One-way ticket to a bad situation

Serious legal flaws lie at the root of the National Lottery fiasco. Should it be run by the state?

The four remaining members of the National Lottery Commission and their officials can be forgiven for feeling punch drunk. Over the last fortnight, they have been accused by a judge of "abusing their powers" and by a major client of theirs, Camelot, of being "gratuitously insulting".

The four remaining members of the National Lottery Commission and their officials can be forgiven for feeling punch drunk. Over the last fortnight, they have been accused by a judge of "abusing their powers" and by a major client of theirs, Camelot, of being "gratuitously insulting".

As they now know, the people who run lotteries worldwide are tough, vengeful and often implacable. However, the main reason they feel so dazed is that they believe the real cause of their problems are the acts controlling the National Lottery. They believe the law is vague, incomplete and in desperate need of revision.

In an interview before her surprise resignation last week, Dame Helena Shovelton, then chair of the commission, said a review of the law was essential after the next licence is awarded. In comparison with relatively straightforward first licensing in 1994, this year's experience had been very different. "This has been an extraordinarily difficult process to go through," she said.

Some officials regard this as an understatement. "It's like walking through a maze and finding three doors which read 'death'. There is nothing which says emergency exit, and not even a laundry chute," said one wearily.

The root of their crisis has been the remarkable level of discretion it has. Neither the National Lottery Acts of 1993 or 1998 sets down clearly how actually to stage a competition or sets guidelines on its conduct. They only require the commission to ensure the lottery is run with "all due propriety", protect the interests of lottery players and maximise the proceeds of the game.

Based on advice from Treasury Counsel and a very narrow reading of those duties, the commission knew it could legally end the first licence process on 23 August by declaring neither bidder had passed all three tests satisfactorily. It then started, entirely legally in its view, what it believed was an completely fresh process by opening exclusive talks with The People's Lottery, chaired by Sir Richard Branson, on the grounds his difficulties were more easily resolved.

In the High Court last month, Mr Justice Richards agreed with David Pannick, QC, counsel for Camelot, that this was badly wrong. It ignored the need for fairness established in public law by previous test cases and was contrary to natural justice to exclude Camelot from any chance of rectifying its concerns. That "fell outside the range of decisions open to a reasonable and properly informed decision-maker," the judge said.

Nonetheless, the legal vagueness and loopholes exist. But the commission's concerns go further. Clearly driven by its dislike for state industries, under the 1993 Act the then Tory government insisted on the game being run entirely as a private monopoly, in which the operator owned the games, assets and intellectual copyright.

But it seems that neither the government nor Peter Davis, the first Lottery Regulator, thought through the legal and commercial complexities of a competition with an incumbent operator. No provisions were made for handing over the lottery to another operator.

Although copyright of the blue "crossed fingers" logo is held by the Secretary of State for Culture, Media and Sport, Camelot owned all the other branding of the lottery; had complete control over their list of 25,000 retailers; owns the "Instants" name; and had vested in it the intellectual property of the lottery.

Although these issues have been largely tackled by the commission, this meant a competitor would have to rely on public data on the existing operation and, if they won the new licence, their competitor's goodwill on issues such as access to retailers.

"These are issues for somebody other than us to discuss: to look at what's happened this time and the difficulty of trying to deal with the incumbent versus a competitor," Dame Helena said. "This genuinely has within it things that are difficult and therefore we think that the Government ought to think about that."

At the same time, the commission has no flexibility in punishing misbehaviour by a lottery operator. If an operator or its supplier fouls up, it can detonate the "nuclear option" of finding an operator not "fit and proper" and completely withdrawing its licence, thus closing down the lottery, or it can do nothing at all. Section 5 of the 1993 Act also introduces another obstacle. It states there can be only one lottery operator at a time. This prevents one lottery being phased in as another is phased out, allowing for greater continuity of income for good causes. This means there must be a "big bang" hand-over, with the attendant risks of short-term problems.

Under the same provisions, the commission is also barred from allowing more than one company to run national games without the express permission of the Section 5 licence holder. Only Vernon's has succeeded in getting Camelot's agreement for a rival "Easy Play" game, which quickly folded. This prevents the commission from allowing one operator with, say, the best scheme for a National Lottery draw to run alongside another operator with the best plans for Instants games or Internet lotteries.

Some commissioners believe the Tories were wrong in 1993. Britain is one of a very small minority of countries where the lottery is privately-run. In the United States, bastion of the free market, all the state lotteries are controlled by the state. There, a lottery commissioner owns the game, but contracts out supplier, operations and advertising contracts by open tender.

Dame Helena believes this model has merits which should be studied by ministers, chiefly because it ensures much greater continuity. It is highly unlikely, at present, that the Department of Media, Culture and Sport will support that proposal. It is, however, prepared to consider redrafting the current legislation after the next election, in time for Britain's third lottery licence in 2008.