Camelot and its finances: Lottery fund for good causes is facing £1bn shortfall

Dual blow for arts groups as poor ticket sales and diversion of cash to the Olympics lead to funding crisis. Andrew Johnson and Susie Mesure report

The National Lottery operator Camelot faces a £1bn shortfall in the money it has pledged to give to good causes by the end of its licence next January. The news last night prompted fears of a funding crisis for the arts and good causes which are already suffering from poor ticket sales and money diverted to the 2012 Olympics.

Unpublished analysis of official Camelot figures commissioned by The Independent on Sunday show it is on course to raise about £9.5bn, against the £10.5bn minimum it was expected to bring in by the National Lottery Commission.

The figure is also woefully short of the £15bn Camelot promised it would raise during its bitter struggle for the licence, which it eventually won against Richard Branson in 2001.

Camelot's current licence began in January 2002 and expires in January 2009. It has already been awarded a third licence to run the Lottery for a further 10 years after that.

Analysis of the Lottery Commission's annual reports for the five financial years reported so far reveals that just £6.74bn has been given to good causes, including the Olympics. The analysis by Mark Slattery, a former official at the game's regulator, suggests that that shortfall could be as high as £1.3bn. This includes previously unpublished figures for the first months of the licence, from January to April 2002, bringing that figure up to £7.6bn by September last year – a shortfall of £2.9bn. On average the lottery raises about £1.3bn a year for good causes, leaving it facing a black hole of at least £1bn unless its sales increase dramatically.

"To fall £1bn short of its reserve price is beyond embarrassment for the Government," said Mr Slattery, former head of communications at Camelot. "Branson was turned down because of the risk of his plans for a Lotto game that behaves similarly to how Lotto is now performing."

Despite its need to boost ticket sales to meet its target, sales have fallen. In the first six months of this financial year, £595m has been given to good causes, just 26.27 per cent of total income, the lowest proportion since the Lottery began.

Sales have not been helped by a series of controversies. The worst was in May 2002, when chief executive Dianne Thompson said players would be "lucky to win a tenner". The most recent bad publicity came when Steve Smith, 58, who won a £19m jackpot, said last month he would be willing to hand it all back in exchange for being completely healthy. Mr Smith suffers from a serious heart defect that could kill him at any time.

Camelot said yesterday that it had every confidence it would eventually hit its target. A spokesman said that the target was in "the region of £10bn" and with almost two full financial years to report they believed they were on target to meet the expectation.

But Lottery insiders said this looked unlikely. Glenn Barry, an independent lottery consultant, said sales would have to increase by about 30 per cent. "That is sounding like a lot," he said. "Predicting sales and the resulting funds to good causes over seven years ahead is 'very brave', in the language of Yes Minister's Sir Humphrey Appleby."

He added that while lottery incomes can fluctuate from month to month depending on cash prizes, sales tend to remain stable once the game is established because the people who regularly buy tickets will budget for it out of their weekly income. That means that introducing an exciting new game does not boost sales because other games suffer in proportion.

Professor Ian Walker, an economist and lottery expert at Warwick University, added that, while Camelot has been successful in holding up its sales at between £4.5bn to £5bn a year, in real terms they have declined because they have not held pace with inflation.

"At this rate of sales it looks like they're going to be a billion short," he said. "In the past few years Camelot had done a reasonable job of keeping sales up notionally, so in reality they're falling by a couple of per cent each year."

Last night arts organisations expressed fear that many could suffer if grants from the fund were cut back. Martin Brown, of the actors' union Equity, said the expected shortfall was of "serious concern", particularly as the arts lottery fund has already been raided to help to fund the 2012 Olympics. "We have already seen arts companies lose core government funding," he said. "Those that lost out could apply to the lottery-funded Grants for the Arts. Grants for the Arts is already suffering because of poor sales, so it is of great concern."

Previous arts projects that have benefited from the fund, which helps mainly small theatres and companies, and would in future be hit by a possible shortfall, include the innovative Donmar Warehouse. In 2006 it was given £25,000 to help to tour its production of The Cut starring Ian McKellen outside London. The Peepolykus production of The Hound of the Baskervilles which transferred to the West End also benefited from the scheme, along with the Tricycle Theatre's dramatisation of the Bloody Sunday inquiry.

A shortfall of £1bn could be spread across the range of organisations which distribute lottery money, however, including the UK Film Council, which gave £200,000 of lottery cash towards the film Brick Lane.

The Heritage Lottery Fund hands out much larger grants, recently giving an emergency grant of £10m to the Cutty Sark following the fire that gutted the clipper.

Despite this, Camelot will face no sanction if it fails to hit the target. Don Foster, the Liberal Democrat spokesman for culture, media and sport, defended Camelot, arguing that it has held sales up well compared with other national lotteries and suggesting that the Government taxed the organisation too harshly.

"The sales have held up better than any where else in the world," he said. "While obviously it would be disappointing that the original predicted target will not be met – assuming your figures are correct – I am confident if the Government acts on the recommendations we have made, that will lead to a significant boost to lottery good causes."

A spokeswoman for the National Lottery Commission said: "Until the licence ends on 31 January 2009 no one can accurately predict how much will be raised for good causes. It is important to understand that we do not set sales targets for Camelot and we said at the time that a realistic figure would be around £10bn, not £10.5bn."

Grants: Arts projects that depend on Lottery sales

Cutty Sark

The Heritage Lottery Fund, which distributes lottery cash to conserve Britain's endangered heritage such as buildings and landscapes, gave an emergency grant of £10m to the Cutty Sark Trust following the fire that devastated the clipper last year. This was on top of earlier grants totalling £13.45m.

'Brick Lane'

Monica Ali's bestselling novel was turned into a film last year with the help of a £200,000 lottery grant via the UK Film Council.

Donmar Warehouse

The innovative London theatre received £25,000 from the lottery-funded Grants for the Arts in 2006 to help to take 'The Cut', starring Sir Ian McKellen, on tour to Salford, Bristol and Liverpool.

Camelot's licence: A history marred by controversy

May 1994 Camelot beats eight other bidders to win the first lottery licence.

November 1994 The first draw live on BBC1 is watched by 22 million viewers. "It could be you."

March 1995 Scratchcards are launched.

February 1998 Richard Branson wins a libel case against one of Camelot's directors, Guy Snowden, who the jury decides had tried to bribe Branson to pull out of the race to run the lottery in 1993.

June 1999 Camelot's profits fall substantially.

August 2000 Controversy rages over the award of the second licence. Both Branson's and Camelot's bids are rejected by the regulator, which then enters into exclusive talks with Branson. Camelot challenges this decision. It is eventually awarded the licence.

May 2002 Chief executive Dianne Thompson sparks a furore, saying lottery players "would be lucky to win a tenner".

November 2002 Lottery sales plunge by £5m a week, a record low.

May 2003 First announcement that money for good causes will be diverted to pay for the 2012 Olympics.

August 2004 Rapist Iorworth Hoare, right, serving a life sentence, wins £7m.

January 2007 A senior executive resigns after using a bogus name to solicit information on rival bidders for the next lottery licence. Camelot's bid for a third licence appears to be doomed.

March 2007 News that the 2012 Olympics are to take a further chunk of lottery funding from good causes.

August 2007 Camelot wins a third licence to run the lottery for a further 10 years, to 2019.

August 2007 Postal worker Angela Kelly from East Kilbride received the largest payout to date, winning £35.4m in the EuroMillions draw.

October 2007 Camelot questioned by the Charity Commission over the running of its charitable branch.

January 2008 A Lords ruling grants Hoare's victim the right to sue for compensation, 20 years on.

January 2008 Andrew Travers, finance officer for the London Development Agency, announces that it may take until 2031 before lottery cash being used to pay for the 2012 Olympics is repaid.

January 2008 Steve Smith, 58, suffering from a serious heart defect, wins £19m. On winning the jackpot he explained he would give it all up if he could have his health back.

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