Select Committee on Culture, Media and Sport First Report


154. In its Third Report of Session 1999-2000, the previous Committee made the following recommendation: "The BBC's self-regulatory position separate from the rest of broadcasting is no longer sustainable. The case for a single regulator of the market as a whole which we made last year has been reinforced by the rapid development of the market. We reiterate our recommendation that regulation of the broadcast content and commercial activities of the BBC should be the duty of a Communications Regulation Commission."[132]

155. Subsequently, Ofcom has been established and has substantial regulatory authority over the BBC and other broadcasters. More recently, the BBC has moved to achieve greater separation of the Governors from the Executive Committee. Both of these developments represent movement towards the outcome recommended by the previous Committee. However, physical relocation of the Governors is insufficient.

Ofcom's present role

156. Under the Communications Act, Ofcom has a clear statutory remit for the BBC in terms of content regulation ("Tier 1" for standards, including the avoidance of harm and offence but excluding due impartiality and accuracy in news, and "Tier 2" for production quotas) and has concurrent competition powers with the OFT. These are limited in their application to the BBC, since Ofcom's ability to impose ex ante conditions to prevent uncompetitive behaviour is restricted to licensed broadcasters.

157. Ofcom has no regulatory role in relation to the BBC on matters of the Corporation's public service remit ("Tier 3"). On this, the BBC is only obliged to consider anything of relevance in Ofcom guidance and in its annual reports and PSB reviews. The backstop powers Ofcom has over commercial public service broadcasters reside for the BBC with the Government - through the Charter, Agreement and the Secretary of State's power to approve and set conditions for new services.

158. Ofcom believes that any BBC plans for new services should be subjected to a rigorous independent evaluation to ensure that they add public value and would not unduly displace commercial activities. Where it is unclear from independent analysis that the benefits of any new service outweigh the costs, the BBC Governors should decline to take the project forward.

159. Ofcom, as a statutory corporate body, has no preference for any one system of governance or regulation of the BBC.[133] However, Ofcom believes that clarifying the separate roles of governance and regulation of the BBC should be a central objective to the Charter review process.[134]

160. Piecemeal change to the current regulatory arrangements would introduce further confusion[135] and undermine the work of Ofcom and the BBC in developing a modus vivendi.[136] We recommend that Ofcom's regulatory role in relation to the BBC remains substantially the same, for the time being. We believe that Ofcom has too many other duties for it to be an effective regulator of the BBC in its entirety.

The Governors' role

161. In oral evidence to the Committee, the BBC Chairman defended the structural status quo, while conceding the Governors' latest reforms could be codified in some way: "the BBC as a corporation is really of its own kind and other models are not necessarily appropriate. We [the Governors] are in charge, we are entrusted with the public's money and with that trust goes the need to ensure value for money. It also means that the governors are in a position to be proactive, unlike a retrospective financial regulator outside. We are in the entrails of the BBC. We can ensure outcomes. We can hire and fire my colleagues [the Director-General and other executives] … but outside regulators cannot do that. We can ensure positive outcomes. We can really influence from the inside the strategy and the direction of the BBC to meet what the licence payers are telling us."[137]

162. The Secretary of State did not mince her words in saying that the "unsustainability - it is a strong word to use but I mean unsustainability" of the dual function of the BBC Governors as champions and regulators had been recognised. She told us unequivocally that "we would not regard the status quo as an option that would be acceptable or sustainable for the next Charter review." She went on to say that she had not reached firm conclusions but she had a very good idea of the range of alternatives. [138]

163. ITN recommends: "The Board of Governors should be established as a properly independent body, separate from BBC management and based in a different location to the BBC executive and staff. We also believe that the BBC Governors should be drawn in members with relevant professional, legal or regulatory expertise. The Board of Governors should also be more answerable to OFCOM through regular dialogue and publication of minutes and decisions taken in greater detail than those published at present. This would help to ensure more consistency across the Governors and OFCOM."

164. A refashioning of the Governors' role has been suggested by SMG who recommend that "the economic direction of the BBC be subject to regulation to prevent unfair practices and distortion of the market. SMG proposes a solution where the Governors sit in a position akin to a plc Board of Directors, within an environment ultimately regulated by Ofcom, similar to the structure of Channel 4."[139] David Scott of Channel 4 told us: "we envisage a Board of Management with perhaps non-executive directors, who would manage the business and the governors as regulator at some distance, arm's length, in their own building, with a degree of separation."[140]

165. Citing the Hutton Inquiry[141] as further evidence of the conflict of interests that can arise within the Board of Governors, ITV recommends that "The Governors should be maintained as a strong body of people appointed to represent the public interest and champion the BBC. The regulation of the BBC should be the responsibility of the independent regulator Ofcom, which is already responsible for regulating the BBC at Tiers 1 and 2 of the new regime created by the Communications Act."

166. Such a wholesale transfer of powers to Ofcom would give that new body significant additional influence over the UK broadcast media, given the BBC's central role in the provision of public service broadcasting. The Institute of Practitioners in Advertising judged that any dangers that Ofcom might abuse its powers would be outweighed by the benefits of creating a uniformity of approach to regulation.[142]

167. According to the British Internet Publishers Alliance, "The Governors operate largely as apologists for the BBC Management rather than as its regulator. It is significant that the DCMS was obliged to set up the Lambert and Graf inquiries: had the Governors been proper regulators, these were functions it should itself have undertaken. If the Governors cannot be transformed into effective regulators, then the BBC should come fully under OFCOM. In any event OFCOM, as the industry-wide regulator, should have a key role in determining the effect of BBC activities on the wider market—both before and after new service provisions have been approved."[143]

168. The NUJ has expressed opposition to bringing the BBC more fully within Ofcom's remit, claiming that the latter body has a culture and a brief primarily to promote commercial communications services. They went on: "Ofcom is too big and covers too many sectors of communications to be able to regulate properly the BBC."[144] These sentiments were echoed by Richard Tait, now a BBC Governor, in the Committee's first oral evidence session.[145]

The BBC's interaction with the commercial sector

169. The Commercial Radio Companies Association referred to the BBC having "unfettered" flexibility and control over its output. The BBC "produces 'Statements of Programme Policy' which, after initial approval by the Secretary of State, are then self-regulated and may be unilaterally amended at will. Thus, at present, Commercial Radio's principal competitor has the ability to change its formats to enhance its position in the market yet Commercial Radio has no equivalent right with its own stations."[146]

170. Capital Radio's evidence argues that the BBC Governors should concentrate on governance, akin to the Board of Directors in a commercial company. Under the present arrangements, the Board of Governors "are not only expected to act as judge and jury, but as Counsel for the defence as well." Their existing regulatory functions ought to be performed externally by the Secretary of State, Ofcom and the National Audit Office. In particular, "the ex ante competition powers Ofcom has in relation to Broadcasting Act licensed services should be extended to the BBC, and the BBC's accounts should be subject to full audit (including value for money audits) by the NAO."[147]

171. According to Pact, the BBC has operated an increasingly aggressive commercial strategy in recent years. Although the BBC might seek to justify this by claiming it is maximising the return to the licence fee payer, Pact's view is that this has taken precedence over the need to act fairly in the market place and ensure the growth of the UK's creative industries is not hampered.[148]

172. As noted by the PPL and VPL[149] in the specific context of intellectual property, there is "currently no independent body to turn to should a right-holder believe that fair trading rules have been flouted."[150]

173. Professor Whish commented in his Review of the BBC's Fair Trading Commitment and Commercial Policy Guidelines (April 2001) that "A commitment to fair trading must be supplemented by adequate measures to ensure compliance is maintained." The Guidelines themselves were judged appropriate. If adhered to, these ought to prevent the BBC from distorting competition in commercial markets.

Competition regulation

174. There are advantages in the application of ex ante regulation of the BBC's commercial activities, and achieving a more level playing field with other broadcasters. Providing for ex ante competition regulation of the BBC would allow Ofcom to set preconditions, in the form of codes of practice, aimed at ensuring the BBC does not enter into any practices that would compromise fair competition. These codes should take precedence over the BBC's own codes on fair trading. That the BBC's commercial rivals would be satisfied to let the BBC Governors continue to adjudicate on such matters imposes a strain on basic credulity.

175. Written evidence from Professor Richard Collins acknowledges that the BBC has achieved a degree of legal separation of its public service and commercial activities.[151] However, in default of more compelling structural separation, rigorous ex ante regulation is required. This would:

  • Prevent the BBC from cross-subsidising its commercial subsidiaries;
  • Prevent the BBC from showing undue preference towards its commercial subsidiaries;
  • Require the BBC to furnish the regulator with the information needed for effective enforcement; and
  • Require the BBC to notify the regulator confidentially of its commercial plans ahead of their implementation.

176. We agree with Professor Collins that Ofcom is the appropriate body to perform these economic regulatory functions, not least because of the wider access it has to information from the BBC's commercial competitors.

177. The current Charter already stipulates that one function of the Governors is to "determine the strategy for and oversee the provision of the Commercial Services in such a way as to ensure that they are funded, operated and accounted for separately from the Public Services". We recommend the BBC establish a clearer and more transparent separation between its public service and commercial activities. In addition, Ofcom should be provided with powers to regulate the BBC's commercial activities along lines similar to those applying to commercial broadcasters. These powers should provide for effective ex ante competition regulation.

The way forward

178. The present system of BBC governance and regulation has failed, due in part to complacency, and in part to the "tick-box" system of appointing Governors, but above all due to the unresolved conflict between its role as the BBC's advocate and its regulator. We note the Secretary of State's comments on the unsustainability of the current system, quoted above.[152] The BBC's recent initiatives towards taking corrective action, while worthy and well-intentioned, may not work. Government and Parliament should secure regulatory arrangements that guarantee both the BBC's independence and the ability of the Governors to hold management properly to account (in extremis, the Governors can dismiss the Director-General, a sanction they have used surprisingly frequently).

179. Pact stated: "The role of the Governors should be similar to that of the Channel 4 Board, retaining the current duties of the governors in: interpreting the Charter and setting strategy; upholding editorial independence; assessing performance against remit and objectives; and calling management to account. However in terms of external assessment of performance, Ofcom would promote greater transparency and accountability…"[153]

180. We recommend sittings in public by whatever the BBC's governing body turns out to be; except where matters of commercial confidentiality are concerned.

181. Paragraph 42 of the Communication from the Commission on the application of State aid rules to public service broadcasting recommends: "It is within the competence of the Member State to choose the mechanism to ensure effective supervision of the fulfilment of the public service obligations. The role of such a body would seem to be effective only if the authority is independent from the entrusted undertaking."[154]

182. A study by the Institute for Public Policy Research concluded that a BBC regulator should be independent of Ofcom, the Government; and the BBC. However, the IPPR suggested that this goal could be achieved in practice by establishing the Governors as a separate body from the BBC, strengthened and housed outside the Corporation with a general obligation for transparency in communications with BBC management.[155]

183. We believe that a fundamental alteration to the responsibilities of the BBC Governors is required. We recommend that the governance of the BBC should be separated into its two component parts; meaning corporate governance on the one hand, and regulation and maintaining the independence of the BBC, on the other, by formally reconstituting the BBC Board of Governors as an independent body. Governors should be appointed on the basis of relevant experience—particularly in the media—and charged with the specific role of regulating the BBC and maintaining its independence. Corporate governance of the BBC should be supervised by the executive board augmented by independent non-executive directors appointed in accordance with the Combined Code on Corporate Governance for listed companies. This new management board would discharge its duties as if the BBC were a public limited company and in accordance with the principles of the Combined Code.[156]

Content regulation

184. Ofcom has regulatory control over the BBC, and other broadcasters, in relation to "negative" minimum content standards. This so-called Tier 1 covers fairness and privacy, and further aims to provide protection, particularly for people under 18, from harmful and offensive material.

185. In an environment where personal video recorders and video on demand allow time-shifting of programmes, the traditional nine o'clock watershed will become increasingly compromised. Technologies to enhance parental control over their children's viewing will clearly play a role of increasing importance. The BBC has also established a labelling project to identify what further information can be provided to signal the nature of programming content. This is in line with the sentiments expressed to us by Sir Christopher Bland: "It is very important that viewers should not be surprised by what they see in particular in fiction and in a soap. They should be well warned in advance."[157]

186. With the final demise of linear television still some way in the future, the watershed remains one useful and well-understood device. We recommend the nine o'clock watershed be retained, and remind broadcasters it permits rather than mandates the later showing of content aimed solely at adults. We believe that it will be all the more important in the future that broadcasters develop robust and widely understood new means of signposting programmes that might cause offence to certain viewers.

187. Unregulated content on the internet poses a challenge of a far greater order, not least as convergence implies that this will increasingly be watched on the same device as regulated broadcasts. Already, it is possible to watch live webcasts from a huge range of TV channels from around the globe (not to mention from private individuals). Even without plainly illegal webcasts, the issue of control over content comes to the fore. As the Committee recognised in its Third Report of Session 2003-04, "this black hole in policy will have to be tackled".[158]

188. The Internet Watch Foundation observes that "the Internet is not, and cannot, be regulated in the sense that radio and television are regulated".[159] While the IWF has proved highly effective in its primary mission of combating criminal content (in particular, child pornography) its procedures have little relevance in relation to other content that might be considered harmful or offensive. The IWF recommends two broad lines of action: "first, labelling, rating and filtering. Second, awareness and media literacy." So far as BBC online content is concerned, this is subject to the Corporation's own guidelines, first published in 1997 and last revised in July 2004.[160] The BBC's online services have an important role in providing safe and trusted access to entertainment and information. Though the feasibility of Internet content regulation may be underestimated, we believe self-regulation remains appropriate for this open, creative and international medium. Self-regulation should continue to be backed up by improved media literacy, enhanced filtering and rating software, and criminal sanctions for plainly illegal content.

189. We recommend that for online content, a self-regulatory approach by the BBC should continue, but that this be governed by considerations analogous to those applying to broadcasts. This injunction should also apply to licensed broadcasters.


190. This Committee is primarily concerned with how the BBC demonstrates its efficiency, effectiveness and economy in fulfilling its public service remit. The BBC is, rightly, keen to preserve its independence and in this aim it has few antagonists. However, independence does not by any means absolve the BBC from ex post accountability for its performance and its use of a substantial amount of the public's money; 24.5 million licence fee payers providing £2,798 million in 2003-04. The DCMS describes the BBC's accountability as "reflected primarily through the Royal Charter…and Agreement".[161] The DCMS's Independent Advisory Panel on Charter Review, chaired by Lord Burns, reported the suggestion that "it was only the process of Charter Review that concentrated the BBC's mind"[162] and there is no doubt that the most recent process, among other factors, has galvanised the BBC to produce the proposals set out in Building public value - Renewing the BBC for the digital world. The process of Charter review has always also been a tool for external bodies to hold the BBC to account, providing the opportunity for all interested parties to make a more or less detailed examination of key strategic issues such as what the BBC is for, how it is governed and run, what resources it needs and how these might be delivered.

191. Of course, in line with other public bodies, the BBC also publishes its annual report and accounts, required under the Charter to be made to the Secretary of State and laid before Parliament.[163] Sir Christopher Bland, a former Chairman of the BBC, suggested to us that this opportunity could be more fully and methodically grasped by Parliament.[164] For some years, on the original initiative of Sir Christopher, the BBC Governors and executives have appeared before this Committee on, or soon after, the day of publication of the annual report and accounts to answer questions on the information set out therein (and in the past the Committee has published this evidence without an accompanying report).[165] Most recently, the Committee invited the BBC executive and the Governors to appear separately; reflecting an emerging consensus around the importance of separating their roles.

192. Annual evidence sessions with the BBC have often been marked by robust exchanges on both the substance of the reports and also on the style of the information provided (and not provided). Over the years the Committee has consistently put to the BBC the charge that the annual report was, in essence, more self-congratulation than self-examination; to equally consistent rebuttal.

193. This year, therefore, we welcomed the agreement of at least the new Chairman of the BBC, Michael Grade, that: "Traditionally, the Annual Report and Accounts has been as much about marketing the BBC as holding it to account - and as much about management's view of its own performance as about the Governors' view of management's performance."[166] In the 2003-04 BBC report, described as a 'transitional' document, Mr Grade states his aim is to turn "the BBC's Annual Report into a document owned by the Governors, which evaluates the performance of BBC management against publicly stated objectives and commitments."[167]

194. This aim is explicitly part of a stated broader ambition for more robust governance, independent from BBC management,[168] announced in the BBC's contribution to the Charter review debate: "the [BBC] Governors in future will act—and be seen to act—fully independently of the BBC's management and will be resourced properly in order to make informed and independent judgements."[169] We discuss governance more broadly, and the adequacy of the BBC's own plans and competing proposals, elsewhere in this Report.

195. In considering the BBC's past annual reports and accounts, and the evidence taken in relation to each, we believe that there are a number of key improvements that should be made to the BBC's annual reporting to give effect to the new Chairman's ambitions. HM Treasury guidance to government departments and public bodies is that an annual report should provide an account of the stewardship of public funds and it is reasonable to expect the document to provide tools and data necessary for effective scrutiny of:

  • how well the organisation is performing against its high-level aims, subsidiary objectives and any detailed targets;
  • performance in relation to external, or otherwise objective, measures and comparators; and
  • the quality of the strategic "grip" that the organisation has over itself, its activities and its operations.

196. In order to do this, annual reporting needs to set out: high-level aims and purposes; clear objectives and evidence-based measurements of how these have been achieved; performance indicators for efficiency, effectiveness and economy; comparators with other, equivalent or competing, organisations; a statement of strategy; a candid assessment of performance and any difficulties faced in achieving its goals; and some assurance of accuracy and candour (i.e. external validation).

197. When we measured the BBC's recent annual reports against these parameters there appeared to be some gaps (set out in the boxes below and discussed thereafter).

The BBC's report should include a clear statement of what it needs to do to fulfil its public service remit, providing added value compared to other broadcasters. The previous BBC Chairman said that the BBC needed to provide a "richer and more ambitious" package than the commercial sector but provided no criteria against which performance could be judged.

198. The BBC's direct response reported agreement "with the thrust of this point" and said that the 2003/2004 report went further than previously in reporting on the performance of each BBC service against its public service remit. The BBC pointed to plans, set out in Building public value, for new evidence-based performance metrics for BBC services based around: "reach, quality, impact and value for money" as well as new public service "licences" (setting out budget, remit and targets) which will be monitored annually and reviewed regularly.[170] There is no ducking the issue that the BBC's remit presents a challenge in terms of formulation, as discussed elsewhere in this Report, as well as sub-division into measurable objectives. In Building public value, the BBC has defined its key role as "aiming to maximise public value" and the new performance framework looks set to become the touchstone for all its services and activities.

199. The Independent Advisory Panel (IAP) said in its statement of emerging themes, published as this Report was being prepared, that "the new Charter should require the BBC to focus clearly on its core PSB purpose and the areas where it can generate value for audiences in addition to that provided by the rest of the market".

Objective setting

It was difficult to assess the performance of the BBC against its key objectives as some were unspecific, some not measurable and some incremental without a baseline. There were statements such as "a year of strong BBC performance" without reference to measurable achievements or quantitative comparisons with other broadcasters (beyond reach and share).

200. The BBC has told us that the Governors' own work has led them to decide that there should be significant changes in their assessment of performance against objectives in future annual reports, "much along the lines identified by the Committee". The BBC said that key objectives for 2004/2005 were focused on major pan-BBC priorities while individual channel, service and genre objectives were set out in the Statements of Programme Policy.[171] The IAP said that: "if the next Charter is to include more specific high level purposes … there will be a clear need for a set of measurable goals to inform the conduct of the management and to enable the Governors to assess afterwards whether objectives have been achieved". Lord Burns's panel also observed that: "Building public value outlines some high level purposes but more work is necessary if they are to be translated into how the BBC operates on a day-by-day basis and they need to be set out in a way that makes management accountable for the delivery of these purposes."

Illustrating performance

More comparators should be used to illustrate the BBC's use of resources, output and performance compared with other broadcasters (both TV and radio).

201. The BBC agreed and reported the reinstatement in 2004 of information, left out of the 2002/2003 report, relating to: comparative reach and share; the range of peak-time UK-made programmes; the comparative cost per household of viewing/listening.[172]

202. We welcome these moves. We see the relative costs per household of viewing and listening arising from, on the one hand, a compulsory licence fee, and, on the other, contracts entered into by choice, as interesting (but incomplete without estimates also for ITV and Channel 4).[173] However, the truly valuable data for assessing the efficiency and effectiveness of the BBC in its use of the public's money would be comparative programme production costs per hour between the BBC and other programme producers. The BBC said that it would like to undertake such analysis but commercial broadcasters would not release such information.[174] Comparative data on programme budgets of the terrestrial broadcasters, albeit in broad terms, used to be available on the former ITC's website (which showed that, across 2001-2003, BBC One's budget consistently exceeded that of ITV1 by £100-200 million). One way of achieving these comparisons would be via Ofcom as a mediator of commercially sensitive data. Alternatively the BBC could make a start by comparing in-house costs with those of programmes secured from the independent sector (the data for which is presumably accessible).

203. Capital Radio told us that the BBC should be subject to the same degree of scrutiny of its accounts as other public bodies and should therefore be fully accountable to the National Audit Office including on value for money issues; like the rest of the public sector. Capital said it was impossible to see how the Governors can adequately consider value for money without access to comparable industry data. Unlike the Governors, the NAO might be in a position "to compare and analyse costs and spending across the broadcasting sector." This is a long-standing debate with the BBC resisting a perceived challenge to its independence over operational decisions despite the NAO's long experience of, and clear focus on, efficiency, effectiveness and economy issues while abjuring interference with policy. Mr Michael Grade, the BBC Chairman, told us: "It seems perfectly proper … for the NAO to inquire into various things, but [not] to go through the full formal constitutional proprieties of an NAO relationship" where the Director-General becomes the BBC's Accounting Officer.[175]

204. An interim compromise was reached in 2003. Under paragraph 4 of the Schedule to the amendment to the BBC Agreement, dated 4 December 2003, the BBC Audit Committee is required to examine the value for money achieved by the Corporation in using the licence fee. In doing this, they must consult the Comptroller and Auditor General over the possible scope of an audit programme and consider which individual reviews under that programme might best be conducted by the NAO.[176] The NAO has completed a study of the establishment of Freeview with no visible damage to the Corporation as a result. We regard the BBC's fear of formal relations with the NAO to be based on a misunderstanding of the C&AG's role and we look forward to the development of the relationship between the BBC Governors' Audit Committee and the NAO in the future.

Targets and standards

The targets within the BBC's Statements of Programme Policy (SoPPs) should be reviewed with a view to increasing: the correlation with the BBC's high-level objectives; specificity and measurability (tackling the vaguer instances of incrementalism); as well as the challenges posed. It would also be useful to validate performance by external, as well as internal, audit.

205. The BBC wrote that the BBC's approach to SoPPs had yet to be informed by Ofcom guidance (on which consultation was published in June 2004). The Corporation stated that its SoPPs for 2004/2005 were more detailed, more factual and more measurable than in the previous two years and that the report on performance against the 2003/2004 SoPPs, in the 2004 annual report, was "significantly more thorough" than before.[177]

206. We noted that, as for example Channel 4 had exceeded all of BBC's Two's quantified targets and a majority of BBC One's in 2002, these targets must be relatively undemanding. The BBC responded that the specific hours commitments were floors, i.e. minima, and therefore not really targets at all in the aspirational sense.[178] In this light we regard them as largely useless as measures of performance (and they should not be presented as such) being about compliance with the inevitably low baseline, or safety net, established by a system of quotas for PSB programming regarded by many as a necessary evil.

207. The BBC also pointed out that the commitments were about the type of programming and not its quality or the range within each specified genre. The Corporation asserted that the SoPPs for 2004/05 demonstrated a more sophisticated approach through their clarity and specificity (and pointed out that the minimum requirement for news on BBC One had been increased from 570 to 1,380 hours).[179]

208. The BBC said that—while BBC Two outperformed Channel 4 on every relevant indicator in 2003/04 except hours of religion (since the BBC concentrates religious programming on BBC One) and BBC One's performance was significantly ahead of Channel 4's in many PSB genres—the different remits and audience-expectations of these channels made such comparisons "rather invidious and of limited value". [180]

209. In our view the BBC should be setting its own real targets, on top of its regulatory minimum duties, to set out clearly the levels of performance that it believes it needs to be achieving and to invite scrutiny of both its ambitions and its subsequent performance.

Value for money

The BBC had targets during 2002/2003 for financial efficiency gains—licence fee collection, commercial activities, central overheads, and programme production—but progress was only reported in relation to the first three which, even taken together, represented limited prospects for savings or gains compared to the potential within the BBC's £2.4 billion production budget.

210. It is worth taking a little time to consider the BBC's recent record on seeking, and reporting on, efficiency savings in its core spending; a key area for a body that receives a compulsory and regressive viewing tax from about 20 million households. The Secretary of State told us that: "the BBC's protected status is not an accident, it is a democratic choice … which creates for the BBC very clear responsibilities and one of them is to ensure that money is not wasted".[181] Tessa Jowell went on to suggest that evidence of waste would be the surest way of undermining public support for the licence fee.

211. In relation to the efficiency gains targeted by the BBC in 2002-03: licence fee evasion represented a loss of £200 million (with improved collection inevitably subject to diminishing returns); commercial activities returned £147 million; and central overheads were £347.5 million. In contrast expenditure on programme production was £2,378 million. The outcomes from the reported improvements, in the first three areas, added up to £60.1 million; 1.5% of total spending.

212. In the 2004 annual report the BBC failed to refer to the specific sub-targets for efficiency. Instead, it referred to the overall 7-year Charter target to achieve efficiencies and earnings—termed "self-help"—of £3.3 billion between 1999-2000 and 2006-07. While there is merit in this, as this target covers the whole of BBC expenditure, there are also some difficulties. In its annual reporting the BBC has not broken this target down into annual sub-targets (so it is difficult to assess financial performance for 2003-04 specifically against the target). The 2004 report did not report outturn against the target to date since 1999-2000 and it does not say what contribution to the target was achieved in 2003-04. There was simply insufficient detail behind the statement of "steady progress" for an independent judgement to be formed.

213. In Building public value the overall cumulative progress—and projected steep curve towards fulfilment—of the self-help target is set out with a continuing, and perhaps disproportionate, emphasis on gains from licence fee collection (and it is not clear whether this is due to increased efficiency or expectations of more households and more licence fee payers). The 2004 report also said that a new programme of efficiency/earnings had been agreed in order to achieve the £3.3 billion target but gave no details. The report did reveal that the one-off sale of assets, such as BBC Technology, will count towards the "self-help" target which suggests a softer potential route, in extremis, to its achievement than the rigour of efficiency initiatives. We note that reductions in overheads has been limited and in fact in 2003-04 there was an absolute increase of £4 million on the previous year albeit within a reduction of overheads to 12% as a proportion of total spending.

214. Programme production is the BBC's core activity representing the great bulk of expenditure. However, initiatives to increase efficiency in this area (without compromising quality) have not been the subject of clear reporting; giving rise to the suspicion that the issue has not topped the agenda of an organisation enjoying a guaranteed level of public money. It is a matter of more than anecdotal evidence that the BBC regularly sends large numbers of journalists and other staff to cover the same news or sporting event, with separate BBC outlets often replicating each other's work. While direct comparisons with the print media, or other broadcasters, would be invidious, we believe that the BBC should seek to make further efficiencies in this area.

215. We also note that the BBC has been criticised for programme acquisition,[182] including of Hollywood blockbusters, for far above their 'market' value, when in competition with other terrestrial broadcasters without, therefore, a demonstrable gain in terms of public value.

216. In 2003 the BBC Governors reported that "Over the next year programme production costs need to be benchmarked to determine if further efficiencies are achievable. We have also agreed with the Executive to look for ways to conduct a thorough review of effectiveness-based, value for money measures of BBC performance." They themselves emphasised this in going on to say: "It is timely now to conduct a thorough benchmarking exercise to ensure that the BBC's programme costs are justified in relation to the value and quality of its programmes, as compared with other broadcasters."[183]

217. In 2004 the Governors reported that the BBC must "now set itself more stretching efficiency targets if it is to deliver licence payers the best possible value for money" and that the "key challenge" lay in improving the efficiency of production processes. They conceded that progress with this, particularly in terms of benchmarking productions costs, had "not been as rapid as we had expected".[184] No benchmarking of costs seems to have taken place and no efficiency achievements for production costs have been reported on, presumably either because there were none or because the BBC financial systems were not in a position to identity them. This year the Governors again undertake to have a "thorough review" of this area, this time under the guidance of a new "Head of Value for Money". The BBC told us that it "recognises that this is an area where a renewed push towards world-class levels of efficiency is called for."

218. We believe that the BBC, under new governance and management and with the new business plans recently announced, must grasp the nettle of the efficiency and effectiveness of its core spending on programme production and acquisition - which it seems it has courageously begun to do. It should have done so before now. If necessary it should establish a project board comprising both internal expertise and perhaps personnel seconded from the National Audit Office and the independent production sector to assist in the process of comparing BBC norms, values and practices with those from elsewhere.

Evidence of internal financial control

Regarding cost targets in general, the BBC report would be enhanced by more information about and from the BBC's internal financial performance measure and indicators to provide a comprehensive picture of the BBC's financial performance.

219. The BBC told us that the annual report currently contains most of the financial performance measures and indicators used internally in the 'Broadcasting facts and figures' section of the report. These measures included: network television hours of output, radio hours of output, monthly and BBCi reach, monthly page impressions, cost per hour of originated programmes, distribution costs, cost per hour of originated programmes by genre, and creative spend outside the BBC.[185]

220. The BBC said that the only main measure of internal financial performance that was not included was comparison to the budget but that it was "not considered appropriate to disclose details of the BBC's internal budget in the annual report and accounts". The BBC went on to say, however, that in Spring 2005, the Governors will grant licences for each BBC public service which will "specify the budget of each service, as well as its remit and performance targets".[186]

221. As we have noted, Lord Burns's Advisory Panel on Charter Review has seen a need for the definition and demonstration of its unique selling point (or in this case its unique justification for the licence fee), added public value and public service contribution as key emerging themes of Charter review. The Panel also said that "any system of judging the BBC's performance should be based on a wide range of factors, some quantitative others qualitative." At first sight this seems to be pointing towards a framework such as that presented in Building public value for reach, quality, impact and value for money (especially in view of the IAP's eschewing of audience "share" as potentially perverse). However, Lord Burns's panel also concluded: "if such a test is defined solely by criteria set by the BBC, using data and measures defined by the BBC, it will lack conviction. There is a clear need for an independently determined set of objective measures, applicable to the whole of the broadcasting industry, which the BBC should use when making such judgements." The IAP points to Ofcom's conduct of its review of public service television as an exemplar.


222. Overall the current situation poses great challenges to the ability of external observers to assess what it is the BBC is trying to achieve and to measure its success in making progress. We note that the BBC indicates new thinking is taking place on these points. We accept the encouragement of Sir Christopher Bland to seize more fully the opportunity presented by the BBC's annual report and accounts to improve the accountability of the Corporation to Parliament. However, our determination must be matched by a new culture of openness at the BBC, and rigour among the BBC Governors, leading to a wholesale renewal of the Corporation's reporting of its performance, and added value, to the Secretary of State, to Parliament and, thereby, to the licence payer. This has been signalled clearly by the new BBC Chairman and in the mechanisms proposed in the BBC's bid for Charter renewal, Building public value. However, we note that Lord Burns's advice to the Secretary of State is likely to suggest that these efforts do not go far enough with the BBC needing to come out from behind its barricades and out from within the charmed circle of its self-referential objectives and measures.

223. We recognise that a vessel of the size and complexity of the BBC needs both time and effort to turn on to a new course and adopt any significant change in organisational culture. However, the BBC Chairman told us that: "from the outside the BBC has looked arrogant. It is not arrogant, it takes its accountability responsibilities very seriously. The problem is that decisions that it has made have been behind closed doors, a cosy discussion between the two boards … no transparency, no objectivity, no independent thought, until after the decision has been made … but we are addressing that."[187] This suggests a much more open process of which the annual report would be just the pinnacle; rather than an annual spasm. It would be a very great shame if Mr Grade's attractive initial offering proved immune to further development or even to require discounting over time to account for the twin inflationary pressures of Charter review rhetoric and new broom bravado. We regard the area of accountability, and concrete mechanisms and measures for improvement, as a crucial test for the DCMS in its development of detailed proposals for its prospective green paper.

132   Third Report, 1999-2000, HC25 paragraph 113 Back

133   Ev 72-76 Back

134   Ev 223 Back

135   Ev 231, Q 583 Back

136   Ev 230, Q 581 Back

137   Ev 202, Q 467 Back

138   Ev 241, Q 626; for some alternativessee Ev 8, Q 18 and Ev 11, Q 28 Back

139   Ev 46 Back

140   Ev 119, Q 176 Back

141   Report of the Inquiry into the Circumstances Surrounding the Death of Dr David Kelly C.M.G., HC 247, 28 January 2004 Back

142   Ev 27 Back

143   Ev 32 Back

144   Ev 168 Back

145   Ev 7, Q 17 Back

146   Ev 41 Back

147   Ev 76-81 Back

148   Submission to the Review of the BBC Charter, Pact, March 2004 Back

149   Phonographic Performance Ltd and Video Performance Ltd Back

150   BBC Charter Review (DCMS) PPL & VPL Response, March 2004 Back

151   Ev 249-250 Back

152   Ev 241, Q 626 Back

153   Submission to the Review of the BBC Charter, Pact, March 2004 Back

154   2001/C 320/04 Back

155   From Public Service Broadcasting to Public Service Communications, IPPR, 2004 pp 178-179 Back

156   The Combined Code on Corporate Governance for Listed Companies has been developed by the Financial Reporting Council following reviews commissioned by Government. The Code is widely endorsed for the relevant regulatory authorities and City institutions as representing best practice in this field. Back

157   Ev 96, Q 70 Back

158   Third Report , 2003-04, HC 380 para 114 Back

159   Ev 136 Back

160   BBC Online Editorial Guidelines, revised July 2004  Back

161   Review of the BBC's Royal Charter, DCMS, December 2003, p 26 Back

162   Emerging themes, Independent Advisory Panel on Charter Review, 1 December 2004, paragraph 3.28  Back

163   The most recent was BBC Annual Report and Accounts 2003/2004, published 13 July 2004 Back

164   Q58 Back

165   The proceedings of the most recent such session was published on 20 October 2004 as HC 862-I (2003-04)  Back

166   Annual Report and Accounts 2003/2004, BBC, 13 July 2004, p 2 Back

167   Ibid Back

168   Building Public Value, the BBC's contribution to the Charter review debate, published June 2004, p 130 Back

169   Ibid, p 128 Back

170   Ev p 262, para 2 Back

171   Ev p 262, para 1 Back

172   Ev p 262-3, para 3 Back

173   ITV 1 and 2 and Channel 4 are free at the point of use but the consumer pays for the advertising carried on air through increased prices in their 'shopping baskets'.  Back

174   Ev p 264 Back

175   Q 473 Back

176   Ev 78 Back

177   Ev p 263, para 4 Back

178   Ev p 263, para 4 Back

179   Ev p 263, para 4 Back

180   Ev p 263, para 4 Back

181   Q595 Back

182   Ev 106, Q 130 Back

183   BBC annual report and accounts, 2002/2003, p 13. Back

184   BBC annual report and accounts, 2003/2004, p 19. Back

185   Ev p 264, para 7 Back

186   Ev p 264, para 7 Back

187   Ev 214, Q 506 Back

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