UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1490-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

CULTURE, MEDIA AND SPORT COMMITTEE

 

 

BBC REPORT & ACCOUNTS 2005-06

 

 

Tuesday 11 July 2006

MR MICHAEL GRADE CBE, MR MARK THOMPSON,
MR JEREMY PEAT and MS ZARIN PATEL

Evidence heard in Public Questions 1 - 106

 

 

USE OF THE TRANSCRIPT

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Oral Evidence

Taken before the Culture, Media and Sport Committee

on Tuesday 11 July 2006

Members present

Mr John Whittingdale, in the Chair

Janet Anderson

Philip Davies

Mr Mike Hall

Alan Keen

Rosemary McKenna

Adam Price

Mr Adrian Sanders

Helen Southworth

________________

Witnesses: Mr Michael Grade CBE, Chairman, Mr Mark Thompson, Director-General, Mr Jeremy Peat, Governor and Chairman of the Audit Committee, and Ms Zarin Patel, Group Finance Director, BBC, gave evidence.

Q1 Chairman: Good morning. This is our annual session with the governors and senior management of the BBC. It has traditionally been timed to coincide with the publication of the BBC's Annual Report and indeed would have done had the Government not decided to hold a debate on the BBC yesterday and the BBC kindly brought forward the publication of the report in order that we had a chance to see it before the debate. It seemed to me slightly curious that it was that way round rather than the Government moving the debate, but never mind ... I hope it did not cost the BBC too much money. Could I welcome the Chairman, Michael Grade, the Director-General Mark Thompson, from the governors Jeremy Peat and the Director of Finance Zarin Patel. This is the likely to be the last of these sessions under the present structure of the BBC but you have said that you are already operating, to some extent, in the way that the new structure is likely to divide responsibilities. Perhaps I could begin by asking Michael Grade, given that you are now chairing a board of governors which will evolve into the BBC Trust and already operating in that way, can you tell us some examples where you have been able to be perhaps more rigorous, independent and transparent, perhaps overriding the Executive, than you might have been under the old structure.

Mr Grade: Thank you, Chairman. Perhaps, very briefly, before I directly answer that question, I could say how much the BBC welcomes on behalf of the licence fee payers and is very grateful for the support from across the House last night for the new Charter and Agreement. We recognise, of course, that there are some strongly held differences of view on particular aspects of both documents, the Charter and the Agreement, as illustrated by the opposition amendments, but we very much welcome the consensus over the broad direction of the future of the BBC, if I could just place that on the record. Thank you. On the new structure, the Board itself felt, once the air had cleared following the huge public debate about the future governance of the BBC, that, even though the new rules of engagement - or disengagement - came into, as it were, legal force on January 1, we should operate within the spirit of that absolutely. As a result of that, we have created a governance unit which depends entirely for its pay and rations on the governors and not on the management. There is a clear line of responsibility from the Governance Unit to the governors, and not to management whatsoever, as was the past: the governors used to depend for their information and scrutiny on people who worked basically for the Director-General, at the end of the day. So that clarification has happened. We scrutinised with some independent consultants the licence fee bid. We made the decision to go public on that. We questioned many aspects of the bid that was compiled by the management. We made quite a few changes to the bid before we were prepared to endorse it, which we did when we went public with it. The Governance Unit really provides the governors now with very detailed analysis and questioning of all the documents that come out of the Executive, and I would say it is much more efficient and there is much greater accountability and scrutiny for the Executive than there ever has been in the history of the BBC.

Q2 Chairman: Are there any areas where you feel you will be able to do more once the Trust is fully set up and operational or are you essentially already there?

Mr Grade: No, we are not already there because we do not have the service licences in place yet. That is the crucial step forward that will enable the Trust to judge the performance on behalf of the licence fee payers of the delivery of the six purposes of the BBC by the Executive. That is the core. Those service licences are in preparation presently. There are 27 separate service licences being prepared by the Governance Unit presently which will go out for consultation in due course when the Trust is in place. We have also said that, if any proposal comes forward from the Executive before the Trust is in place that is either a new service or a significant alteration to an existing service, we will apply the public value test. Even though we are not required to legally, we will of course apply a public value test.

Q3 Chairman: Which we will come on to in more detail. The decision about which services should require individual licences, individual impact assessments, those will all be decisions taken by the Trust.

Mr Grade: Indeed.

Q4 Chairman: Can I just ask the Director-General: operating under this new rigorous regime, have you already encountered areas where the Trust has told you that you have to do things differently from the way you would like to have done?

Mr Thompson: You will recall, Chairman, that before I spent a couple of years on Channel 4 I spent some years on the Executive Committee of the BBC under, as it were, the ancien régime, the traditional BBC governor's role. There has been a step-change in the level of scrutiny and it is scrutiny which is backed up by independent research and evidence gathering. For example, the Board of Governors have employed Deloittes as independent scrutineers of the BBC's proposals to create a new broadcasting centre in the North of England, in Greater Manchester, and at every stage of the process in the development of those plans, in addition to receiving proposals from the management, the governors have also had access to this independent work. As with all the major decisions in front of them, I think it is adding value. It certainly means that we are being asking questions and in some cases being pressed in ways we would not have been under the old scheme; in other words, pressed on value for money and also pressed on the match between BBC proposals and the public purposes of the BBC.

Q5 Chairman: Have there been any examples yet where you have had serious disagreements or where you have been stopped from doing something by the Trust?

Mr Thompson: There was a very lively debate to years ago about the extent and the character of the value for money savings and the programme of change that the BBC was undertaking. In particular, I would say pressure from lead governors - Jeremy Peat, to my right, was one of them - again supported by external advice - in this case from PA Consulting - that the management should think much more seriously about ensuring that change in the organisation in the matter of efficiency was genuinely transformational; in other words, going beyond the business of simply looking at cost reduction and looking at new ways of working and organising to deliver better value for money. I have to say, that was an impetus which came from the governors, was soundly based on evidence and materially affected the way that I and my colleagues thought about the change programme.

Mr Grade: Could I add, Chairman, that there are frequently robust debates between us. What we have not had is a complete stand off on a major issue. The arguments and the analysis from the Governance Unit is pretty effective and pretty thorough and pretty intellectually and numerically rigorous. Something which might start out as a major difference between the Executive and the governors gets resolved through evidence rather than emotion and serendipity. There have been many, many differences but they have been resolved because they have been based on evidence which has been provided by the Governance Unit.

Q6 Alan Keen: Good morning. I made a personal appeal to you last night, Michael, from the floor of the House, to be Chair of the Executive, because of all your experience in this, rather than, as a backstop, Chair of the Trust. We could do with somebody, not like Zarin, but a boring old accountant, who does not want anybody to do anything to chair the Trust and to make sure the BBC does not do anything it is not supposed to do, and you should be at the forefront and alongside, not helping on a part-time basis but at the sharp end, making these decisions based on all the experience you have got. Why is that not so?

Mr Grade: We are not getting divorced. We still have each other's phone numbers and we will still talk to each other. I think there was a lot of fear when I came in that I would confuse the role of dispassionate, objective Chairman with the role of wanting to be the Chief Executive of the BBC. Experience has shown - I hope - and proven to the world, that that is not the case. I think it is very important that the operating board of the BBC under the new structure is chaired by the Director-General, the Chief Executive, whoever he or she might be in the future. We cannot have two lay chairmen of the BBC running around town. It is a recipe for confusion and a recipe for a game that the Executive used to play extremely well, which was divide and conquer, enabling them to come through the middle and do whatever they wanted. It has to be very clear in the governance structure, going forward, who the Chairman of the BBC is, and I think it is right that the Chief Executive should chair the operating board and that the only lay chairman of the BBC should be the Chairman of the Trust in future.

Q7 Alan Keen: Does that mean you are not going to involved proactively helping to drive the BBC forward? If you are, how can you then act as a backstop? I am referring now really to the problem with your two predecessors. Gavin, rightly so, I thought, was involved in the proactive side of the BBC, and therefore when there was a problem there was not a backstop. We could have a boring old accountant as a backstop. Nobody would mix you up with a boring old accountant, Michael: there will still only be one chair in everybody's mind. Why does it not work that way? I think I am right and I think the organisation as it is now is wrong.

Mr Grade: I think one of the significant changes in the dynamics of the Board of Governors which will be carried over into the Trust is that there is some measure of sector experience on the Board which has not happened before. We have Richard Tait, as a governor, who is going forward as a trustee, who is the former editor of ITN, and myself, with a lifetime in the broadcasting industry. I think that is a valuable dynamic, but the Board of Trustees is there to represent the interests of all the licence fee payers and the value that I think I can add from a distance is the sector knowledge that I have of how it works and what supplementaries to ask the Executive Board. I think that is a help but the trustees are there to represent the interests of all licence fee payers throughout the UK and I think the way it is will work extremely well.

Q8 Alan Keen: I will not go on about it, but I have one last thing to say. In the system you are adopting you are depriving the Director-General of what would be, as we see in many commercial companies, an Executive Chairman, who is there to rub ideas off.

Mr Grade: I think it would be dangerous in the long term, inadvisable, to devise a government structure built around individual personalities who are presently in situ.

Alan Keen: I will not ask you any more. There are so many questions we want to ask you. Thank you.

Q9 Chairman: It does raise, however, the root of the problem, in that you have said that you will have each other's telephone numbers and you, as the Chairman of the Trust, still have the job of setting the strategic direction, but you are also expected to be the arbiter of complaints, you are expected to be essentially the regulator. Do you not see that even under this new separation there is still a conflict in those two roles?

Mr Grade: I do not see a conflict whatsoever because of the separation. The Board of Governors presently is quite involved in the day-to-day operations of the BBC. It will step right back from that day-to-day involvement, looking at investment cases and the things that we presently do. We will be able to step back; we will have distance; we will be independent of management; enabled to devolve all the responsibility for the day-to-day operation. Implementation of the strategy that we set will be handed to the operating board and there will be a clutch of senior non-Executive directors to act as a check and balance on performance and to advise, as critical friends, the operating board. I think it will work extremely well. The fact that we are one stage removed, with our own governance unit, will bring an objectivity to the governance of the BBC which has hitherto, frankly, been sadly lacking.

Q10 Chairman: Just one small point: you have said that you saw the Director-General as being the Chairman of the Executive Board. That does not have to be the case under the new structure, but it is your intention that the Director-General will chair the Executive Board.

Mr Grade: It is indeed, Chairman.

Q11 Mr Sanders: How confident are you that you are going to be both judge and jury in that situation?

Mr Grade: Judge and jury over what, over the spending of the public's money? The primary responsibility is to ensure not just that the money has been spent well but that it is going to be spent well and you can only do that from inside the BBC. That is the true raison d'être for having a trust which is a part of the BBC. It is no good some outside body coming in afterwards and saying, "What happened to all that public money?" when we are in a position to ensure that it is going to be spent wisely and in the public interest. That is the key.

Q12 Mr Sanders: That sounds like an argument against external audit.

Mr Grade: Audit is post facto.

Q13 Mr Sanders: You said there is no point somebody coming in after the event.

Mr Grade: No, no, we have that in any event. We have that in any event, but it is important, since the Trust is going to be responsible for £3 billion of public money, to ensure that it is going to be spent wisely and then to be in a position to judge how the money has been spent. The regulatory powers of the Trust are well defined and limited compared to the powers of the governors prior to the Communications Act.

Q14 Mr Sanders: One of the controversial aspects of the increase in the licence fee is over the analogue switch-off. In your calculations for the costs of the digital infrastructure, what account has been taken of savings from analogue transmission costs?

Mr Grade: May I ask the Finance Director to answer.

Ms Patel: Our analogue transmission costs are unnaturally low, largely because they are all fully depreciated assets and we have been doing very little maintenance work on them. Going forward, the new high-powered DTT transmission network will cost us more because for the investment needed to build on.

Mr Thompson: It is also worth making the point that the analogue to digital television process of switch-over begins in 2008 but much of the United Kingdom is not switched over until 2012-13, so in this licence fee period the BBC's bid relates to a suggestion of a seven-year period but the duration of the period is itself obviously a matter for government. In much of this seven-year period you are seeing simultaneous parallel transmission on analogue and digital, until the analogue signal is switched off.

Q15 Mr Sanders: One of the other concerns around this is using the licence fee payer's money in order to pay for the transfer. Quite a few commercial organisations will be beneficiaries from the investment that has been made by the licence fee payer. How do you justify that?

Mr Grade: I think there are three components to digital switch-over. There are the BBC's costs of reconfiguring its own transmitter network; there are the industry costs of switch-over (that is to say our contribution to Digital UK, the company that is going to manage this: we have been asked to pay some costs for Channel 4); and the third element is targeted help - which I think is the issue to which you are alluding. Targeted help, which is yet to be quantified in any detail, seems to the BBC to be entirely consistent with the BBC's mission which is to be universally available. This is a unique event, I think, that there is actually going to be a switch-off of analogue. I do not think this has ever happened in the history of broadcasting. When we went from 405 to 625, and from black and white to colour, they did not switch off the black and white when we went to colour. The Government is going to switch off the analogue signal and it is very, very important that the BBC achieves its fundamental aim of being universally available and free at the point of consumption. To achieve that, it is going to require targeted help. That is why we have not resisted the use of the licence fee to pay for that. We have laid down two conditions for that, which we hope the Government will be receptive to. One is that we have to reduce existing services in order to pay for targeted help and the second is that the cost of it is so great that it would bring the licence fee into disrepute with public support for the licence fee. Those are the two conditionalities that we have suggested.

Q16 Mr Sanders: In terms of the budgeting for likely costs, what if they turn out to be significantly less? Would that then be reflected in a future years' licence fee increase?

Mr Grade: Sam Chisholm, a friend of mine, once said that in every negotiation there is a difficult conversation. In that situation, I think we would be having a very difficult conversation with the Government.

Mr Thompson: Absolutely, certainly from the management side of it, the actual costs, the outturn costs of this process, should be reflected in the overall funding of the BBC over this period. We do not yet have a model. The Government has yet to set out a model for what this licence fee period might look like, but if, for example, the assumption is that you have a licence fee which changes year on year, it seems to me that if the outturn digital cost is lower than expected you could expect to see a reflection of that in the out years of the settlement. There is no intention at all on the BBC's part to ask for a licence fee in the hope, as it were, that the actual outturn for costs of digital is lower than expected and therefore there is free money that can be applied to something else. We want to be completely transparent about the actual costs. Once those costs are cleared, if that means there is subsequent adjustment then so be it.

Q17 Mr Sanders: The person who would make that judgment will actually be the BBC.

Mr Grade: The costs will be very transparent on those big issues. There is no question of the BBC keeping licence fee money that was intended for one thing if the costs come down. There is no question of the BBC keeping the money internally.

Q18 Mr Sanders: You said last year that you had the proposition for satellite free-to-view and it has not been launched to date. Can you explain why your most recent governors' minutes edited out all discussion of the subject?

Mr Grade: There are commercial conversations going on with potential partners which are at a sensitive stage. The governors are deeply embarrassed that there are licence fee payers in the UK paying for services through their licence fee which they are incapable of receiving because free view - for topographical reasons, transmitter reasons or whatever reasons - is not available in certain areas. For the governors, in all their public meetings, on the website, in their correspondence with the licence fee payer, this is the biggest single complaint from the licence fee payers and we have been pushing the management to expedite these discussions. We are very keen to see that a BBC free-sat offering, with partners if possible, is made available as soon as possible. We believe we are making progress in that area at last and there are active discussions going on with partners. I do not know whether the Director General wants to add anything.

Mr Thompson: I believe that we should launch this free-sat standard to offer licence payers/citizens another useful choice as we come to switch-over. Sky has a free satellite proposition currently, which is also a useful choice for the public to have, but we believe this extra free-sat standard does make sense. It is most likely to succeed and therefore to be useful if it is done in partnership with other broadcasters. It obviously needs the support of set-top box manufacturers and others in the industry. I believe we are making progress and I am confident that we will be able to launch this standard during the course of calendar 2007.

Q19 Mr Sanders: Somebody needs to put a rocket up you.

Mr Thompson: Did you say up us?

Q20 Mr Sanders: Yes.

Mr Grade: Consider the rocket dispatched.

Mr Thompson: I am fairly uncomfortable now. I want to say that we have been working very strenuously on this, but, rather like the free-view project in which the BBC was involved some years ago - which, to be honest, has made digital switch-over possible in the United Kingdom - this project is much more likely to succeed if it has broad support across the industry. It is the issue of garnering broad support which has caused the delay. It is not because we have lacked enthusiasm. We are very eager to get on with it.

Q21 Chairman: But the justification that the Chairman has just given for free-sat, that all these complaints you get from people who cannot access digital services because free-view coverage does not reach them, is going to be solved in the next couple of years, once switch-off occurs. The whole purpose of switch-off is that we get 98.5% coverage of free view, so why do you then need free-sat?

Mr Grade: There is a long time before the country is fully digital. It is 2012, which assumes no slippage - which I hope there will not be - but, if it is 2012, people are still paying for those services in the meantime. There is also the issue of DAB, which is rolling out more slowly than television. Those who are not in DAB areas will be able to get BBC, and a lot of other people's digital audio stations which they presently cannot receive, through their free-sat.

Q22 Chairman: When do you hope to have free-sat broadcasting?

Mr Thompson: The issue, as you know, Chairman, is not the broadcasting. We are already broadcasting in the clear from the astro-satellite. The broadcasting part of this equation for BBC services and indeed for ITV now is already addressed. The issue is agreeing a standard and encouraging the industry to meet the standard with boxes and dishes which the public can buy. I have said we would like to have the standard agreed and launched during the course of calendar 2007. If we take autumn 2007 as a benchmark, that means that at that point I believe there would be widely available boxes and dishes which the public can buy. In terms of the out-of-DDT-coverage areas, in many of these areas autumn 2007 is five years before switch-over would happen, so for this five-year period it provides an alternative. I have to say, even after switch-over happens it provides another choice. We would hope to see, as we have seen in the case of free view, that natural competition between the manufacturers of the equipment, the receivers, the boxes and the dishes, would mean that prices over time would come down, so that when people have no choice but to move to digital television they have a range of choices available, including some low-cost choices.

Q23 Chairman: Could I come back to Adrian Sanders' point about the cost of switch-over. Quite a lot of your licence fee bid is to cover what are essentially one-off costs, so once those costs have been met can we look forward to a reduction in the licence fee to reflect the fact that you no longer have to meet those?

Mr Thompson: Ultimately this is a question which is well above my pay grade, even, as it were, within the BBC with the new governance arrangements, but let me begin on that. I think that the costs which are one-off should be reflected in the settlement and once those costs have been borne should come out of the settlement. One complication is a question mark as to the extent to which the matter of digital switch-over - which, as it were, characteristically involves quite lumpy, large outgoings of cash in some key years - should be reflected in a licence fee which leaps up, as it were, in some years when expenditure is the greatest, or whether it would be better from the public's point of view if there was some smoothing; in other words, a licence fee which goes up over the period in a way which enables these costs to be met but where there is not a straightforward like-for-like matching between outgoings in any one year and the level of the licence fee. The advantage of smoothing clearly is that the increases which have to be faced by the public are not so sharp. A disadvantage is that you are talking about some form of borrowing to enable the smoothing to take place. Smoothing might make the question you have asked rather more complex because you might be looking at paying for these one-off costs over a longer rather than shorter period. But I think the principle, which is that one-off costs should be addressed and paid for through adjustments in the licence fee which are also essentially one off, must be right.

Q24 Chairman: The new services you are proposing to launch and have bid for as part of your licence fee, each one is obviously subject to the public value test. If any of those fail the public value test, will you therefore receive less from the licence fee, in that you will not have to meet those costs?

Mr Thompson: Where I want to begin with this question is to say that the BBC is charged with meeting a number of public purposes in the White Paper. Clearly one of the things I try to do with my colleagues is to come up with the best way of meeting those public purposes. One of the ways we do that is by proposing various services or adjustments to services or enhancements to services, or projects like, for example, the move of a significant part of the BBC to the North of England. Clearly it is possible that one of these projects or services will not pass the public value test, but I think what I want to say is that the underlying public purpose would still remain. I think it is for Michael now to address, but, in the event of a particular public purpose not being satisfactorily addressed by one proposal, it might be the Trust would say, "This is wrong, this is not the right way of proceeding, but you should consider alternatives." For example, if the governors or trustees decided that the Project North project did not represent good value for money or was not affordable, they might say to the management of the BBC, "We would still like you to look hard at ways of reflecting the whole of the UK and basing yourself more broadly across the whole of the UK. Come back with some alternative suggestions." Whereas in the case of the digital costs these are very closely associated and understood around a piece of public policy and national public infrastructure, in the context of the rest of the licence fee, which is aimed at the public purposes sector of the BBC, it is not quite so clear-cut because the underlying duty on the BBC Trust and on the BBC is to deliver the public purposes.

Q25 Chairman: That sounds very like you are saying that, if a service fails the public value test and you have been given money for it, you are essentially being told, "Okay, go away and think of something else you can spend the money on."

Mr Thompson: I do not mean it like that. If at any time the Trust believed that the BBC could adequately deliver all of its public purposes with a lower licence fee, then it should declare that and suggest the licence fee should be reduced. At the same time, if we take out-of-London and this idea of rebalancing the BBC across the UK as an example, I think many people, if one accepted this was a good thing to do, would say, "You should not abandon this entire policy just because one particular project has failed a value-for-money test." I think, in other words, that both halves of what is proposed are reasonable. Any project that the management comes up with should be put under intense scrutiny. I believe Project North will provide value for money and will, I hope, be affordable. I strongly believe it is something we should do, but if - and I understand this might happen - that was not the view of the Trust, I would not want to abandon the idea of adjusting the BBC out of London in other ways. In other words, I do not think it is simply "Let's spend the money anyway," it is about saying, "What is the BBC here to do? What are the priorities that licence payers have got the BBC to perform for them? Let's, in good faith, try to come up with the best ideas for doing that. If it turns out our ideas are not good enough or they fail because of excess market impact or whatever, let's reconsider."

Mr Grade: Chairman, may I add a coda to that, if I may speak on behalf of a Trust which does not exist yet. The Trust will have no hesitation, in representing the interests of the licence fee payers in returning money that it does not feel it needs.

Chairman: Thank you.

Q26 Philip Davies: In your licence fee bid you requested a further £1.6 billion of public money for quality content. Could you tell us what this £1.6 billion figure comprises and whether or not it is an indication that the current output from the BBC does not have good enough quality content in it?

Mr Thompson: Can I begin by itemising the £1.6 billion - and I can, by the way, provide precise figures to the Committee for this. There is just over £230 million on new content for our children's channels and children's services; just under £500 million on drama for BBC Television, with a significant proportion of spend on BBC One; just over £100 million on entertainment; £350 million on factual programming, focusing on factual programmes which build knowledge and are of educational value; £40 million on interactive services; £231 million on journalism; £30 million on music across the organisation; £8 million on sport; a specific £50 million on projects of learning across media but with a focus on new media, for young people between the ages of 16 and 19; and £50 million which is aimed at taking, subject to regulatory approval, some segments of the digital curriculum and making them available to young people on mobile phones. That is the breakdown of what is intended. It is worth for a moment looking more broadly at what is at issue. The White Paper which the Government has published is interesting on the subject of public service priorities for the BBC and in particular lays out a series of conditions for what the BBC's content should look like. This is paragraph 3.1.9 from the White Paper where it lays out the standards that all content from the BBC should meet: it should be high quality - the BBC's programming should be recognised by licence payers as standing out from the rest; it should be challenging; it should be original; it should be innovative; and it should be engaging - and there is some detail on each of those. The next paragraph, 3.1.10, goes on to say: "We confirm that all BBC content should display at least one of these characteristics." Historically, BBC channels have used, quite understandably, proportions of repeat programmes, of low-cost factual programming, acquired programmes to make out the schedule. We know from our own research, from research done by Ofcom, from research done by DCMS in the course of preparing the White Paper, that licence payers believe that the number of repeats on BBC Television should reduce. They are reducing; the public would like to se them reduce further. They believe we should be less reliant on certain kinds of low-cost factual programming. The public would like from the BBC more drama, more programmes of outstanding specialist factual quality - Planet Earth would be a good example of that or the recent Climate Season on BBC Television. In other words, they would like a much richer mix.

Q27 Philip Davies: In that case, can you give us an example of some poor quality content at the moment that you are going to take off to replace it with this high quality stuff.

Mr Thompson: I think a good example would be our current mix on our children's channels. Our children's channels have been very successful but they have a very, very high ratio of repeats currently. If you look at CBBs or CBBC you will see the same programmes around again. This £1.6 billion, which sounds like a ferociously large amount of money put like that, represents £700,000 a day. Replacing one hour of repeats on BBC One with one hour of drama costs nearly £500,000 a day. In the context of the children's channels, we would like to spend the money on more original British programming to put on CBBs and CBBC. Even spending this money, by the way, will still mean that there are significant numbers of repeats on these children's channels but we would like to shift the balance on those children's channels towards new original programming, away from repeats. We currently have a repeat rate of 8.9%, the annual report says, in BBC One peak time. We would like to reduce that - indeed, it is an objective from the Government to reduce that further.

Q28 Philip Davies: Do you think that giving Jonathan Ross £18 million contributes a lot to quality content from the BBC?

Mr Thompson: The public say they would like the best talent available on BBC channels and I do not apologise for the fact that, frankly, for decades the BBC has had to go out into the market to get outstanding talents. There was a time when Morecombe and Wise were, as it were, constantly getting phone calls from other broadcasters and being tempted across. I do not really want to get into individual artists because I do not think it is fair on them, but I think Jonathan Ross is one example of an artist who, when his contract came up for renewal, was very widely courted by other broadcasters. We know from this and other examples that other broadcasters were prepared and are prepared to offer substantially more to artists than they get from the BBC. Jonathan is an example but I can think of many examples of artists who have stayed at the BBC despite the fact that they could earn a great deal more elsewhere. Looking at the work that he does and the work that some of our other stars do across BBC Television and BBC radio, and the very high levels of affection in which they are held by the public and the extent to which the BBC has a duty to entertain people as well as to educate them and inform them, I believe that for absolutely key talent it is right that the BBC should go out into the market and get the best deal it can. I think we should always try to strike the best deal. Where we can encourage people to come to the BBC or stay at the BBC at lower than the market rate, we should do that. But a BBC that allowed itself to get into a position where it did not have entertainment programmes and it did not have big entertainment stars would be a BBC that many members of the public would be less satisfied with.

Q29 Philip Davies: Do you think all the questions that Jonathan Ross asked David Cameron met the high standards that the BBC expects from its presenters?

Mr Thompson: The Jonathan Ross show is a late night entertainment programme. Its audience is very familiar with it and with its style, which is comic, which is satirical. It is a programme which is broadcast way after the watershed. I believe that the entirety of the interview was absolutely acceptable from the BBC's editorial standards.

Q30 Philip Davies: In that case, why did you prevent Andrew Neil from broadcasting it on This Week, which is broadcast at a similar time of night?

Mr Thompson: We have a policy - which is not a new policy, by the way, it has existed for a long time with the Jonathan Ross show - of not allowing any other programmes, including BBC programmes, to show fragments of the programme out of context. We are absolutely happy for any programme to show that interview either in its entirety or in substantial measure. There is no blanket ban on this interview at all. It is standard practice for Jonathan Ross, if another programme wants to show it, that that is certainly possible and permissible but they need to show it in context.

Q31 Philip Davies: I do not know how many complaints you got about that. Perhaps you might be able to tell us.

Mr Thompson: The answer is: in the first two days after the programme, 11. Every complaint we take seriously. This is a very, very small number of complaints. Once it became an issue - the Mail on Sunday made a point of it - the complaints went up rather. I believe within a few days later the complaints were in, as it were, the low hundreds, the 300/400 range. I have to say, compared with, as it were, the 58,000 at Jerry Springer or even the 1,300 complaints for our marketing campaign about digital - our so-called faces campaign - these are, of course, to be taken seriously but relatively small numbers. It is worth saying that David Cameron himself is not one of the complainants. He professed himself happy with the interview and said he would be very happy to go back on the Jonathan Ross show again.

Q32 Philip Davies: In 2005-06 you handled 150,000 complaints, compared to 137,000 the previous year. You have just acknowledged that 58,000 of those were about Jerry Springer the Opera, so the underlying number of complaints rose by about 80 per cent. What do you put that down to?

Mr Grade: The governors have been very keen to improve the whole complaints procedure to the BBC. I am on record as saying that you can judge an organisation by the manner in which it handles complaints. The whole issue of the complaints procedures in the BBC has been improved. Not only have complaints procedures been improved but we have been encouraging, through the website and other means, the public to let us know what they think. This has in a sense been stimulated by us and by the fact that it is now much easier to complain to the BBC and we hope that the evidence is that complaints are dealt with much more effectively and efficiently and that people are not just fobbed off as they might have been once upon time.

Q33 Philip Davies: Now it is easier to do it, would you like to see a reduction in the number of complaints or are you still seeing more complaints as a measure of success?

Mr Grade: It depends on the nature of the complaints. We would have to analyse - as we do - the direction. The governors themselves do spot trends from complaints. Many of the complaints we have been receiving - and I cannot quantify it today but I am happy to do it some other time - has been about the lack of availability of digital services. That has been the single largest measure of complaint and the licence fee payers are very angry about that. A lot of complaints are related to that.

Mr Thompson: Certainly from my point of view I would much, much rather, if someone is unhappy with any programme or service, that they get in touch with us. If they write to me or to anyone to let us know about their unhappiness, we will look into it. The second point to make - and I cannot remember whether the exact numbers are given in the annual report or not - we get around two million contacts from the public every years. Complaints form a relatively small proportion of the contacts we get from the public. We get a large number of requests for information. We even get the odd compliment.

Q34 Mr Hall: Mr Grade, you said you would judge an organisation by the way it handles complaints and then you have gone on to say you would be quite happy to receive inquiries from people about programme making. I made a specific inquiry to the BBC about the programme The Secret Policeman. I asked whether the person who produced that particular documentary had any assistance in producing it and was I told that he had not and quite clearly he had. What is your view about the BBC using criminal elements to help in programme making?

Mr Grade: There are very clear guidelines that are abided by and adhered to by all the journalistic fraternity in the BBC. There are editorial processes; there are referral processes; there is an editorial guidance department who will say what is justified and what is not justified. This is a matter for the Editor-in-Chief of the BBC and the Director-General. Every case is different but the guidelines I think are pretty clear.

Mr Thompson: I believe The Secret Policeman was an outstanding programme and I do not believe - although some have tried - that anyone has been able to cast credible doubt over the core of what that programme had to say. It won many awards and I think rightly so. Investigative journalism requires specialist skills and requires people with a particular aptitude for that kind of journalism. Should we take great care to ensure that all the journalism which we broadcast is accurate? Yes, we should. Should we be careful about the backgrounds of the people involved in investigative journalism? Yes, we should. If you want to write to me, I can ----

Q35 Mr Hall: I did write to you. Mr Thompson, I had an extensive correspondence with you and in the end somebody under your management had to write back and say that I had been misled in the information I had requested. I wanted to know if the programme maker had used outside assistance and the answer I got back was that he had made it all on his own. Of course it was impossible for him to have put all the intelligence gathering devices in the room that he used at Bruche College on his own, and the company he employed I was interested in asking. This correspondence went on for a while, so I am very interested in the answer given by Mr Grade in relation to the checks and balances for programme making that clearly in this case did not apply.

Mr Grade: Forgive me, once you had exhausted your correspondence with the Director-General, were you advised that if you were not satisfied you could go to the Governors' Complaints Committee.

Q36 Mr Hall: No.

Mr Grade: And appeal to the Governors' Complaints Committee if you still wished to pursue it?

Q37 Mr Hall: This is long gone but this is just a point I am trying to make.

Mr Grade: There is no statutory limitation, so far as I know of. Muffin the Mule one might draw a line under!

Q38 Chairman: Could I return very quickly to the Jonathan Ross episode which Mr Davies was asking about. You will presumably be adjudicating these complaints, as the governors, will you?

Mr Grade: There are two avenues of complaint on matters of taste and decency, which I would assume would be the basis for a complaint of somebody who was offended by that interview. You can go to Ofcom, who took over the responsibility of the old Broadcasting Standards Council, or you can go to the BBC and come to the governors over or it, or you can go to both if that is what you wish to do. It would be inappropriate for me at this stage, in case we do get any complaints, to make any comment. The governors would have to reserve their position until ----

Q39 Chairman: You say "in case" - you have not had any complaints?

Mr Grade: Not to the governors yet. There may will be some complaints going through the editorial side of the house. If a complainant is not happy with the response that they get from the Executive, they have the right of appeal to the Governors' Complaints Committee.

Q40 Chairman: I can think of several colleagues of mime who, on hearing that answer, will be writing this afternoon.

Mr Grade: Fine. That is open to anybody at all.

Q41 Chairman: Mark, you will respond to these complaints to Michael robustly. You do not, for instance, accept the view expressed by our colleague Tony Wright in Parliament yesterday that the BBC seriously let us down by broadcasting this interview.

Mr Thompson: You heard, Mr Chairman, what I said, which is that, in my judgment, the entirety of the interview was within acceptable bounds, given the particular character of this programme. Complaints will first of all be addressed to BBC Television, which is the part of the BBC which broadcast the programme, but we will make it very clear to all complainants if they are not satisfied with the responses they get from there that they have recourse to the Governors' Complaints Committee, and, indeed, if the complaint is on a matter of taste and decency, as opposed to impartiality, they can also, as Michael said, go to Ofcom.

Q42 Chairman: But just to be absolutely clear, you reject entirely these complaints?

Mr Thompson: I believe that the interview as broadcast was acceptable, yes.

Chairman: Rosemary McKenna?

Rosemary McKenna: I do not want to get into internal Conservative Party politics!

Chairman: It was one of your colleagues who raised it!

Q43 Rosemary McKenna: Can I just say that I was delighted to hear what you said about the improvement and hoping to put additional money into children's programming. I am just back from a weekend in Tobermory with my granddaughter, who thoroughly enjoyed finding all the Ballamory houses, and it was a wonderful educational experience for her. I am putting in a bid for another round of Ballamory programmes, but apart from that are you planning more live children's on CBeebies because I think it is an excellent programme for children? Will that be part of your proposals?

Mr Thompson: This is really what this part of the bid, the £236 million (which is about £46 million a year or just under £1 million a week) is intended to try and mean that we can offer more live programming on CBeebies and CBBC, that we can do a bit more drama and entertainment but also more factual programming which we make around the UK but with a significant contribution from BBC Scotland. I was Director of Television at the BBC when we launched these two channels. We launched them and, to be honest, they are probably, of all our digital services, the ones that the public most quickly started using and thanking us for, but they were launched with what, by anyone's standards, were tiny budgets for origination and for making new programmes, so this part of the bid is intended to mean that we can make more. This is a good example. People sometimes say what would happen if the BBC does not get the money it has asked for. Being able to make more children's programmes is one of the things we want to do and clearly if we get a lower licence fee settlement, it is one of the things that we would have to look at.

Mr Grade: The feedback that the Governors get from their discussions with fee payers is that the licence fee payers hugely value dedicated children's services that are (a) free of advertisements and (b) free of wall-to-wall violent imported cartoons.

Q44 Rosemary McKenna: The free of advertising bit is very, very important to parents of young children. Can I move back to the licence bid and talk about the £1.4 billion required to cover an increase in "base costs" or super-inflation. How was that figure arrived at and what is driving that bid?

Ms Patel: Again, it helps to look at these figures on an annual basis. On an annual basis, we think our costs will rise above inflation by about £35 million a year. Half of that is due to staff costs, but our growth in staff costs is in line with the average growth of the economy but above inflation for people in the knowledge sector and the media sector. The other 25% is due to independent productions, where again the same underlying issues apply. There is a scarcity of supply of talent and creative talent and as the independent sector will get more commissions from the BBC under the Window of Creative Competition, we think their buying power will increase and they will be more attractive to talent, so again we believe there will be super-inflation there. The remaining25 % is on key talent, on programme acquisition and a certain amount of source rights. The important point to note is that whilst we have super-inflation and we incur it, we absolutely cover it by making productivity and efficiency gains so that we can pay for that super-inflation ourselves. That is a key point to understand on that. In looking at the BBC's requirement overall, 70% of the costed requirement can be funded from efficiency, from growth in the licence fee, from inflation and from commercial cash flows improving. If you take the content spend on our core channels - BBC One, BBC Two, BBC Three and BBC Four and the radio networks, excluding the children's channels - content spend will stay flat broadly in real terms because efficiencies will pay for better quality on screen.

Q45 Rosemary McKenna: We all agree that we want real quality from the BBC and I think this last year has shown particular quality, with Bleak House and sports coverage in general but certainly the World Cup and Wimbledon, but alongside what you see as quality, there are real concerns among people - and I have had correspondence about it - as to what some people perceive as exorbitant salary increases?

Mr Thompson: Just so I understand, in particular in terms of on-screen and on-air talent?

Q46 Rosemary McKenna: No, in terms of internal salary increases within the BBC. That has been raised by several people.

Mr Grade: If this is a remuneration issue I think I ought to answer.

Mr Thompson: Let Zarin start off talking about staff costs at large and then if you want to answer about senior executive pay, Michael is your man.

Ms Patel: Staff costs across the BBC account for about one-third of our costs, so it is a significant item of spend for us. Our policy on pay for content staff is that we pay just under the median, about 97% of the median salary, and for professional services and support staff about 98%. In terms of the annual growth in the pay bill we try and limit that to just above inflation, and that again is in line with what is happening to average earnings growth in the economy. We have a particular issue around knowledge workers and workers in the media sector where, as I said before, there is a dearth of talent and availability. That is on the generality of staff costs. If you take talent costs, as Mark said before, outstanding talent is scarce but we have the Jonathan Ross type issues in the very, very top sector, not in the generality of our talent. What we do there is we try and limit increases to inflation. Where there are increases above inflation they are subject to fairly rigorous scrutiny. What we can offer talent is the volume and range. We can nurture talent and bring it on and we can give them more freedom to be creative and therefore we are able to afford it.

Mr Thompson: If I can just emphasise, we believe that we have been pretty successful over the last year in limiting the amount of money that the BBC spends on its staff, both by reducing the number of people we employ - and we are in the middle of a very significant exercise in reducing the number of jobs in the BBC - but also, where we can, in changing the mix of employment so we have got a higher proportion of staff working on particular jobs at rather lower points of seniority than in the past. We believe that we have had a very significant success over the last couple of years in trying to control these costs and we intend to go on trying to do that. This is quite difficult and, understandably, it is an area which for trade unions and others, for reasons I entirely understand, is very difficult. You will have seen in the last few days again our trade unions proposing a ballot on strike action, with pay as one of the issues, but I am quite clear that if the BBC is to achieve what we believe we need to achieve, and we talked about quality content, but if you look at what the BBC is being asked to do and our plans for the next seven years, that we have to look at these issues and have to find ways of holding the amount of the licence fee we spend on staff, holding it down and where we can reducing it.

Q47 Chairman: Does not that apply as much to the Executive Board as to the rest of the staff?

Mr Grade: I think the whole issue of senior executive pay requires a degree of context. The BBC's pay policy is the same for everybody inside the BBC, which is to pay at or around the market median. These figures are calculated by the Pay Consulting Group who specialise in analysing pay rates across various sectors and they advise the Governors Remuneration Committee. We have been very clear and very transparent about what our pay policy is and our pay policy is to pay at or around the market median at all levels inside the BBC. Two years ago the Remuneration Committee was advised, and our Analysis Board, that the pay rates of senior executives of the BBC had, on average, fallen significantly behind the market median and indeed behind the market median by comparison with the rest of the BBC, comparatively speaking. That is to say it was around 15% below the market median. We announced at the publication of the Annual Report last year that our policy was to pay the market median. We made that very clear. We made it clear that the senior executives had fallen behind and that we were going to redress this anomaly across two years. We made the first adjustment last year and we made the second adjustment this year. Nobody questioned either at this Committee or publicly or in any way, shape or form that the Governors had not struck the right balance between running a public service in a market-place and applying the median principle to pay. The adjustments that you see in this year's Annual Report to the senior executives brings them to at or around the market median. In fact, on the latest data, and these numbers move all the time, on basic pay the senior executives are on average 4.5% above the market median. If you add the bonus to it, they are still 20% below the market median. So I think our pay policy is consistent and it is transparent. The fact remains that the BBC is going through an enormous period of change. It is perhaps belatedly so, given what has gone on in the private sector of broadcasting organisations over the last five years or so. The BBC has finally faced up to the fact that it has been grossly inefficient. It has set about a task of implementing value-for-money savings that will result at the end of a three-year process in £355 million cash savings which will be reinvested in services. It is a very, very difficult time for the BBC. It is difficult for the staff because they are having to deal with not just a reduction in staff numbers but transformational ways of working. At the same time they are required to improve the quality of the services that they are delivering for the licence fee payers. That takes leadership and it takes leadership of the highest quality throughout the BBC. We have to be able to attract and retain leaders who can carry out this programme. We saw this morning in the public sector a severe criticism in another area of the public sector where the leadership was in question in terms of transformational change and so on. We are not going to allow that to happen. People understand when they work for the BBC that they work at a discount to the market rate. Everybody at the BBC understands that. Most of the talent, if not all the talent understands that when you work for the BBC, you work at a discount. It is a public sector organisation, it is public money. The numbers are large but they are not large by comparison with what goes on in the private sector. We are well below the private sector.

Q48 Rosemary McKenna: I would like to ask Jeremy on exactly that point. Jeremy, you have vast experience in business and finance in the private sector. As a member of the Board, are you satisfied with the bid and all the processes that take place in that bidding process?

Mr Peat: I am not a member of the Remuneration Committee where the detailed work is undertaken, but the suggestions and the proposals from the Remuneration Committee come to the full Board. I personally am satisfied that the process that has been set up provides the data and information to enable the Governors to be sure that the proposals that come forward fit both with the policy that Michael has set out and with the data and information that has been professionally put together by the Heye Group, looked at carefully by our advisers where appropriate within the Governance Unit, so we are provided with full and proper advice to make sure we are implementing the policy that Michael has described. The other point I would note is that at the same time there has been a move to reduce the bonus potential of those on the Executive Board substantially, which the Governors believed was appropriate, and more appropriate on the level of bonus potential that is now available for a publicly funded organisation. So the overall balance, in my view, is sound and I certainly believe that it was appropriately examined by the Board.

Rosemary McKenna: Thank you.

Q49 Philip Davies: Just on this point though, you compare it with the private sector; is that a reasonable comparison? In the commercial broadcasting sector there is fierce competition, people have got to earn revenues, they have got to earn advertising revenues. The BBC is completely immune to many of those commercial pressures.

Mr Grade: That is why the pay rates are below the top rate.

Q50 Philip Davies: When you are doing this comparison who are you comparing with and why do you think they are a fair comparison, when the BBC is in this semi bubble of a privileged position in the market?

Mr Grade: Because that is the market-place in which the talent operates. The last four Chief Executives of Channel Four have been recruited from the BBC, myself included. That is the market in which the talent operates, so we look at that market. We also look at the public sector and there is a Chief Executive in the public sector earning a lot more than the Director General.

Q51 Philip Davies: But not many.

Mr Grade: I only know of one.

Q52 Janet Anderson: Michael Grade, you said earlier that it was very important to retain public support for the licence fee, and I would agree with you. I hear what you say about the market median but to my constituents in Rossendale and Darwen these are very, very big figures indeed and they do find it very difficult to accept. Do you think this will help or hinder retaining public support for the licence fee?

Mr Grade: I think if the matter was presented fairly, the public would understand that it is a privilege to work for the BBC. Everybody who works for the BBC understands that. That is why people who work for the BBC are prepared to work for less than they could easily command in the private sector. I think everybody understands that, although the numbers are high because that is the nature of the media and there is a lot of money in media and intense competition and so on, which drives the price up. I think if everybody understood that and the message got out, perhaps from here, that people do work for a considerable discount inside the BBC to what they could earn, I think people would understand. They may not like the fact that somebody running a department of the BBC can earn this kind of money, but they could earn an awful lot more and they choose not to.

Q53 Janet Anderson: As Philip Davies says, you do have the comfort of the licence fee. If you did not have that and you had to operate more as a commercial operation, then maybe your Executive Board could earn even more.

Mr Grade: That is the justification. If you take the other "public sector broadcaster", namely Channel 4, which has to earn its own revenue, salary levels there are higher than the BBC's. That is because although they are a public sector company, nevertheless there is a bottom line and they are rewarded ---

Q54 Chairman: The senior executives of Channel 4 are not paid more than the BBC. I had a look at the Annual Report before I came down and they are actually below in many cases.

Mr Grade: I am not sure they are, Chairman. If you start with the Chief Executive of Channel 4 ---

Q55 Chairman: It is an embarrassing subject to get into but if we do start with the Chief Executive, the Chief Executive is below.

Mr Grade: I disagree, Chairman.

Q56 Chairman: I actually have it with me. The Chief Executive's salary is 500 ---

Mr Grade: £416,000 Chairman. £416,000 and his bonus was "£270,000 of which he deferred £150,000 into his long-term incentive scheme, to which he was entitled, but he chose to defer it into his long-term incentive scheme, which makes 686 against 609 for the Director General of the BBC. It is a matter of record.

Mr Thompson: I am happy to add, I was previously Chief Executive of Channel 4 so I am fairly familiar with the particular comparisons. I was very clear that although Channel 4 is a public corporation, just as the BBC is, and although most people would say it is a rather smaller broadcaster and the responsibility of the Chief Executive is somewhat lower, nonetheless, I absolutely recognised and also accepted that in moving from Channel 4 to the BBC my earnings potential was going to be lower and was going to be constrained. Of course, there is always a debate about how much more constrained should it be but, again, I am not sure the public understand just how stark the difference is, particularly in the higher and more senior jobs between the commercial sector and the BBC. I do not know if the Chairman has ITV's Annual Report but the Chief Executive of ITV earns three times what the Director General of the BBC earns.

Q57 Chairman: Maybe his job is slightly less secure.

Mr Thompson: If I may come back to a point that Mr Davies made, actually if you look at the history of previous people to occupy my post, you will find it is not a particularly secure one. I think the current run rate is 50% who have been in various ways despatched rather than gone of their own accord. The comfort and security you are talking about does not always feel like it when you are sitting in my chair.

Mr Peat: I do not think anyone should underestimate the challenges that the Director-General faces. Having sat and watched them for the last 18 months, they are not insignificant.

Q58 Adam Price: I think it is an extraordinary line of argument that we heard from Mr Grade there that the public sector in general should try and ape the hyper-inflation that we see in private sector salaries. It would be interesting to see if Mr Peat thinks, for instance, we should pay the Governor of the Bank of England a similar salary to the Chief Executive of HSBC. It is not sustainable for the public sector. It would bankrupt the public sector and we have to, of course, emphasise that public service clearly creates a wholly different context. When we are talking about the super-inflation in the independent sector, who is driving the super-inflation in the independent sector? It is taxpayers' money that the BBC are putting into the independent sector. Are you not creating a rod for your own back in promoting this hyper-inflation in the media sector?

Mr Grade: I do not recognise that as my argument which you characterised in your opening few sentences. The point I am trying to make, obviously with little success, is that people do work for less for the privilege of working for the BBC. They do work at a discount to the market. Nevertheless, the Governors of the BBC (and in future the Trust) have to balance retaining great talent working in the public sector but operating in a very competitive and overheated market. The competition in the private sector is incredibly fierce. There are people fighting for survival out there and flashing cheque books for talent that the BBC either in an executive capacity has grown itself or indeed on-screen talent that the BBC has taken from obscurity and turned into household names. It is certainly not the BBC in my experience, with some knowledge of these things that is fueling the inflation, not at all. Let me be very, very clear, I will say it one more time: people work at the BBC for less money than they could command in the private sector. There is no question about that and that is as it should be.

Adam Price: Long may it remain so.

Chairman: Moving on, Helen Southworth?

Q59 Helen Southworth: Can I ask you about your plans to increase the sense of connection between the BBC and its audiences. You are seeking an additional £641 million for "new local investment". What are the specific proposals that you have got for that money?

Mr Thompson: If you will indulge me I will go through the list on the £641 million systematically, and again I am very happy to provide this information in written form afterwards for the Clerks. A significant part of it, over £300 million, is around the specific out-of-London project in Greater Manchester and Salford, as you know, is now the preferred bidder. We have also got a proposal for local TV. We have been running a limited pilot which will come to an end shortly in the West Midlands, a full roll-out of that. This is the idea of effectively ten minutes of TV or audiovisual news to go alongside local radio and our local websites to enrich the websites and also potentially deliver by digital satellite and if possible by other means, which would enable us to make our local offering in England multi-media but would also enable us to offer for the first time a layer of regional coverage in Scotland, Wales and Northern Ireland. That is a good example of what the Chairman was talking about earlier. That is an example of a service which will definitely need a public value test in due course if it becomes a proposal from the management. We want to spend £49 million filling in gaps in our current local radio provision. We know that in Cheshire, Dorset, Somerset and we believe also in Bradford, there is quite strong demand for local radio. Our current map of local radio does not yet achieve that. We believe that the pattern of open centres and so-called digital buses that the BBC launched - and I was involved in its launch some years ago - has been very successful in driving understanding amongst the public about digital and therefore take-up of digital media. We want to extend that and spend about £5 million a year, about £29 million over the period on that. We want to launch a new television region in England around Milton Keynes. We have done a lot of work over the last five years improving our coverage to the very large population centres in the greater South East of England, launching a new region in Kent and delivering a sub-opt (so-called) a brief television news service as part of the 6.30 programme from Oxford. That has enabled us to get our London programmes to be more relevant to people broadly within the M25. North of London there is now in central England a significant and fast-growing population centre around Cambridge and Milton Keynes which does not really look to London or Norwich, and we would like to create a new television region there. It would be about £10 million but £39 million over the period to create that. And finally, we would like to make local radio available on digital satellite. This will enable people to listen to their local radio via their television even if they were not in their own region. That will cost £20 million over the period. So it is a range of measures over and above some other things we are doing. One of the things we are dong which does not require more money is shifting network production out of London to the rest of England and out of England to Scotland, Wales and Northern Ireland. There are some things we can do about improving our relevance and our immediacy to audiences around the UK which we can do over and above the money in this bid.

Q60 Helen Southworth: The establishment of a cutting edge, low-cost digital working environment in Manchester.

Mr Thompson: Sounds good, does it not!

Q61 Helen Southworth: That is of very, very considerable interest right the way across the north but the other regions as well. Can you expand on your commitment to making that happen?

Mr Grade: Should I explain the constitutional position as we have it presently. The Governors have at initial stages approved, in principle, the idea of investment in the North West to follow and to give the English regions a bit of a catch-up given the rate of investment that has gone into Scotland, Wales and Northern Ireland over the last few years, and not before time. We have approved that in principle. There was then serious research into finding a site and putting a plan together. We are now at the point where Salford has been approved by the Board of Governors as the preferred bidder. The Executive is now able to nail down finally its business plan for moving to the North West now that it has an actual site and a reality which it can cost. That plan will then be scrutinised by the Governors, with help from Deloittes, and a final business plan will be arrived at. The Governors then have two decisions to make. Firstly, does that represent value for money? That is the first decision. Can we justify spending that amount of money, whatever it is, on an investment in the North West? If we decide and we can demonstrate that it is value for money, the last decision is can we afford it? That process will hopefully take place over the next few months. The final decision will obviously have to depend on the licence fee settlement because you cannot judge whether something is affordable until you know how much money you have got.

Q62 Helen Southworth: It seems absolute common sense that an establishment within the North West region is going to be far better value for money than an establishment within London. What are the issues about? Is it not common sense? Are there not going to be London premises released?

Mr Grade: Of course and there is a detailed review going on presently of if we were able to make the Salford move what are the savings on the London property portfolio and the general property portfolio of the BBC? That is work that is now underway which the Governors have asked for. It is all part of the dynamics of whether this is affordable. Is this value for money? Obviously it would release a number of properties in central London.

Q63 Helen Southworth: One of the things I was touching on there is something that I am sure is very familiar to you, that Salford is in many ways a disadvantaged community and these things are reflected in such things as property values, but is that not also part of the reason why the BBC has an opportunity here to reach out to disadvantaged communities; it has a corporate social responsibility?

Mr Grade: It is a huge opportunity and I do not want my note of caution to be interpreted as cold feet over this at all, but we have a responsibility for the licence fee payers' money and to ensure that it is spent wisely, and we are not yet at a stage where we can honestly sign that off and say that we believe this is value for money and that we cannot afford not to do it, which is the position that I think all the Governors would like to get to. We are not at that position yet because we do not have final business plan because we have only just selected the site.

Mr Peat: If I could add something, I think the complexity of the project and its full ramifications again should not be underestimated. It is not just the implications for property; it is the implications for staff and what changes are going to take place. That is why it is appropriate to have this period of exclusivity when the Salford option can be assessed in full with the assessment also being added to by the work that Deloittes will undertake for the Governors. So the Governors will be in a position to look at all the ramifications and come to a reasoned view on value for money. This is not something that is straightforward. It is not just a matter of looking at the financial cost of the new building and its operation. It is a very complex set of interactions which do need to be looked at extremely carefully.

Mr Thompson: I am not allowed to be enthusiastic about this project but I think it is a fantastic opportunity potentially. One of the reasons that Salford is the preferred bidder is because of the vision that they brought to the table. If you like, people sometimes say why did this project begin costing X and end up costing Y? When I arrived at the BBC I inherited a great vision for the BBC in the North West but that was very much on its own. What has happened is we found in working with the bidders, in particular working with Salford, a much more collaborative approach to this where the BBC is part of the story and potentially, hopefully, a bit of a beacon which brings other people and other parts of the creative industries in as well, but where the thing is achieved in partnership with key local stakeholders - the North West Development Agency, Salford itself of course, other broadcaster facilities and other providers - with a shared goal of creating a "media city" which potentially could be a magnet for investment and for the building of the creative and service sector not just in Greater Manchester but in much of the North West and, I hope, with some effects in the rest of the North of England. What I would also want to say is I think it is quite important that as we go forward that out of London does not just mean what we do in Greater Manchester but that we think hard about what the opportunities are for improving network production in the North and in the North East as well. This needs to be part of a bigger story. I think in the long run we will deliver programming in a new way and at a lower cost than we could achieve in London. Over the period of this licence fee, the transitional costs and the costs of achieving it mean that although the cost has come down because of the solution that we have found, it will still cost excess money, as it were, over this licence fee period.

Q64 Helen Southworth: The opportunity for stimulating creativity and cultural excellence is available to you, and I think one of the key points right across the North West region is indeed the opportunity to develop our skills and our creativity, the assets that we have got there that need this pivotal decision.

Mr Thompson: This is a part of England that is full of talent and it has got a fantastic track record. To that extent no-one gives lie to the suggestion that the BBC has discovered or found creative talent in the north and particularly in the North West. Some of the best programmes ever made in television were made in the North West. In its heyday Granada and indeed the BBC working in the North created some fantastic output. The reason I am so straightforwardly enthusiastic about this - recognising of course that it has got to pass these hurdles before it can go ahead and it needs to be properly and rigorously tested - is that I believe over time it will change the way the BBC is considered by our licence payers in the north. I do not want to claim this is going to happen overnight but when you start routinely expecting to see children's programmes with audiences which come from the north and presenters which come from the north, the pride I hope people will take in what is being made in Salford and other centres the BBC has got in the north will slightly change the terms of the debate in terms of what kind of institution and what kind of service the BBC is and what kind of service it provides for the British public.

Q65 Helen Southworth: Can I ask you a question about involvement with the independent sector. Within the Nations and Regions part of the Annual Report you have referred to your aim that by the end of the next Charter period the BBC plans to spend more than £1 billion a year on programmes made outside London which is going to increase by more than a third. How much of that will be in the independent sector?

Ms Patel: At least 25% because that is the target and anywhere between 25% and 50% depending on how the Window of Creative Competition will work.

Q66 Helen Southworth: Are you going to specifically split the target for the outside London independent sector?

Mr Thompson: I think that the modelling we have done would suggest that the current overall split in the Annual Report between in-house and independent is 31% independent; the balance in-house. I would expect the spend mix to favour the independent sector more, typically. Do you see what I mean? I think the mixture of in-house and indie will be slightly more towards the independent sector outside London than in London and I expect that trend to continue. The proportion of BBC commissioned spend with the independents has grown somewhat over the last few years. If you recall, it is not many years ago that the BBC failed to achieve the statutory 25%. It is now comfortably over 30%. We must see how the Window of Creative Competition develops. I not know what the future proportions are going to be - and I should not know because this is not meant to be a managed economy, it is meant to be a meritocracy where the best ideas get through - but all of our modelling would suggest that the balance will be slightly more towards the independent sector outside London than it is in London.

Q67 Adam Price: You note in the Annual Report on audiences that in network news coverage the University of Aberdeen found that in the period that they studied only 2% of network news stories came from Scotland, and I suspect the figure for Wales was even less. Do you think it is acceptable that Wales and Scotland, which have 15% of the UK population, have such a tiny proportion of network news stories?

Mr Thompson: No, our belief is that overall our track record post-devolution in covering the UK is a good one and, as you know, both BBC network news and indeed our News Hour including Wales Today in Wales is one of the highest-rated news programmes anywhere in the UK. Network news particularly and Wales Today perform very well in Wales. I believe that our coverage both of stories in Wales, Scotland and Northern Ireland but also our attempt to try and cover, as it were, UK stories but sometimes reflecting on either differences between the arrangements in different parts of the United Kingdom or simply to take examples drawn from the whole of the UK, England and the nations, is pretty good. I also believe that our track record in terms of accuracy, understanding the jurisdictions and where different things apply (in different areas of social policy for example) across the UK is pretty good, but I would be the first to say where we can we should make it better. Where we can reflect the lives of every part of the UK, of course to include Scotland and Wales, better, we should do so.

Q68 Adam Price: Will you give a commitment to increase that 3% because it is an absolutely appalling figure, surely? Why are we being served up as licence fee payers in Wales and Scotland a constant diet of stories about English health and education policy that has absolutely no relevance to us in Wales and Scotland? Either give us our own 6 o'clock service in Wales and Scotland or at the very least ensure that there is a higher proportion of coverage of news stories on Wales and Scotland on network news.

Mr Thompson: I think you have to be very careful with the numbers. A very large proportion of news content at the moment is absolutely appropriately and properly about international events. When we cover an earthquake in Pakistan that is a percentage of our news figures. I do not think you can take the figures which are about total news and simply apply them. If you are talking about our coverage of home policy, I believe the percentages will be much higher but what I am prepared to do of course is to go back and talk to my colleagues in news, put the point you made to me and we will discuss it.

Mr Peat: As the National Governor for Scotland, obviously this is the type of topic that I discuss regularly with the Broadcasting Council for Scotland and with licence fee payers in Scotland and indeed the Governor for Wales and the Governor for Northern Ireland and the Governor for the English Regions. I would emphasise two points from what Mark Thompson has told you as being exceptionally important, in my view. One is the accuracy of reporting on devolved issues. I do not think there is anything that aggravates licence fee payers in Wales and Scotland more than inappropriate reporting of policies without the accurate description of which nation or set of nations those policies apply to. I think that is a first requirement for the BBC and news reporting to get that accuracy. The second requirement, in the devolved society within which we now all live, is to attempt wherever appropriate to enrich news reporting by bringing in lessons learned or policies under consideration from the different nations, so when a story is being told that may start with an issue of health in England, if there are interesting aspects of equivalent policies in Scotland or elsewhere which can be brought in to help develop a news story to add value to that news story, then I think that is thoroughly appropriate. I have heard and seen some very good examples recently on smoking bans, on licensing laws and the like where that is happening more and more. I am delighted that the BBC Executive is developing a module for all news staff on reporting within a devolved environment which will be rolled out to all BBC news staff. I think it is long overdue that we make sure that all our news staff are fully understanding of the devolved society in which we operate, so that will help to add to the accuracy and to the enriching that is possible. Also with the number of channels that are now open, with News 24, with the web broadcasting, the opportunity to get that broader story across in so many ways is there. It is something that I, along with the other new National Trustees, will continue to watch and the audience councils across the UK will, of course, continue to watch and we will want to see full accuracy, we will want to see more and more enriching of stories and that has to be appropriate within the society in which we all live.

Adam Price: Thank you.

Chairman: Alan Keen?

Q69 Alan Keen: I sometimes feel that we should look at some of the more boring aspects of this, but I will only be very brief as there are a lot of important things to come to yet. You are changing the system of assessing overheads against content. There is a full report on it and it looks as if you are intending to drop that in future.

Ms Patel: When we first set the current target of content/non-content, our intention was very much to focus on one single figure so the whole organisation was focused behind reducing overheads, and we made significant progress, but going forward and as part of the value-for-money programme we are looking at some of our infrastructure and support costs - for example, property, technology, finance, HR, marketing - and say who is best able to influence those. If you take property, a programme maker on the ground cannot really influence the cost of property because they are big infrastructure issues so we are going to centrally manage a lot more of these infrastructure and support costs so that we can standardise processes across the place. I think that requires a slightly different measure. What we are going to do is measure in a more granular way and three things will be measured. First of all, how do we utilise the assets? How efficient is the underlying process? For example, in finance, how quickly do we pay supplier invoices compared to the best in the market place? The third is head count and the fourth is cost. So there will be a much more granular method of reporting, much more ability to benchmark against best practice, so that you can see the cost across the BBC rather than seeing it fully absorbed in programmes. That is a boring accountant's answer to your question.

Mr Thompson: If I could interject. I would not want to suggest it was a bad idea a few years ago to focus on this headline number. I think there was a moment where actually saying the headline number should come down, let us focus on getting it down, was probably the right thing to do. We are now at the point of getting to the next stage, it is better to take off individual cost areas, benchmark them and try and find particular ways of reducing them. In a sense, it is the end of one chapter and the start of another one. It does not mean that what was done was bad; at the time it was probably the right thing to do.

Q70 Alan Keen: Am I right in saying that really because the BBC is a high-profile public body people like us ask questions about headline figures, rather than a commercial company which would be cross-examined on that basis of them looking sensibly at their costs all over the place without trying to impress anyone with them.

Mr Grade: It is very important in the BBC that there is an on-going incentive to efficiency. It does not have a bottom line. There is no profit bottom line return on capital, the traditional means of measuring the health of the business. It is very important therefore that the incentive to efficiency is built into the BBC's business plan. It is built into the licence fee bid and that will be subject to considerable scrutiny. Once that number is finalised, I have asked on behalf of the Trust in future that the NAO come in and measure our performance against that efficiency target on an annual basis.

Chairman: Helen Southworth?

Q71 Helen Southworth: Are you satisfied when you are looking at the willingness to pay tests for the licence fee settlement that your methodology was sound enough?

Mr Peat: If I could just make a first comment on that. I think that what the Governors wanted was, again, an independent view on this area and one that was as up-to-date as it could be, so we made publicly available an independent report by Professor Barwise about the public's opinion of the BBC licence fee bid and its implications for willingness to pay. I think the two conclusions that I took very positively from Professor Barwise's work were first the more customers knew about the BBC and the BBC's proposed services the more positive their attitude. That was very welcome. Secondly, when asked to think about and if really forced to choose between paying the licence fee and losing BBC services most licence fee payers would, if they had to, pay substantially more than the current £10 a month for the existing BBC. There is a great deal more detail in the work. We got this independent assessment of all the elements of willingness to pay which had been undertaken for the Executive and for the Governors and we put into the public domain the report that Professor Barwise, an acknowledged expert in this area, provided to us.

Q72 Helen Southworth: Were people given the option of having a lower licence fee and a reduction in services?

Mr Grade: The objective was two-fold. Firstly, it was to test the research that the management had done that accompanied the original bid but, more importantly, it was to test the public response in terms of their willingness to pay, once they knew what it was, once the bid was published; what it was they were being offered, were they willing to pay. I understand from last night's excellent debate that the Department is conducting its own willingness to pay research too as part of the licence fee discussions so there will be further research available on this topic.

Mr Thompson: I think the answer to your specific question is that in the Barwise methodology the respondents were given the choice of losing services rather than paying a licence fee or paying a bigger licence fee, so the option of paying less was, I believe, put to them.

Q73 Chairman: Are you not slightly worried, going back to the point about targeted help, that that is going to represent a significant increase in the licence fee? It may actually affect willingness to pay. It may jeopardise the BBC licence fee public support because you are being expected to meet costs which are central to the BBC.

Mr Grade: If that were the case then we would object quite strongly and, as I said in my earlier remarks, we set two conditions for supporting the use of the licence fee for targeted help. One was that we did not wish to do so at the cost of reducing existing services that licence fee payers expect; and secondly, we said that the cost of it would not be such that it would bring the licence fee into disrepute. If it did I think the trustees or indeed the present Board of Governors would object very strongly.

Mr Peat: It is clear from Professor Barwise's work that people are more evenly divided when asked about a licence fee supplement to pay for this targeted help. It clearly is an issue.

Q74 Chairman: You also referred a little earlier to inviting the National Audit Office in to examine and make sure that you are providing efficiency and value for money. You will have heard the continuing demands from Members of Parliament that the NAO be given full, unfettered access. Are you still unwilling to allow that?

Mr Grade: There is a serious issue of principle here which is that the independence of the BBC is jealously guarded on behalf of the licence fee payers. In every piece of research, not least the most recent research which the Department itself did in the run-up to the Green Paper, the clear message from the licence fee payers is that they want a very independent BBC. The BBC has always resisted the proposition that you have espoused, for the very reason that there is a risk that it could lead to political interference in the running of the BBC. That is straightforwardly the issue and I think we will always resist it. We are very happy to work with the NAO and we value greatly the projects that we do together. In fact, I was very happy and it was the Board's suggestion, that the issue of efficiency going forward is such a crucial part of the bid. 70% of the new proposals in the published bid are to be funded out of efficiency savings. We cannot afford to slip up in our delivery of those efficiencies. It seemed to us as a Board that the right people to come in and look retrospectively each year at how we have performed against that efficiency so there is no misunderstanding is the NAO. We were happy to invite them in on that basis.

Q75 Rosemary McKenna: Can we move on now to the new services and the public value tests to be applied. It is still unclear as to how many of the new services will qualify for the conduct of the public value and market impact tests. Have you made any further progress on deciding which pilots will have public value tests performed and which will subsequently be defined as new services with individual service licences?

Mr Grade: It will be for the Trust to determine when a public value test is required, but it is pretty well laid out in the White Paper, the Charter and Agreement that for new services or for significant changes to existing services we must apply the public value test. I think it is pretty straightforward. I suspect the rule will be if in doubt you do a public value test. It is very, very important in the early years of the Trust, after all this upheaval and fundamental change, that the BBC wins the trust and confidence of the private sector with which we share this media sector. It is very, very important that we win their confidence and trust. That will mean that if we are ever in doubt we will certainly go for a public value test and it will be very transparent and the judgments that the Trust makes at the end of that full process will be published and will be evidence based.

Q76 Rosemary McKenna: And if, say, Ofcom disagree with you, what is the process then that the BBC Trust goes through?

Mr Grade: In the unlikely event (but it is possible I grant you) that there is a real disagreement between the Trust and Ofcom over the interpretation of the market impact assessment, I think the Trust would have to have some pretty overwhelming arguments to, as it were, not overrule Ofcom but to ignore Ofcom's market impact assessment. The market impact assessment will be weighed against the weight of the public value created. The other side of the balance sheet is the public value created. Undoubtedly, there will be some difficult calls. You could see a situation where in legal terms it is 50/50 and the Trust will have to make a judgment, but the judgment will be transparent, the private sector will have been fully consulted, a market impact assessment will have been gone through, and I have no doubt that the Executive is going to be very disappointed on occasions where we feel in the end we have to make a fine judgment. Hopefully, in most cases the judgment will be very clear but in those cases which are fine judgments, I think the Trust will weigh very heavily its responsibility to licence fee payers who enjoy not just the BBC's services but the wide range of choice that is available to them as licence fee payers from the private sector of the media. They are consumers, they are not just licence fee payers; they enjoy the plurality. We have a responsibility not just to them as licence fee payers but to the individuals not to interfere in any way or put at risk the choice that they are able to enjoy. That is a significant change in the outlook of the governance of the BBC, that recognition of the licence fee payer as a consumer of a wide range of media is a significant change, and we have to take that into account and that will weigh most heavily with the Trust.

Q77 Rosemary McKenna: You referred to the conflict between the private sector and yourselves and how important it was to establish a better relationship.

Mr Grade: Absolutely.

Q78 Rosemary McKenna: I think a bit of work has been done already. During the consultation process on the BBC Charter, that was proven by the numbers of commercial media who came along and said yes, there had to be a BBC, but to take that forward, what is the consultation process with the private sector, with the commercial sector? Is there a consultation process and what is it?

Mr Grade: There is a joint steering committee of Ofcom and the BBC who will set out the terms of reference for the market impact assessment. Ofcom themselves will do the work and produce the market impact assessment and it will be their responsibility on the market impact assessment to consult and take evidence from the private sector or any stakeholders involved in what it is the BBC is proposing.

Mr Peat: If I may just add, just to re-emphasise, at the end of the day we are going to be talking about a judgment call. We are not going to be talking about nice, neat pound signs in a cost-benefit analysis. We are talking about judgment. I think it is hugely important that the terms of reference for any study are set out in such a way that one can acquire the information on the public value assessment and undertake the market impact assessment in such a way that the best informed judgment can be taken, and throughout the process I think that the Trust will wish, as I am sure Ofcom will, that one has the highest level of both transparency and consultation so that the judgment is made on an informed basis and seen so to be made.

Mr Grade: Two quick points, if I may. The Trust will of course consult widely on the whole concept of the public value test once we have got the mechanics of it bedded down. We will consult widely before we actually get into it as a Trust.

Mr Peat: We have already considerably consulted.

Mr Grade: But I think that will continue --- and I have lost my second point.

Mr Thompson: If I could very very briefly comment on a management point while the second point re-emerges. It is also worth saying from the way we are trying to approach the future that where we can we would like to forge partnerships with colleagues in the commercial sector to achieve the BBC's public purposes. I recognise this is not always possible and sometimes there will a set-to about whether the BBC should do something or not. For example, as we think about this local TV idea, there has been some very vocal scepticism expressed by local and regional newspapers, as it were, at the level of national organisation. On the ground, we have been trying to work and have been working rather effectively with individual local newspapers and one or two newspaper groups. Certainly in my vision of how that local TV project will work in the future, I can see significant investment into journalism in the local and regional newspaper sector, in cross-training and linking from our sites to local newspaper sites, and all the rest of it. We believe that where we can forge effective partnerships and where we can help in a broader sense grow a market, that is much better than the BBC thinking it needs to be entirely on one side and entirely separate. There are editorial issues in relation to that, but whether you are talking about PACT and the independent producers or whether you are talking about other media players like local newspapers, I would like to see a future where there is much more frequent partnership between the BBC and the rest of the media than there has been in the past.

Mr Grade: I am sorry to say I have remembered my second point --- and it is a crucial point really!

Mr Thompson: Has it gone again?

Mr Grade: No, no, I am just waiting for the laughter to die down! I think it is worth stressing at this point the radical nature of this approach from the previous way that the BBC has dealt with the private sector, which was to ignore it totally. Decisions on new services and significant changes to existing services would have been made in the privacy of the Board of the BBC Governors by the Board of Governors presented with a paper from management, no external scrutiny, no Governance Unit, no independent advice. That decision would have been made and a new service or a significant change to an existing service would have been embarked upon before anybody knew what had happened. There was complete disregard for the private sector. That is not overstating how it used to be and if you look at that way of working against the new governance rules and structure of the BBC, with the public value test, service licences, and so on, what it represents is truly a revolution in the way that the BBC is going to manage its relationship with the private sector in the interests of the licence fee payer, which we now recognise has a wider interest than simply the BBC in the choice that is presented by the whole of the sector and we must not interfere with that.

Q79 Chairman: You said that the question of a new service or a change to an existing service would be straightforward and that would require a market impact assessment and public value test, but actually it is not straightforward, surely, because there will be a lot of argument about what consists a new service, what consists a change to an existing service? To take just one example, the proposal that the BBC should launch a new teen broadband service; is that going to be subject to a market impact assessment and a public value test?

Mr Grade: If it is a new service, yes.

Q80 Chairman: Who will determine that?

Mr Grade: The Trust.

Q81 Chairman: If a commercial operator comes and says, "We think this represents a change or we think this represents a new service," will you nine times out of ten, 99% of the time accept that and conduct a public value test?

Mr Grade: If the evidence is there, absolutely. Every decision that the Trust makes will be transparent and the judgments they make must be evidence based. That does not rule out judgment but at the end of the day it must be evidence based.

Q82 Chairman: But you will lean strongly towards conducting tests when asked to do so?

Mr Grade: Certainly.

Q83 Chairman: How many tests do you expect to be undertaking roughly in the next couple of years?

Mr Grade: It is absolutely impossible to forecast.

Q84 Chairman: Tens?

Mr Grade: It is impossible to forecast.

Mr Peat: I do hope, Chairman, that when we come to implementing the public value test that there will be scope, and this will be a matter to discuss with Ofcom, for varying the degree of intensity of the market impact assessment and the PVT that is undertaken, according to the circumstances. I am an economist by trade and I am aware of how complicated and time-consuming these tests can be. It is very important for the major decisions where there are major market impacts that they should be so intensive, but I think there may be instances where the market impact is deemed to be relatively limited, and I think one has to be able to vary the intensity of the examination to take account of that. We do not want to be bogged down in unnecessary work.

Mr Grade: But the check and balance will obviously be the collaboration which I am sure will be very fruitful with Ofcom.

Q85 Chairman: There is concern that trials and pilots in themselves are going to distort the market. The Director General has very recently announced the extension of the podcasting trial. At what point do you conduct a market impact assessment there?

Mr Grade: Every pilot is different. Some are closed pilots; some are open pilots. Each one is of its own kind and they have to be looked at on a case-by-case basis. The principle that will drive the decisions of the Trust - and I would not rule out doing a public value test on a pilot. - the overriding consideration for the Trust is that the BBC does nothing in the way of new services (and that includes pilots) that could potentially damage the choice that is available to consumers. That will be the overriding principle that will guide the Trust through its decisions in this area.

Q86 Alan Keen: The reason why the BBC, although it is a public body, has been so successful and one of the reasons why I like it so much is that it has acted like the private sector. It has made decisions in private. It has been cut-throat. Do you not think these changes are going to alter the whole culture of it and make it like the Health Service where you are hamstrung by democracy and it is going to be so slow to take decisions that we are going to bury it like other public bodies?

Mr Thompson: Can I have a go at that. Clearly that is a risk in this mechanism that it is too officious, it is too rigid, it is too slow, that it will impair the BBC's ability to evolve and offer the best possible services to the public. I have to say firstly I think that the interest of other people, other commercial players in understanding what the BBC is proposing, having a chance to be consulted, an objective market impact assessment carried out by Ofcom, all of these things, I understand why people want them, I understand why the Government has gone for this system in the White Paper, and I think it will build confidence. I hope there will be a point where the whole process becomes rather more routine and it becomes one of the things that happens. Just a couple of points on trials. Firstly, a trial with terms of reference already agreed with the BBC Trust is itself quite an important part of the evidence gathering you need to do the public value test and indeed the market impact assessment, so although one takes the point that one must look quite closely at, as it were, prima facie evidence that even the trial itself will have a very significant market impact, one does not want to be in a position where you cannot do a trial without a public value test which itself requires a trial as part of its evidence gathering. What I want to say is that we now control trials and pilots very closely. We have a meeting once a month where we update where we are with trials. It is true that there will be occasions where we believe we should extend a trial. The Chairman mentioned podcasting. There are a number of things we want to explore such as chapterisation in podcastng and we want to look at some different technical formats and Codex in podcasting. We also want to explore downloading in podcasting at different bit rates. There are a number of particular things we want to try and do but in the case of podcasting we will continue to restrict the content available to podcast to 50 hours, a fairly small selection of programmes, and we will restrict it to programme areas where we believe market impact from a trial is likely to be low - speech and unsigned music being the categories. Other trials, and I mentioned local TV, will come to an end. We have already brought the IPlayer trial to an end. Once there is nothing more we can learn from a trial we will stop the trial and then wait for the verdict of the public value test to come through.

Mr Grade: There is some helpful direction in the White Paper at 53.13 if I may quote an extract: The ability to pilot new services has the potential to generate useful data to assist a public value test. However, the Trust will need to be satisfied that any pilot proposed by the Executive Board is of the smallest possible scale and duration to deliver the required information and there should be a general presumption that, where practical, a pilot will come to an end before any decision on a public value test is taken." That is the clear guidance for the Trust. To which I would add what I said earlier which is if the Trust at any time believe that even a pilot - and one cannot foresee all the changes that are going on at this stage in the media - if there is any potential that a pilot could interfere with the choice available to consumers, we would not allow it.

Q87 Alan Keen: But overall are we not betraying licence fee payers by going soft? Do they not deserve ruthless managers to look after their money instead of having to go and consult people about it? That is one way of looking at it, is it not?

Mr Grade: There is no question that the BBC's impact on the sector must be harnessed to be beneficial to the licence fee payers overall. That is our role and we have to manage that relationship with the private sector better than it has been managed hitherto.

Q88 Alan Keen: You are helping Channel 4 or talking to Channel 4 I presume over releasing some of the spectrum? Are those talks going along fruitfully?

Mr Grade: There is goodwill on our side to be as helpful as we possibly can to Channel Four and those talks are continuing, so far as I know, with real goodwill on our side.

Q89 Janet Anderson: Could I just take you on in terms of the Governors' objections to the independent study by Sir Quentin Thomas on the impartiality of news coverage of the Israeli/Palestinian conflict. This prompted Philip Stephens, who was a member of that independent review panel, to write an article in the FT where he referred to the BBC's coverage of domestic political affairs. He said: "I do not believe there is deliberate political bias, even if some well-known BBC figures will never forgive the prime minister for the Hutton Report on Iraq. Rather, quality, depth and judgment are sacrificed to showbiz trivia and hyperbole. Labour, Conservatives and Liberal Democrats are equal victims of this shallowness. Partly it is a question of lazy journalism. It is much easier to retail Westminster gossip than to seek to report complex policy debates, or to shout at politicians rather than subject them to forensically robust cross-examination." I just wondered if would like to comment on that.

Mr Grade: Before I pass to the Editor in Chief who is responsible for news on the BBC, I would have to say as a viewer - forget my role as Chairman of the BBC - that I would not recognise that rather crude caricature of the BBC's journalism. Certainly the BBC in different kinds of bulletins and different services serving different audiences does cover what one might call the populist agenda from time to time. There is nothing wrong with that. Everyone pays their licence fee and if you are interested in Wayne Rooney's metatarsal, I do not think the BBC should avoid covering it. However, I would not recognise as a viewer, as a news junkie that very crude caricature of the BBC's journalism.

Q90 Janet Anderson: How many complaints, for example, do you get about the line of questioning on occasion by John Humphrys on the Today programme?

Mr Thompson: The answer is that we do not tend to get many complaints. More than that I have to say our research and impact from the contacts we have in the public suggest, to be honest, that the robust approach taken on the Today programme with politicians and other public figures, and occasionally senior members of the BBC are on the receiving end of this, is welcomed by the public as a legitimate way of holding public figures to account. I have to say audience research on that would suggest that it is all the other way and that people say that quite robust questioning of politicians is something, if anything, they would like to see more of, not less of. If I could address more broadly the point, and the point that Philip made in his piece, I think if you look at the year in question, it is a very big year for news. There was a UK general election. It was also a year when the BBC did some very large-scale projects to try and increase public understanding and public engagement with key issues. Our recent Climate season across the BBC (but with a lot of attention on BBC1) would be an example. The season last summer Africa Lives on the BBC was an attempt, again using some of our most popular programmes, to engage the public in some really big issues. I would say that in recent years, with Andrew Marr and now with Nick Robinson, that the calibre of political reporting across our news programmes has gone up not down. We have also tried to find to a point key specialist editors. I think of Evan Davies in economics; I think of Mark Mardell, whom we have made Europe editor; I think of Jeremy Bowen, the new Middle East editor, to try and make sure that when we do cover a major, topical political event we do not just tell the story of that day but we have a seasoned journalist who can give some sense of the context and the background to the story. I would say across our current affairs programmes that we are trying harder to do two things. One is we want to try and bring news and current affairs alive for our audiences. If we do not engage our audiences there is a danger that fundamental democratic engagement will break down. It is important that we find ways of actively interesting and engaging audiences. We are trying to do it in a way that does focus on significant issues. I think it is fair to say that it has been quite a busy year and a complex year in British politics. It is also true that individual political personalities and the stories around individual ministers and other senior politicians, leadership elections and so forth, means that that is part of the way we report what is going on. I would say that my own view as Editor in Chief of the BBC is that our news division has had a very good year indeed in terms of covering events in the world, and our coverage of Westminster politics, I think, is growing in depth. With due respect to Philip and the FT, I would say we would compare well with any newspaper you can buy in this country.

Mr Grade: I can understand why a serious journalist of Philip Stephens's standing and reputation writing for a journal as specialist as the FT would not be terribly interested to switch on the 6 o'clock News on BBC1 and find out that Sir Paul and Lady McCartney were getting divorced. I am sure that is not particularly on his radar screen. However, a great number of people who pay their licence fee are interested and that is a news item of the day, and we have to serve the readers of all newspapers with all their demographic backgrounds and interests, which I think is the point that he has not quite grasped.

Mr Thompson: Our output on programme analysis on the Westminster Hour, if you look at the depth of political coverage we have now on our website, is unrivalled. Nobody else is covering British politics. BBC Parliament and other partners; no-one is covering our democratic institutions or British politics, not just, by the way, at UK level but at national level in terms of the devolved institutions in the nations, at regional level, at local level. No-one is investing as much or spending as much time on UK politics as we are.

Q91 Janet Anderson: What you are saying by your response is you think that persistent questions of senior politicians about their private lives fits in with that strategy. You are public figures, you work for a publicly funded body; how would you feel if you were subjected to that kind of questioning?

Mr Thompson: The answer is it seems to me the approach I take when this happens to me is it depends whether it is a matter of legitimate public interest. Of course, I do not suggest that uninhibited questioning of anyone about their private life is reasonable, but there are occasions where an aspect of a politician's personal behaviour becomes a matter of legitimate, as it were, not interest by the public but public interest, and where not only is it permissible for the BBC to explore questions but, frankly, it is our duty to explore what is going on. Do we need to be careful? Of course we do. Of course we need to be careful about not straying beyond the boundaries, but there are moments where questions about an aspect of someone's personal behaviour are of political relevance and we would be remiss if we did not ask those questions when that happens. If we overstep the mark, we should not, and we should correct it. I would say again my view in recent months in what has been sometimes a very difficult and intense political environment is that we have not overstepped the mark, but perhaps you have examples where we have.

Janet Anderson: I think you perhaps have on occasions but we will leave it at that.

Q92 Mr Hall: I listened with great interest to your exposition of the BBC's coverage of politics. I have established anecdotally that the coverage of politics during election time has got to be balanced and yet there was absolutely no balance in the coverage of politics in the run-up to the local elections in May. What have you got to say about that?

Mr Thompson: We always make sure not just in UK general elections but also in local elections that we abide by all of the relevant legislation, but more broadly than that we think very carefully about the nature of balance in the context of those local elections. At the same time we take the view that beyond of course our statutory obligations, which we must and do uphold, that it is important that we continue to cover the broad run of political stories that are continuing. For example, international events in which Britain has a role need to continue to be covered, but our Controller of Editorial Policy, David Jordan, has a specific duty to ensure that there is constant monitoring of the general political coverage to make sure that we do not think there is an inappropriate impact on the way in which the local elections are covered and also the context of people thinking about how to vote in local elections.

Q93 Mr Hall: Were there any good news stories in the run-up to the local elections in May that the BBC published about what the Government had done? I can tell you that every night in the broadcasts there were anti-Government stories leading the news on the BBC.

Mr Thompson: We would need together - and I am very happy to do this - to go through the running order for all of our news programmes for the weeks in question to be sure about this but what I would say to you is this: firstly, UK general elections affect the entire country, they affect every household in the country; local elections do not affect every household.

Q94 Mr Hall: That just excuses it, does it?

Mr Thompson: No, it does not, but what it means is that you need to strike a balance ---

Q95 Mr Hall: I agree, you need to strike a balance; that is the point I am trying to make.

Mr Thompson: If you are saying that you believe that the BBC's coverage of general politics in the run-up to local elections was biased, I have to say I simply do not believe that is the case. What we try and do is we cover what is going on in this country and also we try and cover the stories which are of interest to UK audiences and which may or may not involve UK government and other UK interests around the world. We try to do them objectively and not from one slant. I have to say I do not believe there is any systematic evidence that in this period or in any other period we failed to do that. We look quite closely and track surveys of people of different political persuasions and ask them whether or not they believe that the BBC is biased against their party. Over this period and over the year in the Annual Report the numbers of people amongst both supporters of the Conservative and Labour parties who believe we are biased went down in both cases. They stayed the same for the Liberal Democrats, but went down for both Tory supporters and Labour.

Q96 Mr Hall: Is there any programme on Radio Five Live that does not carry a gratuitous attack against the Government?

Mr Thompson: Again, I have to say I do not recognise the picture you paint of Radio Five Live, any more than I recognise the picture you paint of BBC journalism as a whole. I do not believe there is any programme that I am aware of in recent weeks on Radio Five Live that has included a gratuitous attack on the Government. To state the obvious but I will say it again, it is not the job of BBC news, or BBC journalism more broadly, to launch gratuitous attacks on anyone. We try and report what is going on objectively and fair-mindedly. That is what we are there to do.

Q97 Adam Price: I would like to turn briefly to the issue of questions about private conduct of politicians and other public figures. Just so we are all clear where we stand on the Today programme what we are likely to be subjected to, do you think John Humphrys was right to ask about the Deputy Prime Minister having other affairs?

Mr Thompson: I believe that the interview with the Deputy Prime Minister by John on the Today programme a few days ago was legitimate, yes I do.

Q98 Adam Price: That was a fair question, even though it was open-ended and it had no clear bearing whatsoever, as far as I could see, because no context was given on the conduct of his public responsibilities?

Mr Thompson: The context, which I believe would have been entirely understood by people listening to the interview, was obviously of a news story which has emerged over recent weeks and months in which it was felt by many - and again it is for people to draw their own conclusions - in the media, and I think the evidence would suggest many voters, that the affair which the Deputy Prime Minister is said to have had with his diary secretary did raise matters of legitimate political interest, and it was right for the BBC and the rest of the media to report that and to explore any political ramifications of that.

Q99 Adam Price: But the question was about other affairs, was it not?

Mr Thompson: Well, when the Today programme did its interview, there was an environment where very widely on the Internet and elsewhere there were questions being raised, indeed allegations being made about other affairs. Given the particular circumstances, the extent to which the affair which the Deputy Prime Minister accepted had taken place and the impact that had had on his political standing and the broad debate that it raised, I thought it was legitimate for John Humphrys to press him on this issue in that interview. I think it was done with courtesy. I do not think it was hectoring or impolite.

Q100 Adam Price: He asked him six times ---

Mr Thompson: --- I thought it was a legitimate piece of journalism.

Q101 Philip Davies: Can I just ask does the BBC or has the BBC ever received in terms of grants or loans money from the European Union or any European Union institutions?

Ms Patel: I do not believe it has. Without double checking to see whether there is any grant received anywhere, I do not believe we have.

Q102 Philip Davies: If I could prompt you a bit further then. The European Investment Bank claims on its website that it gave loans to the BBC of €40 million and €96 million under "the most favourable of terms ... financing capital projects according to the objectives of the Union." Does that ring any bells?

Ms Patel: Those are the loans which are to BBC Worldwide on normal commercial terms. The European Investment Bank does lend to companies so that is not a grant; it is a loan on normal commercial terms.

Q103 Philip Davies: So when it says on its own website that it gave the money on "the most favourable of terms ... financing capital projects according to the objectives of the Union"; that is wrong, is it?

Mr Peat: That would relate to the rating of the BBC which meant that the terms would be the most favourable they were prepared to grant.

Q104 Philip Davies: Given that the European Investment Bank's stated objective is to contribute towards the integration of member countries, how does the BBC claim that it can report on matters of the European Union objectively when it has, by its own admission, received loans from this particular institution?

Mr Thompson: Can I make two points. Firstly, I think the most sensible thing is if we subsequent to this meeting write to you in some detail about this. My understanding is that this money relates to various technical projects which are eligible for this support. Can I emphasise absolutely there is no connection whatsoever between any grants, loans, or anything else, that may go to one or two technical, as it were, experimental projects in our research and development area, and any of the journalistic work the BBC does in reporting Europe and the European institutions ---

Q105 Philip Davies: I am sure you must be aware that many people feel that the BBC has a pro-EU bias and I am sure you must have heard before that it has been dubbed by people the "Brussels Broadcasting Corporation". Do you not at least see there is the potential for people to fear the BBC may not always be impartial in these matters when you take money from these kinds of institutions?

Mr Grade: On the question of the BBC's coverage of European issues, the Governors commissioned an impartiality review extensively carried out by a very distinguished panel. The conclusion was that there was no institutional bias one way or another. There was certainly, to coin a phrase, a bias against better understanding. I would reject immediately, on impartial and independent evidence, any suggestion that the BBC has a point of view on Europe. So far as these funds are concerned, you will appreciate that we have done an extensive briefing amongst ourselves before this session. This was not an issue that we covered and I think we need to look at it. On the other hand, I would say that the BBC has an obligation if there is money available from whatever source, provided there are no strings attached and there is no confusion between the editorial chain of command and receipt of that money, to find the cheapest money we can.

Mr Thompson: To state the obvious, none of this money will go anywhere near the BBC news division, nor would anyone in news, frankly, be aware it existed. I want to give you my absolute assurance that I have absolutely no doubt at all that the BBC's impartiality in the matter of reporting Europe is utterly unaffected by this.

Q106 Philip Davies: The final question on this is Jonathan Chapman, described at the time as a "Senior BBC World News Reporter", apparently said a couple of years ago: "The UK media is broadly sceptical [about the EU] so we try in Brussels to break that cycle of scepticism. The BBC's job is to reflect the European perspective ... and make news less sceptical. That is why the BBC has such a big bureau in Brussels". Do you associate yourselves with those comments or not?

Mr Thompson: No, I do not. Our job in Brussels and in London is to report Europe, the affairs and the actions of the European institutions, and public attitudes to those institutions across Europe, and of course in the UK, completely impartially. We should reflect, and I think we have over the last 18 months got rather better at reflecting, the full range of opinions about Europe to include the many different strains of scepticism which are very widely represented amongst the UK electorate. If you look at the interviewees that we are inviting onto programmes like the Today programme, if you look at the way in which Newsnight and other programmes are covering Europe, I think that over the last 18 months we have got rather stronger at reflecting the full range of opinion including, as I say, euro scepticism of different kinds by those people who believe that we should leave the European Union completely and those who take other views either about the euro, about the European Constitution, and so on.

Chairman: I am delighted that we managed to find a subject for which you had not prepared yourselves! Can I thank you very much for giving up a lot of time. It has been an extremely useful session, and we could go on probably all afternoon, but I thank you.