WEDNESDAY 17 JULY 2002

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Members present:

Mr Gerald Kaufman, in the Chair
Mr Chris Bryant
Mr Frank Doran
Michael Fabricant
Alan Keen
Miss Julie Kirkbride
Rosemary McKenna
Ms Debra Shipley
John Thurso
Derek Wyatt

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MR GAVYN DAVIES, Chairman, LORD RYDER OF WENSUM, a Member of the House of Lords, Vice-Chairman, DAME PAULINE NEVILLE-JONES, Governor, MR GREG DYKE, Director-General, MS JENNY ABRAMSKY, Director Radio, MR JOHN SMITH, Director of Finance, BBC, examined.

Chairman

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 Awards - I 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 to do.

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.

John Thurso

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 Executive - guidance, strategy-setting, objective-setting - has always been rigorous. It certainly has been in my time at the BBC. What I felt prior to February - and the Governors and the Executive both bought into this fairly wholeheartedly - was 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.

With regard to the setting of objectives - because clearly that is a very central part of the way you are taking things forward - objectives 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 objectives - 91/2 out of 10 of which, or whatever, have been met - are actually testable objectives and ones that stretch the management?

(Mr Davies) This is a key question. In our judgement - and I fully accept that much of this is subjective - we think that about 81/2 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 office - a 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.

The compliance officer would report to whom?

(Mr Davies) The compliance officer reports to the Secretary of the BBC and, through him, to me - not to Greg.

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 answer - the 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 hard - as 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 cost - apart 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 million - largely 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.

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.

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 it - and that is the prudent thing to do.

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 mortar - particularly if they happen to be in, say, the Home Counties and they have not been revalued since 1993 or 1996 - you 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 thought - that 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 prudent - and, 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.

Do you have an audit committee?

(Mr Davies) We have an audit committee, the chair of whom is Pauline Neville-Jones.

Could I suggest - and not ask for an answer - that the audit committee might like to look at it.

(Mr Davies) It will be done.

Mr Bryant

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 collapse - as have many of the newspapers in this country - that 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 services - all 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.

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.

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.

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 BBC4 - or BBC3 as it will become, I guess - deliberately 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 those services.

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 mine - and an increasing figure, more than 10 per cent of the licence fee - are 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 believe - and it is not a political point in any way - that, 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 you - I 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.

Chairman

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 BBCi - the 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.

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 homes - because 56 per cent of homes do not at present receive digital television - there 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 TV audience?

(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.

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.

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, "BBC Four launched to critical acclaim in March 2002 and attracted an audience reach of 5 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.

I do not even understand that, Mr Dyke, because the other part of the question I was going to ask you is about the parenthesis at the end of that bullet point on page 13, "(three-minute reach figures)". Are you therefore telling us that what you can boast about with BBC4 is that, having lost 90 per cent of its audience after a month, you are only now able to measure any appreciable reaction on the basis of a three-minute reach, which includes four-year-olds?

(Mr Dyke) Mr Chairman, it might make a good headline but it did not lose 90 per cent of its share in its first month. You are comparing share with a reach, and you are comparing two very different----

Explain it to me, Mr Dyke. If I am being stupid about it, explain it to me.

(Mr Dyke) If you look at pages 108 and 109, one gives you the share by reach, which is a 15-minute weekly reach; the other gives it to you by share. They are two distinct measures. This is the number of people who, at some stage during the week, watch that channel for 15 minutes. There are the figures there.

If it is 15 minutes, will you explain "three-minute reach figures" on page 13?

(Mr Dyke) I would consider that it would be consistent on reach figures between this and that. There are two reach figures published by BARB: one is a three-minute reach and one is a 15-minute reach. This one is done on a 15-minute reach. However, it is not unusual - in fact, it was almost certain in every station I have ever been involved in - that actually, when you launch a channel, you get a blip at the beginning; it goes back down, and then gradually over time it rises. If you give a lot of publicity to the launch of a new channel, you get a blip - inevitably.

I read in the newspaper that what you achieved - setting aside the simulcast that you did with BBC4 - in terms of digital homes the peak that you were reaching was 11,000 viewers, of whom you now appear to have lost 9,500.

(Mr Davies) Chairman, you are quoting reach and share figures as if they were interchangeable, and they are really different figures. At the moment, BBC4 is reaching about 1.1 million people per week in digital homes. That is about almost 5 per cent of digital viewers. That is the number of people who watch it for three successive minutes at some point in the week. That is the reach of the channel. The share of the channel is a completely different matter, as is the average viewers per programme, which I think may be the figure that you have read in the press which you have just quoted. I do not know what the 11,000 figure is, but that could conceivably be it. There is a big difference between the average viewer for a particular programme and the number of viewers over a whole week that access the channel.

I understand all of that, Mr Davies, and I understand that you get these somewhat larger figures by adding together people who may have zapped in for a short while; then you add them all together and say that you have this audience of 5 per cent in the first month. However, would you just explain this to me - because, as I say, I am ready to be instructed on this matter - if you are talking about 15-minute periods why, on page 13, do you talk about a three-minute reach figure? It is your figure; you put it in.

(Mr Davies) Because both are true.

Which is truer?

(Mr Davies) Both are true but they are measuring different things. It is like the difference between a pint and a quart. They are both accurate but they are measuring different quantities.

They can be different things. What I do not understand is how many people you claim are watching these channels. When you talk about a three-minute reach figure, you must have put "three-minute reach figure" in for some good reason, must you not? The clerk has put that my time is up!

(Mr Dyke) Because my time is not up, I presume that I can continue! Surely what you should be discussing about BBC4 is content? If you have what is often quite esoteric, quite difficult content, you will not get large audiences. Are you saying that we should not attempt to do a very large number of the Proms on television, because they will not get large audiences?

Since my time is up, I will refer you back to Mr Bryant. I have the droit de seigneur as far as this is concerned.

(Mr Davies) May I write you a letter, chairman, that explains----

Chairman: No. I want you to tell me now.

Mr Bryant

I wholeheartedly agree with BBC4 and I think that BBC3 should happen, so that you better serve those audiences which are presently under-served. However, my question is about access for the 50 per cent of my constituents who pay the full licence fee but do not have the opportunity of digital televison.

(Mr Dyke) It is a perfectly fair question. What we are trying to do is to take what we judge to be the best programmes of the digital services and repeat them at some stage on BBC1 and BBC2. That is all we can do at present. Remember, it was the Government who decided not to have a digital licence fee. A digital licence fee would have solved the problem. We recognise that there is a problem. You could argue that somewhere between 10 and 15 per cent of the money that they are paying is going on services that they cannot receive.

But part of the answer lies in your hands. You are rolling out digital radio and digital television, increasing the coverage of digital terrestrial television and digital radio on exactly the same map, slowly through Britain, but it will not be getting to the Rhondda for quite some time, as far as I can see.

(Mr Dyke) I agree. There are particular areas of Britain where to roll it out is incredibly expensive. There are plans on how you could bring digital terrestrial television to those areas. Some of those areas, I suspect, will only receive digital terrestrial television when there is actually switch-off.

(Mr Davies) Bear in mind also that the sole motivation for bidding for the DTT franchises - which a consortium, including the BBC, won last month - is to spread digital take-up more rapidly and make these services more widely available. We are hoping that cheaper boxes, under £100 a box, will become available to people and they will be able to get these services much more readily.

You can buy them in Dixons for £79 at the moment - second-hand ITV Digital ones - which probably still belong to somebody else!

(Mr Dyke) What we discovered in all the work we did there was that digital terrestrial television is a technological nightmare for this country at the moment. You discover that only 39 per cent can actually receive, and half of those get interference. Something has to be done, therefore - which is what we will do, along with the others. We have to sort out the technology if we want to get a much broader reach. At the moment, people are buying boxes, taking them home and cannot get them to work.

Yes, I have one. Could you write about the roll-out of coverage? Every time I ask this, we do not seem to move much further forward on knowing when digital terrestrial television will reach some of the more difficult areas. It would be refreshing if we did not always follow the same roll-out pattern, which is that we always get to certain places last on the list. Those people are paying the licence fee, just the same as everybody else.

(Mr Dyke) The ones that are normally last on the list, as you know, are the ones that are the most expensive to cover in terms of the roll-out. That is the problem.

(Mr Davies) Would you object if we write to you on that subject, Chairman?

No, he would not. May I ask one other question? Do you and your journalists like politicians?

(Mr Dyke) I am not sure that is a question I should answer really. Either way, it seems to me to be a difficult question. I expect that there are some I like and some I do not like. Some a bit like you, probably!

In the reporting of news, therefore, do you think that it is right that politicians or commentators should most substantially report events?

(Mr Dyke) Politicians should be used in the reporting of events, but should not report the events, no.

Mr Bryant: Do you think that you have that balance right? Because I think that there would be many of us who would worry about it.

Rosemary McKenna

I will move on to something different. It is about the audiences that you under-serve at the moment. Clearly you have been very successful in introducing a variety of different cultures from the minority ethnic groups into programming. For example, in the last two years in EastEnders, and certainly the introduction of The Kumars, which I think everyone absolutely adores. That does not seem to be translating into the management of the BBC. You report a very small increase in the levels of senior management. I think the report says that it is now up to 3.2 per cent. How many does that represent and what steps are you taking to improve that?

(Mr Dyke) We will have to check on the actual numbers. When I arrived at the BBC the figure was 2 per cent. The figure across our staff generally was 8 per cent. We set ourselves a target for the end of 2003 to be at 10 per cent of the staff and 4 per cent of the management. You could argue that 4 per cent is still a pathetically low figure, and I would not disagree with that. However, it will take time. I will have to let you know the exact numbers. We are quite confident that we will hit the 10 per cent figure in our staff by the end of 2003. I would be surprised if we did not hit that. It is obviously something which you can put in place. The law allows you to put in place all sorts of training programmes, and that is what we have done. In terms of the management, I suspect that the only way we will see a significant change over time is through internal promotion. We have introduced a programmed called Ascend, which we did with women a decade ago. The level of women in management has changed phenomenally. Thirty-seven per cent of the management figure are women. That is up from 32 per cent in two years, and up from 14 per cent when we started. It is therefore a dramatic change. We have to do the same thing in relation to ethnic minorities. Ascend is a programme which identifies people from ethnic minorities with management potential and tries to fast-track them through the organisation.

I was involved in training programmes for women before I came here, and I know how successful that has been. It did achieve success very quickly. You should be able to do exactly the same with members of the ethnic groups - really intensive training and identifying people whom you can fast-track through the system. Do you have plans in place to do that?

(Mr Dyke) We have a programme which we have introduced this year called Ascend. In the first 18 months we had what I would call a fairly scattergun approach. We had a lot of different programmes. We then took the money and said, "Let's concentrate on the five who we think have a chance of being successful". It will undoubtedly take time. Two weeks ago we appointed a manager of a local radio station from, for the first time, an ethnic minority background. It is beginning to happen, but it is slow and it is hard work.

We would encourage you to get on with that. It is very important in the public sector.

(Mr Davies) We have set a very clear objective for next year. The objectives for next year are on page 17 - to "accelerate progress towards the BBC's target of 10 per cent of its total workforce and 4 per cent of senior management coming from ethnic minorities". So we are very aware of the problem you are raising.

(Mr Dyke) Given that two-thirds of our workforce are in London and most are in urban conurbations, even 10 per cent is a fairly low figure.

Can I move on to the other under-served group, the young audiences. Since my family fit exactly into the characteristics of that group who are leaving - you report a drop of young people aged 16 to 35 in your share of BBC1 audience - what steps are you taking and where are we with BBC3?

(Mr Dyke) With BBC3 we are currently awaiting a decision from the Secretary of State. She had concerns about the effect of BBC3 on the commercial marketplace. We have some figures; the ITC have now produced some figures, and broadly we are in agreement. We are expecting a decision some time in the next month.

Hopefully a positive one?

(Mr Dyke) We hope that it is a positive one, yes.

But if it is not? Across television in particular?

(Mr Dyke) It is a big issue for us. BBC2 has shifted to aim at an older age group. I suspect that, with the sports events and suchlike this year, it will have helped us a great deal in the current year. I suspect that the Jubilee helped us in this category, because that seemed to get everybody in.

Is that the young audience? The sports audience is certainly the young audience.

(Mr Dyke) The football is certainly a young audience. Although it is not in the year that we are talking about but in the year since, our audiences for the World Cup are remarkable. Then we may talk about the audience on radio.

(Ms Abramsky) If you take Radio 1 in the last year, we have actually increased our reach amongst 15 to 24s by just under half a million - just for Radio 1. We have slightly lost share. We have more people listening, but they are listening for a slightly shorter length of time. We have also increased the reach on Radio Five Live, which again is the sport factor. Overall on radio we have therefore increased the reach amongst young people. But they are now listening, and one of the interesting things about young people is that they listen to more radio stations. The length of time they spend listening to a radio station may be shorter, because they are listening to others, but more of them are listening than were listening a year ago.

(Mr Davies) This is an objective which we have also set for next year. We have set the objective of bringing younger audiences to BBC services by developing bold and innovative programmes. We are therefore well aware of both of the areas that you have raised.

Derek Wyatt

I am on page 68, which is about salaries and pensions. I note that there are 19 Executive members who earn more than the Prime Minister. In fact, there are 19 who earn more than any chief executive of any National Health trust, which is also a public service. Can I talk you through the bonuses for a moment? I see that six bonuses are more than the total of an MP's salary. I can understand Mark Byford getting £69,000 as an additional bonus, because he has done such a phenomenal job after September 11. He and his staff - and I hope that it is his staff - should absolutely get that. I cannot quite understand, say, £58,000 for Mr Yentob. I do not recall that he is a director of either BBC1 or 2. How do you decide that, for someone who is already getting £221,000, they get £58,000? Because of the commercial deals that he has done? Because of his success? How do the audit committee evaluate the difference?

(Mr Davies) The first thing I would like to say is I think it is unfair to comment on individual people but I am very happy to give you an answer about the compensation policy for the BBC's executives as a whole. I do not think it is customary or right to pick out individual people. We have adopted this year precisely the same policy that we have had for as long as I could find, at least ten years and probably much longer, which is to pay the executives of the BBC on average the median that applies to a group of comparator bodies, including many in the private sector and many in the public. This year we have not been able to achieve that. These levels of compensation are below the median for this outside group of bodies that we compare with, and this year we have paid around 89 per cent of that median. Last year we paid I think 95 per cent of the median so interestingly, although some other media companies seem to have had a hard time in terms of revenues, they have not had that hard a time in terms of what they paid their executives. We have not increased our executive compensation, even this year, in line with what has happened outside. Now could I comment on the difference between the public sector and the public service and what we are doing at the BBC? The BBC is a public service entity but it operates in the private market place. The people who run the BBC are outstanding people and they have very ready access to jobs in the media industry. If we were simply to compare BBC salaries and compensation with public sector bodies we would lose most of the outstanding people who are running the BBC, so we have always had this view that we should pay median amounts of money to what are outstanding people, and I can tell you these people, from my experience of the private sector, would be enormously better paid if they moved into the private sector. They would also have access to share option schemes which would potentially make them very rich which do not apply in the BBC so, although we try and get this group towards the median for the comparative group, the people concerned could do a heck of a lot better if they moved into the private sector.

On the pensions side, could you explain column 3 where you have against Jenny Abramsky £109,000, against Richard Sambrook £321,000 and against Alan Yentob £211,000. That is the amount paid into their pension fund currently, is it?

(Mr Smith) No, it is not. The best way of looking at it is, first of all, just at column 1 which is the increase in the amount of pension the person is entitled to as a result of the expiring - in other words, another year's entitlement. Column 3 is what the net present cost of that increase would be to the pension fund if the person left and took it with them in one go. So it is the cost of fund net present value of the annual increase that is in column 1, and it is not paid in cash.

(Mr Dyke) For instance, taking the case of Richard Sambrook, he was promoted during the year from deputy head of news to the head of news and therefore he gets quite a significant increase, and the implications of that in the pension fund are quite high. The other thing is, and I would hate to tell you the age of everybody here but the age of people also changes that figure. In some ways, therefore, that figure is an actuarial calculation and nothing else.

(Mr Davies) We do also take into account the pension benefits when we make the decisions in the Remuneration Committee on compensation.

I have the BARB figures here for April to June of this year and, just to try and help the Chairman a little bit, BBC4 is 0.05 per cent for three minutes in that period and the reach is 2 per cent in that period, so whilst we have some differences about the 15 and the three I think what would really help me is you writing to me, if not to Chairman, to give me the cost per hour of the digital channels when they are on air and then, if it is possible, the cost per viewer because it seems to me that while, on the one hand, the chief executive is saying that he is driving ratings on BBC1, you cannot have the same philosophy for digital channels, so my question is at what stage do you decide as the Governors that BBC4 will never get beyond what it is, and at X amount per hour or viewer this is not sustainable? What sets of objectives, and can they be put in the public domain, have you set for each digital channel?

(Mr Davies) I think it is hard to do this on a formula. I would love to have one because it would make life easier but there will be some services that we should have and should feel enormously proud of that will have permanently a high cost per listener hour or cost per viewer hour, for example, Radio 3. I do not know if Jenny has the figures but Radio 3 will typically have quite a high cost per listener per hour but it is something we are proud of and it is something the BBC should do, and it is something no other broadcaster is likely to replicate. The key for me is whether across all of our services we are giving value to all of our licence fee payers; it is not so much to compartmentalise the services one by one and think whether all of them are giving equal value in terms of cost per hour. As Greg never ceases to remind me, if we wanted to reduce the cost per viewer per hour we would have EastEnders on seven nights a week four hours a night. There is a balance here and we have to do it subjectively; I do not think we can do this through a formula.

What you are suggesting is that, irrespective almost of the cost, you would not take the arts off because it is low, because you feel that fits the public service because it fits you currently, but surely the Governors as a whole would be concerned about the money, as Chris has said - 10 per cent at some stage. You have more DTT coming at more expense, so at what stage do you say we are not hitting the targets?

(Mr Davies) I think there would be a time we would become concerned about that and I do not deny it. It also makes plain why the relative budgets of BBC4 and BBC3, if we get permission to do BBC3, are as they are because essentially we think we might get more viewers on BBC3 - at least initially. So these things are taken into account. But I think you need to give it time and make the judgments as best you can taking all the evidence into account as opposed to trying to do it through a formulaic approach

(Mr Dyke) For instance, rugby cost per viewer hour is one of the most expensive things we do. Should we not do it? Those decisions have to be made as judgments. BBC4 I think costs us £32 million a year.

Mr Wyatt: I was going to ask you about that because I was going to come on to sport.

Chairman

I am sorry, Derek. If there is time later on I will come back to that but I would just like to ask two questions concerning what Mr Wyatt has been asking you about. Mr Davies and Mr Dyke have explained that when you have got very few viewers you are proud of it because of the quality of the programmes, but when you outdistance ITV because ITV's audience has shrunk then you boast about the fact you have more viewers than ITV. You are having it both ways, are you not?

(Mr Davies) I think the BBC is a selection of different services and they are not all going to give equal value for money in terms of cost per viewer per hour or listener per hour, and I think that is inevitable if you run a series of different channels aimed at different objectives. In my mind, it is a strength not a weakness that we have this selection of different services. However, overall, the BBC has to serve the entire public and certainly in some parts of its services it needs to attain reach and audience approval from nearly everybody, so I agree - it is a difficult circle to square but I think it has to be squared in the BBC.

(Mr Dyke) Also, if you come into some of the questions that Rosemary McKenna was raising, for instance we are expanding the Asian network to try to take it digitally to as many places as we can, which includes probably creating an Asian soap, and if you start looking at that just in terms of cost per listener hour you would not do it in a million years but that is a part of our audience that we do not think is being properly served.

Mr Wyatt asked you about the remuneration of members of the Executive Committee. There is no member of the Executive Committee whose total remuneration over a whole year falls below a quarter of a million pounds, yet on page 67 under Benefits you say, "... new appointees to the Executive Committee are only eligible for a company car and fuel for private use". On the basis of those gross remunerations, ought they not to pay for their own car and petrol?

(Mr Davies) The current custom and practice in terms of executive compensation is often still to include car benefit. It is becoming rarer and at the BBC the old practice used to be to include both a chauffeur driven car and a car for personal use, and the former of those two has by and large gone now. I think the trend, Chairman, is moving in the direction you say across the whole of British industry and we are changing in line with that, but these numbers relate to the year that has just ended.

(Mr Dyke) We are changing our policy right across the BBC away from cars to giving people choice in-car allowances. It is much more environmentally friendly, and that will happen over the next 6-9 months right across the BBC. It is not always the most popular decision, let me tell you!

Alan Keen

One of the successes of this Committee was when we discovered the way the Chairman of the Board controlled the Director General by taking his specs off, and it must be true because he mentioned it on Desert Island Discs and now we have this wonderful photograph on page 7 of the Director General welcoming the new Chairman and formally handing over his specs! It is good to see the confidence that the Chairman has because he has got them back again now.

(Mr Davies) I find it improves his mood to leave him with his specs, so I am making that exception today.

Can I come back to BBC News 24 on page 82? I did not quite follow the answers that were given earlier. Originally when we first queried this a year or more ago we were told that the cost of BBC News 24 was £50 million. I was a great supporter, and still am, of News 24 until my colleagues were being critical by saying that the cost must be very high. We were told at that time that that included a fair proportion of the cost of collecting news. I have noticed that BBC News 24, from early mornings when it is the main news through to the night, fits smoothly into becoming the morning news programme in a way. Presumably that was partly common sense in that it saves money, but these figures do not show the cost of news anywhere else. Is that £50 million the cost of collecting the news worldwide for all the news programmes?

(Mr Smith) There is a figure on page 10 which breaks down total spend by genre, of which one is news, and the figure is £395 million.

(Mr Dyke) But that includes current affairs as well. That is the whole news division.

And obviously the news programme on BBC1 --

(Mr Dyke) I am sorry, I am told it does not. I have misled you.

(Mr Smith) It is just the news.

So that £50 million is an allocation, I think we discovered before, of the news gathering around the world?

(Mr Smith) Within the £395 million there is a figure of about £80 million odd for news gathering.

And is part of that allocated to News 24 in this £50 million figure, or is that just the production costs in the studio?

(Mr Smith) From memory the costs of News 24 are largely the marginal costs of having the channel over and above those which we would have anyway. I can set out the exact picture for you in a note.

It is an important question because my colleagues were critical of the costs of News 24 against its value. As I say, I did not agree with them but if that is just the cost, I believe in questioning a year or more ago it was said that if 24 hour news was shelved, ditched - and I am not advocating that - not all the £50 million would be saved because there was news gathering in that figure, but from what you are saying now that is not really true.

(Mr Smith) Let us give you the precise answer in a written note.

(Mr Davies) I think, Mr Keen, you are right: not all the £50 million would be saved.

(Mr Dyke) Also, if ever we have seen a year of the value for News 24 it was this year on a number of occasions because where, on other occasions, we would have gone across to a news flash on BBC1 for September 11, the period of the Afghanistan war, the Prime Minister's announcement of war - all those sorts of things - this year we cut straight to News 24 and put it on to our main channels. It has been brilliant for that reason.

(Mr Davies) We think for a couple of months it has overtaken Sky News in terms of audience reach. The Chairman wrote a piece in The Independent last week saying that we were counting the overnight BBC1 figures in our News 24 figures but that is not true. News 24 for the last two months has overtaken Sky in digital homes, not counting the overnight show on BBC1.

(Mr Dyke) To be fair, Sky News still is not in digital terrestrial homes, which it will be from later this year.

(Mr Davies) Yes, which will make a difference.

BBC 24 is under digital services and not under analogue. I have not got digital but I have been watching 24 hour news for a long time.

(Mr Dyke) Then you have a trick that the rest of us have not, Mr Keen!

(Mr Davies) I think you have been watching it overnight on BBC1.

(Mr Dyke) On analogue cable?

Yes. That is why it is digital - I see what you mean. Can I come back briefly to the balance sheet and the valuation of films? On the archives, for instance, presumably there is no market value of the vast archives. I agree with John Thurso's inference when he said that, if you do not put a value somewhere in the accounts, it does give a false picture. I was brought up in accounting in the old days - not as Andersen and others have been operating in the States recently - and I guess in this country as well in some cases where as long as you valued the balance sheet as low as possible that was what was needed, but it does give a false position really and I do not agree with what John was saying about the possible reasons for doing that, but we are trying to show the public the value of the BBC and what assets it has. You could not guess really at the value of the archives, could you? You do sell the use of the archives, am I right?

(Mr Dyke) You could put a value on it because you could value it according to what you sell it for and multiply it up, but I would caution against that. Having run a media company in the United States let me tell you that if ever there was an area of suspect accounting it is the value of libraries on American media companies.

I am not advocating putting it into the balance sheet.

(Mr Dyke) You could certainly do a valuation of it based upon its potential income, because we know what that is.

Can I suggest that we look at the possibility of putting it as a note but definitely not in the balance sheet?

(Dame Pauline Neville-Jones) On the value of the archive, undoubtedly you could value the archive and there is a value there, clearly, but it is also a cost because it is only a value if you can use it. A great deal of the material there has to be got into a useable form and there is a big backlog of work to be done on the subject of cataloguing. You can imagine that previously, when people did not think of using archives in this way, both contracts governing the material and also the quality of the material itself had to be sorted out. It was not ab initio put into a form where it could readily be used so we have a big job in sorting out rights and also putting that kind of film material very often into good physical order, as well as locating it. What I would say, therefore, is I absolutely take your point: it is quite a big task and you cannot simply say, "We have this lovely lot of material and it is valued at X".

When you carry out the work to bring it into useable form, is that just charged as a cost? You do not put it into the balance sheet?

(Mr Smith) We just charge it as a cost. Also, the most valuable output tends to be the most current and BBC Worldwide you know exists to invest in BBC programmes that are currently being made in order to exploit them around the world. Insofar as Worldwide do invest in programmes, the value in Worldwide's balance sheet is also on the BBC's balance sheet at £111.8 million, so where we are actively planning to exploit current output by selling it around the world and therefore Worldwide have actively invested in it that figure is put on the balance sheet because that is the thing we are planning to export commercially. Most of the back catalogue is used for BBC public services rather than commercial exploitation. There is a bit of commercial exploitation but it is not massive.

Michael Fabricant

Firstly, can I be nice and congratulate the BBC on winning the DDTV franchise from the Independent Television Commission? I think the BBC was absolutely right to say that the only way DDTV is going to survive is if free-to-air channels are provided and they are exclusively free-to-air and that is absolutely right, so well done. Now I am going to obey the injunction of our Chairman -

(Mr Dyke) I thought we could end there!

-- and refer you to page 17, particularly the section which says, "Connecting with all audiences", I am sure you are going to guess what I am going to say. Gavyn Davies said just now, talking about Radio 3 and his pride in Radio 3 and I agree with what he said, "This is something the BBC ought to do which no other broadcaster is likely to replicate". Now, in "Connecting with all audiences" it talks about having "a particular focus on making the BBC's news and current affairs more relevant and engaging for this group" - this is talking about young people - "without diminishing the BBC's commitment to parliamentary reporting". Now, you will have read the newspapers recently and I quote The Guardian from July 15 with an unkind headline because I do have very high regard for Greg Dyke not just currently in the BBC but also his previous career in broadcasting, but the article was called "Dyke's dumb idea, BBC must defend political programming" relating to this very item, and it goes on to talk about the future of programmes like On The Record and Despatch Box and others, and changing the whole style of political reporting so that it will appeal more to young people. Apparently you have a board meeting this afternoon and you are going to come up with some sort of compromise. Can you let us into the secret?

(Mr Davies) Firstly, we do not have a board meeting this afternoon. There is one tomorrow --

You mean The Guardian is wrong?

(Mr Davies) Yes. As far as I know, there is no board meeting this afternoon but there is one tomorrow. We will not be taking a paper on this subject tomorrow; it may come up verbally but we will not be taking a paper. We intend to get this matter settled by the autumn essentially, so the timing is certainly wrong. We have not yet, therefore, as Governors seen what the Executive is going to propose in its paper but I have written to the Chairmen of both the Labour Party and the Conservative Party explicitly saying that neither the Governors nor the Executive has any intention of dumbing down political coverage, reducing the amount of time or money spent on parliamentary coverage, or anything of that sort. We do think it is our public service duty, as the leader of the Conservative Party said yesterday, to cover very adequately our Houses of Parliament.

I am sure they will be reassured.

(Mr Davies) May I just add --

Well, we only have ten minutes each so I would like to ask my questions.

(Mr Davies) -- But that does not mean we leave in tablets of stone everything we try to do.

I am glad you said that having tried to cut you off because I can now move to Greg Dyke and ask how will you fit in then, not keeping things in tablets of stone, with trying to bring in a younger audience without "dumbing down"? How are you going to get that balance made?

(Mr Dyke) That is the trick.

Let us into the secret.

(Mr Dyke) I could not tell you the secret but I can tell you what we are trying to do. We have had a lot of discussions here, and they have been very helpful, with the Modernisation Committee about broadcasting in Parliament and how we do it and where we can interview people and all sorts of things, and a lot of progress has been made and we thank members of Parliament for that because I think that alone will help in making the whole process seem more dynamic. We started that review last November, and why did we do it? Because we recognise there is a problem of disengagement from politics amongst certain generations. Now, it is not our job in any way to make people vote but it is part of our job to involve people in the political process so we started preparing, which when you read some of the papers is quite funny but we started from a very aspirational moral position, a paper which says "How do we involve more people in this process?", and we have done an enormous amount of research, as you can guess the BBC does, both qualitative and quantitative, which will form the basis for a number of recommendations which will go to board of Governors in the autumn. I will just say that we have no intention of reducing the amount of time we devote to covering politics; actually we will increase the amount of money we devote to covering politics; we do not intend to reduce the amount of money we spend or the time we spend on covering Parliament, and we will not be dumbing down the output. What we will be trying to do is exactly what you say: is there a way of bringing in different, younger people, people disenchanted with politics, without, crucially, alienating the by and large traditional, which tends to be over 50, audience because they are our heartland. We cannot afford to alienate or lose them so we have to keep our traditional programming to keep them, or a large chunk, while at the same time trying to change the programming to attract a younger audience.

So it is a question really of additionality, you are saying, rather than substitution?

(Mr Dyke) No. There could be some substitution.

But what?

(Mr Dyke) Well, that has to go into the report of the Governors and the Governors might not agree with our proposals. We are piloting a lot of different things this autumn but the one thing I can assure you of is that there is no easy - well, you all know - solution to this. It will be difficult and that is why we are going to try and pilot a number of different programmes, and while some of those will be trying to bring politics and make it very relevant to younger audiences, others will be piloted for more traditional audiences. I think the whole experience of Westminster is quite interesting, and our drama budgets are nothing to do with this but I think the idea of whether you could use drama money is interesting and we have asked our drama department to come up with some ideas about politics.

Maybe the drama department could give training to politicians to be more dramatic in the Chamber! But can I move on now to the balance sheet, if I may? I am very keen on there being flexibility and also transparency in the BBC's accounts - I think we all are on this Committee and I think the BBC is too - but you will be aware that there is always the question of the BBC getting involved in commercial ventures, which I welcome, but using the licence fee to cross-subsidise, and the BBC has got some very strict rules on that and the BBC always say and maintain that this is not being done. In order to give extra satisfaction to your commercial competitors as well as this Committee, why do you consistently refuse to allow the National Audit Office to audit your accounts and to investigate you from time to time, which would give that little bit of extra satisfaction?

(Mr Davies) Could I ask Pauline to comment on this?

(Dame Pauline Neville-Jones) I think the straightforward and honest answer is that we are extremely comprehensively and thoroughly audited by our commercial auditors.

Then what have you to worry about?

(Dame Pauline Neville-Jones) I do not think it is necessary to have two lots of auditors. The National Audit Office is not in a position to substitute for commercial auditors. In other words, we would have to have two lots of auditors.

Do you not think it gives out the wrong signals? I have no doubt you are properly audited - you have good accountants - but you do not have to pay the National Audit Office. What have you to hide? Nothing. Therefore, does it not send out the wrong signals, this stubborn refusal to allow the National Audit Office to investigate from time to time as they see fit?

(Dame Pauline Neville-Jones) I am not going to accept the characterisation. I do not think there is the need for the National Audit Office to do it and I think there are considerable downsides in the NAO doing it.

What are they?

(Dame Pauline Neville-Jones) Let me explain. The BBC is not a government department; it is not therefore part of government policy; and I think it is wrong and damaging to send out the sort of signal that auditing by the government auditor would give. It is very important to maintain the independence of the BBC and the independence of the BBC's remit and the appearance of its total separation from government, and therefore I do not think it is a very good idea.

But do you accept you are publicly funded, albeit by the licence fee?

(Dame Pauline Neville-Jones) Then we would have a situation by which the Chairman or Director General would have to appear before the PAC, and you start getting into the question of how is it, therefore, that the BBC is serving government policy, because that is what the PAC is there to examine. I do not think that is what the BBC should be examined on. The right people to be examining this are yourselves as public service broadcasting, so I think there are some downsides in having the National Audit Office involved and I do not think it is necessary.

Chairman: I am afraid we have to move on, but I will add a coder to that, which is this: the BBC is created by Parliament and it would not exist if Parliament did not create it. The BBC's independence which Sir Christopher Bland used to proclaim the whole time is its independence in terms of politicians not interfering with its programming - that is the BBC's independence. The idea that Parliament, which creates you and funds you, ought not to have the right for the NAO to investigate you I have to say, Dame Pauline, is a misuse of the very important ethos of BBC independence in terms of politicians not interfering in any way with what you broadcast.

Michael Fabricant: And to suggest this Committee can substitute for the NAO is, frankly, ridiculous.

: Chairman

We have our incredible merits but we are not accountants.

(Mr Davies) I am not sure the NAO is constituted to look at entities like the BBC. It is not, in fact.

(Dame Pauline Neville-Jones) It does not do commercial audits.

(Mr Davies) No, so it is not clear to me they are the right body. If you look at when this started in 1983 with the National Audit Act, at that stage there were maybe 30 public corporations trading in the market place, including the BBC, none of whom were audited by the NAO. Now the majority of the others have been privatised leaving the BBC looking more of an anomaly, but it was correctly put, in my opinion, that in a family of public corporations separate from government departments, and we are not a government department, that the NAO should not have jurisdiction over us or indeed, I think I am right in saying, John, the ability to audit. There are different types of audit and it is very different to audit a government department spending public money from an entity like the BBC which is operating in the market place.

Miss Kirkbride

Can I go back, Mr Dyke, to what you said to Mr Fabricant when you said you were not going to reduce the amount of time that you spend on politics as a result of your review. Can you reassure us that you will not swap channels and put politics on digital and BBC1 in a politics free zone?

(Mr Dyke) Yes. The letter I wrote this week to a number of members of Parliament said precisely that. I particularly talked about BBC1 and BBC2 for exactly that reason. That is not to say we cannot to additional things on those but it is not our intention to take programming off BBC1 and 2 and put it on to the digital channels. However, it probably will be our intention to do additional coverage of Parliament on those channels.

But that is promise that will be perpetuated over the next few years, and not just in the following year?

(Mr Dyke) I suspect all bets are off at the stage of analogue switch-off, because at that stage everybody can receive and then it is a different position, but it is the point Mr Bryant was making earlier: that our fundamental responsibility must be to the people who cannot receive digital.

(Mr Davies) Also, I can assure you that whatever we do in the next few months and implement we will monitor, and if it turns out that we have made mistakes or should rethink we will. We have done this before; we have rethought and made changes and that is precisely how we will approach it this time.

Can I move on? If Mr Blair is a braver politician than I expect he is he might just have a referendum on the single currency in the next few months, and given that this is a very unusual situation for Britain in that the BBC covers general elections as well and that is a fair and well thought out process, a referendum is different and I wondered what the Governors felt about ensuring that a fair and balanced coverage is maintained?

(Lord Ryder of Wensum) That is a very good question. Coverage of the referendum for the BBC and all other broadcasting outlets will be more difficult than a general election, because the ground rules are in place for a general election and we have only had one major national referendum before, some time ago. Certainly since I have joined the Governors of the BBC I have raised this and I know that preparations are being put in hand to ensure proper fairness throughout a campaign. It is difficult but already plans are afoot so that fairness is achieved. I can also tell you that we have as Governors during the last three or four months ensured that the code of conduct for all BBC employees is the same for referenda as it is for elections, and the use of the words "referendum" and "referenda" have been added to the codes of conduct for all the employees for the BBC.

Will this become public knowledge as to what is put in place and how the BBC will cover any referendum, or are we just going to have to rely on you to stand up and say, "We did not think that was fair", afterwards?

(Lord Ryder of Wensum) No. As you will know far better than I do, the organisations on one side or the other in a referendum are not yet in place. They are changing all the time. There is a "Yes" campaign and a "No" campaign; the people involved in those campaigns are changing all the time; the chairmanships change; the various organisations and how they are funded change; and until that becomes clearer I think it would be quite difficult to come to any concrete decisions. If we came to concrete decisions now and there was a different set of people in place differently funded in X months' or years' time I think we would have cause to regret it.

(Mr Davies) And we will publish the rules that we are imposing on the news division, as we do in elections.

(Mr Dyke) In the objectives that we have done for the director of public policy and the controller of that policy this year, like you we recognised that there could be a referendum and therefore it is specifically referred to. You are right - it is going to be, I suspect, much harder than a general election.

And it is too late once the vote has been counted.

(Mr Dyke) I agree. It is too late afterwards to say, "Oh, sorry, we have got it wrong".

Can I just go back to digital switch-off? What do you think of the government's plans to switch off analogue between 2006 and 2010? How is that going to be achieved in the present climate?

(Mr Dyke) One of the reasons we got involved in bidding for DTT was, as was made clear earlier, that we would have real difficulty justifying a lot of our digital programming if we did not believe that at some stage analogue was going to go. What was clear in the work we did on DTT is that there is something like 30-35 per cent of the population who do not want pay television and are not going to pay for it, and if digital can only come to them through pay television it is never going to get there, therefore it seemed to us that the success of DTT is in a pretty parlous state - public confidence in it has gone for the moment, and that is why I went into free-to-air and all those sorts of things - but more importantly, the single biggest problem about analogue switch-off is going to be second, third and fourth sets around the house, because what we describe at the moment as a digital home is a home with one digital television set.

So is 2010 realistic?

(Mr Dyke) It could be. It depends on what develops out of DTT. It is going to be called an adaptor rather than a box and, as those adaptors get cheaper, as they will, the second set problem becomes manageable. Once you can buy something and just plug it into the back of your set, plug the aerial in and it still works - and I see someone is going to bring one on to the market next year for £29.99 but I will believe that when I see it, but now they are down below £100 and they will probably halve over the next two to three years - then you begin to see it is possible.

There is also a balance where some areas cannot receive DTT and until they can you cannot see what you are doing, so it is chicken and egg to some point?

(Mr Dyke) There are two problems with DTT. We are still going to end up with the situation where 20 per cent of the population could receive it but will not be able to because they have not got good enough aerials. All the testing done in advance assumes that you have the up-to-date aerial, whereas most aerials have been there twenty or thirty years on the roof, so there is the problem of the aerials. There is then the problem of the 20 per cent of population which at the moment cannot receive it at all, and we have all sorts of quite interesting ways where on the day in time you can change that but that comes to the day of switch-off. The point is how do you make sure people have got the equipment the day before when they could not receive the signal, and that is one for the government and not us.

But given the dilemma that exists around the service that lots of people cannot get, what guarantees will you make to the Committee about the 8 per cent of your budget of the licence fee presently spent on digital programmes? How much will that increase as a result of your DTT programming commitment? What is the cap on that figure?

(Mr Dyke) When we got the licence fee increase there were four criteria - and these were laid down. The government cannot tell us but the Secretary of State encourages us. One was BBC1; one was education; one was nations and regions i.e. outside London, all of which we have increased significantly, and the fourth was interactive and digital programming. There will not be in the remaining period of this Charter a significant increase in our spend on digital services because there is not any more money as a percentage. That is unless we get BBC3. BBC3 will be a jump and after that you will not see an increase.

A jump by how much?

(Mr Dyke) I think Choice costs us £50 million and I think it is about £90 million, so it is about £40 million.

Just quickly, you were saying that News 24 has had a bigger audience - I do not know whether it is reach or share but bigger audience - in the last few months but you were saying it is because it has a billion other people watching it on DTT?

(Mr Dyke) I doubt whether there is a million watching on DTT these days.

But were you telling the Committee it had a bigger share because it is on digital and on DTT, whereas Sky is only on -- ?

(Mr Dyke) Exactly.

So it is not entirely fair?

(Mr Dyke) Exactly. It was mea culpa, not yours. I was saying, yes, but you have to be careful because they are not in DTT homes but because of the services they are going to put on the Crown Castle licence you will see Sky News on there and that will change the audience base again, and I suspect Sky will be there or thereabouts. Our hope is that you can get five million DTT homes over about five years.

(Mr Davies) I think the trend, just to be clear, is that News 24 has been gaining viewers relative to all the other 24-hour channels.

Because you give it away free on lots of platforms.

(Mr Dyke) So is Sky News, of course.

Chairman: We must move on.

Ms Shipley

As you know, the Chairman requires us to have a page reference so I am really pleased to have spotted on page 6 a logo for CBeebies which gives me the opportunity to congratulate you on an excellent launch which I attended, and stayed for hours and hours which is incredibly rare for me, and you know why I stayed for hours, I am sure, and it was very good, in Battersea Park as I recall. I will now move on to refer to page 56, where there is a nice little picture of the Tweenies. I asked ITV executives when they came whether they did public service broadcasting for children and they said, "Oh, yes, all their children's television was public service broadcasting", and I said, "How do you justify all the advertising", and they squirmed all over the place and are continuing to squirm. Now, in your case, you are public service broadcasting for children - excellent - but what about all that nasty merchandising? How do you justify that?

(Mr Davies) It is something that does sometimes worry me. If I thought that CBeebies especially but also CBBC existed in any sense to promote merchandising as a prime objective I would be very concerned indeed, but I think it is different if we are making programmes which are successful for young children - and, like you, I have young children. To make available the potential to purchase soft toys does not strike me as stepping over the threshold of unacceptable commerciality but it does need to be watched and I know exactly what you mean having young children myself.

I would certainly say it is not in the league of all the teeth-rotting stuff that surrounds things like Blue Bear and that sort of really seriously dangerous, I find, appalling food advertising around ITV's programming for little children, but it is commercialising children's television and merchandising. I take your point that you are concerned so at what point would you say the BBC would have to stop? Where is its threshold?

(Mr Davies) Certainly if the impulse for the programme was going in the wrong direction, in other words if BBC Worldwide were desirous of selling soft and cuddly toys and they then persuaded CBeebies to make a programme which essentially helped them do that, that would be the wrong way round.

So where structurally does that very wide comment come into your organisation? Who is aware that it is that way round?

(Mr Davies) Both sides are very aware. It is in the commercial guidelines given to both sides. If it were the other way round, I know Greg would be concerned and so would the Governors.

What about the sheer quantity of merchandising that is packaging programmes now? Have you a threshold for that?

(Mr Davies) What do you mean?

Well, if you have a successful programme like the Tweenies, there is a massive amount of merchandising around it. Where is your threshold? How far would you go?

(Mr Dyke) We look at the quality and we look at what is being done until we think it is beneficial, rather than necessarily damaging.

Beneficial? It might be nice or it might be firm, but beneficial for whom?

(Mr Dyke) You are not including videos then? Because videos are massively beneficial to children. I have just got through that age, my children are getting too old, but we know children watching videos for the 92nd time --

Beneficial to parents!

(Mr Dyke) Yes, but a lot of the programming we produce and commission for children of that age has an educational input.

And the bags and the beakers and the merchandising.

(Mr Davies) I know exactly where you are coming from, Ms Shipley, and I have a lot of time for where you are coming from. However, another way of looking at it would be that many families would find it odd if Disney were making Mickey Mouse available in the same way and the Tweenies or the Teletubbies were not at all available when their kids wanted them, so I think you have to look at it from that angle as well.

So where is your threshold?

(Mr Davies) I do not think we have overstepped it on the Tweenies or the Teletubbies but we have to keep it in --

You would not know if you have overstepped it because you do not know where it is.

(Mr Davies) I do. I have a lot of Tweenies and Teletubbies.

So where is it then?

(Mr Davies) I am not sure I can define it. I cannot measure it in terms of Teletubbies.

(Mr Dyke) We have a system whereby everything that is going to be marketed related to a product comes in to a department who look at it and say, "Do we think this is in any way damaging?", so they lay down a threshold.

So you have a quality threshold but not a quantity one?

(Mr Dyke) That is right.

At the top of page 56 it says that commercial activities contributed over £100 million to the BBC. Is that profit?

(Mr Davies) No.

(Mr Dyke) It is cash coming into the BBC.

(Mr Smith) It is net cash coming from all our commercial activities.

How much do you reckon it costs you to generate that?

(Mr Smith) Turnover is £660 million so -

(Mr Davies) It did not cost us anything. The BBC did not pay a cost in order to generate that. The commercial subsidiaries had revenue of £600 million --

(Mr Smith) £660 million.

(Mr Davies) And returned £100 million of that to the BBC in cash. There is no cost to the BBC.

(Mr Dyke) I think the outstanding programme of the year was Blue Planet which I thought was quite magnificent. 50 per cent of that was being paid for from that.

Tell me about this overall trading loss of £5.4 million, page 58.

(Mr Smith) You have moved on to a different group of companies. There is a big distinction to be drawn between BBC Worldwide, whose job is to sell BBC programmes and merchandising and so on around the world and to run the commercial channels, and the newly forming BBC Ventures group. The aim of the latter is to take assets which have already been built up by the public service and use them, as far as we can, in commercial markets - for example, to sell studios in the downtime to people who want to hire studios. So the trading loss you are talking about of the Ventures group is not commercial. The key message about that, of course, is that in the world of facilities, resources, studios and so on the whole United Kingdom market place has had massive over-capacity for a long time. It has been a notoriously difficult business to make money out of and our aim has been to make sure that business becomes profitable as fast as possible, and you can see that the loss has come down from £9 million in the previous year to £5 million.

(Mr Dyke) And we would expect it to be profitable this year.

So this approval for incorporation of a holding company is important, is it, if you are going to wipe out these --

(Mr Smith) Very. Yes.

So how long have you been waiting for DCMS to come up with the answer?

(Mr Smith) We had the approval this week.

That is good. So you are all happy?

(Mr Dyke) Yes. It means now that, for the different commercial organisations we have, all their profits or losses will go into this one holding company, and we will be able to tell you how much we have made or lost across the whole lot and we hope it will include BBC World as a separate figure.

Ms Shipley: Thank you.

Mr Doran

I am going to try and sweep up a few issues - everything except the spectacles of power. I am reminded what happened to John Major when his underpants became the underpants of office! I was interested to read pages 50 and 51 which is the environmental report, and it is obviously encouraging to see the progress being made in that, but I contrast that with what you said earlier about following industry practice or company best practice. It is becoming best practice in industry now to produce a social, ethical and environmental report which is much more wide-ranging than what you have in here. This seems a little bit narrow and does not really focus on the context in which the BBC operates.

(Ms Abramsky) Firstly, in terms of the environment report which I believe we are publishing this week --

That is your website version? The larger one?

(Ms Abramsky) Yes, but we are publishing both simultaneously -- is that we have made huge progress within the BBC in terms of collating exactly what we want to do, creating targets for every division which I think is extremely important, and also looking to the long term future, because we have a very important rebuilding programme going on, so that it is informing the whole way we are approaching our rebuilding programme. In terms of an ethical policy and a socially responsible one, that clearly will be an issue for Governors as to whether they feel it needs to be widened. I can tell you this has been a huge step forward to get to the point we are in terms of the environment, and it is a huge education job across the whole of the BBC in terms of our working practices, and also in relation to the other organisations that we relate to, to get them to start conforming to the standards we create.

(Mr Smith) There are two paragraphs at the top of page 50, one is on the socially responsible investment policy and one is on ethical policy, both of which we follow.

So this statement is intended to cover those topics as well, is it?

(Dame Pauline Neville-Jones) I do not understand. The Audit Committee does operate according to the standards of the combined code. Also, although you did not utter the words, some of the thrust of your question was directed at social responsibility and the Director of Finance and I are engaged in dialogue on that very subject at the moment because it is important, and when I approached them on the subject I discovered there were things that were happening, and I am going to take that further because the BBC is a benchmark organisation and ought to have a good record in this area.

Thank you. I did see that the report was extremely encouraging but one of the areas that concerns me, moving on to a different topic, is that you do devote a little bit of time in the environmental report to transport and travel, and as someone from the regions, particularly Scotland, I have been lobbied in the not-too-distant past by some of our local production companies who have been complaining a little that a lot of the BBC's regional and independent productions are put together by companies from either Glasgow in the case of Scotland or in the case of England, London, travelling to the regions. I am interested to know whether this is an issue which concerns you. The point which is made to me is that those production companies which do operate in the regions, and in my case I have come from Aberdeen, my own constituency, do work for the BBC but they tend to be in a box which they cannot get out of, and it is very difficult for these companies to develop because the larger contracts are never really tested and go to the Glasgow and the London companies, and if there is to be a real and genuine commitment to regional production, that needs to be looked at.

(Mr Dyke) I do have some sympathy. Having visited our Aberdeen offices this year when I discovered that their relationship with Glasgow is about the same as Glasgow with London, which you do not think of down here, Scotland I think is one of our success stories. The amount of extra money and the extra network commissions we have spent going to Scotland is enormous, and we are very pleased with that. We also took a decision some time ago that we should allow much more flexibility to Scotland, Wales and Northern Ireland for the channel controllers to opt out of BBC1 and play regional programming which we are doing much more, and therefore in the coming year you will see the first ever BBC Scottish soap, which is a massive investment in Scotland. Also in the last twelve months we were terribly conscious that there had been a large amount of money spent in Scotland, Wales and Northern Ireland and we have increased it again, but that we had not done the same in the north of England, and we have had a big north of England initiative over the last year in all sorts of ways, one of which is about drama. One of our responsibilities must be to reflect the different parts of Britain to each other. In some ways there is no point in pouring production in to Scotland if in the end you make English programmes, it has to be something that reflects Scotland. We have put big investment into the North of England and you are beginning to see that, we have a lot of northern dramas coming through, we have big writer initiatives in the North of England and Radio 4 has gone back to Manchester.

The point of my question was, who is making these regional productions, is it big companies coming from London or are local companies going to get a slice of the action?

(Mr Dyke) There is a problem that we have all seen over the last decade, which is as ITV changed the production industry increased, there is no doubt about that. We are fighting that trend, there is no doubt about that. I can see the problem if you are a small current affairs producer in Aberdeen that it is quite difficult to break into drama, I can see that.

It is necessarily drama. In some respects you are a victim of your own success because there are local companies who have received these commissions. They now feel there is a platform there which they can move forward on, but there is not an opportunity to move forward, partly because of what we said about the ITV companies, but the encouragement ends at the point when they are ready to expand.

(Mr Dyke) Also, there is always the problem that if everybody who leaves film school who does not want to work for us sets up an independent production company in a sense there is a never-ending supply from the bottom end.

These are tried and tested companies, not new companies.

(Mr Dyke) I can see that particular point, especially in Aberdeen. I am happy to go away and look at that. I can see that problem.

Can I move on a little, the copyright for this question comes from my colleague John Thurso, who is much more acute in these issues than I am. It is one really for Dame Pauline, in the fallout from the Enron and WorldCom affairs has the audit committee met to discuss the implications for the BBC?

(Dame Pauline Neville-Jones) There has been dialogue on precisely the issues Enron gave rise to. We have taken each of those aspects and gone through it and satisfied ourselves that neither the auditors are doing things they should not nor are the BBC that can give rise to those problems. We have been through that agenda.

You have a clean bill of health and there are no changes in the practice required

(Dame Pauline Neville-Jones) The audit committee are always trying to increase the scrutiny that we give to the affairs of the BBC. I would not say everything is perfect but I can assure you that in that area we are satisfied of the probity of our auditors and the correctness of our own procedures.

Have I time to squeeze one more question in? A letter from a disgruntled former BBC employee - it was not Lord Birt you will be pleased to know - triggered off a thought in my mind, I will read this very quickly, "Greg Dyke has declared that he believes the advertising slump affecting ITV, Channel 4 and Channel 5 to be bad for the health of the industry. If he truly believes this will he concede that the licence fee should be reduced by at least 10 per cent to enable competition on a fair footing"?

(Mr Davies) No.

(Mr Dyke) I think you have to look at the previous 10 years, you cannot just take one year.

I guessed that would be your response. There is a problem, as the industry fragments and technology takes over the BBC is going to become more and more exposed as the Goliath in the industry, publicly funded, and for many of these smaller companies who have inevitably come into the market you will be enemy number one. How are you going to deal with that? It may not be a problem for you, but I think it could be a problem.

(Mr Dyke) I think that is inevitably an issue that emerges. The downturn in advertising revenue I suspect is not cyclical but actually where there has been an incredible rise over a comparatively short period of time I suspect there has been clear readjustment and you have a new base and you have to work from there. The market will sort that out in the end. However, if you then combine that with the fragmentation of what is happening in the market, ie as more people go digital and get multi channels they will watch a range of channels rather than just two or three. If that happens I think the problem gets bigger. When I did the McTaggart lecture a couple of years ago in Edinburgh one of the arguments I made then was it probably means that the BBC's role becomes more important, not less important, particularly in relation to the production industry. If you look at the history, remember early ITV a lot of American programming, the BBC quickly changed its position and invented what is British popular programming today, and that is by and large what has gone on for 40 years. I suspect it will be more incumbent on the BBC to make sure it can do that given the fragmentation of the market place.

Mr Doran: Thank you very much.

Chairman

Frank Doran referred to a disgruntled BBC former employee. I note on page six that in two years you will reduce the proportion of your income spent on running the BBC from 24 per cent to 15 per cent, what does that say about former gruntled BBC employees?

(Mr Dyke) Disgruntled or gruntled!

Thank you Mr Dyke, thank you Mr Davies, Lord Ryder, Dame Pauline, Ms Abramsky and Mr Smith. We look forward to seeing you again next year.

(Mr Davies) Chairman, thank you very much for doing this with us.