Oral evidence

Taken before the Culture, Media and Sport Committee on Tuesday 15 July 2003

Members present:

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

__________

Witnesses: MR GAVYN DAVIES OBE, Chairman, LORD RYDER OF WENSUM, a Member of the House of Lords, Vice-Chairman, DAME PAULINE NEVILLE-JONES DCMG, Governor (and Chair of Audit Committee), MR GREG DYKE, Director-General, MR JOHN SMITH, Director Finance, MR RICHARD SAMBROOK, Director, News, MR ASHLEY HIGHFIELD, Director, New Media, and MR MARK BYFORD, Director, World Service, British Broadcasting Corporation, examined.

Chairman: Good morning, thank you very much for coming. I make clear, as I always do on these occasions, that this evidence session on the BBC Report and Accounts takes place at the request of the BBC and is an annual event which was launched by Sir Christopher Bland when he was Chairman of the BBC. I will call Chris Bryant to ask the first question.

Q1  Mr Bryant: Thank you, Chairman. It is a delight to welcome you here. I remember when I worked at the BBC myself and used to help write these documents what an exciting time it was as you ran up to the process of being grilled by the Select Committee. Can I just ask the governors amongst you - and it is good to welcome so many members of the BBC, I think I can count 20 members of the BBC staff in the room - how genuinely independent you believe the governors are from the board of management?

Mr Davies: We work completely independent from the board of management, Mr Bryant, when we need to be, which is a lot of the time. You have got to bear in mind that we are also the board of the BBC, so there are times where it is entirely appropriate for the board of governors to act in unison with the board of management but there are times when it is appropriate for the two things to be distinct. I can tell you, Mr Bryant, I am perfectly capable of telling the difference.

Q2  Mr Bryant: I am glad about that, but having looked at the seven pages, 15 columns, of the governors' assessment of the performance, I have to say (having looked at annual reports for the last 15 years from the BBC) this is just about the most complacent I have ever seen. There is not a single word of criticism that I can see, except for the phrase "It is disappointing that despite these efforts there is little evidence so far that the BBC is attracting more people from ethnic minorities to its output". In other words, the only piece of criticism about the BBC that the governors are prepared to advance is that not enough ethnic minority people are choosing to watch the BBC. The number of times it says "We will monitor this"; "We will monitor that"; "It is too soon to judge"; "It is too soon to judge this, that and the next thing" - this feels more like a kind of Enron annual report than a BBC governors' annual report.

Mr Davies: Mr Bryant, can I ask you to restate that? You are saying this is "like an Enron annual report"?

Q3  Mr Bryant: It is fundamentally complacent. At what point would you want to advance any criticism of the BBC at all?

Mr Davies: Mr Bryant, "like an Enron annual report"?

Q4  Mr Bryant: Yes. It has absolutely no criticism. It is complacent in the extreme. There is no point at which you would choose to say that the BBC could have done better.

Mr Davies: Mr Bryant, what has that got to do with Enron?

Q5  Chairman: Mr Davies, you are not here to ask Mr Bryant questions, you are here to answer questions.

Mr Davies: Thank you, Chairman. Mr Bryant, I fail to see what that has to do with Enron.

Q6  Mr Bryant: For instance, the quotas that are set in law. You do not mention anywhere in your governors' assessment that they have not been met. You have not met the quota for independent production. There is an explanation about it later on in the report. You do not meet the quota of 33 per cent that you set yourself for producing programming outside London and the South East.

Mr Davies: I think there is a fundamental mistake in the premise of your question, which is that the governors' assessment of performance is the only part of this report that is influenced or owned by the governors. In fact, the entire report is published by the BBC and, therefore, all of it is owned by the governors. At the back of the report I would say there are 50 or 60 pages of reports on compliance, on accounting and on the financial statements which are essentially owned by the governors. Large chunks of this is directly reporting what the governors have done to ensure compliance. The factors that you pick up in terms of the independent quota, and I think you said the regional quota, those are explained in the compliance part of the report under the full aegis of the governors.

Q7  Mr Bryant: Do you not accept that if in the whole of your assessment, the bit that is attributed directly to you and to your own Chairman's foreword, there is no criticism of the performance of the BBC at all, then licence fee-payers, such as our constituents, who come to us - and I will raise some of them in a moment - with a whole series of issues and concerns and complaints about the performance of the BBC, can genuinely question how independent the BBC governors are, because you have now just said that there is no difference between your annual report and the BBC board of management's report. So you are there to defend the back of the BBC board of management.

Mr Davies: I did not say there was no difference. I do not believe that licence payers or your constituents are likely to draw the conclusion that you have drawn. The BBC has had, in my judgment and in the judgment of the governors, a very strong year, Mr Bryant. You may not agree with that and you may want to put questions to me or to my colleagues here that reflect your concerns, but it is our judgment - my judgment and the governors' judgment - that the BBC has had a very strong year. I do not, I am afraid, apologise for saying that in the annual report. As I say, you may not agree with that, but it is our view.

Q8  Mr Bryant: So you think there is no area in which you could say that the BBC has significant work to do to improve its performance, bearing in mind that it has had a very significant increase in its funding from licence fee-payers?

Mr Davies: Mr Bryant, with due respect, there are large numbers of things here where, in the governors' assessment of performance and in the compliance sections, we make it clear there is further work to do. I would never, ever come to this Committee ----

Q9  Mr Bryant: Such as?

Mr Davies: Such as, for example, ethnic audiences. I believe that the BBC has some of the worst share of such audiences. I believe that we have made great progress in the richness, ambition and quality of our television output, but we can go further. It says it very clearly under the governors' assessment of performance. I think you have read, first of all, the governors' assessment in isolation of any of the compliance parts of the document and, secondly, I think you have, to be honest, understated the balanced and fair analysis of the year that is included in this.

Q10  Mr Bryant: I remember other years when, for instance, the governors were very honest and said "We think comedy has had a difficult time", or that BBC 1 has had a difficult time, and various other issues. There is none of that this year. As you say, the only thing you can really draw attention to is the one point that I made about ethnic audiences.

Mr Davies: I can draw attention to a lot more, if you want me to. I just did on the ----

Q11  Mr Bryant: I have asked you to four times now.

Mr Davies: If you stopped asking and started listening I will tell you, sir. Do you want me to go through the objectives one by one?

Q12  Mr Bryant: I would like you to say where you think the BBC can improve its performance.

Mr Davies: I have already said, under objective one I think we can further improve. We have improved but can further improve the range and distinction of our major television output. We have done a great deal on arts but we have got, I think, more to do and we can do better. On objective two, the digital services can work better as a portfolio.

Q13  Mr Bryant: What does that mean?

Mr Davies: It means that they can co-operate better to serve licence payers as an entity and not as individual channels, and that is something that BBC Television will need to learn as it gets used to managing an increased portfolio of channels. I can do this on every single one of the objectives, Mr Bryant.

Q14  Mr Bryant: It is not very clear in the annual report at any point. Let me take up the issue of the digital portfolio then, because I think this is one of the areas where a lot of audiences are genuinely perplexed nowadays. You mention the launch of Freeview in here, and I would guess that everybody on the Committee would want to congratulate the BBC on its commitment to making sure that Freeview happened. However, it is still only available to 67 per cent of the country. That figure is not actually in the annual report that I could find anywhere. There are many people who say "Why is it that my licence fee is being used to roll out lots of new services which are not equally available to everybody?"

Mr Davies: Is it permitted for me to ask the Director-General to answer this because he has the answer?

Q15  Chairman: Please, Mr Davies. Anybody on the witness table with you who at any time wishes to answer a question is at perfect liberty to do so.

Mr Davies: Thank you, Chairman. I felt it was right to answer the point raised by Mr Bryant on governors directly, but the Director-General can answer the question that you have just raised.

Mr Dyke: Can I, first of all, just say how deeply we resent the use of the word "Enron". Enron was a corrupt financially mis-managed business, and if that is what you are implying I think it is disgraceful and I think you should apologise for it. It is a disgrace to our Finance Director ----

Q16  Chairman: Thank you very much ----

Mr Dyke: No. You cannot get away with words like "Enron".

Q17  Chairman: I just wanted to ask you to speak up. I am not hearing you as well as I would like.

Mr Dyke: Can I just say, I thought it was disgraceful - the use of the word "Enron". That is a corrupt financial organisation, and that is what you are implying, and that is not acceptable. I look forward to your apology at a later time. As for the digital channels, we do not disagree with you. If, in the future, all our digital channels are not going to be available to every home, there is a problem that we recognise. That is why we got into Freeview. That is why we have just gone unencrypted on satellite - for exactly that purpose. Actually, you will now, as from this week, be able to buy a box and a satellite dish - not through Sky - and you will be able to get our free services, all the BBC services. Over time we hope we will extend that. I think your 67 per cent figure is low but we cannot be certain. The evidence seems to suggest that actually the figure is higher than that. We have inevitably been conservative in terms of the advice we give, or that Freeview gives, because obviously we are not going to be loved if we tell people "Yes, you can easily receive this" and then when they go and buy the box find they cannot. I think we have inevitably been conservative and you will probably find the figure is above that. We are currently looking at how we can extend that further and how we take that figure higher. However, by going unencrypted on the Astra Satellite it has meant that virtually everybody now in the UK can now, one way or another, receive - if they buy the right equipment - BBC services without having to have pay-television.

Q18  Mr Bryant: Mr Dyke, I am quite happy to apologise for any statement that you feel has been made of anybody being financially corrupt, but the point I am trying to make - and I think you have just made it again for me - is very simply that the bits that are in this report and the bits that are missing from this report leads to a report which is misleading, I believe. So, for instance, on the issue of Freeview, you herald Freeview's launch and you congratulate yourselves for it - or the board of governors do - but my experience as a constituency MP is that it is not available in my constituency, it is not available in any of the neighbouring constituencies to me, but those people pay exactly the same licence fee. So it seems crazy to me that your annual report is extremely economical with the truth because it never says, at any point, that only 67 per cent ----

Mr Dyke: Perhaps I can point out, that was the decision of your Government. I presume it is your Government ----

Q19  Chairman: It is your Government as well, you know. It is the Government of all of us whether we like it or not.

Mr Dyke: The Labour Government decided, at the time when there was a recommendation from the Davies Committee - 1999 - that there should be a digital licence fee ----

Q20  Mr Bryant: So it is his Government?

Mr Dyke: No, he recommended it. The Government of the day decided that was not the way they wanted to go. Instead they decided there should be one licence fee and that, therefore, for a period of time - and let us assume that there is analogue switch-off in the latter part of the decade, which I still believe is possible - people would be paying for services they would not be receiving.

Mr Davies: Mr Bryant, you have picked a particularly odd one to focus your criticism on. Freeview is probably the fastest growing new consumer product ever introduced in the United Kingdom. It is a product which has sold many, many more boxes than anyone thought feasible when it was launched. It is a product that has extremely high approval ratings from the people that have bought it. I honestly think it is an odd one for you to pick, on which to criticise the BBC.

Q21  Mr Bryant: I am making the point that you, at no point, put any figures in here, and I would have thought if the governors were there to do more than to back up the board of management and were there to represent licence fee-payers then it is one of the issues that will be high in their minds, because I can tell you the issue is of access, which comes in hundreds of different formats. People in Wrexham, completely different parts of Wales to my own constituency, are troubled because they are not sure whether they are getting BBC 2 Wales or BBC 2W, which provide completely different sets of programming. In fact, the local newspaper does not tell them which they are going to get. So my concern is that audiences are being atomised around the country, the BBC's digital strategy is contributing towards that and you do not mention that at any point in your annual report.

Mr Davies: In the section on digital take-up we make it clear that we are monitoring the cost and performance of the digital channels, and that clearly indicates that we are concerned with take-up. Another thing I would like to point out to you, Mr Bryant, is that simultaneously with, or shortly after, what happened to Freeview last year the BBC took steps to ensure that a free satellite possibility was going to become available to your constituents. That, I think, is something you should not overlook.

Q22  Mr Bryant: Which you have now unilaterally withdrawn from - the service card.

Mr Dyke: No we have not. You should try to understand the difference. There is a difference between service cards and making our services available. Anybody, as from Thursday of last week, who goes out and buys a satellite box, buys a dish and puts it up and connects it up can now receive all the BBC services. The card you are talking about is the card that used to be available in certain Sky boxes which no longer take Sky, to ensure that people could receive the BBC services. Actually, they can continue to receive the BBC services; the issue is whether they can continue to receive ITV and Channel 4. In all honesty, that should be the responsibility of ITV and Channel 4 and not the BBC.

Q23  Mr Bryant: But you would not pull out unilaterally of the analogue transmitters, would you? You are part of a broadcasting ecology, and that is part of your charter.

Mr Dyke: Our aim must be to ensure that as many people in this country can receive all of our services. That should be our aim. I agree with you entirely. That is consistent with what we are trying to do. It cannot be the BBC's job to spend money to make sure former Sky digital subscribers can receive ITV and Channel 4. That has to be ITV and Channel 4's responsibility.

Q24  Mr Bryant: I think we will have to agree to disagree on this. Let me take up just one other issue about the figures that seems curious. At one point you say that during the war 70 per cent of Britain watched News 24. Later on in the report you say that viewing figures for News 24 is 0.1 per cent.

Mr Dyke: The difference is between what News 24 gets as a stand-alone channel and when we use News 24 on BBC 1 and BBC 2.

Mr Bryant: You do not draw that distinction in your report, which is why I think it is untruthful.

Q25  Chairman: Could I just intervene on this, because this is the end of your turn, Chris. On page 43 of your report you say "BBC One was the most watched and trusted channel" (this is during the Iraq War) "and BBC News 24 was seen by 70 per cent of the population." Not "did reach" 70 per cent of the population but "was seen by" 70 per cent of the population. On the other hand, on page 124, where you have "Share by service and platform" you say that BBC News 24 has a 0.4 per cent share of all homes (and that is people from four years old upwards) and that in digital homes it has 0.6 per cent. So would you please explain how you reconcile the share statistics on page 124 with your statement on page 43 that "BBC News 24 was seen by 70 per cent of the population"?

Mr Davies: I can immediately tell you two things, Chairman.

Q26  Chairman: No, I would just like you to tell me one thing, and that is how you reconcile those two statistics.

Mr Davies: I have two reasons for reconciling them. The first is that Table 2 on page 124 relates to share through the year - share, therefore. The second thing is that the number on page 43 represents reach at a specific time in the year. Therefore, not relating either in the number measured, or in the period covered, to the same thing.

Q27  Chairman: I just do not understand what you are saying, Mr Davies. The number of digital homes as a proportion of the total number of homes, if you look on page 124, is 26.2 million. That is what you say. The total number of people is 55.6 million. So you have got 26.2 million people who have access to digital, and there are 55.6 million inhabitants of this country. Twenty-six point two million is less than half of 55.6 million. You yourself say that 0.6 per cent of the 26.2 million and 0.4 per cent of the 55.6 million is the share of BBC News 24.

Mr Davies: On average through the year.

Q28  Chairman: Yes. Would you explain to me how, since BBC News 24 is a digital channel and less than half the population have access to digital channels, BBC News 24 was seen by 70 per cent of the population?

Mr Davies: Absolutely. It was carried on BBC 1, it was carried overnight on BBC 1 and watched on BBC 1.

Q29  Chairman: That is not very honest, is it? I do not mean you are not being very honest, but this report is not being very honest because it says "BBC News 24 was seen by 70 per cent of the population", and there is no effort to distinguish the difference between that and BBC 1. In that very same sentence it says "BBC One was the most watched and trusted channel and BBC News 24 was seen by 70 per cent of the population". You do not say "As part of the BBC 1 audience", you just say it. Frankly, whoever wrote this - and I assume that both you and Mr Dyke take overall responsibility ----

Mr Davies: Yes, we do.

Q30  Chairman: ---- has made an absolutely preposterous and utterly untenable claim.

Mr Dyke: Surely the point is that BBC News 24 is a 24-hour news service, running seven days a week throughout the whole year. What is interesting is that if you look at the figures for BBC News 24 there are particular peaks, and you will find exactly the same with Sky News. September 11 was an enormous peak, Soham last year was an enormous peak and the war this year was a peak. During the war, there were many hours of BBC News 24 that were switched and shown on BBC 1.

Mr Davies: Chairman, it says that in the preceding paragraph to the one you mentioned.

Q31  Chairman: You do not say that.

Mr Davies: It does, it says "BBC ----

Q32  Chairman: You have got 120 odd pages to say all this stuff and you do not say it.

Mr Davies: Yes, in the preceding paragraph.

Q33  Chairman: Now, after I ask you question after question, we get this somewhat strained explanation of how 0.4 per cent is translated to 70 per cent.

Mr Davies: It is said in the preceding paragraph, Chairman. It says "BBC News 24 was simulcast on BBC One and BBC Two".

Chairman: Yes, I see that. That does not explain why in the next paragraph you say "and BBC News 24". It is incredible by any statistical assessment you can make. When you compare it now - later on I will be asking you about costs - with this graph for reach, well I have to say that taking into account that you could phrase this in different ways then it is - at its very, very best - disingenuous.

Michael Fabricant: Mr Davies, I spent a lot of time over Christmas and New Year in Houston, so I am going to ask you this for the record. You are a former Chairman of Goldman Sachs, you are an economist and you are Chairman of the BBC. I notice that your accounts were audited by KPMG and under The Companies Act both you and the entire board are responsible if the accounts are fraudulent. Are they in any way fraudulent?

Q34  Chairman: No, I am not having that question. Let me make clear to all colleagues.

Mr Davies: Mr Fabricant, to the absolute best of my knowledge, these accounts have been made in the most rigorous way possible ----

Q35  Chairman: Mr Davies, I am speaking from the Chair, if you would remember. I will not allow any Member of this Committee to imply there is anything either corrupt or fraudulent in this report, or in the conduct of the BBC. It may be open to criticism of various kinds, but the implication that there may be fraud or corruption is one that I will not accept round this table. Therefore, Mr Fabricant, I would be glad if you would move on to your next question.

Mr Davies: Chairman, thank you.

Q36  Michael Fabricant: Mr Davies has answered the question to my satisfaction, that it is not fraudulent, and that is what, Mr Chairman, I wanted to get on the record. That was the point of my question. Now we move on to the area that I do want to get into, which is News 24. First of all, I must congratulate the BBC over the coverage of the Iraq crisis. I think, once again, the BBC has proved its ability to have people in place, on time and deliver a service that people want to see. How did News 24's coverage or viewership compare with that of Sky News during that period?

Mr Dyke: I do not have the exact figures here but I can let you have them. I think it is fair to say, as a direct comparison not for the period when News 24 was on BBC 1, that in Sky homes Sky got quite a significantly large audience. In cable homes it is much harder to measure because cable did not distinguish between when we were on BBC 1 and when we were not, so you can only really compare with Sky homes. In Freeview homes, which is a much smaller number than Sky, the evidence suggests that BBC News 24 does considerably better than Sky. Again, that is from the evidence and that would not be surprising, in that the sort of people who are buying Freeview are people who are often Sky rejecters or are more traditional BBC viewers.

Q37  Michael Fabricant: I think that is a fair answer. Do you not think that, given that the BBC news gathering resources are considerably more than Sky and, also, (to put down on the record while I am putting things on the record) considerably more than CNN, CBS, NBC, ABC and Fox News all combined, that really you deserve a far bigger audience than Sky? Is there not really a question therefore that the presentation of BBC News 24 is somewhat dated, hacked, and actually not attractive to those people who want to watch ----

Mr Dyke: I think the Lambert Report did sum it up and said perhaps you are comparing the Daily Mail with the Daily Telegraph, and that actually what the Lambert Report ----

Michael Fabricant: That will upset Quentin Letts.

Q38  Chairman: Michael, I do not want this kind of thing to happen. I do not want you to make references to the views of journalists, I want you to ask questions as a Member of a House of Commons Select Committee.

Mr Dyke: I think the answer is that we are more the broadsheet end and Sky would be more the tabloid end. For instance, we carry far more foreign news than those. This is not in any way a criticism of Sky News, but maybe Richard Sambrook, who is the Director of News, would like to answer that question.

Mr Sambrook: Yes, Mr Fabricant. I agree, I think that clearly we would hope to have more viewers than we have, but the Lambert Report outlined ways in which we could make News 24 more distinctive and also address some of the issues around presentation, and we are in the middle of developing the service in line with the recommendations in that report.

Q39  Michael Fabricant: But the Lambert Report came out a year ago, and I have watched News 24, and apart from seeing "Breaking News" appear within days of the Lambert Report coming out - because that was a specific recommendation they made - the overall format of News 24 has not changed a great deal, except I notice that when you have Talking Heads you do occasionally show alongside it a video replay of a relevant event that may have happened over the last 48 hours, which is a technique used by Sky and other broadcasters. There really has not been, has there, in the last year a fundamental change? One of the other recommendations that Richard Lambert made in his report was that there should be a detailed remit for News 24 which (and I am quoting) "should be as precise as possible about its objectives, and about the ways in which the channel should be distinctive.". No mention is made in the annual report and accounts about such a detailed remit being produced. Was such a detailed remit produced? If so, why is it not mentioned in the annual report?

Mr Sambrook: The remit, we believe, is encapsulated in the Statements of Programme Policy in which there are specific agendas laid down for News 24. In terms of the broader points you make, we have been developing the service and we have more international news now on BBC News 24 than Sky News does, we are working at how we get a greater use of our regional resources on to the channel, we are developing some of the programming in the rolling news format and I think later this year we will be changing some of the presentation format of the channel. One of the things we have done since the Lambert Report, for example, is to introduce new graphics, there is a graphics capability on the channel. This is an evolution and not a revolution, and our approach to it has been to develop the channel in a given time rather than to have instant change.

Q40  Michael Fabricant: I will just pursue you on this, at the risk of boring everybody. The BBC, as I said earlier on, has more resources - and that is good - paid for by the licence payer, and I think it has invested well in correspondents overseas and correspondents in the domestic market too. However, if at the end of the day, News 24 is not pulling in the audience it could do, without dumbing down (there is no need to dumb down, and no need to become a tabloid as opposed to a broadsheet as the Director-General said), are you really fulfilling the objective of the licence payer? After all, the cost of News 24 is said to be in the order of £24 million a year. Does that include the cost of buying in? Do you have a notional cost for buying in stories from journalists who would be there in place in any event - quite rightly and properly - for the news on other services provided by the BBC?

Mr Sambrook: There are a number of things there. Firstly, I agree with much of what you said. Indeed, we found the conclusions of the Lambert Report very helpful and we supported them. I think part of that conclusion was really to address exactly the point you have made, that actually News 24 needs to reflect the full resources that the BBC is able to bring to news and current affairs and we accept that to date it does not necessarily do so. However, part of the plans that we are bringing to bear over the next few months, I hope, will achieve exactly that. In terms of cost, I think this year for the first time they have been separated into production costs, news gathering costs and into central overheads. The kinds of costs you have alluded to are under news gathering.

Mr Smith: If you would like to see a breakdown of the costs, by the way, Mr Fabricant, it is Table 16 on page 131.

Mr Dyke: I think the point to make is that news gathering is a contribution towards the central news gathering for the whole of the BBC, and production costs are one of the costs of actually broadcasting the channel and running the channels and, also, two, any specific news that the channel wishes to commission itself as opposed to taking it from a central news gathering pot. In other words, if you closed it down you would save the 23.8 but you would not save the 18.8.

Q41  Michael Fabricant: In your report you state as well that the amount of 15 minute reach - the number of people who watch News 24 for 15 minutes in a 24-hour period - is around 4.1 per cent in all homes, 7.7 per cent in multi-channel homes and 7.3 per cent in digital homes (this is the point raised by the Chairman earlier on). What is your aim for audience reach, given that you alluded to the change in presentation that will be introduced over the next few months, Mr Sambrook?

Mr Sambrook: We have not set ourselves a specific reach, or share, target because we think that might produce the wrong motivations in terms of trying to develop the channel. What we set ourselves are the objectives set out in the Lambert Report of improving distinctiveness and differentiation in the other news channels. That is what we are focusing on at the moment.

Mr Dyke: If I can just add to that, with the growth of Freeview, where so far viewers disproportionately watch BBC News 24 as opposed to the other news channels, we would obviously expect reach and share to increase.

Q42  Michael Fabricant: Do you have it as an aim, regardless of whether you regard it as tabloid or not, to have more viewers watching News 24 in digital homes than Sky News?

Mr Sambrook: Not captured as a specific objective. We believe the key thing is the public service differentiation, and that is where our focus is, following the recommendations of the Lambert Report.

Q43  Michael Fabricant: But BBC 1 is claimed to be (and may be for all I know) the most popular television service, and yet that is public service broadcasting. Surely the two are not incompatible. You can be popular and be a public service broadcaster. Why can News 24 not be popular and a public service broadcaster?

Mr Sambrook: We would like as many people as possible to watch News 24, but we think the priority is to differentiate the service and to emphasise the public service value and resource of the BBC. That is where our primary and priority objective lies.

Q44  Rosemary McKenna: Good morning. I have been a lifelong supporter of the BBC and continue to do so, because I believe the BBC have set a standard for broadcasting throughout the world, worldwide, and I think you should always take great credit for that. I will always defend that. However, I think over recent years I have become concerned about the impartiality of BBC news coverage, particularly in terms of the lack of differentiation between straightforward news coverage and editorial comment. I think there is a much less clear line now than there used to be. I agree with much of the Chairman's foreword, apart from one or two areas, and I would like to ask you about those in particular. You talk about the BBC's coverage of the war in Iraq and you say that the BBC did a superb job. There is one sentence there I would like to refer to. "Of course there were some individual errors along the way." What was in your mind when you actually wrote that?

Mr Davies: Mrs McKenna, first of all thank you for putting it in the way you have, which I greatly respect. What I had in mind was stories that were broken during the war which turned out to be based on information that did not stand up to subsequent scrutiny. For example, the one I had in mind when I wrote it was the fall of Basra which was reported, I think, on all the news channels in the UK on two or three separate occasions. So really what I meant was that the fog of war (which showed up very clearly last week in the BBC 2 documentary, by the way) applied to all news channels and we were not free from that fog on occasions. I did not mean that to imply that there were breaches of our overall impartiality.

Q45  Rosemary McKenna: I do think that there were breaches of impartiality throughout the coverage of the war.

Mr Dyke: There is a distinction again between bulletins and 24-hour news. Twenty-four hour news inevitably tries to be first with the news, tries to get it out there. Bulletins allow you a much longer period to sit back and think "Is this likely to be right?" Sky and ITN at times broadcast information that was coming to us, often from the military, who also believed it to be true but actually, at a later time, it was demonstrably not true. For instance, Sky at one stage broadcast that the Iraqis had retaken the airport, because that is what the Iraqis were claiming. In a bulletin, the ten o'clock bulletin, you have probably got a lot more time to consider whether that is right. The danger of 24-hour news is that you try to get it out and at times it proves to be wrong.

Q46  Rosemary McKenna: I specifically wanted to refer to 24-hour news because lots of us - certainly politicians - watched BBC News 24 very carefully. What concerned me was how very often at the top of the story, on the hour, you ran a story for about 20 minutes and then 20 minutes into the news you said there was then a statement "This has been denied". However, the 20 minutes had already taken place and the reporting, but it was also repeated at the top of the next hour and the next hour.

Mr Dyke: One of the things we have done since the war is to commission some academic work relating to the whole issue of embedded journalism because what we need to know is, was embedded journalism more or less accurate than other journalism? In other words, if you put journalists in with the military, and that is their only source, I could not tell you whether we believe that was to our advantage or disadvantage in terms of telling exactly what is happening. You can only work that out by doing a piece of research, which we have commissioned from Cardiff University.

Q47  Rosemary McKenna: Was it a member of the military who actually told a journalist, which was repeated on television, that the Iraqis felt safest under Saddam?

Mr Dyke: If I remember rightly, that was a piece of information that came out after the war was over, and was a view expressed by our correspondent on the Today programme. It is quite interesting because I have since seen that expressed by members of the military on a number of different news programmes.

Chairman: Can I say that I think we are doing two things that I do not believe are appropriate. I recognise the way in which Rosemary is doing it, but nevertheless (a) I do not regard it as appropriate for a House of Commons Select Committee to interrogate the heads of the BBC on the content of BBC programmes. I regard that as absolutely out of the question. That is not for Parliament to do. Secondly, I do not wish this session to, in any way, be distorted by discussion of the BBC coverage of the Iraq war or its consequences. That may be a matter for other committees but it is not a matter for this Committee.

Q48  Rosemary McKenna: Thank you, Chairman. One other question then. Do you not believe that there are concerns about impartiality and that the BBC's trusted place in the world in broadcasting is in danger because of those concerns?

Mr Davies: Mrs McKenna, we, at board of governor level, have responsibility for the impartiality of BBC news, and therefore I would like to say a couple of things about this. The board has been concerned that there have been allegations of breaches of impartiality widely across the political spectrum recently. We, honestly, the 12 people on the board, do not share those concerns. We have discussed them in depth but in order to ensure a belt and braces approach to this the board is looking at doing some things that are new and different. For example, I think it says in the annual report somewhere that we are going to take more frequent and more detailed reports from editorial policy in the BBC on whether impartiality has been attained. We are going to look further into whether we can measure audience perceptions of impartiality - something that we already do but something we may need to do further to see whether our audiences really believe we are impartial. The evidence is that they do, but we are going to look further into that. We have already started a process where the board gets reports on individual topics, particularly contentious topics, from external bodies such as Chatham House, to inform the board on whether past coverage has been impartial. I share these concerns since they are topical. I do not believe they are valid but we do want a belt and braces approach.

Q49  Rosemary McKenna: Can I ask that in that you include what is seen by many as agenda-setting by BBC reporters, who then write in newspapers with the authority of a BBC journalist. I am thinking particularly about BBC Scotland where a journalist who covers the holiday programme, sets the agenda at the end of the week, writes in national newspapers over the weekend and the agenda is set for the Monday? Can I ask you to include that?

Mr Davies: Mrs McKenna, the board put out a statement last Sunday in which it said, among other things, that it was intending to look again at the rules under which BBC reporters and presenters are permitted to write for newspapers, once it has received recommendations from the Director of News who is thinking about this at the moment.

Q50  Chairman: Could I follow that up because I do believe this raises a very important issue, relating to the impartiality, which you, Mr Davies, write about in your Chairman's introduction. A little while ago the BBC sacked Rod Liddle as editor of Today, and I believe they were absolutely right to do so; I believe that it was unacceptable that the editor of a news programme should also write extremely contentious and controversial articles for newspapers. You have other journalists who do this, and what I am at a loss to understand is why they continue to be allowed both to write these articles and to remain in the employ of the BBC. May I make it absolutely clear, I am not here referring to the content of articles or, in any way, the subjects covered. Mr Andrew Gilligan has written articles both in The Spectator, going right back to the beginning of June, for example, and in The Mail on Sunday, which are bellicose, contentious, controversial articles, personal animadversions of individuals. My own view is that just as you sacked Rod Liddle you ought to give Mr Gilligan the choice between writing controversial polemical articles for the press or remaining employed by the BBC. I also believe that although it may well be that their status within the BBC is different the time has come when you should tell Mr John Humphreys, Mr John Simpson and Mr Andrew Marr that it is up to them to make the choice as to whether they continue to be what are regarded as impartial presenters on the BBC and, at the same time, writing articles which are contentious and controversial for the press. Therefore, I put that to you that that is a matter that you should be dealing with now, certainly in the case of Mr Gilligan because there is absolutely no doubt that he is a member of the staff of the BBC and he should long ago have been told either to stop writing these articles - and I am not commenting on their political content in any way - or to stop working for the BBC. I would like an answer to that now, please.

Mr Davies: Chairman, we are looking again at the policy. The Director-General will talk about the specifics.

Q51  Chairman: No, I would like a more precise answer.

Mr Davies: Yes, from the Director-General.

Mr Dyke: I do not quite understand what answer you want.

Q52  Chairman: What I want to know is, if you sacked - in my view absolutely rightly - Rod Liddle for writing contentious articles in the press, why, after more than six weeks have you allowed Mr Gilligan to go on writing these articles?

Mr Dyke: We did not sack Rod Liddle, he chose to leave when we said to him he could not continue. He was the editor of the Today programme and he wrote something that we regarded as completely unacceptable, that did not go through the proper process, was not discussed within the BBC and was at its crudest not in any way political balanced. That is why Rod Liddle left. Many of the people who present for the BBC, some work for the BBC, some do not work for the BBC, some work one day a week for the BBC - it is not an easy line to draw. As the Chairman has already said, we changed our guidelines after Rod Liddle and the governors have asked us to look again, and that is what we will do.

Q53  Chairman: While Mr Sambrook prepares to reply, I realise in the case of some of these extremely well-known people that they are freelancers who work for the BBC, though that may not be apparent to the members of the public who listen and who view them and believe that they are the impartial voice of the BBC, as they should be. On the other hand, so far as I can understand it, and either you or Mr Sambrook will correct me, Mr Gilligan is a staff journalist on the BBC, and I would have thought it ought to be out of the question for staff journalists on the BBC to moonlight by writing polemical controversial articles in the press.

Mr Sambrook: Chairman, if I could answer, the Director-General is right; the issue of Rod Liddle was that the article had not been cleared and gone through the due process and, indeed, in our view compromised our impartiality, which is why we asked him to make a choice between being a BBC programme editor or writing for the press. That was clearly the issue there. Going forward, we absolutely recognise the point you make but the Director-General is also right in that it is complicated. Many of the individuals who you mentioned are freelancers and we demand broadcast exclusivity from them, but if we also demand that they cannot write then clearly they cannot operate as freelancers. So this is slightly different to our situation. In terms of staff, I agree the situation has arisen where some of our staff - reporters, correspondents and presenters - have a certain value to newspapers, clearly, but I agree there is an issue there, and going forward it will be only exceptional where members of BBC staff are allowed to write in this way, but clearly I need to undertake a review and report back to the board of governors, which I have undertaken to do in the very near future.

Q54  Chairman: Was Mr Liddle freelance?

Mr Sambrook: No, Mr Liddle was on the staff. That is why he was forced to make that choice.

Q55  Chairman: So you sacked Mr Liddle. I repeat, I believe you were right to sack Mr Liddle. I think his attack was on the Countryside Alliance ----

Mr Dyke: We did not sack Mr Liddle, we gave him the choice and he chose to leave.

Q56  Chairman: If you gave Mr Liddle that choice, and he made his choice, which was to go, so that he can now write his articles without compromising the impartiality of the BBC, why have you not given that choice to Mr Gilligan?

Mr Sambrook: The issue there is on our view about whether what appeared has compromised our impartiality. We absolutely recognise the risk and the dangers that you speak to and indeed, as I have said, we will be significantly tightening this in future.

Q57  Derek Wyatt: Good morning. If you look at the broadcasting ecology, ITV has had a pretty bad year, Channel 4 is rebuilding and not having too good a year, and it seems to me you have had a very good year. So you may be surprised but I would like to congratulate you. Can I move to the question that Chris Bryant asked but you sort of skated over slightly, and that is the independent production ratio, which is less than 25 per cent. If I am correct, it was less than 25 per cent last year. I have not got the evidence but I think last year you said you would review that and make sure that it did not happen again. So why have the independents not reached the 25 per cent mark?

Mr Dyke: As we explain here, the problem we have is that two years ago a considerable number of independents were bought by companies that had broadcasting roots and, therefore, they no longer counted as independent. For instance, Endemol UK, the biggest independent supplier to the BBC, which used to be called Bazal, was bought by Endemol, who in turn were bought by Telefonica and Telefonica own some 50 per cent of Antenna 3 in Spain. That meant they no longer qualify. We wrote to the Secretary of State, who was Chris Smith at the time, and said "You do understand this is going to create real difficulty because this can happen in any year; anyone can come along and buy one of the biggest suppliers. What do we do about it? Are we therefore to cancel their programmes?" The Government has recognised that and has recently changed the rules regarding independents, which has brought Endemol back into the fold of independents, and actually would have been over 25 per cent if they had not. I am looking at the total. Twenty-seven point five per cent of the eligible programme hours - in other words the hours that are available to independents - this year went to production houses outside the BBC. So actually 27.5 per cent, which is well above 25 per cent, went outside. Some of them would not have counted anyway. For instance, Granada make University Challenge for the BBC and that would not have counted anyway. Others that would have counted historically did not count. As I say, that change has now been made. I can tell you that today we expect to meet the independent quota this year but, hand on heart, if Granada went along and bought one of the biggest independent suppliers - the vast bulk of independent production comes from a comparatively small group of companies - or Carlton went along and bought one, we would be in difficulty again. I am not sure we find an easy way out of this until there is a different definition of what is an independent.

Q58  Derek Wyatt: There are two things that come out of that. One is if Endemol is back in the fold that distorts the figures so maybe the independent production should be 40 per cent and you should allow a slice of that to the larger ones. That is the ecology of that particular business, but you should encourage the younger ones so there should be a higher take-up. If the bigger ones are bigger, they have more muscle so they can fight you for rights.

Mr Dyke: When the 25 per cent was first introduced in the late 1980s/early 1990s, the intention was to drive and create an independent production sector. That has happened. The argument at that time was that in ten years' time you would not need a quota because the market itself would suffice. I do not think the independent production companies agree with that any more. Nor do I. The evidence shows that is not what happened in America when they changed the rules. We are very happy to continue with the 25 per cent quota. We have a large production base. We have all sorts of constraints on our production base. Scotland, Wales, Northern Ireland, Manchester Birmingham and Bristol are all network production bases and we have to get enough production into those areas. Some of that comes through independents. There has been a massive success in Scotland. Over the last three years, the amount of production in Scotland has doubled. That is what we wanted because we want to build production bases. If you were to say you would have 40 per cent from independents, you could not sustain that number of production bases.

Mr Davies: The BBC spent or invested almost £1 billion in the last year in creative industries outside the BBC. People are unaware of the vast scale of the support and partnership which exists between the BBC and the outside world.

Q59  Derek Wyatt: Can I turn to page 95 of the report? I am looking at the digital costs. It seems as though this last financial year you have spent £279 million, if I have understood that figure correctly. Would I be right in thinking then that over the last three or four years the figure spent on digital is about £1 billion?

Mr Davies: Yes.

Q60  Derek Wyatt: That is an extraordinarily high figure. If you come down to BBC 3 and 4, audiences are sometimes as low as 10,000 - sometimes they do not register at all. I have taken out the BBC schedule this week. BBC 3 was supposed to be risky and at the edge, I am told. BBC 3: Eastenders, Eastenders, Eastenders, Eastenders. BBC Four: Legend of Julian Bream, repeated, Legend of Julian Bream on Friday. If I go to CBBC, I find The Cramp Twins are on Monday, Tuesday, Friday, Saturday and Sunday. If I go to CBeebies, it is Fimbles, Fimbles, Fimbles and Fimbles, repeated as well. Can I ask where the creative edge and the risk is in BBC 3 and BBC 4? Secondly, at what stage do you say to yourself that they are not working and you should not invest the money?

Mr Dyke: As part of our agreement with Sky, we have changed our EPG positions for BBC 3 and BBC 4 which has led to an immediate increase in the audience. Secondly, in Freeview homes our digital channels are now getting five to six per cent of viewing. If you start new channels in this environment, it inevitably takes longer. I cannot agree with you about the creative intent. You can pick out Eastenders but you can pick out all sorts of other programmes, some of which have been successful and some of which are pretty disastrous. BBC 4 has been widely acclaimed as doing things that the rest of television does not do. CBeebies, in a matter of months, became the most popular children's channel in Britain. In terms of the total expenditure, that does include what we spend on the internet. We were given certain digital radio frequencies and certain digital television frequencies and we were asked to provide services for them. We have helped, with both Freeview and digital radio, the drive for digital in this country enormously.

Mr Davies: We continue to spend 87 per cent of licence payers' money on analogue services.

Q61  Derek Wyatt: The question is at what time do you say that you are failing? Are you satisfied with an audience of 10,000, sometimes not registering, given that this is public money?

Dame Pauline Neville-Jones: It is clearly not a satisfactory situation over the long term. They are new services. Part of the problem is access to EPG. If you cannot find a channel, it certainly puts people off. It is an important rectification to have. It is not satisfactory in a long term situation. If that is the long term situation we have to think very hard about it.

Q62  Derek Wyatt: Next year if the figures are no better, will you come and say that they will come off the air?

Dame Pauline Neville-Jones: I do not think we shall say that but we will have to think very hard about it. It will be self-evidently the case that this would not be a satisfactory situation.

Q63  Chairman: As it happens, BBC 4 is the channel which I probably watch more than any other of the BBC output and as much as any other channel. Therefore, obviously it suits me that you should have a channel of the quality of BBC 4. On the other hand, it has to be said that you have in your statistics on page 124 an audience reach of 0.1 per cent of the entire audience and 0.1 per cent of the digital audience. If you make it 0.1 per cent of the digital audience, that is fewer than 30,000 people watching, by your calculation. You have maybe 30,000 people watching and not watching consistently but watching for these 15 minute spells. It suits me because I like the channel but is it really a justification of the expenditure of £41.2 million for a year for you to spend money which is something like £1,500 per viewer when at the same time you read in the press that in the competition for the Premiership you may not have enough money to compete with Sky? I would guess that I am in a tiny minority of people who prefer watching BBC 4 to Premiership matches.

Mr Davies: You are clearly pointing to a dilemma that exists across the whole of the BBC. Should you make programmes that are designed to appeal to minority tastes, that are uplifting and great programmes? How far should you concentrate solely on mass tastes? I think we should do both with different services. I know you have been in the past a stalwart defender of Radio 3. You could perhaps have made similar points about Radio 3 that you are now making about BBC 4.

Q64  Chairman: I could, except Radio 3 does not cost as much. As far as I am concerned, you can spend any money you like on Radio 3 but this is just me as a tiny minority.

Mr Davies: We have to be concerned about value for money overall to all licence payers. All licence payers need to get service from the BBC that they believe gives them value for their licence fee. To the greatest extent possible, that must be true. I would argue that all licence payers in parts of their lives would be uplifted by Radio 3 and BBC 4 and that those channels should be available to them. They are expensive in cost per viewer per hour or cost per listener per hour, but it is one of the things that a great cultural organisation like the BBC should do and should be proud of doing because we are there to promote British culture.

Mr Dyke: In respect of the Premiership, if we had to pay what Sky have been paying for the last contract, you could have BBC 4 for six premiership matches.

Q65  Chairman: Some people would make that choice, would they not?

Mr Dyke: Clearly, they would.

Q66  Derek Wyatt: Let me go on to the pensions issue. Can you tell me what the hole is and how you are going to fill it?

Mr Smith: First of all, I do not think there is a hole and therefore we need to explain more about how the scheme is run and how healthy it is. The thing that has reached the headlines, as it always does, is the figure of £1 billion calculated under the accounting standard FRS17, a relatively recent innovation, which as you know is contentious. It is not the way to look at the health of pension funds in deciding what the long term contribution rate should be or indeed whether or not it can meet its obligations as and when they fall due. The things that matter for the BBC are the following: the scheme is far from mature in terms of its liabilities. We have 55,000 people in it, of which only 20,000 are receiving a pension. It is quite a long time before any assets will need to be sold in order to pay the pensions, which is a different situation to that which some other companies face. FRS17 looks at assets at a particular snapshot valuation at a particular point in time. If you are not intending to sell the assets, that is not something that is relevant in calculating whether the thing is healthy. Secondly, the scheme earns more income each year from the contributions from the staff and contributions from the BBC than it pays out in all its costs. It is adding value, not reducing it. Point number three: instead of looking at it on an FRS17 basis, which is contentious, the alternative is to look at it on an actuarial valuation. The last formal actuarial valuation we carried out was in March 2002. We asked our actuary to carry out an interim valuation for us at March 2003. It takes a while to do and therefore was done unfortunately after the annual report was produced. The actuary's figure for March 2003, as up to date as we can get it, is still a surplus of about 270 million. From an actuarial point of view, which looks more carefully at long term return rates rather than just a snapshot at a point in time, the scheme is in surplus. One of the dangers of looking at schemes from an FRS17 point of view is that the very next day that valuation has moved. In this particular case, March 2003, it happened to be an absolute low point in the cycle of the stock market values and since then the values have come up 15 per cent. Each day you try and do a snapshot valuation, it is wrong the very next day. Interestingly, I looked back on FRS17 calculations at each quarter end over the last two years and you get a very different picture each quarter you look at it. It is not the way to look at pension funds when you do not intend to sell the assets. If you valued it today on an FRS17 basis, because the stock market has come up, that figure of a billion even would have come down by about 250 million and is moving all the time. Finally, in our particular case the BBC and the members have been enjoying contribution rates for the fund of about 4.5 per cent since about the early 1990s. We have been enjoying low contribution rates simply because the fund has been very heavily in surplus for a long time, to do with investment performance over many years. Like many companies, we have reduced our contribution rates. Some companies have taken a contribution holiday so they do not contribute anything. We decided a year ago in discussions with the staff that it would be a good idea very gradually to increase the contribution rate from the BBC and from the staff from the current rate of 4.5 per cent to a rate of six per cent over a three year period. There is no need to do it urgently because the scheme is in surplus and it is earning more income than it pays out.

Q67  Derek Wyatt: Last year I asked about remuneration. Given that you have had a pretty good year, why are the bonuses so much lower this year?

Mr Davies: We have a bonus system in order to allow us some flexibility for compensating the executive of the BBC. That flexibility goes towards several things: individual performances of the people; the performance of the BBC as a whole and the divisions in which they are working; their ability to work as a team. It also allows us some flexibility to take account of what is happening in the external market place. Surprisingly, given what has happened to revenue in the external market, the amount paid in bonuses in the private sector has continued to rise many fold more than we are paying. However, the Remuneration Committee took the judgment that the froth in the market was less this year. There was less chance that our executive would be bid away for jobs in the private sector. As a result, we took a slice out of bonuses for everybody in the executive. As a result, the amount paid in bonuses this year will be several percentage points lower than it was last year. It reflects our judgment on the Remuneration Committee, informed by two external advisers, about the activity in the private marketplace.

Q68  Mr Doran: Can I congratulate the BBC on what has been a good year? I am going to concentrate on some more mundane issues but I would like to start with a comment Mr Dyke made to my colleague, Mr Wyatt, about the situation in Scotland. It is quite clear that there has been a substantial increase in production in Scotland. When you look at the figures on page 127 of the report, there has been quite a substantial drop in the amount of production for the network. I wonder if you could say a little about that. This year it is 169 hours for the network. Last year, it was 219. That is about a 25 per cent drop.

Mr Smith: 32 per cent of all our network spend goes into the nations in total.

Mr Loughrey: I am not sure which figures you are quoting.

Q69  Mr Doran: It is page 127, table eight, "Television hours of output by origin." While the output of digital channels in Scotland has clearly increased substantially and the output of production and broadcast in nations and regions --- I presume that means within Scotland --- has increased substantially, the first figure for "First transmission: Originated programmes Network BBC One and BBC Two" shows a substantial drop. I would like an explanation for that if you have one.

Mr Loughrey: I am afraid that specific is new to me. The level of spend in Scotland in cost terms has trebled in the past three year period. 20 per cent of all children's output in the entire BBC is now originated by BBC Scotland. Hours of output are quite moving figures within the television industry. One of the most expensive genres in the whole business is television drama. Three television dramas are worth a great deal more in terms of hours of output.

Q70  Mr Doran: On these figures, television drama is 23 hours this year and 23 hours last year. There is no change.

Mr Davies: It is clearly in the children's genre that it has happened. Do you mind if we write with an explanation?

Q71  Mr Doran: I am happy with that. We had a Scottish parliamentary election earlier this year so you have effectively the first parliament under your belt broadcasting in Scotland with the new Scottish Parliament, functioning with the Scottish Executive. I would be interested to know if you have done any analysis of your performance over these four years and if that is going to mean any changes in the way in which you broadcast or report the Parliament in future years.

Mr Loughrey: The most significant part of our parliamentary coverage is within our news output. I am pleased to say that in the last year, for the first time in the previous six or seven years, Reporting Scotland has moved ahead of the commercial opposition in terms of its popularity. It is not the only yardstick by which to judge our output but it is very encouraging as we have a much higher level of coverage in Westminster and Holyrood political life than any part of our commercial opposition but we still manage to achieve very high levels of trust and viewer loyalty within the Scottish market. It is also very encouraging that that pattern is carried through from breakfast to lunchtime, to early evening and late evening. The launch of the new BBC UK-wide politics show has also provided an extra 20 minutes a week of dedicated political coverage in the nations as well as the originating coverage. Those programmes are doing very well and proving very popular in all the three nations, including Scotland. The recent review of political coverage within the BBC and the rejuvenation of that coverage has done particularly well in Scotland and the three nations.

Q72  Mr Doran: Steady as she goes? Is that what you are saying?

Mr Loughrey: No. Our political coverage was very much part of the BBC-wide politics review this year. We learned a lot of lessons from that. We were concerned, as were our colleagues in this House and within broadcasting, that the age profiling of the political programme viewers was worryingly high; that the younger part of the population found those programmes less appealing than we would have liked. As a result, we have looked at the fundamental approach of our political coverage production in the nations, at UK level, and the audience trends so far are encouraging for those of us who believe that politics matter and deserve rejuvenation and a renewal, like all other genres.

Q73  Mr Doran: We managed to get through the election without any serious discussion about the idea of a Scottish six. Is that finally dead and buried?

Mr Davies: My predecessor and Greg's promised several years back that we would review this after the ensuing next December election and we are still intending to do that.

Q74  Mr Doran: It is still a possibility but it is subject to review?

Mr Davies: It is subject to review.

Mr Dyke: The review is currently going on.

Q75  Mr Doran: Can I move to the area of film? You will be aware that this Committee has been carrying out an inquiry into the British film industry. One of the issues which did come up was the very poor performance of television companies as a whole, including the BBC although the BBC is far and away ahead of all the other companies in terms of its investment. You are on a par with Channel 4 at about ten million a year but the proportion of investment into the film industry is extremely low. It is about five per cent compared to about 36 per cent in France from television companies in the indigenous film industry and a similar figure in Spain. When we heard BBC witnesses, I think there was a certain sense of self-satisfaction about the fact that compared to the rest of the industry the BBC figures were quite good and that is undeniable but in terms of overall performance it was pretty poor. Have you any intention of looking at that and reviewing it? I am conscious, for example, in the report that I could not find any reference at all to investment in film.

Mr Dyke: There are cinema films where we invest. When I arrived at the BBC, we decided we would try to help the British film industry and we put aside £10 million. It was no longer dependent on the controller of BBC 1 or the controller of BBC 2. We gave it to Alan Yentob and we said, "One of your jobs is to invest in feature films that are fundamentally British and attractive to the British audience." We have had some success and some failure. At the moment we are probably ahead. I remember once sitting on the board of a film production company in Los Angeles where they reckon that one in 16 had to be a hit. When you get to 15 failures, you become very nervous. We have been reasonably successful in film. The second investment in film is what the television division does and what the controllers of BBC 1 and 2 do which is to invest in specific, one-off television films. That is not included in the ten million. Whether we should invest considerably more of our money into the film industry in this country I think is open for quite a long debate.

Q76  Mr Doran: Are you having that debate inside the BBC?

Mr Dyke: In the sense that Alan Yentob would always like to get more than his ten million, we have that debate weekly. The question is do you make The Lost Prince for television or do you make more films for the film industry. A lot of the subsidy that has gone on in the past has not necessarily produced results. One always remembers the lottery funding for the film industry which is about as bad an example as you can get of how not to do something. The decision we took was we did not want to invest in films that were not distinctly British and not likely to be attractive to an audience. Some of them we develop and we bring in other income from elsewhere. Some other people develop and we try to buy all the UK rights.

Q77  Mr Doran: It sounds fairly ad hoc. There is no clear strategy or policy but you dipped your toe in the water effectively with ten million available each year. You make it sound as though the quote around that ten million is on fairly shaky ground.

Mr Dyke: We have had some good results out of it. We had Billy Elliot. We had Iris and there are some quite good films coming. The danger is always that you have to be careful of the self-indulgence of the film industry and film producers. A lot of those lottery films were never distributed by anybody. We do not want to invest in films that are not distributed by anybody because we want the films to play on BBC 1 and BBC 2. Whether we should put more in we have not discussed. We could do. Whether that is a way of encouraging the British film industry --- it probably would be, yes.

Q78  Mr Doran: If you look at it from the outside, not from the BBC perspective, you are the pre-eminent production facility for television film etc., in the country. You have the resources; you have the size and the scale to do something significant for the British film industry but you are making it clear at the moment that you do not have a strategy.

Mr Dyke: The strategy is here is £10 million. Someone like Alan Yentob who understands our industry --- this is our aim. We had in the past films that were made and funded by the BBC and the controllers of BBC 1 and BBC 2 did not want to play them. We decided what we wanted to do was support British films that would get an audience on BBC 1 and BBC 2, where we were not the sole investor. Often we developed them. Billy Elliot was a BBC development. We would develop them and often bring in other partners. Our ten million produces as a benefit to the British film industry considerably more than that because we are not the only funder. Often, we are the last funder.

Mr Davies: We do have a strategy. We took a strategy paper on film about 18 months ago out of the board. The problem is that, if we end up paying a vast amount extra for a film that we can then show to our licence payers, that may not be the best use of licence payers' money. We attempted to tell management at that stage that if they were making entertaining films more cheaply than they could purchase them in the open market made by somebody else that was good value for money. Otherwise, it was debatable whether the BBC should be doing that.

Q79  Mr Doran: We received figures from the Film Council which showed a pretty poor response from the BBC in terms of showing British films. UK films less than eight years old form nearly 3.8 per cent of the total films shown on BBC 1 and 2. There is no outlet now for British films except television and for many of them they are either make or break. We seem to be fairly even in that respect. We can get third rate American films but we cannot get first rate British films on television.

Mr Dyke: Often those films have no distributor at all because they are not attractive enough. Most of the films that play on the BBC play late at night and are bought incredibly cheaply.

Mr Loughrey: If I return to page 127, I can see the basis of the confusion, for which I apologise. It was the move of children's output from analogue to digital. If you look at the first column, the figure you were quoting was the move from 219 to 169. In the second column, in the digital channels, you will see the hours of children's output moved from 11 to 116 and the total at the bottom of the page indicates a move for BBC Scotland from 164 to 297. The first column is the output on analogue channels and hence, with the creation of the two children's channels, it moved to digital. The total spend in BBC Scotland on network is very encouraging, 47 to 51 million, of which children's is a significant part.

Q80  Alan Keen: You have been doing very well with the commercial activities. We are towards the end of our inquiry into the British film industry. I learned during that inquiry why a film I might want to see suddenly disappeared completely from every cinema in the country. That is because they plan very carefully how to get the film shown and get the publicity and so on. Then they shut the film out of the cinemas and it goes out on DVDs and so on. Are you being as calculated as that with the stuff that you put out?

Mr Dyke: Yes, with some of it. The DVD of the first series of The Office was the fastest selling television DVD ever in this country. It sold a million copies in something like a month. The second one comes out quite soon. A lot of television product does not have further exploitation value. We try to exploit the ones that we think are likely to be commercially successful.

Q81  Alan Keen: What about the characters that can be created for television and have a spin-off afterwards with being able to sell rights to other companies? Have you begun to go into that seriously as a byproduct?

Mr Dyke: We have done it in certain areas. You remember Teletubbies which was incredibly successful. It is mainly in the children's area. That brings with it some controversy as well in terms of which products, but it is a very hit and miss business. There is no guarantee whatsoever that because you have a new series it is going to work or take off.

Q82  Alan Keen: I am all in favour of the BBC doing it. Some of my colleagues may not be, but that is why I am asking the question.

Mr Dyke: The BBC agonises about these things. The famous discussion was we could do Teletubbies custard but we could not do Teletubbies yoghurt because someone had worked out one was central to the programme and the other was not. As I was not a Teletubbies viewer at the time and did not have children of that age, I was not quite sure why.

Mr Smith: There is some stuff on page 55 but The Office was sold to 25 different countries. It became the best selling book of scripts and sold more than one million videos and DVDs and became the UK's best selling video and DVD television title last year.

Q83  Alan Keen: I presume that the more successful you are with this technique the more people are going to say you should not be doing it.

Lord Ryder of Wensum: I have heard the argument.

Mr Dyke: The Walking With series has been very good. Walking With Dinosaurs was a massive seller around the world. Next week we launch the Blue Planet cinema film. Blue Planet has been enormously successful on the same basis. We are even planning concerts where we have an orchestra. We did one in Hyde Park last year and one at the Albert Hall before that. What you must not do is allow the tail to wag the dog. You should not make programmes if you are the BBC because there might be some commercial viability further on. We should be making programmes we think are important to our viewers and in some cases hopefully there will be some further exploitation because it helps the finances.

Mr Davies: We must not let the tail wag the dog and we must not put the "franchise" brand value of the BBC at stake by inappropriate exploitation. We must not breach our fair trading guidelines. If you put those three things together which are special to the BBC, there are some handicaps on exploitation. Within those three constraints, I completely agree with you. We should be exploiting commercially the assets that we have on behalf of the public.

Q84  Alan Keen: The person running the commercial activities should not be involved in deciding what programmes are going to be put on.

Mr Dyke: That is right.

Q85  Alan Keen: I am one of the few people who still are on analogue cable. I watch News 24 but I cannot get text. Why is that?

Mr Dyke: There are quite a lot of people still left on analogue cable because the cable companies discovered that the economic model to digitalise did not work. I have no idea why you cannot get text. Ashley Highfield is head of media technology and he understands why you cannot get it.

Mr Highfield: I am guessing you are probably with one of the franchises like NTL or Cable London. They simply do not have the technology to run the advanced text services.

Q86  Mr Bryant: You cannot get any of the other BBC news channels on analogue. News 24 is allowed to be analogue but BBC 3 and 4 digital channels are not available on Westminster or NTL. It is only an analogue cable service.

Mr Dyke: Yes.

Q87  Alan Keen: When discussing compliance, you mentioned marginal costing between BBC News and BBC World. I understand marginal costing but could you elaborate how it affects this particular issue?

Dame Pauline Neville-Jones: BBC World will pay the costs it incurs in either making or versioning anything it takes from the rest of BBC production. It has its own news room and it makes some of its own news programmes.

Q88  Alan Keen: It is disappointing, BBC World, compared with the other programmes that are available. When I was in Japan for the World Cup the BBC's news and portrayal of the Jubilee event was wonderful and that comes to an end and there is some boring item on. It is the nation and I felt a bit ashamed. I know there are reasons for it but what is needed to put that right. What does government have to do?

Mr Davies: BBC World is a commercially funded channel. In the last 12 months it made a loss of £15 million. We decided about a year ago to put Mark Byford in charge of BBC World as well as The World Service and the internationally based on-line service.

Q89  Chairman: How does his work relate to that of Mr Rupert Gavin?

Mr Davies: Very confusingly.

Q90  Chairman: That is why I wanted to ask the question, to have my confusion solved.

Mr Davies: In this particular instance, I am very sympathetic to your confusion. BBC Worldwide is what Rupert Gavin leads. That is a commercial business unconnected with news.

Mr Byford: I run all the BBC international news services, radio, television, BBC World and the on-line services. BBC World came out of Worldwide during the past year to be part of that new division. We want to improve World but it is improving. During Kosovo, the Afghanistan war and now Iraq, in terms of its overall news coverage, offering a distinctive edge compared to other international news broadcasts, it is definitely doing that. It is improving in terms of the depth of analysis. The key aim for World is to be the best international news channel in terms of authority, depth, and to be a showcase for the best of BBC journalism. We also hope that by improving and developing its overall journalistic clout we will be improving its reach impact and distribution across the world is increasing. It is now available in 255 million homes around the world and more than 100 million homes 24 hours. As part of the overall focus of the global news division, we are trying to ensure that in terms of its depth, its analysis, its eye witness reportage, the big interviews, it becomes even better than it is today.

Q91  Alan Keen: The financing of it is in the hands of the BBC. There are no restrictions?

Mr Davies: There are very clear restrictions. The channel has to be funded out of commercial revenue and essentially be a break even, stand alone, commercial business within a period covered by a business plan.

Q92  Alan Keen: Is that for competitive reasons?

Mr Davies: It is so that there is no cross-subsidy of the channel from public funding, from the licence fee.

Q93  Chairman: The confusion which I mention is reflected on page 83 of the report. I have been trying to track down the commercial success or otherwise of the BBC because it has been a theme of mine for many years that the BBC ought to be doing better in terms of earning money through commercial activity. If you look at page 83, half way down the first column we get BBC Worldwide and BBC World both under the same heading which adds to the confusion. You say that BBC Worldwide increased its cash return to 123 million up from 106 million. What is not clear from that is cash return is one thing; profit or loss is another. If you have seen me searching madly backward and forward throughout this session, it is because at some stage I saw the profit and loss of BBC Worldwide and I cannot find it now. It then goes on to say, "BBC World, while increasing its distribution around the world, faced a tough advertising market in 2002/2003. During 2002/2003 it had a cash outflow of £14 million ..." Is "cash outflow" a synonym for "loss"?

Mr Smith: It is not identical but it is close.

Q94  Chairman: Why do you not say so? "Cash outflow" sounds as though you are doing marvellous investing. Loss is loss. It is all part, if I may say so, of what I might call the euphemistic phraseology that pervades this report.

Mr Smith: This is so fundamental. If you are a spending organisation, the thing you really want out of any commercial subsidiaries is cash flow. What you ideally want is an annually growing source of cash flow, growing at a rate which can be sustained. What you do not want is sudden cash injections or sudden cash outflows from commercial subsidiaries. Neither do you want profit if it is not in cash. For me as finance director, the thing that matters most about subsidiaries is the cash flow. Those are my words on page 83 and that is why I refer to the cash flow figure. I obviously have the profit figures elsewhere in the report and if you would like me to clarify those now I can.

Q95  Chairman: Could you tell me, if you have the figures --- and if you have not the figures I would like to know why --- in this year which this annual report is covering did BBC Worldwide make a profit or a loss?

Mr Smith: A profit.

Q96  Chairman: Did it increase its profit from last year or has the profit reduce from last year?

Mr Smith: Worldwide made a profit of 44 million which is an increase on last year's profit of 26 million.

Mr Davies: BBC World made a loss.

Mr Dyke: Half way through the year, World was taken out of Worldwide.

Q97  John Thurso: May I make a plea in regard to broadcasting to the far north of Scotland, bearing in mind that with the new changes that were referred to earlier many of my constituents who on advice received from earlier sources of the BBC to go to Sky and get a free card to be able to get the best reception will now lose some of their channels. Anything you can do to let them keep those channels would be gratefully received by them.

Mr Dyke: There are possibly plans inside some of the commercial organisations that they too will go unencrypted which means they will get them back again.

Q98  John Thurso: Can I turn specifically to the balance sheet and ask Dame Pauline Neville-Jones this: last year, I asked about FRS11 and why it was that the BBC chose not to apply that in regard to its assets --- i.e., namely revaluation. You agreed to have a look at it. Did you look at it and what conclusion did you come to?

Dame Pauline Neville-Jones: We did look at it. We did decide against going down the road of periodic revaluation. We are not a publicly quoted company. We did not see the advantage in having a constant which we would have had to do. I think we felt the volatility that is produced in a valuation adds to the volatility of the balance sheet overall. We have already had quite a lot of difficulty explaining to people the import of FRS17.

Q99  John Thurso: You say under "Compliance" that there is a general impression of compliance of broadly PLC standards. There is reference to the model code and there is a broad impression that compliance is to PLC standards. However, there is some selectivity in the way in which financial reporting standards are put in. FRS17 is highly contentious but you are not required yet as a PLC to put it in. Indeed, the Accounting Standards Board may well decide not to adopt it because of the many problems, although it was an attempt to answer some of the deficits. You have chosen to put that in; whereas you have not chosen to do FRS11 which would probably have increased the value of your balance sheet. The net result is you have deliberately chosen to show us that your net worth is 85 million.

Dame Pauline Neville-Jones: We have no deliberate strategy in relation to the results of the balance sheet process. One learns from experience and FRS17 is very difficult to manage. You have to go through an extremely careful exercise with the employees of the BBC to allow them to understand why the balance sheet shows quite a different situation. On FRS11, my understanding is that it is not true to say that other companies have gone down the road of using it. I think you will find it is still not the case and that is the position we have adopted for the moment.

Q100  John Thurso: Most companies would make a statement as to why they do not use it if they do not use it. Can I suggest perhaps more caution in implementing financial reporting standards? I think the Audit Committee needs to look at that.

Dame Pauline Neville-Jones: I take the point.

Q101  John Thurso: The reason for looking at the strength of the balance sheet is to look at what is happening to cash. Quite rightly as a spending organisation which does not make a profit, you are entirely concerned with cash. You made a deficit this year. You are now in a net debt position of approximately 74 million from a surplus of 285 million. On page 82 you have a graph which shows your projected indebtedness which will gradually rise and you will be in deficit every year from now until virtually the end of the charter. You have a statement averaging out over the period of the charter but it is entirely down to the last year in which you suddenly, miraculously, come spinning up. If I was a city analyst, I might look at that and say, "They always say that, don't they?" Also in July, which is I presume post the balance sheet date, you issued an eight million bond. Could I ask if you are genuinely secure in your projections on net debt and if you feel you would get back to a balanced position ? What rating have you on your debt, given the net book value of the company of 85 million?

Mr Smith: On the question you put to Dame Pauline, under FRS15 which is the one primarily concerned with the valuation of assets it says that the basic rule about asset valuations is to include them on the balance sheet at their historic cost as adjusted for depreciation and any subsequent impairment, which is what FRS11 is all about. There is an optional alternative treatment, which is to revalue the assets and if you do it you need to revalue them every five years. Companies are split about whether that is a good or a bad thing to do. For the BBC, where we are not intending to trade our assets, it is not a useful piece of information to know whether or not the assets are going up or down every five years, especially when you then have to incur the cost of valuing them just to prove the point.

Q102  John Thurso: I could disagree because I think a balance sheet is about showing a true and fair view of the worth of the company. If some of your property assets are worth two or three times what they are in the balance sheet because historic cost to today's market valuation might be quite huge, who knows, you might sell White City and you might have a different net value. I will leave that to one side.

Mr Smith: When it comes to buildings and land, there is the Companies Act as opposed to the accounting standards requirements. If the net book value of the land and buildings shown in the balance sheet is materially different to their open market value, it must be disclosed in the accounts. Of course we have that valued periodically as we must, so we do take your point about that. Of course, I am a member of the Accounting Standards Board so I am very aware of the importance of these things.

Q103  John Thurso: I read that.

Mr Smith: You asked about the debt and projections of it in relation to the Charter. There are two things to say. We have been building up a cash balance for quite a long time. It really started in the mid-990s when the transmitter work was sold to Trentcastle, you may remember, for about £244 million and that money has been put on deposit earning interest ever since. Through a series of attempts since then to control the rate of cash outflow so that the cash balance could be as high as possible that has all been designed to build up a war chest which could be used when the launch into digital finally arrived. Of course what has happened now? The launch into digital has finally arrived and we are using up the war chest. This is the year when the channel was launched, and indeed channels were launched in the previous year but this is the first full year this year, so this is the year when cash has flowed out. That explains why we have gone from a cash surplus to an overdraft situation. My second point in terms of if you project that to the end of the Charter what essentially is happening in BBC economics is as follows: costs out are more or less going to be flat from now on to the end of the Charter period. We have got to add inflation of course and the digital curriculum has to be launched, but apart from that there are no extra new costs to incur so the costs are more or less flat from now to the end of the Charter. The revenue base on the other hand is now going to rise at RPI plus 1.5 per cent on the licence fees, plus we are going to reduce inflation, plus there is household growth, so there is real growth in licence revenues each year. So in each year between now and the end of the Charter if you drew a graph you would see a gradual rise in income and costs more or less staying flat, meaning that the debt, which has been building up, can be paid off by end of the Charter period. The only reason that does not show a perfectly smooth curve is because of other things like the property strategy and like the sports rights that have to be paid in advance, which make it lumpy and distort an otherwise smooth curve. The intention clearly is to end the Charter with as close to zero as we can possibly get it. That is what I mean to say when I say to break even over the life of the Charter.

Mr Davies: Speaking as a former City analyst - thank goodness it is former- I think a City analyst would be aware that the income of the BBC over a short period of time, over three years, is a great deal more secure than it is for some private companies, and therefore what we have to make sure we do is spend the right amount of money to fit in with income. If there were any dangers whatsoever of failing to hit these targets, which I have to say we have hit remorselessly over several years including this year, we could simply spend less. John, do you want to add anything on the bonds?

Mr Smith: You are quite right to point to the bond. By the way, bond prices at the moment are unusually low and two years ago when we launched our property strategy, which was all about redeveloping the whole of the BBC estate after decades of under-investment, we decided to try and do that in a way which smoothed out the cost of redevelopment as best as possible over a 30-year period, and to do that through the mechanism of a joint venture with Land Securities which we formed a couple of years ago. Indeed, that venture is currently building new offices at the White City site which will be open and we are due to move into those offices six months early as a result of Land Securities' efforts and their contractor bonuses, where they have done very well. In the intervening period what has happened is the prices of bonds have come down.

Mr Davies: Yields have come down, prices have gone up.

Mr Smith: Prices of bonds have come down, interest rates ---

Mr Davies: Prices have gone up, yields have gone down. I know that much!

Mr Smith: It is so significant that we decided collectively, whilst preserving the partnership, that it would be a good idea to go into the bond market and raise the funds for the next building in the strategy which is Broadcasting House, which is the biggest, because it is substantially cheaper at the moment. Morgan Stanley have done the bond launch for us to present to investors, analysts and the credit rating agencies. The important thing to say is that it is not the BBC that is borrowing £800 million, it is the venture and the BBC's investment in it is two-fold. One is to sign an occupational agreement which says we will stay in the building for 30 years and therefore give a defined amount of rent over that period, and that is the vehicle that the rating agencies are rating, not the BBC and of course its standing is dependent on the covenant implied by that rental agreement. That is crucial thing number one and crucial thing number two has been to help Morgan Stanley make presentations to ratings agencies and investors about a whole load of facts and information about the BBC, about the Charter, about the fact that the Charter expires, about the pension fund, and about licence fee revenues and how secure they are, et cetera.

Mr Davies: Are you able to say what the credit rating was?

Mr Smith: We got with a double A with one agency, a double minus from the second and a double A3 from the third. Morgan Stanley decided to ramp them up and supply mono line insurance which means paying a small premium to a mono line insurer, which meant that they then entered the market for triple A bonds so they are bought by investors as triple A bonds, £800 million over a 30-year life is backed up by a covenant of BBC rental payments, which has meant the cost to the BBC of the debt is incredibly cheap.

Mr Davies: The bottom line is that the analysts who rated the bonds (and therefore looked at the BBC's financial health standing behind the bond in a sense, given it is our rent that will be paid in JV) essentially rated the BBC double A.

Q104  Mr Flook: Can I continue on the bond, and for those listening I am unlikely to be able to "sex it up" any more, there was no reference in the Annual Report which I understand because your financial year was a March year end, but why was there no reference to it? You announced it on 2 July and I presume this was printed after 2 July.

Mr Smith: The Annual Report is about the year to 31 March. There is no attempt to try and hide anything.

Q105  Mr Flook: There is no accusation in that. £800 million is quite a substantial amount of the £2.6 billion you get on an annual basis. I know it is over 30 years but I was just wondering why it has not been referred to.

Mr Smith: The critical point, apart from the fact it happened after the year end, is it is a joint venture that is issuing the bond not the BBC. That is a crucial piece of information.

Mr Davies: It will not be on the BBC balance sheet next year so even next year you will not see it.

Q106  Mr Flook: Is there reference to this project in the Annual Report?

Mr Smith: I think I mention it on page 83, let me just check.

Q107  Mr Flook: That is fine. You mention the main Broadcasting House, how many other projects will the £800 million cover? Before you answer that, can I ask you about BBC Somerset Sound. Mr Dyke paid a visit to the town of Taunton a couple of weeks ago but you seem to do yourself a disservice, in the figures on page 130 because you do not break down BBC Somerset Sound individually, it is included within BBC Bristol, but you have increased the number of hours broadcast, you have increased substantially the amount of investment in the building, yet you have not broken that up. I know that some of us will criticise you for not being open, but in other facts you have hidden your light under a bushel.

Mr Dyke: We have invested. We decided three years ago that we had not invested enough outside of London which was a positive decision, and that was particularly in capital. We were in some pretty awful buildings with some pretty terrible equipment and we brought forward the whole capital spend and we have expanded pretty rapidly and we have just announced a new radio station for Coventry as opposed to an opt out and things like that. As we look forward to the next Charter I think a great deal of it will be about what is the BBC's regional role and role in the nation. I think that will become more important in the new digital world, and not less.

Q108  Mr Flook: Mr Dyke, you will no doubt be aware having been in Somerset - and I am sorry I could not have been there - where somebody will have bent your ear about the broadcasting signal system and the fact Somerset gets cut in half, and half of us get Plymouth and half get Bristol and other parts can only get Southampton. Will any of the £800 million be involved in improving broadcasting equipment?

Mr Dyke: No, that would not change it. What going unencrypted on satellite does mean is that as opposed to Freeview you will be able to choose which region you wish to be part of. First of all with Sky - and you have to go to Sky because they are doing the regionalisation service 101 and 102 - all the regional services for the first time ever will be available everywhere. If you come from Somerset and live in Lancashire, in future you will be able to watch your own regional service. That will only be on satellite. We spent quite a lot of money on it. First of all, it is the first time we have put all the regional services onto satellite. We needed to do it at some stage in this decade and we decided to do it now. If you have a dish you will be able to watch your local Somerset news while you are here in Westminster in the future. The change has started, I think it finishes later this autumn, and we will get everybody up. What I think we should say about the property strategy which I think is important is that the Governors laid down a criterion at the very beginning, and that is we could not spend more on property over the 30 years than was planned anyway. We are moving later this decade out of Bush House which will save a considerable amount of money on rent which allows us to pay for the improvement of much of our property.

Mr Smith: Page 84, by the way, not 83.

Mr Flook: Thank you very much. We spoke about worldwide and I understand the difference between cash flow and profit, Chairman.

Chairman: That is me put in my place!

Q109  Mr Flook: I see it went cash flow wise from 106 worldwide to 123. Where do you see that going? That is quite a big judgment.

Mr Smith: We have had a target for quite a long time to quadruple the figure since the start of the Charter by the end of the Charter. It was 53, it is now 120 and we are well on course for 210, which is what it needs to be at the end of Charter to meet that target.

Q110  Mr Flook: You mentioned earlier, Mr Smith, that you aim to be neither in debt nor in surplus by 2006 in public services. On the licence fee the evasion level is 7.2 per cent, I think the figures say £54 million extra of income which equates to two per cent of total income on an annual basis. How much lower do you think you can get that 7.2 per cent down? Is four per cent evasion realistic, is one per cent realistic?

Mr Smith: Probably the only way to answer it is to look at comparators around Europe. At the moment the lowest is Denmark at five to six per cent and that is partly because they levy extremely high fines on people who evade. Many others are in the eight to 10 per cent range - Germany, Finland, Norway, Sweden, France, Austria. There are some, including Italy and Ireland, who are in the 17 per cent range, so it varies considerably. Our desire and indeed our plan would be to get the combined cost of evasion plus the cost of collecting the licence (because in addition to the evasion there is the cost of collecting it which at the moment is 5.5 per cent and currently the combined cost is 12.7) down to nine per cent by the end of the Charter, which is a significant increase on where we are now.

Q111  Mr Flook: You probably know this figure, how much extra would that give the BBC to spend?

Mr Smith: I do not but one per cent is worth £25 million a year.

Q112  Mr Flook: So between £50 and £100 million extra?

Mr Smith: Which is amplifying the point in answer to Mr Thurso's question earlier.

Q113  Mr Flook: On page 131, table 18 a number of these are the costs per hour for various types of programme. Drama - no surprise, well over £500, and that is quite level year on year; news and weather - unchanged at £50 an hour; current affairs, smaller £123; Parliamentary - collapsed to £50 an hour from £73. Is there any particular reason for that? And sport up a lot from £128 per hour to £192.

Mr Smith: Because the cost of Parliamentary programming is not the biggest number in the world, if the hours change the figure looks as if it is hugely swinging from one year to the next. I think it is the overall increase that has reduced the cost per hour.

Q114  Mr Flook: Sport?

Mr Smith: Of course this has been a massive year of investment in sport.

Q115  Mr Flook: The Commonwealth Games?

Mr Dyke: Commonwealth Games, World Cup.

Q116  Mr Flook: So that figure is likely to go back down this year we are in?

Mr Dyke: By and large, sport varies. Every two years you get a World Cup and an Olympics, one or the other in the two years, so therefore you get a lull in the years in between and an increase in those two years.

Mr Davies: I hope these detailed questions on the accounts will persuade you at least that Mr Bryant's earlier charge that our accounts are like Enron's was one of the most wild and idiosyncratic charges that I have heard recently from a Member of the House of Commons. I assume he did mean it as a joke.

Q117  Chairman: Let's move on from that, Mr Davies, I think we have dealt with that. I would like now to deal with some of your statistics. I see in your forward, Mr Davies, that you say: "Here the BBC has done well --- BBC One increasing its share in both analogue and multi-channel homes, and BBC Two remaining the only terrestrial channel to increase overall share ..." In the Director-General's review it says: "BBC One is now established as Britain's favourite channel and continues to lead ITV in audience share." Now then with regard to what you said, Mr Davies, namely that BBC1 has increased its share in analogue and multi-channel homes, if one looks at page 124 under table 3, one sees that BBC1 in fact by your own statistics did not increase its share in digital homes, it remained the same at 18.8. In analogue homes according to your figures it went up from 32.9 to 33.5. Overall it remained where it was at 26.5. So what you said in your introduction is not accurate because it did not increase its share in digital homes as you claim it did. It is there, it is in your report, if you are looking at figures that both you and Mr Dyke put forward. If one looks at rather more up-to-date figures on the same basis - BARB figures supplied to me yesterday by the House of Commons Library - June on this year for the June on last year, one finds that in fact BBC1's share of the audience has fallen over the past year from 28.8 per cent to 25.9 per cent and therefore it has fallen by 2.9 per cent. BBC2 has certainly increased on those figures from 10 per cent to 10.3 per cent but that increase of 0.3 per cent is parallelled by the increase in Channel 4's viewing, and Channel 5 viewing has increased its impact by more than BBC2 from 6.3 to 6.7 per cent. The total BBC viewing has in fact fallen over the past 12-month period according to the very statistical source that you use in your report, from 38.8 per cent to 36.1 per cent, and while it is perfectly true that BBC1 remains ahead of ITV, the gap between them has narrowed from 5.2 per cent to 3.7 per cent. What in fact is happening is your audience overall is shrinking just as total terrestrial audiences are shrinking overall whereas the only really substantial increase of any sector is what is called "other viewing", which is presumably satellite and cable, which over the last 12 months has gone up from 20.6 per cent to 23.9 per cent, an increase of 3.3 per cent. So what we have got is a situation in which you, who are funded by the taxpayer, have lost 2.7 per cent of your audience over the most recently measured period, whereas other viewing, ie that which is not financed by tax, has gone up by 3.3 per cent. How long do you think you can continue to argue your right to be funded by a tax when according to these figures (which are done by the same people who supply you with your figures) you have only a 36 per cent share of total viewing. How long is it viable for the BBC as it goes on shrinking (as it is shrinking and will shrink) to go on arguing that it has the right to be funded by tax?

Mr Davies: I will start out and ask the Director-General on some numbers. First of all, on the figures in my forward, I have had these very carefully checked and I believe they are going to stand up to scrutiny. There may be a rounding problem ---

Q118  Chairman: Why do they not check out with the figures you yourself put on page 124? Let's be clear, Mr Davies, if the figures you offer are accurate - and I am not challenging your veracity, I am challenging your accuracy - any increase must have been infinitesimally small.

Mr Davies: I think it was very small, but I think the big picture which is very relevant to the question on the licence fee which you put is that basically BBC television in the last couple of years has been slightly increasing its share against the trend, where you correctly say the multi-channel offerings have been taking a lot away from other terrestrial services, ITV and others. You are absolutely right to point to that trend. My reply to you would be with a 39.1 per cent share of viewing in all homes compared to 38.6 per cent last year, the BBC has been very robust in the face of the growth of multi-channels and that 39.1 per cent is more than sufficient to justify the licence fee and the value that licence payers get from the fee.

Q119  Chairman: It depends what you mean by "robust". The June on June figures, which are obviously more recent than the ones covered by your report (but compiled by the same organisation, BARB) show that the BBC's total share of viewing has fallen from 38.8 per cent to 36.1 per cent, and whereas in June 2002 all BBC was 38.8 per cent compared to other viewing of 20.6 per cent ie nearly double, the June figure for this year shows 36.1 per cent to 23.9 per cent, which is 3:2, not double at all.

Mr Dyke: Up to 9 July 2003, which are more recent than yours, so far this calendar year comparing the year to date 2002-03, in 02 BBC1 got 26.2 per cent and it is now getting 26 per cent, so it is down 0.2. BBC2 got 11.2 to 10.9, down 0.3. ITV got 24.5 per cent down to 23.6 per cent, down 0.9. Channel 4 is down from 10.1 to 9.4 which is down 0.7, ie, both more than BBC1 and BBC2. Channel 5 is flat at 6.4 across the year. At the same time BBC3 has gone from 0.8 to 1.51; BBC News 24 has gone from 0.6 to 0.9; BBC4 has gone from 0.2 to 0.3; CBeebies has gone from 0.2 to 0.6. If you add them all up you will discover we are down on our traditional terrestrial channels by 0.5 and we are up on our digital channels by about 1.0. I will send you a copy of the figures.

Q120  Chairman: I will show you mine if you will show me yours, Mr Dyke, but what is clear is that these large claims made by both you and your Chairman are really quite tenuous.

Mr Dyke: Let me answer your question. The second claim you made was about what I put in my forward which is that BBC1 has become Britain's favourite channel. These are not our figures, these are figures done by the Independent Television Commission. They produce them every three years and the last set which came out earlier this year asked people, "If you only had the choice of one channel, what would it be?" For the first time ever BBC1 was top. I do not say this with great pride because what happened is the BBC historically has gone up from the low 30s to the mid-30s. ITV has come down from 40 per cent to 27 per cent in three years and what happened in those circumstances (I have got charts coming out of my ears) if you look long term is BBC1 has managed to stay remarkably stable over about 30 years whereas ITV has gone like that. That again does not surprise me because if you look at who first went into satellite, who first went into multi-channel, they were more likely to be people who watched ITV, but the BBC figures over a period of time are comparatively stable. For several years now the Chairman has been right in saying that while our share in both digital and analogue homes is going up, of course the number of homes going from analogue to digital has also gone up and therefore the overall share is coming down. We think that is now bottoming out because it does not happen so much in Freeview, you do not get the same sort of drop in watching to the BBC but if at the end of all this the viewing of the BBC services overall is at something over 30 - probably 35 to 36 per cent (and let me tell you in the United States if one organisation had viewing figures of 36 they would die to get that) what this tells you is in a fragmenting world the importance of the licence fee and importance of the BBC grows not lessens. As you can see in the crisis currently affecting ITV, all sort of models have been done in ITV (and I know this for a fact) about how much can we reduce our spend on programming and still sustain a service. I do not blame them, I would do the same if I had the commercial realities they have. In those circumstances if you believe in the importance of British production and you believe in a television system that reflects our culture, the BBC becomes more important, not less.

Q121  Chairman: I am thrilled. What I would say, Mr Dyke, is that you are in the wrong job. You should be at Number 10 Downing Street because you could deal with the Andrew Gilligan thing in a far more obfuscatory manner.

Mr Dyke: Would you like me to send you the figures?

Q122  Chairman: What you have got, Mr Dyke and Mr Davies, and indeed your report as a whole is you have got a supreme talent for elision, an absolutely supreme talent, so on the question of 70 per cent watching BBC News 24 you elide that with a statement about the viewership of BBC1.

Mr Dyke: You do not think it is the way you read them?

Q123  Chairman: Let me speak in turn, you have had quite a big turn.

Mr Dyke: I thought we were here to answer questions.

Q124  Chairman: You have done a brilliant job in elision. The BBC is established as Britain's favourite channel, but that is a subjective opinion.

Mr Dyke: It is based on ITC research.

Q125  Chairman: It is subjective opinion, is it not?

Mr Dyke: All choice is subjective.

Q126  Chairman: Come on, Greg, let me finish this sentence. Honestly, you have finished lots of sentences and I have remained relatively silent. BBC1 is now established as Britain's favourite channel and continues to lead ITV in audience share, so you get the impression that it is the favourite channel because of continuing to lead ITV in audienceship. What I am simply putting to you is that there can be a case for the BBC as a public sector broadcasting corporation, there can be a case for the BBC being funded by a poll tax, but the fact is that your share of the audience is falling, and I will have a little bet with you, will go on falling just as those others will go on rising because that is the nature of the world we are living in.

Mr Dyke: I do not doubt that what is going to happen over time is a decline in traditional ---

Q127  Chairman: --- Over time we are all dead.

Mr Dyke: You only have to look at the States and you will see the same thing. What you have to start questioning is who are the others, how much investment is going to the others? What has not happened in this country is wholesale investment in British production as a result of the growth of pay television. That has not happened. There has been significant investment in the coverage of sport and that is it.

Mr Davies: Chairman, if we had a supreme talent for evasion we would not have volunteered to spend the last two and a half hours answering your questions.

Q128  Chairman: I did not say evasion, I said elision.

Mr Davies: You said elision? Even so.

Q129  Chairman: Finally, before I give Julie Kirkbride and then Mr Keen the last word, we have got here in the Governors's assessment of the report "distinctive", "high impact", "memorable", "excellent", "significant successes", "we welcome the fact", "landmark year", "we commend", "some notable successes", "a highlight", "encourage", "promising", "particularly successful". How can we possibly have any regard for a Board of Governors which issues such an utterly gushing report with not one single word of criticism, except disappointment in the failure of audiences to live up to your expectation? Do you really wonder why some of us believe that the BBC Board of Governors is not an appropriate body for the BBC to be accountable to and that the whole of the BBC ought to come under Ofcom?

Mr Davies: Chairman, if you pick on individual adjectives of that type ---

Chairman: You find me one critical adjective in eight pages and 15 columns and I will take you out to lunch.

Q130  Mr Bryant: That will be fun to watch. Can we all come, Chairman?

Mr Davies: You have just put me off, I am afraid, but otherwise I would have done so.

Chairman: One critical adjective. Julie?

Q131  Miss Kirkbride: I wanted to turn to the issue of subtitling and audio description. We have received representations from the RNIB which is very disappointed by the service you offer. If you look at the figures, the progress that a) you have made and that b) you intend to make seems very limited. After all, we are talking about people who are the most marginalised who have the most need to have television and who yet are still not in a position to receive your services. The figures are given on page 125 of what you have done and we do not seem to have made very much progress year on year and you are only intending to get to 10 per cent by 2008. Why? You are a public service broadcaster and you take money off these people for having a television and they cannot watch or hear you because of their disabilities, and yet that is the progress you are proposing to enable them to do so. Explain.

Mr Dyke: We have certain people who represent particular areas and I will ask Mark Byford because he is responsible for the whole area of disability.

Mr Byford: Firstly, on subtitling we are clear we have got a commitment, as we show in the Annual Report, that by 2008/09 we will be 100 per cent, and we are on course for that. You can see there has been an increase and a meeting of targets set. On audio description you can see there as well that there have been increasing targets and it is 10 per cent, so 100 per cent for subtitling and it is much less for audio description but we have been working with manufacturers to try and develop this. We have issues and challenges concerning the technology there. Our commitment to making our services more available to people with disabilities is absolutely clear on this and subtitling I re-emphasis is 100 per cent by 2008, and we are on course. On video description we are making progress in making it available to all audiences.

Q132  Miss Kirkbride: But I understand that Sky has a very good system which is very much welcomed by people with problems with their sight and the BBC is refusing to get involved. You could have half a million more disadvantaged people to watch your services with greater enjoyment yet you are not going to do it; why is that?

Mr Byford: What I know myself is our commitment to improve is shown there.

Q133  Miss Kirkbride: It is minimalistic if you talk about figures. It is not great, is it?

Mr Byford: On video description we are on course to get to 10 per cent by 2008 and through our own research and development we are doing work with the industry to make the audio description developments improve.

Q134  Miss Kirkbride: But the system exists, Sky has a system and you are refusing to get involved in a system that would serve half a million more disabled licence payers. You are still only proposing to add 10 per cent of your programmes to be done in six years' time.

Mr Byford: On the specifics you give us with Sky we will take that away and reply specifically. I do not know the full answer on that.

Q135  Miss Kirkbride: Does Mr Smith know more about it as he is whispering to you.

Mr Smith: I apologise. From memory, the target committed to on audio description is one laid down by ITC for audio broadcasters as a whole.

Mr Byford: And we are ahead on subtitling.

Mr Dyke: I think it is better if we come back to you and check the actual technical information. My understanding is that there are still real technical problems. If you say there is another system ---

Q136  Miss Kirkbride: Maybe your equipment is only being piloted but there is already a system in operation on satellite used by Sky which you could have become involved in and you did not do so.

Mr Dyke: I did not know that but we are very happy to look at that.

Q137  Miss Kirkbride: What are the figures on producing subtitling?

Mr Smith: We are spending £11 million a year on subtitling at the moment and audio description is more than that.

Q138  Miss Kirkbride: Right, and you are spending £70 million a year on the Internet where it is only a very small proportion of viewers and one could argue that those people can afford to pay for the service, compared to the derisory amount of money for subtitling and audio description, given your overall budget. You offer figures of getting to your 100 per cent target or ten per cent target in six years' time. How can you justify the difference in spend there?

Mr Dyke: On subtitling we have had a plan.

Q139  Miss Kirkbride: It is still six years before it is 100 per cent. That is a long time in people's lives when they are blind or deaf and they are marginalised anyway, yet you are spending £72 million this year on the Internet services. You have told us what the costs are and they are a fraction of the costs you are providing to the Internet and you are not doing it today.

Mr Dyke: You could say the same about drama, entertainment or anything else.

Q140  Miss Kirkbride: That benefits everybody because it is available to everybody because it is on.

Mr Dyke: On audio description we have technical problems, and we will look at those. On subtitling we are ahead of everybody else.

Q141  Miss Kirkbride: You are the public sector broadcaster ---

Mr Dyke: I agree.

Q142  Miss Kirkbride: --- You take money off them in a compulsory fashion. The money that you are talking about seems to me very small and yet there you are spending £72 million.

Mr Dyke: It is about how fast you can gear up the service.

Mr Byford: Also it is a commitment of 100 per cent across all services.

Q143  Miss Kirkbride: If you just did it for BBC1 and BBC2 you would make a lot of people very happy. After all, we have already established that very few people watch digital services. Maybe the 30,000 who watch digital services will miss out but those watching BBC1 and BBC2 will be dead chuffed.

Mr Dyke: On audio description let us look at the technical difficulties of making it work.

Q144  Miss Kirkbride: But in subtitling there is no difficulty. As an organisation that takes money off people compulsorily for having a television set and offering services in six years' time at a cost not much in comparison to the £3 billion of your budget - and I draw your attention to the £72 million you are spending on the Internet - how can you justify that to me and my deaf constituents?

Mr Dyke: Can we justify it?

Q145  Miss Kirkbride: Yes, the six-year wait with subtitles?

Mr Dyke: We obviously discuss this with the representatives of the deaf. I have had two meetings with them since I have been Director-General. We meet quite regularly.

Mr Byford: We have a clear commitment that by 2008 all services, not just BBC1 and BBC2, will be on course for that. For BBC1 and BBC2 it is 76 per cent ---

Q146  Miss Kirkbride: Is it 70 per cent already?

Mr Byford: 76 per cent for BBC1 and 76 per cent for BBC2.

Mr Davies: We take your point, we obviously have a particular responsibility to deliver to blind people and deaf people a service that they will find meets their needs.

Q147  Miss Kirkbride: So you make them wait six years for it?

Mr Davies: I think that is unfair. I think that we are making substantial amounts of progress. In a perfect world we would have done it all yesterday, but we are moving in the right direction.

Q148  Miss Kirkbride: Can I ask you about the money that you do spend on your Internet services. It seems to be a very large figure and I notice on page 59 it is £72 million. On page 59 there are even some observations made by your user group about whether or not all of these things should be provided for free and whether it was fair to use the BBC's money on services which are not available to everybody and which are in addition to broadcasting, your primary function.

Mr Dyke: As you know, there will be a review of all of our on-line services which DCMS will be doing in the next few months, no doubt you will be looking at them here. We will be looking at them again in some detail. I think that what we have done on the Internet in a comparatively short period of time is quite remarkable. What is interesting is the market would not have done it. I do not believe we have knocked somebody else out of that market at all. In fact, we have just had a big analysis of the amount of money that is spent on Internet services. Ashley Highfield is the Head of New Media.

Mr Smith: The reach on our Internet site reached 42 per cent, so it is not a tiny fraction.

Q149  Miss Kirkbride: How many foreigners are getting it for free?

Mr Smith: Page impressions reached 1.2 billion during the Iraq war so it is a huge service enjoyed by very, very large amounts of people.

Mr Highfield: Across all services, platforms, broadband, we are at 14 million, so this is not a fringe activity, and fewer and fewer have international access getting it for "free". We are now able to identify international access and filter it accordingly, although some of it is funded through grant-in-aid for the World Service site.

Q150  Miss Kirkbride: I want your take on how you are spending the money and whether you thought that was appropriate.

Mr Dyke: As we go into the DCMS review we have obviously done a lot of work ourselves and there are some things where we think, "Why are we doing that?" That always happens, but you will no doubt be getting a copy (it is not completed yet, it goes in at the end of this month) of our report on what we think about on-line services that will go to DCMS. As I say, when I first joined the BBC I joined at the height of the dot-com boom when everybody thought everything to do with dot-com was going to be worth a fortune. It turned out that most of it was not worth a fortune and most of what we do is overwhelmingly a public service because nobody else would run the scale of news operation. Secondly, you have to look forward. You are coming to the time when the content that is going to be available to broadband on the Internet is going to be many more pictures than are available now when the real use of the BBC library comes into force and there are all sorts of opportunities then both in terms of news and other areas where what disproportionately was a written service up to now is not going to be a written service and therefore the value of the BBC library becomes enormously important in those circumstances, not commercially important but important to the public.

Mr Highfield: If I can put the £72 million into perspective, the current evaluation of the Internet service into the United Kingdom is £8 billion a year so our expenditure is less than one per cent of that.

Q151  Miss Kirkbride: With all of the BBC your money is being provided by the taxpayer and other people's money is provided out of their own money or by the bank. That is the difference. Can I turn to Lord Ryder, last year when you came to the Committee you said you were pursuing the issue of how the BBC would tackle the referendum on the single currency. The Prime Minister has ruled it out for this year but he is still holding it over our heads for next year as a possibility. What conclusions have you reached on that? How are you going to ensure impartiality and fairness on the referendum's coverage on the BBC?

Lord Ryder of Wensum: We have had extensive discussions during the course of the year about impartiality as far as it affects Europe. Last year I remember during our exchanges that I said the problem with the single currency referendum was probably a greater problem than any previous Parliamentary election or referendum that has taken place in the United Kingdom, and that remains our view, and it is precisely because we are so anxious to ensure that we prepare properly for it that we have had several discussions at board meetings at governor level and executive level about the prospect of a referendum, and I am reasonably assured that all the preparations have been made for such a referendum to ensure impartiality. We are dealing here with an issue that divides all political parties. Parliamentary elections are much simpler to deal with. The BBC has got much more experience of them and does it pretty well, and those of us who are keen to ensure that preparations are properly laid never stop reminding members of the executive of that keenness.

Q152  Miss Kirkbride: Are there any practical points you can tell us that are part of ensuring that remit of impartiality and things which have to be guarded against which otherwise would not happen in the normal course of political coverage?

Lord Ryder of Wensum: Yes, we have a unit at the BBC which is responsible for impartiality. We have a political adviser who is in close contact with everybody here in Parliament. She is in touch with all the main political parties and she is aware of the differences of emphasis and differences within those political parties and she and others at the BBC have built up extensive preparations for the prospect of a referendum and I think that she and others have advanced a long way from where we were a year ago.

Mr Dyke: We do have the draft guidelines. We have not published them but the guidelines have been written for how we would cover the referendum.

Q153  Miss Kirkbride: You have those?

Mr Dyke: Yes, they have been done but they have not been published yet.

Mr Davies: One of the complications obviously, Miss Kirkbride, is that this may not be a vote that is split on party lines and therefore judging how much weight to give to each side and where the spokespeople are coming from raises different questions from general election campaigns.

Lord Ryder of Wensum: Last year you pushed at an open door and the door is still open.

Miss Kirkbride: We shall leave it in your capable hands.

Q154  Alan Keen: I want to make one serious point. It is serious because however many millions you spend on new comedy programmes, you cannot beat Gardeners' Question Time. For those who missed the episode this morning the azalia was dead. The next thing that happens is one of the panellists will say, "So the azalia is dead then? Did you give it plenty of water and prune it back in spring?" "Yes." "That is why it is dead then."

Mr Davies: Well, this azalia is not dead, Mr Keen.

Chairman: I have ensured that we end this session with contributions from two indubitably nice members of this Committee.