In Camelot, they make magic

After four months, the nation is hooked on the National Lottery. Good news all round - but the best news is for those running the show. Marianne Macdonald reports

There is a certain irony in the fact that 26 million people a week buy lottery tickets in the hope of winning a fortune, while Camelot's faceless executives hit the jackpot every time. These businessmen were too clever to gamble on one-in-14 million odds of winning the top prize. They understood early on that the way to win was to run the show. This strategy has given them a licence to print money.

Now in its 18th week, the lottery has reaped £121m for Camelot so far, nearly the same amount as the consortium's £125m start-up costs.

This is not yet profit - clearly, Camelot is having to pay its running costs as well as recouping its original investment, but it is already considerably more than the £81m the consortium predicted, last May, that it would take as its share of lottery revenue in the first year.

Pre-launch projections had Camelot going into profit in its fourth year of operation. On the basis of the first 18 weeks' income, it will actually pocket £349.5m in its first year, without taking into account the extra income from the scratch cards launched yesterday. If, as industry observers expect, these new cards increase the market by 25 per cent, the consortium's share will be closer to £437m.

Camelot is not minded to offer any explanation as to why its income is so vastly exceeding its own estimates. But it admitted yesterday that it has been retaining 12.15 per cent of lottery proceeds since the game started in November - which flies in the face of launch claims that its income would average 5 per cent. Launch publicity suggested that the proportion might vary, but would not exceed 8 per cent.

The total lottery take is split five ways. Tax is fixed at 12 per cent, retailers' share at 5 per cent. The remaining 83 per cent is divided between prizes, good causes and Camelot. So the extra income is in effect money diverted from arts, sports, heritage, charities and the millennium, which have been receiving 25.85 per cent, and from the punters, who receive 45 per cent.

Camelot says these proportions will change as the lottery continues. The prize pool, for example, for the scratch cards launched yesterday is higher - 55 per cent. And the proportion going to good causes will also rise, up to 30 per cent, says Camelot, triggered as total revenue hits a certain level. It will not say what that level is.

Camelot's income is certain to carry on growing rapidly. When the first instant scratch game sells out, it already has two more printed up. And it is planning a series of "superdraws" to keep up public interest in the main lottery. Terminals are still being fitted throughout the country (there are 20,000 now in place) and will reach their projected total of 40,000 only at the end of 1996.

Meanwhile, Camelot intends to spend even more - if that is possible - on advertising the scratch cards than it did on the original launch, when 40 million adults saw an average 13 television commercials. The scratch cards offer more prizes, albeit at lower levels: every player has a one in five chance of winning.

The regulator of the lottery, Peter Davis, chose Camelot over Richard Branson's UK Lottery Foundation, which would have given all its profit to charity and good causes. He says this was because the wording of the National Lottery Act forbade him from taking Branson's non-profit pledge into account. Whatever the reason, it has meant that over the seven-year franchise, Britain will lose millions, which could have helped the community, to the five companies that make up Camelot - De La Rue, Cadbury-Schweppes, ICL, Racal and GTECH.

A few lone crusaders have been pointing out such uncomfortable facts to a nation that seems blinded by the headlights of the lottery's get- rich-quick glamour. One is Tony Banks, Labour MP for Newham North-West. In a December parliamentary debate, Mr Banks asked the National Heritage minister Iain Sproat why the lottery was not made a charitable foundation, allowing the Treasury's 12 per cent to be added to the fund for good causes. "There must be a way of ensuring that Camelot does not find itself with riches beyond the dreams of avarice without ever having to do anything significant for them. Camelot should not get money for old rope," he said.

Mr Sproat's response was hardly reassuring. "No doubt when the franchise comes to an end in 2001, or in the run-up to 2001, those matters will be looked at," he said. "Charitable trusts could have applied [to run the lottery] but none did so.

"As to Camelot's percentage to cover its operating costs and profits, I have looked around the world at the percentage taken by other bodies running lotteries and have not been able to find a single body doing it on a leaner margin than Camelot."

In other words, the government does not expect Camelot's licence to print money to cease for seven years. If, as estimates suggest, the consortium has paid off its launch costs in the first year of operation, it could have made hundreds of millions of pounds of profit by then.

This does not appear to worry the director-general of the regulatory watchdog Oflot, even though as a chartered accountant himself he should be familiar with the figures. Yesterday he said: "Out of the money they have retained they have to pay all the costs of running the lottery, including in the early years the very considerable start-up costs."

Peter Davis prefers to keep a low profile on lottery matters, although he is often to be seen at the star-studded lottery functions sitting next to Coronation Street celebrities or Camelot bigwigs. He could, if he chose, tell Camelot to reduce its share of takings back down to 5 per cent. He even has the power to close down the lottery if necessary.

His most public intervention so far, prompted by public fury, was to order an inquiry when Camelot was accused of sowing a paper trail of clues that led to the identification of the Blackburn factory worker who won £17.9m on the lottery in December.

Other vexed issues remain unresolved. One sore point is the way the Government continues to tax the pools companies at 37.5 per cent compared with Camelot's 12 per cent, even though the National Lottery threatens the existence of smaller operators. Littlewoods, Vernons and Zetters have all seen sales drop as the British punters have switched in droves to the lottery. The fall-out has been inevitable: redundancies and cost-cutting.

Charities are also cautiously reporting anecdotal evidence that their income from donations has been adversely affected, although the only hard evidence so far has come from Ethiopiaid, which has found its charitable giving down by a third from last year.

Perhaps the most important issue is yet to come. Only one payout - to sports - has so far been made by the five lottery distribution bodies, which have earned £259m over the last 18 weeks. But when they do begin paying out to sport, heritage, arts and charities in earnest, the cash- strapped government is almost certain to cut back on its own funding of those areas. Tony Banks anticipated this possibility in December, asking the Government to safeguard the budgets of sports, arts and heritage to ensure that they did not shrink as a result of the extra lottery money going to them.

Ministers have, of course, pledged they will not make cuts. But observers remain cynical. If we all carry on playing this way, the true winners of our new national obsession may well turn out to be the taxman and the monstrous consortium that delivers our weekly fix.