Examination of Witnesses(Questions 140-159)|
WEDNESDAY 22 MAY 2002
140. The reason I am trying to establish that
none of you had any experience in the lottery market is that it
seems to me the key determining factor in awarding the Lottery
to Camelot was the Commission's forecast of sales, am I right?
(Mr Harris) The Commission looked at its own forecast
for sales in order to calibrate the bids but obviously it just
did not impose its own forecast; it looked at the judgments made
by the bidders and the whole detailed bid and the game plan and
used judgments on those.
141. If you look at appendix 8 on page 43, it
has the various sensitivity tests applied by the Commission to
the various bids and, as far as I can work out, tests 1-6 which
were based on common forecasts all showed that The People's Lottery
would generate more revenue for good causes: tests 7-20 all showed
that Camelot would produce more revenue for good causes: and those
sensitivity tests 7-20 were all based on Commission forecasts,
so the Commission forecast was absolutely crucial in the decision
to award Camelot the licence.
(Mr Harris) The forecast used by the Commission was
an important part of that but it was based on a full analysis
of the two bids, not just simply a forecast of what the Commission
judged the bids would do, and that was supported fully by the
Commission's consultants who advised it in assessing how the bids
142. Maybe we can have an idea of how good the
Commission's forecasts had turned out to be. What was the Commission's
forecast of how many sales Camelot would have last month, say,
and what are the actual sales? Not what Camelot was projecting
but what the Commission forecast Camelot would be selling in April
2002 and what they actually sold in April 2002.
(Mr Harris) The Commission did not produce or monitor
a month-by-month forecast in that way. What it did was to look
at the bids. The Commission's judgment was based on a range of
risks and possibilities that led it to more general judgments.
These were forecasts done by the Commission's consultants on its
behalf to understand the different effects of assumptions that
were made within the bids and, if one varied those, what effect
it had on the relative performance of the bids.
143. There must have been a forecast for sales.
I do not know whether it is broken down monthly, quarterly or
yearly because, as it makes clear, although the return for The
People's Lottery was higher in terms of good causes for every
pound sold, you did predict that Camelot would make more sales,
so you must have had some forecast of the sales?
(Mr Harris) Yes. The forecasts that were used are
those set out at appendix 8.7 which are the forecasts put together
by the Commission's advisers so that was an important part of
it, but obviously all the Commission could do was to amend the
forecasts that were provided by the bidders and those depended
on all sorts of things like when they would bring games forward,
when they would launch them
144. But the end process must have been a numberX
million sales as a result of all these factors as opposed to Y
(Mr Harris) That figure there at 8.7 was produced
over a period of time, but it depended on the assumptions bidders
made considerably earlier about when they would be bringing games
forward and so on and so forth, so it does not reflect what has
happened at the end of the day. What the Commission did was use
this as a tool to help it understand more broadly how this would
145. But the bids, reading from this and given
the way the process went, were very finely balanced between the
two bidders, and it seems to me a swinging factor was the Commission's
forecast that in the end The People's Lottery could not generate
the sales that it was said it was going to, and that Camelot were
likely to have more sales and as a result generate more revenue?
(Mr Harris) The view that the Commission reached was
that on balance it believed that Camelot would produce more sales
and more returns for good causes. The Commission recognised it
was making judgments and, at one extreme, that if everything that
The People's Lottery had identified it could do came off and it
achieved that topline curve, then the top of the appendix shows
that they would have produced more for good causes. But the Commission
judged all the risks and all the problems it had with assumptions
that were made within that bid, as it did for Camelot, and it
brought both bids down significantly but it concluded at the end
of the day on balance that there was more risk and more uncertainty,
and so more likelihood that The People's Lottery would produce
less. That was the judgment it made and that was the judgment
that I think the NAO has been through
146. But you cannot tell whether the model turned
out to be accurate or not? The only way you would ever be able
to test this is if you had The People's Lottery running in some
parallel universe but what I am trying to get at is that you produced
a model and you awarded a contract based on the figures produced
by the model; was the model accurate?
(Mr Harris) I understand exactly what you are asking
147. It is a pretty basic question, because
you are going to have to award this licence again.
(Ms Street) The revenue that the Commission thought
it would probably get from this is around £5 billion and
so far as we can judge it is running at £4.9 something. Now,
I cannot say that is always going to be the case.
148. In paragraph 4.15 of that Report at page
29 it says, ". . . the Commission's staff and consultants
developed forecasts of sales for the period of the second licence.
. . The Commission considered that these forecasts were unduly
pessimistic". Am I getting that right: that your staff or
you perhaps produced these forecasts and then the commissioners
thought they were unduly pessimistic?
(Mr Harris) These were forecasts that were derived
independently by our consultants with some members of staff who
had had the involvement in these areas, and the commissioners
looked at the forecasts and said, "There are a range of places
where you have discounted the bids and put lower levels and those
all add up to a low level and we think, cumulatively, it is likely
that the bidders will not perform to that low level on all those
things and, therefore, we think it would a bit higher than the
levels you have set but"
149. Was that just a hunch on their part, to
(Mr Harris) It was a judgment after long discussions
with the consultants as to the assumptions they had made and the
belief they had, and the Commission came to the view
150. So who has proved to be right? Your staff
or your commissioners? That is a tough question!
(Mr Harris) The answer is we will not know for two
reasonsfirstly because it will take considerably longer
than the short time the licence has been running but, secondly,
one can only tell if Camelot implements a game plan that is exactly
the same, where everything happens to the same degree and to the
same point as was included in the bid and, just as markets conditions
change, so the game plan will not be exactly the same.
151. It seems very oddwhy were the huge
overestimates in your view that the two bidders made in terms
of sales, the original estimates I mean, so similar? It seems
odd that they both overbid and bid with remarkably similar figures.
Was there any evidence that they knew what each other was up to?
(Mr Harris) I have no reason from where I stand to
believe they did, although I know that both of them in the run-up
to submitting their bids made public statements about what they
expected to pledge and how they expected their games to work.
I do not know whether they were able to take anything from that
152. Looking at table 9 on page 30, which is
their projections, they are very similar. They have a slightly
different shape and they turned out to be both wildly over-optimistic
anyway as events have subsequently proved, but you did not investigate
whether they were really matching each other since they knew there
was no-one else in the process, by then there was nothing?
(Mr Harris) We did not carry out an investigation,
no. Our concern was to make sure which was the best bid.
153. One of the jobs of civil servants is to
implement the manifesto commitments of governments. The Labour
Government in 1997 had a manifesto commitment to seek a not-for-profit
operator, and I do not understand why, when the statement of principles
was produced in 1999, the not-for-profit element was included
in that statement.
(Ms Street) As you say, the manifesto did say, "We
will seek an efficient not-for-profit operator to ensure that
maximum sums go to good causes". The White Paper issued by
Government said very clearly, "We do not intend to prescribe
the nature of the operator", and it was very important that
the Commission should run the competition.
154. Finally, can I ask you both whether you
think it is possible realistically for someone to mount a bid
against the incumbent Lottery operator? In terms of the enormous
expertise that Camelot by then have had in running the Lottery
and given that the Commission has had this duty to maximise revenue
for good causes, can they ever realistically take the risk of
going for another operator? Does not the way the whole thing is
set up mean that the encumbent now is in place for ever?
(Ms Street) My view would be that an enormous amount
rests on the consultation which the government is about to launch
and on the way that the market develops, both in terms of the
technology and in any relaxation of the gambling laws, so I think
we would be looking at the different market. Within the terms
of the present position, there are already, as my colleague has
said, a number of things that could be done to generate an effective
competition but I think there will be room for a lot of innovation
in how we should run these matters in the future. Specifically
one wants to look at the section 5 and section 6 constraints currently
in the law and there are ways of doing that differently, so I
think we would appreciate quite a lot of help including from this
Committee on that.
155. Can I concentrate on the letter Sir John
Bourn sent to Mr Alan Williams? Sir John, if you had carried out
your Report as you would have wished to have done you would have
concentrated on reporting the competition side of awarding the
licence and whether the characters were fit and proper persons,
have I got that right?
(Sir John Bourn) I would have reported on the fit
and proper aspects of the people. The Report itself is a report
essentially on the competition process that led to the decision
to award the contract to Camelot.
156. And, Permanent Secretary, the reasons why
the Comptroller & Auditor General could not carry that out
was, as you described it, that there were some difficulties to
the gateways to this information, which appear to some of us to
be rather like drawbridges, and the gateways were that certain
Acts of Parliament forbade you to give him the information which
you have collected under the four Acts, is that right?
(Ms Street) We were advised that there was not a safe
lawful passage from me to the Comptroller & Auditor General
and we regretted that. I certainly regret the time that it has
taken to put it right but, yes, that is correct.
157. So you have in your possession information
gathered under the Financial Services and Markets Act, and you
have information under the Companies Act, the Financial Services
Act and the Criminal Justice Act, which because three of those
orders have not been made you cannot provide to the Comptroller
& Auditor General?
(Ms Street) I understand the Commission holds the
(Mr Harris) The Commission has these papers because
the relevant gateways are open for the Commission to receive this
information from certain agencies, but for the Commission to disclose
that information to any other person is a criminal offence. The
solution is that, if the same gateways are opened for the Comptroller
& Auditor General, then we would be able to open our files
and allow the Comptroller & Auditor General to see all the
information which I quite appreciate he must be able to see in
order to ensure that our vetting processes are working properly.
158. But when you read the information, did
that information from any of those four sources cause you trouble
and help you to explain the movement from one group to another
which other colleagues on the Committee have described, and which
is certainly a more rational approach to your behaviour than one
of really flapping around in the wind?
(Mr Harris) The vetting information we received did
not affect the Commission's decisions about either the fitness
and propriety of GTech or the all due propriety test going forward,
no. That information told us about people's past records and whether
they declared them properly and rightfully.
159. So when you hand that information over
to Sir John, you would expect him to report very quickly that
all the players were fit and proper?
(Mr Harris) Sir John would then be able to reach a
view on our processes and whether they worked properly, and whether
or not the information held on the files demonstrated that we
had operated the processes properly, yes.