For The Observer/Guardian UK

Governor George W Bush was a fighter pilot during the war in Vietnam – not in the US Air Force, where one could be seriously hurt or injured – but in the Texas air force, known as the Air Guard. Membership excused these weekend warriors from the draft. Young George W tested at 25 out of 100, one point above ‘too dumb to fly' status, yet leapt ahead of hundreds of applicants to get in.

Baby Bush's good fortune 30 years ago is connected in a strange and edifying manner to the victory by GTech Corporation and its Camelot partners in beating Richard Branson for the new contract to operate the National Lottery, starting in 2002.

Some may find this news of GTech's success a bit surprising for two reasons. First, the National Lottery will not send out invitations to bid for contract until Tuesday. Second, the Government supposedly banished US-based GTech from the Camelot partnership two years ago, after a jury ruled in a libel case that GTech's chairman had tried to bribe Branson.

It is not confusing if you follow the money. Look back to 1968, when an aide to Ben Barnes, lieutenant-governor of Texas, suggested to Brigadier-General James Rose that he find a safe spot in the Air Guard for Congressman Bush's son.

Neither Congressman – later President – Bush nor his son, later Governor Bush, remembers asking for this favour. How Barnes knew he should make the fix without a request from the powerful Bush family remains a mystery: one of those combinations of telepathy and coincidence common in Texas politics.

Fast forward to 1997, when GTech's licence to operate the Texas lottery faced an unprecedented threat. The state's lottery director was sacked following revelations that GTech had put her boyfriend on the company payroll while he was under indictment for bribery

A new, clean-hands direc tor, Lawrence Littwin, was appointed by the Texas Lottery Commission. He ordered an audit of GTech's accounts, ended GTech's contract and put it out for re-tender. He also launched an inquiry into GTech's political donations.

Then a funny thing happened. The Texas Lottery Commission fired Littwin. Almost immediately, the Bush-appointed commissioners cancelled the bidding for a new operator, although the winner had already been announced – and it was not GTech. The commissioners also halted the financial audit, ended the political payola investigation – and gave the contract back to GTech.

Why did the Texas government work so hard at saving GTech's licence? An unsigned letter to the US Justice Department, which was evidence in the civil suit, points to one lobbyist to whom GTech paid fees of $23 million (£14.2 million) – Barnes.

The letter accuses Barnes of using his knowledge of Bush's draft-dodging to lock in GTech's exclusive deal with Texas. In court papers filed in a racketeering suit brought by discharged regulator Littwin, Barnes concedes steps one and two: he got Bush into the Guard; and he received millions from GTech.

Barnes denies GTech's cash bought them use of his favour to Bush to influence the Lottery Commission. GTech responds, irrefutably, that when the Lottery dismissed Littwin, Barnes was no longer in the company's employ. However, the anonymous letter to US prosectors details an earlier instance of Barnes' supposedly blackmailing Governor Bush while Barnes still worked for the company. And although the company denies it maintained the financial connection to Barnes, GTech chairman Guy Snowden was a partner in a big real estate venture with Barnes's wife.

‘This is all from the past,' the GTech spokesperson told me. ‘In the past 18 months, especially, we've made enormous changes.'

Quite true. Of course, there was a lot of past to change. The GTech lobbyist who paid a California legislator $13,500 to change a vote is gone. (GTech says it had nothing to do with his actions.) The head of GTech's US salesforce received a four-year jail sentence for kickbacks.

Also ancient history is the $100,000 personal investment by Snowden in a company controlled by the son of the Irish Taoiseach, Charles Haughey, in 1992, a month before Ireland granted GTech a lottery contract. Snowden, the man Branson nailed for attempted bribery, was flung out last year to appease the British regulator.

This week, GTech's $23m payment to Barnes, who saved Junior Bush from Vietnam, became history when the company agreed to pay $300,000 to Littwin. In return, the former Texas Lottery agreed to seal Barnes's five-hour deposition transcript.

As a rule, questionable deeds exposed by the press are in the past, because companies do not ring up reporters to say: ‘Hey, here's the creepy stuff we're going to do in the future.'

But there is a rare exception. In June last year, The Observer received a telephone call from a would-be GTech lobbyist explaining how he planned to put in the fix for GTech with New Labour.

The fellow believed he was talking to an American businessman. Lobbyist Derek Draper had inside word from the Cabinet that, in light of the bribery verdict, the Government had decided to boot out GTech from the Camelot consortium. All lottery vendors must be ethically ‘fit and proper', says the law. But the Draper told me of the scheme he and GTech were cooking up. ‘The Government needed someone to sell tickets for this ridiculous Millennium Dome thing my old boss [Peter Mandelson] is building.

‘But GTech has offered to do that via the lottery selling equipment. If the Government thinks GTech can sell tickets for the Dome, it's got to be a legitimate firm to sell tickets for the lottery.'

In fairness to Draper, I must note that he denied saying these things. In fairness to this paper, I must note that I have the tape recording.

Last July, when The Observer blew the whistle on Draper and cronies, his lobbying days ended, and with it, I assumed, the Dome ticket scheme. That is why I was intrigued when, leaving the Labour Party conference in September, I saw a large billboard urging the masses to purchase a Millennium Dome ticket ‘at your lottery agent'.

I learnt that the Lottery Commission authorised Dome ticket sales, an unprecedented use of the machines, on 22 September – just after the commissioners issued draft terms for bidding on the next lottery contract.

Looking over the bidding requirements drafted by NatLot, one expert concluded: ‘The bid is a lock for GTech. They've already won it.'

Two other experts, both sympathetic to GTech, conceded that the bidding format gives it ‘a very, very unfair advantage to GTech'. I was surprised by these insiders saying GTech, not Camelot.

‘To all intents and purposes,' one told me, ‘GTech is Camelot.' Although the corporation was forced to sell its 22 per cent stake in Camelot, the Government permitted GTech to sign an exclusive vendor agreement with its old Camelot buddies. In effect, this allowed GTech back into the consortium. Indeed, through their technology, it is a key player in Camelot.

The Government has all but named the GTech-Camelot group as winner of the new Lottery franchise by failing to counterbalance Camelot's crushing advantage in having 30,000 online machines already in the shops, already depreciating, and fantastically costly for competitors to duplicate. With these game rules, said one critic, ‘you'd have to be crazy to bid against GTech'.

So I called Richard Branson's office. In September, his spokesman maintained a ‘we fear nobody' bravado based on a belief that Camelot had contracted to turn over its machines if Branson won.

Not so, the Lottery told me. Camelot agrees only to ‘co-operate graciously' with a winning rival, but nothing is required in law. Camelot's chief says co-operation includes no obligation to sell the machines: ‘We may want to use them for something else.' Camelot's official mentioned the Dome tickets as an example. If Camelot-GTech loses, Labour loses its big, no-cost network for Dome sales.

On 26 October, competing bidders met NatLot, and Branson's team found it had been dished. And if Branson does win, NatLot will give him just three days to change all the machines.

‘We're shocked, stunned, horrified,' said Branson's adviser. Lottery chairman Brian Pomeroy told me the bidding process favoured the current provider only because he was constrained by the Lottery Act, one of New Labour's first reforms.

Reform consisted of shuffling the organisation chart and changing the name to NatLot. The Texas Model remained in place, as did GTech. How did that happen? Let us just call it Texminster, a combination of telepathy and coincidence common to the politics of two continents.

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Gregory Palast writes the award-winning column, “Inside Corporate America” fortnightly in Britain's Sunday newspaper, The Observer part of the Guardian Media Group, where this first appeared.