Examination of Witnesses(Questions 1-19)|
WEDNESDAY 22 MAY 2002
1. Welcome to the Public Accounts Committee.
Today, we are looking at the Comptroller and Auditor General's
Report into awarding of the licence to run the National Lottery.
We are delighted to welcome back Sue Street, who is Permanent
Secretary for the Department for Culture, Media and Sport. We
are also very pleased to welcome Mr Mark Harris, who is Chief
Executive and Accounting Officer at the National Lottery Commission.
Mr Harris, can I start by asking you why there is no guarantee
about the amount of money that will be available to the good causes?
(Mr Harris) The basis of the competition
that the Commission decided to run was that it asked the bidders
to commit a proportion of the proceeds that they raised from sales,
less the prizes won and less Lottery duty, and to commit to pay
that proportion over to good causes. That proportion was part
of the licence and therefore is a commitment and can be enforced.
2. The truth is that under the procedures that
we have, if the National Lottery fails to deliverand there
has been various speculation that Camelot may not perform as well
as it has done in the pastthe risk is not borne by Camelot;
it is borne by the good causes, is it not? Would it not be worth
looking at some kind of threshold that they have to commit to
deliver, particularly in any review for the next round of licences?
(Mr Harris) The Commission looked carefully at the
basis of competition before it started the competition and it
did consider whether or not one of the options might be to undertake
some form of auction. However, the Commission was concerned, firstly,
that the effect of doing that would be to pass so much risk to
the bidders that the bidders would have an incentive to bid lower
so that they were protecting themselves against the risk. The
Commission was also concerned that the bidders might well not
be able to raise that amount of money to pay up front and would
in any case have to meet their commitments from sales as sales
progressed. If they under-performed, they would then be driven,
effectively, into administration because they could not find the
funds to meet their commitments and there might then be a break
in the National Lottery. Alternatively, if they over-performed,
they would obtain all the benefit from that over-performance.
The Commission believed that in the long run it placed quite a
high risk on the NLDF to follow that basis.
3. Can we look at the history of what went on,
particularly in August 2000. Mr Harris, can I ask you to turn
to page 21 and look at paragraphs 3.15 and 3.17? I want to know
why did the Commission decide to negotiate with the People's Lottery
alone when you had received legal advice that this would carry
a significant risk of legal challenge and indeed that is precisely
(Mr Harris) At that point, the Commission was in the
position of having decided to reject both bids. It had decided
that part of the reason it rejected the Camelot bid was that it
did not believe that Camelot could rectify its concerns about
propriety within the one month period it believed it had available
to negotiate a successful solution to the concerns it had about
either bid. The Commission therefore looked at both bids and indeed
asked whether it could negotiate with both bidders or with one
bidder alone. The advice the Commission took and received was
that, although there was a risk of challenge if it proceeded only
with one bidder, in effect there was a greater risk if it proceeded
with both bidders in dual track negotiation, because the Commission
had already decided that Camelot was unable to rectify its bid
within the one month period. Therefore, it would have been entirely
inconsistent for the Commission to have gone forward with the
Camelot bid with only one month available.
4. This has been described to me as a cock up
with the correct result in the end but could you explain exactly
why things happened in the way they did? First of all, why did
you come to make such an about turn? First of all, you decided
to negotiate with the People's Lottery alone and, at the end of
the day, you awarded the licence to Camelot. How did all this
transpire? Could you not see this coming?
(Mr Harris) At the time the Commission decided to
negotiate solely with the People's Lottery, it was in a position
where it believed that that was the only bid available to it.
It believed that the Camelot bid could not be rectified other
than within a three month period. As the judicial review demonstrated,
the Commission made a false assumption that it very much regrets
that led to the single negotiation process, but nonetheless that
was the position the Commission was in. It believed that that
was the one bid that it could go with and it therefore sought
to convert that bid into an acceptable bid. As a result of the
judicial review, the court instructed the Commission to carry
out its evaluation afresh and it was able to do so with two bids,
both of which it was able, after a month's negotiation with each,
to make compliant and it therefore had a full choice between the
5. Ms Street, can you tell us what was going
on in your department during these difficult events? What were
you doing to avoid a break in the Lottery because this was something
that could have happened. Was the Commission in an impossible
position, given the timescale under which they were operating,
and the need to avoid a break in the Lottery and did the Commission
effectively have to make one of these bids work.
(Ms Street) At the outset, the department and the
Secretary of State took the view at the time of the invitation
to apply was made that it had an arm's length relationship with
the Commission and, as set out at paragraph 1.8 of the report,
the Secretary of State essentially looks to the Commission as
the sole actor in awarding the licence. Come August, the position
was indeed extremely difficult and, at that time, the view of
the Secretary of State was that his overriding duty under the
Act was to look at due propriety and the protection of the players.
Since one bid failed on one count and the other failed on the
other count, there was no question of instructing or directing
the Commission to make an award if it did not meet the statutory
conditions. Therefore, what went on in August was a look at what
other possible solutions might be reached with the interim licence
emerging as the practical option.
6. Can I ask the Treasury about paragraph 1.15
on page 14? These are documents which are provided to the Commission
about the vetting of the fitness and propriety of applicants to
run the National Lottery. Can I ask you when the Comptroller and
Auditor General is going to have sight of these documents.
(Mr Glicksman) It is necessary for some statutory
orders to be made. Two of those orders have been made and we hope
the others will be made within the next few weeks and the Comptroller
and Auditor General will be able to have the documents as soon
as that has been done.
7. Ms Street, what are you doing to assist the
(Ms Street) In February, I pressed the Home Office
to open the Gateway. They have opened part of it and the next
part will be open within a matter of days. It has always been
the position of this department that any papers we can lawfully
make available to the Comptroller and Auditor General we would
be not only ready but willing to.
8. Can I turn briefly to what is going to happen
in seven years' time? Mr Harris, can you tell me why there was
not more interest in the licence? After all, only two people came
forward. I want to lead on to what is going to happen in seven
years' time and whether we are going to get a more serious bidding
process. Can you give us an explanation for why you think this
is such an inherently risky prospect that the market place does
not appear to be working very well?
(Mr Harris) Part of the reason is that there is an
incumbent and, under the present structure, one has to put together
a whole arrangement to challenge that incumbent. It is quite expensive
to put a bid together and there are relatively few suppliers of
the specialist software and expertise that support lotteries.
Those are the sorts of reasons why other organisations were not
particularly keen to come forward. Relatively low numbers of bidders
is quite common in other jurisdictions who have sought to have
competition of the type that we have.
9. If we are looking at this process which is
going to come round in seven years' time, by then Camelot will
have had this contract for 14 years. Is there a prospect that
nobody else might come forward? After all, you have to put up
£3 million or £4 million to get into this process, do
you not? What are you doing about it?
(Mr Harris) There may well be a prospect in seven
years' time if we do not take action. I know the department will
be consulting more widely but the Commission has spent some time
thinking this through and has raised a number of issues, which
are set out in the Report, as to how it might encourage competition
within the existing constraintsarrangements such as paying
bidders' costs as long as that is done in a properly controlled
way; trying to reduce the information and burdens on bidders and
trying to make it more straightforward for them to bid and also,
if possible, finding new technologychanges in technology
in seven years' time may help to do thatwhereby the limited
number of suppliers in the market may become less of a constraint.
10. What would you do if there is only one bidder?
(Mr Harris) If there is only one bidder in seven years'
time, we would have to negotiate with that bidder but in a way
that enabled us to be sure that we were satisfying our statutory
duty to generate the best possible return for good causes. Although
the Commission has not gone into great detail about how that might
be done yet, there are lessons from other regulatory models, particularly
the utilities models, where it may be possible to base returns
to the operator on capital employed or on some form of profit
control or something like that. We believe there are other options
available, which we would definitely want to look at if we found
ourselves in that position, but the key thing is to try and generate
competition as we worked very hard to do this time, so that we
do not get in that position.
11. Ms Street, can you say a word about this?
There are ideas of setting up a lottery company so that a bidder
would not have to create an entirely new infrastructure. You would
have a lottery company and people would bid to run it. Can you
share with us some of your thoughts on the review process?
(Ms Street) I will do my very best, bearing in mind
that ministers have not yet issued a consultation document. We
hope that will be next month. The purpose of the consultation
documentand we are now six and a half years before the
next competition; we are conscious that although that is quite
a long time it can reduce very quickly if we do not have the right
steps takenis to generate effective competition. It takes
into account the extremely helpful comments from the NAO in its
Report and the Commission's comments in table three about things
that could be done. They range from some quite minimalist changes
which would not require legislation, like for instance helping
with bidders' costs or being clearer about sales targets, to some
more radical options. One, as you have described. Another would
be to separate section five, which is the section that is currently
held by Camelot to run the whole thing, into, for example, one
owner of the infrastructure and one company who does the marketing
and other parts. There is already an obligation on Camelot to
try and bring other interests into section six, which is the sub-licence.
There are a number of things that could be done. The real aim
now is to throw it open to consultation. Bear in mind that it
is quite difficult to make commitments to any detailed mechanisms
now because we expect the market to be quite different in six
and a half years' time, both because of the technology and also
because if the government finds legislative time for its response
to the Budd Report on gambling one will have a pretty dynamic
market and the exact processes and detailed mechanisms should
take account of that.
12. Can I establish a few background facts before
I ask my questions? I need the cooperation of the National Audit
Office here. When we first looked into the issue of the first
licence, G-Tech clearly came with a substantial track record of
running very close to the edge of the law. At the hearing, I established
that the regulator, Mr Davis, accepted the use of G-Tech's private
aircraft while he was in the United States and he failed to see
this as a conflict of interest. That is accurate as far as it
goes, is it, Sir John, as a recollection?
(Sir John Bourn) Yes.
13. Not to put Mr Davis in the wrong, I do not
think he is a dishonest man but his judgment is a different matter.
The first licence had already been given but did the regulator
then not subsequently give other licences to G-Tech after he had
had the use of the aircraft?
(Sir John Bourn) Yes, he did conclude commercial arrangements
with G-Tech after his personal links with the company.
14. G-Tech has haunted this process from before
its beginning and ever since. After that situation, I wrote to
you as an individual member of the Committee drawing attention
to the fact that doubts had been expressed about the due diligence
processes applied by the then regulator and by Camelot. That is
correct, is it not?
(Sir John Bourn) Yes.
15. You indicated that you had no powers to
look into these. Did you ask either the regulator or Camelot if
they would voluntarily allow you access to the information?
(Sir John Bourn) We did discuss this but the regulator's
view was that he did not have the power, as the witnesses have
said, to make this material available to me. He was confined as
far as information relating to United Kingdom citizens was concerned
by the law and he was confined so far as United States citizens
were concerned by the fact that the information that he had received
from the FBI had been given to him on the basis that he did not
share it with anybody else.
16. On the basis of that, because he felt he
did not have the powers and you felt you did not have the powers,
I raised it in the Committee and with the Chairman and I cannot
remember whether you came with us.
(Sir John Bourn) Yes, I did.
17. Can you tell us the date on which we then
saw the Secretary of State to make representations that the appropriate
power should be given either to the regulator or to you to enable
you to have access to the due diligence process?
(Sir John Bourn) Yes, it was 28 July 1998.
18. I have a letter from you which I have given
to other members of the Committee in which you say that, even
on this report on the second licence, we are not able to examine
as part of the report how the Commission carried out its statutory
duty to satisfy itself that applicants to run the National Lottery
are fit and proper. That is quite an important consideration in
the public eye. Subsequently, over a year agothis was some
time in 2001three years after you, the previous Chairman
and I first took this up with Ms Street's department, an agreement
was reached that disclosure would be made but it required legislation.
That being just over a year ago and your letter being dated 8
May, that would be approximately six months before the new licence
was due to come into operation as originally scheduled. That is
so, is it not? 30 September?
(Sir John Bourn) Yes.
19. At a stage when it is too late effectively
to implement any legislative back up or almost too late, the deal
was done but, at the time of your letter, 8 May, although that
agreement was reached a year ago, and although four orders were
required, only one of them had been implemented. We now gather
the second one has been implemented. The first was in May 2001
according to your letter which is one month after the second licence
was due to come into effect. Is that correct?
(Sir John Bourn) Yes.
1 Note by witness: The first order was made
in November 2001, one month after the second licence was due to
come into effect in October 2001. Back