For love or money

As the bidding for the next Lottery franchise gets going, the government will have to face a few awk

Traffic wardens, tax inspectors and the directors of Camelot are part of that rare subset in society that says the better they do their jobs, the bigger the boost to the public coffers, the more they are universally reviled and despised.

To run a lottery, with its connotations of putting handicapped children on ponies and bath rails in old people's homes, ought to require only a beatific smile and a bucket to rattle. The reality is that squelching pounds out of the pockets of the poorest and possibly stupidest members of society on a weekly basis, in order to generate millions for the Churchill family or do up Vivienne Westwood's house, requires something more sophisticated than well-intentioned volunteers.

When Camelot launched five years ago it undertook the largest consumer branding exercise Britain has ever seen - accompanied by the creation of a new IT network which was akin in complexity to re-installing the national grid. It took on 800 staff and trained more than 10,000 retailers, and by the time it launched on 19 November 1994 it had 22 million people tuning into its first draw on BBC1. Five years later, as Camelot prepares to reapply for its licence, the big question is whether the government wants its Lottery operator to work for love or money.

In 1993 the Conservative government decided that Britain should have its own National Lottery; at the time we were the only European nation apart from Albania that did not have a weekly state-run draw. John Major and his heritage minister Virginia Bottomley were more open-minded than Margaret Thatcher had been about the lobbying efforts of those who sought, as they saw it, to open a treasure chest for worthy causes, and were less inclined than her to listen to the protests of the established gaming fraternity.

The result was a beauty parade of contestants for what was at the time regarded as a licence not only to print money but also to thrust your brand into every corner shop and petrol station in the land. The submission of Lottery bids, for those of us observing it, involved the kind of knockabout fun and cod industrial espionage that one normally expected to witness only when ITV franchises were awarded: the unlikely combination of Richard Branson, a white horse and Lord Young of Graffham launching Virgin's efforts; or Gerry Robinson, the chief executive of Granada, holed up in some industrial estate outside Heathrow in a mock-up of the Great British Lottery Company's headquarters. But even before the invitation to apply was issued it was clear that the racing certainty to bag the bid was a consortium that called itself Camelot. Composed of the ethically robust Cadbury Schweppes, banknote printers De La Rue, computer manufacturers ICL, defence engineers Racal and a little-known US lottery operator called GTech, Camelot's preparation seemed streets ahead of the rest.

This conclusion was not because most of us at some time or another had been flown gratis to see GTech in Rhode Island (which we had) or because we had been bombarded by the polished operatives at the City's most prominent PR firm, Brunswick (which we also had), but because the depth of Camelot's military-style operation simply made it look far better prepared than its rivals.

Indeed the presumption of Camelot's superiority was so prevalent that someone - either one of the seven rival bidders or a concerned member of the public - saw fit to circulate plain brown envelopes among the press detailing supposed Mafia connections with GTech, and raising questions about how scrupulous its corporate governance practices were in running its multiplicity of lotteries in the US and throughout the world.

It would later emerge that GTech had not only flown journalists around the US for free, but had also couriered Peter Davis, the director general of Oflot, the regulator, in the company jet. This small cost-saving exercise cost him his post and led Labour to restructure Oflot into the National Lottery Commission.

Concerns about GTech's operating methods were ignored in favour of the National Audit Office's evaluation of the applications, which suggested that Camelot would return £6.8 billion to good causes over its seven-year licence term. As it turns out, Camelot is expected to raise £10 billion during the term.

Two further blots later spread across the closely scrutinised copybook of Camelot. One was the issue of executive pay. When, in 1997, three Camelot directors - the chief executive, Tim Holley, the chairman, Sir George Russell, and the head of corporate affairs, David Rigg - picked up six-figure bonus packages, Labour's heritage secretary Chris Smith spotted an opportunity to carpet the trio, even though the packages had been set out and agreed with the award of the Lottery licence. The new government made populist capital out of the case.

Harder to remove was the stain from a damaging libel case fought out in court between GTech's Guy Snowdon and Richard Branson. Snowdon's defeat was enough to force GTech to sell its stake in Camelot and remain as a supplier only.

Both executive pay and the GTech scandal revived the question of whether the next lottery should go to a not-for-profit operator. Independent audits and surveys have suggested that the UK Lottery is the largest and most efficient operator in the world; its sales in 1999 were more than £5 billion, of which £1.5 billion went to the "good causes" and £664 million to the government in taxes, while Camelot shareholders received a relatively modest pre-tax profit of £70 million. Camelot's chief executive Tim Holley has consistently argued that the profit motive makes for a better, more efficient business.

"This time round we would still be very bullish about seeing a return for our investors," says Camelot's director of corporate affairs, Louise White. Before the election, Labour said it wished the Lottery to go to a not-for-profit bidder. Last month the chairman of the Lottery Commission, Brian Pomeroy, made it clear that for-profit bids would also be considered, the theory being, according to No 10 sources, that: "We don't want to be in the position where we only have one bid - there should be a range of bidders from profit and non-profit sectors."

Since the commission issued its preliminary "invitation to apply", there has been an eerie silence from potential bidders. The pools company Littlewoods has said it will not bid. Branson, struggling with the daily ennui of running a rail franchise and an airline, has thus far shown no sign of bidding. Camelot has unnerved potential competitors by announcing a partnership with the Post Office, which will become a shareholder in Camelot should the bid succeed. The only known rival bid to date is likely to come from Earth Port, an Internet company that runs lottery games online. A further 13 companies have expressed interest, but most observers would be surprised if more than a handful made it through to June.

Louise White says: "The government is already saying it wants £11 billion for good causes in the new licence period, which will be quite an ambitious target. Since the Lottery started, there have been around 50 separate deregulations to the gaming market; and the Internet just adds to this, so it will make the Lottery's job more difficult."

This is the heart of the dilemma for the government. According to Terri La Fleur's World Lottery Survey, published in 1998, Camelot does perform: it returns more as a percentage of sales to the Treasury and good causes than any other of the 34 national lotteries monitored by the survey. As part of its further atonement Camelot is submitting itself to a rigorous social and ethical audit, which will be published next year.

What will weigh heavy on the minds of the commissioners before they make a final decision in June is just how much they wish to gamble with the Lottery. Rather like the anti-trust trial against Microsoft, the ritual pillorying of Camelot is in the consumer interest without the consumer really giving a damn. What matters to the Lottery-playing public is that every week for five years they have been able to buy tickets with no glitch, no cock-up and no bother. Usually with no result, too. What is certain is that as Camelot celebrates its fifth year rolling over and doling out, the government has all its balls in the air.

The writer is business editor of the "Observer"