House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Third Report

IV. FUNDING OF THE BBC

Introduction

53. The Davies proposal for additional external funding of around £150-£200 million a year is in addition to £600 million per annum which is expected to become available to the BBC by 2006 as a result of household growth and what are termed "self-help measures".[172] The number of households with a television licence rises regularly over time as a result of household growth of 0.85 per cent per annum. This is likely to produce additional income for the BBC of between £80 million and £140 million a year by 2006.[173] This figure is included in the total of £600 million, which is otherwise based on the assumption that the so-called "self-help measures" are "implemented as intended by the BBC".[174] The Review suggested that the BBC might come closer to its "full service vision" than would be provided for under the Review's funding proposals if the BBC were to achieve "faster gains in efficiency and commercial activities".[175] Sir John Birt also held out the prospect of funding the BBC's vision by thinking of how "we can stretch ourselves even further to fund it [the vision] ourselves".[176] We consider that the precise scope for savings from the BBC's capacity to stretch itself should be rigorously explored before, not after, decisions on external funding levels.

BBC efficiency savings

54. When we last considered the BBC's finances we stated our expectation that the review of the BBC's funding "will include a thorough examination of the scope for efficiency savings in the Corporation in future years".[177] Regrettably, this recommendation has been ignored. Mr Davies contended that analysis of efficiency savings "required full-time attention from experts" and that the Panel "just did not feel we had the resources or time to do" a detailed investigation.[178] We would not dispute either of these claims, but they do not explain why an independent scrutiny was not commissioned to inform the Davies Panel's recommendations.

55. Instead, the Davies Review suggested that the Secretary of State commission a study on efficiency savings before implementing the Panel's recommendations.[179] Mr Chris Smith has agreed to this proposal and has in fact commissioned an independent study of all the BBC's financial projections.[180] The appointment of the consultants was announced in mid-November and their findings will be submitted to Mr Smith by the end of 1999.[181] A summary of these findings will be published when Mr Smith announces his decision on the Davies Panel recommendations.[182] This timetable precludes consideration of the findings during this Committee's inquiry, let alone during the period of public consultation on the Davies Review.

56. The Davies Panel accepted the contention of the BBC that the level of savings achieved in the 1990s meant that efficiency savings would be harder to achieve in future.[183] The BBC contended that past efficiency gains resulted from step changes which could not be replicated in future.[184] Compared with savings averaging £89 million a year in the last three years, the BBC foresees achieving savings around £60 million in coming years.[185] Sir John Birt saw no scope at present for changes to these efficiency targets. The "opportunities going forward are harder and tougher than they have been in the recent past"; the targets "will be very difficult indeed to achieve".[186]

57. In 1996, the BBC predicted that its efficiency saving in 1997-98 would be below £20 million and the saving in 1998-99 below £40 million.[187] The actual savings achieved in these two years were £76 million and £105 million respectively.[188] Even allowing for the low levels of inflation in the period from 1996 to 1999, this discrepancy would suggest that the BBC's capacity to predict its own potential for efficiency savings is not one of its strongest suits. The independent study which preceded the establishment of the five year funding formula from 1997 to 2002 concluded that the targets which the BBC had set itself were "not stretching enough" and that there was "a scope for more ambitious efficiency achievements" because of the "excessive" discontinuity between past savings and projected future savings and the higher yield from technology-based process improvement.[189]

58. We were disappointed at the statement of Mr Greg Dyke, the BBC's Director-General-designate, that reductions in overheads were already "factored into the numbers" for future efficiency savings which he will inherit.[190] Mr Chris Smith welcomed Mr Dyke's commitment "to seek to shift more resources out of bureaucracy and into programme-making".[191] We consider that this should in future be linked explicitly to a pursuit of savings beyond those already planned. Sir Christopher Bland claimed that "the BBC is now a pretty efficient organisation", but accepted that "it is not world class".[192] Should the independent study of BBC projections which the Secretary of State for Culture, Media and Sport has now commissioned find that any BBC targets for efficiency savings are under-estimates, we recommend that any differential should be taken into account when assessing BBC claims of a funding shortfall, rather than being left for the BBC to spend on such unspecified services as it thinks fit.

BBC Worldwide

59. On previous occasions this Committee and its predecessor have argued that the BBC should do much more to enhance the cash flow benefits from its commercial subsidiary, BBC Worldwide.[193] We previously characterised the BBC's target of increasing the net benefit to the BBC from the activities of BBC Worldwide to £200 million a year by 2006 as "markedly unambitious".[194] In its consideration of BBC "self-help", the Davies Panel argued that the current targets are "demanding" and "it will be difficult to exceed them by any substantial amount, even if the culture of the BBC gives greater emphasis to commercial activities in future".[195]

60. Elsewhere, the Panel appeared to take a somewhat different view. It argued that the BBC's archive has been under-exploited for too long.[196] It stated that it is "convinced that there is considerable scope to increase commercial revenues".[197] Of the £200 million target, the Panel shared "the Select Committee's view that the growth potential could far exceed that figure".[198] The Davies Panel believed, however, that this further growth potential would be tapped only by structural change within BBC Worldwide.[199] The Review recommended that private funding of BBC Worldwide should be increased rapidly to 49 per cent through an injection of private capital at holding company level.[200] The Panel estimated that a 49 per cent stake in the non-channel business of BBC Worldwide could be worth about £200 million.[201] The Review acknowledged that this part-privatisation would reduce the profits returned to the BBC, but argued that such lost profits "could be quickly made up by the increase in the activities of BBC Worldwide which private involvement would bring about".[202]

61. The BBC, in its response to the consultation on the Panel's work, argued that the 49 per cent private stake at holding company level would probably reduce the future value earned from BBC Worldwide by licence payers because of potential conflict over brand and editorial values, the threat to current and future partnerships and the possible under-valuation of assets involved in the sale.[203] The BBC was confident that existing relationships developed by BBC Worldwide would "build over time towards the 49 per cent level of private capital investment in BBC Worldwide's activities recommended by the Panel".[204] BECTU argued that the Davies Panel had ignored the injection of entrepreneurship into BBC Worldwide resulting from recent management change and believed that it was too early to judge whether the "new commercial managers" would deliver improved results.[205] BECTU agreed that BBC Worldwide was "not contributing as much as it should" to the BBC, but believed part-privatisation would actually reduce income flow to the BBC.[206] The proposal from the Panel did not answer "any of the problems raised. It is just another fudge that will complicate the matter even more."[207]

62. Although we share the view of the Davies Panel that the growth potential of BBC Worldwide is far greater than the present targets for the organisation imply, we do not believe that partial privatisation is a recipe for increasing receipts for the benefit of the BBC as a whole. We reject the Davies Panel recommendation for a 49 per cent private sector share in BBC Worldwide at holding company level. We do, however, continue to believe that the BBC must prove its capacity for much greater increases in net cash flow from BBC Worldwide to the BBC in coming years under the current organisational arrangements.

BBC Resources

63. BBC Resources Limited was established in 1998 as the second commercial arm of the BBC. Over 4,000 staff were transferred into the Company. The aim of granting BBC Resources this status was to give it the freedom to seek external income in "a vigorous and unfettered fashion", tapping into a potentially vast global market.[208] The Company's target is to generate an additional cash flow of £82 million over the next five years.[209] According to the Director-General of the BBC, "BBC Resources Limited and its staff are a valued and integral part of the BBC".[210] In considering incorporation, Mr Chris Smith was quoted as saying "I want to make sure that this cannot be used as a ramp for privatisation".[211]

64. The Davies Review recommended that BBC Resources Limited be privatised.[212] The Panel argued that this would free the organisation from fair trading constraints. The Review considered that "a market exists with a number of competitors that are likely to be interested and who have the ability to realise synergy and develop the commercial potential" for BBC Resources.[213] The Panel noted that the BBC's craft base should not be undermined and the BBC's role as the primary investor in core broadcast skills should not be diluted as a result of the measure.[214] The privatisation of BBC Resources was supported in only one submission received by this Committee, that from ntl, although its reasons for doing so were not given.[215]

65. BBC Resources already competes in a competitive market: producers are free to employ either in-house or external technical staff.[216] There is already significant use of staff and equipment from the external market.[217] Mr Dyke said that experience in Australia indicated that Resources could only be sold in return for guaranteed business at a guaranteed price.[218] This would, of course, run counter to the freedom to choose the external market. Helen Black, in dissenting from the Davies Panel recommendation, argued that "ultimately the BBC would end up paying more for programmes than it currently does".[219] This view appeared to be shared by Lord Gordon of Strathblane, who was "lukewarm" about the Panel's proposal even though he had not dissented from it.[220] Others were also of the view that costs would increase as a consequence of privatisation.[221]

66. BECTU considered that any increase in costs would not be offset by sale proceeds on the scale anticipated by the Davies Panel. The Review estimated that a 100 per cent stake in BBC Resources would be worth in the region of £230 million and thought that the "bulk" of it should be sold.[222] BECTU believed that this valuation was too high, being based on a 1998 business plan which was already superseded by the time the Davies Panel reported. BECTU thought a more up-to-date and realistic valuation was £100-£120 million.[223] It also argued that the BBC would need to compensate new employers for any inherited redundancy entitlements.[224]

67. Technological progress should make it more possible in future for the BBC to achieve greater "vertical integration" between production and resources functions.[225] This approach is already adopted by other broadcasters and is a potential means of obtaining efficiency savings.[226] According to BECTU, "if Resources were privatised that opportunity would be lost to the BBC".[227]

68. ITN, a rival of the BBC, notes that BBC Resources "still plays an important role in equipping individuals with important skills and training for careers across broadcasting and production".[228] The Davies Panel did not explain how the BBC would continue its role as this country's "primary investor in core broadcast skills" following privatisation.[229] BECTU argued that "the largest technical training resource in British broadcasting" would disappear.[230] In an industry increasingly characterised by freelance employment, core skills for broadcasting and the film industry would be lost.[231] We recommend that the Secretary of State for Culture, Media and Sport rejects the recommendation of the Davies Panel that the bulk of BBC Resources be privatised.

The Digital Licence Supplement

69. As its principal proposed measure designed to meet the perceived need for "buoyancy" in the BBC's external revenues, the Davies Review recommended that, with effect from 1 April 2000, a digital licence supplement should be introduced at a level of £1.99 a month, and that the level of the supplement should fall to 99 pence a month by 2006.[232] Several arguments are adduced by the Panel in support of the supplement. These arguments can be summarised as follows: first, "it is unfair to charge analogue households for the development of digital services which they cannot receive";[233] second, there are precedents for charging more for new services, including the introduction of television itself and the introduction of colour television;[234] third, once the initial decision was taken by Government to introduce the supplement, "it would remove the BBC licence fee from the arena of political controversy for many years to come".[235]

70. In support of the argument that "those who benefit should pay" for digital television, Mr Davies stated that "the vast majority of licence fee payers, of whatever means, are paying £10 to subsidise those of us who choose to watch digital TV".[236] However, the Director-General of the BBC himself stated to the National Heritage Committee in 1996:

"We think we can justify investments in new technologies or new services, provided always our judgement is in the long-term all licence fee payers who wish to are likely to be able to receive it".[237]

The television licence fee is a general payment for a whole range of BBC services, not all of which are accessed by or accessible to all licence fee payers. The implications of applying a "user pays principle" to the licence fee are very considerable.[238] They have not been fully explored by the Davies Panel.

71. The Davies Review recommended that its proposed digital licence supplement be reduced and eventually phased out over time, a point which Mr Davies felt had been largely over-looked in media coverage of the Review.[239] This aspect of the supplement was in fact seen by some as particularly worthy of attention as an argument against its introduction. Lord Gordon of Strathblane, the member of the Panel who disagreed with the recommendation for a digital supplement, argued that "those considering a switch from analogue will be tempted to wait until the digital licence supplement has reduced before actually switching", thus deferring digital take-up.[240] Mr Peter Rogers, Chief Executive of the ITC, thought that a digital supplement which declined over time and therefore benefited those waiting longer was "worst of all".[241]

72. The prospect which the Davies Panel held out that the digital licence supplement, once introduced, "would remove the BBC licence fee from the arena of political controversy for many years to come" is a mirage.[242] The digital licence supplement is set at a cash figure for the period to 2006-07, starting at £1.99 and ending at 99 pence. These figures are consciously arrived at and are not presumably intended to be adjusted for inflation.[243] They have already been questioned in quite abrupt terms by the BBC: "The Panel cites no evidence which leads them to recommend a £1.99 figure as opposed to £2.99 or £3.99 a month".[244] We do not accept the view of the Davies Panel about factors affecting what will or will not be a matter of political controversy in coming years. Setting aside for one moment the controversy surrounding the proposed supplement itself, there is no obvious reason why its level should not become the subject for debate, not least because the BBC, like Oliver Twist, can be relied on to ask for more.

73. The United Kingdom is leading the way in the development of digital television.[245] The vibrant market in this country assists in creating business opportunities in international markets.[246] Ondigital is a world leader in digital terrestrial television.[247] BSkyB has the biggest digital satellite platform in Europe.[248] A great deal of money is being invested by private companies in this embryonic industry, involving high degrees of risk.[249] These commercial organisations have argued that a digital licence supplement would substantially reduce their return on this investment.[250]

74. Mr Davies was highly sceptical about the motivation of those who criticised the digital supplement as a "tax on technology": he called this "a slogan coined by people in whose interests it is to maintain the status quo ... the present status quo is obviously of benefit in the short-term to the private sector digital industry".[251] However, characterisation of the digital supplement as a tax on innovation is not confined to the private sector. The current Director-General of the BBC described a digital supplement as "in effect a tax on innovation" in 1996, even though he has subsequently changed his mind on the merits of a digital supplement.[252] The same term is used by Mr Peter Ainsworth MP, the Shadow Secretary of State for Culture, Media and Sport, in the Conservative Party's submission to the Davies Panel.[253]

75. There is a consensus that imposition of a digital licence supplement would delay take-up of digital television. In 1996 the BBC told the National Heritage Committee that such a supplement "would in fact inhibit and delay the growth of digital broadcasting in Britain".[254] Mr Davies himself acknowledged that "it would be foolish to pretend" that the disincentive effect on digital take-up did not exist.[255] The only matter of contention is the extent of that disincentive. The Davies Panel did not believe that "the damaging effect—measured over a period of years—will be large".[256] An alliance of broadcasters, programme-makers and equipment manufacturers vigorously disputes this view, pointing to research by National Economic Research Associates (NERA) which they commissioned which suggested that some 5.2 million less households would have converted to digital television by 2008 in consequence of the supplement.[257]

76. Mr Davies disputed the validity of NERA's findings. He argued that the study had "substantially exaggerated the price effects of the digital supplement" and believed that the fall in take-up suggested was "way too high ... implausibly too high".[258] Mr Davies' critique is in turn disputed by NERA. That body pointed out that the methodology for its study was well-established, having been previously employed for a study on digital take-up for the Department for Culture, Media and Sport. NERA stressed that any decision which dissuaded people from buying integrated digital televisions in 2000 was likely to have a continuing impact after 2006, since television sets are usually replaced about every eight years.[259] Mr Chris Smith told us that he took the conclusions of the NERA study very seriously and was examining NERA's evidence very carefully.[260]

77. We received evidence to support the contention that the digital television audience was highly price sensitive. For example, Ondigital offers subscription packages at £9.99 and £11.99 and finds that "a good proportion of people choose the first of those".[261] As Mr Stuart Prebble, Ondigital's Chief Executive put it, "it feels self-evident that if something costs additional money then people are less likely to take it up than if it does not".[262] Mr Chris Smith confirmed that he would consider the competing claims about the impact of the supplement on take-up before reaching his decision and added that the Department for Culture, Media and Sport's chief economist would provide impartial advice on the differing analyses of this impact.[263]

78. Given that the Secretary of State has set a target level of take-up before analogue switch-off and that the digital licence supplement will slow take-up, it is an almost inevitable consequence that the supplement will push back the date of analogue switch-off. The Davies Panel contended that its proposal is designed so as not to "conflict in any way with the possibility of analogue switch-over in about ten years' time".[264] To this end, the Panel envisaged that the supplement would disappear by 2010.[265] This is problematic in several ways. First, there is likely to be pressure for retention of the supplement once introduced. Second, the argument ignores the disincentive effect on early take-up among those waiting for the supplement to end. The NERA study suggests that the supplement might delay switch-off by three years and argues that the proposal is therefore "incompatible with the Government's plans for switch over from analogue to digital transmissions".[266]

79. The digital licence supplement will fall initially on "early adopters" of digital television. As Lord Gordon of Strathblane, a member of the Davies Panel, noted, "people are not switching to digital to watch the BBC programmes, they are switching to digital to watch the other programmes".[267] The BBC itself acknowledges that "Digital early adopters have very specific viewing preferences. They are primarily interested in sports and film channels."[268] In effect, those who watch the BBC least will pay the most for the privilege.

80. The Davies Panel noted that "a digital licence supplement at the levels suggested (averaging £1.57 per month over the next seven years) is small compared with the cost of commercial subscription packages which range up to £29.99 a month".[269] The Panel ignored the fact that those who subscribe to commercial digital services choose to do so, while a digital licence supplement would be compulsory. Moreover, the Panel's comparison is misleading. Basic digital packages cost far less than the figure cited. Telewest, for example, offers a £5 a month entry package.[270] More importantly, digital television is available simply as a free-to-air service, either following purchase of an integrated digital television or installation of a BSkyB dish.[271] The digital licence supplement would bear heavily on those only able to afford free-to-air digital television.[272] It would negate at a stroke the BBC's earlier promise to deliver digital services to licence fee payers "at no extra charge".[273]

81. The Davies Panel made much of the comparison with the introduction of colour television and of a colour licence fee in proposing a digital licence supplement.[274] Lord Lipsey described the two situations as "very analogous".[275] In fact, the comparison is false. First, at the time of the switch from black and white to colour, the BBC's services were at the core of the improved offering for which people were being asked to pay. For those seeking to switch to digital television, BBC services are currently perceived as peripheral.[276] Also, the technological change is of a different order. Black and white television sets still work. It is the Government's stated policy to render analogue televisions without digital capability obsolete.[277] There is a public policy imperative behind the switch from analogue to digital which simply did not apply to the switch from black and white to colour.

82. Commercial broadcasters also argued that collection of the digital licence supplement would pose considerable difficulties, particularly in relation to those who switched between providers or ceased to subscribe at all.[278] Mr Chris Smith told us that he was considering the ease and cost of collection of the supplement as one factor in reaching his final decision.[279]

83. The Davies Panel described the current licence fee as "a good way of financing public service broadcasting", but "a very bad way of taxing the public".[280] Yet, according to opinion polling commissioned by the Davies Panel, the digital supplement is much more unpopular than the main licence fee.[281] Since there are already well over 2 million digital subscribers, it would be perceived as being, in effect, retrospective.[282] The digital licence supplement would slow take-up of digital television and delay analogue switch-off. It would hamper the possibility of marginally free digital television being available to consumers and would accordingly bear most heavily on the most disadvantaged in society. In short, it would run directly counter to the objectives of public policy. Regardless of any decision on the funding requirements of the BBC, we recommend that the proposal of the Davies Review for a digital licence supplement should be rejected.

The five-year funding settlement, 1997-2002

84. The Davies Panel did consider the possibility that the digital licence supplement might be rejected. Accordingly, they made an alternative proposal—termed "the analogue option"—for an increase in the licence fee of £5 in 2000-01 and a further increase by the same amount in 2001-02.[283] Lord Gordon of Strathblane also argued for increasing the licence fee "very marginally" in these years, by £3 in 2000-01 and £4 in 2001-02.[284] He thought that an increase of £5 to £7 would "not cause too much public outrage".[285]

85. As we noted earlier, the five-year funding settlement was put in place in 1996 precisely in order to fund the BBC's involvement in digital television. The settlement linked the licence fee to inflation in 1997-98, but offered the BBC above-inflation increases in 1998-99 and 1999-2000, to be off-set by increases below inflation in 2000-01 and 2001-02. The overall effect of the settlement was to provide the BBC with funding 0.08 per cent below inflation over five years.[286] In consequence of the implementation of this formula, the licence fee has risen from £89.50 in 1996-97 to its present level of £101.00, an increase of almost 13 per cent in three years.[287]

86. The new Government decided in December 1997 that the five-year settlement "remains appropriate".[288] In December 1998, after the appointment of Mr Davies to chair the Panel, the Government re-affirmed its commitment to the five-year settlement and confirmed that the licence fee increases in 2000-01 and 2001-02 would be "below inflation".[289] The position of the settlement in relation to the work of the Davies Panel was set out by the Government in its published reply to a Report from this Committee in terms which leave no room for doubt or equivocation:

"The review will not reconsider the current five-year formula for the level of the licence fee until 2002, announced in April 1997 following an independent assessment of the BBC's funding needs ... The Government will consider the level of the licence fee after 2002 following completion of the review."[290]

87. The Davies Panel accepted that its second-best proposal "breaches the present licence fee settlement" and that "the five-year settlement should not be re-opened".[291] Even Lord Gordon of Strathblane conceded that "it is a bad idea in principle to disturb the current licence fee settlement".[292] Nowhere did the Davies Panel explain the overwhelming imperative which should lead the Secretary of State for Culture, Media and Sport to renege on his firm and repeated commitment to the five-year funding formula.

88. Mr Davies referred to his secondary alternative as an increase in the "analogue licence fee".[293] But the current licence fee has increased above inflation in recent years and privatisation proceeds have been granted to the BBC precisely to fund its digital services. As Lord Gordon noted, "the presumption must be that the BBC would not have started services as prudent managers of a public-funded organisation unless they could fund them".[294] A similar point was made by Mr Prebble:

"They [the BBC] would have been irresponsible, and I am sure the BBC would not have done it, to launch all of these services and assume that at some point in the future somebody would give them a large sum of money. So they must have had that in their business plan."[295]

89. The BBC has known the profile of its external income from 1997 to 2002 for several years: significant rises initially, followed by a relative decline. It was the duty of the BBC to cut its coat according to the cloth. The Secretary of State reaffirmed his commitment to the five-year funding formula and explicitly excluded the matter from consideration by the Davies Panel earlier this year. We see no possible justification for the Secretary of State to resile from that position. We recommend that the level of the licence fee in 2000-01 and 2001-02 should be set in accordance with the settlement announced in 1996 by the previous Government and endorsed by the present Government.

Concessions and fairness

(i) The licence fee and income distribution

90. When we considered the BBC's work in the Autumn of 1998, we described concessionary licences as "one of the most pressing matters to be considered by the funding review".[296] The Panel observed that this issue attracted more correspondence than any other aspect of the review.[297] The Davies Review considered concessions in the light of its lapidary remark that "the licence fee, correctly described, is a tax and a poor tax at that".[298] The licence fee is "highly regressive", representing 1.7 per cent of the net incomes of the poorest ten per cent of the population.[299] The licence fee as a funding mechanism is "not well suited to solving problems of income distribution";[300] "the alleviation of poverty is not a broadcasting issue";[301] the BBC should not be used "as a surrogate social security department".[302]

(ii) Free television licences for those aged 75 and over

91. The Davies Panel concluded that "an easy solution" to problems related to concessions "does not exist within the confines of broadcasting finance".[303] The Panel decided that any concessions funded by the Treasury were outside its terms of reference.[304] The analysis of the Davies Panel, however, together with advocacy of free television licences for those aged 75 or over by all political parties represented on this Committee, forms part of the background to the recent Government announcement.[305]

92. In his Pre-Budget Statement on 9 November 1999, the Chancellor of the Exchequer announced that, from the Autumn of the year 2000, every pensioner aged 75 or over will receive the television licence free of charge: every one of the 3 million households including a pensioner aged 75 or over would be able to save £101.[306] Mr Chris Smith welcomed a measure which provided "a real benefit to many of the poorest households in this country".[307] He considered it preferable to a general increase in the pension because it would be available as a lump sum to meet a lump sum charge and because it would not be taken into account in calculations of other benefits such as Housing Benefit.[308]

93. The BBC was not consulted before the Chancellor's announcement was made and further details about the precise mechanism by which payment will be made to individuals is not yet determined.[309] We explored some of the practical implications of the scheme with witnesses. Mr John Smith, the BBC's Director of Finance, said that, to "minimise fraud", a licence of nil value would be issued to those aged 75 and over.[310] Ms Patricia Hodgson, the BBC's Director of Policy and Planning, said that the BBC was keen to maintain the principle of liability on individual households; the legal obligation to hold a valid licence would remain even for those aged 75 and over.[311] We put it to Mr Chris Smith that there was accordingly a possibility that someone aged 75 or over could be fined or imprisoned for not obtaining a free licence. He viewed this only as a "technical possibility" which was "unlikely to occur".[312] He did not think that "such a hypothetical problem" should "disrupt a sensible administrative procedure".[313] Nevertheless, a prevailing sense that the obligation to obtain a licence did not apply to those aged 75 or over or that normal sanctions would never be applied might undermine a system based on a compulsory licence without a face value.

94. In an inquiry into the BBC and its funding we do not propose to comment on the merits of a social security measure concerned in part with the alleviation of poverty. We consider, however, that the new scheme for those aged 75 and over should be introduced in a way as well-suited as possible to the needs of broadcasting finance. In our view, the scheme would work best as a voucher system in which all persons aged 75 and over would be issued, as part of their old age pension, with a voucher for the full cost of a colour television licence, currently £101. This system has several advantages: first, it clarifies the obligation to obtain a television licence (at its face value) and thus greatly reduces the problems of collection and enforcement; second, it would switch the burden of determining eligibility from an organisation which has no business in knowing people's ages—the BBC—to one which does—the Department of Social Security; third, it provides those aged 75 or over who feel on financial or other grounds that they wish to pay the full licence fee with an opportunity to do so, thus saving the taxpayer money; and, finally, it will remove a financial disincentive from having a colour television for those old age pensioners aged 75 or over who either do not currently possess a television or who have a black and white television, thus potentially improving their quality of life.

(iii) The concession for blind people

95. When the radio licence was abolished in 1971, its value (£1.25) was converted into an ongoing discount for blind people if they chose to have a standard television (as opposed to a sound-only television receiver). Blind people do not have to pay any licence fee if they have a sound-only television receiver, but many blind people naturally would want a television set with pictures in their home, either for those who live with them or for visitors.[314] The Royal National Institute for the Blind described the current concession as "derisory" and proposed that it be increased to £50.[315] The Davies Panel recommended that the concession be set at 50 per cent of the full colour licence fee.[316] We have received a great deal of correspondence in support of this proposal. We wholeheartedly endorse the recommendation of the Davies Panel that a 50 per cent concession on the cost of the full colour licence fee should be available for registered blind people and congratulate the Panel and the Royal National Institute for the Blind for identifying the insulting inadequacy of the previous concession.

(iv) Collection and payment methods

96. The BBC assumed responsibility for licence fee collection in 1991. Since then collection costs have fallen along with levels of evasion. According to Sir John Birt, "this has been a major success story".[317] This is attributed first and foremost to measures which the BBC has taken to make the licence fee easier to pay for those who find it hard to budget for a single lump sum payment.[318] The schemes introduced were examined by the Davies Panel, which noted that the "Cash Easy Entry" scheme, designed for those on income-related benefits, required its users to pay for two licences in the first year of operation. The Review recommended that this scheme should be put on the same payment schedule as the "Monthly Cash Plan", a proposal already accepted by the BBC.[319]

97. We were disappointed that the Panel did not comment upon the single most popular instalment payment scheme—the "Quarterly Budget Scheme" which is used by 23 per cent of all licence fee payers. Under this Scheme, licence fee payers make four quarterly payments to the BBC, each with a £1.25 surcharge, supposedly because the payments are in arrears.[320] We put to Mr Chris Smith that such a system was not right. He agreed that this was "an entirely valid point" which the BBC "ought to address".[321] It is wrong that the BBC actively solicits licence fee payers to switch to a payment system which requires them to pay £106 for a £101 licence fee. We recommend that the additional charge for payment by direct debit be discontinued with effect from 1 April 2000.

98. The BBC estimated that it could achieve cumulative savings of £50-70 million per year by 2006 as a result in improvements in the efficiency of collection.[322] The Davies Panel was impressed by improvements in licence fee collection and by those now responsible for collection.[323] Granada Media argued, however, that the BBC target of £70 million was "unambitious", not least because digital television would make evasion harder than ever.[324] We have not examined collection in detail in this inquiry. We note that the National Audit Office already has the power to examine the BBC's arrangements for collecting the licence fee and that it and the Committee of Public Accounts have not done so since the BBC assumed responsibility for collection.[325] This may be a fruitful area for scrutiny in the near future.

99. The BBC's enforcement procedures have the weight of the criminal law behind them. Many people are fined for non-payment of their licence fee. In turn, a significant, but diminishing number are jailed for failure to pay the resultant fine: 728 people were jailed in 1995 and 148 in 1998, of whom a significant proportion were women.[326] The BBC has previously expressed the hope that the Crime Sentences Act 1998, which increases the range of non-custodial sentences for those not paying fines, would further reduce the use of imprisonment.[327] Sir Christopher Bland said that the sooner the number imprisoned "is zero the better".[328]

100. The National Consumer Council implied that a switch away from custodial sentences for non-payment of fines was not enough. It recommended that "non-possession of a TV licence should be de-criminalised and treated in the same way as other debts through the civil courts".[329] It argued that criminal sanctions did not apply for other public services and did not believe that collection costs would be much greater.[330] Mr Chris Smith noted that any change would require the involvement of other Ministers in other Departments. His initial view was that the present system worked well because "the criminal sanctions have not had to be applied in enormous numbers".[331] The BBC said that the question of whether the criminal law continued to apply rather than civil sanctions was a matter for Parliament, but that their aim was "to get a sale not a prosecution".[332] We recommend that the Lord Chancellor's Department and the Department for Culture, Media and Sport commission a report for publication during the first half of the year 2000 on the implications both of removing the sanction of custodial sentences for non-payment of fines for licence evasion and of de-criminalising failure to possess a licence altogether.

(v) A fairer licence fee?

101. The Davies Review noted that "while the licence fee is a good way of financing public service broadcasting, it is a very bad way of taxing the public". The Panel confessed that "we have joined several previous committees in failing to identify ways of making the system obviously fairer".[333] The Panel touched upon but rejected the idea of a supplementary licence for households with more than one television set.[334] Mr Davies told us that his Panel had found that "the multiple television households in the UK are not very highly correlated with income or wealth; they seem to be better correlated with family type".[335] Such a charge would also impose considerable hurdles for collection.[336]

102. The Davies Panel also examined the system of business licences.[337] The Review decided that any extension of the licence payable by hotels would penalise small hotels.[338] The Panel thought that any extension to other businesses would raise little extra revenue, but would involve considerable collection costs.[339] We do not question these judgements of the Davies Panel, but consider that avenues for exploration should not be closed off for good.

(vi) Sub-titling

103. No concession on the licence fee is available to those who are deaf or hard of hearing, nor was such a concession proposed by the Davies Review.[340] In order to provide a full service for those who are deaf or hard of hearing—8.7 million people according to the Royal National Institute for the Deaf, of whom 5 million use sub-titles regularly—it is essential that sub-titling is widely available on BBC services.[341] The BBC aims to adhere to targets for sub-titling set by the ITC for other broadcasters and also to be "ahead of the rest of the industry as a matter of policy".[342] It is notable that the BBC's terrestrial channels do not appear to be markedly ahead of ITC channels in terms of sub-titling, although we have not had the opportunity to explore the interpretation of these figures.[343]

104. The Davies Panel examined the proposals of the BBC for sub-titling on its digital services. The Review described the current target, which is for sub-titling of only 50 per cent of programmes ten years after launch of digital terrestrial television, as "wholly inadequate".[344] The Panel recommended that the BBC should aim to achieve 50 per cent of programmes on new digital services being sub-titled in the next five years and 100 per cent by 2009.[345] This recommendation has already been supported by the BBC.[346] We consider it a matter for regret that the BBC as a public sector broadcaster needed external prompting to establish stretching targets for sub-titling, but we also support the Davies recommendation, with one amendment which may or may not be of significance. We recommend that the target of 100 per cent sub-titling of programmes of BBC digital services should be set for 2009 or the date of analogue switch-off, whichever is the earlier.

The level of the BBC licence fee, 2002-2006

105. Mr Chris Smith told us that he believed now was the time to reach a decision on the BBC's remit and funding in the medium term in order to try to "shape the broadcasting world for the benefit of the viewing public".[347] He expected to give a clear view on the level of the licence fee in the period to 2006 in announcing his response to the Davies Review.[348] We do not believe that now is the right time to determine the BBC's funding beyond 2002. Change in broadcasting is accelerating and the BBC's capacity to account for its own role has not kept pace with this change. The questions referred to earlier about the BBC's impact on the commercial market are become increasingly pressing. The present arrangements for the accountability and regulation of the BBC are not sustainable to 2006. Funding decisions for the period from 2002 to 2006 should only follow after a fundamental reconsideration of the BBC's role and remit.

172 6Ibid, p 55. Back

173 Ibid, pp 46, 55. Back

174 Ibid, p 55. Back

175 Ibid, p 57. Back

176 Q 268. Back

177 HC (1997-98) 1090, para 38. Back

178 Q 37. Back

179 Davies Review, p 54. Back

180 HC Deb, 29 October 1999, col 1213. Back

181 Department for Culture, Media and Sport News Release 281, 17 November 1999. Back

182 HC Deb, 29 October 1999, col 1213. Back

183 Davies Review, p 39; Q 38. Back