Committee Reports > List of Committees > Joint > 1990 > Committee on Commercial State-Sponsored Bodies (6th Committee) > Report No. 03 - An Post National Lottery Company

REPORT

Introduction

1.When the present Joint Committee’s immediate predecessor reported on An Post in June, 1988 (Pl. 5731) it indicated that the performance of An Post National Lottery Company (the Company) had not been separately examined as part of its review of An Post. The present Joint Committee decided soon after its establishment in December, 1989 to carry out such an examination as quickly as possible.

2.In the course of its examination, the Joint Committee twice took evidence from the Company. The necessity for the second hearing arose principally from the decision of the Company to go mid-week with the up to then weekly on-line Lotto game and from the Joint Committee’s further consideration of the Company’s requirements in respect of its printing needs.

Background

3.The National Lottery Act, 1986 provides for the holding by or on behalf of the Minister for Finance of a National Lottery and in accordance with Section 3 of the Act, the Minister for Finance has granted a licence to the Company authorising it to operate the National Lottery on his behalf. The licence was given for a ten-year period from 1 October, 1986.

4.Eighty per cent of the shares in the Company are owned by An Post and twenty per cent by the Minister for Finance. Under Section 14 of the Act, the Minister for Finance appoints the seven directors of the Company, four of whom are nominated by An Post.

5.The licence required the Company to operate an “instant” lottery game and to introduce an “on-line” Lotto game as soon as feasible. The instant game was launched in March, 1987 and the Lotto game in April, 1988. In accordance with Section 28 of the Act the Minister for Finance approves the rules of all National Lottery games.

6.The licence provides that the Company shall operate the National Lottery on a cost recovery plus management fee basis. When both the instant and Lotto games are fully established the operating costs are not to exceed 19.75% of turnover, including a management fee of 1.1% of turnover.

Assessment of the Economic Impact of the National Lottery - DKM Report

7.In addition to the Company’s Annual Reports and Accounts, the Joint Committee also had regard to the independent assessment (published December, 1989) drawn up by economic consultants, Davy Kelleher McCarthy Ltd. (DKM) at the Company’s request on the economic and social impact of its business. The main elements of the assessment are:

(i)the development and operation of the National Lottery,

(ii)a profile of Lottery participants and prizewinners,

(iii)a review of disbursements from the National Lottery,

(iv)the impact on consumer expenditure, and

(v)the economic impact of the National Lottery.

The results showed that over half of the adult population play National Lottery games regularly and the profile of players reflects closely that of the adult population as a whole. Furthermore, regular players spend an average of under £2 a week on tickets. In evidence the Lottery Company’s management stated that in its view the assessment established that the average weekly expenditure levels by the unemployed and the lower income groups were sufficiently low to dispel the myth of excessive participation by these groups. Even so, the Joint Committee does not necessarily concur with management’s strongly expressed view and will comment further on this matter later in the Report.

Matters examined

8.While in many respects the Company may be regarded as being in its infancy, the Joint Committee considered it appropriate and advantageous to address a number of particular aspects of its operations, the earlier, should it be necessary, to identify any perceived weaknesses in management and/or performance. In this context, the Joint Committee has examined the following aspects of the Company’s operations:

(1)printing needs,

(2)management costs,

(3)Lottery surplus,

(4)randomness of Lottery,

(5)social impact of Lottery,

(6)exclusion clause in retailers’ contracts,

(7)prizes/jackpots,

(8)disbursement of Lottery surplus,

(9)advertising/publicity, and

(10)impact of Lottery on voluntary fundraising.

As the Company has no function in relation to the expenditure of the Lottery surplus, the Joint Committee has focused its views in this area to certain improvements it considers worthwhile and necessary which could be made in relation to informing the public of the many uses to which Lottery surpluses are directed.

Printing needs

9.By way of clarification at this stage, it is necessary to explain that “security” in the context of printing arrangements means the measures necessary to ensure and protect the integrity of the individual ticket as distinct from the physical security of stocks of scratch tickets. In other words, that an observer has no means whatsoever of being able to identify a winning scratch ticket from a non-winning scratch ticket; in effect that the security process preserves the anonymity of the stream of scratch tickets.

10.The Company has two major contracts with suppliers of services. The first of these is with PlayPrint Ltd., an Irish Company, and Webcraft Games, an American Company, in a joint and several contract for the supply of Instant Games (Scratch cards) and associated services. This contract was awarded in February, 1989 for two years with renewal options. The award followed the evaluation of eight proposals received under a competitive bid process. The Lottery Company’s management is firmly of the view that no Irish supplier had the capability to satisfy locally the very stringent requirements for Instant Game tickets demanded by the National Lottery.

11.The second major contract is with GTECH (an American-based company), for the supply of facilities management for on-line games. This contract was won by GTECH in a competitive bid process for which there were four bidding companies, all American based. This contract included Irish content to the extent that the central computing system was manufactured by Concurrent in Cork and the air conditioning system and some of the telecommunications hardware were also manufactured in Ireland. A very substantial contract for the printing of Lotto playslips and ticket stock in Ireland has been placed with De La Rue Smurfit Ltd. in Bray. In addition GTECH now use Concurrent for all of their central systems outside the United States.

12.The Company stated in evidence that security is of paramount importance in producing instant game tickets which is itself a technical and specialised area. The priority here is to ensure that in the production of an instant game, the distribution of prizes is done fairly and evenly and at random throughout the game so that no person can have the opportunity of finding out where prizes might be and to prevent any invasive techniques because of the danger of attempted fraud. In view of the fact that the ultimate aim of the Company is to have the scratch cards printed in Ireland, if it can be done, it undertook a feasibility study on the printing of such tickets here. The finding was that while in theory it was possible, there were risks involved and significant cost implications also. The judgment of management was that the contract should continue to be awarded to PlayPrint and Webcraft. In the light of the foregoing, the Company was invited to make the feasibility study available to the Joint Committee, even on a confidential basis, but indicated formally in writing subsequent to its first appearance before the Joint Committee that for reasons of commercial propriety it had to decline.

13.On the occasion of the second appearance of the Company’s representatives before the Joint Committee, they gave a more detailed exposition of the comprehensive tender procedures and security criteria applicable, particularly the evaluation procedures, in respect of tenders. In this latter regard, the company’s evaluation’s team, which is composed of senior management, is assisted by an external consultancy firm. Only after a thorough and exhaustive analysis and appraisal of the tenders (including meetings with the tenderers) does the Board award the contract. In this regard, Appendix A sets out in some detail the criteria, procedure and conclusions in relation to the award in 1989 of the contract for the supply of instant games.

14.The Joint Committee accepts the security arrangements which the Lottery Company deems necessary to preserve the integrity and credibility of the instant game operations but, because of the obvious benefits to the printing industry here and the economy generally, must be concerned that business should not be placed abroad unless it is proved conclusively that there is no other option at home. Technology transfers are obviously available in this as in every other industry and high quality security printing plant already exists in Ireland. The Joint Committee feels strongly that when contracts for scratch cards are being awarded in future the Lottery Company makes all possible efforts to ensure that the contract falls to an Irish company.

Management costs

15.The following tables which have been prepared by the Department of Finance summarise the results of the Company for each year since it was established:

(These operating cost ratios do not include development costs or the costs of acquisition of fixed assets. Fixed assets are held in trust for the Minister for Finance in accordance with Section 17 of the Act).

16.In relation to its operating and development costs, the Company explained that it is in a developing situation e.g. creating infrastructure, developing networks to deal with projected increases in future sales and that it must of necessity carry a developmental overhead that will only diminish as sales increase and fixed costs hold themselves.

17.While there was a variation in approach by the Company and the Joint Committee in calculating operating costs (in evidence the Company excluded agents’ fees and commissions), the Joint Committee does not wish to diminish the success of the Company in its operations nor in its ability to stay marginally within the ceiling imposed under the terms of its licence to operate within a ratio of 19.75% (including agents fees, commissions) of turnover. In this regard, the Company was invited to furnish the Joint Committee with comparable international statistics on the efficiency of its operations and these are set out in Appendices B and C to this report.

18.The Lottery Company indicated that, while it is difficult to make comparisons, the Irish National Lottery is not comparable with European Lotteries because most European Lotteries have been established for a considerable time, are not on-line and do not offer North American style instant games. The Joint Committee was further informed by the Lottery Company that when making comparisons it is necessary to look to America and the more valid comparisons are with North American Lotteries. The Joint Committee is at a disadvantage in this area at present insofar as it has insufficient data at its disposal to validate the Lottery Company’s assessment of the position and accordingly recommends that the Department of Finance monitor on an ongoing basis the performance of the Lottery Company vis-a-vis its foreign counterparts.

19.The Company pointed out to the Joint Committee that one indicator of the efficiency of the National Lottery was that revenue generated per Lottery employee was twice as high as in the case of comparable lotteries in the U.S. Appendix B shows lotteries ranked by 1988 sales as a percentage of State personal income and Ireland ranks 10th when compared with 28 North American Lotteries. However, when the comparison is narrowed down to the more recent lottery start-ups (a more appropriate comparison) Ireland ranks 1st among those lotteries with start-ups in the last 2-5 years and in those in operation less than 2 years.

20.Appendix C shows lotteries ranked by 1988 Government revenues as a percentage of State personal income. The Joint Committee understands, again from the Lottery Company, that this is regarded in the lottery industry as one of the most important means of measuring efficiency. In this case, Ireland ranks in 11th place overall and in 1st place among states with recent start-ups.

21.The Joint Committee understands that some lotteries under the Gaming and Lotteries legislation are permitted operating costs of up to 40% and that in the circumstances and by comparison, the 19.75% limit imposed on the Company might not seem unduly high. However, the Joint Committee wishes to emphasise that the limit on the Company should not be understood by the Company as being a limit up to which they may spend. Rather, it should be seen as an absolute upper limit which, with increased efficiency and expansion, should be decreased. The Joint Committee can appreciate the rationale for the 19.75% upper limit when the Lottery Company was being established because of the absence of any hard facts as to the likely success of the Company but, in view of the phenomenal and unanticipated success, recommends that the statutory limit should be reviewed immediately by the Department of Finance. The Joint Committee cannot ignore the fact that in monetary terms operating costs have increased from £14.5m in the first year of operation to £26m in 1989. Accordingly the Joint Committee proposes to review this aspect of the Company’s operations in twelve months with particular regard to the results of the Department’s review. Subsequent to the preparation of this report, further information was submitted by the Lottery Company in respect of its operating costs (See Appendix D).

22.Following on the decision to have a mid-week Lotto, the Company assured the Joint Committee that there would be no increase in its administrative costs: in fact it sees the development as a more efficient use of the company’s resources both in terms of staffing and infrastructure. The Company accepts that there will be increases in agents’ commission and in the revenue of the company which supplies the facility and management services for the on-line games. However these two extra costs are, in the Lottery Company’s view, directly proportional to the income generated. Because the mid-week lotto draw is in its infancy, the Joint Committee cannot test the foregoing and it will also keep this matter under review.

23.Lottery Surplus

The Joint Committee wishes to draw attention to the surprising and remarkable fact that the tables set out in paragraph 15 of this Report establish that while the surplus in 1987 represented 40.7% of total sales, by 1989 that percentage had fallen dramatically to 31.6%; and this decrease notwithstanding the extraordinary increase in sales from £102.4m in 1987 to £140.4m in 1989. Apart from the increase in the prize fund, the marked increase in operating costs referred to in paragraph 21 must again be adverted to.

Randomness of Lottery

24.In view of recent media speculation on the possibility of devising a “system” to beat the Lottery, the Company’s representatives gave detailed evidence to the contrary. The Joint Committee is satisfied with the Company’s reassurance on the randomness of the Lottery. It is a fact that the higher the level of participation by a player, the higher the probability of winning but this does not affect the randomness of the winning combination.

Social Impact of Lottery

25.While it has to be noted that expenditure on the games is voluntary, the same expenditure is obviously more significant for a low income person than for a high income person. The overall conclusion of the DKM consultancy report was that surveys do not bear out the commonly held perceptions that significant numbers of the unemployed were spending large proportions of their income on Lottery tickets and that such expenditure was a widespread phenomenon. Nevertheless the Joint Committee is aware that there are instances, not always anecdotal, of contrary situations which general statistical data cannot represent and accordingly recommends continuous monitoring of the social impact of the Lottery and that monitoring becomes all the more essential in the light of the advent of the mid-week lotto.

26.While there is no automatic mechanism to prevent excessive participation by players, agents can, however, refuse to sell tickets at their discretion if they feel there is justification. The Company emphasised that 50% of the money wagered is returned in prizemoney and that it has no wish that the National Lottery should become a scandal or a negative imposition on the public. Should problems emerge the Company is prepared to respond positively. The Joint Committee therefore welcomes management’s assurance that the National Lottery should not become a source of disrepute. The Joint Committee would not wish that what should be an entertainment would become an addiction for vulnerable personalities.

27.The Joint Committee notes that concern has been expressed about the dangers of children gambling and accordingly takes the view that the National Lottery should not become another source of under age gambling. The Joint Committee is particularly anxious that any change in the gaming laws or in their more thorough enforcement, should not lead to under age participation in the National Lottery; in this context the Joint Committee wishes that the Lottery Company, through its agents, would be vigilant in the matter.

28.The aforementioned comments on excessive participation, are of course, all the more valid now that the on-line Lotto game has gone mid-week. The Joint Committee had not been informed by the Company at its first appearance before it - 10th April, 1990 - of the imminence of this development - 30th May, 1990 - and in the circumstances must record its dismay and disappointment thereat. The Joint Committee does not see what commercial losses could have been incurred by the Company or competitive advantage forfeited by disclosure of the fact. It is inappropriate during an examination of a semi-state company that salient and imminent developments are withheld. If the Company was apprehensive about divulging the fact, it cannot detract from the fact that it was aware that there is a specific provision in the Joint Committee’s orders of reference in relation to matters of a confidential nature. Furthermore the Joint Committee must express its dissatisfaction at the Company’s omission particularly in the light of the considerable concern about the social impact of the Lottery which the Joint Committee was at pains to convey on the occasion of the Company’s first appearance before it. On this occasion, the Joint Committee is prepared to give the Company the benefit of the doubt but wishes at the same time to signal that a serious view will be taken of any such future omission on the part of bodies under examination.

29.In paragraph 25, the Joint Committee recommended that the Company monitor on an on going basis the work undertaken by DKM on its behalf and the Joint Committee acknowledges the Company’s readiness to do so. While the Joint Committee has no reason to doubt the methodology of the DKM consultancy, the Lottery Company may wish to consider that similar follow up consultancies be spread across the spectrum of experts in the field, the better to acquaint itself with alternative methodologies and to have available to it more extensive methodological data for comparative purposes.

Exclusion clause in retailers’ contracts

30.In the interval between the first and second appearance of the Company before the Joint Committee, the Minister for Industry and Commerce made the Restrictive Practices (National Lottery) Order, 1990 (S.I. No. 130 of 1990) prohibiting the Lottery Company from imposing an exclusion clause in its contracts with the retail outlets. Without commenting on the merits or otherwise of the Lottery Company’s then practice, the Joint Committee welcomes the Minister’s decision to take positive and quick action to put fair trading considerations centre stage.

Prizes/Jackpots

31.The Joint Committee invited the Company to clarify its policy under this heading in view again of speculation about the social impact on peoples lives of large financial windfalls. The Company indicated that the Lotto is essentially a jackpot-led game with bigger and bigger jackpots inviting in more players rather than the existing pool of players spending more. However, the Joint Committee notes that the Company has not ruled out a possible £1m cap. Furthermore, the Joint Committee is aware of the negative impact such a limit could have on sales and growth particularly as the size of the winnings either from the Lotto or the instant game determines the avidity with which players participate. Accordingly the Joint Committee, while not wishing to appear disengenuous, cannot at this stage advance arguments against the present size structure of prizes/jackpots.

Disbursement of Lottery Surplus

32.The Joint Committee is conscious that the Lottery Company has no statutory role in relation to the disbursement of the Lottery Surplus. The Oireachtas devolved such responsibility on the Government. In evidence to the Joint Committee the management of the Lottery Company was quite categorical that it had no role in this area and did not wish to comment on it.

33.The Joint Committee is confined under its Orders of Reference to examining, inter alia, the reports and accounts and overall operational results of the bodies listed in the Schedule thereto. This delimiting of the functions of the Joint Committee would normally preclude the Committee from addressing aspects of the enabling legislation as distinct from the operations of the body established thereunder. Nevertheless, some Members of the Joint Committee expressed concern about the adverse publicity which surrounded some decisions on the disbursement of moneys from the Lottery and believe that a satisfactory procedure has not yet been achieved for allocating funds. The Joint Committee, therefore, takes the view that to ignore this issue altogether would leave its examination of the Lottery Company open to deliberate misrepresentation on this matter. The Joint Committee is concerned about adverse publicity which has surrounded some decisions on the disbursement of moneys from the Lottery. The Joint Committee having considered the issue at some considerable length takes the view that the issue of disbursements from the Lottery surplus would be treated less as a “political football” in public debate if a number of relatively simple steps were followed and accordingly would wish to see

- more information published on projects assisted from the Lottery. The Joint Committee feels that this is the prime responsibility of the Lottery Company and that the Company has not adequately discharged its responsibilities in this matter. The absence of full information for no good reason can only lead to negative speculation. The Joint Committee would at this point reiterate the recommendations made elsewhere in the Report on publicity.

- the publication of clearer information for the benefit of applicants on application procedures. The Joint Committee again feels that the publication of such information cannot but be helpful.

The Joint Committee is publishing for the first time details of the projects supported by National Lottery Funds in 1987 - 1989 and of the 1990 National Lottery allocations (See Appendices E and F, respectively).

34.The Joint Committee believes that the continuing success of the National Lottery will be maintained if the Lottery surplus is seen as additional or new grant aid to those areas of activity which the Government may decide upon and not in substitution for Exchequer funding. At present, the beneficiary areas statutorily eligible for funds from the National Lottery surplus are as follows:

Sport / Recreation / Youth,

Irish Language,

Arts and Culture,

Health and Welfare,

Amenities,

National Heritage.

The Joint Committee endorses the continuation of funding to these areas. Furthermore, the Joint Committee believes that this prescriptive list is sufficiently broad; advises against any widening of the list; and recommends that any pressures to add additional areas of activity, however worthy, which would result in spreading the level of support too thinly, thus losing the impact of the fund, should be resisted. In this regard, the Joint Committee is conscious that from time to time access to the Lottery surplus is put forward as a means of resolving problems and would caution against the view that the National Lottery can be used as a panacea for all funding difficulties.

Advertising/Publicity

35.In view of the enormous Lottery surplus which is distributed, it is a matter of concern to the Joint Committee that there continues to be a paucity of publicity advising the public on the allocations. The Joint Committee welcomes the Company’s concern in this respect particulary as it is in its own interests that the total proposition it offers players is backed up by visible evidence of the projects being funded. To this end, the Joint Committee welcomes the Company’s initiative in allocating a sum in their marketing and PR budget to attend to this aspect.

36.Beneficiaries have tended to ignore the requirement to acknowledge their funding by plaques/signs. However, the Company has assured the Joint Committee that from this year onwards, a systematic approach to such publicity is being adopted by it and that this will be backed up with posters and publicity. In this regard, the Joint Committee advises strongly that the Company should consider issuing a newsletter every six months which would be made available at outlets and indeed dispensing altogether with the requirement for beneficiaries to pay for plaques/signs.

Impact of Lottery on Voluntary Fundraising

37.The Joint Committee notes that DKM addressed this issue in their Report on the Assessment of the Economic Impact of the National Lottery. The Report states, inter alia, at Section 5.4 that DKM had “contacted what we believed were the most significant organisations to enquire how their lotteries had performed since the launch of the National Lottery” and that “all argued that the scope for the development of their lotteries was constrained by the existence of the National Lottery”. In the light of Lotto draws now being held twice weekly, the Joint Committee can justifiably assume that the position generally of the voluntary organisations must be weakened. It is an established fact that the existence of voluntary fundraising organisations has helped immeasurably in recent years to raise the social consciousness of communities to the very significant deficiencies in our social fabric at local and national level and no one would wish to see the invaluable and incalculable good achieved by such organisations inhibited, diminished or vitiated by the existence of a high profile National Lottery. While the Joint Committee has no specific advice on how to achieve and maintain an equilibrium it wishes by highlighting its concern to stimulate debate on a matter that could adversely affect those voluntary organisations which have become an integral part of our social framework and support structures.

Conclusions

38.The Joint Committee is impressed by the success of the Company which has been achieved by highly efficient marketing and public relations. The nature of the Company’s operations are such that its games (including the mid-week extension) have attracted a high public participation and continuing high interest and there is every reason to anticipate increasing participation. The Company is in the hands of an excellent management team. The Joint Committee has recorded its views on a number of areas of concern to it and acknowledges the eagerness with which management responded to questions in evidence. In an extremely short time span the company has laid firm foundations for a continuing smooth expansion. There is enormous public good will towards the National Lottery’s continued success and this must be so because so many worthwhile projects, which would otherwise have remained uninitiated or underfunded, can and do benefit without any obvious imposition on, or loss to, the Exchequer.

(Signed) Dick Roche, T.D.,

Chairman of the Joint Committee.

27th November, 1990