Dome is not the Lottery's only white elephant

I hope that none of the other Lottery grant-giving bodies are watching the miseries of the Millennium Commission with anything other than twinges of sympathetic guilt. Since I take part in Terra Firma, which is an occasional think-tank set up by Nomura, I don't propose to say anything about the argument over the Dome's future. But the black hole that appeared in its finances is symptomatic of a set of attitudes that have too long permeated Lottery funding. We will be lucky if a rash of Domes does not bubble up across the landscape over the next few years, and luckier still if the awarding bodies have woken up to the danger.

I hope that none of the other Lottery grant-giving bodies are watching the miseries of the Millennium Commission with anything other than twinges of sympathetic guilt. Since I take part in Terra Firma, which is an occasional think-tank set up by Nomura, I don't propose to say anything about the argument over the Dome's future. But the black hole that appeared in its finances is symptomatic of a set of attitudes that have too long permeated Lottery funding. We will be lucky if a rash of Domes does not bubble up across the landscape over the next few years, and luckier still if the awarding bodies have woken up to the danger.

This problem has its roots way back in the habits of the public sector, and the way it manages its finances. Historically, these habits have biased the government against capital spending, which was recorded as an indigestible lump in the year in which it was undertaken. When, therefore, ministers needed to cut in a hurry - as in the 1970s, when the International Monetary Fund was breathing down their necks - they found it much easier to slash capital projects than cut back current spending.

This bias not only led to under-investment but also increased the pressure to get public sector capital projects "off balance sheet", encouraging privatisation, the Private Finance Initiative and public-private partnerships. This had some excellent side-effects, in the injection of private-sector disciplines and management skills, but the see-saw then began to topple the other way. The long-term commitments, in terms of revenue costs, into which the departments were entering in order to get capital spending off their books, did not show up in their public expenditure figures. Capital spending was becoming almost too easy.

Both these problems will (at least theoretically) be solved by the change from cash-based budgeting in government to "resource accounting", following the passage of a Bill through Parliament this year. But meanwhile, we are still paying for the effect of past distortions, not least in the way Lottery funding has been handled. When it was decided to run a national lottery in 1992, all the arts, heritage and other bodies with expectations were suffering from a severe shortage of capital. There was a backlog of big projects that the Treasury had been unwilling or unable to fund. There was also a deep suspicion among the arts and other bodies that the Treasury would pull a fast one, switching responsibilities for ongoing funding to the Lottery, meaning that there would be no net gain to the recipients. So it was that the Lottery was launched on a stream of commitments to capital projects rather than revenue funding, and opera houses, museums and visitor centres began to bob up all over Britain.

Fine - up to a point. Some discipline was maintained by insisting on "matching" funding for capital grants. Each project was supposed to have a business plan showing how it would keep going once it was launched, with projections of costs and revenues. Just, of course, as the Dome had.

Far too little thought was given to the total revenue cost of what the Lottery bodies were creating. The problem is particularly acute with respect to projects relying on paying visitors, which have effects on each other: the Dome is not the only "attraction" to have been optimistic about numbers. The problem is reinforced by another essential feature of heritage policy. Grants for the restoration of privately owned property are conditional on the provision of public access. Quite right too: why should taxpayers or Lottery players finance something they are not allowed to see? But public access has to be managed and staffed. Again, that sounds promising, creating jobs in some pretty remote areas. Add a few Lottery-financed "visitor attractions" (after all, why should London get so much?), however, and pretty soon the visitors to all these venues begin to be spread pretty thin.

But it is not only over-estimation of income that is the problem. Suppose (like urban parks) it is intended that a restored piece of heritage should be free at the point of use. That is a sensible application of the economics of public goods. However, a historic park will not stay restored without maintenance. The popular answer is that the local authority will pick up the bill. But local authorities raise only a small proportion of their own funding; these extra costs will, therefore, either feed back to the Treasury and the national taxpayer or form an increasing bulge in council taxes.

Of course all Lottery projects do not suffer from this short-sighted approach. Some capital spending creates revenue costs, but some actually reduces them (careful restoration of a building should cut maintenance spending, if only on patching up the holes). And some is neutral (after all, a good set of stiles on public footpaths will last for years). The trouble is that there has been far too little analysis of the implications of grants, in the hope that once completed, the financing body can wash its hands of the project. In the early days, the suggestion that some projects ought to be endowed (on the National Trust model, but by the lottery body itself) was treated as "too expensive". Quite.

Of course, things have begun to change. Notably, the Treasury has begun to get some money back into traditional public expenditure channels (and remember, it has always taken its pound of tax flesh from the Lottery). The funding bodies are extremely diverse in the number and average size of the projects they finance, as the table shows, and the distinction between capital and revenue has become much less marked. But the Heritage Lottery Fund, for example, has still spent less than 10 per cent of its money on revenue grants. To be fair to the Millennium Commission, now famous only for the quarter of its spending that has (so far) gone on the Dome, it has from the beginning run an excellent scheme of short-term awards at the opposite end of the lottery ecology to the breeding of white elephants. It has given modest sums, usually only about £2,000, to people who carry out some particular piece of work in their local community. An "impact study" to be released next week will show that this has so far underpinned some 12 million hours of voluntary work during millennium year.

The other lottery bodies are beginning to guard their backs by conducting similar assessments of the impact of their spending. Whether they will ask the right questions is another matter. There is a danger that they will slip into the kind of stance adopted by Lord Falconer, who now argues as if the Dome were specifically intended as an exercise in economic regeneration of a single urban area. If so, the booming South-east of England was rather an odd basket in which to place so many eggs, particularly when the countryside is suffering such economic pressure. How about rural regeneration?

Meanwhile, it is worth remembering that the aim of Lottery funding in general and Millennium funding in particular was first of all to create (and recreate) national assets succeeding generations would enjoy, notably by restoring and enhancing our environment, in ways which cannot be financed commercially. If the Lottery bodies are running out of ideas, how about a programme of restoring contaminated land? And while they're at it, how about dealing with visual contamination, using Lottery money to bury some more of the cables that march pylon-high across our beautiful skylines?

Sarah Hogg is chairman of Frontier Economics