and AWI, we have held discussions with the Lottery people, all of whom made no requirement whatever of confidentiality about the competing merits of these two. We came down pretty well on the side of GTech even though AWI gave a dazzlingly brilliant presentation compared with the one by GTech. I simply do not understand why the behind the net curtains, not in front of the children ethos prevails in this country. Mr Faber has been talking about the proceedings of the Lottery Commission and, apart from any matters of commercial confidentiality, I cannot see why the discussions of the Lottery Commission should not have taken place in public and why they should not have been televised; in another country they would have been. (Mr Chris Smith) Of course, the Maryland example might not be an absolute analogy because of the fact that the lottery was not itself being run eventually by a private company. 703. A-ha, but I made that point to you already. (Mr Chris Smith) In relation to the discussions of the Lottery Commission I would certainly hope that as much as possible that was not necessary to be kept confidential as a result of commercial reasons could be made available and open to the public. Indeed, it is also worth bearing in mind that the Commission is required by law to publish a full statement of reasons for any decision that it makes and it has to set out the thinking that led it to make the conclusions that it did. So there is some element of openness there at the moment. I would certainly encourage them to go further than that. 704. Secretary of State, I could go on forever, not just about this, but the whole question of additionality, about the distributing bodies which Mr Faber talked about, but we have kept you here a very long time and it is time we finished and had a cup of tea. I thank you and Mr Zeff very much indeed for coming here this afternoon. We shall be seeing you again quite soon. (Mr Chris Smith) Thank you.