Public Disservice

The way the Lottery licence bids have been handled exposes major problems in marketing public/private partnerships and confusion in the Labour Party over how far it should go to embrace private enterprise. Tony Blair can only hope he doesn’t have another Dome or Railtrack on his hands.

Choosing the next National Lottery operator should be a straight-forward enough task for the five commissioners charged with making the decision by June.

On the face of it, they need to compare the bids received yesterday (Tuesday) and decide which one is likely to bring in the most money for good causes. But for Lottery Commission chairman Brian Pomeroy and his team there is an added complication. They also must ensure the next operator does not alienate public support through excessive executive salaries and profits.

Camelot’s &£500m profits through its existing seven-year licence and the fat-cat bonuses earned by its executives have outraged the public. The Commission accepts that directors’ remuneration “can affect public perceptions, and possibly affect play”.

Their task is not made any easier by Government confusion over the issue. The commissioners insist they will choose the operator solely with reference to the 1993 Lotteries Act, as amended in 1998. But insiders say it would be unusual for a non-departmental government organisation such as the Lottery Commission to make its decision without reference to the wishes of a Government minister.

Culture Secretary Chris Smith, who is responsible for the Lottery, has dropped the Labour Party’s manifesto commitment to ensuring a not-for-profit operator gets the licence. Even so, he still believes excessive profits could damage the Lottery’s standing. But who knows what preferences he may have expressed in private meetings with the commissioners?

Smith’s confusion over what type of operator he favours highlights muddled thinking within the Labour Party about its attitude to private companies running public services.

Camelot has made strenuous efforts to shed its fat-cat image: cutting directors’ bonuses, halving its profits and recreating itself as a more socially-responsible organisation. But Richard Branson’s “People’s Lottery” insists these efforts have come too late, and have little credibility. If its not-for-profit bid wins, it claims it will dispense with the fat-cat issue for good and ensure public support for the Lottery. This would make the Lottery more attractive to players, increasing ticket sales.

Fat-cats’ charter?

The way private companies run public services is an issue that affects many of the UK’s greatest projects. The Lottery has been plagued by claims that it is a fat-cats’ charter and a licence to fill the pockets of private shareholders. Meanwhile, events at the Millennium Dome highlight conflicts between public servants and private sector executives, and the bitter – sometimes farcical – clashes between different approaches.

One insider says public sector confusion can be seen in the way the Dome was presented as a project costing &£758m. He adds: “How do you position the costs? Building the Dome and putting everything inside cost about &£268m, but the New Millennium Experience Company decided it had to state the total cost, including the cashflow. It all got mixed up because Peter Mandelson [then the minister responsible for the Dome] did not understand how companies use their balance sheets. People have focused on the &£758m cost, which seems like such a lot of money.”

As Labour promotes the idea of extending partnerships between the public and private sectors, the hard task of selling such joint ventures to the public is one that few have managed to do successfully.

Part of Camelot’s attempt to re-engineer its public image was the hiring of campaigner Sue Slipman in 1998 to carry out a “warts and all” social and ethical audit of the company – to be published in April.

Slipman told Marketing Week: “Social reporting has got to be at the centre of the Government’s agenda of public/private partnerships. People are not going to move on until they feel comfortable with these partnerships.”

Camelot is bullish that its new-found sense of responsibility and record of running an efficient Lottery make it unassailable as an operator.

The consortium includes Gtech, which runs 70 per cent of lotteries globally and is considered the world’s top exponent of lottery games and systems. The Post Office, which will join the consortium if Camelot wins the licence, brings a stodgy respectability to the bid, as well as its 19,000-strong retail chain. Cadbury’s experience with retailers – particularly the all-important corner shops – is another advantage.

The proposed &£1bn investment over the seven-year licence period – double the current figure – means more money will be spent on marketing, advertising and technology.

The People’s Lottery, on the other hand, will use the lottery expertise of Gtech’s smaller rival AWI. The masterstroke of bringing in Microsoft to oversee the software of PC-based Lottery terminals gives the Branson bid credibility, and Microsoft’s name parries fears that the system could crash during the changeover. Memories of the Passport Office fiasco last summer are still fresh in Government minds.

The tie-up with beleaguered cereal manufacturer Kellogg – which recently confirmed it was to make own-label products for the first time (MW last week) – gives the People’s Lottery access to both the cereal marketers’ retail experience and the field salesforce CPM, which will be useful for its experience of CTNs.

Branson claims the bid has adopted a “best of breed” approach, choosing the best possible suppliers from each area.

His team approached Gtech about running a joint bid, but Gtech said it was already wedded to the Camelot bid. Nevertheless, Gtech does not rule out switching sides if Branson wins. A Gtech spokesman says: “As this is hypothetical, we cannot rule it in or out.”

The People’s Lottery also approached Mars – the retail partner in Branson’s last bid – but it declined to take part. Its interest last time was spurred by worries about the effect Lottery sales would have on sales of countlines – fears that have turned out to be unjustified.

The Post Office was also approached by Branson’s team. Director Jerry Cope says: “We spoke to Branson and lots of other people, but our own evaluation was that Camelot is going to win.”

Even so, according to Branson’s team, Camelot’s efforts to show its socially-responsible side have come too late and the company is permanently tarred with images of greed.

One observer says: “Branson is successful because he runs a business, but no one perceives him as wanting to make money. He’s got the commercial messages absolutely correct.”

Branson already embodies an image – true to life or not – that he is responsive to public opinion. In fact, he has made a career – and several fortunes – running rings around the great ogres of capitalism, whether it be British Airways, BT or the financial services industry.

Reinventing Camelot

While Branson has correctly positioned his bid with a view to garnering maximum public support, Camelot has had to reinvent itself. The consortium is made up of some deeply conservative companies for whom playing to the public stage and changing their image does not come easily. Will Cadbury, ICL, Gtech and the Post Office launch their own social and ethical audits, as they have instructed Camelot to do?

“I hope they do one,” comments a Camelot spokesman.

These companies brought their private sector values to running a public service, and seemed not to understand the outrage their profits and executive bonuses were causing. They have lobbied long and hard to try to change Camelot’s image.

The Department of Trade & Industry is about to publish a White Paper on corporate governance that some observers believe will float the idea that the law should be rewritten so directors are responsible to all of a company’s stakeholders, rather than just shareholders.

Even so, few expect this to happen, as it would revolutionise company law. Railtrack, another company facing the full brunt of the public’s suspicions over public/private partnerships, would be affected greatly. Last month, it abandoned plans to bid to run London Underground subsurface routes, claiming the timeframe needed to integrate these services with its local London overland services made the bid impossible.

In reality, it was because Ken Livingstone had made the Tube a central plank of his mayoral campaign and was using Railtrack as a weapon against the Government, playing on its unpopularity since the Southall and Paddington disasters. So the Government leaned on Railtrack to pull out.

Railtrack’s negative public image has cost it at least one important contract. And in the past year Railtrack’s share price has fallen from &£15.70 to &£6.48. The company admits the fall is largely the result of crashes such as Southall and Paddington, which remind shareholders of the dangers associated with transport companies.

Even its spokesman admits Railtrack has a “PR problem”, before quickly adding that this is not warranted. Warranted or not, Railtrack needs to improve its image.

The spokesman says: “Image is important, because what’s good for the shareholders is also good for consumers and staff morale. A healthy share price inspires confidence in investors, who provide the finance needed to improve the service.”

But to improve its image Railtrack must walk a tightrope between standing up for itself and appearing to waste money on a hollow image-building campaign. The spokesman says: “We face the same problem that many of the utilities companies faced when they were privatised. When you are a private company operating in a public sphere, you have to do things slightly differently.

“The railway service has always been a goldfish bowl – under British Rail and now as Railtrack. Because we were brought in to improve the service, there have been very high expectations, which are difficult to deliver. Our image doesn’t necessarily reflect the work we have done, although we accept there are many improvements to be made. Besides, there are no golden bullets to solve our PR problem.

“The question is, do we spend our time trying to turn people’s perceptions or hunker down and see to the basics and make sure the trains are running safely and on time? That is our number one priority.”

With pre-tax profits up 34 per cent to &£130.2m for the six months to October 31 and full-year profits expected to exceed last year’s record of &£428m, cynics could be forgiven for wondering where Railtrack’s priorities lie.

The Lottery, Dome and Railtrack all highlight the tough task of marketing public/private partnerships. The outcome of the Lottery showdown will be seen not just as an assessment of the relative strengths of the bids. It could also signal a new direction in the way the public and private sectors work together.

Additional reporting by Tom Bawden