Examination of Witnesses (Questions 1-19)|
WEDNESDAY 17 JULY 2002
1. Mr Davies, I welcome you and your colleagues
here this morning. If you permit me to do so, I especially welcome
Lord Ryder since it is the first time that we have seen him at
one of these meetings. As you point out in your annual report,
these meetings take place because of an offer by yourself and
your predecessor that we should have a session, questioning you
about your report and accounts. We appreciate that. We appreciate
the fact that you have embargoed the report until after this session
ends, and I think it appropriate to place on record that I myself
at the moment am working on a programme for the BBC. Mr Davies,
would you like to make an opening statement?
(Mr Davies) Briefly, Chairman. First
of all, it is rather an inversion of normal practice that we would
invite ourselves round to see you, but we are very grateful to
you and the Committee for having us. We think that this is the
only public or private organisation that is subjected to this
kind of parliamentary scrutiny on the day it publishes its results.
This is part of our plan and our intention: that the Governors
have intended for some time to become more accountable, and it
is part of the reforms to governance that we announced in February,
shortly after we met this Committee on the previous occasion.
I think that the Governors have now more clearly delineated their
responsibilities in the areas of accountability; setting objectives;
compliance, especially with fair trading; setting strategy, and
regulating output. This has been my first year as Chairman of
the BBC. I think we would all agree that it has been a year of
remarkable events: September 11; war on terror; the funeral of
the Queen Mother and, more recently, the Golden Jubilee and the
World Cup. I believe that the BBC has faced enormous challenges
in covering these great events but has done it magnificently,
and I hope you would agree with that. Between a half and two-thirds
of the nation have typically turned to the BBC when these events
have occurred. This role in unifying the nation remains profoundly
at the heart of what the BBC does. On a more mundane level, we
have hit all of our major financial targets for the last 12 months,
the key one being that we have now reduced the amount of money
that we spend on bureaucracy in managing the BBC down to 15 per
cent of the total budget. We are therefore spending 85 per cent
of our revenue on programmes or programming, and that is a target
we have hit two years early. As you have said many times, Chairman,
the prime barometer of the health of the BBC is whether it is
making great programmes. I would argue that this year we have
delivered on that. We have spent £270 million extra on programming
this year, derived in large part from saving money on bureaucracy
and other efficiency gains. We have achieved higher ratings this
year, but that is not primarily what we are about. I think it
more important that we have made higher-quality programmes of
greater range and distinction. We could all think of our favourites.
The Blue Planet; Clocking Off; The Way We Live Now; Walking with
Beasts; Conspiracy; A History of Britain; Only Fools and Horses;
Radio 3's World Music AwardsI could go on for
a long time. Having said that, we recognise that there is more
work to be done at the BBC. Not all of the objectives the Governors
set last year have been met in full. Some of them remain work
in progress. We think that we need more progress in improving
the culture and creativity of the organisation; in improving its
ethnic mix in terms of staffing, and its appeal to young and ethnic
minority audiences. We did not succeed in launching BBC3 or the
Digital Curriculum. We would still like to do both, if we get
the go-ahead from the Government. For next year, the Governors
have set an objective of further extending the range and quality
of our core services, and we have said particularly in arts and
current affairs. In summary, therefore, we think that we have
had a good year. We think that we have had a year of progress,
but we are not yet the finished article and we have lots of work
Chairman: Thank you, Mr Davies. Before
I call John Thurso to start the questioning, could I point out
to your colleagues as well as yourself that any one of the six
of you who feels that they would like to answer any question that
comes up, please feel free to do so.
2. You talked in your opening remarks about
accountability and openness and you set out that objective on
page 16 of the report, objective 10. There is a difference between
openness and accountability. I am not, in this question, concerned
with the openness and the public; I want to focus quite strictly
on corporate governance, which is very much something that is
internal within the organisation. I think it has been admitted
that in the past the relationship between the Governors and the
management favoured the management perhaps slightly more than
the Governors. Looking to the future, in order for the Governors
to operate as an effective regulator there needs to be a healthy
and dynamic tension between those two bodies. Much of what you
announced you were doing in February sets out to do precisely
that. Can I ask you first of all whether you agree with that and
what progress you are making, and whether you feel that the Governors
as a body have sufficient weight, strength and support to enable
them to fulfil their role in that dynamic relationship?
(Mr Davies) I do not think that I would agree with
your premise that somehow the balance between the Governors and
the Executive was out of kilter prior to last year. It may sometimes
appear like that from outside the BBC, but from inside the BBC
I believe that the scrutiny that the Governors give the Executiveguidance,
strategy-setting, objective-settinghas always been rigorous.
It certainly has been in my time at the BBC. What I felt prior
to Februaryand the Governors and the Executive both bought
into this fairly wholeheartedlywas that we needed to make
some changes to our procedures, in order to clarify to the outside
role, and maybe also to ourselves, what the role of governance
was. One of the key things is to define what the two boards do,
relative to each other. We have only had three or four months
under the new system, but my feeling so far is that it has helped.
The role of the Governors as a supervisory body and the role of
the Executive as an operative body have been clarified. The business
that comes to the two boards reflects that. I hope that Parliament
and the public are becoming more comfortable with this, but we
will have to wait and see over the next two or three years.
3. With regard to the setting of objectivesbecause
clearly that is a very central part of the way you are taking
things forwardobjectives are really only as good as the
criteria which you use to measure their success, and the quality
of the objective itself. What are your systems, or how do you
go about establishing those criteria? How can you assure me that
these objectives9½ out of 10 of which, or whatever,
have been metare actually testable objectives and ones
that stretch the management?
(Mr Davies) This is a key question. In our judgementand
I fully accept that much of this is subjectivewe think
that about 8½ out of 12 were met last year, and we think
that we have made some progress on the others. I do not think
that on any of them we failed to make some genuine progress. However,
one of the things that we did feel in February we should do was
to improve our objective-setting framework. We have therefore
done a couple of things. The first is that we have had a much
more vigorous debate between the two boards on the objectives
for next year. The ones we have set for next year have been thoroughly
"scrubbed" by both the Executive and the Board of Governors
and then, in joint session, by the two boards coming to a final
view. I can tell you that the Governors did make some fairly significant
changes to the objectives which were suggested by the Executive.
There are two other things that I would like to mention. One is,
in future and for the first time, we are allocating individual
Governors to monitor individual objectives, not on a single-to-single
basis but on a double-to-double basis. Each objective will have
two Governors and each Governor will have two objectives to monitor.
We hope that keeping the board informed through the year will
be much more effective by that mechanism. We have appointed a
new head of objectives and compliance in the governance and accountability
officea gentleman whose job it will be independently to
inform the Governors and to measure how the BBC are doing on these
objectives. I take your point. I think that we could do better
on objectives, and I hope that we will do.
4. The compliance officer would report to whom?
(Mr Davies) The compliance officer reports to the
Secretary of the BBC and, through him, to menot to Greg.
5. Can I ask another question entirely unrelated
to that, which I suspect probably should go to the Finance Director,
Mr Smith? It relates to the balance sheet and to the notes pertaining
to the balance sheet which, if my memory serves me, were notes
12a and 12b on pages 91 and 92. What I am interested in is the
quality of the balance sheet in terms of the quality of the assets,
and how you go about establishing what is the quality of those
assets. As we all know, assets can be stated in many different
ways, and they can be fluffy or very solid. I notice that in your
revaluations you do not, for example, follow the corporate practice
of the triennial revaluation; you take a valuation and more or
less leave it there. Do you feel that these assets are all hard
and ones that you could put your hand on your heart and, in a
fire sale, say, "Yes, they will go for that"? That is
the first question.
(Mr Smith) It is probably best if you look at page
73 for my answerthe balance sheet itself. The main thing
to say about your question is as follows. First, we rarely put
on the balance sheet anything other than hard assets. There are
some exceptions which I will explain in a moment, but it is rare.
So, for example, some companies would have a very large figure
on the balance sheet, being what they would describe as intangible
fixed assets: things like brands or trade marks, which are only
of value temporarily and put on the balance sheet, based on a
series of valuations at a particular point in time. We rarely
do that. Nearly all of the assets on the BBC's balance sheet are
very hardas you can see. You have pointed to note 12. £761
million is land, buildings and other very tangible fixed assets,
which are all stated at costapart from a very small revaluation
which was done in 1993 when the BBC's internal market was introduced.
At that point the assets were revalued, to allow different parts
of the BBC to trade with each other. The value of the uplift from
that valuation is only £6 million on a balance sheet of £2.4
billion. The only intangibles on the balance sheet are in note
10, £15 millionlargely goodwill. In answer to your
question, therefore, most of our assets are very hard. You mentioned
the corporate practice of triennial revaluation. It is optional
and we have opted not to, as have many other companies. We would
prefer our balance sheet to be very prudent.
6. I cannot remember which FRS it is. I have
a suspicion that it is 15, but it is to do with this matter. The
point about revaluation is that in any organisation there is as
much danger in undervaluing the assets, which leads you to one
set of management decisions, as in overvaluing them. The two halves
of my question are, first, is it reasonably conservative and,
second, is it not so conservative that in actual fact you have
well understated the true value of the business?
(Mr Smith) If you said what would be the value on
the BBC, that would of course be an entirely different figure.
However, the BBC's balance sheet largely comprises assets it is
using for itself. It does not comprise assets that it is selling
on to other people, which would be the normal situation for many
companies. We are therefore in a different situation. The important
thing for us is that it is as prudent as makes sense, bearing
in mind the business that we are in.
7. There could be an uncharitable way of looking
at that, which is that this is a set of assets that has been built
up out of the licence fee over many years, and it is much better
for you to understate them and not draw attention to them, rather
than to state a true value of how much public money you actually
have on your balance sheet.
(Mr Smith) There is no intention or desire or effort
put into trying to hide any of that. I just think that it would
be a mistake to try to value the BBC, or value the brands that
comprise its programmes; and then have to do that every single
year, and report to people on the basis of something which is
an entirely subjective matter. By putting our assets on an historic
cost, there is no doubt about that. That is what it costs; there
is no argument about itand that is the prudent thing to
8. I would wholly concur with you in regard
to intellectual property, because the value of intellectual property
is an absolute minefield, as the dotcom bubble showed us. With
regard to tangible assets, however, if we are saying that you
have bricks and mortarparticularly if they happen to be
in, say, the Home Counties and they have not been revalued since
1993 or 1996you could be looking at a valuation 50 per
cent higher than that which is in the balance sheet. There is
no argument as to whether it is appropriate that you should or
should not have your assets. Clearly you should have your assets,
but is it not appropriate that, in a set of accounts which sets
out what you have been given in the past and what you are using
on behalf of the public, the public ought to know more accurately
what it is you are using on their behalf? There is no implied
criticism in that; it is merely a thoughtthat it would
be nice to know more broadly accurately what assets you are operating
on behalf of the public.
(Mr Smith) As I say, I think that what we are doing
is entirely sensible, bearing in mind the business we are in,
and it is prudentand, of course, it complies absolutely
with all FRSs under company law.
(Mr Davies) I think that when the Statistical Office
published the assets of the public sector, which from memory was
a year or two ago, it did put the BBC's assets into that calculation.
I think that there has therefore been an attempt to do something
along the lines that you have suggested. Am I right?
(Mr Smith) Yes, the National Asset Register.
(Mr Davies) I think that this is done for a somewhat
different purpose and perhaps more accurately gives the sum total
of cash which we have turned into fixed assets through time, rather
than the current resale value of those assets.
9. Do you have an audit committee?
(Mr Davies) We have an audit committee, the chair
of whom is Pauline Neville-Jones.
10. Could I suggestand not ask for an
answerthat the audit committee might like to look at it.
(Mr Davies) It will be done.
11. On page 10 you say that the digital services
were costing £278 million last year. If you add on the digital
transmission costs of £52 million, that takes you to £330
million, which is more than 10 per cent of the licence fee. I
think that this is the first year that is true. I thought there
was a commitment that those costs would not go above 10 per cent.
(Mr Dyke) I do not think we ever made a commitment.
If you look at what we are spending on our digital services, they
are split in different ways. There are the on-line services. When
I first joined the BBC there was much excitement about what could
be the value of the BBC's on-line services. What would be the
value of it if you ran the most popular on-line service in Europe?
We all know that the value is very limited and the on-line service
is clearly a public service. We have all discovered from the dotcom
boom and collapseas have many of the newspapers in this
countrythat on-line information per se has no revenue
base, and therefore there is no business. There are undoubtedly
all sorts of businesses that will develop out of the on-line world,
but it will not be the giving of wholesale information. It is
therefore a classic public service. You have that. There is a
duplication of transmission costs with digital and analogue, but
we have to do that while we still have the analogue switching.
You then look at our digital television and radio servicesall
of which are using capacity that was gifted to us and was the
intention of successive governments. It was certainly the intention
of the last Government.
12. I am sorry, this is not quite the point.
(Mr Dyke) The point is that I do not think that we
ever said we would only spend 10 per cent.
13. You did actually, in several annual reports.
(Mr Dyke) But it was inevitable that, as we produced
new services and went to the Secretary of State to get consent
for those services, our expenditure would grow. There are now
something like 46 per cent of homes and over 50 per cent of the
population who can receive digital. We support and look forward
to the situation that all the main political parties support,
however, and that is that at some stage in this decade there will
be an analogue switch-off. At that stage our digital services
will be received by everybody. I concede that there is a problem
in the period between then and now, in the sense that people are
paying a licence fee for services that they cannot receive.
14. Just to correct you, historically the BBC
has made two commitments on digital services. One was that they
would not go above 10 per cent of the licence fee. The second
was that any programmes that were made outside these figures would
always be shown on BBC1 and BBC2 first. That is certainly no longer
true, is it? Sometimes you use new programmes that are made and
they are put on BBC4or BBC3 as it will become, I guessdeliberately
to get people to take up digital services.
(Mr Dyke) On the second, in developing BBC4 in particular,
hopefully BBC3, and News 24 and the Children's Channel, there
was a commitment to the Secretary of State in relation to the
amount of new, British-originated programming that would be on
15. Which I accept, but that does lead you to
the logical problem that it seems to me you have had for a substantial
period, namely that large amounts of BBC licence fee money, which
would be raised in constituencies such as mineand an increasing
figure, more than 10 per cent of the licence feeare now
going on services which it may be very difficult for them to receive,
and they will not even see it first on BBC1 and BBC2.
(Mr Dyke) We accepted that. We believe that all three
political parties believeand it is not a political point
in any waythat, some time during this decade, we will switch
off the analogue signal and everybody will have digital. That
is our intention. If that was not the intention, then I agree
with youI think we would be in some difficulty.
(Mr Davies) I remember some of the numbers to which
you are referring, which I think were given to my panel three
or four years ago when I was doing the licence fee review. I think
that they have been superseded by the licence fee settlement that
came out of that review. Essentially, in that settlement, broadly
this path of digital expenditure was agreed with the Government.
If anything, we have been slightly below the intended path because
we have not been able to launch BBC3.
16. I want to follow up what you are talking
about. Let us look at the table to which Chris Bryant has referred
on page 10. Your total licence revenue is £2,591 million.
Your expenditure on digital services is £278 million. Let
us take away from that the £8 million on digital radio and
the £100 million on BBCithe Internet. In order to
be scrupulously fair, let us take that away. I then work out that
what you are spending on digital services is something like 8
per cent of the licence fee.
(Mr Davies) That is precisely correct.
17. If we turn to page 109 and look at the percentage
of the audience you are achieving for these digital services,
on which you are spending roughly 8 per cent of the licence fee,
we see that among all homesbecause 56 per cent of homes
do not at present receive digital televisionthere is not
one of those services that is being watched by more than 0.7 per
cent of the available audience. Even in digital homes the only
ones which go above 1 per cent are BBC Choice at 1.5 per cent,
and CBeebies at 1.3 per cent. The percentage for BBC4 is 0.1 per
cent on both measurements, and the percentage of BBC Knowledge,
which is the same thing, is 0.1 per cent. How can you conceivably
justify spending £1 in £12 on services like this, which
are being watched by fewer than one in a thousand of the available
(Mr Davies) First of all, you are right that, in the
initial stages of a new service, you would expect to spend rather
more on the service than you might find utilisation by the licence
payers, in a table like that which appears on page 99. That is
predominantly because these are new services and we do not yet
have universal coverage in terms of digital access for all our
licence payers. That is one thing. The second point I would make
is that, when we have launched new services in the past on radio
and on television, something very similar has happened. I am certain
that in the early days of BBC2 we spent much more on the production
of programmes and the transmission of BBC2 than the share of viewing
it initially won. There are therefore time lags involved here.
The third point I would make is that some of the programming,
especially on CBBC and CBeebies, that is, originating for those
channels, does then appear elsewhere. It appears on BBC1 and BBC2.
I do not think that it is valid, therefore, simply to add up these
figures. As I say, some of the digital services are available
on BBC1 and BBC2 via analogue transmission.
18. If you are talking about BBC News 24, all
you are doing is filling in dead hours on the analogue services.
Also, BBC News 24 has been running for several years now. Nobody
can say that it is being run in. Yet, even among digital homes,
it is only 0.5 per cent of the available audience. We discussed
this before we invited you in this morning and I, for one, was
not able to understand it. If you look at page 13
(Mr Dyke) Before we do that, can I point out that
if you take page 108 as opposed to page 109, page 109 is talking
about ratings and page 108 is taking about reach, i.e. it is talking
about how many people at some stage watch it. The figures there,
of course, are very different. You will see that at some stage
during a week 15 per cent of people in digital homes watch BBC
Choice. You will see that 7.7 per cent watch CBeebies. I do not
think, therefore, that ratings in the digital world is what it
is about. It is about how many times do people come in and use
those services at some stage during the week.
19. Mr Dyke, by using those words "at some
stage" you have anticipated the next question I want to put
to you. If you look at page 13, point 2, third bullet point, you
say, "BBC4 launched to critical acclaim in March 2002 and
attracted an audience reach of five per cent in digital homes
in its first month on air". That is the first part of the
question I want to put to you. There you say it "attracted
an audience reach of 5 per cent in digital homes in its first
month on air", yet on page 109 you tell us that BBC4's share
of the audience was 0.5 per cent. Are you therefore telling us
that after its first month it lost 90 per cent of the people who
were watching it?
(Mr Dyke) You are comparing share with reach. They
are two different figures.