No Winning Numbers: The CAT’s Judgment On The £70 Million National Lottery Subsidy Control Challenge

The Competition Appeal Tribunal (CAT) recently issued its ruling in the case of The New Lottery Company Ltd and Others v. The Gambling Commission. It found the Gambling Commission’s (GC’s) decision to grant Camelot (as operator of the National Lottery) the use of £70.21 million was consistent with normal market conditions, meaning there was no subsidy within the meaning of s. 2 of the Subsidy Control Act 2022 (SCA). 

This is the third decision made by the CAT in a challenge brought under the SCA. It is the second case to explicitly consider the application of the Commercial Market Operator (CMO) principle, which is the relevant test for determining whether financial assistance confers an economic advantage to an enterprise and therefore a subsidy. 

Taking a Chance: Overview of the Case

The New Lottery Company Limited, Northern & Shell PLC, and the Health Lottery Elm Limited (collectively, the applicants) alleged the GC’s 19 July 2023 decision (the decision) constituted the grant of a subsidy to one or more of Camelot UK Lotteries Limited (Camelot) and/or either Allwyn UK Holding B Ltd or Allwyn Entertainment Limited (together, Allwyn). 

The decision was made following a marketing investment proposal submitted by Camelot for the retention of some of the National Lottery revenues as an investment in the marketing of the National Lottery. The GC granted the use of the £70.21 million for this purpose, taken from funds that would otherwise have been paid to the National Lottery Distribution Fund (NLDF). The applicants allege this sum constituted a subsidy. 

The Existence of a Subsidy

The CAT set out that the parties’ arguments on the existence of a subsidy give rise to four questions: 

1. Whether the CMO principle applies in this case. 
2. If the answer to (1) is “yes,” whether the decision provided a benefit that was consistent with the terms that might reasonably have been expected to be available on the market. If the answer to (1) is “no,” whether the decision provided an economic advantage on any other basis. 
3. Whether the benefit provided by the decision was given from public resources by the foregoing of revenue otherwise due. 
4. Whether the decision provided a benefit that was specific.  

Odds On: The CAT’s Assessment

(1)   Whether the CMO principle applies in this case.

The CAT concludes that the absence of an actual market comparator does not preclude the application of the CMO principle; the decisive question is whether the state intervention is comparable to that of a private operator and consistent with normal market conditions. 

The Third National Lottery Licence (3NL) created an environment in which only Camelot could agree to provide the investment in question, and in that sense, there was no “market” for the provision of a marketing investment to support the National Lottery. Nonetheless, the CAT considers the decision to invest in marketing the National Lottery has a commercial character, and the CAT can therefore identify a commercial context to assist in determining the likely reaction of a rational private investor to the terms of the investment. The CAT compares this to the situation in which a franchisor and franchisee or supplier and distributor make a joint investment of a significant sum in the marketing of a consumer-facing product to generate additional profit from the enterprise. 

The CAT states that the decision to invest would depend on an analysis of what the likely return from the investment would be and that analysis should include quantitative evidence (e.g., econometric modelling) and qualitative assessment (e.g., advice from those with experience of the product and the market). It would also depend on the negotiations between the parties of the investments to find a way to share the anticipated gain. 

The CAT determines that the test to be applied is whether the transaction would not have been entered into, on the terms agreed by the GC, by any rational market operator. The CAT states that the burden is on the applicants to establish that no rational private market operator would have concluded the negotiations in that way. 

(2)   Did the decision provide a benefit that was consistent with the terms that might reasonably have been expected to be available on the market?

The CAT then seeks to answer question (2). This is dealt with in two parts: (i) the rationality of the benefits conferred on Camelot and/or Allwyn; and (ii) the econometric modelling. 

In relation to the former, the factual material establishes: 

• Financial projections suggested the additional marketing investment of £74.2 million would deliver a net £43.4 million gain to the GC in additional payments to good causes, representing a predicted rate of return of 1:1.7 (i.e., £1.70 extra contribution to good causes for every £1 of retained surplus invested in marketing by Camelot). 
• Increased ticket sales would in turn deliver additional profit to Camelot of £3.6 million. 
• Camelot made investment in marketing from its own resources, amounting to £3.5 million. It also agreed to make further investments in retail advocacy in the sum of £2.5 million and staff retention costs in the sum of £3.3 million. 
• The total of the proposed additional investments by Camelot was £9.3 million (compared to Camelot’s estimated additional profit of £3.6 million). 

The CAT dismissed arguments put forward by the applicants concerning the idea that Camelot’s investments in retail advocacy and in staff retention would have created additional indirect benefits for Camelot and/or Allwyn on the basis that there was no evidence adduced by the applicant as to the potential value of the alleged indirect benefits and no attempt to quantify them. Most importantly, the CAT suggests there was no evidence about how a private investor might approach these issues. It is possible a private investor might have sought to extract further value from Camelot because of the perceived benefits or it might have been more willing to share the commercial benefits of increased ticket sales leading to an agreement more generous to Camelot. 

The CAT determined that the GC’s assessment of the adequacy of Camelot’s additional investments, to offset the projected increase in profitability of the additional ticket sales, fell comfortably within the “wide margin of judgment” (see paragraph 127) available to it. 

In relation to the econometric modelling, the applicants’ argument concerns the adequacy of the econometric modelling and that no rational private investor would have entered into the transaction without carrying out further investigation into the likely economic impact of the decision. On this point, the CAT found that, faced with a complex empirical challenge, Camelot gave considerable thought to designing a model that could assess the impact of marketing on ticket sales and that none of the applicant’s criticisms came close to establishing that GC acted irrationally. 

Based on its conclusions in (1) and (2), the CAT concludes the applicant’s case on the CMO principle fails and the decision was consistent with normal market conditions and therefore did not confer a subsidy. 

On that basis, it was not necessary for the CAT to assess (3) and (4), but it nevertheless sets out its conclusions on those points. 

(3)   Whether any benefit was provided from public resources.

The CAT explores the EU case law alongside WTO decisions on this point to establish the relevant benchmark for comparison. It states that the effect of the decision was to permit Camelot to retain additional revenues from the National Lottery, which would otherwise have been paid into the NLDF. If the CAT had found that the decision conferred an economic advantage, then it would also have found that the advantage was granted through public resources. 

(4)   The specificity of the benefit conferred by the decision.

The specificity criterion was satisfied. The fact that Camelot was awarded a public concession contract such as 3NL does not mean that any financial assistance it receives is immune from scrutiny under the provisions of the SCA. 

It Could Be You: Observations on the Judgment

The judgment provides useful guidance on what must be met to argue whether financial assistance falls within the actions that might rationally be expected by a commercial market operator and thus whether it is or is not a subsidy. 

Some specific observations are as follows: 

• The burden of establishing that no rational private market operator would have concluded the negotiations in such a way rests on the applicants bringing the challenge. 
• For a rational private operator, the decision to invest would depend on an analysis of what the likely return from the investment would be. Such an analysis should include quantitative evidence and qualitative assessment/advice and would also depend on negotiations between the parties to the investments. 
• A public authority has a wide margin of judgment available to it when assessing what the fair share of benefits are between the parties. 
• With respect to additional indirect benefits for the recipient, it is appropriate to evidence and attempt to quantify the potential value of those benefits and importantly consider how a private investor might approach these issues in negotiating the transaction. 
• Faced with complex empirical challenges, public authorities should give considerable thought to any econometric analysis (e.g., design of a model) and to assess outcomes. If it cannot be established that the public authority acted “irrationally,” the CAT’s judgment seems to suggest that public authorities are afforded a wide margin of discretion. 
• Assessing whether the decision involves a “forgoing of revenue that is otherwise due” requires a comparison between how the public authority’s decision changes what the public purse would normally receive in revenue compared to what it would have received, absent the decision. 

Three more challenges remain live, including Bristol Airport v. Welsh Ministers, which relates to a subsidy given (explicitly as a subsidy) by the Welsh Ministers to Cardiff Airport. 

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