creating a lottery for the future - gambling commission · 210mm 210mm 297mm 10mm contents 1....

210mm 210mm

297m

m

10m

m

National Lottery Commission101 Wigmore StreetLondon W1U 1QU

Tel +44 (0)20 7016 3400Fax +44 (0)20 7016 3401

www.natlotcomm.gov.uk

© National Lottery Commission 2008

An overview of the Third Licence Competition

April 2008

Creating a Lotteryfor the future

Creatin

g a Lo

ttery for th

e futu

reA

n o

verview o

f the Th

ird Licen

ce Co

mp

etition

Cert no. SA-COC-001768

210mm 210mm

297m

m

10m

m

Contents

1. Foreword 1

2. Overview and issues for the future2.1 National Lottery 32.2 Competition objectives 32.3 Key milestones 42.4 Delivering a successful competition 42.5 Achievements of the competition 52.6 The Lottery in the third Licence period 62.7 Issues for the future 6

3. Main stages of the competition 3.1 Introduction 103.2 Identification of barriers to entry 103.3 Further work on the options available 133.4 Evaluation of the options and broad structure for the competition 153.5 Drafting of detailed terms of the competition 183.6 Finalisation of the detailed terms of the competition 193.7 Bidders compile and submit Bids 283.8 Evaluation of Bids 293.9 Licence finalisation 313.10 Transition period 32

4. Managing the competition4.1 Introduction 344.2 Project Board 344.3 Senior Responsible Owner 354.4 Project Office 354.5 Quality management 364.6 Risk management 364.7 Managing the evaluation process 364.8 Use of external advisers 374.9 Independent scrutiny of the process 374.10 Gateway Review Process 374.11 Independent process review 384.12 Contingency 384.13 Costs of the competition 394.14 Costs relative to previous Licence competitions 404.15 Costs relative to other comparable exercises 41

5. Issues for the future 5.1 Issues relating to the structure of the competition 435.2 Issues relating to the organisation of the project: Lessons learned 46

AnnexesA Overview of the Lottery 49B The current Lottery 55C Summary of services provided by the operator 59D Bid Notes 61E Description and summary of the Draft Licence 64F Project Board Terms of Reference 72G Independent process assurance report: Serco Consulting 77H Summary of documents produced for the competition 79I Glossary 81

Acknowledgements 82 This document is available in large font– please contact 020 7016 3440 oremail [email protected].

1. Foreword

We are the guardians of a unique brand – the National Lottery. Lottery games which are played by millions in the UK and which have raised billions for goodcauses require an industry that is able to innovate and reinvigorate itself to meetthe challenges of the future.

That was our starting point when we embarked on the project to design the third Licence competition for theNational Lottery in June 2004.

We set ourselves a clear vision. We would run a fair, open and vigorous competition to award the third NationalLottery Licence to the single commercial operator who would generate the most money for good causes.

Competition is a spur to success. It generates creativity and innovation and it means we can be confident that thewinning Bidder has been rigorously tested against robust competition.

The National Lottery market is like no other. It was unlikely that there would be large numbers of Bidders queuing up to enter – the UK Lottery market does not operate in this way. We wanted to secure a small number of highlycompetitive Bidders with internationally recognised expertise who would test each other to the very end – and weare pleased to have done just that. We received two strong Bids from Camelot Group plc and Sugal & Damani UKLtd which both met the seven Required Standards necessary to operate the National Lottery. Ultimately, Camelot was selected after rigorous scrutiny as the Bid most likely to generate the best returns to good causes over the ten-year Licence.

However, we couldn’t have done this without a team of expert advisers. Our partnership approach combined thevery best private sector expertise from leading industry players, including Rothschild as lead adviser, with our ownexpert in-house team who have years of experience in Lottery regulation and competition. In addition, we hadrigorous independent scrutiny at every key stage of the project.

The National Lottery Licence competition is a multi-billion pound industry deal which was designed, run andevaluated over an intensive four-year period. We adopted the recognised PRINCE 2 project management systemsthroughout the project and have sought to incorporate best practice throughout.

The purpose of this report is threefold. Transparency has been paramount and we wanted to provide a full and openrecord of this important competition. We also believe it is important to record our experience to help shape thinkingfor the award of the fourth National Lottery Licence. And finally, we hope it may also be useful to other bodies in theprivate and public sectors that run similar processes.

We are pleased to have run a successful competition for the National Lottery. We are immensely proud of our rolewith this unique and special institution and we will continue to safeguard the National Lottery on behalf of theUnited Kingdom.

Dr Anne Wright CBEChair

Robert FosterCompetition Project Board Chair

Mark HarrisChief Executive

Section 1 | Foreword

An overview of the Third Licence Competition | 1

Section 2 | Overview and issues for the future

Since the first National Lottery draw in November 1994, the Lottery has enriched the cultural and sporting life of theUK and helped communities fund a range of important projects. It has raised £20 billion for good causes, createdover 2,000 millionaires and made 280,000 grants to projects large and small. The National Lottery is one of theworld’s largest lotteries, with sales of almost £5 billion in 2006/07.

As the regulator of the National Lottery, the National Lottery Commission recognised that the future continuation ofthat success was not guaranteed. Therefore, the choice of operator to take the Lottery forward from 2009 was animportant decision. This report sets out the way in which the Commission prepared for and delivered a successfulcompetition for the third National Lottery Licence and highlights some issues which the Commission will have toconsider during the third Licence period and about any future Licence award.

2.1 National Lottery

The Lottery was created under UK legislation as a National Lottery, with a dedicated regulator responsible foroversight of the way it operates. The National Lottery etc. Act 1993 (as amended) creates an exception to thegeneral principle under UK law that lotteries are unlawful, by providing that lotteries which form part of the NationalLottery are permitted1. For a lottery to form part of the National Lottery, it must be licensed by the Commission. TheLottery is reserved for generating funds for good causes.

In exercising their functions, the Secretary of State for Culture, Media and Sport and the Commission have the samethree overriding duties:

• To secure that the National Lottery is run, and every lottery that forms part of it is promoted, with all duepropriety; and

• To secure that the interests of every participant in the Lottery are protected; • Subject to these, to do its best in exercising its functions to secure that the net proceeds of the National Lottery

for good causes are as great as possible.

The Commission’s primary responsibilities therefore relate to propriety and player protection. A great deal of itsregulatory activity focuses on these areas. The licensing structure and regulatory regime requires the Commission touphold high standards of propriety and player protection. These are paramount under the UK regime. An overviewof the key institutions and licensing regime is at Annex A and a brief description of the current Lottery operations,describing the games and the ways in which they can be played, is at Annex B.

The Commission’s role is twofold. It regulates and safeguards the Lottery on a day to day basis, and selects andlicences the operator of the Lottery through a competition.

2.2 Competition objectives

The Government and Commission believe that vigorous competition for the right to operate the National Lottery isthe best way to generate the maximum returns for good causes. Therefore, the Commission, in line with its statutoryduties, and after a period of extensive consultation, analysis and feedback, structured a competition designed toachieve:

• High standards of propriety and player protection;• A vigorous competition for the Licence, on the basis that this is the best means to generate the greatest returns

to good causes;• As far as possible, a level playing field for all Bidders; and• Well-aligned incentives for the Licensee to increase returns to good causes.

The competition also sought to develop a framework which would allow a future Licence award process to beconducted on as vigorous a basis as possible.

The Commission sought a Licensee to provide a complete solution for the Lottery, including: setting up and runningthe Lottery; designing, building, financing and operating the requisite infrastructure and systems; designing,distributing and marketing Lottery games; and ensuring a smooth transition of the Lottery from the currentoperations. A summary of the services to be provided by the operator is provided at Annex C.



1 The Gambling Act 2005 also permits ‘society lotteries’ which are regulated by the Gambling Commission. The size of such lotteries is limited by regulation.

2.3 Key milestones

The Commission started preparatory work in 2004 and published its first discussion document at the start of 2005.This allowed for a significant period in which the Commission was able to identify issues about the competitionframework on which it sought feedback from a wide range of interested parties. It also ensured that the opportunityoffered by the competition was marketed extensively before and following the formal start of the competition,which took place towards the end of 2005.

Following the formal start of the competition, the Commission was able to develop a competition structure, set outin the Invitation To Apply (ITA), which gave potential Bidders clarity on the opportunity, the evidence required andthe criteria against which Bids would be assessed. Following publication of the ITA in mid-2006, Bidders were thengiven over seven months to prepare before Bids were submitted early in 2007. A number of parties actively pursuedan interest in Bidding for the Licence.

The Commission received two high quality Bids, which were rigorously evaluated. In August 2007, the Commissionannounced that both Camelot Group plc (Camelot) and Sugal & Damani Ltd (SDUK) had met each of the sevendemanding Required Standards for the competition2. Therefore both Bids were judged to be capable, among otherthings, of providing the modern, flexible technology required to run the National Lottery, delivering transition3

successfully and ensuring high standards of propriety and player protection.

The Commission then concluded that based on an analysis of each business plan, at similar levels of likely sales,Camelot was slightly more generous to good causes than SDUK. More significantly, the Commission concluded thatthere was a strong probability that Camelot would achieve higher sales than SDUK, once the relative strengths andweaknesses of the evidence provided by the Bidders in support of their sales forecasts had been taken into account.The Commission therefore selected Camelot as Preferred Bidder, with SDUK appointed as Reserve Bidder4. At theend of August 2007, the Commission announced that it had finalised terms with Camelot and signed an EnablingAgreement5 for the third National Lottery Licence.

The third Licence starts on 1 February 2009, giving Camelot 17 months in which to prepare. The Commission iscommitted to, and working towards, a successful transition from the second Licence to the third Licence, to ensurethat there is a seamless transition for retailers, and most importantly, players. This will maintain the flow of funds togood causes so that they can continue to support the projects that help communities across the UK.

2.4 Delivering a successful competition

A number of key factors underpinned the way in which the competition was delivered. This involved earlypreparation, marketing the opportunity, a transparent competition process, use of expert analysis, robust projectmanagement structures and a clear competition structure.

Although the Commission’s first consultation document was published more than two years before the evaluation ofBids, such early preparation was essential in allowing the Commission and interested parties to consider theframework of the competition, to consider how a number of key issues could be addressed and to provide theopportunity for the range of skills required by Bid consortia to coalesce.

The National Lottery is the only large scale lottery in the UK. Indeed, during the process of awarding Camelot thesecond Licence in 2002, serious questions were raised about the ability of new Bidders to compete with anincumbent operator. Accordingly, the Commission was mindful of the need to market the competition opportunityactively to potential Bidders and others. It engaged with a wide range of stakeholders throughout the competition.This included Parliament, Government, retailers, the public and, in particular, potential Bidders and potentialconsortia members. The Commission considered such engagement to be essential on a major project of suchnational importance.

Potential Bidders included firms in specialist areas of lottery technology and lottery operation, a number of who werebased outside the UK. The Commission therefore ensured that the opportunity offered by the competition wasmarketed worldwide. It delivered this through presentations at international industry events and other forums, forexample, a seminar for potential Bidders; and through the engagement of Rothschild, its lead adviser, which had aninternational capability.

The Commission delivered a transparent process by setting out from an early stage the expected timetable for thecompetition, to allow potential Bidders and others to take account of the competition in planning their activities. Inaddition, the Commission made available to interested parties, including potential Bidders, a wide range ofinformation about the competition and the Lottery opportunity.


4 | An overview of the Third Licence Competition

2 The Required Standards were: propriety, player protection, transition, organisation, financial soundness, technology operation and operational risk management.3 Transition includes the process of preparing for, and the start up of, operations. 4 A Reserve Bidder was the Bidder with whom the Commission would intend to finalise the draft Licence in the event that finalisation of the draft Licence was not achieved

with the Preferred Bidder.5 The agreement entered into by the Commission and the Preferred Bidder governing the transition period.

From the outset, the Commission recognised the wide range of experience that managing a significant competitionrequired. Input from Commission staff was therefore heavily supplemented by external consultants, appointed toprovide specialist expertise, support the additional workload, and maintain a separation of Bid evaluation activitiesfrom day to day contact with Camelot, as operator of the second Licence.

The Commission also recognised that such a major competition required robust project management. TheCommission therefore put in place a range of arrangements to manage the competition, designed to give potentialBidders every confidence that the competition would be conducted in a rigorous and fair manner. This included thecreation of a Project Board to oversee the detailed conduct of the competition and to support the work of the ChiefExecutive and his staff. A Commissioner, Robert Foster, chaired the Project Board throughout the competition toprovide stability and continuity and acted as the project’s main ‘voice’ to stakeholders and the media. Details of theway in which the Licence competition was managed are set out in Chapter 4.

A clear competition structure, including the basis for the evaluation of Bids, was important to give Bidders clarityabout the process. To ensure that Bidders had a clear understanding of the Lottery opportunity, the evidencerequired and the criteria against which they would be assessed, the Commission issued a comprehensive ITA. Thisidentified the clear and rigorous evaluation process against which Bids would be assessed. The decision was notsubject to challenge, which has not always been the case in the UK or some other lottery jurisdictions.

2.5 Achievements of the competition

The competition delivered against the objectives which the Commission set, of ensuring propriety and playerprotection, a vigorous competition, a level playing field and well-aligned incentives for the Licensee to increasereturns to good causes.

Propriety and player protection are the Commission’s two key statutory objectives and formed a key part of the ITA,against which Bidders had to submit evidence and be evaluated. Propriety and player protection were two of theseven Required Standards against which Bids were evaluated. In this way, the Commission ensured that thecompetition delivered an operator which is able to uphold the highest standards in player protection and propriety.

The National Lottery is one of the world’s largest lotteries. Bidding is therefore a significant undertaking requiring arange of skills, some of which are specialised. Based on responses to consultation and further analysis that supportedthe Commission’s view that the costs of Bidding would not deter serious Bidders, the Commission did not provideassistance with Bid costs but delivered a simplified process, including use of Required Standards. Therefore, theCommission sought a small number of high quality Bids. In the event, the Commission received two Bids prepared ina competitive environment.

The Commission maintained competitive pressure throughout the process through the design of the competitionand by seeking to ensure that there was uncertainty among Bidders of their position in relation to that of otherBidders. It did so through the use of a single stage process with no pre-registration of interest, to avoid Biddershaving clarity about competitors. It also made it a condition of the competition that Bidders could not amend theirprincipal forecast, retention rates and hence forecast contributions to good causes at any time after the Bid had beensubmitted. This encouraged Bidders to make their most competitive offers. An ascending auction process might haveallowed Bidders to make judgements relative to other Bidders. The Commission also sought to maintain competitivetension during the evaluation process by releasing limited information about both Bids and treating informationwithin the Bids as confidential6.

The Commission took a number of steps to ensure that all Bidders had a fair chance to secure the Licence. In doingso, the Commission made clear that this should not be achieved by disadvantaging Camelot, as the current operator.The measures it took were considered to be in the best interests of the Lottery in the longer term. These stepsincluded the adoption of Required Standards in certain areas. The Commission’s assessment of each RequiredStandard took into account all relevant areas of the Bid, and Bidders needed to satisfy the Commission as to theirability to meet the Required Standards. The assessment of each Required Standard did not impact on theCommission’s evaluation of the overall returns to good causes nor be used as a comparator between Bids. This gavenon-incumbent Bidders a fair chance to secure the Licence.

The Commission ensured that Bidders had access to information by making available a wide range of data on theLottery opportunity. It also provided information on a number of key handover issues that would be relevant in theevent that a Bidder other than Camelot had won the competition. The Commission made clear that it expected theoperator, from the start of the third Licence, to make use of modern technology. The Commission also took steps toensure a level playing field in respect of specific issues, such as TUPE7, where it asked Bidders to submit the proposalsthey deemed most appropriate in terms of meeting the requirements of the competition but made clear that theCommission would ignore any proposed redundancy costs in the evaluation of Bids.



6 The Bids included information which remains commercially confidential.7 Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE). The purpose of TUPE is to protect the rights of employees in circumstances where an

undertaking is transferred.

Well-aligned incentives for the Licensee to increase returns to good causes were an important part of thecompetition structure. The Commission sought a retention structure that was as simple as possible and closelyaligned the operator’s returns with those of good causes. Following expert analysis and review, the Commissionprovided for a revised incentive structure in the ITA that allowed for the calculation of the retention in two stages,the ability to specify separate retention rates for four different types of games and for each type of game the abilityto set retention rates that vary with the level of turnover.

2.6 The Lottery in the third Licence period

The Commission has been able to use the third Licence competition to ensure that Camelot, as the new operator,will deliver increased ‘generosity’ to good causes, new modern technology, new innovative games, a new retentionstructure and in so doing use the competitive process to deliver a more cost efficient operator.

Returns to good causes are driven primarily by two variables: the level of sales and the proportion of proceeds whichthe operator has committed to deliver at that level of sales (which are termed “the generosity”). The Commissioncannot make a reliable judgement about the likely level of sales themselves over the third Licence period, as thiswould involve forecasting over a ten year period, which itself does not begin for another year, in a fast changingmarket environment. Specific forecasts of this nature were not the purpose, nor the outcome, of the Licencecompetition. However, it is possible to estimate the effect of the increased generosity of the returns in the thirdLicence when compared to the remainder of the second Licence, at a constant level of sales, based on commitmentsmade during the competition process. This estimation has to take account of the fact that generosity is based on anannual tranche structure contained in the Bid. Generosity will therefore vary depending on sales levels, the mix ofgames and distribution channels, the timing of new games over the period, and between years.

At a constant level of sales of £5 billion per annum, the Commission estimates that the third Licence, whencompared to the position for the remainder of the current Licence, is likely to result in an average annual increase inreturns to good causes of between £60 million and £100 million. This amounts to a total of between £600 millionand £1 billion over the ten years of the third Licence period. The range between these two figures depends on themix of products that are purchased by players.

The third Licence period will bring benefits for retailers from new technology. Terminals will be accompanied by newsatellite communications technology. This should deliver benefits for retailers and players from quicker printing timeto cutting queuing times in busy periods. Retailers will also benefit from digital media screens that will be installed inall Lottery outlets in the UK alongside terminals. And there will be an increase in the size of the retailer estate toensure that there are no less than 27,500 terminals available for use in retail outlets from the start of the third Licenceperiod. The requirement for modern technology means that Camelot will install a new central gaming system, whichshould support innovative new games by allowing faster development of such games. Camelot’s Bid included ideasfor a range of innovative new games, including a world lottery draw game involving lotteries around the globe.

The new retention structure will be in place for the third Licence period and aligns as closely as possible Camelot’sreturns with those of good causes. The revised incentive structure will allow the calculation of the retention in twostages, the ability to specify separate retention rates for four different types of games and for each type of game theability to set retention rates that vary with the level of turnover. This will give Camelot incentives to increase salesand therefore returns to good causes across its games portfolio.

2.7 Issues for the future

Although the competition for the third Licence has been successfully concluded, there are, nevertheless, a number ofissues which the Commission will consider during the third Licence period to ensure that the Lottery continues tomaximise returns for good causes and which relate to future Licence awards. There are also lessons learnedregarding the organisation of the third Licence competition.

Issues relating to the third Licence period and future Licence awards include the following:

• Monitoring returns to good causesThe third Licence includes a new incentive structure which should ensure that Camelot’s incentives to maximiseprofits for its shareholders are aligned with returns to good causes. However, there remains a risk that the operatormay not achieve all potential sales reasonably available to it. The Commission will seek benchmarks by which itcan monitor operator performance, particularly in respect of returns to good causes, during the third Licenceperiod. If the Commission has concerns about Camelot’s performance it will seek to resolve them with Camelot. If the Commission remains unsatisfied it will consider how it could make use of the provisions of the third Licence, particularly the option of third party assessments of performance, to ensure that Camelot is acting in away that gives the Commission confidence that returns to good causes are maximised throughout the period ofthe third Licence.



• Investment opportunitiesIn issuing the ITA, the Commission recognised that technology developments over a ten year Licence period,which itself did not start for another two and a half years, made it difficult for Bidders to provide any certaintyabout the technology that would be required beyond the early years of the Licence period. It therefore did not askfor Bidders to specifically provide for a refresh of technology as part of their Bid. To have done so could haveintroduced a distorting factor into the Bids, depending on the approach taken by different Bidders. It could alsohave led to a sub-optimal investment strategy. Instead, the Commission required Bidders to provide for moderntechnology from the start of the Licence and for that technology to be maintained during the Licence period. TheCommission will be willing to consider, at the relevant time and on a case-by-case basis, proposals for investmentin the Lottery infrastructure that seek to allow Camelot to recover an element of its investment costs, and woulddo so on the basis of business plan proposals to be put forward by Camelot at the time. Camelot would need toconvince the Commission that such investment would genuinely serve to increase returns to good causes in amanner that generated an appropriate return on that investment from a good causes perspective. TheCommission would also need to be satisfied that no ‘windfall’ gains flowed to Camelot from reduced operatingcosts or a reduction in the costs of maintaining existing assets.

• Operator returns and costsA competition conducted in a competitive environment should exert downward pressure on costs. However, lowreturns might provide a barrier to entry which puts off potential Bidders. It might also increase the risk of operatorfailure during the Licence period. The Commission will consider the return that the operator receives for itsinvestment as part of the Commission’s consideration of the structure for the fourth Licence award. This will helpto inform the balance to be struck between continuing to press downwards on operator returns to maximise theamount for good causes as against the possibility that low rates of return could discourage potential Bidders fromentering the process. The Commission will monitor indicators of the financial health of Camelot throughout thethird Licence period.

• The market for potential Bidders, including the supply of lottery technology, is restrictedThe UK Lottery requires a combination of three key skill sets – experience of lotteries and their operation, lotterytechnology and experience of the retailing and distribution of consumer goods in the UK. One or more of thesemay be in short supply.

• There are currently a limited number of commercial lottery operators worldwide. In most countries, the lottery operator is state-run or state-controlled, and is therefore unlikely to Bid for an overseas lottery. There is some evidence that such international commercial lottery operators as exist are diversifying into other areas of the gaming market;

• Whilst lottery technology is not now seen as such a critical element in the Bid process, it nevertheless remains an important component of any lottery. The market for lottery technology is international but, given the natureof lottery contracts (typically national or state monopolies, with contracts let for a relatively long period), supports only a limited number of suppliers and there is evidence of consolidation within this market; and

• Experience of the UK retail and distribution environment for consumer goods is widely available. Although some companies involved in these sectors considered the opportunity to participate more fully in the Lottery as part of a Bid consortium, they did not participate in either of the Bids which the Commission received. New entrants to the Lottery market may find it difficult to acquire this expertise, although it is likely to be available from consultancy organisations.

As regulator, the Commission cannot affect the prevailing market conditions. Nevertheless, the Commission willmonitor national and international developments in these areas on a continuous basis during the third Licenceperiod and on a more detailed basis part way through the Licence, as the Commission starts to consider theimplications for the award of the fourth Licence.

• The fourth Licence awardThere are few lotteries worldwide which undertake a Licence award process for the whole lottery operation, as isthe case in the UK, and certainly none of the same scale. Thus, the UK model is unusual and demands aconsortium which has a specific range of skills, including experience of running lotteries, lottery technology andUK retailer/consumer knowledge. For the award of the fourth Licence, the Commission will have to structure theprocess in response to the market circumstances prevailing at the time, which could include awarding the Licenceon a similar basis to that adopted for the third or on a different basis. The provisions of the third Licence have thepotential for a Licence award on the basis of taking over management of the operator as a ‘going concern’,which should help mitigate the risks inherent in transition and is likely to provide the opportunity for a widerrange of potential Bidders to be involved. These arrangements would also assist in managing the situation wherean operator either withdraws or has its Licence revoked.



As part of the project management arrangements for the third Licence competition process, the Commissionmaintained a record of lessons learned. The key lessons learned were:

General• Where market-making is required, early preparation and engagement with a wide range of stakeholders can

contribute to the success of the project;• A transparent process, involving regular feedback to stakeholders, can deliver confidence in the process amongst

Bidders and other stakeholders; and• To help Bidders to prepare robust Bids, the provision of information about the Lottery is an important factor. The

use of a Virtual Data Room allows Bidders real time access to data at all times and supports potential Bidders notbased in the UK.

Specific• Governance: Clear governance structures, in particular, the use of a Project Board with clear decision-making

authority, facilitates timely decision-making;• Planning: Stage planning benefits from a contingency time margin and any use of that contingency time should

form part of the reporting process to the SRO and Project Board;• Process: To manage and record decisions taken on significiant project outputs, for example the ITA and draft

Licence, policy issue matrices should be used to record issues and the decisions reached. In addition, effortsshould be taken in designing the process to reduce the likelihood of Bidders over-Bidding. However, there is asignificant probability that Bidders will submit over-optimistic Bids. Therefore, it is important to have the rightadvisers and tools, including use of comparative analysis, to deal with any over-optimism; and

• Resourcing: A Project Office should be set up at the start of the project, particularly where projects are time-limited. Furthermore, early identification of the need for and appointment of external expertise to supplementskills available supports successful delivery.

The Commission is keenly aware of the need for continuing effort in protecting the on-going success of the NationalLottery. As a national institution with a special status, its reputation for fairness and responsibility need to beexemplary. It also needs the commercial ability and freedom to continue to attract players and thus safeguard theproceeds for good causes. Regulating such an entity is a unique proposition and one in which the Commission hasdemonstrated expertise and success. There is an onus on the Commission to develop its own work in regulatory bestpractice to the benefit of the National Lottery overall.



Section 3 | Main stages of the competition

3.1 Introduction

The main stages of the competition process were:

3.2 Identification of barriers to entry

Preliminary work on the third Licence competition started in June 2004, when the Commission announced that ithad commissioned independent research to assess likely market interest in bidding for the third National LotteryLicence and the potential barriers to entry. It identified that the new research would comprise a detailed analysis ofthe economic and commercial incentives to bid for the third Lottery Licence and the technological aspects that mightinfluence the design of the next competition. These were undertaken alongside an audit of key interested parties toassess their perceptions of the current Lottery arrangements and what were likely to be the attractions and potentialbarriers to entry.

This work initiated the design of the third Licence competition, which would take place in 2007. The work wasintended to provide a firm foundation on which the Commission could base a detailed appraisal of all the optionsavailable to it during 2005, before the detailed design of the competition in 2006. The Commission also indicatedthat it expected to listen carefully to Bidders throughout the process and would welcome direct contact from anyinterested parties.

At this stage, the Commission considered how it wished to award the Licence. The Commission concluded that acompetition was the best way to deliver competitive Bids and so maximise returns to good causes. The Licencewould therefore be awarded through open competition. The Commission considered a range of different types ofcompetition, including cost control models, auction processes where the operator would Bid upfront a fixed amountof funds for good causes and returns based on a proportion of sales (as had been undertaken for the first twocompetitions).

The Commission ultimately concluded that cost control models would involve a burden on the operator and raisedsignificant issues about the lack of identifiable UK or international benchmarks against which to assess costs. TheCommission also concluded that the operator bidding an amount upfront would involve significant issues for theBidder in structuring such a payment to the Commission. More importantly, it would involve a considerableallocation of risk to the operator arising from the amounts involved and the very significant gearing effects betweenthe amounts expected for good causes and the likely level of return to the operator. Alternatively, if sales weregreater than anticipated for exogenous reasons, it could give rise to ‘windfall’ profits for the operator. Given theCommission’s responsibility for the long term future of the Lottery, the Commission was concerned that the Licenceshould not be awarded on a basis that involved a significant risk that the operator could fail. The Commissiontherefore concluded that the competition should involve returns based on a proportion of sales as returns to goodcauses could be maximised in a way that did not involve an undue transfer of risk to the operator.



Stage Date Output

Identification of barriers to entry July 2004 – January 2005Independent research commissioned.Discussion document

Further work on the options available,analysis of options and further consultationDecisions on options

January 2005 – October 2005

a. Summary of responses and areas forfurther analysis

b. Internal analysis on issues for competition framework

Evaluation of the options and broadstructure for the competition itself

November 2005 Statement of Main Principles

Drafting of detailed terms of thecompetition

November 2005 – April 2006 Draft Invitation to Apply and draft Licence

Finalisation of the detailed terms of the competition

April 2006 – June 2006Final Invitation to Apply and final draft Licence

Bidders compile and submit Bids June 2006 – 9 February 2007 Bids

Evaluation of Bids 9 February 2007 – 7 August 2007 Announcement of Preferred Bidder

Licence finalisation End August 2007 Terms of Licence to be issued

Transition period September 2007 – 31 January 2009 Commencement of new Licence

Discussion paper

In January 2005, the Commission issued a discussion paper “A Lottery for the future: shaping the structure of thecompetition”8 in which it set out its determination to create an attractive competition framework to select a singleoperator to run the Lottery. The document set out areas where the Commission wished to stimulate an informeddebate. The document posed a number of questions to help focus comments and the Commission made clear that itwelcomed views on the questions posed and on potential strategies suggested.

The Commission’s aims in designing the competition were to:

• Make the competition as attractive as possible to potential Bidders, on the basis that a vigorous competition is thebest means available to generate the highest returns for good causes; and

• Make any changes that are necessary to reflect developments since the 2001 competition in:

• The operation of the Lottery, including a larger game portfolio and new methods of distribution; • The market environment in which the Lottery operates; and• The technology that supports the Lottery, including developments in gaming systems, terminal design and

communication networks.

The Commission noted that, as a starting point, it had commissioned four strands of independent research toidentify what factors might prevent a vigorous competition. These strands were:

• Economic barriers – investigated by NERA. A review by economists drawing upon economic analysis and theexperiences of lotteries abroad and of other sectors of the economy where major licences or franchises are let;

• Commercial barriers – investigated by KPMG. A review by commercial consultants looking at the expectations ofpotential Bidders and the business drivers most likely to influence them;

• Stakeholder audit – investigated by the London Communications Agency. A gathering of the confidential viewsof senior executives from a range of organisations which might participate in a Bid consortium; and

• Technological aspects – investigated by HEDRA. An assessment of the attributes of the gaming systems offeredby four key providers worldwide in order to reach a view on how modern technology might influence the designof the next competition.

The Commission also took account of the recommendations made by the National Audit Office and the PublicAccounts Committee in their reports on the second Licence process, the reports of the Select Committee for Culture,Media and Sport and the Joint Committee on the Gambling Bill, the work undertaken by the Department for CultureMedia and Sport in considering the options for the licensing framework and the knowledge held within theCommission itself.

Five themes emerged from the research:

• Cost of Bidding: The research suggested that the costs of Bidding may not be such a significant factor ingenerating a successful competition as previously imagined. It suggested that serious consortia would be willingto invest, as long as the Commission did everything possible to minimise their costs and to reduce unnecessaryrequirements, incumbent advantage and uncertainty in the Bidding process;

• Incumbent advantage: The research made clear that any area of the competition framework which gives, orappears to give, the current operator an advantage would be critical. This advantage would not be judged purelyin financial terms. It could be anything from access to sales information to a better understanding of theregulatory environment;

• Evaluation criteria: A key competition driver would be the criteria the Commission set to evaluate the Bidsreceived and the process which the competition would follow. The criteria would be critical to successfulcompetition as it is only against these standards that Bidders would be able to differentiate themselves;

• Handover and transition arrangements: Handover would be an issue if a Bidder other than Camelot, as thepresent operator, won the competition. The Commission took steps in the second competition to reduce the risksassociated with handover at the end of the second Licence, but a ‘big bang’ transition was still likely to berequired. Bidders would therefore need a clear understanding of how the handover could be made to worksmoothly; and

• Technology: The research suggested that this was not now seen as such a critical issue in the Bid process. The research identified that, although it will be important, it might not be as significant a differentiator betweenBids as in previous competitions. The main theory was that technology had advanced to such an extent that off-the-shelf options with a degree of tailoring might now be viable, whereas in the past, bespoke solutions were the norm.



8 A full copy of the discussion document can be found on the Commission’s website at www.natlotcomm.gov.uk.

The results of this work further informed the Commission’s thinking about three key areas: the timetable for thethird Licence competition; where potential barriers to entry might lie; and potential strategies to address the barriers.

The key issues for debate, with potential strategies identified for each area, were grouped as follows:

Encouraging competition • The competition and regulatory frameworks: the Commission appreciated that Bidders would wish to be

clear how the framework it adopts, as regulator, was likely to impact both on Bidders’ chances of success in thecompetition itself, and on the conduct of their business if they are successful.

• Reducing the costs of Bidding: the Commission recognised that one important factor which potential Bidderswould consider carefully is the cost of Bidding, relative to their perceived chances of success and the opportunitycosts of focusing resources on this rather than other opportunities.

• Choice of gaming systems providers: The Commission was aware that in previous competitions, a criticalrequirement had been that Bidders demonstrate a gaming technology solution that will meet the RequiredStandards. This gave the advantage of certainty surrounding the solution and cost provision in the Bid. But it alsohad disadvantages, since there is a small number of gaming systems providers worldwide which may constrain thenumber of Bids and there is less competitive pressure on such providers to bring down their costs. TheCommission noted that modern lottery systems now had greater inter-operability and versatility. It thereforewished to explore the option of a ‘dual competition’ approach where the technological solution was put in placeafter the selection of Preferred Bidder. However, the Commission recognised that whilst this had potentialadvantages, it also had potential disadvantages in that the process would take longer and the full costs would notbe known at the time of selection of the Preferred Bidder.

• Bid realism and sustainability: The Commission made clear that a key issue for it was the realism andsustainability of the Bids. Therefore, whilst it wished to encourage Bidders to achieve a level of sales that would deliver as great a level of returns to good causes as possible, it did not wish to encourage unduly over-optimistic Bids.

• Transition arrangements: The Commission was aware that there had to be a period between selecting thesuccessful Bidder and the start of the third Licence, so that the successful Bidder had time to put a newinfrastructure in place (in the case of a new operator) or to allow time to make changes to the existinginfrastructure (if Camelot, as the present operator, was successful). The Commission was therefore aware that itwould need to have made clear, in inviting Bids, what features of the second Licence arrangements it wouldexpect to see replicated by, or passed over to, the successful Bidder.

• Consortia arrangements that might restrict future competition: The Commission was aware that consortiummembers might enter into agreements among themselves, whether formal or informal, which might restrict theability of the organisations involved to participate in other Bids. The Commission was concerned that sucharrangements might reduce competition.

• Criteria for determining whether reserve powers should be adopted: The Commission set out that theGovernment had decided that the competition should offer a single Licence to operate the National Lottery, butthat it would retain reserve powers used after consultation with the Commission to allow more than one Licenceto be offered in the event that a single Licence did not generate a successful competition.

Levelling the playing field • Access to information: Given that the UK National Lottery has only ever had one operator, potential competitors

would inevitably have less information on which to base their Bids than Camelot. The Commission recognisedthat this might discourage potential Bidders and recalled that it had taken significant steps in terms contained inthe second Licence to make more information available to potential Bidders than was available in the secondcompetition; and that it expected to assess again the sufficiency of such information.

• Requirements for new gaming systems and equipment: The Commission noted that Camelot had acompetitive advantage in that it had gaming systems and terminals in place. The Commission identified that itcould level the playing field by requiring all Bidders to introduce new technology. But it would only be justified indoing so if it considered that such a requirement would result in increased returns to good causes.

• Handover arrangements: The Commission recognised that handover was a critical issue for any Bidder otherthan Camelot. The legislative requirement that the Commission can grant only one operator’s Licence at a timehas the practical effect that any handover is likely to be ‘big bang’ rather than a phased handover. TheCommission recalled that it had sought, in the second Licence, to minimise the risks by making arrangements forthe transfer of intellectual property, terminals and key information.

Aligning incentives • Balancing retention rates and funds for good causes: The Commission had designed the second Licence to

provide the greatest returns at the point where returns for good causes are maximised. Under the second Licence,each Bidder was asked to Bid a proportion of the value of total sales which it would retain after prizes and LotteryDuty had been deducted. The successful Bidder’s profits represent its retention less the costs it incurs. However,the Commission set out potential strategies to improve incentives through differential retention structures or pre-determined retention structures.



• Licence duration: The Commission noted that Licence duration involved balancing the competing demands of (i) frequent competition so that the market is tested regularly and (ii) a longer Licence term which allows a greaterperiod for the operator to recover its initial investment and to make further investment.

• Recovery of investment: Under the second Licence, Camelot bears most investment costs from its share of sales,allowing for recovery of its investment costs over the Licence period by calculating appropriate levels of retention.The Commission noted that this approach had served the Lottery well where the investment had been predictableat the start and relatively static over the life of the Licence. However, it does not adapt well to circumstanceswhere investment costs are difficult to predict at the time of Bidding, or where significant new opportunities ariseduring a Licence period which were not provided for at the start. The Commission identified that whilst it wouldexpect Bids to provide for both the initial investment and a degree of continuing investment, it could see anargument in favour of new arrangements to support substantial investment during the term of the Licence wherethis was not provided for in the Bid process.

• Restrictions on other activities that the Lottery operator can undertake: The Commission noted that thesecond Licence required the Licensee itself to take the form of a single purpose vehicle, to ensure that theoperator focuses fully on the National Lottery. But the Commission sought views on whether this might be apotential disincentive for potential Bidders.

The Commission identified that early priority would be given to areas which might impact on the competitiontimetable, such as two-stage process; allowing a competition between key technology suppliers after the selection ofthe preferred Bidder; and the transition period between finalisation of the preferred Bid and the start of the thirdLicence period.

3.3 Further work on the options available

Following publication of the discussion paper the Commission engaged in an extensive debate with a wide range ofinterested parties about the structure of the competition for the third Licence. In doing so, the Commission gavepresentations to, or participated in, the main industry events, including the World Lottery Association conference inNovember 2005 and at the European Lottery Congress in June 2005.

Over and above these meetings, the Commission held a City Briefing on 22 July 2005 at the London Stock Exchange.The 40-minute briefing was aimed at professionals who might wish to comment on the competition and whoseservices were likely to be sought by Bidding consortia. The presentation covered details of the opportunity offered bythe National Lottery, the current environment, and the competition process. In addition, one-to-one meetings werealso held with all stakeholders who requested them, including not only potential consortia members but also retailersand technology suppliers. The Commission also published a presentation which gave more information about thetechnology opportunity offered by the National Lottery. And it sent out its regular “Update: briefing from theNational Lottery Commission” publications to a wide range of stakeholders providing regular information updates onthe competition and other Lottery issues.

The Commission was aware that for the issues raised by the competition, there were a number of inter-dependencies. It therefore sought expert contributions from some of the leading economists in this area. It held tworoundtable events to consider the design and consequence of options relating to the games portfolio and balancingretention rates and funds for good causes. In order to stimulate discussion, the meetings took place under theChatham House rule, where attendees are not identified and comments made are non-attributable. A summary ofeach of the roundtable discussions was made publicly available.

Summary of responses

During this period, the Commission also undertook its own significant work on the issues raised by the discussionpaper. That work, supported by the responses, identified a number of specific areas which the Commission looked at more closely and where it welcomed further views. Therefore, in July 2005, the Commission published a furtherdocument “A Lottery for the future: summary of responses and areas for further analysis”. This set out the range of views expressed by over 20 interested parties who had responded to the January 2005 discussion document, the Commission’s initial reactions to these and highlighted areas where the Commission intended to carry out further work.

The document identified that there was general agreement from those who responded that the proposed timetablefor the competition was about right, including the 5-6 months for compiling Bids and 14-18 months for transition.On the specific issues raised by the January 2005 discussion document:

Encouraging competition • The competition and regulatory frameworks: The Commission’s proposals relating to the treatment of risk,

evaluation criteria, regulatory model and legal and policy framework were broadly supported and respondents didnot see the issue as particularly contentious.



• Reducing the costs of Bidding: There were some strong views from respondents on the issue of meeting Bidcosts. The majority of respondents were clear that they did not believe that the Commission should meet all orpart of Bidders’ costs. But there was general acceptance that Bidding for running an undertaking as significant asthe National Lottery was necessarily a complex process. Whilst there was general support for simplifying theprocess, respondents were also clear that these steps must not result in an over-simplification of the competition.

• Choice of gaming systems providers: The potential strategy – a ‘dual competition’ approach – where thetechnological solution is put in place after the Preferred Bidder is selected, was generally recognised byrespondents as a very difficult and complex area in the context of designing the competition. The responsesacknowledged that the number of lottery systems providers was limited but there was no consensus view on howbest to incorporate systems providers within the competition. A number of potential solutions were proposed,though the risks of so doing were also raised.

• Bid realism and sustainability: A variety of views were expressed on the issues the Commission identifiedrelating to setting central sales, arrangements for dealing with poor performance, arrangements for dealing with‘shocks’ and arrangements for dealing with operator withdrawal. In terms of setting central sales levels, someresponses suggested that there is a case for using a central sales figure based on historical performance of theLottery for assessing Bid sustainability over the next Licence period.

• Transition arrangements: All respondents recognised the importance of providing for an appropriate period oftime between the selection of the successful Bidder and the start of the Licence. There was also broad agreementthat the issues identified in the document relating to the transition period and transition services were the onesthat concerned potential Bidders.

• Consortia arrangements that might restrict future competition: There were a range of responses to thisissue. Some preferred allowing the market to regulate how consortia form whilst others advocated the need toensure that competition was not reduced through restrictive practices, especially in respect of key supplier services.

• Criteria for determining whether reserve powers should be adopted: There was a diversity of opinions onthe use of reserve powers. Respondents agreed that a two-stage process could assist in identifying whetherreserve powers should be used. However, there were differences of opinion on what might constitute anineffective competition for a single Licence.

Levelling the playing field • Access to information: All respondents agreed that the provision of accurate historical Lottery data would be

essential. The Commission made clear that it was committed to delivering a competition that treated all Bidderseven-handedly, and which allowed potential Bidders to access key information on the Lottery, while at the sametime making arrangements to protect adequately the disclosure of commercially sensitive information wherenecessary.

• Requirements for new gaming systems and equipment: A number of respondents highlighted the concernsraised over incumbency advantage set out in the discussion paper. In general, the expectation was that existingequipment should be replaced where it was in the best interests of the Lottery.

• Handover arrangements: There was general agreement among respondents that handover was an absolutelycrucial issue. Cooperation between any outgoing operator and incoming operator was seen as essential.

Aligning incentives • Balancing retention rates and funds for good causes: The responses suggested that the retention structure

used for the second Licence period had two areas of weakness from the perspective of maximising sales, andhence returns to good causes. Firstly, as the Commission had previously noted, since the retention rates used forthe second Licence are applied across all games, regardless of prize payouts and costs, operators may be lessincentivised to grow sales of certain games. Hence the flexibility to deal with these constraints was welcomed.The second area highlighted was the inclusion of the retailer’s commission as part of the costs met by theoperator, with the suggestion that a more flexible approach might be to meet the cost of retailer commissionbefore the proceeds are split between the operator and the good causes.

• Licence duration: Most respondents favoured an initial Licence duration of seven to ten years, with potentialextensions. However, an economist roundtable discussion on balancing retention rates and funds for good causes,organised by the Commission, set out a number of arguments against a longer Licence term.

• Recovery of investment: There were varying degrees of support by respondents for each of the possibilitiessuggested in the discussion paper: the establishment of a reserve fund, adjusting retention rates or that the nextLicensee pays for installed systems.

• Restrictions on other activities that the Lottery operator can undertake: Most respondents supported theCommission in examining whether to relax the requirement that the Licensee take the form of a Single PurposeVehicle (SPV), with some suggesting that returns to good causes might be increased through synergies with otherareas of operations. However, some advocated maintaining the SPV arrangement as long as this did not preventthe operator from using the Lottery infrastructure (with appropriate safeguards) for other transactions.



In addition to the specific issues raised by the January 2005 discussion document, the Commission also set out thefollowing issues for further analysis on which it invited further responses:

• Encouraging competition: The Commission sought views on: the breadth and depth of the supplier andtechnology and scratchcard markets; whether there were other supplier markets that had not been identifiedwhere interested parties considered supply restrictions might impact on competition; other measures which mightensure sufficient competition; whether limiting the ability of consortia to enter into restrictive agreements mightadversely impact on their ability to submit a Bid; whether restricting a consortium’s ability to tie in providers forfuture competitions was likely to have a significant impact on either the current competition or the operation ofthe Licence in the run-up to the next competition; views on partial Bids being accepted; and any further views onthe measures the Commission was contemplating.

• Handover: The Commission agreed with respondents that an important step to mitigate the risk inherent in ahandover was to have a clear and early view on the rights and obligations of all parties involved. The Commissionnoted that it had therefore opened discussions with Camelot in order to provide early clarity on these issues.

• Balancing retention rates and funds for good causes: The Commission noted that it was considering anoption which would switch from the existing retention structure, which is based on gross profit9, to one that isbased on net profit10 as this would align incentives more closely. Another area of work identified was tounderstand whether it was possible to set different retention structures for different games, or groups of games,and what might be the benefits and difficulties of such an approach. The Commission asked for any further viewson balancing retention rates and funds for good causes.

• Recovery of investment mechanism: The Commission noted that respondents to the discussion papersupported the idea of aligning operator incentives to invest in the Lottery with those of the Commission, but therewas no clear consensus on the best way this could be achieved. One part of this debate was whether this couldbest be achieved through incentive mechanisms within the period of a Licence or through the ability to extend theLicence to permit a greater investment recovery period. The Commission identified that it was carrying out furtherwork in this area and welcomed further views.

• Bidder performance and Licence extension: The Commission sought views on whether, if the Commissionagrees that Licences should be extendable for good performance, parties had views on what the criteria might befor extending the Licence e.g. key performance indicators; and if performance criteria are adopted, should therebe provision for varying them. If so, how?

The Commission identified that it intended, in line with the illustrative timetable set out in January 2005, to publish aStatement of Main Principles in Autumn 2005.

All responses to the discussion paper were treated as confidential to encourage feedback. However, to providefurther information to stakeholders, the Project Board agreed that all respondents should be asked whether theywere prepared for their name to be made public and their responses to be made available on the Commissionwebsite (redacted as necessary). The responses were published on the website in October 2005.

3.4 Evaluation of the options and broad structure for the competition

In November 2005, the Commission issued the “Statement of Main Principles”. This marked the formal start of thecompetition to award the Licence. It set out the principles that would underpin the competition and ensure a fairand transparent process. The Commission’s aim was to design a framework that supports good causes, protectsplayers and attracts the market.

The Commission identified that it had structured a competition framework and approach it believed would achieve:

• A vigorous competition for the third Licence, on the basis that this is the best means to generate the greatestreturns to good causes;

• A level playing field for all Bidders; and• Greater incentives to increase returns to good causes.



9 That is, sales less prizes due, less Lottery Duty.10 That is, sales less prizes due, less Lottery Duty, less operator’s costs (including retailer commission).

The key principles that the Commission adopted to create a strong competition that was fair to all are reproduced below11:

The Commission recognised that Bidders would wish to understand the basis on which their Bids would beevaluated. The Commission set out that it intended to deliver a simplified and transparent evaluation process. Thisshould give confidence that the process would be conducted fairly.

There would be two parts of the evaluation structure: Required Standards which each Bid would be required tomeet; and returns to good causes which would be the basis of comparison between Bids.

The Commission said that it would adopt Required Standards in certain areas. Its assessment of each requiredstandard would take into account all relevant areas of the Bid, and Bidders would need to satisfy the Commission asto their ability to meet the Required Standards. The assessment of each required standard would not impact on theCommission’s evaluation of the overall returns to good causes nor be used as a comparator between Bids.



11 Extracted from p6 of “Statement of Main Principles” (November 2005).12 The Commission’s ability to offer extensions was subject to the passage of the National Lottery Bill.

We are offering a ten-year Licence, with the possibility ofextensions12, to increase the attractiveness of the opportunity;

The evaluation will be simplified to increase the transparency ofthe process, and will assess a number of areas by reference toRequired Standards. These will be evaluated separately from theassessment of likely returns to good causes;

The competition will be based on a one-stage process because we believe that this is most suited to achieving our objectives and generating nigh quality, competitive Bids;

We will take steps designed to ensure that sales projections arerealistic and comparable, whilst also taking account of Bidders’own forecasts;

In their proposals, Bidders will need to demonstrate that they have the full capability to manage the operations of anundertaking the size of the UK National Lottery and deliver their proposed solution;

We accept that there is some risk inherent in the transitionprocess. We will require all Bidders to meet a defined hurdle. We must be satisfied that a Bidder has a comprehensive transitionplan that convinces us that the Bidder has the ability to effecttransition successfully, identifying the associated risks andmitigating them appropriately. Once a Bidder meets thisrequirements, we will not take any further differential between itstransition risk and that of other Bidders into account in assessingreturns to good causes;

We will be encouraging Bidders to be innovative by emphasisingthe outcomes – or results – the Lottery needs, rather than usingprescriptive specifications;

We will permit the use of Lottery infrastructure for other purposes(e.g. payment of utility bills) and take account of the returns thiswill generate for good causes in our evaluation;

We are simplifying our requirements where practicable, and will provide guidance in various areas such as propriety and player protection;

We will introduce arrangements to encourage investment during the Licence period, where this will increase returns to good causes;

We will be amending the retention structure by allowing it to vary by class of game to provide better incentives across the game portfolio;

The process anticipates a transition period of 20 months;

There will be a demanding output-based performancespecification; hence we will expect the operator, from the start of the third Licence to make use of modern technology that isflexible and adopts open systems principles, including appropriateinteroperability standards;

We are seeking to make available to Bidders all the informationabout the Lottery they are likely to need to compile their Bids;

All suppliers and contractors, including suppliers of equipment,gaming related software, scratchcard providers and retailers, willbe able to participate in more than one Bid where they wish to do so;

We are considering requiring that the next Licensee makeprovision to transfer its assets and contracts at the end of the next Licence period to a new operator for a fixed period, toensure handover can be even smoother following a fourth Licencecompetition. Where assets and contracts include technology, thedesign of that technology should not inhibit such transfer; and

In order to qualify for participation in the competition, Bidders willneed to certify that no restrictive contractual arrangements havebeen entered into from the date of this document. Any suchagreements that pre-date this document will have to be disclosed.We are taking this step to ensure that competition for the thirdLicence is not unfairly or artificially reduced;

We do not propose to provide assistance with Bid costs.

The Commission recognised that Bidders would wish to understand the basis on which their Bids would beevaluated. The Commission set out that it intended to deliver a simplified and transparent evaluation process. Thisshould give confidence that the process would be conducted fairly.

There would be two parts of the evaluation structure: Required Standards which each Bid would be required tomeet; and returns to good causes which would be the basis of comparison between Bids.

The Commission said that it would adopt Required Standards in certain areas. Its assessment of each RequiredStandard would take into account all relevant areas of the Bid, and Bidders would need to satisfy the Commission asto their ability to meet the Required Standards. The assessment of each Required Standard would not impact on theCommission’s evaluation of the overall returns to good causes nor be used as a comparator between Bids.

The Commission would also make an assessment of a Bidder’s ability to maximise returns to good causes. Bidderswould be required to propose retention rates, which would in turn determine the amounts available for good causes.The Commission would analyse the present value of the expected contributions to good causes over the life of theLicence under a number of scenarios. These scenarios would include a common sales scenario, which theCommission would provide to Bidders, and Bidders’ own sales scenarios.

In publishing the Statement, the Commission set out its view on a number of the issues which had been raised in itspublications of January 2005 and July 2005:

• Single stage competition for a single Licence: The competition for the third Licence was a one-stage processbecause the Commission believed that this was best suited to achieving its objectives and generating high quality,competitive Bids. It considered the use of a process with a pre-qualifying stage. However, it concluded that anybenefits associated with such a process (including reducing the costs of Bidding) were likely to be marginal, andoutweighed by the disbenefits. Similarly, it had decided not to implement a dual competition whereby a preferredBidder is selected and then runs its own competition for key suppliers. The Commission believed the technologyand operations of the Lottery to be closely interconnected. Having separate competitions for the two elementsmight not only reduce the expertise available to operators to the detriment of the competition, but would raisesignificant difficulties in evaluating the components and increase the risks inherent in the transition.

• Realism of Bids: To assist with the realism of Bids, the Commission set out that it would be providing a commonsales scenario to prospective Bidders. Since it was only intended to assist the Commission in evaluating Bids andwould not represent the Commission’s view on what likely sales might be, Bidders would also be able to providetheir own estimates of sales achievable under their business plans. Bidders’ own estimates had to be supported byclear justification to demonstrate why their levels of sales were achievable and realistic, and what factors mightcause them to vary their estimates. The Commission believed that this should discourage over-optimistic Bids andprovide a sound benchmark for evaluation.

• Licence duration: Here, the Commission decided to increase the term of the Licence to ten years from sevenunder the second Licence. The Commission considered this would allow Bidders a longer period of time overwhich to recover their initial investment and to make substantial further investment over the ten-year term. TheCommission noted that it would be reserving the right to grant extensions to the Licence, which could be for aperiod of up to a further five years13.

• Transition period: The Commission decided to provide for a period of 20 months in order to smooth transitionto the third Licence. The decision was based both on further research and on the experience of overseas lotteriesthat had managed similar transitions.

• Contributions to good causes: The Commission identified that Bidders would be asked to specify their expectedcontributions to good causes based on three key elements:

• Primary contributions – this would be a function of total ticket sales and the proportion that is available for good causes after deducting prize payments, Lottery Duty and the operator’s own retention;

• Secondary contributions – a proposed share of any surpluses generated from running the Lottery which are beyond those originally forecast and which might be considered windfall profits; and

• Ancillary activity payments – a proposed share of net revenues from any ancillary activities.

• Primary contributions: The Commission also clarified that it intended to introduce different retention structurefor different classes of game. This would allow Bidders to structure retentions for games with lower prize payoutsand lower variable costs (such as Lotto) differently from retentions for games with high prize payouts and highervariable costs (such as scratchcards). This would give the operator similar incentives to grow sales across all classesof games. The Commission said it expected to limit the differential structures to three to four, grouping togethergames of a similar type.



13 The Commission’s ability to offer Licence extensions was confirmed by the National Lottery Act 2006.

• Transfer to a fourth Licensee: The Commission identified it was considering requiring the third Licensee totransfer material operating assets and contracts to its successor at the end of the third Licence. The Commissionnoted that it was conducting further work in this area and would provide additional detail on its requirements inthe draft ITA. But in practice it might require that:

• Any material assets owned by the existing operator be made available for transfer at the option of the incoming Licensee at nil cost. They must be in sufficiently good condition, as determined at the end of the Licence, to have a reasonable life expectancy of two years from the end of the third Licence period;

• All material supply contracts be capable of novation at the option of the incoming Licensee on existing terms for up to two years from the end of the third Licence period;

• Sufficient information be provided to all potential Bidders for the fourth Licence in order to allow them to take a view on what assets and contracts they might designate for transfer;

• Staff terms and conditions be controlled in the run-up to the end of the third Licence14; and • Furthermore, the Commission would also retain the ability, at its sole discretion, to implement an interim

Licence, in six monthly increments, of up to two years in length based on the market environment and other considerations at the end of the third Licence.

• Commitments to the London 2012 Olympic Games: The Commission identified that Bidders would beexpected to include, as part of their sales and marketing plans for the third Licence period, details of dedicatedOlympic Lottery games, to fulfil the National Lottery’s commitment to support the staging of the Olympic Gamesin London in 2012.

• Management of transition risks: The Commission made clear that it attached importance to the transition tothe third Licence taking place as smoothly as possible. It set out that it expected the successful Bidder to avoid anyinterruption of service. The operator should have sufficient business, delivery and communications systems inplace and operational at the start of the third Licence period to ensure that players have convenient access assoon as operations begin, even though not all new distribution channels may necessarily be fully in place from thestart of the Licence period. The Commission said it would assess the risks contained in each Bid that might causea delay to the start of the third Licence operations as a Required Standard. Once Bidders had fulfilled this requiredstandard, the Commission would not take transition risk further into account when assessing returns to goodcauses, or use it as a comparator between Bids.

3.5 Drafting of detailed terms of the competition

In line with the approach taken earlier in the competition process, a significant element of the Commission’sactivities following the publication of the Statement of Main Principles involved identification of and interaction withstakeholders, in particular potential Bidders and suppliers.

To market the Lottery opportunity, the Commission (particularly the Project Board Chair and the Chief Executive) andlead advisers (Rothschild) attended a range of conferences, including a Lottery Supplier Conference in New York(December 2005), the World Lottery Association Conference in Mexico (February 2006), the Gaming InvestorConference in London (May 2006) and the Lottery Monitor Conference in London (June 2006). The Project BoardChair gave presentations at the World Lottery Association Conference, to the Association of Convenience Stores and at the Lottery Monitor Conference. These presentations were published on the Commission’s website. As leadadvisers to the Commission, Rothschild also sought to highlight the opportunity further in a series of internationalmeetings.

In addition to the activities set out above and its regular Update publication, the Commission published a range ofinformation for Bidders on key issues affecting stakeholders in the form of Bid Notes. A summary of the Bid Notespublished during the competition process is set out at Annex D.

Bid Note 01 – TUPE (Transfer of Undertakings (Protection of Employment) Regulations 1981)

Bid Note 01 was published in March 2006. This provided information regarding the potential application of theTransfer of Undertakings (Protection of Employment) Regulation 1981 (TUPE). The Commission recalled that it haddrawn Bidders’ attention to this issue in the Statement of Main Principles which stated “In the United Kingdom, achange in the ownership of a business or a change in service provider can attract the application of the Transfer ofUndertakings (Protection of Employment) Regulations 1981 (“TUPE”). Revised TUPE regulations are due to be laidbefore Parliament later in 2005 and are expected to come into force on 6 April 2006. Bidders, including overseasBidders, will need to form their own view on whether TUPE will apply.”



14 The Commission also identified that these arrangements would assist in managing the situation where an operator either withdraws or has its Licence revoked.

The purpose of TUPE is to protect the rights of employees in circumstances where an undertaking is transferred. IfTUPE applies, then on day one of operations of the Third Licence, any of the existing operator’s staff to which TUPEapplies will automatically become employed by the third Licensee. The third Licensee may need to makeredundancies in connection with this transfer of staff and, if this is the case, the Commission is aware that theseredundancy costs could be material. In addition, depending on the staffing implications of the requirements outlinedin the Statement of Main Principles, the existing operator may also need to make redundancies following the awardof the third Licence.

The Commission set out how it intended to deal with this issue and invited comments. In so doing, the Commissionmade clear that “irrespective of the Commission’s intended treatment of redundancy costs set out in the Bid Note, it is for Bidders to decide whether TUPE will apply to the grant of the next Licence, and its application may bedependent upon Bidders’ individual proposals.”

The Commission identified that it would be asking all Bidders to submit the proposals they deemed most appropriatein terms of meeting the requirements of the competition.

However, Bidders (including the current operator) would be asked to disregard any redundancy costs that wouldarise from taking up the Licence when submitting their proposals. The most economically advantageous Bid thatmeets the requirements set out in the ITA would then be chosen. The Commission would ignore any proposedredundancy costs in the evaluation of Bids. The Commission was proposing that all redundancy costs reasonably,necessarily and properly incurred as a result of taking up the Licence be recoverable by the successful Bidder throughan adjustment to the retention rate. The future Licensee would be required to provide such evidence as theCommission requires that those redundancy costs have been reasonably, necessarily and properly incurred, and thatthe Licensee had attempted to minimise those costs. This assessment would be carried out by a third party expertand would be binding on both the Commission and the future Licensee.

As identified in the Summary of Responses document, the Commission had also engaged in discussions abouthandover issues with the operator. The Commission is grateful to the operator for its efforts in this regard. The aimsof the discussions were to provide the Commission with clarity about handover arrangements in the event that theoperator was not selected as the third Licensee. The discussions covered issues surrounding assets and contracts,information and intellectual property, cooperation and TUPE.

3.6 Finalisation of the detailed terms of the competition

Draft Invitation to Apply

In April 2006, the Commission published the draft ITA, setting out the detailed terms of the competition. It set outnear-final details of the ten-year third Lottery Licence Bidding opportunity, as well as clear guidance on thecompetition process, its requirements and evaluation criteria. The draft ITA was a substantial document. TheCommission did this in order to ensure that Bidders had as much clarity as possible about the various RequiredStandards against which they would be assessed. In a number of areas, the Commission also provided explanationsof issues where Lottery arrangements had been established over a period of time. This gave Bidders the opportunityto identify that they would adopt those arrangements or to identify alternative but equivalent arrangements. Anexample of this, is the information that the ITA provided about the operation of the players’ trusts set up to protectplayers’ funds and prize liabilities.

A draft Licence was published at the same time. The Commission took the opportunity of the competition to take afundamental look at the provisions required from the third Licence and to ensure that lessons learned duringprevious Licence periods were incorporated within the Licence. The draft Licence was therefore substantiallydeveloped from that used for the second Licence competition, with the Commission and its advisers criticallyappraising the requirements of the Licence in terms of regulation and securing returns to good causes.

The draft ITA was released in order to provide Bidders with further detail on the near final requirements to becontained in the final ITA and to allow Bidders to provide comments on the structure, requirements and processcontained in the draft ITA and similarly to allow Bidders to provide feedback on the draft Licence. The Commissionidentified that Bidders would have five months from the final ITA to put together Bids; a change made in response toconsultation following the Statement of Main Principles.

Virtual Data Room

At the same time as publishing the draft ITA, the Commission launched a Virtual Data Room (VDR) as part of itscommitment to providing Bidders with information on the Lottery opportunity and to deliver a level playing field.



Since some of the information that the Commission wished to provide was commercially sensitive and/or its widerpublic release might otherwise be harmful to the interests of the Lottery, each party was required to enter into a BidProcess Agreement prior to entering the VDR. The form of the Bid Process Agreement was made available on theCommission’s website. It set out, amongst other things, the restrictions that applied to the use and onwarddisclosure of information received, and the process rules by which potential parties had to abide. In accordance withthe Bid Process Agreement, each party also had to provide a bond of £100,000 to be payable on demand in theevent that the party did not comply with those terms.

The VDR contained information about the Lottery from a variety of sources, including information from Camelot andresearch and other information prepared on behalf of the Commission – some of which was developed specially tosupport the competition. In considering the scope of the information to be included, the Commission drew on thecommercial experience of Rothschild in similar transactions. It also made use of its powers under the second Licenceto request information from Camelot. In so doing, the Commission’s position was that it would not be right toinclude information about the way in which Camelot conducted its business, as this would not be in the interests ofa fair competition. But it did wish to provide Bidders with information about the way in which the Lottery operated.It therefore engaged in discussions with Camelot to secure that information.

Information was therefore made available in a secure environment, accessed via the Internet and hosted by a leadingData Room provider, Merrill Corporation. Subject to certain exceptions, set out in the VDR, each party entering theVDR could download, print or save documents provided in the VDR. A summary of the key categories of informationcontained in the VDR was:

• Sales information by game;• Interactive sales information;• Average weekly sales by television region;• Data regarding subscription sales;• Information on NLDF funding for games;• Coverage of number combinations for Lotto and EuroMillions;• Retailer information, including:

• Sales by postcode district;• Breakdown of distribution of retail outlets by sales bands; and• Individual retailer information;

• Details of marketing expenditure;• Data regarding ancillary activities; • Data regarding unpaid and unclaimed prizes;• Player care, complaint and contact metrics;• Selected technology information;• Data regarding interactive channel registrations;• Channel transaction volume data;• Example trust deed;• Market research;• Current codes of practice and procedures; and• Information concerning intellectual property.

Briefing for Bidders

To give interested parties the opportunity to find out more about key aspects of the competition and regulatoryrequirements, the Commission held a briefing for potential consortia members on 15 May 2006. It also gaveinterested parties a chance to put questions to a National Lottery Commission panel. Four areas were covered in thebriefing: Propriety; Player Protection; the Commission’s Regulatory model; and the Licensee‘s Retention Structure.

“The Licensee’s Retention for the Third National Lottery” NERA Economic Consulting (May 2006)

Alongside the briefing for Bidders, the Commission published a paper, prepared by NERA, which described the waythat the Licensee’s retention, i.e. the amount of sales revenue that the Licensee retains, for the third National LotteryLicence would be calculated. It also summarised the main reasons why this approach had been adopted, andexplained the role of the Licensee’s retention in the overall incentive structure.

This explained that the retention is calculated on the basis of retention rates specified by Bidders for different levelsof turnover. It provides the means by which the Licensee recovers its own costs and also receives any profit orsurplus. The way that the retention is determined therefore has implications for both the Licensee’s financialsoundness and also its incentives to increase turnover and thereby generate additional returns for good causes.



The Licensee’s retention is one of the elements that determines the returns to good causes that the Lottery willgenerate. Along with the amounts payable as Lottery Duty, prizes and retailer commissions, the amount payable asthe Licensee’s retention will be deducted from sales revenues in order to calculate the remaining funds that arepayable to good causes.

The Commission adopted the retention approach (which was also used for the first two Licences), rather than forexample asking Bidders to specify a fixed sum that they would contribute to good causes, because this approach was likely to produce the highest expected returns to good causes in a situation where the level of turnover over the 10 years of the Licence was uncertain.

The Commission’s approach in designing the retention structure was to ensure that, as far as possible, the incentivesof the Licensee to maximise profits would be aligned with its incentives to generate the maximum returns for goodcauses. In addition, the Commission recognised the need to ensure that the retention structure remained fit forpurpose in a period that could see a number of new, innovative games and distribution channels, and that it wassufficiently flexible to be suitable for Bidders with different business models or cost structures.

The paper also summarised the rationale for some of the key features of the retention structure:

• The calculation of the retention in two stages, with separate retention rates applying to “gross sales” and “net sales”;

• The ability to specify separate retention rates for four different types of games; and• For each type of game, the ability to set retention rates that vary with the level of turnover and the implications

of this for the Licensee’s incentives.

Gross and Net Sales RetentionsThe Licensee retention structure proposed for the third National Lottery, which was intended to allow the Licensee to cover its costs and earn a reasonable profit or surplus, required Bidders to specify retention rates for two differentdefinitions of sales:

• “Gross sales”, which are simply the total value of tickets sold; and• “Net sales”, which are calculated from Gross Sales by deducting (a) Lottery Duty, (b) prize payments, (c) retailer

commission and (d) the Gross Sales Retention.

The purpose of the Gross Sales Retention is to allow the Licensee to recover its expected variable costs. The Net SalesRetention then allows the Licensee both to recover its other expected costs and also to earn a profit or surplus. The



Lottery Duty Retailer commission

Licensee retention

Good causes

Lottery Ticket

Prizes

reason for having these two separate forms of retention relates to the underlying rationale for the Licensee’sretention – for each additional ticket sold, the retention should allow the Licensee to cover any additional costs thatit incurs as a direct result of the increase in ticket sales and, where appropriate, provide it with a reasonable profit asa reward for generating extra sales (and hence contributions to good causes). These two levels of retention arenecessary, therefore, to satisfy the objectives of (a) recovering expected costs efficiently and without distortingincentives, and (b) ensuring the Licensee’s profits are correlated, as far as possible, with returns to good causes. One difference between the retention structure for the second Licence and that developed for the third Licence isthat, for the third Licence, retailer commissions are to be identified separately and deducted from gross sales. Themain reasons for this are that it is better able to cope with any situations where retailer commissions are morecomplex than a simple percentage of sales and it provided a mechanism for dealing with any proposed change in the level or structure of retailer commissions during the Licence period.

Separate retentions for different types of gamesThe retention structure for the third Licence applies each of the retentions set out above to four different types of games:

• Draw-based games distributed through retailers;• Draw-based games not distributed through retailers;• Scratchcards; and• Interactive Instant Win games.

The main reason for calculating the retention separately for different types of game is the likelihood that variablecosts will be higher or lower for some types of games than for others. It would also allow Bidders to set Net SalesRetention rates to achieve a certain structure of incentives – this could be uniform or it could feature differentincentives for certain types of game than for others. The four categories of games were selected on the basis ofpracticability of definition and implementation, likely differences in variable costs, and likely differences in prizepayout ratios.

Setting retention ratesAs well as setting separate Gross Sales and Net Sales Retentions, and being able to specify different retention ratesfor different types of game, Bidders were also able to set retention rates that varied according to turnover. This wasachieved by specifying, for each retention, separate turnover bands or “tranches” and the retention rate that wouldapply to any turnover falling within that tranche.

Both the draft and final ITA included a worked example of how the calculation of the Licensee’s total retention isdetermined (for a single year). The numbers used in the example were purely hypothetical and were included forillustrative purposes only (though the total sales assumptions were consistent with the common sales scenario).

Review of the Commission’s approach to regulation

In April 2006, the Commission also published a review of its approach to regulation to complement the competitionprocess15. This identified that the National Lottery has proved to be remarkably successful – inspiring confidence inplayers and generating significant returns to good causes. It committed the Commission to delivering a healthyfuture for the National Lottery by looking forward and regulating positively.

The report set out that the Commission had undertaken a review of its regulatory model. The review was designedto ensure that the Commission continues to meet the five principles laid down by the Better Regulation Task Forceand that it takes into account the outcomes of other recent regulatory reviews. It was also considered important thatBidders in the competition for the third Licence were provided with an overview of the regulatory regime that theoperator would be working within.

The review detailed the Commission’s commitment to be open-minded in its approach, and its determination toregulate in a way which enhances the development of the National Lottery without imposing unnecessary burdenswhich constrain or restrict its potential. To avoid the potential for any adverse impact on the competition processarising from changes to the regulatory model, the Commission did not publish further proposals during the period ofthe competition.

Final Invitation to Apply

In June 2006, the Commission issued the formal invitation to Bid for the third Licence to operate the NationalLottery. The ITA set out the final details of the ten-year National Lottery Licence opportunity, as well as clear guidanceon the competition process, its requirements and evaluation criteria. The ITA contained only minor changes to the



15 “A Review of the National Lottery Commission’s approach to Regulation” (April 2006), available from the Commission’s website at www.natlotcomm.gov.uk.

draft ITA, reflecting the generally positive response from interested parties on the structure of the competition for thethird Licence. The final draft Licence was published at the same time.

The Commission also published two Bid Notes indicating (i) the sections of the final version of the ITA and (ii) thefinal draft Licence; that had been subject to substantive amendments since the draft ITA and draft Licence werepublished in April 2006. Bidders were asked to note that, following representations, the date for submission of Bidshad been extended by a further two weeks to 15 December 2006. The time periods allocated for each subsequentstage remained the same, resulting in a reduction to the Transition Period of two weeks.

The ITA identified that each Bidder must satisfy the Commission of its ability to deliver the proposed solution in timefor start of the Licence on 1 February 2009, and to operate throughout the Licence period in accordance with theLicence and regulatory environment and in a manner that enabled the Commission to comply with its statutory duties.

The ITA set out that the evaluation of Bids would be based on the Commission’s statutory duties. The Commissionwould evaluate a number of specific elements, which could be grouped in two parts:

• Required Standards, which each Bid would be required to meet; and• Returns to good causes, which would be the basis of comparison between Bids.

Required Standards The Required Standards were in respect of the following areas:

• Propriety – the Commission had to be satisfied that the Lottery would be run with all due propriety. It had to besatisfied that those likely to manage the business, or for whose benefit the business was likely to be conducted,were fit and proper. This involved two elements, fit and proper testing of individuals and companies, andassessment of the arrangements for corporate governance, internal audit and arrangements in respect ofsuppliers and contractors;

• Player protection – the Commission had to be satisfied that the Bidder had made the necessary arrangements toensure that the interests of every participant in the Lottery would be protected, that players would be treatedfairly, and that effective and rigorous arrangements would be in place to counter excessive and underage play;

• Management of transition risks – each Bidder had to satisfy the Commission that the Bidder was able to delivertransition successfully. Each Bidder was required to have a comprehensive transition plan that was fully supportedby the appropriate skills, resources and capability of that Bidder and its consortium. Each Bidder was also requiredto fully satisfy the Commission that the Bidder was able to identify, monitor and manage any associatedsignificant transition risks and take appropriate action to mitigate those risks;

• Overall ability of management and capacity of organisational structure – each Bidder had to satisfy theCommission that it had the capacity and ability to plan, organise and operate an undertaking of the nature of theLottery. It also had to satisfy the Commission that it had, or would have, the appropriate corporate and legalstructures in place to comply with the requirements set out in the ITA;

• Financial soundness – each Bidder had to satisfy the Commission that its proposals were sufficiently robust andwell-developed to remove any material risk, on financial grounds, that might lead to a failure to meet theobligations set out in the Bidder’s proposal and draft Licence;

• Technology operation – each Bidder had to satisfy the Commission that it would ensure the security, capacity,resilience and integrity of the technology operation, as well as its suitability as a basis for a modern lottery. TheCommission had to be satisfied that the technology operation would be developed, operated and maintained toappropriately high professional standards; and

• Operational risk management – each Bidder had to have a comprehensive risk assessment and riskmanagement plan that fully satisfied the Commission of its ability to: identify, and assess significant operatingrisks; put in place sufficient measures to address those risks; and monitor such risks in a way that effectivelysupports the delivery of the Bidder’s objectives.

For each area where information was to be supplied as part of the Bid, the ITA set out the requirement, theevaluation criteria and the evidence required. The ITA set out that each Bidder’s ability to meet a Required Standardwould be assessed separately from the evaluation of its ability to generate returns to good causes. In addition,Required Standards would not be used as differentiators between Bids. Bidders were asked to note that whilstRequired Standards would be assessed separately from the evaluation of returns to good causes, each Bidder’s abilityto satisfy a particular Required Standard might depend on the analysis undertaken in other areas.

Returns to good causesThe ITA set out that the Commission would be making an assessment of each Bidder’s expected returns to goodcauses. It was this assessment that would, provided the Required Standards were satisfied, determine the Bidder thatwould be awarded the Licence.



The assessment of each Bidder’s ability to make primary contributions to good causes would be the key aspect of thispart of the evaluation. It would draw on the responses to all areas of the returns to good causes evaluation. In orderto make an informed assessment, the Commission required each Bidder to submit sufficient evidence to enable it tounderstand the key drivers of these contributions, including information on the:

• Business Plan: this was intended to satisfy the Commission about the likely level of contributions to good causesthat it would deliver. It would assist in demonstrating each Bidder’s proposals were well founded and based on aclear and realistic view of the inputs that are required to run a successful Lottery. It would play an important rolein allowing a Bidder to demonstrate financial soundness over a wide range of possible scenarios. Throughsensitivity testing, the business plan would also demonstrate a Bidder’s flexibility to adapt its approach to a rangeof possible developments over the whole of the Licence period, and the implications for its financial soundnessand level of contributions under those scenarios;

• Contributions to good causes: returns to good causes, or contributions, are ultimately determined as a result oftwo elements – the ability of the Licensee to generate turnover; and the proportion of any revenues that isavailable for good causes after deducting prizes, Lottery Duty, retailer commissions and retentions to cover theBidder’s own costs and generate the required return. This element would focus on the retention structure thatwould be applied to revenues in order to determine what proportion of revenues each Bidder proposes to retain,but also how the proposed retention structure would affect the incentives of each Bidder to generate thoserevenues;

• Marketing plan: the marketing requirements were designed to test whether each Bidder’s proposals providedcredibility for the principal forecast submitted in relation to the business plan. The Commission would assesswhether there was a direct link between individual elements of the strategy and the sales forecast, in order tounderstand the relationships and drivers that underpinned the forecast returns to good causes;

• Game plan: Bidders were required to set out their strategy, proposed game portfolio, details of individual gamesor classes of game, and the forecast sales from each game. Each Bidder was required to deal with all major draw-based games separately. However, scratchcard games and interactive Instant Win-type games could be consideredas single game classes. Each Bidder was expected to include details of dedicated Olympic Lottery games to fulfilthe Lottery’s commitment to support the staging of the London 2012 Olympic Games;

• Player access plan: each Bidder was required to set out its plans for providing players with access to play theLottery games. Player access could be through established retail channels e.g. confectioners, tobacconists andnewsagents, multiple grocery, petrol stations, independent kiosks and new channels e.g. internet, mobile phones,digital television, and all related hybrids. The Commission expected that these new channels/delivery mechanismswould be available in increasingly sophisticated and consumer acceptable forms during the Licence period;

• Marketing communications plan: each Bidder was required to set out its plans for communicating to players,including brand strategy, advertising and promotion, public relations and broadcasting; and

• Marketing resource and sales plan: each Bidder was required to provide a marketing resource and sales planthat demonstrated the organisational capability to successfully deliver the entirety of the marketing plans. Theresource plan was required to focus on the elements of the organisational structure, people and managementprocesses that are critical to the delivery of the marketing plans.

The ITA made clear that each Bidder’s financial projections would be adjusted to take into account the Commission’sassessment of its deliverability based on its robustness and the risks associated with its deliverability. Primarycontributions would be calculated for a range of turnover projections and other sensitivity tests, and the expectedpresent value of contributions calculated for each Bidder based on an assessment of the likely probabilities ofdifferent scenarios occurring. Whilst important, the ITA noted that this part of the analysis would not itself solelydetermine the outcome. The Commission would also test the relative strengths and weaknesses between eachBidder in order to inform an overall view as to which Bidder was likely to generate the highest returns to goodcauses. The level of secondary contributions to good causes, if any, would also be calculated based on a similarrange of projections of the turnover likely to be generated by each Bidder (and also its costs).

The Commission provided an overview of the evaluation process (see diagram). Bidders were asked to note that thediagram was a simplification of the proposed process and as a consequence did not necessarily show all the relevantinteractions nor represent the order of each specific element. The Commission reserved the right to makeamendments to this process.



The following diagram is taken from the ITA, page 73.



Note: At the appropriate time, the Commission may consider asking Bidders to make presentations to the Commission. In addition, the Commission may consider conducting site visits.

Initial tasks

Completion of initial analyses of Required Standardsand returns to good causes

Approval of compliance with Required Standards and comparison ofBids based on likely returns to good causes

Required Standards

• Propriety

• Player protection

• Transition

• Organisation

• Financial soundness

• Technology

• Operational risk management

• Business plan

• Contributions to good causes

• Marketing plan

• Game plan

• Player access plan

• Marketing communications plan

• Marketing resource and sales plan

• Technology aspects

• Further assessment of Required Standards as necessary

• Additional scenario testing forfinancial soundness based on business plan analysis

Further assessment of returns to goodcauses to identify:

• Key drivers and differentiators of bids; and

• Additional scenario testing

Returns to good causes

Required Standards

Review

Final review and selection of Preferred and, if relevant, Reserve Bidder

Finalisation of Draft Licence

Licence Award

Returns to good causes

Evaluation process

Other issues The ITA also provided Bidders with guidance on a range of other issues:

• Ancillary activities: The Commission set out that it was keen to encourage innovative ideas and methods toincrease revenues through ancillary activities, and to share those increases as appropriate between the goodcauses and the Licensee. Essentially, ancillary activities referred to any activity that generated income derived fromthe use of Lottery assets or from Lottery-related activities other than that derived from ticket sales. However,Bidders were required to note that for the purposes of the competition and evaluating Bids, they should notinclude any ancillary activities in the business plan projections. In this way, the Commission identified that itintended to focus the financial evaluation on the contributions to good causes driven by core Lottery-related sales.

• Process: The Commission set out the timetable by which it intended to complete its evaluation. It made clear that the Commission would then select a Preferred Bidder with whom to finalise the draft Licence in the light of any commitments made by it in its respective Bid and which were not already included in the draft Licence. The Commission noted that it might also take the step of selecting a Reserve Bidder, with whom it would intendto finalise the draft Licence in the event that finalisation of the draft Licence was not achieved with the Preferred Bidder.

• Communications with the Commission: The Commission made clear that each Bidder, and any partiespromoting its Bid, were strictly limited to the forms of communication set out in the ITA. Communications wererequired to be directed to a contact identified in the ITA, except where specifically authorised by the Commission.The ITA set out a process by which Bidders could meet with the Commission and a process for clarification andinformation requests. To ensure a level playing field, the Commission clarified that Bidders should requestmeetings through a clarification and further information process. The clarification and further information processidentified that further clarification or further information requests had to be made in writing only to theCommission. A form for making such requests was provided. Any clarification or information arising from suchrequests would be published under the competition section of the Commission’s website, taking into accountissues of confidentiality and commercial sensitivity. A deadline was provided for such requests.

• Bids: The Commission set out details of the approach it proposed to take in respect of the delivery of Bids. It alsoset out requirements in respect of the formats of the Bids and that each Bidder had to submit with its Bid a copyof the draft Licence. The Commission strongly discouraged any Bidder from marking up conditions of the draftLicence, other than those specifically identified, when submitting their Bid. Notwithstanding the Commission’sposition, if a Bidder wished to amend a provision in the draft Licence, the Commission made clear that Biddershad to submit alternative drafting and an explanatory note outlining the scope and purpose of that drafting withtheir Bids.

• Presentation of Bids: The Commission set out that it intended to invite all Bidders to make a presentation to it.Further details would be provided. In addition, the Commission might wish to visit lotteries or other operationswhere services were being provided by Bidders or their consortium members. Accordingly, each Bidder had tospecify in its Bid three sites that the Commission might visit.

• The Commission’s right to clarify during the evaluation of Bids: The ITA set out that each Bidder might berequested to provide additional information in writing on particular aspects of its Bid. The Commission reservedthe right to seek such further particulars from any Bidder at the time and in the format of its choosing.

• Modifications and amendments to Bids: It was made clear that no unsolicited material would be acceptedfrom any Bidder after the final date for Bids and prior to finalisation of the draft Licence unless the Commissionwas satisfied that the material had been submitted in good faith, no unfair advantage was afforded to that Bidderand no other Bidder was unfairly prejudiced. The Commission explicitly reserved the right to grant a Bidder theopportunity to amend its Bid where the Commission considered that this would allow a deficiency in the Bid to beaddressed. A deficiency included any concern that, if not addressed, might prevent the Bid passing any RequiredStandard or meeting any other requirement set out in the ITA and draft Licence. Where the Commission decidedto grant an opportunity to address a deficiency in respect of any required standard, then all Bidders would begiven a similar opportunity to address any deficiency in respect of the Required Standards aspects of their Bids, ifnecessary. Where the Commission decided to grant an opportunity to address a deficiency in respect of areasother than Required Standards, then all Bidders would be given a similar opportunity to address any deficiency inrespect of those areas. The Commission noted, for the avoidance of doubt, no amendment, either upwards ordownwards, might be made to a Bidder’s principal forecast, retention rates and hence forecast contributions togood causes at any time after the Bid had been submitted.



Retailers and the general public

Retailers and the general public were identified as groups with which the Commission wished to further engage inthe development of the competition process.

The Project Board Chair and the Chief Executive met with relevant trade associations. The Commission alsoconducted focus groups with independent retailers and in-depth interviews with branch and field managers from asample of larger retailers. The detailed results were made available to potential Bidders through a Virtual Data Room(VDR), while a summary report was prepared for publication on the Commission’s website in June 2006.

The key issues raised by retailers were:

• Terminal allocation. While multiple retailers were reasonably confident of retaining their Lottery terminals,independent retailers with a Lottery terminal were seeking assurance from Bidders that they would retain theirterminal in the next Licence period. Retailers without a terminal wanted the opportunity to obtain one;

• There was a strong desire amongst independent retailers to maintain the percentage of terminals placed withintheir sector;

• All retailers wanted to protect (or increase) the 5% retailer commission rate; • Independent retailers perceived some inequity in the way they were treated compared to larger multiples in terms

of terminal allocation and other operational decisions, but particularly in respect of Fast Pay; • An emphasis on the support that any retailer needs in terms of the Account Manager relationship, ordering

systems, helpline availability, communication, promotional materials and regular training; and • The implications of any contingency that involved multiple operators for the workloads and profitability of

neighbourhood stores operating on small margins.

In addition, the Commission contacted 13 multiple retailers and asked whether they would be prepared, in principle,to work with any consortium as a distributor of Lottery products and whether they would be prepared to meetpotential consortia to discuss specific issues that might affect that consortium’s Bid. Confirmation was received fromall 13, and released to the market through a Bid Note made available on the Commission’s website.

The National Lottery is an institution in the UK; it is something that is important to people, whether they play or not. And that is why the Commission wanted to give everyone an opportunity to have their say on the Lottery of the future.

The Commission launched its public consultation on 14 February 2006; it closed on 31 May 2006. It was aquestionnaire, which could be accessed online via the Commission’s website, or by hard copy on request. Thequestionnaire was not intended to solicit views on the performance of the operator, but to gain an insight into whichaspects of the National Lottery were important to people, and how they would like it to be run in future.

The questionnaire asked people:

• Which aspects of National Lottery games were most important to them, is it the size of the jackpots, for example,or the fact that the Lotto draws are televised?

• How important they believed different aspects of the Lottery were in regard to its future operation. For example,how important was the use of the latest technology, or the fact that a proportion of ticket sales goes to good causes?

• Could people identify aspects that they would like to see change in the future? • Were people aware that the Licence competition is happening, and did they have sufficient information?

Key findings from the questionnaire, published in August 2006, were:

• Issues of accessibility, such as how easy it is to buy tickets and the ease with which players can check Lotteryresults, were seen by the majority of respondents to be important factors in the National Lottery;

• There was a general consensus that the integrity of the Lottery and player protection were important issues; • The majority of respondents valued the fact that a proportion of ticket sales goes to good causes. It was also

found that there was a desire for information about the good causes funded to be publicly available; • Opinion was more divided on issues of the size of jackpots, game variety, TV and technology; and • When asked about the Licence competition, almost half of respondents declared themselves to be uninterested in

the process itself, although two thirds thought they could easily obtain information about the competition if theywere interested.



It should be noted that as with all public consultation, respondents to the questionnaire were self-selected and weretherefore not representative either of Lottery players or the UK population in general. A summary of the results wasmade available on the Commission’s website.

To support the public consultation exercise, the Commission enaged in a range of other activities, including live radiophone-ins by the Project Board Chair in 12 regions that reached an estimated 3.6 million people.

3.7 Bidders compile and submit Bids

During the Bid preparation period, the Commission held discussions with a number of parties who were interested inBidding. Not all of these parties submitted a Bid. In some cases, this was because of developments and alternativecommercial opportunities in other areas of their business.

During the period from June to December 2006, Bidders could request further clarification and further informationfrom the Commission about issues arising from the ITA (see previous section for details). Any clarification orinformation arising from such requests was published under the competition section of the Commission’s website,taking account of issues of confidentiality and commercial sensitivity. The Commission published 34 ITA clarificationson issues including the retention structure, player protection, business plan format and intellectual property.

The Commission also published four amendments to the ITA on its website covering:

• Amendment 1 – clarification regarding participation in more than one consortium: This clarified the positionregarding the participation of parties in more than one consortium;

• Amendment 2 – extension to Bid preparation: Following a review of the competition timetable, and having takeninto account feedback from, and an assessment of, the market, the Commission decided on 20 September 2006to extend the Bid submission deadline by six weeks. The delivery date for Bids was therefore extended to 26January 2007;

• Amendment 3 – additional time allowed for clarification and information requests: The Commission extendedthe clarification and information requests deadline by ten days, to 7 December 2006; and

• Amendment 4 – additional time allowed for submission of Bids: On 14 December, the Commission extended theperiod to Bid for the third Lottery Licence by a period of two weeks. The final deadline for submissions was now 9February 2007.

On both occasions when the deadline for the submission of Bids was extended, this was undertaken by theCommission following a request from an interested party. The Commission considered that, if it was to fulfil itsstatutory duties and to ensure a fair and effective competition, it had to give careful consideration to such requests.On both occasions, all known interested parties were consulted and a range of views taken into account by theCommission. The Commission also considered the effect of an extension on the period provided for transition. Thedecisions therefore reflected the Commission’s duty to maximise returns for good causes and its judgement that nounfair disadvantage arose as a result of either extension.

The VDR remained open throughout this period, to provide Bidders with information on the Lottery opportunity. The Commission also continued to make information available to Bidders through Bid Notes. This included notes on transition monitoring and the process for managing the “fit and proper testing” elements of the third Licencecompetition.

Bid Note 09 – Transition monitoring

Published on 6 October 2006, this Bid Note set out further information about how the Commission proposed tomonitor transition to the third Licence as part of its work to deliver on its statutory duties.

Transition includes the process of preparing for, and the start-up of, operations for the third Licence. TheCommission made clear that it attached great importance to the transition taking place as smoothly as possible. TheCommission noted that it had an interest in the continued sustainability of the Lottery in order to deliver its statutoryduties. The Commission had therefore decided that, although the successful Bidder would be responsible fordelivering the Lottery operation in accordance with the Bid commitments and the Licence, it wished to undertakeregular monitoring of the Successful Bidder’s progress with Transition to provide it with assurance that the SuccessfulBidder was delivering in accordance with its Bid commitments.

The Commission proposed to undertake regular monitoring of the Successful Bidder’s progress against its Transitionplan. The Commission would achieve this by having full access to the progress monitoring reports available to the



Successful Bidder’s senior management. In addition, the Commission would undertake regular reviews of theSuccessful Bidder’s progress. The frequency and timing of the reviews would be discussed with the Successful Bidderbut as a guide, the Commission anticipated that they would typically take place at 6 weekly intervals, though theprecise timing was likely to vary depending on the Successful Bidder’s Transition plan and the outcome of previousreviews. Frequency and scope of reviews were likely to reflect the past performance of the Successful Bidder and thedegree of risk that the Commission considers associated with the remaining phases of the Transition.

The Commission intended that the reviews would use a risk-based approach as part of a Commission risk mitigationstrategy. A small team from the Commission (which might include advisers appointed by the Commission) wouldcarry out these reviews. It was proposed that at the end of their investigations the review team would produce ashort report summarising their findings and recommendations, together with an assessment of the Transitionproject’s status. Bidders were asked to note that the reports would be produced for the competition Project Boardand Commissioners but would also be made available to the Successful Bidder’s Transition team. A senior member ofthe Successful Bidder’s Transition team would be expected to attend the competition Project Board meetings todiscuss progress.

Finally, Bidders were asked to note that the Enabling Agreement would include provisions which would allow theCommission to implement the monitoring arrangements described above.

3.8 Evaluation of Bids

On 9 February 2007, the Commission received Bids from Camelot Group plc and Sugal & Damani UK Ltd to operatethe third National Lottery Licence. In line with the process set out in the ITA, Bidders had the option of deliveringtheir Bids to either the main delivery address or, with advance agreement, to an alternative address. The alternativeaddress was not made public and, in the event, neither Bidder took advantage of that opportunity. Bidders were alsooffered the opportunity of a photocall with the Chair of the Project Board at the National Gallery on the morning of9 February. Both Bidders took advantage of this opportunity. Following receipt of the Bids, the Commissionannounced the names of the Bidders but did not disclose further details about either Bid, in order to continue tomaintain competitive pressure during the evaluation period.

Bidders

Shareholders connected with the Camelot Bid were: Cadbury Schweppes plc, De La Rue Holdings plc, Fujitsu Services Limited, Thales Electronic plc and Royal Mail Enterprises Limited. Principal contractors connected with theCamelot Bid were:

• GTECH Corporation;• Elsym Consulting Inc.;• GTECH Global Services Corporation Limited;• Scientific Games International Limited;• ICM Business Continuity Limited; and• Hughes Network Systems Ltd.

Shareholders connected with the SDUK Bid were: Sugal & Damani Lottery Agency Pvt Ltd, Deutsche Bank, FinancialTechnologies Limited and Gopsons Papers Limited. Principal contractors connected with the SDUK Bid were:

• Ogilvy & Mather Group (Holdings) Ltd;• Transaction Network Services (UK) Ltd;• System Consultant Services Limited;• Betware H/F; and• HCL Infosystem Limited.

Evaluation process

The evaluation was carried out in accordance with the process set out in the ITA and took some 25 weeks tocomplete from the receipt of Bids on 9 February 2007. This process encompassed a number of elements:

• Preparation for initial Bidder presentations: In preparing for the initial presentation by Bidders,Commissioners were provided with two documents for each Bid. These were the executive summary provided bythe Bidders and a short factual summary setting out the key or distinctive features set out in the executivesummary and other important information not necessarily covered in the Bidders’ executive summary;



• Initial Bidder presentations: Bidders were invited to make presentations to Commissioners in the weekcommencing 5 March 200716. The initial presentations lasted for up to 3 hours. Bidders had a maximum of twohours to describe whatever aspects of their Bids they wished, provided that no new information was provided.Bidders were encouraged to use this presentation as an opportunity to provide an overall summary of the Bidproposals, showcasing key, innovative and important elements as they saw fit. The Commission and its advisersthen asked questions;

• Analysis of compliance with each of the Required Standards and understanding returns to good causeselements: In preparing for the site visits and detailed Bidder presentations, Commissioners undertook an initialreview of the each Bid’s compliance with the Required Standards and the key returns to good causes elements ofeach Bid;

• Clarifications: The ITA provided that each Bidder might be requested to provide additional information onparticular aspects of its Bid. The Commission therefore provided a number of such requests for information toboth Bidders to clarify its understanding of the proposals contained in the Bids;

• Site visits: The ITA reserved the right of the Commission to visit operations where services were being supplied by consortium members. Visits were therefore undertaken during April to two operations for each Bidder, by adelegation headed by the Project Board Chair and including the Commission Chief Executive and Commissionadvisers;

• Detailed Bidder presentations: Bidders were invited to make detailed presentations in the week commencing16 April 2007. The detailed presentations enabled Bidders to describe at greater length certain aspects of their Bidproposals. A full day was allowed for each Bidder. The Commission provided each Bidder with an agenda and setof issues two weeks before the detailed presentations. Further questions were asked at the presentations.Different questions were asked of different Bidders;

• Provisional decisions on Required Standards: Following the detailed Bidder presentations, site visits and Bidderclarifications, Commissioners considered the position of Bidders in relation to each of the Required Standards.Commissioners were only able to take provisional decisions on whether either Bidder met each of the RequiredStandards due to the inter-related nature of some of the issues arising. For example, issues arising on thetechnology operation required standard could impact on the transition required standard. The ITA reserved theright of the Commission to grant Bidders the opportunity to amend their Bids where the Commission consideredthat this would allow a deficiency to be addressed. After considering the position, the Commission took adecision to allow modifications to Bids17;

• Analysis of the returns to good causes elements of the Bids: The Commissioners made an initial assessmentof the key issues affecting the deliverability of returns to good causes for each Bid and were able to make someinitial comparisons of the returns to good causes from each Bid under different scenarios;

• Assessment of modifications and amendments: Modification and further clarification requests were sent toboth Bidders. Following the receipt of the modification and clarification responses, the Commissioners consideredthe extent to which the responses had addressed the deficiencies identified by the Commission. Where theresponses addressed the deficiencies, the Commission reached a provisional view on the Required Standards. TheCommission then considered the position in relation to remaining deficiencies identified. As a result theCommission agreed to grant the Bidders a further opportunity to amend their Bids and as a consequence to varythe competition timetable (see below); and

• Final decisions: Following receipt of the further modification responses and their analysis, Commissionersconsidered whether they were content that the evaluation process had been carried out in accordance with theITA18 and subject to that whether each Bid had met each of the Required Standards. Subject to each Bid havingmet each of the Required Standards, Commissioners considered which Bidder was most likely to maximise returnsto good causes. In the light of that analysis, which included both absolute and comparative assessments ofreturns to good causes, the Commission’s role was to consider the appointment of a Preferred Bidder and,potentially, a Reserve Bidder and prepare a Statement of Reasons setting out the basis for its decision.

In considering Bidders’ responses to the required standard on propriety, a vetting exercise was undertaken by theCommission, to ensure that anyone who was likely to be involved in managing the business or any part of thebusiness of running the National Lottery, or for whose benefit that business was likely to be conducted, was a fit andproper person. A specialist team, comprising Commission staff, was provided with a secure office which, becausevetting was distinct from other aspects of Bid evaluation, was separate from the main evaluation suite. Bidders wererequired to provide information about individuals and companies, which was then checked with a range of agenciesand other third parties. The results of that work formed part of the Commission’s decisions on whether each Bid metthe required standard for propriety.

Alongside the publication of the ITA in June 2006, the Commission had also published a draft Licence which Biddershad to take into account as part of their Bids. The Commission had strongly discouraged any Bidder from markingup conditions of the draft Licence, other than those specifically identified, when submitting their Bid.Notwithstanding the Commission’s position, if a Bidder wished to amend a provision in the draft Licence, theCommission made clear that Bidders had to submit alternative drafting and an explanatory note outlining the scope



16 In line with the process set out in Bid Note 12.17 As identified earlier in this report, no amendment, either upwards or downwards, might be made to a Bidder’s principal forecast, retention rates and hence forecast

contributions to good causes at any time after the Bid had been submitted.18 In considering this, the Commission received confirmation that the process had been carried out in accordance with the ITA from both the Commission’s Project Office

and Serco Consulting (who provided the Commission with independent process assurance on the competition process).

and purpose of that drafting with their Bids. Neither Bidder submitted any such mark ups with their Bids. TheCommission therefore sought clarification from both Bidders to confirm that they accepted the Licence as drafted bythe Commission.

Following correspondence in this respect, one of the Bidders submitted an amended draft Licence part way thoughthe evaluation period. This contained a significant number of amendments to the draft Licence to which theCommission was required to give careful analysis and consideration. The Commission considered that a number ofthe proposed amendments gave rise to significant concerns in relation to the Required Standards contained in theITA or were inconsistent with the Commission’s statutory duties. It therefore asked for the draft Licence to bemodified as part of the evaluation process set out above. Following modification by the Bidder where it withdrew alarge number of the amendments which had given rise to the concerns set out above, the Commission entered intodiscussions with the Bidder. The discussions provided an opportunity for the Commission to set out the reasons forthe Commission’s drafting of the provision and issues arising with the remaining amendments. The Bidder then hada further opportunity to address the Commission’s remaining concerns in a final modifications process. Thisprocedure necessarily took time to complete but was undertaken before the announcement of the Preferred Bidder.

On 11 June, the Commission announced that it remained on track to award the Licence to run the National Lotteryat the end of August. It set out that its own analysis of Bids was proceeding well and in accordance with its plans. Italso stated that, as envisaged in the ITA, the Commission had been working with both Bidders to securemodifications to their Bids. This was to enable the Commission to meet its objective of achieving as strong Bids aspossible. This process was ongoing and was likely to continue for a number of weeks. As a result, the preferredBidder would not be announced at the end of June.

Preferred Bidder announcement

On 7 August, the Commission announced Camelot Group plc as the Preferred Bidder to operate the third NationalLottery Licence. The Commission also published its Statement of Reasons for the decision19.

The Commission identified that it had received two strong Bids from Camelot Group plc and Sugal & Damani UK Ltd.Both had met the seven demanding Required Standards outlined by the Commission in the ITA. Camelot Group plcwas then selected as the Preferred Bidder as it was considered better able to maximise returns to good causes. Basedon an analysis of each business plan, and at similar levels of likely sales, Camelot Group plc was slightly moregenerous to good causes and, more significantly, the Commission concluded that there was a strong probability thatCamelot Group plc would achieve higher sales over the course of the Licence. Due to the evidence provided in itsBid, Sugal & Damani UK Ltd was selected as the Reserve Bidder which could operate the Lottery if for any reason theterms of the Licence could not be finalised with Camelot Group plc.

The Licence was due to be finalised with Camelot Group plc and an Enabling Agreement entered into by the end of August.

3.9 Licence finalisation

Following the announcement of the appointment of the Preferred Bidder and the appointment of a Reserve Bidder,the Commission entered into discussions with Camelot Group plc, as Preferred Bidder, to finalise the draft Licenceand the Enabling Agreement.

The Enabling Agreement was the agreement entered into by the Commission and the Preferred Bidder governing thetransition period. During finalisation of the draft Licence, the Preferred Bidder was required to confirm that it had secured any consents, approvals or other conditions that might have been required, particularly those from third parties.

The Enabling Agreement confirmed that the Commission had accepted a Bid from Camelot as Licensee pursuant tothe competition and that the Licensee had agreed to operate the National Lottery pursuant to the new Licence andin accordance with the Bid. In summary, the terms of the enabling agreement provide that:

• The Licensee shall implement the Bid and prepare for the commencement of the new Licence;• The Licensee shall continue to run the National Lottery up to the start date in accordance with the current Licence;• The Licensee shall implement its Bid in accordance with the transition plan;• The Licensee shall facilitate the conduct by the Commission of transition reviews;• The Licensee shall develop or procure the development of all intellectual property necessary for implementing the

Bid and, on request by the Commission, transfer or grant an exclusive Licence to the Commission or its nominee;• The Licensee shall provide the Commission with a copy of any exception report that it escalated to the Licensee’s

transition and operations director;



19 The full text of the Statement of Reasons can be found at www.natlotcomm.gov.uk. At the same time, the Commission published a document setting out thebackground to the National Lottery Commission, the third Licence competition process and information on the Bids received.

• The Commission may use, publish or disclose any information, including information provided to or generated bythe Commission in accordance with or relating to the draft Licence or for monitoring the Licensee’s compliancewith the Enabling Agreement;

• The Commission may terminate the Enabling Agreement and decide not to grant the new Licence if the Licenseehad committed a persistent or material breach of any of its obligations under the agreement, is no longer a fit andproper body to run the Lottery, on the grounds of insolvency or the current Licence is revoked; and

• Appendices to the Enabling Agreement contain:

• Details of Licence conditions requiring the Licensee to seek approval from the Commission before the start of the new Licence; and

• Details of ancillary documents to be produced by the Licensee at the completion meeting20.

A high level summary of the Licence is attached at Annex E. The Licence which the Commission concluded withCamelot is consistent with the draft Licence issued alongside the ITA. In concluding the draft Licence, the Commissionand Camelot agreed a series of protocols to assist in the practical application of some Licence conditions. Theseprotocols set out working arrangements to be applied to determine how a particular Licence obligation would applyin any given case. The purpose of the protocols was to provide a mechanism for improving the relationship andefficiency of operations between the Licensee and the Commission during the term of the Licence.

On 31 August, the Commission announced that it had finalised terms and signed an Enabling Agreement for thethird National Lottery Licence with Camelot Group plc. With the execution of the Enabling Agreement, Sugal &Damani’s status as Reserve Bidder lapsed.

3.10 Transition period

The third Licence starts on 1 February 2009. The Commission is committed to a successful transition from the secondLicence so that there is a seamless transition for retailers and, most importantly, players.

During the transition period, the Commission will undertake regular monitoring of Camelot’s progress against itstransition plan, in line with the arrangements set out in Bid Note 09 (see above). The first of these reviews took placein September 2007. The Commission intends to carry out further reviews during the transition period, as part of aCommission risk mitigation strategy. The results of the reviews are considered by the Commission’s Project Board, atwhich Camelot is also represented.

The Licence requires Camelot to seek input from the Commission during the transition period, for example on thelicensing of games for the third Licence period. Therefore, a project management function, using PRINCE2 principles,has been retained within the Commission in order to manage the reviews of Camelot’s transition plans and also tosupport the internal coordination of work at the Commission, including to ensure that the operator delivers Licenceapplications to the Commission in a timely manner and to the requisite quality. This includes coordinating theactivities it is required to undertake in order to monitor Camelot’s activities under the current (second) Licence, toclose down the second Licence and to effectively regulate the Lottery under the third Licence.

The external advisers used for the competition process are no longer being used by the Commission, with theCommission’s own work relating to transition and the closing down of the second Licence being delivered principallyfrom internal staff resources.

Following the successful conclusion of the competiton for the third Licence, the Commission has recommenced workon the review of the Commission’s approach to regulation (see above) which it had suspended during the Bidpreparation and evaluation periods. The Commission intends to take the opportunity during the transition period toreview relevant aspects of the regulatory regime to ensure that it is able to regulate in a way which enhances thedevelopment of the National Lottery without imposing unnecessary burdens which constrain or restrict its potential.

A list of the key documents produced during the competition is attached at Annex H.



20 Completion means the grant of the new Licence by the Commission to the Licensee subject to the provisions of clause 17 (Termination). Completion meeting meansthe meeting at which completion takes place.

Section 4 | Managing the competition



21 Robert Foster was until September 2004, Chief Executive of the Competition Commission. He has also held a number of senior posts in Whitehall includingresponsibility for the Department of Trade and Industry's innovation expenditure and Director of Aerospace and Defence Industries. He has handled major projectsincluding the planning and setting up of the Office of Science and Technology, and chairing the Project Board of the PFI Project to rebuild the National PhysicalLaboratory. He is a Chartered Engineer and was previously an engineering manager in the telecommunications and electronics industries.

4.1 Introduction

At the outset, the Commissioners recognised the wide range of experience that managing such a significantcompetition requires, and the demands that it places on a group of part-time Commissioners and the relatively smallorganisation that supports them. It therefore appointed a number of external advisers and put in place a series ofarrangements to manage the competition. These arrangements were designed to give all potential Bidders everyconfidence that the competition would be conducted in a rigorous and fair manner.

The arrangements that were put in place to manage the Licence competition were based on the following structure:

• Project Board: Chaired by a Commissioner, Robert Foster, this provided assurance to all stakeholders and to theCommission that the competition was properly conducted and delivered to deadlines;

• Senior Responsible Owner (SRO): As Chief Executive and Accounting Officer, Mark Harris was accountable toCommissioners for the overall success of the project. Acting as a key member of the Project Board, he ensuredthat it was delivered in an appropriate manner. The SRO was supported by a Project Steering Group, whichincluded representatives from the Commission’s advisers; and

• Project Office: Headed by an internal project director, this was set up specifically for the competition. It wasresponsible for the day to day management of the project and for ensuring that the outputs of the project wouldcontribute towards the delivery of a successful competition.

4.2 Project Board

The Commission created a Project Board to oversee the conduct of the competition and to support the work of theChief Executive and his staff. In early 2005, the Commission asked the Department for Culture, Media and Sport(DCMS) to appoint, as one of the new Commissioners, someone with the right commercial, procurement and publicsector skills and expertise to fulfil the role of Project Board Chairman. Robert Foster was appointed to this role.

The Board comprised two Commissioners (Robert Foster21, Chairman, and Brian Pomeroy, Vice Chairman) and theChief Executive and Accounting Officer (Mark Harris). Robert Foster chaired the Project Board throughout thecompetition, providing stability and continuity and acting as the project’s main ‘voice’ to stakeholders and the media.

The Project Board operated under terms of reference agreed by Commissioners. The Project Board’s main functionwas to carry out the work required to award the third Licence to run the National Lottery. The Project Board’s taskswere to:

• Ensure that the competition was run fairly and competently; • Oversee the strategy for and delivery of the third UK National Lottery Licence competition; • Ensure the project was completed to time and to agreed budget;• Delegate responsibilities to the Chief Executive and monitor their execution; • Make decisions on issues identified by the Project Board or raised by the Project Steering Group; • Make recommendations to the Commission on decisions which had not been delegated to the Board; • Provide assurance to all stakeholders and to the Commissioners concerning the conduct, resources and delivery of

the project; • Be the project’s voice to the outside world; and• Approve the publication of the project’s deliverables; and public statements regarding the project, except where

items were reserved to the Commission.

The terms of reference also included a specific scheme of delegation from the Commission, under whichCommissioners reserved to the full Commission approval of key competition documents, including the Statement ofMain Principles, the Invitation to Apply and the Statement of Reasons. The Project Board’s terms of reference are setout at Annex F.

The Project Board was in place by the Spring of 2005. It met regularly – at least monthly – throughout the period ofthe competition. The Project Board ensured that issues relating to the competition and the design of the competitionstructure were fully scrutinised and debated in the Commission. This role was particularly important during theperiod leading up to the publication of the Statement of Main Principles, when it provided a forum to consider theCommission’s position on a wide range of issues raised by the Commission’s discussion documents. Throughout thecompetiton, the Project Board also undertook a significiant role in ensuring that project deliverables were of thenecessary quality, that inter-dependencies were addressed and ensured their timely delivery before they weresubmitted to the full Commission for approval.



22 PRINCE (Projects IN Controlled Environments) is a structured method for effective project management. PRINCE2 is a de facto standard used extensively by the UKgovernment and is widely used and recognised in the private sector, both in the UK and internationally.

To ensure that it had the advice necessary to allow it to fully deliver its functions, meetings of the Project Board werealso attended, in an advisory capacity, by members of the Commission’s Project Office and by a number of senioradvisers. These senior advisers were largely separate from the advisers involved in the project on a day-to-day basis.They were therefore able to provide a challenge function on deliverables, thereby supporting the Project Board in itsquality assurance role.

A Commissioner-led Project Board was seen as a successful means by which to ensure oversight of the managementof the competition. It also had the authority to take decisions, within the Scheme of Delegation from Commissioners.

To ensure that transition to the third Licence is managed effectively, the Commission has decided that the ProjectBoard should continue to operate throughout the transition period.

4.3 Senior Responsible Owner

As SRO, Mark Harris was responsible for the delivery of the competition. A working-level Project Steering Group(PSG) supported the SRO to monitor progress of the project against the overall project plan and stage plansapproved by the Project Board.

The PSG comprised representatives from the Commission and its advisers. It supported the SRO in deciding whichissues to escalate to the Project Board for resolution or guidance.

The SRO used the PSG to support the Project Board by co-ordinating the wider work on the project. Its mainfunctions included:

• Managing work flows to the Project Board (and Commissioners) and monitoring work for completeness,timeliness and quality;

• Monitoring progress of the project against the overall Project Plan; • Monitoring progress of the project against the Stage Plans and ensure any deviations from Plan are being

managed appropriately or to escalate deviations to the Project Board where appropriate;• Monitoring wider work and the completion of identified work streams, and the completion of deliverables;• Advising on issues put to it and escalating those issues deemed appropriate for Project Board resolution or

guidance; and • Reviewing the Risk Register and identifying those risks to escalate to the Project Board.

4.4 Project Office

The Commission established a dedicated Project Office to provide the SRO with day-to-day support in managing the process.

The Project Office was responsible for the day-to-day management of the project and for ensuring that that theoutputs of the project contributed towards the delivery of a successful competition. Staffing included a dedicatedproject manager. The Project Office’s prime responsibility, was to ensure that the project produced the requiredproducts, to the required standard and within the constraints of time and cost. This included designing and applyingan appropriate project management framework for the project (using relevant project standards).

The project office approach was based on PRINCE2, taking into account any specific modifications that wererequired by the project22. The project office developed and maintained a set of control documents, namely:

• Project Definition Document: which set out the scope and objectives of the project;• Project Governance: which set out how the project would be managed;• Risk management strategy: which set out the project’s approach to risk;• Issue management strategy: which set out the way in which issues would be managed;• Configuration management strategy: which set out how the project’s outputs would be identified, tracked

and controlled;• Change management strategy: which set out how any changes to the project’s scope, timetable or costs would

be managed;• Resource management strategy: described the project’s approach to ensuring that adequate resources were

available so that the project’s objectives could be achieved; • Quality management strategy: defined a set of guidelines and procedures which were used to ensure that

project deliverables were of the necessary quality; and• Code of conduct: which set out provisions relating to the handling of contact with prospective Bidders. This

applied to Commissioners, Commission staff and relevant staff among the Commission’s advisers engaged on thecompetition project.

In addition to the control documents, the Project Office introduced additional controls, to ensure that the projectcould be managed and monitored on a day-to-day basis:

• Detailed planning schedules for each stage of the Licence competition project;• Work package management: management of individual work streams within each stage;• Fortnightly reports on expenditure and progress against work streams;• Budget tracker: on-going costs monitoring process;• Project schedule: overall planning schedule for the Licence competition project;• Progress reporting: monthly reports to the Project Board;• Budget reports: quarterly reports on the budget; and• End of stage reports: reports produced at the end of each stage of the Licence competition project, reporting on

achievements for each stage completed, requesting authority to move to the subsequent stage and setting outobjectives for that subsequent stage.

4.5 Quality management

The Commission’s approach to quality management sought to ensure that all outputs were fit for purpose andproduced to time/budget and in accordance with agreed specification.

Quality reviews were carried out at three levels. Work package managers were responsible for ensuring that qualityreviews of deliverables were undertaken in accordance with the adviser’s own internal quality procedures before thedeliverable could be considered further by the project. The deliverable was then subject to peer review by PSG. Thesereviews provided an opportunity for Commission staff and its advisers to provide views and ensure that issues whichemerged from interrelated work packages were taken into account. Once the deliverable was agreed by the SRO itwas then forwarded to the Project Board. The Project Board would discuss and ask for changes or approve thedeliverable, except where items were reserved to the Commission. In these instances the Project Board would make arecommendation to the Commission on the deliverable.

The approach to risk management for the competition was in accordance with the Commission’s overallmanagement of risk framework. The Commission’s strategic approach to risk provided the framework for riskadopted for the competition. This was based on the fundamental premise that:

• For all activities which relate to the Commission’s statutory duties, the appetite for risk is low; and• For all other areas of activity, the appetite for risk is medium.

4.6 Risk management

The risk framework adopted included: identification of risks; evaluation and analysis; and mitigation. Foridentification of risks, mechanisms were put in place to identify the extent of risks occurring. The Project Office hadresponsibility to collate all risks for the competition, and responsibility for the development and operation of a riskregister in which risks were recorded. For evaluation and analysis, the Project Office undertook a process involving aformal review of identified risks together with a rating methodology and the allocation of responsibility for thedevelopment of risk mitigation plans. On mitigation, actions were identified to ensure that the risk could becontained or reduced. The Project Office monitored progress of mitigation actions.

The process for the management of risk included the establishment of a Risk Review Group comprisingrepresentatives of each of the Commission’s advisers and Commission staff. It met on a regular basis during thecompetition to review and administer the risk register. The recommendations of this group were reported to theSRO, who reviewed risks at meetings of the PSG. The SRO then decided which risks should be escalated to theProject Board for review or decision. The Project Board was advised on a regular basis of those risks with a high netrisk rating and any movement of the identified risks so that it could consider the mitigation strategies for those risksor whether any risks should be escalated to the full Commission.

4.7 Managing the evaluation process

For the evaluation period, a number of processes were put in place to ensure an effective evaluation, including thedevelopment of an evaluation manual, a process for the receipt of Bids and a dedicated evaluation suite.

The Evaluation Manual was approved by Commissioners and set out the detail of how the evaluation process was tobe managed in order to ensure that Commissioners were able to reach decisions based on robust analysis. A numberof Subject Review Groups (SRGs) were set up to assess the Bids in relation to each of the Required Standards andundertake the returns to good causes analysis. To ensure that an appropriately wide range of expertise was used ineach element of the evaluation, the SRGs were multi-disciplinary teams comprising both Commission staff and advisers.





23 In 2007, Cornwell became Serco Consulting (a subsidiary of Serco Group plc).24 Further details about the OGC and the Gateway Review process can be found at www.ogc.gov.uk.

The Project Office developed and administered a process for the receipt of Bids in a secure and auditable manner.This ensured that the Bids were received from Bidders and stored under secure conditions, including the use ofsecurity guards. The process was overseen by Cornwell Management Consultants23, who confirmed that the processhad been properly conducted.

To ensure complete separation between the evaluation process and the day-to-day regulation of Camelot, the SROauthorised that a dedicated evaluation suite in temporary office accommodation should be acquired for theevaluation period. The suite also assisted with security arrangements for the evaluation process and ensured thatthose working on the evaluation from both Commission staff and the advisers were co-located to make sure thatdependencies between the different elements of the evaluation were addressed.

4.8 Use of external advisers

To support the additional workload, and maintain a separation of Bid evaluation activities from day-to-day contactwith Camelot as operator, input from Commission staff was supplemented by external consultants (except in theareas of vetting and player protection).

In appointing the advisers, the Commission complied with European Union (EU) procurement law. The methodadopted was to advertise in the Official Journal of the European Union when required or to use other procurementmethods permissible under the directives to ensure an open and transparent competition for each contract opportunity.

Advisers appointed to support the process were:

• NM Rothschild (lead adviser, financial and commercial);• Hedra plc (technology and IT);• NERA UK Limited (economics);• Freshfields Bruckhaus Deringer (legal);• Mazars LLP (tax and accounting); and• April Strategy (marketing).

In addition, the Commission appointed, through open competition, advisers to assist with the third party assessmentof redundancy costs recoverable by the successful Bidder (in line with Bid note 01) and the regular reviews that itproposed to carry out in relation to monitoring the successful Bidder’s progress against its transition plan (in line withBid note 09). The advisers appointed were:

• Collinson Grant (TUPE adviser); and• Campion Wilcocks (transition stage review leader).

4.9 Independent scrutiny of the process

The competition was subject to independent scrutiny by:

• The Office of Government Commerce (OGC) Gateway Review Process; and• Cornwell Management Consultants, appointed by the Commission to provide further independent review of

the process.

This independent scrutiny provided the Commissioners with assurance that the process was properly conductedduring the competition and, in particular, when it came to make its final decision.

4.10 Gateway Review Process

The OGC Gateway™ Process examines programmes and projects at key decision points in their lifecycle24. It looksahead to provide assurance that they can progress successfully; the process is best practice in central civilgovernment, the health sector, local government and Defence. OGC Gateway Reviews deliver a “peer review” inwhich independent practitioners from outside the programme/project use their experience and expertise to examinethe progress and likelihood of successful delivery of the programme or project. They are used to provide a valuableadditional perspective on the issues facing the internal team, and an external challenge to the robustness of plansand processes. The reviews help the SRO achieve their business aims and the project is given an overall rating using aRed/Amber/Green scale.

During the competition, the project was subject to four Gateway Reviews. Each review gave the project an overallrating and made recommendations for action. Mark Harris, as SRO, accepted each of the Gateway Review reportsand their recommendations for action. All recommendations were actioned and regular reports on progress providedto the Project Board.

The Gateway Reviews carried out during the competition were as follows:

• Gateway 0 – Strategic assessment (May 2005);• Gateway 1 – Business justification (January 2006);• Gateway 2 – Procurement strategy (May 2006); and• Gateway 3 – Investment decision (May 2007).

The project will undergo further OGC Gateway Reviews during transition, to assess readiness for service.

4.11 Independent process review

To provide Commissioners with assurance that the competition process had been properly conducted when theycame to make their final decision on the preferred Bidder, Serco (formerly Cornwell) was appointed in mid-2005 toact as observer to the competition process.

Serco attended competition meetings (Commissioner meetings relevant to the competition, Project Board meetingsand meetings of the Project Steering Group), reviewed relevant papers produced by the Commission or its advisers,and reported to the Project Board and the Commission at critical milestones or times of its choosing.

Specifically, the independent process assurance team:

• Monitored compliance with agreed processes, and reported any concerns; and• Advised as required on project management to ensure that best practice had been followed, and that the project

was compliant with key principles of PRINCE2 methodology.

The independent process assurance team advised the Project Board and Commissioners on whether it was contentwith the processes adopted, highlighted any areas of concern, and was able to comment on any other issues thatmight affect the proper conduct of the competition.

The independent process assurance team:

• Provided support to the Commission in seeking to encourage competiton, level the playing field and align incentives;

• Sought to ensure that potential Bidders could have independent assurance that the process had beenadministered fairly;

• Worked alongside the project team and its advisers, but was not part of the project team; and• Provided a review of the processes adopted by the project for the Project Board and the Commission.

Before Commissioners took their decisions on whether either Bidder had met each of the Required Standards and,subject to that, which Bidder was most likely to maximise returns to good causes, Serco provided a report offeringtheir view of the competition process. This report concluded that the evaluation of Bids had been rigorous and fair,and carried out in accordance with the ITA. As a result, they saw no reason why the Commission should not proceed to make its decision on the award of the third Licence. The summary conclusions of the report are attachedat Annex G.

4.12 Contingency

An important element of risk management under PRINCE2 is planning for measures to be taken if a defined riskshould occur. A contingency plan is prepared where other actions (risk prevention, reduction or transfer) are notpossible, are too expensive or estimated cost if the risk materialises does not sufficiently outweigh the cost of takingavoiding action – but the risk cannot be simply accepted. Given the importance of the Lottery to good causes, theCommission considered it prudent to undertake contingency planning for the Licence competition – and that certainelements of that should be done in conjunction with DCMS. The need for contingency planning had also beenidentified by the National Audit Office in its report on the second competiton25, as follows: “The Commission’sexperience in awarding the second Licence underlines the need for contingency plans to be established for asituation where there are no suitable Bidders, or indeed where there is only one suitable Bidder.”

The second Licence, which ends on 31 January 2009, contains no provisions whereby the Commission could requireCamelot to accept an interim Licence. Accordingly, the competition process was subject to time constraints becauseof the requirement for a new operator to be appointed through open competition and be capable of running theNational Lottery as from 1 February 2009. If at any stage it appeared that this would not be achieved, there wouldbe a risk of a hiatus in the operation of the Lottery. The Commission therefore saw the need for contingencyplanning around a number of scenarios for the competition:



25 “Awarding the new Licence to run the National Lottery” Report by the Comptroller and Auditor General HC 803 Session 2001-2002: 10 May 2002.



26 This would include considering activating the reserve power within the National Lottery Act 2006 to offer more than one Licence.27 The ITA made clear that “Bidders should note that it is the Commission, not the Secretary of State for Culture, Media and Sport, that is responsible for appointing the

Licensee, and that the Department for Culture, Media and Sport plays no part in the selection.” 28 In-Licence operator failure could arise for reasons including propriety, financial reasons or significant Licence breach. The circumstances in which the operator’s Licence

could be revoked are set out in section 10 of the National Lottery Act.

• No Bids received;• No compliant Bids; • One or more compliant Bids but none offered sufficient returns to good causes; and • Compliant Bid with sufficient returns but failure to agree the draft Licence.

Contingency planning would also help provide a mitigation strategy in the event that there were:

• Difficulties during the transition period (after the appointment of the successful Bidder but before the next Licence began); or

• In-Licence operator failure for any reason.

The Commission undertook internal analysis of its position and potential mitigation strategies, including drawing on expert analysis by professional advisers. The conclusions are summarised below for each of the scenarios set out above.

If there were no Bidders for the Licence, a re-run of the competition would have been a possibility, where there wasan alternative structure that would meet market expectations26. But the need to complete a new competition(assuming there was a ‘market’ for one) and allow for a sufficient transition period before the end of the secondLicence may not have made this option practicable.

If there were no compliant Bidders, the modifications process included within the ITA would have allowed Bidders torevise their proposals to become compliant. To deal with the situation where there was only one Bid or only onecompliant Bid, the Commission undertook analysis of information that might help those undertaking the evaluationto assess the competitiveness of that Bid. This included international evidence and costs analysis.

On failure to agree the draft Licence with the preferred Bidder, and assuming that there was at least one otherappointable Bidder, the Commission included within the ITA an option of a Reserve Bidder with whom the draftLicence could be negotiated.

Although the Government played no part in the selection or appointment of the Licensee, the Commission alsoshared its analysis on contingency planning with DCMS from 2005 onwards. The aim was to ensure there was acommon understanding of the position and of the points in the process at which the Commission might requiresupport from the Department in dealing with a contingency situation.27

Notwithstanding the mitigation strategies set out above, the Commission recognised that there might becircumstances in which the competiton to award the third Licence might be unsuccessful or where there was anunsuccessful transition. The Commission therefore considered with the Department how such a situation could behandled, given that there is a shared objective to avoid a hiatus in the operation of the Lottery. The Commissionconsiders it is unable under its existing powers to create a subsidiary to run the Lottery and, in any case, conflicts ofinterest issues would arise if it had a direct interest in the operator as well as being the regulator. It would thereforebe dependent on the Department for contingency arrangements for a fallback lottery operator, although theDepartment and the Commission are clear that this would only be considered as a course of action of last resort ifthere were no viable alternatives. The Commission and the Department therefore undertook preliminary planningwork on the potential structure of a fallback lottery operator and on the steps involved in setting it up and initiatingits activity and independence.

Looking forward to the third Licence period, the risk which requires mitigation is to deal with circumstances of in-Licence28 operator failure for any reason. In any such instance, the Commission would consider all options. Therewould inevitably be the risk of a short hiatus in the National Lottery in such circumstances. The Commission willtherefore ensure that it reviews with the Department on a regular basis the continued applicability of the workundertaken on contingency planning. Both the Department and the Commission are clear that the option of afallback lottery operator would only be considered if there were no viable alternatives.

4.13 Costs of the competition

A major public competition such as that for the third National Lottery Licence necessarily involves significiant costs,both to the Commission in running the competition and to those who choose to Bid for the Licence. This isparticularly true in circumstances where the Commission had to complete the competition and allow sufficient timefor transition before the end of the current Licence. The Commission took a number of steps to reduce the costs toBidders (though without paying their direct costs) but in so doing some of these impacted on the Commission’scosts. For example, the Commission produced a high quality ITA and revised Licence which provided Bidders withclear requirements and also provided information on the Lottery, including commissioning its own research which it

made available to Bidders. There were also external factors which impacted on its costs, including issues raising theneed for professional advice which could not have been foreseen, such as the amended draft Licence submitted byone of the Bidders. Nevertheless, the Commission used the budget control and monitoring procedures set out aboveto keep downward pressure on costs during the competition.

The Commission has accounted for the costs of the competition on a ‘whole project life’ basis. Under this, not onlyare the costs of the advisers appointed for the competition accounted for separately in the Commission’s budgetreporting but also the Commission’s internal costs relating to the competition. The Commission has reportedannually on the costs of the competition within its Annual Report & Accounts, as presented to Parliament29.

Notes:The figures for 2005/06 and 2006/07 are taken from the Commission’s Annual Report & Accounts.

The figures for 2007/08 are unaudited figures.

The figure of £5,626,000 for expenditure on consultants in 2006/07 includes £3,008,000 of contractual commitments relating to the

New Licence Competition, payable in 2007/08.

Therefore, the total cost of the competition, up to and including finalising the Licence and concluding the EnablingAgreement, was £14.9 million, which equates to 0.08% of returns to good causes over the term of the Licence(assuming returns are constant at the current rate) or 0.02% of total sales (assuming the Common Sales Scenarioused for the competition).

4.14 Costs relative to previous Licence competitions

The Commission was mindful of the need to actively manage costs and conducted a review of value for money,using the standard objectives of economy, efficiency and effectiveness.

The Commission assessed the extent to which costs of the third Licence competition could be compared to theprevious two competitions. Unfortunately, these only provide partial comparisons. The costs of the first competitionare largely unknown as much of the preparatory work was undertaken by DCMS, ahead of OFLOT’s formation (theprevious regulator of the National Lottery). The second competition was undertaken on a different basis to that forthe third. As the second competition came very soon after the Commission was established in 1999, the competitionwas placed under significant time constraints which affected the shape and structure of the competition. To meetthe time constraint, the ITA and draft Licence were primarily prepared on the basis of those used for the firstcompetition. In addition, the Commission did not have the opportunity to engage in any significant stakeholderconsultation or to ensure that the opportunity offered by the competition was marketed worldwide. Althoughadviser costs are recorded, the internal staff costs are not separately identified. This impacts on comparisons as, dueto time contraints and the limited scope of changes envisaged to the ITA and draft Licence, most of the work onthese was undertaken in-house and was not separately recorded.

There are therefore significant issues in comparisons between the second and third Licence competitions:

• The third Licence competition was designed differently to the second competition. As there were concerns(including those expressed by the PAC and NAO in their reports on the second competition) about the need toconsult stakeholders and to ‘create’ a market, the third Licence competition involved a significantpreparatory/consultation stage and activities to ensure that the opportunity offered by the competition wasmarketed worldwide. This was not undertaken to anywhere as significant an extent in the second competition;



29 The Commission’s Annual Reports are prepared in compliance with Section 14(1) of the National Lottery etc. Act 1993 (as amended) by the Secretary of State for theDepartment for Culture, Media and Sport. Accounts prepared pursuant to Schedule 2A, Section 11(1) of the Act together with the Report of the Comptroller andAuditor General pursuant to Schedule 2A, Section 11(4).

2004/05 2005/06 2006/07 2007/08

Staff and Project Board costs

308 537

Travel & subsistence 101 12

Consultants 2,708 5,626

Legal advice 1,665 1,183

Accommodation – 155

Office costs – 68

Total 287 4,782 7,581 2,274

(£’000) (£’000) (£’000) (£’000)



30 “Awarding the new Licence to run the National Lottery” Report by the Comptroller and Auditor General HC803 Session 2001-2002: 10 May 2002. This said “The Commission’s decision to award the second Licence to the incumbent operator was influenced by the risks involved in transferring to a new operator. If potentialcompetitors are not to be deferred from Bidding in future, the Commission needs to make clear that it will be receptive to new and innovative approaches to runningthe Lottery.”

31 “The Auction of Radio Spectrum for the Third Generation of Mobile Telephones” Report by the Comptroller and Auditor General HC233 Session 2001-2002: 19October 2001. Paragraph 8 of the report identifies that the Agency stimulated competition by “intensively marketing the commercial opportunity of 3G to potentialBidders through their advisers NM Rothschild and Sons, whom they incentivised through an appropriate success fee.” That fee was £4.07 million, plus £0.7 millionsuccess fee.

• The third Licence competition progressed from earlier consultative stages into a more formal and structuredprocess following the publication of the Statement of Main Principles in November 2005; and

• During the period in which the ITA and draft Licence for the competition were prepared, the Commissionidentified that it wished to develop a modern ITA and draft Licence, the management of which was allocated toadvisers using internal Commission resources. The ITA was also developed on a significantly different basis tothose for the first and second competitions, with the development of Required Standards (including fortransition30) and the inclusion of evaluation criteria within the ITA.

Therefore, the differences in the preparatory stages of the second and third Licence competitions makes it difficult toundertake meaningful comparisons. Notwithstanding this, it is possible to compare the evaluation periods of eachcompetition. Both the second and third Licence competitions received two Bids, each undertook a six monthevaluation period. Both involved similar days of effort to deliver, albeit that costs for the evaluation for the thirdLicence were higher due to service price inflation over the period.

4.15 Costs relative to other comparable exercises

Finding similar projects in either the public or private sectors with which to compare the third Licence competition isnot straightforward. The Licence competition is unusual as it involves a service concession, rather than procurementfor goods or services. This means that it is difficult to identify comparable projects.

Where comparisons can be drawn on a ‘closest fit’ basis, for example major Government procurements, there islimited data (for example, from NAO reports) about the costs of such projects. Most projects do not disclose costsand where there is cost data available they do not include whole life costs. In most cases, only adviser costs areincluded and internal costs are not identified. Even adviser costs need to be treated with caution, as they usuallyinvolve organisations which are larger in size than the Commission, and so are better placed to provide internalresources for such projects.

An example of where information is available is the auction of the Radio Spectrum where costs were less than 0.1%of total income from the auction (£22.5 billion)31. However, even here, any comparison should be treated withcaution as it is not clear that the costs identified represent whole life project costs. The third Licence competition wasnot an auction and the Commission has an interest in the outcome of the operator’s performance. This impacts oncosts, as certain elements, such as the draft Licence, combine elements of regulatory requirements with those ofcommercial contracts. Nevertheless, the Commission’s costs at 0.08% of returns to good causes appears in line withthat example.

Section 5 | Issues for the future



5.1 Issues relating to the structure of the competition

The Commission is considering the issues to be taken forward from the award of the third Licence and applied bothduring the third Licence period and to a future competition. These are set out below:

Monitoring returns to good causes

IssueThe third Licence includes a new incentive structure which should ensure that Camelot’s incentives to maximiseprofits for its shareholders is aligned with returns to good causes. However, there remains a risk that the operatormay not achieve all potential sales reasonably available to it.

ConsiderationsThe Commission will place primary place reliance on the incentive structure to ensure that Camelot maximisesreturns to good causes. It is not the Commission’s role to double-guess Camelot’s commercial judgement.

However, the Commission will seek benchmarks by which it can monitor Camelot’s performance, particularly inrespect of returns to good causes, during the period of the third Licence. The Commission will consider domesticmarket developments, including changes to the gambling market and retailing environment, as well as comparisonwith overseas lotteries and comparable products in the UK, in informing its view of Camelot’s performance.

Way forwardTo the extent that the Commission has concerns about Camelot’s performance it will seek to resolve them withCamelot. To the extent that the Commission remains unsatisfied after consideration with Camelot, the Commissionwill also consider how it could make use of the provisions of the third Licence, particularly the option of third partyassessments of performance, to ensure that Camelot is acting in a way that gives the Commission confidence thatreturns to good causes are maximised throughout the period of the third Licence.

Investment opportunities

IssueIn issuing the ITA, the Commission recognised that technology developments over a ten year Licence period, whichitself did not start for another two and a half years, made it difficult for Bidders to provide any certainty about thetechnology that would be required beyond the early years of the Licence period. It therefore did not ask for Biddersto specifically provide for a refresh of technology as part of their Bid. To have done so could have introduced adistorting factor into the Bids, depending on the approach taken by different Bidders. It could also have led to a sub-optimal investment strategy. Instead, the Commission required Bidders to provide for modern technology from thestart of the Licence and for that technology to be maintained during the Licence period. However, the Commissionrecognised that it needed to provide arrangements that would support significant investment opportunities thatarose during the Licence period.

ConsiderationsThe third Licence includes provisions under which the Commission can consider proposals from Camelot that willenable Camelot to take advantage of substantial new investment opportunities that become available during theterm of the Licence. Such arrangements will apply only where such investment opportunities can be shown to be ofbenefit to good causes but the returns to Camelot would not justify it making that investment solely on its ownaccount. This could arise where the time remaining on the Licence period would not provide sufficient time forCamelot to make a suitable return on its investment. Any such arrangement would need to take account of savingsmade by Camelot from the benefits provided by such investment.

Therefore, within the Licence, the Commission has included provisions relating to extensions of the Licence, of up tofive years, in the event that the Commission determines that Licence extensions are an appropriate mechanism toallow the Licensee to recover its net costs relating to significant, unanticipated investment opportunities.Alternatively, the Commission might consider making an adjustment to the contributions structure to accommodatethe extra costs incurred by the operator.

Way forwardThe Commission will consider investment opportunities for the Lottery operation as they arise during the thirdLicence period.

Given the uncertainty surrounding any such step-change investment, the Commission has not prescribed a specificmechanism for dealing with step-change investment. Rather, the Commission will be willing to consider, at therelevant time and on a case-by-case basis, proposals for investment in the Lottery infrastructure that seek to allow

Camelot to recover an element of its investment costs, and would do so on the basis of business plan proposals tobe put forward by Camelot at the time. Camelot would need to convince the Commission that such investmentwould genuinely serve to increase returns to good causes in a manner that generated an appropriate return on thatinvestment from a good causes perspective. The Commission would also need to be satisfied that no ‘windfall’ gainsflowed to Camelot from reduced operating costs or a reduction in the costs of maintaining existing assets.

Operator returns and costs

IssueA competition conducted in a competitive environment should exert downward pressure on costs. The competitionfor the third Licence was conducted on a competitive basis and the increased generosity of the successful Bidderprovides some evidence of downward costs pressures on the operator and on suppliers flowing through as benefitsto good causes.

However, low returns might provide a barrier to entry which puts off potential Bidders. It might also increase the riskof operator failure during the Licence period.

ConsiderationsThere were some informal suggestions from interested parties during the third Licence competition that the Lotterywas not necessarily seen as a business opportunity which generated significant returns for an operator whencompared with competing opportunities. This issue is particularly important for the Lottery where there are very fewcompanies for whom this is a ‘must win’ opportunity, rather an opportunity to be considered amongst many.

The Commission carefully considered evidence on the cost base and financial viability of both Bidders as part of itsevaluation process.

Way forwardThe Commission will need to consider the extent to which changes in costs over time are likely to produce thepossibility of further cost savings in a future Licence award.

Also, the Commission will need to consider the return that the operator receives for its investment as part of thefourth Licence award to understand the balance between continuing to press downwards on operator returns tomaximise the amount for good causes against the possibility that low rates of return could discourage potentialBidders from entering the fourth Licence award.

The Commission will monitor indicators of the financial health of Camelot throughout the third Licence period.

The market for potential Bidders, including developments in the supply of lottery technology, is restricted

IssueThe UK Lottery requires a combination of three key skill sets – experience of lotteries and their operation, lotterytechnology and experience of the retailing and distribution of consumer goods in the UK. One or more of these maybe in short supply.

Considerations1. Commercial lottery operatorsThere are currently a limited number of commercial lottery operators worldwide. In most countries, the lotteryoperator is state-run or state-controlled, and is therefore unlikely to Bid for an overseas lottery.

There is some evidence that such international commercial lottery operators as exist are diversifying into other areas of the gaming market. During the period of the competition, some of those commercial lottery operatorsreviewed their business priorities and underwent corporate changes. For example an Australian lottery operator,Tattersalls, merged with Unitab, and an Italian lottery operator, Lottomatica merged with GTECH, a US lotterytechnology supplier.

It is not presently clear whether this trend will change in the coming years, nor what other competing internationallottery opportunities will be available to such companies at the time of the fourth Licence award.

2. Lottery technology suppliersWhilst lottery technology is not now seen as such a critical element in the Bid process, it nevertheless remains animportant component of any lottery. The market for lottery technology is international but, given the nature oflottery contracts (typically national or state monopolies, with contracts let for a relatively long period), supports onlya limited number of suppliers.





During the process for the third competition, the market underwent consolidation, with the takeover of both Essnetand Oberthur Gaming Technologies by Scientific Games and the merger of Lottomatica with GTECH. This has furtherreduced the available number of key lottery technology suppliers, which may be a factor in a future Licence awardprocess for the UK National Lottery. It is not clear the extent to which changes in technology during the third Licenceperiod will reduce or otherwise change the reliance on specialist lottery technology suppliers.

3. UK retail expertiseExperience of the UK retail and distribution environment for consumer goods is widely available and is likely toremain so for the foreseeable future. However, many of the major retailers are already involved in the Lottery, asticket retailers. Although some companies involved in the consumer goods sector considered the opportunity toparticipate more fully in the Lottery as part of a Bid consortium, they did not participate in either of the Bids whichthe Commission received. Since participation in the Lottery operator does not currently seem a fundamental businessrequirement for any part of the UK retail and distribution of consumer goods sector, new entrants to the Lotterymarket may find it difficult to acquire this expertise. However, expertise is likely to be available from consultancyorganisations.

Way forward1. Commercial lottery operatorsAlthough there are currently a limited number of commercial lottery operators, that position might change beforethe next Licence award. For example, a number of US States are considering changing their method of lotterydelivery from a state-run or state-controlled entity to a commercial-run operator.

The Commission will keep developments in this area under review.

2. Lottery technology suppliersThe Commission will also continue to monitor international developments in respect of lottery technology, on acontinuous basis during the third Licence period and on a more detailed basis part way through the Licence, as theCommission starts to consider the technology implications for the award of the fourth Licence.

This aspect might also be addressed by a Licence award for the operator as a ‘going concern’ (see ‘The fourthLicence award’ below).

3. UK retail expertiseThe Commission will monitor developments in this area for effects within the third Licence period and implicationsfor a future Licence award. It will also consider what information might be necessary to inform a Bid from a non-UKlottery operator in a future Licence award process.

The fourth Licence award

IssueIn addition to monitoring developments in lotteries worldwide and technology developments, the Commission willalso have to consider the market for potential Bidders ahead of the fourth Licence award.

There are few lotteries worldwide which undertake a competition for the whole lottery operation as is the case inthe UK, and certainly none of the same scale. Thus, the UK model is unusual and demands a consortium which has a specific range of skills, including experience of running lotteries, lottery technology and UK retailer/consumerknowledge.

The Commission will therefore need to consider how a fourth Licence award process could be structured to attract awide range of potential Bidders.

ConsiderationsIn developing the structure of the competition for the third Licence, the Commission also considered measures toenhance a future Licence award process. Whilst the Commission has an interest in the continued sustainability of theLottery over a longer period, the interests of a Licensee will be restricted to the period for which it holds the Licence.The third Licence therefore includes provisions which require the third Licensee to transfer material operating assetsand contracts to its successor at the end of the Licence and to make information available to all potential Bidders forthe fourth Licence.

Way forwardThe provisions of the third Licence have the potential for an award process on the basis of a transfer of assets and,potentially, staff of the operator (in part, depending on the view taken at the time about the application of TUPE), asan alternative to a Licence award on the basis undertaken for the third Licence. This would allow a Licence award onthe basis of a ‘going concern’ which should help mitigate the risks inherent in transition and is likely to provide theopportunity for a wider range of potential Bidders to be involved. These arrangements would also assist in managingthe situation where an operator either withdraws or has its Licence revoked.

A Licence award for a ‘going concern’ could also provide the opportunity for a two-stage process. Under this, therecould be a competition to be the operator. This would then be followed by a separate competition for the supply oftechnology, in which the operator and good causes would expect to share in the benefits.

It is difficult to forecast the market for potential Bidders in ten years time. Therefore, for the fourth Licence award,the Commission will have to consider all options for the structure of the process based on the market circumstancesprevailing at the time.

5.2 Issues relating to the organisation of the project: Lessons learned

As part of the project management arrangements for the competition process, a lessons learned log was compiled.Under PRINCE2, a lessons learned log is a respository of any lessons learned during a project which can usefully beapplied to other stages of the project or to other projects. The key lessons learned for this project were:

General:• Where market-making is required, early preparation and engagement with a wide range of stakeholders can

contribute to the success of the project;• A transparent process, involving regular feedback to stakeholders, can deliver confidence in the process amongst

Bidders and other stakeholders; and• To help Bidders to prepare robust Bids, the provision of information about the Lottery is an important factor. The

use of a Virtual Data Room allows Bidders real time access to data at all times and supports potential Bidders notbased in the UK.

Governance:• Clear governance structures, in particular, the use of a Project Board with clear decision-making authority,

facilitates timely decision-making; • Use of senior advisers, separate from those working day-to-day on the project, ensures that the Project Board has

the specialist advice necessary to deliver its functions, in particular to support quality assurance; and• To ensure that lessons have been learned and applied from previous competitions, there is benefit from retaining

individuals in key posts with relevant experience.

Planning:• The delivery of project outputs and cost control is enhanced by integration of the planning and budgeting

process;• To allow time for proofing and printing of significiant outputs, identification of a point at which all policy decisions

are required to be completed is necessary; • Stage planning benefits from a contingency time margin and any use of that contingency time should form part

of the reporting process to the SRO and Project Board; and• To support adviser understanding of the detail of the project an induction process should be used.

Process:• The use of a specific risk review group, staffed by a range of those involved in the project, supports the

management of risk;• To ensure the separation of the evaluation process from the day to day regulation of the operator a separate

dedicated evaluation suite is considered helpful. It also assists with ensuring security arrangements and allows co-location to deliver common working;

• A clear plan of internal communication activities should be used to inform staff not working on the project aboutthe detail of the successful Bid;

• To manage and record decisions taken on significiant project outputs, for example the ITA and draft Licence,policy issue matrices should be used to record issues and the decisions reached; and

• Efforts should be taken in designing the competition to reduce the likelihood of Bidders over-Bidding. However,there is a significant probability that Bidders will submit over-optimistic Bids. Therefore, it is important to have theright advisers and tools, including use of comparative analysis, to deal with any over-optimism.





Resourcing:• A Project Office should be set up at the commencement of the project, particularly where projects are

time-limited;• To deal with external factors which impact on costs, the budget should include a specific reserve margin

under SRO control;• Early identification of the need for and appointment of external expertise to supplement skills available

supports successful delivery; and• Adviser continuity throughout the process ensures a common understanding of the project framework

and methodologies.

Annex A: Overview of the Lottery

Annex A | Overview of the Lottery


Annex A: Overview of the Lottery

Key institutions

GovernmentThe Lottery was established by the National Lottery etc. Act 1993 (as amended). The Act provides that the Secretaryof State has an overriding duty to exercise his functions relating to the licensing and regulation of the Lottery inaccordance with three overriding duties:

• To secure that the National Lottery is run, and every lottery that forms part of it is promoted, with all duepropriety; and

• To secure that the interests of every participant in the Lottery are protected; and• Subject to these to do its best in exercising its functions to secure that the net proceeds of the National Lottery for

good causes are as great as possible.

The Secretary of State:

• May make regulations in relation to the promotion of constituent lotteries. It is an offence, in certaincircumstances, not to comply with the regulations;

• May issue Directions to the Commission with which it must comply. These typically deal with matters that theCommission must consider when deciding whether to issue a Licence and what conditions should be containedwithin Licences;

• May direct the Commission to provide him with information relating to the Lottery; and• Appoints the Chair and members of the Commission.

The current Regulations and Directions are available on the Regulating the Lottery section of the Commission’swebsite.

The CommissionThe regulator of the Lottery was established by the National Lottery Act. Initially, the regulator was the Director-General of the National Lottery, who ran the Office of the National Lottery (OFLOT). The National Lottery Act wasamended in 1998 and established the National Lottery Commission as the new regulator. The Commission assumed all of the regulatory functions of the Director General in April 1999, and OFLOT staff became Commissionemployees.

The Commission is established as an executive Non-Departmental Public Body. Schedule 2A of the Act sets outdetailed provisions in relation to the Commission’s organisation, status, capacity and powers of delegation.

The Commission currently comprises five non-executive Commissioners (including the Chair) and one executiveCommissioner (the Chief Executive), all of whom are appointed by the Secretary of State. The Commissionersappoint the Chief Executive of the Commission who is responsible for the day-to-day operation of the Commissionand in so far as these have been delegated to him, the exercise of the Commissioners’ functions and powers.

The Act provides that the Commission may issue a Licence to operate the Lottery, and only one body may belicensed to do so at any one time. The Commission may also issue Licences to promote lotteries as part of theLottery. In granting such Licences, the Commission must be satisfied that its statutory duties are complied with. Inaddition, the Commission may not grant a Licence unless it is satisfied that the applicant is fit and proper. In comingto its decision, the Commission may take into account whether the individuals running or benefiting from theapplicant’s business are fit and proper.

The Licensee

The current holder of the Section 5 Licence to operate the Lottery is Camelot Group plc (the current operator). The Current Operator was awarded the Section 5 Licence in 2002 and is the only holder of Licence to promotelotteries as part of the Lottery granted under Section 6 of the National Lottery Act. Camelot has five shareholders:Cadbury Schweppes plc, De La Rue Holdings plc, Fujitsu Services Limited, Thales Electronics plc and Royal MailEnterprises Limited.

Distributing bodies

The proceeds of the Lottery are passed to the National Lottery Distribution Fund (NLDF) and the Olympic LotteryDistribution Fund (OLDF). The NLDF and OLDF, administered by the Department for Culture, Media and Sport, passthe money to the Lottery distributors. Any NLDF and OLDF balances that have not been drawn down by distributorsare invested by the National Debt Commissioners for the benefit of the NLDF and OLDF.

The beneficiaries of the funds are known as the good causes, and they are specified in the National Lottery Act, as isthe proportion of the distribution fund that is allocated to each of them. The good causes are the arts, for whichthere are six distributing bodies; sport for which there are five distributors; the national heritage; expenditure whichis charitable or connected with health, education or the environment; and projects to mark the year 2000 and thestart of the new Millennium. The Millennium good cause has not received an income stream from Lottery proceedssince 2001. Each distributing body is independent of Government but has to follow statutory duties established inthe National Lottery Act and is required to comply with policy and financial directions given by the Secretary of Statefor Culture, Media and Sport under the National Lottery Act, when deciding who should receive Lottery money.These bodies make their grant decisions independently of Government and of the Department for Culture, Mediaand Sport. They also make their decisions based on the published criteria of each of their different Lottery fundingprogrammes32.

There are currently 14 independent distributing bodies responsible for awarding Lottery grants. There are: SportEngland; Sport Scotland; the Sports Council for Wales; the Sports Council for Northern Ireland; UK Sport; ArtsCouncil England; Arts Council of Wales; Arts Council of Northern Ireland; Scottish Arts Council; Scottish Screen; theUK Film Council; the Millennium Commission; the Heritage Lottery Fund and the Big Lottery Fund. Following theannouncement that the Olympic Games will be hosted by London in 2012, an additional distribution body has beenestablished – the Olympic Lottery Distributor.

Licensing regime

Background to the National Lottery ActThe National Lottery Act established the present licensing structure. It anticipated that a private sector operatorwould run the Lottery, with the possibility of individual lotteries being promoted by other parties. It does notprescribe the design or detail of lotteries forming part of the Lottery but instead sets out the control framework thatmust be complied with in order for a lottery to be regarded as part of the Lottery. The National Lottery Act thereforedivides the operation of the Lottery into two, separating the functions of running the Lottery from promotinglotteries as part of it.

Under Section 5 of the National Lottery Act the Commission may issue a Licence to run the Lottery (a Section 5Licence). Only one Section 5 Licence may be issued at any one time. Any person wishing to promote a game thatforms part of the Lottery (e.g. Lotto or a scratchcard game) must be licensed to do so under Section 6 of theNational Lottery Act (a Section 6 Licence). That promoter may be the Section 5 Licence holder or an organisationother than the Section 5 Licence holder, (but only with the agreement of the Section 5 Licence holder).

Before the Commission may issue either type of Licence, it must receive an application in writing from theprospective Licensee and must be satisfied that the prospective Licensee is fit and proper to hold such a Licence. The Commission may only issue Licences in respect of lotteries. It has no power to authorise gaming and betting. So, when it considers applications for Section 6 Licences, the Commission must be satisfied that the game inquestion is a lottery. The Gambling Act 2005 has, for the first time, provided a statutory definition of a lottery. This is set out below.

Section 14 of the Gambling Act 2005 defines that an arrangement is a simple lottery if:

• Persons are required to pay in order to participate in the arrangement; • In the course of the arrangement one or more prizes are allocated to one or more members of a class; and• The prizes are allocated by a process which relies wholly on chance.

Section 14 of the Gambling Act 2005 also provides that an arrangement is a complex lottery if:

• Persons are required to pay in order to participate in the arrangement;• In the course of the arrangement one or more prizes are allocated to one or more members of a class;• The prizes are allocated by a series of processes; and• The first of those processes relies wholly on chance.

These arrangements will be applicable to lotteries forming part of the Lottery, and so the Commission will be capableof licensing complex lotteries. The provisions relating to complex lotteries came into force in September 2007 and assuch have not yet been tested with the Commission in respect of licensing games.

RegulationsRegulations lay down the way in which tickets and chances in Lottery games may be promoted. In summary, theyprovide that:



32 The Licensee has no ability to influence the way in which funds for good causes are distributed.

• Lottery tickets may not be sold to someone who is under 16 years of age;• Lottery tickets may not be sold in the street;• A person shall not be invited to purchase a Lottery ticket in any licensed betting office, approved racecourse or

licensed track, premises used wholly or mainly for providing amusements in the form of amusements with prizesor of amusements by means of slot machines or in any bingo or gaming club; and

• Lottery tickets may not be sold by means of an unattended vending machine. Sales are permitted where avending machine is attended by a person authorised by a Section 5 or Section 6 Licence holder and where thatperson is in a position where he can control the operation of the machine and in particular take action to preventthe purchase of tickets by any person whom he believes is not at least 16 years of age.

The Regulations can be found on the Commission’s website under the Regulating the Lottery section.

Directions

The Secretary of State has directed that the Commission must:

• Not authorise the promotion of a lottery which encourages excessive participation or does not allow for sufficientcontrols to prevent underage play;

• Ensure that no Licence is granted which allows more than one draw to take place in any period of one hour. Thisapplies to lotteries authorised to be promoted under a single Licence or under more than one Licence relating toassociated lotteries, but does not apply where a prize is allocated to a ticket before sale, or is pre-determined atthe point of purchase;

• Not grant a Licence for a lottery for which the price of tickets or plays is unreasonably high;• Ensure that every lottery provides for a reasonable period in which prizes can be claimed; • Include a condition in every Licence which provides that unclaimed prizes are paid to the Secretary of State for the

benefit of the good causes;• Ensure that all Licences include conditions that have the effect that:

• The Commission can inspect all forms of records relevant to Lottery contracts or operations held by theLicensee or its significant contractors;

• The Commission has the power to approve any party to a significant contract with the Licensee;• Information for participants as to whether they have won a prize is available without payment or undue

inconvenience; and• No tickets or plays are given away free unless either: (a) the price of the ticket is paid in full by another person,

such that the value of the ticket is counted fully when calculating the Licensee’s primary contribution; or (b) theCommission has given its consent, such consent not to be given unless the Commission is satisfied that theproposal will not encourage excessive or underage play and that it is likely to increase overall returns to good causes;

• Not amend the extract from its publication ‘Financial Penalties: Principles and Procedures’ (which is attached tothe Directions) without first obtaining the consent of the Secretary of State;

• Establish and publish appropriate performance standards;• Facilitate the operation of the National Lottery Promotions Unit; and• Not determine the proportion of proceeds of lotteries that form part of the Lottery that are attributable to

Olympic Lotteries without first having obtained the approval of the Secretary of State.

The Directions can be found in full at on the Commission’s website under the Regulating the Lottery section

The Section 5 Licence

What is involved in operating the Lottery is not specified in legislation. The details of the conditions with which theSection 5 Licensee must comply are set out in the Licence itself. A fee is payable on the grant of the Licence33.

The National Lottery Act provides that the Section 5 Licence must contain a condition that requires the Licensee topay sums out of the proceeds of the lotteries which form part of the Lottery to the Secretary of State, to be heldwithin the NLDF and the OLDF. Proceeds held within these funds are then distributed by the distribution bodies.Section 7 of the National Lottery Act sets out various other conditions that the Commission may include in a Section5 Licence.

In addition to the conditions contained in the Section 5 Licence, with which the Licensee must comply, certainconditions of the Section 5 Licence require the Licensee to issue and comply with codes of practice, strategies orprocedures. These are subject to the approval of the Commission.



33 The National Lottery Act 2006 included provisions relating to Licence fees. These provisions have yet to be brought into effect.

Section 6 Licences

Section 6 of the National Lottery Act allows the Commission to Licence a body corporate to “promote” lotteries aspart of the Lottery. Such a Licence will be granted for each Lottery game (e.g. Lotto or Thunderball) which itselfusually comprises a series of lotteries (in that each draw is legally a separate lottery). Section 6 Licences may also begranted for Lottery generic games (e.g. scratchcards). Section 6 Licensees are responsible for the design, promotionand conduct of the games provided that each game is consistent with the overall structure and systems establishedby the Section 5 Licensee. A fee is payable on grant of each Section 6 Licence.

Each Section 6 Licence describes the lotteries for which it authorises promotion. Section 7 of the National Lottery Actsets out various other conditions that the Commission may choose to include in a Section 6 Licence.

The conditions contained in a Section 6 Licence will vary according to the type of game that it authorises but thevarious Licences have common elements. For example, the contractual terms governing player participation in thevarious games (e.g. game rules and procedures and, in certain cases, interactive account terms and conditions) areannexed to the Section 6 Licence12. The Licensee must adopt, maintain and comply with those contractual terms.Before such terms are annexed to the Licence, they are subject to the prior written approval of the Commission andany changes to such terms are also subject to such approval.

All Section 6 Licences are for a finite period – typically shorter than the length of the Section 5 Licence. Section 6Licences may be held by bodies other than the Section 5 Licensee but only with the Section 5 Licensee’s agreement.There is no restriction on the number of bodies that can hold Section 6 Licences, although there has only ever beenone holder of a Section 6 Licence that has not also been the Section 5 Licensee.

Penalties and sanctions

Revocation

The Commission has the power to revoke a Licence granted under Sections 5 or 6 if it is satisfied that the Licenseeno longer is, or never was, a fit and proper body to run the Lottery.

The National Lottery Act also specifies grounds on which the Commission may revoke a Licence granted underSections 5 or 6. These include the grounds that:

• A condition in the Licence has been contravened; or• Information given by the Licensee was false in a material particular; or• The Licensee is insolvent; or• Any person managing part or all of the business or benefiting from it is not fit and proper to do so.

The National Lottery Act sets out, in Schedule 3, the procedures that the Commission must follow in revoking aLicence. These include:

• The requirement that the Commission must serve a formal notice on the Licensee giving its reasons for a proposalto revoke a Licence;

• The rights of the Licensee to make written or oral representations. The procedure for hearing oral representationsis laid down in Regulations made by the Secretary of State; and

• The rights of appeal to the High Court34 against a final decision by the Commission to revoke a Licence. Thepossible grounds for an appeal against a finding that a Licensee has contravened a condition of a Licence are thatthe Commission has made an error as to the facts; that there was a material procedural error; or that theCommission has made some other error of law.

Enforcement of Licence conditions

Section 9 of the National Lottery Act provides that if:

a. There is a reasonable likelihood that a person will contravene a condition in a Licence granted under sections 5 or 6; or

b. A person has contravened such a condition and there is a reasonable likelihood that the contravention willcontinue or be repeated; or

c. A person has contravened such a condition and there are steps that could be taken for remedying thecontravention;



34 Or, in Scotland, the Court of Session.

then the Court may, on the application of the Commission, grant an injunction restraining the contravention ormake an order requiring the Licensee, and any other person who appears to the Court to have been party to thecontravention, to take such steps as the Court may direct to remedy it35.

Financial penalties

The National Lottery Act provides that, if the Commission is satisfied that a person has contravened a condition in aLicence under Sections 5 or 6, it may impose a financial penalty on that person in respect of the contravention.

The matters to which the Commission may have regard in imposing a financial penalty include the desirability ofboth deterring persons from contravening conditions in Licences, and recovering any reduction in the sums paid tothe Secretary of State for the benefit of the good causes which resulted from the contravention.

The Commission is required under Directions made by the Secretary of State to act in accordance with the principlesincluded in a statement entitled “Financial Penalties: Principles and Practice” made by the then Director General ofthe Lottery in May 1998. Details are attached to the Directions.

Section 10A of the National Lottery Act allows a Licensee to make written or oral representations on a proposal bythe Commission to impose a financial penalty, including on the amount of the proposed penalty. The Secretary ofState has made regulations governing the procedure to be followed if a Licensee wishes to make oralrepresentations. A copy of the Regulations can be found on the Commission’s website.

Section 10B of the National Lottery Act allows a Licensee to appeal to the High Court36 against a decision by theCommission to impose a financial penalty, or against the amount imposed. The possible grounds for an appealagainst a finding that a Licensee has contravened a condition of a Licence are that: the Commission has made anerror as to the facts; that there was a material procedural error; or that the Commission has made some other errorof law. An appeal against the amount of a penalty can be on the grounds that it is unreasonable; that there was amaterial procedural error; or that the decision was based on a manifest material misapprehension as to the facts.

Minor breaches of Licence conditions

Where the Commission considers that a condition of a Licence has been breached, but that the breach is notsufficiently serious to justify any of the penalties set out above, it will usually record the breach in writing and publishdetails on its website and in its annual report.



35 Similar provisions apply where the case falls under the jurisdiction of the Courts in Scotland.36 Or, in Scotland, the Court of Session.

Annex B: The current Lottery

Annex B: The current Lottery

This annex sets out a brief description of the current Lottery operations, describing the games and the ways in whichthey can be played.

Since it was established in late 1994, the Lottery has become a national institution. Over 65 per cent of people playthe Lottery regularly and 91 per cent of people know the Lottery brand. As at the end of 2006/2007 financial year, ithad paid just under £29 billion in prizes and raised over £20 billion in funds for good causes.

The game portfolio

There are currently eight different types of games in the portfolio. These are shown in the table below.

Annex B | The current Lottery


Lotto Thunderball DreamNumber

Hot Picks Daily Play EuroMillions Scratchcards IIWGs

Whenlaunched

Saturday draw:November1994.Wednesdaydraw: February 1997

Saturday draw:June 1999.Wednesdaydraw: October2002

July 2006 July 2002 September2003

February 2004 March 1995 February 2003

Price £1 (same pricesince launch)

£1 £1 £1 £1 £1.50 £1, £1.50, £2, £5

From 25p to £2

How to play Players match 6 out of 49numbers. A maximum of 7 lines ofnumbers can be played perplayslip

Players match 5 out of 34numbers and 1 Thunderballfrom numbers 1 to 14. A maximum of 5 lines ofnumbers can be played perpayslip

The game usesseven sets ofballs from 0 to9, and playershave to matchthe numbers inthe same orderas they aredrawn

Players canchoose, as aseparate play, to pick 1through to 5numbers from49, based onthe Lottonumbers draw

Players mustfirst choosewhich days to play, thenmatch 7numbers from 1 to 27. A maximum of 4 lines ofnumbers can be played perplayslip

Players match 5 numbers from 1 to 60,and 2 LuckyStars from 1 to9. A maximum of 4 lines ofnumbers can be played perplayslip

A set of variedthemes and play styles

A set of variedthemes and play styles

Top prize Jackpot game Fixed prizegame; top prize of£250,000

Fixed prizegame; top prize of£500,000

Pick 1 – £5Pick 2 – £40Pick 3 – £450Pick 4 – £7,000Pick 5 –£130,000

£30,000 (formatching 7 out of 27numbers)

Jackpot game Up to £2 million

Up to £100,000

Frequency Twice weekly on Wednesdaysand Saturdays

Twice weekly on Wednesdaysand Saturdays



Draws are held MondaythroughSaturday,exceptingChristmas Day

Once weekly on a Friday

Other pointsof interest

Highest Jackpot was£42,008,610won in January1996

First designateddraw-basedgame tosupport London2012

Record 11 series rolloverand jackpot of£126,059,632in February2006

The chart below shows the breakdown of sales for each of these games, or groups of games, for the financial year2006/2007.

NB: Dream Number replaced Lotto Extra in July 2006. Source: National Lottery Commission Annual Report and Accounts 2006/2007.

Distribution channels

Players can currently participate in the Lottery through the following channels:

Players

The Lottery has a wide participation in the UK, with the demographic profile of players resembling closely the overalldemographic of the UK. During recent research over 65 per cent of adults over the age of 18 claimed to play aLottery draw based game at least once a month. In addition, 17 per cent of Lotto players claimed to play as part of asyndicate. The National Lottery name is instantly recognisable to 91 per cent of the UK population.



2,857

330

13

928

220

49

45659

Lotto

Thunderball

Lotto Extra

Scratchcards

Hotpicks

Daily Play

EuroMillions

Dream Number

Channel Description

Retailers Via around 26,000 online terminals (OLTs), selling draw-based tickets and scratchcards

Around 1,500 Scratchcard only terminals (GVTs)

Electronic Point of Sale (EPOS) terminals

Independent retailers – c. 60% of all outlets by number

Multiples (such as supermarkets) – c. 40% of all outlets by number

Internet Players are able to play games including Internet-only games

Interactive digital television (IDTV) Through Sky Active

Players can purchase up to 8 weeks worth of tickets via an individual user account

Mobile telephones Players can participate via text message on mobile phones

Subscriptions A subscription service is also available through the Internet, by post and by telephone

Sales of Lottery games (£m)

Syndicate play

Players are able to play via syndicates. Syndicates are simply a group of participants who choose to pool their ticketfunds in order to purchase a greater number of ticket combinations than they would otherwise do on their own, andas such to increase their chances of winning.

Anybody who joins a club or syndicate has no entitlement to a prize claimed direct from the operator of the Lotteryeven if the numbers they entered are drawn. It is only the holder of the ticket that has the entitlement to claim thatprize. Club or syndicate members must therefore rely on their contract or agreement with the club or syndicate forany financial returns. The Current Operator provides assistance to syndicates, for example, by suggesting the keyterms of any syndicate agreement governing how the syndicate plays.

EuroMillions

EuroMillions is run by the Current Operator as a Lottery game in the UK and the Isle of Man. All prizes at each levelof the game are pooled, in effect, and shared between the winning players in the participating countries.

In terms of the structure and arrangement in place with the European partners, a limited liability company (SLE) wasestablished in Belgium to facilitate the provision of common services necessary to the operation of the game (e.g.operating and administrating the draw). Each participating lottery operator holds shares in SLE either directly or viaan affiliate.



Annex C: Summary of services provided by the operator

Annex C: Summary of services provided by the operator

The Commission sought a Licensee to provide a complete solution for the Lottery, including: setting up and runningthe Lottery; designing, building, financing and operating the requisite infrastructure and systems; designing,distributing and marketing Lottery games; and ensuring a smooth transition of the Lottery from the currentoperations. The table below highlights the key responsibilities of the operator:

Annex C | Summary of services


Transition

• Planning and riskmanagement

• Transition management

• Acquisition of premises and facilities

• Roll-out of infrastructure

• Recruiting and training of staff

• Appointment of all suppliers

• Establishing the distributionnetwork

• Development, testing and implementation of allproposed systems

• Launch of initial gameportfolio

Operations

• Development of gamesinitially and on an ongoing basis

• Creation and execution ofmarketing strategy

• Management of retailers andother distribution channels

• Provision of a completetechnology andcommunication solution,including maintenance anddevelopment

• Delivery of systems availability

• Organisation of draws

• Payment of prizes

• Protection of intellectualproperty

• Provision of customer serviceand care

Contribution

• Maximisation of returns togood causes

• Payments of contributions tothe Secretary of State

• Development of any ancillary activities

• Enhancement and innovationto drive returns to goodcauses and shareholders

• Transfer of unclaimed prizes

Compliance

• Propriety

• Preventing underage play

• Preventing excessive play

• Corporate governance

• Compliance with approvedcodes

• Approved processes andprocedures

• Minimum requirements forplayer access

• Performance standards andreporting

• Provision of information tothe regulator

• Assignment of rights

• Ability to be effectivelyregulated

• Marketing spend obligations

• All Licence conditions

Annex D: Bid Notes

Annex D: Bid Notes

Bid notes were published by the Commission and covered areas where it believed clarification or further informationwould be helpful.

Bid note 1 – TUPE (21 March 2006)Bid note 1 set out further information regarding the potential application of TUPE in respect of the Third LicenceCompetition. The Commission drew Bidders’ attention to this issue in the Statement of Main Principles released inNovember 2005 by stating: “In the United Kingdom, a change in the ownership of a business or a change in serviceprovider can attract the application of the Transfer of Undertakings Protection of Employment) Regulations 1981(“TUPE”). Revised TUPE regulations are due to be laid before Parliament later in 2005 and are expected to come intoforce on 6 April 2006. Bidders, including overseas Bidders, will need to form their own view on whether TUPE willapply.”

Bid note 2 – Market research: a picture of National Lottery players (30 March 2006)Bid note 2 explained that the NLC had commissioned a quantitative segmentation analysis of consumers in the UKLottery market. This research had been commissioned as part of the Commission’s commitment to ensure a levelplaying field and encourage high quality Bids. It would be made available to all potential Bidders by early May 2006.Bid note 2 gave details of the areas covered by the research and the format in which it would be made available.

Bid note 3 – Virtual Data Room (VDR) (28 April 2006; updated on 31 May 2006 and 20 September 2006)Bid note 3 gave details of the Virtual Data Room (VDR), designed to enable each party to evaluate fully the Lotteryopportunity and to provide a level playing field. It identified that information about the Lottery would be madeavailable in a secure virtual data room (VDR) accessed via the internet. Subject to certain exceptions, set out in theVDR, each party would be able to download, print or save documents provided in the VDR to assist it in compiling itsBids. A summary of the contents of the data room was provided in the Draft ITA.

Bid note 4 – Retailers (22 May 2006)The Commission was committed to providing as much information as possible for potential Bidders throughout thecompetition process. As part of this commitment, the Commission contacted a number of multiple retailers andasked whether they would be prepared, in principle, to work with any consortium as a distributor of Lotteryproducts. In addition, it asked whether they would be content to meet with potential consortia to discuss anyspecific issues that affect that consortium’s Bid, such as sales through retailer checkouts. Bid note 4 listed the retailersthat responded positively (ASDA, Co-operative Group (CWS) Ltd, Costcutters Supermarkets Group Ltd, MusgraveBudgens Londis Ltd, Nisa Today’s (Holdings) Ltd, Royal Mail Group plc, Sainsbury’s Supermarkets Ltd, SomerfieldGroup, Spar (U.K.) Limited, Tesco plc, TM Retail Group Ltd, Waitrose Ltd and Woolworths Group plc).

Bid note 5 – Substantive amendments to the Draft Invitation to Apply (ITA) (29 June 2006)Bid note 5 indicated the sections of the final version of the ITA that were subject to substantive amendments sincethe Draft ITA was published in April 2006. It was provided to assist Bidders in reading the ITA but it was not intendedto be an exhaustive or comprehensive summary of all amendments, substantive or otherwise, made to the Draft ITA.Bidders were advised that they should not rely upon it as such. Bidders were directed to the relevant sections of theITA for full details of the changes.

Bid note 6 – Summary of amendments made to the Draft Licence (29 June 2006)Bid note 6 indicated the sections of the Final Draft Licence that were subject to substantive amendments since theDraft Licence was published in April 2006. It was provided to assist Bidders in reading the Final Draft Licence but itwas not intended to be an exhaustive or comprehensive summary of all amendments,substantive or otherwise, madeto the Draft Licence. Bidders were advised that they should not rely upon it as such. Bidders were directed to therelevant sections of the Final Draft Licence for full details of the changes.

Bid note 7 – Market research: trends, players and retailers (9 August 2006)As part of the Commission’s commitment to ensure a level playing field and encourage high quality Bids, itcommissioned the following research reports:

• Key trends for the National Lottery (conducted by the Future Foundation): The report presented a set of key trendsin the external environment for the Lottery. It provided historical and forecast trend information with both anexplanation of the data and comment on the main drivbers of trend.

• A qualitative study of lapsed player and syndicate manager segments (conducted by Synovate): for the study, aseries of geographically dispersed focus groups and in-depth interviews were held with the target segments. The report included retailer views on: being a National Lottery retailer; summary of the retailer relationships withthe National Lottery; commission rates; communication from the Operator; and technology and equipment.

Annex D | Bid Notes


• Understanding independent and multiple retailers and the National Lottery (conducted by Synovate): This studycomprised a series of geographically dispersed focus groups and in-depth interviews with the target segments.The following topics were included: the National Lottery brand, associations, product and occasion imagery; thegradual process of lapsing play; players’ needs; syndicate manager histories; the proactive and reactive syndicatemanager; and the needs of syndicates.

These reports were made available within the virtual data room (VDR).

Bid note 8 – ‘Your Pound, Your Choice’ Project (21 September 2006)As part of the Commission’s commitment to ensure that information on developments in the Lottery was madeavailable to interested parties, this Bid Note provided background to a trial project which encouraged publicinvolvement in local funding awards.

Bid note 9 – Transition monitoring (6 October 2006)Transition includes the processes of preparing for, and the start-up of, operations under the Third Licence. TheCommission attaches great importance to the Transition taking place as smoothly as possible. The Successful Biddermust manage and deliver the Transition from the current Lottery operation to its new operation so that there aresufficient business, delivery and communication systems in place and operational to ensure that the Lottery isrunning successfully from day one of the Licence Period, in accordance with the Bid commitments and the Licence.The Commission included transition as one of the Required Standards on which the Commission must be satisfied;otherwise the relevant Bidder would not be eligible for the award of the Licence. This note set out furtherinformation about how the Commission proposed to monitor the Transition to the third Licence as part of theCommission’s work to deliver on its statutory duties.

Bid note 10 – Propriety (Fit and Proper Testing) (28 December 2006)In awarding the Licence to run the Lottery, one of the Commission’s statutory duties is to secure that the Lottery isrun, and every lottery that forms part of it is promoted, with all due propriety. The Commission must therefore satisfyitself both that the Lottery will be run with all due propriety and that those likely to manage the business, or forwhose benefit the business is likely to be conducted, are fit and proper. The Commission included Propriety as one ofthe Required Standards on which the Commission must be satisfied. If it is not satisfied that the standard is met, therelevant Bidder would not be eligible for the award of the Licence. This note set out further information about theprocess for managing the ‘Fit and Proper Testing’ elements of the third Licence competition.

Bid note 11 – Arrangements for Delivery of Bids (5 January 2007)This Bid Note detailed the arrangements for Bid delivery, which were supplemented with a photo opportunity. Asoutlined in the Invitation to Apply, Bidders had the option of delivering their Bids to either the main delivery addressor, with advance agreement, to an alternative address.

Bid note 12 – Presentation of Bids (15 January 2007) This note set out the dates when the Commission expected to invite Bidders to make initial presentations to it,further detailed presentations and the dates for site visits.

Copies of the Bid Notes may be found at www.natlotcomm.gov.uk.

Annex D | Bid Notes


Annex E: Description and summary of the Draft Licence

Annex E: Description and summary of the Draft Licence

Introduction

A copy of the Draft Licence is available on the Commission’s website (www.natlotcomm.gov.uk).

This Annex provides a high-level summary of the Draft Licence. It should not be regarded as comprehensive. In theevent of any discrepancy between this summary and the Draft Licence, the Draft Licence shall take precedence. The definition of any terms that have been used in this Annex, but not defined, can be found in Schedule 1 to theDraft Licence.

The Draft Licence can be seen to be based on the current Section 5 Licence. However the Commission has alsosought to build on its experience, and that of its predecessor OFLOT, of regulating the Lottery over the past 14 years,and to reflect the evolving regulatory environment and the principles set out in the Commission’s review of itsregulatory approach. Conditions in the current Licence have been amended where necessary to improve theCommission’s ability to regulate the Licensee effectively and, where appropriate, to adjust the regulatory regimemore towards outcome-based regulation.

For example, this means that in certain areas the Commission has moved away from direct control but has retainedthe right to require the Licensee to provide reports if it deems it necessary and appropriate. This is intended to allowthe Licensee a greater degree of commercial freedom, in the context of balancing the Commission’s social regulationresponsibilities, such as the prevention of underage or excessive play, and its commercial regulation responsibility tomaximise returns to good causes. In some cases, such as handover at the end of the Licence Period, the Commissionhas adopted arrangements to reflect the fact that the Commission has an interest in the continued sustainability ofthe Lottery over a longer period than the Licensee.

The provisions of the Draft Licence

Condition 1 – Grant of LicenceThe Licence provisions will come into effect from 1 February 2009, once the Licence has been executed on behalf ofthe Commission and the Licensee. Unless extended, suspended or revoked, the Licence will continue in force until 31 January 2019.

During this period, the Commission grants the Licensee the right to operate the National Lottery, and the Licenseeagrees to operate the National Lottery, on the terms and conditions set out in the Licence.

Under the provisions of the National Lottery Act, the Commission may vary the conditions of the Licence either withthe Licensee’s consent or without its consent (where the Licensee has been given an opportunity to makerepresentations). The Commission may not vary conditions of the Licence without the Licensee’s consent where suchvariation would result in the transfer of property or rights or where the Licence provides that the condition may onlybe varied with the Licensee’s consent. Condition 1 of the Draft Licence details the Licence provisions that may onlybe varied with the Licensee’s consent.

Condition 2 – Definitions and interpretationsCondition 2 should be considered in conjunction with Schedule 1. These provisions contain guidance on theinterpretation of the Licence and provide definitions of the terms used in the Licence.

Condition 3 – CommencementCondition 3, in conjunction with Schedule 2, requires the Licensee to ensure that certain games and facilities areavailable at the start of the Licence. If the Licensee does not make such games and facilities available on the datethat the Licence comes into effect or within 5 weeks of that date, the Commission may impose a financial penalty onthe Licensee for breaching the terms of the Licence.

Condition 4 – Handover from the Previous LicenseeThis condition, in conjunction with Schedule 3, requires the Licensee to make arrangements in respect of issues thatwill arise during the second Licence period, but which will remain outstanding at the start of the Third Licence. Forexample, the claim period for prizes won during the second Licence period will extend onto the third Licence period.The Licensee must ensure the payment of such prizes through the prize claim period.

Condition 5 – Service requirementsThis condition sets out the Licensee’s obligations in relation to the systems, facilities and processes required tosupport the operation of the National Lottery.

Annex E | Description and summary of the Draft Licence


The Condition imposes an overall obligation on the Licensee to ensure that its running of the National Lottery is Fitfor Purpose. The Licensee must ensure the consistent delivery of all aspects of the National Lottery in compliancewith its obligations under the Licence.

The condition also requires the Licensee to:

• Comply with certain standards and codes of practice, as listed in the Licence, in respect of its TechnologyOperation, together with such other generally accepted standards as the Commission may determine;

• Maintain all assets used in the operation of the National Lottery;• Develop written procedures for any operation undertaken by or on behalf of the Licensee in operating the

National Lottery. The Commission may direct the Licensee to submit procedures for Commission review andapproval; to submit an operation to testing by an independent third party; and/or to procure an independentaudit of the functionality of an operation;

• Establish an Independent Verification System (IVS) for its own use, and a separate copy for the Commission (ineach case possessing the functionality specified by the Commission). IVS enables the Commission to ensure theintegrity of the Licensee’s main gaming systems;

• Ensure the security of all equipment, systems, data, materials and premises used in connection with the NationalLottery. The Licensee must report any security breaches to the Commission;

• Develop, maintain, test and implement Business Continuity and Disaster Recovery Plans;• Restrict access to those areas which must be kept secure to protect the security of the National Lottery;• Ensure that a specified number of retail outlets provide players with access to draw-based games. At the start of

the Licence, the Licensee is required to ensure that there are 27,500 such outlets. The required number of outletsvaries throughout the remainder of the Licence, however there must be a minimum of one retailer outlet perPostcode District, which has a minimum of 2000 residents;

• Seek Commission approval before occupying any premises to be used in the operation of the National Lottery;• Comply with any laws, rules and regulations that impose obligations on the Licensee; and• Develop and implement a Technology Maintenance Plan and, on request, submit it to the Commission for review.

The Licensee must also review its Technical Operations and report to the Commission, at least on an annual basis,on any potential technological advances that could be of benefit to the National Lottery.

Condition 6 – Prohibition of activities not related to the National LotteryExcept with the approval of the Commission, the Licensee may not engage in any Ancillary Activity. The termAncillary Activity includes any activity other than the running of the National Lottery; the use of intellectual property,assets or subcontracts other than for the running of the National Lottery; the activity of any subsidiary of theLicensee; and some investments by the Licensee in shares and securities.

The Licence provides the Commission’s consent to those Ancillary Activities listed in Schedule 4.

The Commission may require the Licensee to cease any Ancillary Activity if, in the opinion of the Commission, itjeopardises or may jeopardise the operation of the National Lottery.

The Licensee must make payments to the good causes in respect of Ancillary Activities, as set out in Schedule 5.

Condition 7 – Consumer protectionThis condition contains provisions to ensure the protection of players’ interests. Player protection is of significantimportance to the Commission and this is reflected in the length and detail of this condition.

The following is a list of some, though not all, of the player protection provisions:

• The Licensee must adopt, maintain and implement strategies to prevent play on the National Lottery by personsaged under 16 and to prevent excessive play on the National Lottery. Both strategies are subject to review and toCommission approval, in accordance with Schedule 7 of the Licence;

• The Licensee must ensure, at all times, that tickets for at least one draw-based game are available at everyNational Lottery retailer, and that players have access to another way of participating in the game, other than byvisiting a retailer;

• The Licensee must ensure that, except where the Commission grants consent, no tickets are given away for freeor sold for less than their full price unless the price of the ticket is met by the Licensee or a third party, or the fullprice of the ticket is taken into account in calculating the amount payable by the Licensee to the good causes;

• Save with the Commission’s consent, the Licensee may not be involved in the use, provision or promotion ofpremium rate telephone numbers;

• The Licensee cannot hold more than one draw per hour in respect of a single lottery or Associated Lotteries;• The Licensee requires Commission approval to introduce a new method of effecting sales;



• The Licensee must adopt, maintain and comply with a code of practice regarding the availability of top prizes forscratchcard games. The code is subject to review and to Commission approval, in accordance with Schedule 7 of the Licence;

• The Licensee must adopt, maintain and comply with the terms and conditions, rules, procedures and gamespecific rules (as appropriate) for each game, as approved by the Commission. The Licensee must ensurecompliance with the same by anyone who sells National Lottery tickets on its behalf;

• The Licensee must adopt, maintain and comply with a Player Guide (a guide to play at retailers), a Service Guide (aguide to interactive play) and a Subscription Guide (a guide to play by subscription). Each guide is subject toreview and to Commission approval in accordance with Schedule 7;

• The Licence contains provisions setting out the information that must be made available to players at retailers andvia the National Lottery website. The Licensee must also give or send certain information to players on request;

• The Licensee must take reasonable steps to ensure that information regarding the National Lottery is available toplayers with a visual and/or hearing impairment;

• The Licensee must ensure that all players can find out, without payment and without undue inconvenience,whether they have won a prize;

• The Licensee must ensure that prizes are only paid to those entitled to claim them, in accordance with theconditions of play;

• The Licensee is prohibited from disclosing the identity of a prize winner, or of a person who is entitled to a shareof a prize, unless it has obtained that person’s prior written consent;

• The Licensee is required to establish and implement an effective system for handling player complaints;• The Licensee is required to adopt, maintain and comply with a code of practice regarding advertising, sales

promotions and public relations. The code is subject to review and to Commission approval in accordance withSchedule 7; and

• The Licence seeks to ensure the reliability of information regarding the National Lottery, which is designed toencourage the people to play. The information must be accurate, must not mislead players and must becompatible with the conditions of play. Factual statements must be capable of independent verification.

Condition 8 – Retailer commission and retailer managementThis condition sets out the sums payable to retailers for selling tickets and paying prizes. The Licensee may not altersuch remuneration rates unless it has consulted the Commission. The condition also requires the Licensee to ensurethat it devises and applies clear and fair criteria in the selection of retailers. Finally, the condition requires the Licenseeto carry out at least 9,000 visits per year, to establish whether sales have been made or are likely to be made topersons under the age of 16.

Condition 9 – Independent section 6 Licence applicantsThis condition requires the Licensee to adopt, maintain and implement a strategy for handling proposals from thirdparties for games to be included in the National Lottery. The strategy must cover proposals which may lead to anapplication, by a third party organisation, for a Section 6 Licence from the Commission. The strategy is subject toreview and to Commission approval in accordance with Schedule 7.

Condition 10 – Information and reportingThis condition, in conjunction with Schedule 9, sets out the detailed obligations of the Licensee in relation to theprovision of information to the Commission.

The general obligations include the following:

• The Licensee shall provide the Commission and its representatives and advisers with access to its staff and to anyinformation regarding itself or its business or affairs in order for the Commission to carry out its duties, verify theLicensee’s compliance with Licence obligations or in connection with any competition or tendering exercise;

• The Licensee shall establish and keep up to date, on a monthly basis, registers of information about itself, itsbusiness or affairs;

• The Commission shall have the right to publish any such information; and• The Licensee must obtain such third party consents as are required to allow such information to be available to

the Commission and published, as required by the Commission.

The condition also requires the Licensee to:

• Report to the Commission if an incident occurs, or is anticipated or reasonably suspected, that is likely toadversely affect the proper running, reputation or image of the National Lottery;

• Ensure that the Commission, its representatives and advisers can access information with a third party with whomthe Licensee has contracted for the provision of goods or services, or with any of their subcontractors;

• Provide facilities for the Commission’s employees, representatives or advisers;



• Provide the Commission and its representatives and advisers such management and operational information asthe Commission may specify;

• Maintain records or its performance, as compared to performance standards and targets imposed by theCommission, following consultation with the Licensee;

• Maintain and preserve records of every financial transaction connected to the participation by players in NationalLottery games;

• Maintain, as required by Schedule 9, management and annual accounts; and• Retain all player correspondence in relation to a potential or actual dispute for 6 years.

Condition 11 – Payments to the Secretary of StateThis condition, in conjunction with Schedules 5, 8, 10 and 11, sets out the payment mechanics and associatedobligations of the Licensee in relation to the payments to be made to the Secretary of State. If a payment is not paidon the due date, the Licensee is liable to pay interest.

Condition 12 – Shareholders, other Connected Parties and debt providersThis condition covers a number of areas. Firstly, it sets out the obligations that apply to the Licensee in terms of itsconstitutional documents and capital structure.

• The Licensee must ensure that the constitutional documents that were agreed by the Commission prior to thecommencement of the Licence are in force upon commencement. They may only be amended with the consentof the Commission. Similar conditions apply to the Licensee’s shareholder and financing agreements; and

• The capital structure of the Licensee at the commencement of the Licence must also be consistent with thestructure approved by the Commission. Any material change to the Licensee’s paid-up capital and anyrestructuring of debt facilities, must also be approved by the Commission. It must notify the Commission of anydefault or potential default under any Finance Agreements.

The condition also sets out the Licensee’s obligations to provide the Commission with such information as it mayrequest in order to determine whether any person managing the Licensee’s business or for whose benefit theLicensee’s business is being carried on (a Connected Party) is, in the Commission’s opinion, fit and proper.

The condition obliges the Licensee to ensure that its Connected Parties are the same as those persons notified andapproved by the Commission prior to the start of the Licence. In most cases, Connected Parties may not be changedwithout the prior consent of the Commission.

Condition 13 – VettingThis condition sets out the Commission’s entitlement to carry out investigations into whether individuals employed orto be employed by the Licensee or in connection with the Licensee’s business, are fit and proper. The Licensee isrequired to adopt, maintain and comply with a procedure detailing the activities it is required to carry out to enablethe Commission to undertake fit and proper vetting.

Condition 14 – Control environmentThis condition sets out the Licensee’s obligations in relation to corporate governance, internal control systems andrisk management procedures.

The condition imposes obligations on the Licensee to:

• Comply with the requirements of the Combined Code on Corporate Governance;• Submit an annual report on its compliance with the Combined Code as part of its annual statutory report

and accounts;• Ensure that it has structures in place to deliver sound corporate governance;• Demonstrate that it has in place an effective system of internal control that supports a robust control

environment to the satisfaction of the Commission;• Establish a code of corporate social responsibility and a code of conduct which provides an ethical framework

for all business decisions;• Establish a whistle-blowing procedure to encourage its staff and subcontractors to assist the Licensee in tackling

any form of malpractice within its organisation. The procedure is subject to Commission approval;• Ensure that its statutory auditors are appointed on terms that require them to report on whether they have

identified issues concerning the Licensee’s system of internal financial control or any irregularities or misconductby the Licensee or members of its staff; and

• Establish and maintain an effective risk management strategy.



Condition 15 – ContractorsThis condition, in conjunction with Schedule 12, sets out a number of obligations relating to the subcontractors.Certain provisions apply to organisations that contract with the Licensee to provide goods and services, to theirsubcontractors, and also to the subcontractors’ subcontractors.

The condition requires the Licensee to manage subcontractors in a way that will ensure that the Licensee meets itsobligations under the Licence and that each subcontractor meets its obligations under the relevant subcontract.

The Licensee is required to procure that certain contractual provisions are incorporated into subcontracts (in themanner and to the extent specified in condition 15), so as to enable such provisions to be enforced against the thirdparty subcontractor by the Commission.

Condition 16 – EmployeesThe condition sets out certain restrictions on changes to staff numbers and their terms and conditions ofappointment. Save with the Commission’s consent, the Licence restricts the Licensee’s ability to agree any paymentthat falls due on or after the end of the Licence. In the last two years of the Licence, certain restrictions are placed onthe Licensee’s ability to vary existing terms of employment or engagement, its ability to recruit staff on terms andconditions materially different from existing equivalent staff, and its ability to vary overall staff numbers and costs.

The Licence also places restrictions on the Licensee in respect of the employment of Commission staff.

In respect of any redundancy costs incurred in the first year of the Licence, the condition also allows for the Licenseeto recover any such costs necessarily, reasonably and properly incurred as a result of taking up the Licence, subject toapproval by a third party expert appointed by the Commission.

Condition 17 – Performance monitoringThis condition provides that, where the Commission, in its absolute discretion, is dissatisfied at any time with theLicensee’s performance in any area of its operations, it may require the Licensee to procure the carrying out of areview by an independent third party of the Licensee’s performance to assess whether, and if so how, it could beimproved. If the review recommends certain actions for the improvement of the Licensee’s performance, theCommission may require the Licensee to adopt those recommendations within a reasonable period.

Condition 18 – Handover on expiry or revocation of the LicenceThis condition, in conjunction with Schedules 12 and 14, sets out the obligations on the Licensee in respect ofhandover to a fourth Licensee following expiry or upon revocation of the Licence.

Condition 18 includes provisions that require the Licensee:

• To assist the Commission, its representatives and advisers in preparing for the continued existence of the NationalLottery following the termination of the Licence;

• Not to take steps that would frustrate the transfer of the business of running the National Lottery as a goingconcern at the end of the Licence;

• To co-operate with the Commission, its representatives and advisers and with a Successor Licensee to ensure theorderly handover of control of the National Lottery; and

• Develop, maintain and implement a Transition Plan to assist in the smooth transition from the Licensee to theSuccessor Licensee.

Condition 19 – Security for Players’ fundsUnder this condition, the Licensee is required to enter into a security trust arrangement with an independentcorporate Trustee. The purpose of the arrangements is to safeguard players’ money and to ensure the payment ofprizes in all circumstances, including the failure of the Licensee.

The arrangements are outlined in the Licence, but are detailed at length in separate security trust deeds, which aresubject to review and approval by the Commission.

Condition 20 – Confidentiality and Freedom of InformationThis condition sets out the obligation on the Licensee not to disclose Confidential Information to any third party(subject to certain exceptions). It also sets out the Licensee’s acknowledgment that the Commission is subject to theFreedom of Information regime, and details the Licensee’s obligations in respect of any requests for information thatthe Commission may receive under that regime.



Condition 21 – Intellectual propertyThis condition, in conjunction with Schedule 13, sets out the Licence of Lottery intellectual property granted by theCommission to the Licensee for the duration of the Licence, including the Licensee’s obligation to comply withLottery intellectual property guidelines.

This condition further sets out the Licensee’s obligation in respect of intellectual property. In summary it requires thatintellectual property that is specific to the Lottery should be secured for future use by the transfer or license ofintellectual property to the Commission or its nominee. This obligation extends to a best endeavours obligation toprocure the transfer or Licence of intellectual property held by third parties, such as suppliers, to the Commission orits nominee.

The condition also sets out restrictions in the use of Lottery-related intellectual property, requirements relating to itsregistration and obligations on the Licensee to pursue any enforcement action necessary in the event of anyinfringement of Lottery-related intellectual property.

Condition 22 – Data protectionThis condition sets out the obligations relating to the protection of personal data, and the extent to which thisextends to the Licensee’s subcontractors. The Licensee is required to ensure, and procure that any subcontractorensures that:

• All processing of personal data incorporated in any database is carried out in compliance with the Data ProtectionAct or equivalent overseas legislation; and

• Appropriate consents are obtained to enable such information to be transferred to or accessed by theCommission or to its appointed nominee e.g. a Successor Licensee.

Condition 23 – Licence extensionsThis condition sets out the obligations surrounding an extension of the Licence. It provides that by mutualagreement, the Licence may continue for a maximum period of five years on the same terms a set out in the Licenceor on such terms as the Licensee and the Commission may agree.

It also includes provisions allowing for a Licence extension in the case of Licensee Investment. A Licensee Investmentis a significant, unanticipated investment opportunity arising during the course of the Licence that may have thecapacity to enhance the National Lottery in a way that benefits both the good causes and the Licensee and whichwould not be undertaken in the absence of a Licence extension.

Finally, it sets out the ability of the Commission to extend the Licence in order to facilitate handover to a SuccessorLicensee. The Commission may extend the Licence in such circumstances for a maximum period of up to two years,in six monthly increments. The condition provides for the Licensee’s to recover reasonably and properly incurred costsover and above those that it was incurring prior to the extension of the Licence. If the Commission and the Licenseecannot agree the sum to be provided in favour of the Licensee, the parties will refer the issue to an expert, inaccordance with Schedule 14.

Condition 24 – No waiverThis condition provides that no failure or delay by the Commission in exercising any right or remedy under theLicence shall prejudice any rights or remedies as may be available to it.

Condition 25 – SeverabilityThis provides that in the event that a condition within the Licence is held to be illegal, void or unenforceable, it shallnot invalidate the remaining provisions of the Licence.

Condition 26 – Governing Law and jurisdictionThe Licence shall be governed by English law and the English courts shall have exclusive jurisdiction in relation to anylegal action or proceedings arising under the Licence, save that the Commission shall be entitled to bringproceedings in any other court or courts having jurisdiction.

Condition 27 – Third party rightsThis condition provides that a person who is not a party to the Licence shall have no right under the Contracts(Rights of Third Parties) Act 1999 to enforce any of its terms.

Condition 28 – NoticesThis condition sets out the procedure for serving Notices under the Licence.

Condition 29 – SurvivalThis condition sets out the conditions of the Licence that shall survive its expiry or revocation.



Schedules to the Licence

The Licence also includes a number of Schedules. These are as follows:

• Schedule 1 – Definitions

• Schedule 2:• Schedule 2 (Part 1) – Games and facilities to be available in the first five weeks of the Licence• Schedule 2 (Part 2) – Financial penalties

• Schedule 3 – Handover from the Previous Licensee

• Schedule 4: • Schedule 4 (Part 1) – Ancillary activities that the Commission has consented to• Schedule 4 (Part 2) – Further conditions relating to Ancillary Activities

• Schedule 5 – The Ancillary Activity Payment

• Schedule 6 – Intentionally left blank

• Schedule 7 – Codes of practice and strategies

• Schedule 8:• Schedule 8 (Part 1) – Primary and Secondary Contributions: Definitions and interpretations• Schedule 8 (Part 2) – Primary and Secondary Contributions : Calculation of the Primary and

Secondary Contribution• Schedule 8 (Part 3) – Primary and Secondary Contributions: Payment• Schedule 8 (Part 4) – Primary and Secondary Contributions: Information

• Schedule 9 – Accounts

• Schedule 10:• Schedule 10 (Part 1) – Minimum marketing expenditure • Schedule 10 (Part 2) – Information• Schedule 10 (Part 3) – Heads of marketing expenditure

• Schedule 11 – Lost and stolen Scratchcard Lottery tickets

• Schedule 12:• Schedule 12 (Part 1) – The Licensee Subcontract Novation• Schedule 12 (Part 2) – The Deed of Transfer for Transferring Assets• Schedule 12 (Part 3) – Co-operation Agreement• Schedule 12 (Part 4(A)) – The Key Licensee Subcontract Transfer• Schedule 12 (Part 4(B)) – The Key Licensee Subcontract Licence

• Schedule 13:• Schedule 13 (Part 1) – The Lottery IP Licence• Schedule 13 (Part 2) – The Lottery IP Sub Licence• Schedule 13 (Part 3(A)) – Form of Deed of Transfer• Schedule 13 (Part 3(B)) – Form of Licence • Schedule 13 (Part 4) – Databases Assignment

• Schedule 14 – Expert determination



Annex F: Project Board Terms of Reference forCommissioners and Senior Management

Annex F | Project Board Terms of Reference


Annex F: Project Board Terms of Reference for Commissioners and Senior Management

1 Functions 1.1 The Commission wishes:

• To ensure the successful award of the third National Lottery operating Licence to the operator which is most likelyto maximise returns to good causes, and able to run the National Lottery with due propriety and to protect theinterests of participants; and

• To ensure a successful transition from the current Licence to the next.

1.2 Consequently the Commissioners of the National Lottery Commission have set up a Project Board as an executivecommittee with decision-making powers.

1.3 The Commission has delegated to the Project Board responsibility for delivering as a project the successfuloutcome to the competition for the award of the third Licence, subject to certain key decisions, which will be taken by the Commission as a whole. The extent of the Project Board’s authority to make decisions will be defined in ascheme of delegation, approved by the Commission (see page 7).

1.4 The Project Board’s main function is to carry out the work required to award the next Licence to run the National Lottery:

• To ensure that the competition is run fairly and competently. • To oversee the strategy for and delivery of the third UK National Lottery Licence Competition. • To ensure the project is completed to time and to agreed budget. • To delegate responsibilities to the Chief Executive and monitor their execution. • To make decisions on issues identified by the Project Board or raised by the Project Steering Group. • To make recommendations to the Commission on decisions which have not been delegated to the Board. • To provide assurance to all stakeholders and to the Commissioners concerning the conduct, resources and

delivery of the project. • To be the project’s voice to the outside world. • To approve the publication of the project’s deliverables; and public statements regarding the project, except

where items are reserved to the Commission.

2 Responsibilities The Project Board is responsible for:

• Ensuring the project is delivered successfully. • Making decisions on all key aspects of the competition (e.g. on policy relating to the competition and project

management), unless reserved to the Commission. This will include matters identified by the Board and issuesfrom the project team.

• Making recommendations to the Commission on matters, which require decision and have not been delegated to the Board.

• Recommending to the Commission key documents for publication, which incorporate the Commission’s views or decisions.

• Approving the overall Project Plan and Stage Plans; and signing off the completion of the Stage Plans andauthorising the Next Stage.

• Overseeing the management of risk with input to the Audit Committee. • Overseeing and monitoring the management and planning of the project, including:

• analysing risks (e.g. as set out in the risk register) and deciding how to mitigate these, • monitoring budgets and the use of resources – ensuring that adequate resources are committed to the project

to achieve a successful outcome, • monitoring quality, • checking the business case defined in the Project brief and Business Case.

• Overseeing responsibilities delegated to the Chief Executive. • Overseeing the preparation of reports to Commissioners, Ministers and the Press.

3 Attendance & Composition 3.1 The Project Board will be chaired by a member of the Commission, other than the Commission Chairman, whohas relevant experience and expertise. There will be one other Commission member on the Project Board, who willbe appointed at a full meeting of the Commission. The formal members of the Project Board responsible for takingdecisions are the Chair, the Vice Chair and the Chief Executive. Others attending the Project Board do so in anadvisory capacity. The composition and roles of the Project Board are as follows:

3.2 Chair of the Project Board:• The Chair is a Commissioner and leads the Project Board in deciding the strategy for delivering the project, and

ensuring that the competition and its risks are tightly managed, and that the final decision is robust. • The Chair will nominate the Vice Chair for approval by Commissioners. • The Chair of the Project Board will act as the primary public face for the competition and for the Project Board

(e.g. with the media, the public, Government, and lead in contacts and negotiations with senior business figuresworking closely with the Chief Executive). This will help to reduce any concerns on the role of the NLC asregulator and the running of a fair competition without incumbent advantage.

• On behalf of the Project Board, the Project Board Chair and Chief Executive have responsibility for advisingCommissioners on policy issues relating to the competition, for briefing on progress on all aspects of thecompetition, and to ensure that the project is managed effectively. The Project Board Chair and the ChiefExecutive will work closely together to agree such advice and briefing. The Project Board Chair will ensure that theCommissioners have sufficient and regular information and in good time to take decisions on key issues, identifiedby the Project Board, which have not been delegated – in particular keeping the Chair of the Commission up todate on issues which may need to be considered by Commissioners.

• If decisions, delegated to the Project Board, need to be taken between Project Board meetings (e.g. on policyrelating to the competition or project management where delay would be detract from the efficient running ofthe competition), these may be taken on behalf of the Project Board by the Project Board Chair in agreement withthe Vice Chair (if available) and the Chief Executive – reporting this to the next meeting of the Project Board.

3.3 Vice Chair of the Project Board: The Vice Chair is a Commissioner and chairs the Project Board if the Chair is unavailable.

3.4 Commissioners on the Project Board (i.e. the Chair and Vice-Chair) In addition to the responsibilities above:

• Represent the interests of Commissioners. • Provide expert input on previous experience of the Licence process, and other major projects.

3.5 Role of the Commission Commissioners as a whole will take decisions at board meetings of the Commission on issues not delegated to theProject Board (as attached) and ask the Project Board Chair and Chief Executive to take these forward. The ProjectBoard Chair, supported by the Chief Executive, will give a report to the Commission at each of its meetings,including an update on overall progress of the project and a schedule for future decisions needed by theCommission. Papers put to such board meetings will have been approved by the Project Board Chair and the issuesnormally discussed at a meeting of the Project Board.

3.6 NLC Chief Executive: • As Accounting Officer and Senior Responsible Officer, the CE has ultimate responsibility for the management of

the delivery of the project and the use of resources. • Ensure that the Project Board and Commission has all the advice and information necessary to make effective,

legitimate and informed decisions. • Supports the Chair in leading the Project Board. • Provides overall project guidance and assessment throughout. • Has responsibility for ensuring implementation of decisions taken by the Project Board.

3.7 The Project Board will have access to independent expertise. This expertise will comprise a senior member of theCommission’s Corporate Finance Advisors and the Commission’s Legal Advisors, and may also include a consumerand leisure business expert with wider commercial, gaming and retail expertise. These experts will attend ProjectBoard meetings and participate fully in discussion, but will not have voting rights.

They will: • Contribute to and comment on the process, based on wider experience. • Contribute to and comment on findings from commercial and legal perspectives.

3.8 An Independent Process Advisor will provide further independent assurance on the project overall: • Monitor compliance with the agreed process and report any concerns. • Advise as required on project management to ensure that best practice has been followed (OGC etc), and is

compliant with the key principles of Prince 2 methodology. • The Independent Process Advisor attends the Project Board as observer.



3.9 Other aspects • It should be noted that the composition of the Project Board could change from time to time to reflect the stage

of the project. • The Project Board will be provided with a secretarial function by the Commission Secretariat Manager who will

circulate papers and minutes of meetings of the Project Board to all members of the Commission. • Commissioners who are not members of the Project Board shall have the right of attendance as an observer and

may contribute but not vote on issues. The Project Board Chair may invite any Commissioner to attend. • The Project Board may ask any other officials of the organisation to attend in order to assist it with its discussions

on any particular matter. • Other advisers to the Commission will attend meetings, as required by the Project Board. The Project Board may

ask any or all of those who normally attend but who are not members to withdraw to facilitate open and frankdiscussions of particular matters.

• If there is a difference of view between voting members of the Project Board, which cannot be resolved, this willbe referred to a meeting of Commissioners.

4 Delegations to the Chief Executive The Project Board delegates agreed activities to the Chief Executive. The Chief Executive is supported by the PSG,which will monitor the progress of the project against the overall Project and Stage Plans approved by the ProjectBoard. The Chief Executive will provide monthly reports to the Project Board on all aspects of these activities andindicate items where decisions or guidance are needed by the Project Board, e.g. in relation to the mitigation of risk.The reports will include, for example:

• Project management products and plans e.g. work streams (including status of each work stream in terms ofprogress against the work package plan), work package definitions and product descriptions;

• Summaries of the status of the project including: achievements in the period (deliverables and milestonescompleted), expected achievements, key problems arising and suggestions regarding resolution;

• Issues report, setting out project issues needing guidance from the Project Group; • Risk register and matrix report, summarising the status of current risks and their movement; • Combined monthly financial and resources reporting with actual expenditure against budget, including staffing,

consultant and non-staffing matters (e.g. accommodation levels against plan). The report will include mitigatingactions to address any identified variances; and quarterly financial forecast reports;

• Copies of the updated overall Project Plan and Stage Plan; and• Minutes of PSG and its subcommittees.

5 Frequency of Meetings • Meetings of the Project Board shall be held at least quarterly (and normally monthly) and at the end of key stages

in the process, at a time and place agreed by the Chair, and with agendas agreed in advance with the Chair. • A meeting of the Project Board may be cancelled if the Chair determines that there is no business for the Project

Board to conduct, or requests the Chief Executive to cancel the meeting. • The Project Board Chair may convene additional meetings as deemed necessary. • At least two members of the Project Board (i.e. two out of Chair, Vice-Chair, and CE) must be present for the

meeting to be deemed quorate, one of which must be a Commissioner. • The Chair or may bring additional matters to the attention of the Project Board without advance notice when

such information is deemed by the Chair to be of an appropriate nature that requires immediate attention. • Other members of the Project Board who want matters considered should normally provide three days notice

before meetings, unless this is impracticable.

6. Reporting • The Project Board Chair will report back orally or in writing to the Commissioners, after each meeting. • The Project Board shall decide items that are to be referred to the Commission for decision or ratification. The

item shall typically be the subject of a written report to the Commission, which will be approved in advance by theProject Board, unless the Project Board determines otherwise.

7 Authority • The Project Board is authorised by the Commission to investigate any activity within its terms of reference, and to

seek any information it requires from staff, who are requested to co-operate with the Project Board in the conductof its business.

• The Project Board is authorised to obtain independent professional advice if it considers this necessary.

8 Other The meetings and proceeding of the Committee are governed by the provision of Part B of the Commission’sStanding Orders.



Scheme of delegation to the Project Board

All issues relating to the next Licence competition shall be delegated to the Project Board, except the following items,which are reserved to the full Commission:

1. Approval of the Statement of Main Principles, including decision on the main issues covered in the statement andany earlier decision on items, which will fall to be covered in the statement.

2. Approval of the draft Invitation to Apply, including decision on the main issues covered in the Invitation. 3. Approval of the final Invitation to Apply, including decision on the main issues covered in the Invitation. 4. The decision to exclude any Bidder at any point in the process, including at the end of the first stage of a two-

stage process (if such is adopted). 5. The decision to negotiate with, or seek improvement to any or all outstanding Bids. (The Commission’s decision

would allow the Project Board Chair and negotiating team to enter into a negotiation stage with certain statedobjectives. The Project Board would not have to go back to the Commission on detailed negotiating points.)

6. The decision which Bidder should be selected as preferred Bidder, including approval of the Commission’sStatement(s) of Reasons.

7. Approval of the final Section 5 Licence to be granted to the preferred Bidder, including decision on the mainissues covered in the Licence.

8. Approval of the annual budget for the project, and of any increase in the overall budget. 9. Ratification of any documents for publication that set out any views or decisions, which are attributed to the

Commission as a whole.



Annex G: Independent process assurance report(Serco Consulting, July 2007)

Annex G | Independent process assurance report


Annex G: Independent process assurance report (Serco Consulting, July 2007)

Summary

The independent process assurance team would summarise its findings and conclusions as follows:

• The conduct of the competition for the third Licence was a long and complex process, and although not highrisk/mission critical in Gateway© terms, it was nonetheless a high profile project with a high degree of public interest;

• A Project Board, chaired by one of the Commissioners, was set up from the outset, and attended by amongothers, the Chief Executive of the National Lottery Commission acting as the Senior Responsible Owner (SRO) forthe project. The Project Board together with the SRO and his team were effective in moving the project forward,ensuring the quality of work, and managing the complex interdependencies within the project;

• The project was run using a formal project management system (Prince 2), appropriately adapted to meet theneeds of the project. From the beginning of stage 2, the project team was configured in accordance with bestpractice and functioned effectively;

• Although the various advisers to the Commission were appointed before we were asked to take on the assurancerole, it is clear that the competition to find advisers led to the selection of advisers who we believe carried outtheir tasks with a high degree of competence and enthusiasm. We observed no incidence of situations where aconflict of interest might arise, and due propriety was observed at all stages;

• For the duration of the project, the key deliverables were produced after intense and rigorous analysis anddiscussion with the relevant parties. Individual responsibilities were taken seriously and the net result of projectactivity was the production of deliverables of an extremely high standard;

• The structure of the competition, as laid out in the Statement of Main Principles, was the product of aconsiderable amount of open discussion among the NLC, the Commissioners, their advisers and a large numberof interested parties within the lottery world. Although not to the satisfaction of all potential Bidders, (e.g. somewould have preferred a two-stage process), the shape of the competition was carefully thought out and discussedat great length before Commissioners reached their final decision;

• Potential Bidders were given every encouragement to Bid, and it is difficult to see what might else have beendone to increase their number, given the state of the market at the time of the competition. The inherentadvantage of the incumbent operator was recognised, and considerable effort was expended to ensure that alevel playing field was created to ensure potential Bidders were not deterred from submitting a Bid;

• The ITA document was comprehensive and clear, and elicited two Bids of quality from Bidders seriouslydetermined to win the competition. The Evaluation Manual, produced in parallel with the ITA, provided theproject team with clear guidance on the processes to be adopted by the evaluation team;

• The evaluation of the Bids was rigorous and fair, and carried out in accordance with the ITA and the EvaluationManual. The competition required Bidders to do two things: meet Required Standards under a number ofheadings clearly laid out in the ITA, and offer the best returns to good causes. The SRGs performed well inanalysing the Bids, and presenting the Commissioners with generally clear and well argued recommendationsunder each of the Required Standards headings;

• The clarification and subsequent modification process allowed for in the ITA was followed with meticulous care,and Bidders were treated equally without any evidence of undue favouritism for either Bidder being displayed;

• At all points where a potentially contentious issue arose, the Commission sought, and took the advice of Counsel.

The assurance team was given access to all the documents it needed to carry out its task and was able to attend anymeeting it considered necessary to understand the progress of the project. As a result, we can see no reason why theCommission should not proceed to make its decision on the award of the third Licence, confident that the processhas been fair, thorough and rigorous, and consistent with the objectives of the project as determined byCommissioners at the outset.

Note: This annex is an extract from the Serco Report.

Annex H: Summary of documents produced for the competition

Annex H | Summary of documents produced for the competition


Annex H: Summary of documents produced for the competition

Title DateCommission commences independent research into potential interest in Bidding for the next Licence (Commission press release) June 2004Encouraging Bidding in the single Licence National Lottery framework (report by NERA) November 2004National Lottery Commission market perceptions audit (report by London Communications Agency) November 2004Lottery Systems Technology Audit (report by Hedra) November 2004Possible Bidders and the Drivers of Bidder interest in the 2009 Lottery Licence process (report by KPMG) January 2005A Lottery for the future: shaping the structure of the third competition (a discussion paper) January 2005City Briefing Presentation July 2005A Lottery for the future: Summary of responses and areas for further analysis July 2005The Technology Opportunity presentation September 2005Consultation responses October 2005Statement of Main Principles November 2005World Lottery Forum presentation February 2006Presentation to the Association of Convenience Stores Government Relations and Campaigns Committee March 2006 Bid Notes (12 Notes were published) March 2006 – January 2007Virtual Data Room rules April 2006Draft Invitation to Apply: Third Licence Competition April 2006Draft Licence: Third Licence Competition April 2006Bidder Briefing presentations May 2006The Licensee’s retention for the Third National Lottery (report by NERA) May 2006Draft ITA clarifications (4 published) May – June 2006Retailers and the Third Licence Competition: summary report June 2006Lottery Monitor Conference presentation June 2006Invitation to Apply: Third Licence Competition June 2006Final Draft Licence: Third Licence Competition June 2006Bid process agreement June 2006Westminster Media Forum presentation July 2006A Lottery for the future public consultation: summary report August 2006Business plan outputs spreadsheet September 2006ITA clarifications (34 published) August – December 2006ITA amendments (4 published) September – December 2006Bid submission checklist December 2006Statement of Reasons: Licence to run the National Lottery 7 August 2007Background: Licence to run the National Lottery 7 August 2007 NLC finalises National Lottery Licence with Camelot Group plc (Commission press release) 31 August 2007Enabling Agreement September 2007Section 5 Licence to commence 1 February 2009 September 2007

In publishing this report, the Commission is also making available the following internal analysis documents:

Meeting Bidders’ Costs NERA, June 2005Arguments For And Against A Two-Stage Process Rothschild, June 2005Licence Length and Investment Issues NERA, August 2005Converting First Stage Bids To Full Bids In A Weak Market NERA, August 2005Reserve Pricing NERA, August 2005Technology: Inherent Risk Of Handover Hedra, August 2005Technology: Requirement For New Technology Hedra, August 2005Evaluation Rothschild, August 2005Supplier Market Restrictions Rothschild, August 2005Technology Supplier Landscape Hedra, September 2005Single Purpose Vehicles Rothschild, September 2005Licence Length, Extensions And Investment Considerations Rothschild, September 2005Technical Principles: Ensuring An Appropriate Technology Solution Hedra, September 2005Dual Competition Rothschild, September 2005Common Sales Scenario: Issues Paper NERA, December 2005Financial Evaluation NERA, January 2006Penalty Payments NERA, February 2006Use Of Quantitative Research Techniques In Lotteries April Strategy, March 2006National Lottery: Segmentation Research April Strategy, May 2006Minimum Marketing Expenditure April Strategy, June 2006Future Foundation Report April Strategy, June 2006

Copies of all of these documents may be found at www.natlotcomm.gov.uk.

Annex I: Glossary

Annex I | Glossary


Annex I: Glossary

Bid A Bid as formulated in response to the ITA, or the process of submitting that Bid.

Bid Process Agreement The agreement entered into between each Bidder and the Commission, which set outthe rules governing a Bidder’s participation in the Competition.

Bidder The legal entity that had submitted or intended to submit a Bid.

Commission The National Lottery Commission.

Competition The competition process undertaken to award the Licence.

Consortium The Bidder, its Bid Group and Key Contractors.

Current Operator Camelot Group plc.

Directions Any directions issued by the Secretary of State for Culture, Media and Sport to theCommission (see Annex A for further details).

Draft Licence The draft Section 5 Licence to run the Lottery issued by the Commission to accompanythe ITA.

Enabling Agreement The agreement entered into by the Commission and the Preferred Bidder governing theTransition Period.

Handover If applicable, the transfer of responsibilities for running the Lottery from the CurrentOperator to a Successful Bidder who is not the Current Operator, together with anyassociated transfer of assets, people, data, contracts, rights and other aspects of thecurrent operation. This occurs at the expiry of the current Licence period andcommencement of the Licence Period.

ITA The Invitation to Apply.

Licence The Section 5 Licence to run the Lottery entered into by the Commission and theSuccessful Bidder, the form of which was substantially set out in the Draft Licence.

Licence Period The period over which the third Section 5 Licence is intended to be in force, from 1 February 2009 to 31 January 2019.

Licensee The party to whom the Licence is granted (Camelot Group plc).

Lottery The UK National Lottery.

National Lottery Act The National Lottery etc. Act 1993 (as amended).

Preferred Bidder The Bidder with whom the Commission finalised the Draft Licence.

Regulations Any regulations issued by the Secretary of State for Culture, Media and Sport concerningthe promotion of constituent lotteries of the Lottery (see Annex A for further details).

Required Standards The standards set by the Commission in respect of certain areas of the evaluation thathad to be met if a Bidder was to be awarded the Licence.

Reserve Bidder The Bidder, with whom the Commission intended to finalise the Draft Licence in theevent that finalisation of the Draft Licence were not achieved with the Preferred Bidder.

Successful Bidder The Bidder to whom the Licence is awarded.

Transition The process of preparing for the next Lottery operation, including any activities necessaryfor Handover.

Transition Period The period of time from Licence Award until grant of the Licence.


Acknowledgements

The Commissioners would like to thank all of those who contributed to the success of the third Licence competition:

• Mark Harris, the Chief Executive, and all the staff at the National Lottery Commission

• The Commission’s advisers:• Rothschild• Hedra plc• NERA Economic Consulting • Freshfields Bruckhaus Deringer• Mazars LLP• April Strategy Ltd• Hill & Knowlton• KPMG LLP• London Communications Agency

• The Bidders: Camelot Group plc and Sugal & Damani (UK) Ltd

• All those who gave their time to respond to the Commission’s consultations

• Those international lotteries who gave their time to explain how they had managed lottery competitions orundertaken lottery technology changes:• California Lottery• Colorado Lottery• Florida Lottery• Westdeutsche Lotterie• OPAP S.A.• Norsk Tipping AS

• Serco Consulting (formerly Cornwell Management Consultants plc)

• The Office of Government Commerce

• Department for Culture, Media and Sport

210mm 210mm

297m

m

10m

m

Contents

1. Foreword 1

2. Overview and issues for the future2.1 National Lottery 32.2 Competition objectives 32.3 Key milestones 42.4 Delivering a successful competition 42.5 Achievements of the competition 52.6 The Lottery in the third Licence period 62.7 Issues for the future 6

3. Main stages of the competition 3.1 Introduction 103.2 Identification of barriers to entry 103.3 Further work on the options available 133.4 Evaluation of the options and broad structure for the competition 153.5 Drafting of detailed terms of the competition 183.6 Finalisation of the detailed terms of the competition 193.7 Bidders compile and submit Bids 283.8 Evaluation of Bids 293.9 Licence finalisation 313.10 Transition period 32

4. Managing the competition4.1 Introduction 344.2 Project Board 344.3 Senior Responsible Owner 354.4 Project Office 354.5 Quality management 364.6 Risk management 364.7 Managing the evaluation process 364.8 Use of external advisers 374.9 Independent scrutiny of the process 374.10 Gateway Review Process 374.11 Independent process review 384.12 Contingency 384.13 Costs of the competition 394.14 Costs relative to previous Licence competitions 404.15 Costs relative to other comparable exercises 41

5. Issues for the future 5.1 Issues relating to the structure of the competition 435.2 Issues relating to the organisation of the project: Lessons learned 46

AnnexesA Overview of the Lottery 49B The current Lottery 55C Summary of services provided by the operator 59D Bid Notes 61E Description and summary of the Draft Licence 64F Project Board Terms of Reference 72G Independent process assurance report: Serco Consulting 77H Summary of documents produced for the competition 79I Glossary 81

Acknowledgements 82 This document is available in large font– please contact 020 7016 3440 oremail [email protected].

210mm 210mm

297m

m

10m

m

National Lottery Commission101 Wigmore StreetLondon W1U 1QU

Tel +44 (0)20 7016 3400Fax +44 (0)20 7016 3401

www.natlotcomm.gov.uk

© National Lottery Commission 2008

An overview of the Third Licence Competition

April 2008

Creating a Lotteryfor the future

Creatin

g a Lo

ttery for th

e futu

reA

n o

verview o

f the Th

ird Licen

ce Co

mp

etition

Cert no. SA-COC-001768

creating a lottery for the future - gambling commission · 210mm 210mm 297mm 10mm contents 1....

Documents