Who wins on the wheel of fortune?

OVER the past few months the National Audit Office, Parliament's watchdog on contracts awarded by the Government, has been taking evidence at its west London headquarters about how the contract for one of the world's largest lotteries was awarded.

The inquiry is taking place against a background of growing excitement about the National Lottery's early success, but also some disquiet about the ease with which it appears the lottery organiser - the Camelot group - is cashing in on the rewards.

There is strong evidence that the lottery has truly caught the public's imagination. Last week, a survey from the Henley Centre showed that two- thirds of the adult British public participated in the lottery each week; the UK has achieved the highest percentage of regular players out of any lottery launched in the last 20 years.

Such a successful beginning has lifted hopes that the lottery will raise the money for good causes that its supporters always hoped it might; but its very success has also focused attention on whether Camelot might be making more money than it should.

Last week, details emerged of how much money Camelot has collected after the first £1bn of ticket sales. According to David Rigg, Camelot's director of communications, approximately £470m has been paid in prize money; £120m has gone to the Treasury; £270m is scheduled to go to good causes; and £51m has gone in commission to retailers who sell the tickets.

According to these figures, the Camelot consortium itself has taken £89m, nearly 9 per cent of sales, which covers its advertising and administrative costs before leaving a profit.

If that figure turns out to be correct - some critics say that the lottery firm is keeping more like 12 per cent of total sales - it is still higher than the 5 per cent Camelot has said it will keep back for itself on average over the seven years.

Mr Rigg says the figure kept back now is higher as a percentage than it will be later when sales grow because the amount given to good causes grows in percentage terms as sales of lottery tickets rise.

For example, under commitments given when it won its licence, Camelot promised to hand 25.79 per cent of ticket sales to the National Lottery Distribution Fund in this first year on the first £750m of ticket sales. Of sales beyond £750m and up to £1.5bn, the proportion rises to 26.8 per cent. Sales in the £2.5bn to £3.5bn band are "levied'' at 33.8 per cent. And so on.

As the percentage given to good causes increases, the amount Camelot retains drops in percentage terms, which means that as long as lottery sales grow Camelot will keep to its commitment of handing between 25 per cent to 30 per cent to good causes. (Next year the percentage it will give to good causes on the first £750m of sales drops to 20.66 per cent.)

Under the terms of the licence agreement, Camelot is obliged to pay 12p out of every pound straight to the Treasury. This is the only fixed figure agreed before the lottery even started.

The exact figures of the remaining distribution depend on a number of factors, including sales volumes and the mix of games. Early literature from Camelot shows that the intention is to pay around 50p in the pound on prize money; between 25p and 30p in the pound would go to good causes; there would be 5p for the retailers' commission and 5p for operating costs and profit.

Oflot, the lotteries regulator, makes the point that the better Camelot does, the more money will go to good causes. "For every 6 per cent taken by Camelot, an average of 28 per cent will go to good causes," says an Oflot spokesman.

The Camelot Group comprises the food manufacturer Cadbury-Schweppes, the banknote printer De La Rue, Racal Electronics and G-Tech, an American corporation with experience of running lotteries over there. Each of them has a 22.5 per cent investment, with 10 per cent being held by ICL. These shareholders invested a total of £49.5m in Camelot, while a £75m loan was arranged by the Royal Bank of Scotland.

Camelot won the contract against fierce competition from seven other bidders, which included the UK Lottery Foundation, a consortium headed by Richard Branson and Lord Young, who promised to forgo a profit made on the venture. Mr Branson said that he wanted to put his profits into good causes instead.

Peter Davis, the director-general of Oflot, defended his decision not to accept Mr Branson's bid by saying that under the terms of the Act he could not consider the general uses to which any of the applicants might propose to devote their profits.

Failed bidders, inevitably, have been eagerly telling the National Audit Office that all was not well in the selection process. They have been trooping up to the top floor of the NAO's Victoria headquarters in London, where they are taken into a high-security room normally reserved for the discussion of defence contracts.

One notable absentee, however, has been Camelot itself. "We are aware that there is an inquiry going on," said a spokesman, "but I don't think we're the right people to ask whether the contract was correctly awarded and whether it is being run properly."

One of Camelot's rivals was furious that the consortium, in its position as "manager" of the lottery, refused to consider tenders for alternative lotteries from other groups connected to any of the other consortia. The Independent on Sunday was told that this team had a sophisticated instant games strategy which Camelot "refused to consider or even look at".

Other critics have pointed to the fact that Camelot has awarded a number of important contracts to members of its own consortium, including ICL, Racal and G-Tech.

Kate Hoey, the Labour MP who recently hit the headlines by taking on corruption in football, has been raising some of the issues in the House of Commons. Late last year she told Parliament that ICL, one of the consortium members, had been awarded a computer servicing deal worth more than £100m over the period of the licence, which expires in 2001. She alleged that the contract was awarded to ICL in spite of the fact that three other companies bid only £35m.

David Rigg disputes the £100m figure but declines to say what the true figure is. "We invited bids from a number of suppliers and ICL provided the best service," he says.

Ms Hoey has said the competitive bids and the contracts should have been made public. "We did not see them, so there is no real feeling that this is the best deal."

She also says that Oflot should have insisted that, as with other lotteries in the world, the consortium repay its start-up equity holders and bank lenders as quickly as possible.

Last March an all-party group of MPs signed an early day motion urging the Government to award the lottery licence to a company (or charitable foundation) that returned all the profits to public causes, as happens in all other countries.

Those same MPs are now watching Camelot and Oflot like hawks. If the money continues to roll in as it has done, there will be growing speculation about the amount landing in Camelot's coffers.

Camelot appears confident it can ride this storm. "When the official figures are announced, the numbers will speak for themselves. Our shareholders obviously expect to get a decent return on capital but no supermarket would set up business on these margins," Mr Rigg says.