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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 483-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE CULTURE, MEDIA AND SPORT COMMITTEE
BBC REPORT & ACCOUNTS, 2004-05
Tuesday 11 October 2005 MR MICHAEL GRADE, CBE, MR MARK THOMPSON, MR JEREMY PEAT and MS ZARIN PATEL Evidence heard in Public Questions 1 - 59
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Culture, Media and Sport Committee on Tuesday 11 October 2005 Members present Mr John Whittingdale, in the Chair Janet Anderson Mr Nigel Evans Paul Farrelly Mr Mike Hall Alan Keen Adam Price Rosemary McKenna Mr Adrian Sanders Helen Southworth Mr Tim Yeo ________________ Witnesses: Mr Michael Grade, CBE, Chairman, Mr Mark Thompson, Director-General, Mr Jeremy Peat, Governor of BBC, and Chairman of the Audit Committee, and Ms Zarin Patel, Group Finance Director, BBC, examined. Q1 Chairman: Good morning everybody and welcome. This is the first public session of the new Culture, Media and Sport Select Committee and I am aware that many people will find it extraordinary to see somebody other than Sir Gerald Kaufman sitting in the chair after his long reign. In the main we are a very new Committee although we have two survivors from the last Parliament whose experience we shall rely on considerably, but perhaps we could also bring some fresh thinking at the same time. Normally we would have held our session to coincide with the publication of the BBC's annual report and that is a practice which I think we would hope to be able to follow in future, but it was not possible this year, not through any fault of the BBC but because the House of Commons was rather slow in setting up the Select Committee. We are very pleased that in our first public session we should have the opportunity to talk to the Chairman, the Director-General and senior staff of the BBC about the annual report and about the publication of their document Building Public Value and The Future Funding of the BBC which has, helpfully, come out today. Given that, perhaps it would be helpful to start by inviting Mr Grade to say a few words about the announcement the BBC has made. Mr Grade: Thank you very much, Chairman. Perhaps I may just introduce my colleagues. Jeremy Peat, on my right, is the National Governor for Scotland, on my left is the Director-General, Mark Thompson, and on his left is Zarin Patel who is the chief financial officer of the corporation. Thank you for the invitation. This is an important calendar date in the diary of accountability of the BBC and we are sorry that you were not in place to coincide with the annual report, but no doubt we will get back in sync in the coming years. I am very glad to answer your questions today. This morning the Director-General and I unveiled the BBC's case for the level of the licence fee for the first seven years of the next Charter, that is to say, from 2007 to 2013/14. This is the first time that the BBC has openly made its case for the licence fee at the beginning of the debate about the level, it is the first time that the public has been consulted about what it wants and expects from the BBC in return for its licence fee, and it is the first time that the governors have independently scrutinized the costs and savings proposed by the management to ensure the lowest licence fee to meet the public's expectations first outlined in our vision document Building Public Value and subsequently refined and endorsed in the Government's Green Paper. Today the BBC set out the costs of its vision and made a commitment to meeting 70 per cent of those additional costs itself. Its case for the licence fee is RPI+2.3 per cent per annum. This includes the cost of digital switchover but not targeted help. On behalf of the Board of Governors, at this point we commend the bid. On behalf of those who pay the licence fee, the governors welcome further scrutiny and I am pleased the Select Committee is able to question us today on this and any other topic that suits you. Thank you, Chairman. Q2 Chairman: Thank you very much. You have put in an opening bid for RPI+2.3 per cent and that is certainly ambitious. Somebody once said that the existing licence fee settlement had resulted in the BBC basking in a Jacuzzi of spare public cash. It might be arguable that this will result in a swimming pool. You will be aware that there are complaints from other broadcasters about the size and the power of the BBC, particularly at a time when commercial broadcasters are facing a more difficult financial future. Is there not a danger that if your resources increase at this level, at a time when the commercial broadcast industry is going to be struggling, the BBC will become an even fatter cuckoo in the nest and will tend to distort the market even more than is the case at present? Mr Grade: If you take the three main sectors of British broadcasting, and I am talking now only about television, I am not talking about radio for a second, you have got the BBC, you have got Sky and then you have got the commercial terrestrial broadcasters. The difficulty of the terrestrial broadcasters, although Channel Four seems to be bucking the trend, is that there is a downturn in advertising revenue which is cyclical. Even in the days of the ITV monopoly of advertising revenue there was a cycle, advertising revenue went up and down. I do not think that has anything to do with the BBC, frankly. So far as Sky is concerned, they seem to be going from strength to strength. Their profitability seems unimpaired and their ability to invest in their business seems absolutely unimpaired by anything that the BBC is doing. I do not quite see where our present position in the market is doing anything other than adding choice for the licence fee payers. Mr Thompson: Perhaps I could just add a word on the point about the Jacuzzi. A year ago we announced quite an aggressive three-year programme of value for money savings inside the BBC. We have been reducing head count in the BBC from July last year. By the end of that programme and including the disposals there will be more than 7,000 fewer employees at the BBC. As a result of that we are absolutely back on track to meet all of the savings and self-help targets that were set in the 2000 settlement and we have made a down payment on the future. Our proposal today sees, because of the very ambitious priority set for the BBC in the Green Paper, a programme of very large scale investment by the BBC over the period 2007 to 2013/2014, a total of £5.5 billion across many, many projects, the biggest of which is obviously Digital Britain. We are saying that 70 per cent of the £5.5 billion can be met by the BBC helping itself through efficiency, through improved commercial revenues, through better collection of the licence fee and so on. Although we recognise that the licence fee is a burden and a larger licence fee sends new challenges to the licence payer, we believe that we can meet 70 per cent of this vision ourselves by stretching and improving the quality of our services. Q3 Chairman: You have pointed out that you will benefit from better collection methods and at the same time you have managed to find efficiency savings of £350 million upwards and you have said a lot of that will be going into programmes. Where does it stop? You can go on putting more and more money into programmes, but how do you measure the point at which it becomes good value for money? How do you assess the financial cost against the benefit of investment in programmes? Mr Grade: I think historically that is not a bad caricature of the way the BBC has conducted itself in the past, with pretty good results for the licence fee payers overall. We are in a much more competitive world. Our interface with the private sector is much more sensitive than it has ever been and the whole of the governance reforms, which have been the subject of so much debate over the last year, which have now culminated in a set of proposals, are designed precisely to ensure that it is the interests of the licence fee payers and not the narrow interests of the institution which are the responsibility of the new trust. The processes and procedures by which we will attempt to meet that remit is through the introduction of service licences, public value tests, all kinds of processes which are far more objective, which are open to consultation with all our peer groups in the industry and with other regulators and so on. All of that is designed to get the BBC into a position where if it wants to change a service or develop a new service it has to go through a very public, open, transparent process of accountability before a decision is made to agree that. Gone are the days of the BBC where every time you opened the window another bit had been added on to the BBC, which by and large used to work but it is not an acceptable process. I cannot stress enough, the fundamental purpose behind the governance reforms is to bring that to an end and have a process which is much more accountable and so if the organisation does wish to expand the case has to be made publicly, with the market impact understood fully before any decision is made to go ahead. It is a radical departure. Mr Peat: That public value test was subject to scrutiny by the National Audit Office as part of the value for money studies that were sponsored by the Audit Committee of the BBC and the governors and they came up with some very helpful comments, but generally they saw that our work was at the forefront so far as this type of assessment is concerned. We are not complacent that that is the end of it, but it was very helpful to have the NAO's professional input and we are very satisfied that we are heading in the right direction on both looking at the positive side and assessing the market impact. Q4 Mr Evans: The Director-General has just termed the licence fee a burden and it is because people do not have a choice. You have a television set and you pay the licence fee. What testing of public opinion have you taken in order for you to come here today and say that you want an inflation-busting settlement, when there are millions of people out there who watch the BBC and who do not get inflation-busting increases whatsoever? How have you got the nerve to come here and say that over the next seven years you want to push the licence fee up from £120 to almost £180 when your viewers will not have a choice, they will have to stump up the cash? Mr Thompson: Firstly, we are currently in a licence fee settlement period where the licence fee grows at 1.5 per cent above inflation. That has been the case since 2000. Over that period the licence fee has grown in real terms and we have delivered many new services as a result which we believe have made a big impact in driving Digital Britain. As a proportion of household income the licence fee has fallen over that period for median households and it has also fallen slightly more steeply as a burden on the lowest ten per cent of households. If the BBC was given a licence fee which grew at 2.3 per cent between 2007 and 2013, it is our belief, forecasting forward household income growth, that although it would be a licence fee that grew in real terms, it would continue to decline as a burden on median households and on the poorest ten per cent of households. Although I recognise the licence fee is a burden, it is our belief, even with the settlement we are proposing today, it will continue to decline as a burden on licence payers, even the poorest ones. The second point I want to make is that in addition to extensive consultation conducted by the DCMS during this period and by the BBC and Ofcom's research about the public's priorities for public service broadcasting, we have asked MORI to conduct an independent survey looking at the public's interest in the kind of package of digital services laid out today and their willingness to pay for those services and that suggests that the overwhelming majority of licence payers do want us to deliver the kind of services we are talking about today. Eighty per cent, for example, say they would be very interested in using BBC on-demand services and it is almost an equivocally high number support the idea of local services and better local television. We also know that the majority of licence payers accept that it might be necessary to pay a slightly higher licence fee and they have said they would be happy to pay a higher licence fee. How much higher they would be prepared to pay varies. Forty-two per cent of people in the MORI survey said they would be prepared to pay a licence fee which was twice as great as the present licence fee. The average response, given the services on offer, was that people would pay a licence fee which was ten per cent greater than the current licence fee. We have got quite a lot of independent evidence that the public, who are themselves discovering every day this new digital revolution, are interested in the BBC taking part and indeed in leading it and they recognise that it might mean a higher licence fee. Q5 Mr Evans: You have talked about willingness, but willingness does not come into it as far as the viewers are concerned because this is a poll tax on their TVs and they have got to pay it. You are saying that at the end of this period they could be facing a licence fee of almost £180. You say that people want these wider services, but you will know from the annual report that a number of the extra services you are providing people simply are not watching. Per viewer it must be very expensive to be delivering some of the services on BBC Three, BBC Four and some of the radio stations for instance. At what point can you say you want more money coming in to provide extra services that a lot of your viewers simply are not watching? Mr Grade: Could I pick up the point about digital television services? One of the great success stories of the last 20 years in broadcasting has been the take up of the Freeview box which was driven by the promise of extra choice including a basket of BBC services. You cannot compare the ratings for those services with the ratings of BBC One and BBC Two. The basket of channels available on Freeview has created a demand. There are over 6 million Freeview boxes. There are those who forecast it will soon overtake the number of Sky ones. Sky has been a phenomenal success story and part of what has driven that success has been the basket of BBC channels. I would be cautious about just looking at the intrinsic ratings of those stations. The one undisputable piece of research, both formal and informal and anecdotal, that is consistent throughout every conversation any of us ever has with the licence fee payers or any other research is that they want more local, regional and national programming about where they live and reflecting the region where they live. The consolidation of broadcasting in London is something that is deeply resented by licence fee payers outside of London and something that we will have to address and do something about. Part of the BBC's ambition and vision for the future reflects that message that comes back to us over and over again from the licence fee payers. That is part of what we are offering. Q6 Mr Yeo: Are they asked how they would like to pay for those services? Are they given the options as far as that is concerned? Mr Grade: I am sure they are. They know that the question they are being asked is from the BBC and that the way this is going to be funded is through the licence fee. They understand perfectly well what the proposition is. Mr Thompson: During this process DCMS carried out very extensive consultation with the public. We recognise that there are legitimate questions to ask about licence fee funding. The current view of the British public seems to be that the licence fee is the best way of continuing to pay for the BBC. There is evidence in the MORI survey and elsewhere that the overwhelming majority of the public believes that the licence fee represents good value for money. Q7 Mr Yeo: Am I right in thinking that part of the justification for the 2.3 per cent over inflation is the cost of carrying out the analogue switch-off? Mr Thompson: Yes. Q8 Mr Yeo: Is it your judgment that that is the most sensible way to pay for that cost? Why is it that licence fee payers, who are effectively paying a broadcasting tax, should be bearing the cost of that? Mr Grade: The costs that are in the bid are the costs of switching the BBC from analogue to digital and it is no different from the switch from black and white to colour or from 405 lines to 625 lines. There are some costs in there which are our contribution to the industry costs through SwitchCo, through marketing and so on. There is nothing in the bid to pay for ITV and Channel Five. Q9 Mr Yeo: One would assume you have got quite a lot of marketing power at your disposal by advertising on your own channels. There is a big cost that arises there since you are having so many hours of your programmes watched all the time. Mr Grade: Included in the marketing costs will be things like help-lines for people having trouble with their equipment and so on. All of that is part of what one would call marketing. Mr Thompson: You are quite right that not paid for free air time on BBC services will be an important part of the public information programme. This is a very large and ambitious project for the entire country in terms of switching every household from analogue to digital television. The public information costs and the support line costs over the period and the marketing - because we will not reach everyone through our own airwaves, there will also be posters and other forms of marketing - are going to be very considerable over the period. Q10 Mr Yeo: Does this envisage also meeting the costs of the last few households who have not bought the right kit? Mr Thompson: The Secretary of State announced at the RTS Cambridge convention a programme of targeted help for certain disadvantaged households. Those costs are not quantifiable yet. We are doing a number of large scale trials to try and assess those costs. I guess the Government will be looking very closely at that. Our figures today do not include that category of targeted help. Q11 Mr Yeo: Have you not made any provision for that? Mr Thompson: There is no provision in the bid for that. Q12 Adam Price: Presumably, given your background, you would agree that a strong Channel Four and the S4C in Wales is good for the BBC. Do you think, as we approach analogue switch-off, there is a reasonable case for top-slicing the licence fee for other public service broadcasters? Mr Grade: I think it is a bigger question than top-slicing. It is a question of whether there needs to be public intervention to ensure plurality in public service broadcasting. Once that question is resolved you can then look at any number of options. If the public policy decision is that there is a case for public intervention, you will then look at all the different methods of meeting the bill, one of which could be a licence fee supplement or top-slicing the licence fee. I would have to say that this is an issue for the next Charter review because, fortunately, Channel Four is in rude health, ITV is not exactly struggling to make ends meet and so on, so it is not an issue for now, it is an issue for later. I would be very, very nervous about taking any step which interfered, diluted or in any way upset what we are trying to build here through the governance procedures and the new governance set up of the BBC, ie the delicate relationship between the BBC and the licence fee payers. At present the BBC licence fee is exclusively spent by the BBC. The whole point of the governance reforms is to ensure that we are more accountable to the licence fee payers, that the licence fee payers have a much better and easier way of inputting the decisions that the BBC makes, so there is a clear line of accountability about their money. Once that money starts getting dished out to Tom Dick and Charles Allen I think you rather defeat the object of the governance reforms. So I would be very nervous about interfering with that. I think that is a matter for the next Charter review and hopefully we are all spared! Mr Thompson: One of the reasons we have plurality of public service broadcasting and we have these other great broadcasters, Channel Four and S4C, out there is because we have had plurality of funding. I think if you start putting your eggs in one basket there are real dangers in terms of plurality as well. The public understand the connection between the licence fee and the services they get from the BBC. If you start muddying that it seems to me you also endanger plurality. Q13 Adam Price: I think the fact that you have published for the first time your bid as it were is to be welcomed. In terms of the overall process, do you think there is any merit in the suggestion that in order to remove even the merest hint of any political influence during the Charter review process an independent expert or independent mechanism should be appointed to review the licence fee and recommend the increase? Mr Grade: At the beginning of the Charter review process, which was kind of when I arrived at the BBC in unusual circumstances back in May a year and a half ago, I did float that as a possibility quite publicly and nobody seemed to pick it up as anything worth pursuing in the great order of issues affecting the BBC. I am absolutely confident that the negotiations over the licence fee will be dealt with by the Government and the Treasury on the basis of the merits of the case. I can assure this Committee and, if I may through this Committee, the licence fee payers that if it was not so I would be the first one to cry foul publicly. Q14 Rosemary McKenna: I am delighted that the BBC appears to be moving away from the old regime of ratings wars which I was very uncomfortable with. I always felt that the BBC should be producing good quality programmes and be more involved in reach rather than share and going down the Digital Britain route seems to be making a change there. However, there are still many issues around the switchover. How is the BBC going to help people who are in areas where it is very difficult and they are unable to afford to have fully digitized households? How are we going to deal with the three plus television household that may only be able to provide digital access to the main television? How are people going to deal with that? Is the BBC going to help there? Should the BBC be helping? Mr Thompson: The reason this question is impossible to answer is because of the way the BBC and our predecessor, Mr Gavin Davis, seized the potential of Freeview and turned what was potentially a dying platform into something which is working. It is now in more than six million households. In the early days of Freeview it was said that maybe one day the cost would be less than £100. You can now get Freeview boxes for less than £30. At the point of switchover we will be achieving the kind of universality for that Freeview service that we can achieve currently for analogue television, in the very high nineties, and if we imagine the boxes coming down a little bit further in price, that means that even for a household with three televisions the total cost of conversion in many cases could be well under £100. For those households that is the answer. Much of the switchover only takes place in 2012. There are big areas of the UK that will be done at the end of the sequence. Sky offers a free satellite offering and we are glad that they do. One hundred and fifty pounds means that people can get, through that Sky free-to-air platform, the BBC services and we welcome that. I get letters almost every day from licence payers who are in areas which currently cannot get Freeview and who would like to get our services long before the final switchover in their area. We think there is room for a cheaper or even free satellite option as well. We have signed a memorandum of understanding with ITV to work together to try to create something rather like Freeview. This is not going to replace the Sky offering. We want to continue to work with Sky to promote digital switchover as well so that licence payers have got a range of choices and part of this is about making sure that consumers have got as many choices as possible about how they want digital. We know that of those who do not have it yet, most of them want the choice and they would prefer to have an aerial rather than a dish. We want to make sure the consumers have a wide choice and that the costs of whatever platform they choose are as low as they can be. That combined with the Government's separate proposals on how you help disadvantaged groups should make it possible to move the whole population smoothly into digital. Mr Peat: I was down in the Scottish borders last week, which is to be the first region to move across, and it was very clear from a packed public meeting that the Broadcasting Council for Scotland had, at which the Chief Executive of Digital UK was also present, that there are a whole host of questions and there is a lot of knowledge that licence fee payers need to seek and it is going to need a major communications campaign to make clear the different methods by which they will be able to achieve a digital switchover. There is a massive amount of information to impart. There is a massive programme that Digital UK, with the assistance of the BBC, will need to be involved in. All that Mark is saying is absolutely correct, there are these different options, but simply imparting that knowledge of what is there and who can get what and what assistance is available to them is a major programme and we will have to watch that very carefully over the next couple of years. Q15 Paul Farrelly: I want to ask you about free satellite services because there are some hard questions that need to be answered. The Government has made it quite clear it intends that the BBC should play a key role in the building of Digital Britain. In terms of the licence fee bid you have put in, would you say that the BBC is taking on extra responsibilities and extra financial burden that other providers have not so that it is justified that viewers underwrite that role by paying higher licence fees? Mr Grade: What is included in the bid is the costs for the BBC of switching to digital transmission. There are some smaller costs of making a contribution to SwitchCo, which is the co-ordinating industry body who will have to co-ordinate the sort of information that Jeremy was talking about, but essentially the major cost in this bid is the cost of the BBC switching off analogue and moving to digital. Q16 Paul Farrelly: In terms of the free satellite service, how can you justify the licence payers paying a public subsidy which may be to the detriment of other commercial providers, such as BSkyB, for a competing service? Mr Thompson: Where we begin is with our desire for universality so that every licence payer can get the full range of services from the BBC. That is what Freeview was behind. Let me repeat what I said earlier. I welcome the fact that there is a free-to-air offering from Sky which people can use. I know from the letters I get from licence payers that people want the choice. They are used to going into electronics shops and getting a range of different options for almost every kind of consumer electronic device that you could mention, whether it is a microwave or an MP3 player or a transistor radio. They expect to get a wide range of choice and a wide range of price points. In most other European countries there is a choice. You can go into a Carrefour in France and buy a self-install satellite dish and box for 80 euros. In a sense what we would like to see is that licence payers get a broad range of choices including some cheaper choices. There is no reason at all why many households could not be getting a simple version of free satellite television at well under £100 and then they can get services forever. The BBC is not going to create its own satellite boxes with the BBC emblazoned on it or anything like that. This is about encouraging the market against the clear standard for free-to-air satellite so our licence payers can get our services. Anyone who wants consumers to have the widest possible choice would welcome it. Mr Grade: There is a gatekeeper role here. I do not think anybody could argue that it is in the consumer's interest that there is a single gatekeeper for any platform. I think that needs great protection. I think people would be very upset if the BBC were the single gatekeeper of any platform and I think it is in consumers' interests that there are a number of gatekeepers. Q17 Paul Farrelly: Many people here today think the BBC licence fee is good value for money and indeed, even with the risks you are proposing, it would still be good value for money when compared with the costs of other services. To what extent do you think the development of this choice and the payment of a licence fee at these levels is an important moderator of the charges that other dominant providers, such as BSkyB, can charge? Mr Grade: I think it is difficult. I do not think it works in that way because you have a choice whether you take Sky or Freeview or which addition of platform you wish to avail yourself of. What I hope works in the consumer's mind, and it has certainly been proven in the Freeview example, is that people know very clearly what the Sky proposition is. It is a very clever, valued proposition in some homes, but for a very large proportion of homes it is not something they want, they want something else. They want to have the ability to exercise choice. If we were having this conversation now and the BBC had announced that it was going to launch Freeview and the public policy decision had gone against the BBC, over six million households would have been denied choice. I do not think FreeSat is any different. Mr Thompson: There has been a very large scale public debate about the future of the BBC and the most recent milestone in that debate has been the publication of the Green Paper. We strongly support much of what the Green Paper has got to say about our future. What this bid is based on is in costing the Green Paper, in looking at what we are asked to do in the Green Paper, from reducing repeats and increasing high quality originations on BBC to this digital challenge. This is not a bit we made up, it is based on costing what the Green Paper asked the BBC to do. What the Green Paper asks for is not a bigger BBC, I think it wants a leaner BBC, a more efficient BBC, but it does call for a bigger mission for the BBC. If you asked me why the licence fee has to go up, it is because, despite the efficiencies, we are being asked to take on a lot of fresh challenges. What I believe as Director-General, and I know Michael and the governors also believe this, is that despite this increase we will deliver services and a transformation of our infrastructure as a country through this bid which will still represent very good value for money for licence payers. Q18 Mr Sanders: The licence fee is not as universally accepted as perhaps it once was. Clearly it is not based on the ability to pay. There is an argument that it ought to be based on ability to play. The reality of the additional increases over the next few years is not exactly as you have answered it, that this is just some extra investment for SwitchCo. The benefits of the investment that will be coming from the fee payer are to organisations out with the BBC and I think there will be some public upset that they are being asked to do that. The beneficiaries of the switchover are not just the BBC, they are going to be a number of other organisations, some of them in the private sector. Where is their contribution to this? Let me go back to your opening statement that you need to be very conscious of public expectations of the BBC. There is a balance here, is there not, between Government expectations of the BBC and the licence fee payer having to help meet some of the Government's expectations of the BBC? Mr Thompson: The proportion of British households who pay the licence fee is higher now than it has ever been. Evasion is down to five per cent. As far as we can tell the public's willingness to pay is higher now than it has ever been. Despite the new technologies and despite more competition actual payment of the licence fee has gone up, not down. Although we are getting pretty close to the economic floor of what we can to in terms of evasion, we are keen to go on trying to drive that. Throughout its history the BBC has been asked by Government and the country to take a leading role in each of the various waves of change in broadcasting. Originally it was a monopoly that built the original radio and television transmission change, it took a lead in the movement from 405 to 625 lines in the introduction of colour and indeed a leading role very early on in the provision of very high quality internet services. This big step from analogue to digital is part of that. There is a political debate to be had about whether a flat charge on the whole population is the best way of paying for all of this and that is a debate which I am sure Parliament has already begun and will wish to have. From our point of view, we know from talking to audiences that they like the idea of assigning a leading role to the BBC in helping make this transition to digital possible. Secondly, the Government's view is clear from the Green Paper and that is where we stand. Our bid today, based on the Green Paper, reflects that view. Although I think it is in some ways a project of unprecedented scale and difficulty, I do not think it is at variance with our history, I think this is the kind of thing the BBC has done since it was founded in the 1920s. Q19 Alan Keen: We have been talking about competition with Sky and satellite. I want to talk about competition between the providers of content. When we carry out broader inquiries into television as a whole we always get complaints from the commercial people. The last person I remember asking the question of was the Chairman of Art Square (?) and he said it was hard to compete and he could not do so. How do you assess the competition? How do you decide whether you should compete with an existing provider? Mr Grade: The fact is that historically very little time has been attributed by the policy makers of the BBC to some of those very questions for historic reasons, because the market was under-developed and so on. We now have a very mature and competitive and expanding market. The BBC, if it wishes to change any of its existing services or if it wishes to introduce a new service to meet public demand, cannot just go blind into that process and announce that it is doing a new service and launch a new service. It has to take account of the market impact, it has to take account of the public value that is hopefully going to be created, and it has to find a way to measure those two things, to weigh them in the balance before it makes a judgment about whether it is prepared to proceed or not. The route that has been chosen, which will be put out for consultation shortly, is the public value test and that includes a market impact test. You can be absolutely certain that under the new governance rules of the BBC no new service is going to be introduced and no existing service is going to change materially before it undergoes and passes or does not pass the public value test such as I have described. In addition to that, each existing service will have a service licence which will be issued by the trust. Again those licences will be put out for consultation to all the interested parties including Ofcom, the independent producers and all the stakeholders in this. So there are now processes by which the BBC publicly acknowledges that there is a new world out there today and that we must not damage in any way the growth of the media business which affects the licence fee payers because at the end of the day the licence fee payers are the same as consumers that want the choice from the private sector. We have to tread more carefully than we have ever trodden before. All of that is in hand. That is what the governance reforms of the BBC, the service licences and the public value tests are designed to achieve. Q20 Alan Keen: I just want to extend my question to international services. Lots of us have been away on holiday in the last few months. BBC World has improved dramatically in the last two or three years. How is that progressing? It is not only British holidaymakers abroad who want to be kept up-to-date with news programmes. Sky News tends to be put on in more hotels than BBC News, apart from BBC World. How is that moving on now? Mr Thompson: There are some parts of the world where Sky is in more hotel rooms. Globally the receivership of BBC World is much greater than that of Sky's and is doing very well. It is worth reminding ourselves that the challenge for us here is that BBC World is a service which is not paid for by the licence fee, it is paid for by the UK public, nor does BBC World receive any grant-in-aid from the Foreign Office. The financial model for BBC World is a commercial model based principally on average national revenue and other revenue. The good news is that it is proving successful. Advertising sales around the world have been growing strongly this year and as a result of that we are hoping that we can invest more in it. I would like to see BBC World becoming stronger, I would like to see more regional relevance and specificity for BBC World around the globe and I would like to see tighter links between BBC World, our global web presence and the World Service. I think we have got to start thinking in a more integrated way about what the BBC offers around the world. We are very trusted around the world above all for our news provision and for high quality content. I think there is plenty more we can do to try and build that brand. It is good for the BBC and at least some of it is in the long-term a way of driving revenues. We have many television channels around the world and we have a big global partnership with Discovery. It is also a way of projecting a British perspective and British talent to people around the world. That is a big part of what we want to do in the future. I regard BBC World as a very important part of that. Q21 Alan Keen: Radio Four, which I have had a lot of time to listen to recently, is getting better and better. Mr Thompson: We will pass that on. Mr Grade: Can we stop there, Chairman! Q22 Chairman: I want to move back to this question of market impact assessment. I accept that it is right that the BBC should be looking to make available more programmes and products on multimedia on whatever platforms evolve, but you say you should proceed by treading carefully. During Beethoven Week you made available nine symphonies on the internet, 1.4 million downloads, just at a time when the record companies are struggling to persuade people that they should pay for content of the internet rather than get it free. The creative archive has been piloted without any market impact assessment and may have quite a dramatic effect. There is an impression that this is not treading carefully, that you are proceeding in a way which is going to have a dramatic impact on a number of fledgling commercial companies and suddenly the BBC elephant has come into the ground. Is this something that is causing concern? Will you pause? Will you look at the overall effect that the BBC's activities are having in this area? Mr Grade: The first thing to say is that pilots of the Beethoven kind and other little pilots are going to be incredibly valuable in assessing market impact. They are not permanent features. The BBC puts its toe in the water carefully. It always depends on the size and scale of the experiment or the pilot. If it is something pretty enormous then the public value test would have to be invoked before the governors or the trust would approve such a pilot. On the limited scale that is presently envisaged I think it can only help the process of actually assessing what the market impact potential will be. Mr Thompson: Let me talk about two examples. Let me take Beethoven first. It is interesting that our mad dash for negative market impact should begin with Beethoven, it is a surprise to many. We did a very big project called the "Beethoven Experience". Every note Beethoven ever wrote was played out over a week on Radio Three, a three hour session of Beethoven was played at nine o'clock on BBC Two and on other programmes on the web. I would be very surprised if the total net impact of the Beethoven Experience was not rather positive in terms of the sale of music for Beethoven. As part of the plan we did a time limited experiment of downloading a set of the Beethoven symphonies played by the BBC Orchestra. Before we did it we made it clear to the industry that it was a pilot. We went round to talk to the big record companies and Ofcom to say that we were going to do this as an experiment and asked what they felt about it. Beforehand when we talked about a market impact there was open merriment, but they said there would not be a market for this at all and we should not worry about it. There was no sense of any anxiety from any of the other parties before we went into it. Roger Wright went to talk to everyone beforehand. Our own estimate was we would perhaps get 10,000-20,000 downloads and we got 1.5 million downloads. We are not going to do it again, believe me, without a lot of careful thought and further consultation with the industry because what we do not want to do is to do it - let us take music downloads - in a way which makes it harder for our friends and colleagues in the rest of the industry to run their businesses. It is a very good example, it seems it me, of a time limited pilot. We will learn from it and we will feed the lessons from that into our future policy. One of the things we have learned is that the interest for downloading the BBC of music is massive, even for classical music. That is potentially a positive, but we will have to work out ways of integrating that with the interests of the record industry. In the same period we signed an agreement with Universal Music to exploit jointly part of the musical archive very much in ways which help Universal with their business. So we should not conclude that everything the BBC does in this phase is automatically going to be negative, it will not be. Q23 Chairman: You say everyone was consulted. Can I just tell you that I have been told by PPL that they are unable to trace anybody who was consulted in advance, that the BPI, representing all the record companies, was not consulted, EMI was not consulted and that they have not yet found any record company who was contacted before it taking place. Mr Thompson: Roger had many conversations. Perhaps we should write to you and let you know exactly what Roger did. If I am wrong I will stand to be corrected. Q24 Chairman: That would be helpful. Obviously in determining how you should proceed there are now going to be market impact assessments carried out and those are then going to be compared with the public value test to see whether or not the public value test outweighs the market impact. Do you not think there will be greater confidence amongst commercial companies if that external arbitrator rather than by the BBC? Mr Grade: Not at all. The whole purpose of the governance reforms is to put the trust in a position where it can make objective judgments and its processes are transparent and accountable. In the end it is the trust which is accountable for the public's money and the spending of the public's money and you cannot delegate that to an outside body. It lays a big onus on the trust to make sure that when it makes its decisions and its judgments they are well informed by the public value test, by the market impact test and so on and whatever decision it makes, it must be able to stand up publicly and explain how it came to its judgment and on what evidence it came to its judgment and it is the evidence that counts. Q25 Chairman: But we are not talking about spending public money, we are talking about potentially unfair competition and every other company has to abide by the rulings of the OFT and Ofcom. Mr Grade: I think if the BBC is to launch some kind of service it will involve spending the public's money, will it not? Q26 Chairman: It does. Clearly it is a matter for the trust. Should it not also be a matter for the OFT or Ofcom? Mr Grade: We have suggested that both Ofcom and the BBC together should sponsor the independent market impact test. It is not the BBC that will run the market impact test, we are not suggesting that at all. Mr Peat: Speaking as a governor, certainly we would see to it that the market impact test would be undertaken by a thoroughly objective and well-informed group and we would agree with Ofcom who was suitable to undertake such tests. Mr Thompson: The BBC is subject to ex poste competition law as administered by Ofcom and the OFT and so forth. Q27 Rosemary McKenna: This is quite important. There is also the issue that all of what the BBC is going to make available in the archive has already been paid for by public money. The public are going to say, "We ought to have access to that. It has already been paid for through the licence fee, through our funding of the BBC". Those of us involved in the All Party Music Group have been struggling with this for some time because you have got the desire for new music and selling and new music but you have also got all of that huge archive that really does belong to the public. I know you have been doing a lot of work in making sure that intellectual property rights and performing rights etc are given to writers and producers, but there is a great debate there about what should be available to the public free because they believe it has already been paid for through the licensing fee and the benefits to the industry and the new music industry. Mr Thompson: That is exactly right. You are trying to balance a number of different benefits and disbenefits here. You mentioned that the public have already paid for this material so why should they not enjoy it, but there is the issue of protecting the intellectual property owned by the people who created this content in some cases, and there are also the legitimate concerns of commercial players in this area who may say, "Hang about. If the BBC were to open up the entire archive for nothing what would that do to our business?". These are all legitimate concerns. The point I make is that carefully controlled pilots are one of the ways in which we can explore the best way of proposing these things and, secondly, the Government's reforms and the way in which the Trust is going to go about scrutinising this - and I think this is a real break with the past - means that everyone can see exactly how things are being assessed and balanced against each other. You are absolutely right that these are quite difficult judgments to make. Q28 Adam Price: I would like to make the same point. You are currently going through the second phase of your pilot with the BBC player for downloadable audio and video on MP3. Tomorrow Apple are launching their Video iPod at the BBC Television Centre. I hope that is not a case of product placement. I understand you are using digital rights management software on BBC Player, which essentially means that the programme expires after seven days. If that is wholly owned content, paid for by the BBC licence fee payers, should it not be available to them whenever they want to use it, or should it not be available for them to use in their own creative process? Mr Thompson: Can I give you a picture, almost a personal view, of how we are likely to want to proceed, looking forward? I stress that we are still trying to talk to everyone and pilot things so that we can try and get a sense of what is going on. My own view is that you will see a spectrum of material which is available, some of which will be either of such obvious, overwhelming public value, news provision, for example, or frankly will be of genuine public value and of very marginal commercial interest, let us say, some of our niche factual programmes in certain areas, such as certain forms of public affairs programming or religious documentary output. Making it available in the long term with no additional payment may well make sense. At the other end of the spectrum there may well be output, either because it is the subject of intense commercial interest - popular music might be an example, comedy on television is another example - that it can only be made available for quite a narrow window around the initial broadcast, after which it then goes into a period where it is to be commercially exploited to benefit everyone. The licence fee payer invests in this output and the licence fee payer should get some of the commercial value out of it. That is what we do with our UKTV channels, for example. I see a range of different outcomes for different kinds of programming but unless there is a very good reason to do with market impact, or some other reason why something should not be made available to the public, I would always start with the presumption that the licence fee payer has paid for it so why should they not enjoy it? That is a question we have always got to be able to answer. Sometimes I hope there will be an answer but the more we can make freely available without excessive adverse market impact the better. Mr Grade: We are to a considerable extent in uncharted waters here with the new distribution technologies opening up, all hungry for the BBC's content; it has a rich archive. All I would say is that no doubt the ingenuity of the management of the BBC is going to come up with all kinds of exciting ideas for meeting new demands and new technologies and for exploiting the catalogue and the existing new content, the daily content and so on. Each case is going to be different. Each case will have to be scrutinised by the Trust in a way that the Trust has never done before and there are considerable hurdles, not least the interest of the licence fee payers in what they have already invested, which is a major consideration, if not the major consideration. The issues of market impact and so on in every single case will have to be independently and objectively scrutinised by the Trust. That is why the new governance reforms at the BBC I think are going to work terribly well and they are going to be well equipped to meet these challenges. We can sit down here today and lay down a set of rules about what we can and cannot do, but actually technology and consumer habit are moving much faster than we can possibly regulate sitting here on a date in October 2005 in this place. You have to have a governance system in the BBC that will meet all the different points that are being made around this table. You have got to have a governance system that can capture that and under which you can be certain that the BBC is not just going off its own bat and doing something with, unforeseen by the BBC but, foreseeable consequences in the market place. Mr Peat: The second leg of that, Chairman, is that we now have in the public value testing incorporating marketing an impact methodology that still needs development but has been seen to be usable. We have had independent consultants looking at it before the NAO who have said that it is usable, it can be used, and it is already beginning to impact upon the management of the BBC because the very principles of the measures of public value - reach, quality, impact, value for money and the need to look at market impact - are being dealt with within management even when specific tests are not being undertaken, as they will be within the service licence agreements. We have that methodology and we have the approach which is usable and is being used and is being influential. Q29 Janet Anderson: Could we turn to the issue of quality programming? Obviously, it is not just a question of cost and the BBC, I think we would all acknowledge, does have this incredible pool of talent at its disposal, but how do you see the cost of quality programming changing over the next ten years, particularly taking into account digital development? I wonder if at the same time you could tell us a bit more about the highly localised news coverage you are proposing. How localised is it going to be and have you made any assessment of, for example, how that is likely to impact on local newspapers? Mr Thompson: Perhaps I can deal with quality content first. Partly this is about what your programme strategy is and what you value and partly it is about creative leadership and direction. We are across the organisation trying to focus more resolutely on creative ambition. We are trying to find ways of delivering quality programming where we can for less money. We are about to start Bleak House, a Dickens adaptation which we are going to play on BBC One after EastEnders, and we have tried to make that in quite an innovative way. I think it looks really good and fresh and original. It has also come in at a rather lower cost than we sometimes find. To contrast that, another serial starting shortly on the BBC, a co-production with Home Box Office, Rogue, is a rather wonderful but fantastically expensive piece of period drama. It is a very good deal for the licence fee payer because of the amount of money Home Box Office has put in, but it is quite possible in a few hours of television to spend $100 million making it. We are trying to find ways of delivering quality output where we can for less money but it is expensive. If you replace one hour of repeats on BBC One with an hour of original drama you are replacing content with an average cost of £13,000 with content with an average cost of £534,000. You do not have to do much in terms of enriching the schedule with new programming as opposed to repeats, or if you replace a leisure lifestyle programme with a science or history programme, but the cost even for a single hour is very large indeed. We are looking hard at that but we recognise that in the end, if we really want to achieve the dream of further reducing the volume of low-cost programmes and repeats and replacing them with the very best output that the public expects from the BBC, that is quite expensive and quite a big part of bid goes to pay for that. In terms of local TV, one slight mistake in Building Public Value was when we talked about this idea as being ultra local. We have had a wonderful success over the last 40 years with our local radio service and local radio is one of the best loved of all BBC services. In many parts of the country it is a kind of lifeline, particularly in some of the more remote parts of the country, and there is a very deep emotional connection between the listeners to BBC local radio and the stations. We have already begun to develop local on-line around the country, the Where I Live sites, and again there is very exciting take-up of these sites. That is broadening the idea of the local onto the web. The next stage, but at the same level of localness as local radio, not more local, is the idea of news content in particular which we could deliver both on the web, broadband, but also potentially through digital satellite so that we can bring the same values and journalism that we already provide. Much of that already exists; we already have newsrooms in these local radio stations which are doing the journalism. We can provide everything that we provide there - interviewing local politicians, trying to engage in local life - in a way where people can see it as well as hear it. That is another very good example where we have to be very careful. I think it is a good idea. In many ways it is getting more value out of existing investment and it is clearly taking a step into the digital world, but we have to be very careful that as we do this we understand and work with local commercial players, including local newspapers, and that as we refine the idea we find ways as far as we can of working with them and supporting them, linking to them, perhaps partnering with them in relation to some of the content but not adding some of the services which are critical to their business model. Some things, for example, classified advertising, we would never do, but for example we would keep away from the entertainment listings which are an important part of their model, not just for their papers but for their new media space, and try and work in an environment where we are helping to create a market for them and partnering them rather than, if you like in a kind of Bigfoot way, preventing them either from entering a new space or even damaging their existing businesses. Q30 Janet Anderson: Have you had any discussions with local players about that? Mr Thompson: Yes, we have begun to talk to them. Q31 Adam Price: Before coming back to regionalisation and localisation, just on repeats --- Mr Grade: A subject that keeps coming up! Q32 Adam Price: You got there first! I do not think I am the only person that has seen, it seems, every edition of Little Britain and Two Pints of Lager and A Packet of Crisps ever made now from every possible angle. Do you think that the reputation of BBC Three, which has produced some very vibrant programming, has been tarnished slightly by this wall-to-wall prime time repeat loop that it seems to be on at the moment? Mr Thompson: Our research suggests this but also anecdotally this feels right. I think people have slightly different expectations of the two main television channels, and in particular BBC One, than they have of the digital channels. People who have got multi-channel television, whether it is Freeview, digital cable or digital satellite, are used to a large number of channels with a fairly high loading of repeats. If the danger zone for repeats is BBC One peak time during the summer where people can see red if there are too many repeats and not enough outstanding new programming, I think that BBC Three is less offensive to the public than that. Indeed, Little Britain is a very good example of a programme which, frankly, - and I am glad you have been such an early assiduous fan - people are still discovering for the first time. I think even on BBC Three, if we could find the money to originate slightly more, to do more new comedies and to rely slightly less on repeats, we would like to do that but, as I explained earlier, that is a very expensive game. I can get you very quickly into nine-figure numbers for just a few hours every week of drama, for example. Mr Grade: I think the Governors too would take a view on large lumps of investment going into services that are not universally available until the free-set option is more readily available. We would take a view on that. Q33 Adam Price: Moving on to the issue of moving production out of London, you have placed a very strong emphasis on this, which is greatly to be welcomed. You are quoting a cost of £50 million per annum for moving production out of London. The Government in its own relocation plans, of course, talks about the financial benefit of moving employment out of London. Is there a financial value as well to this strategy of relocation? Mr Grade: In general terms from the Governors' point of view, and hopefully the Trust will endorse the policy, there is such a clear clamour from licence fee payers for this. This is not a BBC vision. This is not the Executive or the Governors saying, "Would this not be a wonderful idea?". It is so clear from the evidence that we collect that there is a real hunger from the licence fee payers to see a less London-centric BBC. The BBC always was the national broadcaster and when ITV was founded in 1955 the policy makers at the time gave the monopoly of advertising television to the ITV companies with a brilliant piece of public policy, which was to create a regional federal system to complement the national broadcaster, the BBC. That model is no longer sustainable and for perfectly good economic reasons ITV is having to consolidate pretty much within a stone's throw of where we are this moment. That means that the whole model of broadcasting has changed and the licence fee payers are telling us in terms that they want more enhanced and more targeted services in the nations, the regions and the communities. It is a policy driven by licence fee payers, not by the BBC's expansionist tendencies, which we are trying desperately to curb after the new governance arrangements. This is the ambition for the BBC but it is driven by the licence fee payers. Mr Thompson: If I can deal with the issue of cost and savings, the first point to make is that I think our motives are slightly different from some of the other parts of the public sector. This is fundamentally about investing across the UK, engaging with the whole of the UK, drawing on talent from the whole of the UK rather than, for example, simply an attempt to cut administrative costs. We have significant parts of the administrative side of the BBC outside London already - the entire pensions operation is in Cardiff, for example, - precisely to lower costs. In the long term, 20-30 year horizon, a move of a significant part of the BBC out of London towards Manchester will save costs. The net present value over 20 or 30 years will be a positive one because of the underlying lower cost of employment, but building a significant broadcasting centre over the period of this charter that we are talking about, 2007-2016, will mean excess costs over this period. If you looked slightly further out, and given that sooner or later the BBC would have to redevelop its London television operation, the Television Centre, it would show a net saving. Over the following charter period, therefore, there may well be a dividend out of this programme. It is also worth saying that this money we believe will also have a significant positive impact on the creative industries in the whole of the north of England. This is not just a vision for Manchester. It is a vision for the whole of the north of England - Liverpool, Leeds, Newcastle and the north east - and we think and believe that it will stimulate activity, investment and jobs across the whole sector. One of the reasons for doing it is to have a significant impact not just for our own services but also for the whole of the creative industries. We are talking to ITV, Channel Four, PACT, the development agencies, the various film councils and all the rest of it, to make sure that happens. Mr Peat: We have evidence from economic research that in the case of Glasgow and Bristol, for example, we have significant scale activities such that, as Mark has described, the external benefits have come through, so we are able to begin to see the type of order of magnitude of external gain that can arrive as well as the straight financial impact. Q34 Adam Price: It has been reported, I should hasten to add in The Guardian, not in The New Statesman, that the move to Manchester will be put on hold unless the increase is big enough and that is the position you have taken in the early negotiations with the Government. Is that accurate? Mr Grade: I can understand a few journalists taking that view of the decision. It is not the view that the Governors will take. The Governors are committed in principle to the idea first of all of the broader vision of Out of London, as it is generically called, of which the move to create this Manchester hub for the north of England is the first step (and it is a major step) along the way. We are committed in principle to doing that. Once we have given that approval in principle the management can then go off and start to do their sums and work on a business plan in order to justify that level of expenditure. We are at the point now where we are awaiting the detailed costings from the management. The management is under no illusions that the Governors are going to be very difficult on this on the costs. It has got to be justified. We have got to be able to demonstrate publicly that this is value for money for the licence fee payers. We are not at that stage yet. It is a very important plank of BBC policy driven, as I say, by the licence fee payers. In the absence of knowing what the final settlement is, it is impossible to say what it will look like but it is a very high priority for us if we can do it for a sensible sum of money, and if the licence fee settlement is lower than we have bid for today we will have to look at everything in the round and reorganise our priorities. I would hope that if we get Manchester to a cost that the Governors feel we can live with and justify to the licence fee payers then something else would have to go[sic], but that is for another day. Q35 Helen Southworth: In view of the comments you made about the licence fee payers, and you did make comments earlier in your opening statement about how people viewed a London-centric BBC, are you going to make sure that you have a focus on setting up the northern hub? You looked a little uncertain there and I do not think we would be particularly pleased about that. Mr Grade: Nothing would give the Governors greater pleasure at the moment than to say yes, we are definitely going to do Manchester, but we are not going to sign a blank cheque. Q36 Helen Southworth: No, I should hope not, but you are going to give a clear sense of direction and purpose? Mr Grade: Absolutely, very much so. Mr Thompson: I am totally committed to the Manchester vision. I recognise that we have got to find a way of constructing a proposal which meets the challenge of value for money which Michael and his colleagues want to set. I believe we can do that. We are deep in detailed feasibility plans at the moment. They have made it clear that it is dependent on the ultimate licence fee settlement as well but I have to say that I think it is potentially one of the most positive and important things the BBC can do over this period in terms of reconnecting with a large part of the country and also, as I said earlier, in really stimulating the creative industries across the whole of the north of England. Mr Grade: It has to be in the licence fee payers' interests that the BBC can tap into all the talent that exists that cannot afford to come to London. Why should all the talent have to come to London to work? That is more and more the case now in the private sector as it is consolidating in London. There is a huge opportunity for the BBC but it has to be not at any price. Mr Evans: It is not true then that you have agreed between £530 million and £640 million to incentivise BBC workers to go up north? It is not so bad up north, I have got to tell you. It is lovely up there. Helen Southworth: I was going to add that it might not necessarily be that people cannot afford to come down to London so much as they do not want to. Q37 Mr Evans: Have you put aside any figures for incentivising the workers to come up north? Mr Grade: I have not seen the final business plan yet. It is work in progress. Mr Thompson: There will be relocation elements in it but nothing like the numbers you suggested. The original total estimated cost over a year ago of the entire thing - broadcast centre, facilities, everything - was in the range you talked about. That number is lower today than it was then. I hope once we have done the detailed planning Michael and his colleagues will hear it first and we can bring the numbers down further but the staff relocation costs will be a tiny fraction of the numbers you mentioned. Q38 Helen Southworth: In terms of creative industries and the relationship with the creative industries, how are you going to identify what your targets are going to be in terms of developing the creative industries? In the annual report you say, "This sense of connection between the BBC and its audiences will be strengthened over the coming years by increasing commissioning and production across the UK and through the move of significant parts of the BBC production base out of London". What are you actually aiming for? You are a huge player and the creative industries, by their very nature, are fast-moving, small, growing. What are you going to do to make sure that you are working effectively with them? Mr Thompson: The first component is our own direct investment. As you will have seen, we have a plan to boost network television commissioning from Scotland, Wales and Northern Ireland up to 17.5 per cent and we will broadly continue to work to increase deliveries of network production from outside the M25. By the way, under this bid we put more money into quality content. All of that is factored into that investment, so the total number of investment goes up even more than that. The first thing is the BBC spending money which relates to facilities, houses, to the freelance sector, some of the specialisms in craft and so forth. The second thing is that in each of the centres, whether we are talking about Glasgow, Belfast or Leeds, we want to work more explicitly with other broadcasters, with, for example, Channel Four, Stuart Cosgrove's(?) Creative Cities project, which I was involved in there. We want to partner with them so that we begin to develop a plan outside London. Even the BBC is not big enough on its own, for example, to completely help shape the need in some of our big centres - and Scotland will be a good example - for a number of big independent producers who are as big as and have as much clout as some of the players in London. The second stage will be working with other broadcasters and other commissioners and with the various film bodies around the country to try and build something together. The third stage is talking to regional development agencies and other local stakeholders, such as city councils. We are in conversation with the councils from the North West right now about our Manchester vision so that we can link geographically on where the BBC sits. We have got a wonderful new centre in Glasgow on the banks of the Clyde, Pacific Quay. We are building Pacific Quay at the moment. We have been talking to Glasgow City Council and Scottish Enterprise and others about how to make that, if you like, the anchor tenancy of a cluster of media businesses. It will be the same in Manchester and the same as we come to other English and UK cities. It is about trying to work with others to build an infrastructure and particularly more narrowly to work with other broadcasters around how you stimulate the independent sector, the independent television, film and radio sectors. I have not talked much about research and development but we are also quite interested in working with the universities throughout the country, so you will begin to see greater partnerships between the BBC and other broadcasters and our universities around new technology and new media as well. The cornerstone is spending more money outside London. Q39 Paul Farrelly: I hope sport does move up north so that in a sense Manchester finally gets the Olympics too when it happens. Lots of people say that ten pounds a month for the licence fee is very good value now. Looking ahead, lots of people will say £12.50 in seven years' time or £15 in future is very good value for money as well. That said, I do have some suspicion about nice round numbers, £150 plus 50p not to make it so round. It always looks to me as if the bank manager will stand £150, so build the bid up to that but the bank manager will not stand more than £150, so bring it in just around that level, so maybe Ms Patel can also comment on that, on the job she was tasked to do with this bid. Ms Patel: There is a very weird formula in the regulations for the licence fee which means that the licence fee has to be rounded up or down and always in the licence fee payers' favour, so £150.50 is probably something like £150.80 really but we only get £150.50. That is why it is rounded, to make it easier for the licence fee payer. Q40 Paul Farrelly: But more generally on the way you have arrived at the £150? Mr Grade: There are inevitably at this stage in a seven-year business plan some variables which we have identified and no doubt this bid will now be crawled all over by various consultants employed by DCMS and/or the Treasury, probably both, and they will flush out anything that we, the Governors, have not spotted so far. I would be pretty confident in going on record as saying that no BBC licence fee bid at this stage has ever been scrutinised to the extent that the Governors have scrutinised this one. For example, we were very unhappy in the first pass at the efficiency targets that management presented in the initial draft and we pushed them quite hard on that and arrived at a figure of 3.3 per cent per annum of efficiency savings. There has to be an incentive to efficiency built into a BBC licence fee. Q41 Chairman: So it was initially more than +2.3 per cent? Mr Grade: It has gone through various iterations, Chairman. Another area was that we thought they had rather over-egged the profit targets from commercial enterprises and we pegged those back because we did not think they were achievable, which obviously had an effect on the spending side. If you over-egg the earning side you can relax a bit on the spending side. No BBC licence fee bid at this stage has ever been scrutinised like this. It will obviously, in the interests of the licence fee payers, go on being scrutinised now and a consensus will be reached. Mr Peat: It has been of tremendous value to the Governors to have access to very high quality external advice that we commissioned from PA Consulting for us to be able to look in real detail at what management was putting forward - totally independent, objective and well-informed advice. It is also very advantageous to have the input from the governance unit, which is our source of advice as well internally. That combined external and internal input that we have had has really made the Governors very well placed to look in detail at the proposals being put forward, as we did at the value for money savings that Mark Thompson unveiled earlier in the year. We have really had great benefit from the advice and, as Michael said, this has been scrutinised very thoroughly by the Governors before coming to this stage. Q42 Mr Evans: The whole thing about the licence fee, and you are asking for 2.3 per cent because you have got plans for what you want to do, is a bit like somebody looking at their bank balance statement, being deeply in the red and then saying, "I am spending at the right level. Clearly I am not earning enough". It is like it is the only option and clearly it is not. You have other options and the secretary of state can easily turn round and say, "No. You have been warned. You have had 1.5 per cent increases for a period over and above the rate of inflation. We are now going to keep a lid on it. It is only going to be inflation rates from now on". What is your answer going to be if that is the case? Mr Grade: Then we obviously have to look at the vision of what we would like to do in the next charter period, which we laid out in Building Public Value, a public document on which there has been intensive consultation, dialogue with licence fee payers, research and so on. That does not exist in a vacuum. That exists as a vision and a plan for the BBC services going forward which has been endorsed pretty much by the licence fee payers as far as one can test that. Through that process the culmination of that was a green paper which again was drawn up by the Government following intensive consultations on our Building Public Value document. The green paper refined the Building Public Value document and laid on us a set of objectives and ambitions for the BBC and the green paper says, "BBC, this is what we, the Government, think you should be doing in the next charter". We have now put a cost on that and that is what you see today, the cost of that vision. This is not just an exercise in BBC expansion. This has been a very carefully worked out process fully informed by feedback from the licence fee payers and now the Bill has arrived and so that will concentrate minds. Q43 Mr Evans: I am just wondering, Michael, whether you are not looking at other streams as well for people to contribute to the BBC services. I use them. Since I have been here about five minutes ago the BBC Breaking News has told me that Malcolm Rifkind has withdrawn from the leadership of the Tory Party. It works for me. I am prepared to pay for that, but there are millions of others out there who will be looking at the bill that you are now presenting them with and saying that this is too much for them because they are not using all these other services themselves and perhaps in the long term you are even risking the danger of creating TV licence payer martyrs. We have seen it with the council tax bill where people say, "Enough is enough", and this could happen with the licence fee too. Mr Grade: You are absolutely right and that is the purpose of the whole charter review process. That is why we took the decision to go public with the licence fee bid, so that we could test the licence fee payers' response to this basket of goodies that has been presented. It is all part of the process. It is not a rushed process. This is an orderly process to try and reach a consensus on what is the role for the BBC going forward - is it affordable, what is the least price we can get it for? I am actually rather pleased that this has gone public so that we can get a sense from today of what licence fee payers think about it. Q44 Mr Sanders: I want to bring in the issue of sports coverage and what you are doing to meet the challenge proposed by a failure to acquire key sports rights, particularly as you refer to this in the annual report when you talk about the need to prioritise spending at the same time as looking at the loss of some sports rights and some gains as well. Mr Thompson: First, sports remains a very important part of the BBC service to many of our licence fee payers. We know very clearly that licence fee payers do expect to get a really broad diet of sport on TV, radio and on the web from the BBC. Overall our portfolio of sports rights is in pretty good shape, I think. We have probably the best basket of football rights we have had in our history, at UK level certainly. We have strong positions in many other sports. This summer there has been some controversy about test match cricket. First, we are able and very pleased to be able to cover test match cricket on radio. Secondly, it was the ECB which decided to part company with the BBC after many years in the late nineties. We certainly explored the possibility of bidding this summer for test match cricket. It is quite complex for us. One of the things that the green paper asks us to think very carefully about is competing with other public service broadcasters for rights. Channel Four had the rights and we did not know but it seemed pretty clear that Channel Four was quite keen to hang on to the rights. Given our other priorities we decided at that point not to bid for the rights though we did not expect at that point that the rights would go to a subscription broadcaster and would be lost to free-to-air. When test match cricket rights come up in the future we will certainly look at them as we look at all major rights as they come up. The broader point is that, despite the various changes in technology, despite the arrival of Sky with, particularly in football, its innovative and very popular product in terms of live premiership action to subscription, despite greater competition, Channel Five and so forth, we remain committed to having a strong portfolio of sports rights and I have to say that currently where we stand, although I am sure there will be some losses and some gains, I do not see any reason why we cannot go on offering a lot of high quality sports for the public. Q45 Mr Sanders: From a licence fee payer's point of view do they not look to the BBC in particular to cover a national team when it is doing well? Whether that is rugby, soccer, curling in the Olympics, Wimbledon or whatever, they look to the BBC for the big sporting events and in particular they expect the BBC to be showing them when a national team is doing well. Mr Grade: If I may just offer a correction there, I am not sure about British nationals doing that well at Wimbledon. It is just a small point of factual accuracy! Mr Thompson: Yes, they do, and I think as far as we can we should try and meet that need but the economics of sports rights mean that it is not always possible. We have secured rights to the Olympic Games through to 2012 and indeed the Winter Olympics in 2014, we have access to the World Cup until 2014 and we have, as I have said, a very big basket of rights, including currently, for example, England home internationals as part of our relationship with the FA. As far as we can we try and make sure that these great national sporting moments are ones that licence payers get free to air, but the reality of the economics of sports rights means that you could in theory pay pretty much all of the licence fee just on sports rights and do nothing else and that would not be right either. Mr Grade: In regard to the test matches we are seeing the impact of removing the test matches from the listed events list. Whether that is a good thing or a bad thing is a matter of public policy. It is not for us to say. That is the result of removing test matches which always used to be on the listed events list. Q46 Mr Evans: Were you consulted about the removal of it from the listed events list? Mr Grade: Not me personally, I have to say. Q47 Mr Evans: Were the BBC at all consulted about removing cricket? Mr Grade: I will have to give you an answer separately to that. I have no knowledge of it. Mr Thompson: I was not involved at the time. I was not at the BBC. We can come back to you on that. Q48 Paul Farrelly: I am sure we will come to sports rights again in the future. I want to ask a couple of questions on what I will call mentionables and unmentionables in your report and the Governors' objectives. First, there is express concern in there about MPs' declining perceptions of the independence of the BBC. What on earth are you worried about MPs for? Mr Grade: We are very sensitive souls at the BBC. Our research shows that there is a real disconnect between, if I can use the word, the esteem in which the BBC is held by its licence fee payers as a generality and MPs in particular. I think it is the right thing for us to try and understand why that should be and what the concerns of Parliament as the representatives of the licence fee are and what lies behind those concerns and that disaffection and that disconnect in your perception - not you individually but as a group. I think it is incumbent on us to understand what lies behind that. Q49 Paul Farrelly: I am sure you are doing a good job but, if I can repeat this, I can remember that years ago the BBC refused to show The Monocled Mutineer again because of the outcry in the country. Should the BBC not just to stick to its guns? Mr Grade: It was transmitted. I was the Controller for BBC 1 at the time who had commissioned and transmitted it. Whether it was repeated or not I do not know. I had left by then. I had got on the escape committee. Mr Thompson: I think it is fair to say that this is one aspect of the BBC listening to various stakeholders. Behind your question the views of the general public, the licence fee payers, are the most important measure of how the BBC is succeeding, but we are interested. We do not take impartiality for granted and we try very hard to work on the objectivity and accuracy and impartiality of our journalism. We are interested in perspectives from wherever they come. We are absolutely interested in perspectives from representatives of political parties both inside and outside Parliament. I am not saying that we are going in some way to distort or change what we do because of that but we want to understand why those concerns are there. Mr Peat: From the viewpoint of the Governors we need to know more about why there are these differences before we know whether we should be worrying about them unduly. Q50 Paul Farrelly: Before anybody mentions John Humphrys can I move on to a question about something that is not really mentioned in this report, nor in the Governors' objectives, historic or future, nor in your mission, which is the role of the BBC in promoting a creative Britain. I looked through the report and it is only in the grudging section called "Compliance" that I find any reference to the BBC's responsibilities and relationships with the independent creative sector and it shows in fine print that you exceeded your target of 25 per cent of quota, 30.3 per cent this time. I wondered why you were not singing from high heaven about it and then I get right to the end of the report and on page 146, table 21, it shows that you spent £329 million on independent production, which is nowhere near 30 per cent; it is not quite 15 per cent of your total income. Why is not the BBC talking more about its role in promoting creative Britain and what do you think, with your Channel Four experience, you can do to bring back the spending of the BBC in the independent sector more in line with the percentage target which you just measure in terms of hours? Mr Grade: From the Governors' perspective and from our position we want to be sure that we are compliant with the quota, obviously, and the quota for independent production exists quite correctly to ensure that the conflict between BBC in-house production and independent production is underpinned by some guarantees. There is a development further on which I am sure the Director-General would be happy to talk about. What the Governors wish to see is that there is a clear process and a clear ambition which is implemented, which is to get the best programmes for the licence fee payers from whatever source. We have taken a real deep interest in the proposed arrangements with the independent sector which the Director-General can outline. We have taken a very deep interest not just in what is proposed but how it is going to be implemented. A number of Governors have spent quite a bit of time off line outside of Governors' meetings getting to understand the commissioning processes inside the BBC and have actually been doing workshops on the editorial side of the house, understanding exactly how the commissioning process works so that they can ask the right questions and make sure that the implementation of the new arrangements with the independent producers are having the desired output. Mr Thompson: I feel totally committed to the BBC's big role as an investor in and partner with the whole of creative Britain. That goes from the orchestras we support to all the other ways in which we interact with the creative industries and I have talked about some of our plans around the UK. The 30.3 per cent figure is the narrow definition of eligible hours of television independent commissions. It excludes some areas, and BBC News would be a good example, where we have and I think we are right to have an in-house solution to the provision of news. In addition to that spend we have a voluntary quota for independence on radio production. We are going to extend that to radio nations. We are also opting for a 25 per cent voluntary quota in new media, so we are very keen to open up the BBC to the independent sector. A year ago we announced the idea of a Window of Greater Competition whereby we hold in-house capacity at a lower level than the headline quota would suggest so that there is space for both in-house and commissioned work. Over the course of the last year we have got to a position in dialogue with PACT, the organisation which represents independence in this country, on whether they are supporting the idea of the WOGC and supporting our proposals. The mood music between the BBC and the independent sector has been transformed over the last 18 months and they want to see how the plans work out but at this stage they have expressed confidence in the plans we have suggested. Going forward, one of the most important values the BBC represents beyond the core delivery of that to the licence fee payers is the way it can help work, in Tessa Jowell's phrase, as a venture capitalist or catalyst for the wider creative industries. Q51 Paul Farrelly: Is there not for the Governors a serious issue here, both in terms of that wider role and talking about it and making it central to the mission in terms of the transparency of the accounts? There are lots of tables here but it is very difficult to find out how the independent/in-house split is made up across the programming, and also in terms of the value because it is barely 15 per cent. Anyone who takes an interest in this is always irritated, I must say, when, at the end of a radio or TV programme it says, "This is a Smith, Jones or Bloggs production for the BBC" and Smith, Jones or Bloggs either have long-standing BBC connections or are still employed by the BBC, and, secondly, when you see well-known formats created by the BBC which are simply transferred out to independent production companies without any element of creativity and that is how you meet the quota. There is an issue here for the Governors, is there not? Mr Peat: As a governor I would say we do take this very seriously. The commissioning process is hugely important. I am one of those who have been and had a workshop on exactly how this works. It is not just a matter of making sure that the independents and the BBC in-house people have the same access to commissioners on an even-handed basis. It relates to the nations and regions point as well. Getting a commissioner for comedy based in Glasgow is a huge step forward which will help both the independent sector and BBC Scotland. This is something that is close to our hearts. If you say that the tables in the report do not provide an adequate reflection on this I am very happy that we look at this again for the next report and see whether it can be more carefully set out so that your point is answered. Mr Grade: On the credit side I think it is important - and I defer to the Director-General here and I assume that it is still BBC policy because I have not seen any change on air, radio or television - that due credit is given to the producing entity, whether it is in-house or whether it is Hat Trick Productions or XYZ Productions Ltd for Manchester or whatever. It is very important for the independent producers that they get that credit. There has been no change in that policy as far as I can see. Mr Thompson: No. Mr Grade: They do get due credit. Q52 Adam Price: Can I just say that John Kavanagh's recent piece in The New Statesman aroused a lot of interest but also his core argument that the journalism that the BBC has been less robust or more risk averse since Hutton has a degree of resonance among some observers. The BBC has accused the Political Editor of The New Statesman of lying and, bearing in mind the last time the BBC accused anyone of lying the Chairman of the Governors and the Director-General resigned, do you stand by that position, that there was no truth either in the specific allegation in relation to John Humphrys or in the general point about the journalism of the BBC? Mr Grade: There are two aspects to the Editor of The New Statesman's piece. One was the "factual" basis for his story. Then there was a lot of opinion about how the BBC was behaving in the post-Hutton era. I would like to go on record now as saying absolutely categorically that on the factual side it made good reading, it made for good conspiracy theory, but there is no truth in it whatsoever. When the story appeared, in my role as the Chairman of the Governors, where the responsibility for the independence and impartiality of the BBC ultimately resides, it was clear that newspapers were making allegations that called into question the BBC's impartiality. It was therefore quite proper that I made a single telephone call to the Director-General and said, "I think you ought to look into this. Would you let me know what this is all about? If any of this is true what are the facts behind this?". That was the extent of the conversation. There were never other conversations with other members of staff. It is not my job to do that. I was concerned that we get to the bottom of it and that we say publicly that since the BBC's impartiality had been impugned by these stories the Governors were on top of this. Q53 Adam Price: So nothing you said privately could possibly have been misconstrued as suggesting that you believed John Humphrys had been treated leniently? Mr Grade: No, I am absolutely certain. Mr Thompson: Can I just say for my part that I thought the story was utterly untrue in most of the statements which it made on this particular story, none of which by the way was checked. There was no attempt to check the factual accuracy with us. If they had checked the piece would not have appeared because it simply was not true. More generally, some of the suggestions in it are preposterous. The piece claims that we have issued instructions to, presumably, all editorial staff that "people should go soft on ministers and soft on the Government". I would love to see such instructions. I would love to imagine a world where you could issue such instructions. I would never want to issue such instructions in a million years, but the idea you could do such a thing without it instantly becoming public knowledge --- we have an absolute code of honour about this. What has been interesting in the days since this, quite apart from the fact that I have managed to calm down enough to write an email to staff about it, is that several of our editors - Kevin Marsh, Editor of the Today programme, and others - have quite independently volunteered to come forward to say what utter nonsense this is. Of course there is a debate to be had about various aspects of impartiality; there always will be, but it is a long way from that kind of broad debate to say that the management of the BBC or the Governors of the BBC are issuing instructions that the BBC should go soft on the Government. It may be that you find a resonance in this story. I really do not. A few weeks ago the Prime Minister was letting me know that he was profoundly unhappy with some aspects of our coverage of Katrina. I made it clear immediately that I thought our coverage had been outstanding. If anyone saw Panorama on Sunday, the idea that this is an organisation which is afraid to properly, rigorously, accurately, objectively examine Government policy --- I cannot see any diminution in that in the last 18 months. If you ask the public about the trustworthiness of the BBC, that rating has gone up since Hutton, not down. The public absolutely want us to hold public figures to account. There is no sense I get from the public that their confidence in the BBC has diminished at all. Q54 Adam Price: Could I ask a quick supplementary related to the independence of the BBC's journalism? I understand that the Metropolitan Police have asked for some footage of Muslim clerics following the Panorama programme and the court has ordered footage related to the G8 demonstration to be delivered as well. Is there a danger, in the light of the Incitement to Religious Hatred Bill, the proposals on the glorification of terrorism, that the BBC's cameras effectively could end up becoming the eyes and ears of the state if there is continuous demand for video footage? Mr Grade: I think this is a matter for the editor-in-chief. Mr Thompson: This is a live issue. We have not handed over any material at the moment. We await further developments, including potential legal developments, on this story. Of course, it is for the BBC to abide by all laws. At the same time it is very important that we maintain our independence as an organisation and so we look at each of these cases on their merits, but if I may say so we are right in the middle of that case at the moment. Q55 Mr Evans: Mark, can I just one question? On page 89 of the report it says that 13 Governors got paid bonuses of £546,000. You refused to take a bonus because you thought it was wrong with all the redundancies that were being made within the BBC. Do you feel somewhat let down by your other Governors that they did not follow your line? Mr Grade: It is the Executive Directors, not the Governors. Q56 Mr Evans: Sorry; do forgive me. Mr Thompson: I will hand over absolutely to Michael as Chairman of the Governors. The remuneration of senior executives is a matter for the Board of Governors of the BBC. I can make recommendations about other directors, obviously not about myself. I felt I was in a particular position. I had come into the organisation and been the architect of a very big change programme and I did not personally feel it was right that I should be considered for a bonus. I waived my right to be considered for a bonus. I felt about all of the other employees of the BBC though that we should have paid them in the normal way. We are paying all other members of staff in the normal way. These were other directors who had been set their objectives for the year before I arrived. Their contracts included a provision for a bonus and I thought that I should recommend the bonusing of these colleagues in the normal way and indeed encouraged the rest of the executive board to be considered for bonuses in the normal way. However, it is also true that, quite independently, both Michael and I had come into the BBC and thought that the recent history of contracts for senior managers with quite large bonuses, up to 30 per cent, did not feel right for the public service culture of the BBC, so I was very pleased when the Remuneration Committee of the Board of Governors decided to make a change. Michael, do you want to pick up the story? Mr Grade: I would just say in answer to your original question that I sit on the Remuneration Committee, I do not chair it, but the Remuneration Committee, and I think I speak for all of them, respected Mark's decision to waive his bonus and respected his colleagues' decisions not to waive their bonuses. It seemed to us perfectly proper. We did not query that at all. Irrespective of the bonus scheme one of the first things I did when I arrived was declare that I was unhappy with the level of the bonus. I was also unhappy with the performance criteria which are required to be met. There was nothing in there about efficiency, productivity and so on and we embarked on quite a lengthy process, obviously informed by the usual outside pay consultants and so on, and we formulated a new bonus scheme which reduces the potential from 30 per cent to ten per cent of salary. I think a limited bonus scheme is justified inside the BBC at executive director level. It is a way of signalling to senior people inside the BBC about their performance of the previous year. Q57 Mr Evans: So you are thinking of extending it, are you, throughout the entire BBC? Mr Grade: That is a matter for the Director-General. Mr Thompson: Some members of the BBC are bonused, some are not, but the idea of a common ceiling across the BBC of ten per cent as a maximum is a good idea, and as far as possible I think the idea of beginning to bonus people working in teams together across the organisation is a good idea, but we are looking at that. Mr Grade: I think we should exempt from that ten per cent the commercial activities of the BBC where different incentives may well apply. Mr Thompson: Yes. Q58 Chairman: Unless any of my colleagues have burning issues to raise, can I thank you very much for giving up your time? It has been a very helpful session and we shall look forward to continuing our dialogue over the months to come. Mr Grade: Thank you, Chairman. Mr Thompson: Chairman, we are very happy to invite the new committee to come and visit the BBC and see some of the things we are up to, some of the new services we are up to in particular, at a time of your convenience if that is useful to you. Chairman: I am sure it will be. |