Joint action needed on threat to lottery funding for good causes, says PAC

Since 2012 Camelot has made profits well in excess of what was envisaged in the original 2009 licence, whilst returns for good causes have dropped, by 15% in 2016-17 compared to the previous year.

The Gambling Commission did not include a reopener or break clause in the 14-year contract. This means that the terms of the contract can only be changed with Camelot’s agreement. Camelot’s profits were 122% higher in 2016-17 than in 2009-10.

The drop in returns for good causes was because more players bought scratch cards but sales of draw based games, with higher returns to good causes, declined.

In the context of falling income for good causes, the Department for Digital, Culture, Media & Sport needs to be wary of the risk that Lottery funding programmes become unaffordable.

It also needs to give lottery distributors better data on lottery sales so that the distributors are better placed to plan their grant programmes.

The Department, Camelot and the Lottery distributors all need to work together to better publicise the benefits to good causes as part of efforts to reverse the recent decline in sales.

COMMENT FROM PAC CHAIR MEG HILLIER MP

“Raising money for good causes is one of the founding principles of the National Lottery but this objective is under threat.

“It would be a sad and significant loss to many deserving organisations and individuals if that funding, which has amounted to some £37 billion since 1994, should dissipate as a result of inaction now.

“Our report lays bare the need for a concerted effort from Government, the Gambling Commission and Camelot – a monopoly supplier whose profits more than doubled in seven years while returns for good causes grew by just two per cent.

“It is a stark illustration of the challenge to be tackled that figures for that final year, 2016-17, show a drop in good causes’ year-on-year income of 15 per cent.

“Lessons must be learned from the renegotiation of Camelot’s licence in 2012, which was too generous to the provider and too inflexible to protect the interests of grant recipients.

“But the detrimental effects of tinkering with the format of the Lottery, and a decline in public awareness of its support for good causes, are also clear.

“There must be a renewed focus on delivering returns for good causes and action to ensure these funds can be managed in a sustainable way.

“That should include Government providing real-time data to the 12 public bodies responsible for distributing Lottery funding, to enable them to manage their programmes effectively and ensure grant commitments are affordable.”

CONCLUSIONS AND RECOMMENDATIONS

Good causes lost out when the Gambling Commission renegotiated the licence with Camelot in March 2012. Following the renegotiation in 2012 of its licence to operate the Lottery, Camelot’s profit has increased to 1.0% of sales after tax, rather than the 0.6% anticipated by the Commission in the original 2009 licence. Returns for good causes, per pound spent, have fallen from 27p in 2009-10 to 22p in 2016-17. The licence is supposed to incentivise Camelot to maximise returns to good causes. But returns for good causes were only 2% higher in 2016-17 than in 2009-10, whereas Camelot’s profits were 122% higher. The Commission now acknowledges that the renegotiation in 2012 was too favourable to Camelot. Camelot is proposing game changes intended to reverse the decline in revenue and return more to good causes. Any changes will require the agreement of the Gambling Commission.

Recommendation: The Gambling Commission should take steps to secure a fair return for good causes from game changes proposed by Camelot over the remaining life of the current licence.

The current operating licence is not flexible enough to protect the interests of good causes as player behaviour changes. Scratch-cards and instant win games have become more popular, while sales of draw-based games have declined. However, returns for good causes are much lower for scratch cards (on average 10p in the pound) than they are for draw-based games (on average 30p), and so good causes have suffered. The extended licence runs for 14 years with no facility for the regulator to change its terms, other than through agreement with Camelot. This type of contract is not seen in other regulated sectors where contracts include reopeners or break clauses to reflect changes to the environment. The Gambling Commission acknowledges that it is not comfortable with Camelot’s profit growth in recent years compared to the returns to good causes. Camelot is a monopoly supplier and it not clear whether the rate of return it receives is fair and comparable to companies in other regulated sectors.

Recommendation: In setting the next licence, the Gambling Commission needs to benchmark the Lottery against other regulated sectors to determine what a fair rate of return is for operating the Lottery and build flexibility into the licence terms to secure this fair return in changing circumstances.

Game changes agreed between Camelot and the Gambling Commission have ultimately failed to influence player behaviour as intended, resulting in reduced participation. In October 2015 the number of Lotto balls in the draw was increased from 49 to 59 and a jackpot cap of £50 million introduced. In January 2016, the jackpot cap was increased to £55 million but then in August 2016 it was reduced to £22 million. Although the likelihood of winning the jackpot was reduced by having more balls in the draw, the increased size of jackpots had been supposed to attract more players, and thus also increase returns to good causes. However, after a short-term boost, the longer term result has been falling sales, and a corresponding decline in returns to good causes. In 2016-17 income for good causes fell by 15% compared to the previous year. The Department and Camelot acknowledge that the game changes in 2015 and 2016 have contributed to the fall in income for good causes. Camelot and the Gambling Commission have not been willing to reverse unpopular decisions such as increasing the number of Lotto balls.

Recommendation: The Gambling Commission should fully evaluate whether significant game changes proposed by Camelot are supported by appropriate, robust research and should intervene promptly to reverse changes if they prove unsuccessful.

The Department is not doing enough to test the affordability of the Lottery distributors’ forward funding programmes in the context of falling Lottery sales. The Lottery distributors make commitments to good causes well into the future, and so their commitments will often exceed the funds available to them from the National Lottery Distribution Fund (the NLDF) at a given date. However, in recent years commitments to good causes have been growing faster than NLDF balances. In March 2016-17 the £3 billion NLDF balance was only enough to cover half of the commitments made to good causes – in March 2004 it had been enough to cover 96% of the commitments. In 2016-17 three of the six largest distributors increased their grant commitments at the same time as Lottery income fell. The affordability of the Lottery funding programmes is currently a high risk on the Department’s strategic risk register and the situation could worsen if Lottery revenue continues to decline.

Recommendation: The Department should test the distributors’ modelling of future grant programmes and intervene where it believes forward programmes may be unaffordable.

The Department is not giving the Lottery distributors the information they need to manage their forward programmes. The Lottery distributors require information on expected future lottery income in order to plan the grants they will make to good causes and assess the affordability of the current programmes to which they are committed. The Department has real-time information on weekly sales, which the distributors have requested, but the Department has withheld it, believing that the volatility of sales from week to week makes the data open to misinterpretation by the distributors. The Gambling Commission has started to produce more sophisticated forecasts of future income from Lottery sales for the good causes. But the forecasts do not yet take into account the impact of planned structural changes to the Lottery coming out of Camelot’s Strategic Review and so the distributors do not yet have a forecast which reflects the Department’s expectations for the future performance of the lottery.

Recommendation: Starting immediately, the Department should share real-time weekly sales data with the distributors. The Department or Commission should ensure that the distributors have any help they need to understand and interpret the data and, during 2018, provide an updated forecast to distributors taking into account Camelot’s plans to address the decline in lottery sales.

We are concerned that awareness of the National Lottery’s support for good causes has fallen, and that this is likely to have contributed to reduced participation. The huge contribution made to good causes is less evident to the Lottery player than it used to be. National Lottery draws are no longer broadcast by the BBC and good causes are not mentioned on lottery tickets or well-advertised at the point of sale – either online or in shops. This means that players are less aware of the link between playing the lottery and supporting good causes. They are less positive about the Lottery and so buying fewer tickets. The Department and Camelot agree that good causes should be promoted more in Lottery advertising and Camelot acknowledges that it should do more to promote good causes and the contribution that the Lottery makes to local communities.

Recommendation: Camelot should work with the Lottery Distributors to better publicise the link between good causes and the Lottery and communicate the contribution to good causes from each type of game to customers at the point of sale. We would expect improvements to have been implemented by September 2018.

We are not convinced that Camelot is doing all it can to support education and research for gambling awareness. Camelot believes that the majority of Lottery players do not see themselves as gamblers. Nevertheless, Lottery products, which offer the chance to win big sums for a relatively small stake, are easily accessible to 16 and 17 year olds, and there is a risk that they could be the start of gambling problems. Given the popularity of the Lottery it is also clearly the case that there will be many people with gambling problems who are also Lottery players. Prior to our evidence session Camelot agreed to increase its contribution to GambleAware from £190,000 to £300,000, and claimed that GambleAware were ‘broadly’ content with that amount. However, GambleAware – which aims to prevent people from getting into problem gambling, and to support those who do – has stated that the amount falls well short of expectations that had been made clear to Camelot.

Recommendation: Camelot should review its level of contribution to deal with problem gambling and explain to us within 6 months why this is a fair contribution to GambleAware for such a widely played gambling product.

The full text of the Committee’s Conclusions and Recommendations is included in the Report attached