JOINT COMMITTEE ON FINANCE, PUBLIC EXPENDITURE AND REFORM debate -
Wednesday, 14 Dec 2011

Role and Functions: Discussion with National Lottery

Chairman

I welcome the chairman of the National Lottery Company, Mr. Donal Connell. The Minister for Public Expenditure and Reform, Deputy Brendan Howlin, has given his consent to the extension of Mr. Connell's term of office as a director and chairman of the company. The format of the meeting will be that Mr. Connell will make some opening remarks which will be followed by a question and answer session from members.

I remind colleagues, witnesses and those in the Visitors' Gallery that all mobile telephones are required to be switched off completely as they interfere with the sound production.

I wish to advise witnesses, in this case Mr. Donal Connell, that by virtue of section 17(2)(l ) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. If they are directed by the committee to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or persons or entity, by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing ruling of the Chair to the effect that they should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable.

I invite Mr. Connell to commence his presentation.

Mr. Donal Connell

I thank the Chairman for the opportunity to address the committee.

I am a businessman with an engineering background. I trained as a chartered engineer and I am a Fellow of the Institute of Engineers of Ireland. Before being appointed chief executive of An Post and chairman of An Post National Lottery Company in 2006 I held a number of senior management positions in major multinational companies - 3COM Corporation, Maxtor Corporation and Unitrode Corporation. I was vice president of 3COM Corporation, responsible for the company's manufacturing, distribution and retail businesses across Europe, the Middle East and Africa. My strategy has been to build on the strengths of An Post and its subsidiaries, the largest of which is the National Lottery Company, particularly in the areas of change management, cost efficiency and innovation, in order to maintain and generate the revenue streams and also maximise return for good causes. In the case of the National Lottery Company my approach has been to maintain its integrity and ethos by ensuring an ongoing significant revenue stream.

An Post National Lottery Company is a subsidiary of An Post, 80% of shares are owned by An Post and 20% by the Minister for Public Expenditure and Reform. The National Lottery Company was established in 1986 under the terms of the National Lottery Act 1986 and commenced trading in March 1987. The licence has recently been extended by the Minister up to 30 June 2013 with some key conditions which are similar to those which operated previously. The key licence conditions are as follows: all lottery games require approval by the Minister for Public Expenditure and Reform; operating cost percent and prize percent must be specified, number of agents are controlled; a management fee is paid to An Post; and the Minister owns the assets of the business, including all intellectual property.

The board consists of seven directors appointed by the Minister for Public Expenditure and Reform. Three directors and chair are nominated by An Post and three directors are nominated by the Minister for Public Expenditure and Reform.

Some 2.2 million adults, 63%, are national lottery players. Of those, 1.5 million adults, 42%, play each week. The national lottery has 103 full-time equivalent employees and there are 3,800 retail sales agents. In 2010 it generated €420 million in prize fund, €244 million for good causes, €48 million for agent commission and €60 million for other operating costs. Some 32 cent out of every €1 raised by the national lottery goes towards good causes. Since its inception the national lottery has created 417 millionaires up to the end of 2010 and another 25 in 2011. A total of €3.7 billion has been raised for good causes by the national lottery since its inception, more than €1 billion of which has been raised in the past four years during my tenure of office. Examples of the good causes include Irish Guide Dogs for the Blind, Irish Kidney Association, Wexford Festival Opera, Limerick Youth Service and so on.

In terms of revenue the lotto family products account for 56% of sales. Scratchcards and Internet instant win account for 20%. The lotto continues to be the most popular game for our players. EuroMillions Games continues to attract new players and the new Tuesday draw has made the game even more attractive with jackpots building quicker.

Results for 2010 show that sales amounted to €772 million, prizes amounted to €420 million and agent commission came to €48 million. The total return to the community was €718 million, 93% of sales.

Benchmarking provides some useful comparison in terms of our performance. We looked at how we perform against equivalent international lotteries. In terms of per capita sales, our flagship lotto game ranks fifth within Europe, ahead of bigger European lotteries such as France and the UK. The lotto is also ranked eighth in the world with per capita sales of €129 in 2010, having ranked 37th in 2005. Compared with Camelot in the UK, National Lottery Company sales per capita are consistently 47% and more ahead.

Maximising funds for good causes is one of the key objectives. In this regard the lottery ranks highly compared to our European counterparts with a per capita contribution of €54 in 2010. The National Lottery Company ranked eighth of 41 European lotteries as measured by 2010 funds to good causes per capita, considerably higher than the EU average of €44 and the European average of €29. As an efficiency measure, one of the key indicators of efficiency is sales per employee. In 2010, we generated sales of €7.5 million per lottery employee. This ranks us first in terms of sales per employee when compared with lotteries in European countries of similar size to Ireland.

The product roadmap indicates the changes we have made in the product structure during my tenure. We have rebranded and expanded the number of games from a platform of about four back in 2006 to eight in 2011. We have also rebranded the lottery. We currently offer, Lotto, EuroMillions, and a range of instant win games online. We are also developing the appropriate safeguards and controls to roll this out further. If our players launch an Iphone app, they can check the results of the games. We see the Internet, mobile phone and e-mobile spaces being key components for future growth. We have built the technology during my tenure to provide Lotto and EuroMillions via online and mobile phone with an appropriate selection of instant games. We are using this to attract a new generation of adult players and also working closely with the Department in developing this channel to be consistent with our responsible gaming policy.

An exciting development on which we are working is the world game, as part of the EuroMillions group. This is a new worldwide lottery game concept, which should launch in 2014, approximately, and will deliver a very exciting prize structure that no single lottery could deliver on its own and will enable us to generate significant incremental revenue for good causes. Our social media strategy will strengthen our interaction with players, using these new media channels and we are going to launch our Facebook page in January 2012. We have ramped up digital signage throughout our agent network. By January 2012, about 1,000 of our top agents will have screens featuring jackpot amount and game information throughout the country.

Since its inception, the national lottery has raised €3.7 billion for good causes. During my tenure, that sum is over €1 billion. I hope I have demonstrated that I have a track record of innovation, driving efficiency and crucially in the successful formulation of strategy.

Chairman

Thank you, Mr. Connell. We have about an hour for questions.

Deputy Timmy Dooley

I welcome the presentation by Mr. Connell. I concur with his last statement. He has done a fine job during his period of stewardship at An Post and with the national lottery.

While his appointment would appear to be in train, there are significant proposed changes in the operation of the national lottery. I want to tease out his views on these points.

Mr. Connell has considerable experience of the lottery industry. Has he any concerns about the capacity of the licence auction to generate the upfront payment of between €400 million to €500 million, which has been identified by the Government? Does he believe that is possible or feasible in the current climate? Clearly upfront payments for the purchase of a licence come with significant funding costs and obviously that will have to come from two sources, either a reduction in the money that will be available at a later stage for good causes or a requirement to broaden the overall pool of money that is generated by the lottery. If that is the requirement to generate additional funding, does he see the necessity to expand into other gaming products, which are part of the lottery, such as daily Keno, daily drawings and daily numbers which in the minds of many move away from the protected ethos of the games that the national lottery provides? Is he concerned that this will be a requirement on the successful bidder, that in order to meet the target, it will have to broaden its player base, expand into other markets and effectively make the national lottery a gambling platform rather than the restricted practice under which it currently operates? Clearly we are all very conscious of gambling and gaming. It has been said that gambling is a tax on the poor. That was the reason for the concern about the establish of the national lottery. It has been managed in a careful and controlled way and because it is in State ownership, it has been protected.

Is Mr. Connell concerned about the State's capacity to retain a control over the gaming structure of the national lottery if it were privatised?

Mr. Donal Connell

In terms of the new structure announced by the Minister, as regards the value and the pricing, much depends on the details, which will be published in the first quarter of next year. It represents a substantial change, but the changes are such that they will be value upfront, for example, the extension of the term to 25 years and also the potential increase in terms of the operator's fee. All of that will represent value upfront, but it is difficult to comment any further until the details emerge. An Post is committed to making a bid for the new licence, depending on the actual details that are announced and the level of money required upfront. We may or may not enter into a partnership to do that.

I take the Deputy's point about responsible gaming and so on. An Post and the national lottery are always very conscious of that and we have a policy that reinforces it. We are audited each year by an external group which focuses on our responsible gaming policy. That is something that we would continue in any new structure. I imagine it would be possible to control that, if someone else were to be in that position. We are very interested in winning the licence bid. We have an excellent track record that speaks for itself and we intend to put forward a bid on that basis.

Deputy Timmy Dooley

The cost of the upfront payment is being set to some extent by a requirement to build a particular hospital, which sets the parameters under which the bid will have to be made. There are two aspects, the cost of that funding, which has to be paid for from somewhere. I am talking about the cost of funding rather than the principal sum, which will impact on the capacity to provide the same level of money from the pool to good causes. The bidder may seek to get around that by offering a broader level of gaming that will appeal to a wider audience to fill the gap. My concern is that it would appear that the overarching requirement is to reach a particular sum of money and that is what will drive the standard of the games that will follow. In particular, I am concerned that in an effort to reach that level, some competitor will come to the marketplace with a broader game offering that takes the national lottery into more mainstream gambling. I would welcome suggestions on how to ensure that would not happen. In that context, has the Department or the Minister conversed with the national lottery to get a better understanding of the marketplace for a privatised licence holder?

Mr. Donal Connell

We believe there is opportunity in the e-mobile and online space for an extension of revenues from their current level, without in any way breaching the standards we have established for over 20 years in responsible gaming. There is some scope. The Minister also indicated in very general terms that there might be an opportunity for a minor reduction of the prize percentage payout which would also contribute. There are things that can be done in that direction. It really depends on the details.

The Department of Public Expenditure and Reform is the regulator and it is obliged, under current legislation, to approve each game. I presume this will remain the case in the context of any future changes. Regardless of who is the operator, there is a structure in place whereby each game and each venture into new channels - if that makes sense - would have to be approved by the Department. I imagine that this safeguard would be retained even if we were not involved. From our perspective, it obviously would be much better if we were involved. However, I am of the view that the existing structure would remain in place.

The Minister's officials engage with us very frequently in respect of the running of the lottery. They see our monthly results and every game is approved by them. They are, therefore, quite familiar with our business. As is the nature of these matters, there will be a bid process. The Department is well aware that the National Lottery Company will be a bidder so in order to ensure objectivity there must, so to speak, be a firewall in the context of its interaction with us. The Department is very familiar with our business and we will be happy to provide, in line with the rules relating to the competition, any other advice its officials wish to seek.

Deputy Liam Twomey

Mr. Connell is stating that An Post will be bidding for this licence if the national lottery is privatised. The figures provided indicate that national lottery ticket sales bring in €800 million per year.

Mr. David Connell

It is €772 million.

Deputy Liam Twomey

One could almost state that the company's profit - for prizes and good causes - is close to €700 million per year. The National Lottery Company must already have done a great deal of work in the context of researching what the privatisation of the national lottery would involve. Would a 10% margin be expected on profits? If the company's business were to continue and if its turnover reached €1 billion in a couple of years' time, the profit involved would be €100 million. From where would that profit come? Would there be a split between prizes and good causes? How would the good causes aspect be affected? If the price that is paid for the national lottery is high, there is a possibility that the amount devoted to good causes could be dramatically reduced. How much research has the National Lottery Company done in respect of this matter?

Reference was made to gambling becoming a problem. The more accessible it becomes, the greater will be the problem. Mr. Connell spoke about the company improving its turnover and referred to using the Internet and iPhone apps in this regard. The latter would give people greater access to gambling and could lead to their becoming addicted to it. When one discusses this matter with those who deal with addiction, one gets the impression that until now the National Lottery Company seems to have had a reasonably clean record in this area. Perhaps that is due to the fact that access to its games are limited. Would addiction become more of a problem if the company were operating on a private basis rather than, as is the case at present, being under the control of the Government and being quite limited in the context of what it can do?

Mr. David Connell

On the Deputy's first question, it will really depend on the details of the Minister's proposal. If I am correct in my understanding of the new licence, there will be an operator's fee involved - this would go to An Post, if it remains the operator - of in the region of 6% of revenue. In the context of an overall amount of approximately €800 million, the fee would be €48 million. This is a substantial increase on the current figure of €2.8 million. This increase, coupled with the proposed extension of the term of the licence to 25 years - the duration of the original licence was just seven years - will definitely attract sufficient value to warrant some type of up-front payment. The Minister will specify the percentage payouts that would be desirable in the context of prizes and good causes. These matters are all usually specified in the terms of the licence. The operator is obliged to operate within the cost base. I imagine this is how it will be done going forward.

The Deputy referred to extending the revenue into other areas. The An Post National Lottery Company is very conscious of its responsible gaming policy. We have a good track record in this regard. In April the company was audited by Deloitte, which certified it as meeting the responsible gaming standard set down by the European Union. We have invested a great deal of time and effort in training our agents to uphold our responsible gaming policy. There is an extremely rigid process by means of which we can verify that people who play our games on the Internet are over 18 years of age. We also ensure that the amount of time people can spend playing these games on a daily and weekly basis is reasonably low. That is the kind of ethos the company has adopted. I anticipate that similar standards would be required of whomever runs the lottery in the future. The extension of revenue into the other areas to which the Deputy refers should be always done in that context.

Deputy Mary Lou McDonald

The National Lottery Company's track record is admirable. The national lottery is an example of the State doing something very well. I commend Mr. Connell and his staff on their efforts in this regard. In view of the company's success, therefore, a question obviously arises as to the wisdom of examining the possibility of diluting or compromising the State's interest in the lottery in any way. I wish to ask Mr. Connell a very direct question. In terms of the return that accrues to society via the good causes the National Lottery Company supports, what is the win for those causes in changing the terms of the licence and moving to a privatised model? Is there such a win?

Mr. David Connell

I thank the Deputy for her comments. The details are rather scant but the Minister seems to be directing that the prize payout for good causes will be maintained at its current level. He has also indicated that there might be scope to reduce the prize percentage payout by a couple of points. By doing this, there would be a great deal more value in the licence than would be the case under the current structure. The intent would be, therefore, to make it attractive for an up-front payment but also to continue the payments in respect of good causes. As I understand it, that is the general direction in which matters are moving at present.

Deputy Mary Lou McDonald

I accept that and I understand Mr. Connell is in a position where he is being asked to answer questions which come within the remit of the Minister. I wish to tease out this matter to some degree. Does the value then reside in the up-front payment? Will that be the win for the State? Extending the term of the licence might increase commercial interest in it but it will do nothing for the average lotto player, who does not concern himself or herself with the length or otherwise of the licence. The latter is not something which influences consumer behaviour.

Mr. Connell is better placed than anyone to comment not on the specifics of the proposal which the Minister might bring forward but rather on the concept behind that proposal. Will he indicate whether there will be an extended licence and whether a private commercial interest in this matter would represent a net gain or benefit for the good causes which the national lottery has so admirably supported over the years? In the context of the capital programme and the funding for the new national children's hospital, the issue of support is almost additional in nature. I presume there would be a once-off transmission of funding in respect of this project.

It may seem simplistic to say so but I am of the view that the adage "if it ain't broke, don't fix it" comes into play here. The company's track record speaks for itself. It is obvious that the licence must be renewed. Save for the element of the upfront payment of whatever size, I do not see a win in that regard. An increase in the operator fee, which is currently €2.8 million-----

Mr. Donal Connell

Yes.

Deputy Mary Lou McDonald

-----and Mr. Connell speculated it could be anything up to €48 million, brings us into very different terrain. Obviously, this could be a lucrative day out for somebody. I would need a great deal of convincing that the winner would be the taxpayer, the citizen or good causes. Without trying to read the Minister's mind, will Mr. Connell give his view on that change of model as it relates to the endgame, which is to support community and voluntary effort?

Has Mr. Connell discussed this matter at board level? I assume his staff are watching that space closely. What conversation has been had with the Minister in respect of the 103 staff? Have reassurances or guarantees been given in respect of their employment?

Mr. Donal Connell

In terms of the first part of the Deputy's question, it is difficult for me to comment without more details on the new model going forward but as I understand it the upfront payment is the gain for the Exchequer. It is a frontloading of a payment that is not in the current model and therefore, as I understand it, to make that attractive there must be an increase in the operator fee. The Minister had indicated something in the region of 5% or 6%. That is the general direction, and also a desire to keep the contribution for good causes on an annual basis at the same level. That is the thought process regarding it, as I understand it. That is a new departure and it is something we are interested in bidding and working on but as I understand it, that is the general direction in which the proposal is to move.

Deputy Mary Lou McDonald

I do not want to put words in Mr. Connell's mouth but he is generally supportive of the idea, whatever about the detail, the Minister is pitching.

Mr. Donal Connell

Yes, that is correct.

Deputy Mary Lou McDonald

Is that because he believes the good causes and the taxpayer will benefit from this new model?

Mr. Donal Connell

Yes, that is correct. As indicated, there can be a benefit in that if the terms are changed in the direction indicated it will make it more attractive and make some type of upfront payment feasible.

Deputy Mary Lou McDonald

I am not being picky but am trying to get my head around this, so to speak. Obviously, an upfront payment to the State in these straitened times could be viewed as a positive but that must be balanced against a massively ramped up operator fee if it is somewhere in the region of 6%. It would want to be one hell of an upfront payment to the State, would it not?

Mr. Donal Connell

Yes.

Deputy Mary Lou McDonald

I cannot do the mathematics here and I do not have a calculator but we are looking at a very large sum.

Mr. Donal Connell

Yes, we would be looking at a large sum and the value depends on many factors, not just the lottery business, markets and so on.

Deputy Peter Mathews

Would it be in the order of €600 million?

Mr. Donal Connell

It could be in the order of hundreds of millions of euro, yes.

Deputy Peter Mathews

I pick that figure because 6% of the current turnover levels is approximately €45 million and if one multiplies that by 15 one gets a yield of 6%. We are talking about €675 million.

Mr. Donal Connell

Yes, and that is the range that has been indicated by the Minister also.

Deputy Mary Lou McDonald

In terms of the current staff, this will be a big change. Will it represent a material change in their employment contracts? Has there been any discussion at board level about the staff?

Mr. Donal Connell

Yes, there has been a discussion at board level. We have met employee representatives and employees in general. We discussed this matter with the Minister's representative also. In terms of the position on that, as far as I am concerned the best case scenario is that An Post wins the bid because there will be no change from an employee perspective. If that does not happen, the lottery has an excellent track record and a great bunch of employees who would be a great asset to any new bidder coming in who may wish to take on most of them. If that does not happen, there is protection under the transfer of undertaking (protection of employee) regulations which will apply. In addition, the majority of them are An Post employees on secondment, which is another factor that would come into play. We have met employee representatives who asked questions of us, and we have discussed it both at lottery board level and An Post board level. We have also held discussions on it with the Secretary General in the Minister's Department.

Deputy Timmy Dooley

I understand that some lotteries in the United States have made it a requirement of the bid process that, where it is being privatised, the employees who were part of the state structure became part of the offering to the new company, in other words, the new company had to take them on. In Mr. Connell's discussions with the Minister it would be helpful if he could have that-----

Chairman

As Mr. Connell mentioned, there are protections under the directive in any event.

Deputy Timmy Dooley

To go back to An Post-----

Chairman

If it qualifies as an undertaking, the transfer of undertakings regulations should apply. It is not certain but they should apply.

Deputy Richard Boyd Barrett

I was one of the people who was sceptical when the lottery was set up in that it was a tax on working class people and promoted gambling. I have to acknowledge that it has turned out to be the most benign form of that, probably because it is held a few times a week and the way it is done does not seem to be tied in with the serious and rampant gambling culture which is becoming an increasing problem. My concern is that if it is privatised, and I would like to hear some words of assurance on that, there will be an incentive for the lottery to promote less prudent gambling. I do not see how that cannot be the case if the operator fee increases, and Mr. Connell is suggesting it is possible for a significant increase in the operator fee but there will not be a diminution in the number of prizes given. There must be some other way to make up the difference. One possibility is that it promotes greater access to gambling and if we are talking about online gambling, as far as I am concerned that is one of the most dangerous forms of gambling gripping our society because of the ease of access.

Mr. Connell intimated that he might be able to offer products through phones and so on. That worries me. It would worry me that a more privatised operator under less Government regulation and control, and less accountable to the Government, might be much more reckless in the way it made money. I am not sure Mr. Connell can give me assurances on that but I ask him to have a stab at it and tell me that will not be the case. If that is the case, I do not understand how the entire operation will not run at a loss or that there is not a serious danger of a loss to the players of the games, possibly in terms of prizes because the pressure comes from that front but, more importantly, on the question of moneys for good causes and the way those moneys are dispensed. There is a certain level of accountability, when it is closer to public control, as to how much money might go to good causes and how we decide the good causes.

Issues of conflict of interest are more important the further the lottery moves away from public regulation and control. Without impugning the integrity of future possible operators, cronyism becomes a possibility in such a situation. I am not saying cronyism is not possible in the public realm, but there is a little bit more control and accountability. How much was the operator fee last year?

Mr. Donal Connell

It was €2.8 million.

Deputy Richard Boyd Barrett

The Minister is now talking in the realms of-----

Mr. Donal Connell

The Minister has indicated in the region of 5% to 6%. The details will emerge, but-----

Deputy Richard Boyd Barrett

It is in the realms of 5% to 6%. My next question is not meant to be personal, but in these times when everybody's salaries are being examined, how much is Mr. Connell paid? How much do the executives and the directors get paid? How many people in the national lottery company are being paid in excess of €100,000 per annum? Are these the kind of jobs where we could see upward remuneration if the company was privatised? I think Mr. Connell is recommending this course of action. Has he been given strong indications from the Government that the company is one of those State assets it is moving to sell? How much does the Government expect to realise from that sale?

Mr. Donal Connell

I will deal with the last point first. The change in the new licence is something for the Minister to decide. He said that it is a new licence. The lottery company per se is not being sold, but rather the licence is being put up for competition.

The first part of the Deputy's question relates to good causes and how the funding for that might work. I imagine that the same structure would continue whereby the money is remitted from the lottery to the Government every week and is then dispersed by the Government to good causes. That would continue regardless of the operator, so I envisage that the same type of control would be maintained in that situation. It has been indicated that there might be scope to reduce the prize payout by 1% to 2% in order to balance the numbers a bit more.

We are very conscious about responsible gaming, and I thank the Deputy for his comments that we are relatively benign in that context. We adhere to the European lotteries responsible gaming policy. We take this policy very seriously and we are audited externally on that basis. I imagine that a similar practice would need to take place with anybody who might be operating the lottery in the future. This includes the training of our agents. We are currently trialling online games and an e-mobile channel, and we are very conscious of controlling access to that. We have a rigid user registration process and we do not want in any way to contribute to the gambling problem out there.

In respect of salaries, I have agreed to the reduction requested by the Minister. That leaves my salary at €328,000 per year. I think there are four salaries in the national lottery above €100,000. I will check that precise number.

Deputy Richard Boyd Barrett

How much went to prizes last year?

Mr. Donal Connell

A total of €420 million.

Deputy Kieran O’Donnell

What type of contingency plans has the company if it is not successful in bidding for a new licence? It has 103 staff employed. What view has the board taken and what kind of strategies has it put in place? What is the make-up of the current board? How long have people been on the board?

Mr. Donal Connell

I have been on the board for five years. The chief executive has been on it for six years. There are several external members who have been on the board for periods of over ten years down to one member who has been on it for less than one year. There are two vacancies at the moment which are in the process of being filled.

Deputy Timmy Dooley

Has Deputy O'Donnell got the runners and riders?

Deputy Kieran O’Donnell

We are lacking in experience in that area.

Deputy Timmy Dooley

I would not say that to Alan Shatter.

Chairman

Order, please.

Deputy Timmy Dooley

I would be keeping an eye on that one.

Deputy Kieran O’Donnell

Has it been discussed at board level what would happen if the company was not successful with a new application?

Mr. Donal Connell

We have discussed it at board level. It is early days yet and I would like to say that we are determined to be successful. We want to win this. In the event that we do not, employees are likely to be protected under transfer of undertakings. The vast majority are An Post employees on secondment, so there would be some level of protection there. If some other company wins the bid, the employees at the company would be a great asset to anybody who wanted to operate the licence.

Deputy Kieran O’Donnell

Has Mr. Connell been chairman of the board for five years?

Mr. Donal Connell

Yes.

Deputy Kieran O’Donnell

How does he feel about the direction the industry has taken and what changes would he like to see in the way it operates?

Mr. Donal Connell

Probably the big development in the last five years has been the advent of online and e-mobile games. It is happening, to a greater or lesser extent, in all jurisdictions. Some of the Scandinavian countries have a looser legislative regime and sales from the sector can amount to up to 15% of revenue. This is probably the biggest single development that has taken place.

We have introduced a range of different games and we have changed the design of the games. For us in An Postthe advent of e-mail, e-mobile and new products that are offered through online technology are significant.

The other thing that is significant in society generally, and a few Deputies have mentioned this, is the advent of online gambling. It is a big development and we all know the names of famous companies that are engaged in it. All of that has changed the environment in which the lottery operates.

Deputy Peter Mathews

I thank Mr. Connell for attending the joint committee. It is interesting to hear and see how it all fits together in an overview. Page five of the slide presentation contains headline figures for 2010: sales at €772 million, cost of sales €86 million. I presume those are mainly agents' fees. I would ask Mr. Connell to think about those figures for a second. If sales are at €772 million, on average the funds under management would be half of that in a year, at €386 million, before distributing the prizes. There would have been interest earning of 4% on that, so one would expect to see a figure of about €15.5 million for investment income. Would that be right?

Mr. Donal Connell

Yes, in principle that is correct. In fact, however, we remit the money every week to the Department of Public Expenditure and Reform, so we do not actually invest that money.

Deputy Peter Mathews

It is not income then, really.

Mr. Donal Connell

No. We have no investment income.

Deputy Peter Mathews

I see that the contribution to good causes is €244 million. Under the proposed or considered arrangements, it would normally stabilise at that. Is that not right?

Mr. Donal Connell

Yes.

Deputy Peter Mathews

The owner of the licence would earn revenues of 6% of €772 million or €800 million, which would be about €45 million a year. Would it absorb the €22 million operating costs or would they just be evaporated costs?

Mr. Donal Connell

I am speculating somewhat here, but I imagine that the new operator would have to absorb those costs.

Deputy Peter Mathews

Maybe half or all of them.

Mr. Donal Connell

Yes, they would have to absorb those costs at ground level.

Deputy Peter Mathews

That might bring back the cost of their licence. Instead of €765 million it would be back to €600 million or something.

Mr. Donal Connell

Yes.

Deputy Peter Mathews

Lastly, one of the safeguards-----

Chairman

Before Deputy Mathews puts another question, does Mr. Connell wish to add to that?

Mr. Donal Connell

There are other factors that will affect that because, as we all know, the markets are very changeable nowadays. All those factors, including what type of long-term return investors or companies will get from an upfront payment, will come into play at the point where it actually happens.

Deputy Peter Mathews

As we know, sovereign debt is about 7% for ten years, but it used to be about 3%

Mr. Donal Connell

Yes.

Deputy Peter Mathews

Therefore I was thinking of a 6% or maybe a 6.5% return.

Mr. Donal Connell

Yes.

Deputy Peter Mathews

The matters touched on by Deputies Richard Boyd Barrett and Mary Lou McDonald included concerns about gambling and its visibility. One of the safeguards of the lotto is that in order to buy tickets, a person must do so visibly in a public place. The purchaser must be over 18 and there are easily observed rules of the game, which is good. Once one goes online or through an iPhone, however, the anonymity and encouragement to gamble is heightened enormously. I am voicing my concerns in that regard. The status quo is good. The ESB had a game which resulted in about €3.5 million in interest earned through collection from its debtors. The company introduced a win a car competition if customers paid their bills on time. A wall of cash of about £40 million was collected in 1981 and 1982 and deposited at the then interest rate of 8%, which amounted to £3.2 million. The cost of 12 cars was nothing by comparison. It just shows the huge appeal of a game or a raffle win.

Mr. Donal Connell

I absolutely understand the concerns about online gaming which has different characteristics, as the Deputy indicated. It is important to have a responsible gaming policy that is taken seriously in the company and which is also regularly audited externally. That plus continuing Government approval of each game as it is announced or launched and entry into each different channel is perhaps the best way to continue from a national policy viewpoint. It is the best way to control that going forward.

Deputy Peter Mathews

Without putting a tooth in it, I would say "No" to online gambling and iPhone stuff as a point of policy for the country.

Chairman

The impact is quite small.

Mr. Donal Connell

Yes, it is quite a small activity. It is about €3 million to €4 million per year. We are doing it on a trial basis. It is in conjunction with the Department in terms of carefully maintaining safeguards and controls.

Chairman

Is this through credit cards?

Mr. Donal Connell

Yes.

Deputy Peter Mathews

I would really be concerned about that. I consider it my duty to say that it is the thin end of an unacceptable wedge.

Deputy Richard Boyd Barrett

I agree.

Chairman

Mr. Connell might take note of that point, which is the view across the joint committee.

Mr. Donal Connell

Yes, I understand that, Chairman.

Chairman

It is a trial process at the moment. Is that right?

Mr. Donal Connell

Yes, it is a trial process.

Deputy Sean Fleming

First of all, I welcome Mr. Connell to the joint committee. I think he is an excellent man for the job we are discussing today. He has done a good job on the lottery so far and also a difficult job at An Post.

I wish to raise two specific topics, the first of which is the one we have just been discussing. I will be upfront about this. I had the privilege of visiting Mr. Connell's head office some time ago to meet some of the senior officials because I had some concerns about the issues that have just been raised by Deputy Mathews. It was an eye-opener for me to realise at that stage that there was a trial run for people gambling or playing the lotto games online. Mr. Connell might help to allay some of the fears by stating that people must register, produce ID and that there are daily, weekly and monthly limits. If such limits were applied, a person could not blow €2,000. Perhaps Mr. Connell could give us that information on safeguards.

Mr. Donal Connell

Yes.

Deputy Sean Fleming

I still have reservations. Maybe the likes of us are not gamblers by nature and that is probably why such reservations emanate from boring accountants and bankers who only play when it is for big money.

Deputy Jim Daly

The Deputy should speak for himself.

Deputy Arthur Spring

The Deputy cited two professions in which many gamblers were involved.

Deputy Sean Fleming

I am just making the point that some people are more inclined to gamble than others. Those who are probably not averse to betting would be more nervous about online gambling. I know of young people who have committed suicide because of gambling debts, although not through Mr. Connell's outfit. I am very concerned about that because gambling is an addiction like drugs and drink. We must put that on the record.

I was surprised to know that Mr. Connell was working so closely with the Department of Finance which is agreeing the policy. I was unaware that the Department of Finance was working hand in hand on approving this. Maybe that is where the market is at. I do not know, but I was a bit surprised. Perhaps Mr. Connell could fill us in on the details.

My concern is that if one is in a competition, whoever wins it, one will be looking at international standards in this area. I know Mr. Connell has a responsible gambling policy, but what are the current limits on the people the National Lottery Company has registered for online games? How many people are there? What are the limits on the amounts people can bet in a month with the national lottery compared with its counterparts in other EU countries or lotteries around the world? Mr. Connell has great comparative statistics, so I presume he knows about these type of figures. The National Lottery Company might be starting off on safe ground, but what is the big picture out there in which we could find ourselves in a couple of years?

That is the first topic and I have one other question after that.

Mr. Donal Connell

I have mentioned that before, but I will reiterate that we have strict control on the age check to validate that the person is over 18. We have to see a photocopy of a driving licence or passport to validate that. That is a crucial control. We have tight spending limits in place: a weekly limit of €300 or a monthly limit of €900 via this method. I do not have international numbers with me, but that does compare reasonably favourably with what obtains elsewhere. We do keep account histories, which are available, so we would spot any odd behaviour. We would spot compulsive behaviour. We have exclusion options and people can be excluded if undesirable behavioural patterns become evident.

Deputy Sean Fleming

Approximately how many are registered?

Mr. Donal Connell

Approximately 15,000.

Deputy Sean Fleming

Where did they hear about it? It is news to some that it can be done.

Mr. Donal Connell

It is on our website.

Deputy Peter Mathews

I imagine they are predominantly young people under 30 years of age.

Deputy Arthur Spring

I believe syndicates are using it more than anyone else. If a person puts his or her name forward, which entity is the legal owner? This must filter through. Anybody who has worked in the retail sector knows that somebody with a syndicate in a firm - perhaps the country should partake - needs to be clocked in on a regular basis. Those at the desk do it for a group.

Deputy Sean Fleming

Light has been shed on the issue. I am concerned about the beneficiaries, although they may be outside the control of Mr. Connell. It has been stated €244 million was distributed last year. The National Lottery Company sends the money to the relevant Department from where it is distributed. I am sure in every survey people indicate they play the game because they know it helps a good cause, but has this been put to the acid test? I suspect the level of transparency with regard to good causes has diminished in recent times. That has nothing to do with the National Lottery Company, but there is a consequential effect. The sports capital grants scheme has not been run for the past couple of years, although there is still funding available to meet commitments. With no new projects, people do not see on the ground where the money is going.

I have noticed in some departmental Estimates during the year, including those for the Department of Finance, funding which might be for housing or recreational facilties part-funded by the national lottery. I have tabled parliamentary questions to find out what are the projects under various headings in the Department of the Environment, Community and Local Government, but I have been unable to obtain answers. I was told the funding was placed in a subhead, but there were no specifics of the projects part-funded by the National Lottery Company. Nobody could tell me how much or how little went into each project.

On the governance side, there is a lack of specifics. If we had everything right, when the National Lottery Company gives €244 million to the Department, it should be possible to receive a report on every project on which money is spent. Could this be done? I could not receive that information in answer to parliamentary questions to Departments. We have seen the photo shoots, but the information is being lost in Departments. We could identify many specific projects and collectively would be able to pin down half of the funding, but much of the rest of it seems to be lost in the HSE budget. It may be used to fund the surfacing of roads into hospitals and so on. I am amazed that when a hospital needs to have a boiler repaired, there are no funds available, yet we hear later that the money will come through in lottery funding from the Department of Health. These are good causes, but the money seems to be subsumed in some Departments. This is not helping the National Lottery Company in the long term.

Mr. Donal Connell

We are anxious to receive full credit on where the money is going. Members may have noticed that we try to have our logo associated with particular sports events. We have a comprehensive idea of where the money is being spent, but it is transferred to the Government which decides where it goes. An important part of our success is that people realise the money goes to what are generally good causes. I agree with the Deputy in that we are anxious to get our name out there.

Chairman

Is the quality of information in the possession of the National Lottery Company on the destiny of funds better than what Deputy Sean Fleming and the rest of us is able to get by way of questioning the Government? That is what the Deputy is wondering.

Deputy Sean Fleming

I gave an example. People did not understand what I was describing was the case.

Deputy Peter Mathews

What is the ultimate destination of the money raised?

Mr. Donal Connell

We have a good idea of where it goes, but I would not say there is a full accounting audit trail.

Deputy Peter Mathews

Would Mr. Connell know down to the last €50,000?

Mr. Donal Connell

Our role is within the remit of the Government which must account for the funding. That is the structure in place. We are interested in knowing where the money goes to receive appropriate credit from a marketing perspective and have our name associated with it. Our role is not to check each entry, as we are not responsible for the accounting.

Deputy Jim Daly

I welcome and commend Mr. Connell. It is rare that a guest to the committee meets with such universal acclaim.

Mr. Donal Connell

I thank the Deputy.

Deputy Jim Daly

That is no mean achievement. I do not want to sound like Scrooge in the run-up to Christmas with this question, but it does grab one's attention. If there is a pot of €420 million to be given in prizes every year, has the issue of taxing prizes ever arisen and what are Mr. Connell's thoughts on it? On a quick inspection, I am not sure a modest 10% tax would turn many off and the availability of €42 million could have spared much pain in the recent budget. I do not want to devalue the licence if it is to be sold by the State, but what are Mr. Connell's thoughts on the issue, as I am sure it has come up? I know that in many other countries lottery winnings are taxed.

I am not sure I fully concur with Deputy Sean Fleming when he indicates many play the lotto because they know it supports good causes. If they wanted to do this, they could support the various causes directly. People play the Lotto to win a prize. I do not want to rain on the parade by talking about taxing winnings, but the sum of money involved is sizeable.

Mr. Donal Connell

I thank the Deputy for his kind comments. Taxation policy is a matter for the Government; it is not the role of the National Lottery Company, as the Deputy appreciates. I have mentioned that we have created in excess of 400 millionaires since the inception of the national lottery, but there have also been hundreds of thousands of small prizes won. The average prize is quite small. If there was to be a tax on winnings, it would make it a little less attractive for those who play and the risk is we might raise less revenue and generate less money for good causes. We need to bear all of this in mind.

Chairman

Mr. Connell is not wildly enthusiastic.

Mr. Donal Connell

No.

Deputy Jim Daly

I appreciate that taxation policy is an issue for these Houses, but would it severely impact on the commercial viability of the national lottery? It should be considered, especially for some of the bigger prizes. I know everything is relative in the case of smaller prizes. Is Mr. Connell aware that winnings are taxed in other countries? I am not certain that has had a negative impact. Has a study been undertaken or a comparison made with fellow EU member states? I am interested to know if the National Lottery Company has considered this option or if it has been discussed.

Mr. Donal Connell

Anything which would depress the value of winnings for players would impact on our revenue performance. One of the reasons we have improved our growth performance in per capita terms in the past few years is there has been a change in the design of the lotto numbers which has resulted in bigger jackpots which attract more revenue. We have not modelled the impact of a taxation charge on winnings or the national lottery’s performance as it is a policy area in which we are not involved. Most other countries would have a similar structure to ours and operate very much in line with what we do. There are widely varying behaviours internationally. Some international lotteries do not pay out one big lump of millions but pay it out per year as an annuity. This attracts a different tax treatment. When one compares like with like internationally, one will find they are all like this.

Chairman

I thank Mr. Connell for attending and for being so attentive to the questions posed. That concludes our discussion. Is it agreed that the committee will inform the Minister for Public Expenditure and Reform that it has concluded its discussion with Mr. Connell and that we will forward a copy of the transcript of the meeting to the Minister for his information? Agreed.

I wish all colleagues a happy holiday. We will have a busy year next year.

The joint committee adjourned at 4.45 p.m. until 2 p.m. on Wednesday, 11 January 2012.