The International Journal
of Not-for-Profit Law
Volume 12, Issue 4, November 2010
By Katerina Hadzi-Miceva-Evans
Proceeds from lotteries and other games of chance provide funding to help address social needs and support the work of civil society organizations (CSOs). This article examines models for distributing lottery proceeds using examples from Europe and beyond. It discusses lottery operators, amounts distributed, the distribution process, and areas and types of organizations supported. The author selected innovative models from different parts of Europe and beyond, subject to the availability of information in English. The conclusion identifies key considerations if designing a lottery to support good causes.
To date there has been limited comparative research on the ways lotteries support societal needs. This paper aims to enrich the existing discourse and analysis and to provide guidance to those developing regulatory opportunities for the use of lotteries to support good causes and CSOs.
THE PLACE OF LOTTERIES IN THE OVERALL CSO FUNDING SCHEME
CSOs rely on several sources to support their activities, such as donations, income generating activities, or government funding. Lottery proceeds are categorized as government funding. They offer an alternative, sometimes substantial, source of revenue for CSOs.
Lotteries and similar games of chance are a form of gambling. Their appearance is linked to the need of rulers to raise sources for financing public tasks, such as building China’s Great Wall or rebuilding first-century Rome. By the 17th century, lotteries were organized to collect money for the poor (e.g., Netherlands).
The regulation of lotteries varies from outright prohibition, through strict regulation and state monopoly, to broad tolerance of private lotteries where proceeds are devoted to the public benefit.
SUMMARY OF MODELS USED TO DISTRIBUTE STATE LOTTERY PROCEEDS
For the purposes of this article, models for distribution of lottery proceeds for good causes have been categorized on the basis of who decides on allocation. The main distribution models are:
- A state or government body (e.g., Croatia, Denmark, Finland, Sweden). The level and areas of support are determined by law and/or decided each year by the government.
- Entities distinct from the government or lottery operator (e.g., Croatia, UK, South Africa, New Zealand). The areas and level of support may be decided in law or by the government, but decisions on individual grants are made by an independent body (albeit one that may include some government representation).
- The lottery operators (e.g., Croatia, Czech Republic, Romania, Serbia, Slovenia). They decide on the level and type of support mainly as part of their corporate social responsibility programs. However, in France, the operators who obtain a license have to participate in the financing of grassroots sport through a progressive taxation on stakes.
- Distribution prescribed by law. Occasionally, as in Macedonia, the decision on who will be the beneficiary of the lottery proceeds is not made by a certain body but is prescribed by law.
Distribution by a State Body
A Finn to Win: Veikkaus Oy
Veikkaus Oy is a government owned lottery established in 1940. It is managed by the Ministry of Education, with gaming rules set by the Ministry of Internal Affairs. Its profits exceed a €1.1m. on a daily basis; in 2009 out of €1, 26.5% was allocated for good causes.
Under the terms of the Funds Distribution Act, the Ministry of Education prepares a proposal for distribution of funds to be approved by Government and adopted by Parliament. In 2009 the Ministry distributed €461m to 2,800 communities as follows: Finnish Arts 44.4%; Sports 27%; Science 18.9%; and Youth Work 9.7%. Supported organizations include associations, museums, libraries, sports clubs, research centers, and youth centers.
Bringing Dreams to Life: National Lottery Ireland
The Irish National Lottery has raised over €3.4bn since it was established in 1986. Its mission is to operate a world-class lottery to raise funds for good causes on behalf of the Government. Of the proceeds, 32% are allocated to good causes in the areas of Youth, Sports and Amenities; Health and Welfare; Arts, Culture and National Heritage; and the Irish Language. Projects are promoted weekly on national television in order to highlight their positive impact. In 2008 the Lottery raised €263.5 million.
The Lottery is operated by the An Post National Lottery Company under license from the Minister for Finance. Each year the surplus is attributed in its entirety to a National Lottery Fund, from which prize payments, operating costs, and capital expenditure are transferred back to An Post. The money allocated for good causes is distributed to different departments that support projects in the areas mentioned above.
Distribution Through Separate Entities
Racing for Charity: The Hong Kong Jockey Club Charities Trust
HKJC is a non-profit organization established in 1884 which holds a government-issued monopoly over all sports betting and the lottery. It distributes all surpluses to community and public benefit projects. It is also the largest contributor to tax revenue, the largest employer, and the biggest supporter of charitable causes in Hong Kong.
Grants are distributed by the Hong Kong Jockey Club Charities Trust. Its trustees are the twelve stewards of the HKJC. Following an open call for applications, grants are allocated according to guidelines in the areas of Health; Community Services; Education; Training; Sport; Recreation; and Culture. The Trust allocates on average HK$1bn a year (€102m), supporting more than a hundred CSOs and projects, providing both one-off grants and multi-year support. Beneficiaries include associations, hospitals, social institutions, and educational institutions.
Good Causes: United Kingdom Distributors of National Lottery
The UK National Lottery was set up in 1993. It is supervised by the National Lottery Commission and is currently operated by Camelot Group. Of the proceeds, 28% are distributed to good causes in the categories of Charities, Health, Education and Environment 50%; Sports 16.67%; Arts 16.67%; and Heritage 16.67%.So far £24bn has been distributed to more than 330,000 projects.
Responsibility for funding rests with the Department for Culture, Media and Sports (DCMS).It sets the policy and financial directions for the distributors (stating who can receive funding, what the funding can be used for, and the conditions the distribution body must meet) and maintains a database of grants. In addition, a National Lottery Promotions Unit raises public awareness of the good causes benefiting from lottery funding.
Under the UK system, the operator passes all proceeds to the National Lottery Distribution Fund (NLDF), which is administered by the DCMS. NLDF passes the money to fourteen lottery distributors, which are independent, nongovernment organizations with specialized knowledge about the particular sector. Funding is allocated through grants based on specific criteria for eligibility and funding. The distributors can delegate grant decisions to other bodies and can enter into jointly funded schemes.
The largest of the lottery distributors is the Big Lottery Fund. It was established in 2006 to distribute the 50% of money allocated for education, environment, charities, and health, and it has distributed a total of over £2.8bn. On average, 60-70% of its income is distributed to CSOs, and it has committed to giving more when it can. It also manages the BIG Fund for distributing non-lottery money.
It’s Important to Have SUPPORT: The National Foundation for Civil Society Development Croatia
In 2003, proceeds from the Croatian lottery were used to support the creation of the National Foundation for Civil Society Development (NFCSD). Under the law, 50% of proceeds from games of chance are allocated for programs according to criteria set out in a decree issued each year by the Government. From that 50%, 14.10% is allocated for the development of civil society. The rest is distributed by different ministries in the areas of Sport, Needs of People with Disabilities; Combating Drug Use; Social and Humanitarian Activities; Culture; Technical Culture; and Out of Institutional Education, Upbringing of Children and Youth.
The NFCSD receives 96.55% of the funding allocated for the development of civil society. The remainder is distributed by the Ministry of Foreign Affairs and European Integration for international cooperation programs.
The founding assets of the NFCSD were HRK 2m (€275.000). By 2008 the assets increased to HRK 46m (€6.3m), out of which HRK 43m (€5.9m) came from the games of chance.
The NFCSD both makes grants and implements activities. It also provides multi-year institutional funding. It finances associations, foundations, institutions, local government units, and others, in the areas of human rights, rule of law, non-institutional education, environmental protection, and youth. Decisions on the allocation of the funds are made by a Management Body. Its representatives are appointed by the Government and it is composed of members of the state administration, local/regional government units, and organizations and experts in civil society.
PLAY + DONATE = 2 X WIN: International Lottery in Liechtenstein Foundation (ILLF)
ILLF is a private foundation which since 1995 has operated a state lottery under government license. ILLF is the only lottery operator in the country and is supervised by Government-appointed auditors which scrutinize the weekly draws. The lottery (called Golotto) is internet-based, being played through the web sites of retailers. Of each purchased Golotto ticket, 5% is donated to charities and projects in Lichtenstein and abroad. Decisions are made by a Charity Allocation Committee composed of two Government and two ILLF representatives. Proceeds are distributed for Education; Research; Libraries; Archaeology; Art; Culture; Science; Sport; Health Care; Social Welfare; Youth; the Handicapped; the Elderly; and Environment. Beneficiaries include international humanitarian organisations, universities, colleges, and libraries.
In addition, the websites which operate ILLF games also allocate a certain percentage of the revenue to fund charities. For example, 25% of all proceeds from the Plus Lotto are donated to the International Federation of Red Cross and Red Crescent Societies. ILLF also runs an online donation web site called Lichtenstein Helps to raise funds for the Liechtenstein Red Cross.
Distribution by Lottery Operators
More Than a Game: The Croatian Lottery
The Croatian Lottery has the exclusive right to organize lotteries in Croatia. Its income is passed to the state budget and distributed as described above. In addition, it runs a program of support called “More than a Game” to show players how their participation in the lottery also supports CSOs, institutions, and individuals in need. In 2009, HRK 2m (€275.000) financed 154 organizations in the fields of Humanitarian Activities; Health; Youth; Sport; Culture; Art; and Education.
Helping Others Win: The Czech SAZKA Lottery
In the Czech Republic 6% to 20% of the profits from a lottery must be distributed to projects that are publicly beneficial. SAZKA is the country’s largest lottery operator, with a mission to support good causes from the proceeds of its games. SAZKA is a joint-stock company. Its shareholders are nine associations engaged in sports and physical education. In 2008, 8% of its total turnover of CZK 1bn (€40m) was distributed for good causes: 99.4% for sports and physical education, and 0.6% for culture. In 2002, the SAZKA Foundation was established to award educational scholarships and grants in the fields of science, technology, art, culture, and support to young people.
Distribution Prescribed by Law
In Macedonia, the Law on Lottery and Entertainment Games from 1997 (amended in 2001 and 2007) lists the organizations entitled to receive lottery proceeds. Of proceeds, 50% are used for financing programs of associations of people with disabilities, sports associations, and the Red Cross. The law sets lower and higher caps for funding, within which the Government has discretion to decide how funds are allocated.
LOTTERIES AS A FUNDRAISING TOOL
Lotteries are used as fundraising tools by CSOs in Germany, Ireland, the Netherlands, Spain, Sweden, the UK, Uzbekistan, and, most recently, Slovakia. They may either be used to raise funds for the CSO itself or for other causes. The lotteries may be one-off incidental events at a fundraising event, or ongoing stand-alone activities designed to raise funds over a longer period of time. These ongoing lotteries, sometimes known as “charity” or “society lotteries,” often exist parallel to state lotteries.
General characteristics of charity lotteries are:
- The main aim is fundraising for CSOs or disadvantaged groups or support of own activities;
- They donate a part of their income to the beneficiaries;
- They make no profits;
- Their funds are allocated and distributed by an independent body;
- They provide funds for the organizations as such (institutional support), but some also support projects or disadvantaged groups directly;
- They operate with a licence from the government; and
- They tend to supplement and not substitute for public or state support.
Charity lotteries can be organized in different ways. For example, charities in Ireland have used lotteries to raise funds since 1940. Rehab Ireland is one of several lotteries operating today. The charity set up a fundraising company, Rehab Lotteries, to sell scratch cards through a network of 1,400 retailers, promote online games, and manage other fundraising initiatives. Proceeds are used to support Rehab activities.
The Spanish National Organisation for the Blind (ONCE) runs the Pro-blind Cupón Lotto scheme to provide its members with “the means to earn a living.” The tickets are sold on the streets by 21,762 salesmen with disabilities. They provide 81% of the income of the ONCE Foundation, which supports social and labor integration programs for people with disabilities.
Aktion Mensch (Action Man) Germany organizes a lottery in cooperation with the TV channel ZDF. Of its income, 30% is used to support around 10,000 projects for disabled persons and other disadvantaged groups.
The Postcode Lottery model was developed by Novamedia, a marketing agency. It currently operates the Dutch National Postcode Lottery, Sponsor BiCSO Lottery, BankGiro Lottery (all in the Netherlands), the Swedish Postcode Lottery, and the UK People’s Postcode Lottery. Novamedia receives a fixed percentage from the proceeds. The Postcode Lottery is a postcode-based subscription lottery (the ticket number is composed of the player’s postcode and a three-digit number). The ticket is sold on a subscription basis paid by direct debit so the player enters all the draws for the month; prizes are split among tickets, rather than players.
Postcode Lotteries support only a limited number of CSOs (e.g., five in Scotland, eight in England, twenty-seven in Sweden, seventy-five in the Netherlands). In the Netherlands, 50% of proceeds are given to charity. In Sweden this figure is 22.5 %, and in the UK 20%. The sums raised can be substantial (€2.6m in the UK since 2005). These lotteries provide multi-year funding support and cultivate relationships with the media to raise awareness about the CSOs supported and the work they do, as well as promote winners.
ISSUES TO CONSIDER WHEN PLANNING A MODEL FOR USING AND DISTRIBUTING LOTTERY PROCEEDS
Lotteries are a popular source for supporting CSOs or good causes. However, the best model or mechanism for a particular country depends upon the purpose of the lottery and the context in which it will operate. This section highlights some of the issues which should be addressed and agreed on based on the local context.
Are lotteries an ethically appropriate mechanism to raise funds for good causes?
Concerns have been raised in many countries that lotteries may create gambling addictions or other social problems, worsened by the fear that lotteries exert the strongest temptation to play on those least able to afford it (most of the state lotteries cited in this paper have increased their income in the 2009 recession). Certainly some state lottery providers have recognized the danger of addiction and have developed special initiatives to counter it. In Finland, Veikkaus’s Responsibility Evaluator Tool evaluates existing or planned games from the perspective of possible gaming addiction. Based on the results, changes or restrictions to the game are proposed. The same concern has been expressed in relation to charity lotteries. Some feel they may compromise their image as it may appear that they promote a fundraising tool which creates addiction. Charity lotteries, however, tend to offer games with smaller prizes and less aggressive marketing. While this may in part be through necessity (see below), it is also the case that these games have relatively low addiction risks and may reduce the potential damage to the operator’s image.
Some have asked if it is morally justifiable to use “good causes” as the flag for promoting lotteries, particularly when these good causes receive a relatively small percentage of the proceeds. If an individual wishes to support a good cause, isn’t it almost always better for the cause for that individual to donate the money directly rather than purchasing a lottery ticket?
State-run lotteries are sometimes referred to as a “stealth” tax,  a “tax on hope,” or a “tax on the poor.” A breakdown of the revenue distribution from each ticket shows that a significant percentage is almost always taxed by the state. After all the expenses are covered, what is left for good causes can be less than half of all revenues (e.g., Finland 26%; the UK 28%; Czech Republic 6-20%). While the total donated to good causes may be high, this is still in some cases less than the sum that is kept by the state or the operator or given away as prize money.
The player in the scheme of lotteries and good causes
Some supporters of the lottery as source for funding good causes feel that lotteries produce a win/win for the players: even if players do not always win money, they take satisfaction from the knowledge that the lost amount will be used to support a societal need. Others make a different assumption: that when the players buy tickets, “hope” to win rather than “desire to help” is the sole motivation.
Understanding the true motivations of many millions of players may not be possible. So the effect that the model of lottery support for good causes aims to have on the player and how it may impact its relationship with the community should be considered. Some questions include: Will the model aim to incite individuals to get involved in the community (e.g., HKJC has developed such scheme)? Will it want to raise awareness about the importance of supporting a certain need or CSO? How can it be ensured that the model does not act as a barrier between an individual donor and CSO, thereby hindering the establishment of a more sustainable or longer-term relationship?
The costs of running lotteries
Start-up and running costs for a lottery can be high, potentially delaying the point at which good causes receive their due allocation. An appropriate assessment of the potential income for beneficial purposes should be made against the operational costs for particular models (the operating cost of postcode lotteries is one reason why the percentage allocated to CSOs is relatively low, especially in the beginning). Consideration of costs is particularly important for lotteries run by CSOs with modest funding opportunities. CSOs should also consider potential costs such as staff time and what is the benefit as opposed to using resources to promote and run the core activities.
In countries where CSOs can operate lotteries, many find that the competition against much larger state lottery operations is made more difficult by certain regulatory obstacles. These include limits on maximum payouts (as are found in the UK and Ireland), required minimum allocations for good causes, or restrictions on the games that can be offered. Some countries have recognised the harm this is doing to charity lotteries –the Irish Government set up a Charitable Lotteries Fund “to supplement the income of private charitable lotteries whose products are competing directly with the National Lottery.” Elsewhere, steps have been taken to reduce the state’s competitive advantage: for example, the Netherlands reduced the minimum amount to be allocated to good causes from 60% to 50%.
What is in it for CSOs?
Many CSOs support and advocate for the introduction of state lotteries hoping that they will be able to use the proceeds to support their operations or activities. However, it is not always this straightforward.
First, not only CSOs benefit from distribution of state lottery proceeds. CSOs must often “compete” with a range of potential beneficiaries, such as individuals, public and private institutions, or even parts of government. Second, most state lotteries restrict their support to certain activities, typically education, sport, culture, and science. In fact, with the exception of Croatia, distribution of lotteries proceeds does not aim to support CSO development or give a “priority” to CSOs. Third, the amount of funding available, however large, is limited (as is the case with most other sources of state funding). These limits do not exist when fundraising from the community; here, the potential pool of resources is much larger and there are no limitations on activities or organizations. While lotteries can provide considerable income for some CSOs, they should not be seen as a key source of revenue for the sector as a whole and be introduced as a substitute for other, perhaps more productive sources.
Politicization of the process
In most systems, the state has influence or control over the policy and mechanisms for the distribution of lottery proceeds to good causes. While some countries determine the areas or the percentage of allocation in laws, others leave it to a government to decide on the distribution each year. This inevitably brings a risk of politicization; the government makes decisions based on its current policies and interests, or subsidizes initiatives that should be funded through other revenue.
The latter has been a matter of ongoing debate in the UK. In response, the Big Lottery Fund has adopted the principle of “additionality” when assessing funding requests. This states that “lottery funding is distinct from Government funding and adds value. Although it does not substitute for Exchequer expenditure, where appropriate it complements Government and other programmes, policies and funding.” Nevertheless, controversy remains over certain decisions, such as the use of “good cause” allocations from the lottery to fund programs related to the millennium celebrations and the 2012 Olympics.
The distribution process
The nature of lotteries combined with the emphasis on “good causes” can make the allocation and use of “good cause” funds particularly sensitive. It is therefore important that this process is transparent, that clear criteria are published in advance, and, where possible, that independent experts are involved in the funding decisions. A rigorous process of accounting and reporting is critical to ensure that the funding is used appropriately.
Similar principles apply to charity lotteries. Indeed, in many cases they are held to higher standards, and their close link to the community creates a risk that one charity lottery scandal can negatively affect the reputation of civil society as a whole.
Various mechanisms are used to distribute lottery proceeds to CSOs or projects beneficial to the public. However lotteries, particularly state lotteries, are controversial. Some believe that neither the state nor CSOs should be promoting gambling, regardless of the benefits. Some CSOs refuse lottery money on moral or religious grounds.
Furthermore, there are risks of negative consequences for CSOs, particularly from the dominant market position that state lotteries invariably occupy. Laws should allow CSOs to operate lotteries and protect them from unfair competition.
Developing a successful lottery therefore requires careful consideration of the opportunities and risks within the local context in order to achieve the aims. Issues to consider include: What are the aims of the model—increasing income for government or maximizing funds for good causes? Which areas to support? Should CSOs have a “priority”? What is the effect on the player? How best to lower operating costs without undermining effectiveness? Which activities should be eligible to benefit? How to ensure that charity lotteries fully exploit their potential? How to ensure transparency and public support and minimize possible political interference?
This article presents some examples of lotteries which successfully provide benefits to governments, CSOs, and good causes. They demonstrate that, unlike the games themselves, the opportunities that lotteries bring do not need to be left to fate, but can be maximized based on a well-planned concept.
Senior Legal Advisor, European Center for Not-for-Profit Law, for the Institute of Public Affairs Poland. The Polish version of this article is published in the “Trzeci Sektor” quarterly (Katerina Hadzi-Miceva “Loterie charytatywne w Europie. Wspólczesne rozwiazania w wybranych krajach.” “Trzeci Sektor,” 2010, issue 22. www.isp.org.pl/kwartalnik) Copyright © 2010 by the European Center for Not-for-Profit Law and Institute for Public Affairs. All rights reserved.
See: Kingma, S., Van Lier, T. The Leeway of Lotteries in the European Union, Vrije Universiteit Amsterdam, 2006; Hadzi-Miceva, K., Suplisson, F. Overview of State Funding Schemes for Civil Society Organizations, ECNL, 2007; Swiss Institute of Comparative Law, European Commission, Study of Gambling Services in the Internal Market of the European Union, 2006.
The European Lotteries Press Release, European Lotteries Welcomes French Law Setting a National Framework for Online Gambling, 13 May 2010.
The rest is distributed as: prize payout 50.8%; lottery tax 4.7%; retail commissions 5.3%; operating costs 9.2%; undistributed prizes’ fund 3.5%.
Veikkaus Oy, CSR Annual Report, 2009.
National Lottery, Bring Dreams to Life Annual Report, 2009.
End of an Experiment, The Economist, 15 July 2010.
The rest is distributed as follows: prizes 50%; Lottery duty 12%; retailers 5%; operating costs 4.5%; operator’s profit 0.5%.
The directions for the distributing bodies in Wales, Scotland, and Northern Ireland are issued by their respective parliaments.
It allocated 92% of its funding in 2008/9. NCVO, Proposed Changes to National Lottery Funding, 2010.
Law on Income from Games of Chance, 2009.
National Foundation for Civil Society Development, Annual Report, 2008.
Hadzi-Miceva-Evans, K., European Practices on Implementation of Policy Documents and Liaison Offices that Support Civil Society Development, 2009.
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The new UK Secretary of State for Culture, Olympics, Media and Sport proposed increasing funding for arts, heritage and sports and decreasing money for the Big Lottery Fund. Holt, A., Culture secretary to shake-up lottery funding, Charity Times, 20 May 2010.