Appendix: The BBC's response
1. During the course of the White City 2 project
additional costs were identified which added over £60 million
to the total cost, an increase of 29%. The whole life costs of
projects should be assessed, and made available to BBC Governors,
before projects proceed.
The original investment agreed by the Governors related
to the construction costs of the White City 2 development. The
BBC welcomes recognition by the NAO that the construction and
basic fit out was delivered within the budget and timescales approved
by the Governors.
The £60m, referred to by the PAC, was not part
of the construction project and £40m related to specialist
broadcast technology equipment, including edit suites and playout
facilities. This cost was known about at the time of the original
investment case. It was specifically budgeted and agreed by a
separate legal entity, BBC Broadcast Ltd (now Red-Bee Media).
The BBC accepts the PAC's recommendation that total
project costs should be included in the original investment case
and have taken steps to seek to ensure that furniture, fit out
and staff move costs are included in all cases presented to Governors
for approval. Nevertheless in a dynamic changing broadcast operational
environment it is unlikely to be possible to envisage all the
possible uses to which a building will be put by the BBC over
its life.
2. Even after signing the contract with Land Securities
Trillium, the BBC made 300 variations to the White City 2 scheme.
The BBC should better integrate design and construction, as recommended
by the Office of Government Commerce, to reduce the risk of design
changes after contracts have been let. Introducing variations
after deals have been signed inevitably heightens the risk of
cost increases.
The BBC accepts the PAC's suggestion to follow recommendations
by the Office of Government Commerce when entering into such contracts.
However, in this instance, out of the 300 contract
variations, 129 were simple confirmation of designs at no extra
cost to the BBC. The NAO's report acknowledges that most of the
variations were to finalise the detailed design and provisional
sums rather than involving significant changes to the agreed design.
According to our cost consultant, the number of variations and
the total value of them is well below the norm for a project of
this size and complexity. There was an allowance in the project
budget for contract variations, and therefore the 300 variations
did not result in any extra cost to the BBC or in delays in completing
the building.
3. The BBC sublet space to BBC Broadcast Limited,
a commercial subsidiary, for rent lower than the cost to the BBC.
Licence fee money should not be used to subsidise the BBC's commercial
subsidiaries. The rent charged for sublet buildings should meet
the BBC's costs or match the market rate if this is higher. As
well as recovering its current costs, the BBC should also recoup
previous undercharging from individual subsidiaries.
The BBC does not use the licence fee to subsidise
the BBC's commercial activities.
The basis of the rental charge to BBCB was reviewed
and updated in spring 2005 by the BBC's Fair Trading Team. The
BBC achieved a full recovery of costs under the original unitary
charge basis and continues to achieve a full recovery under the
current arrangements.
4. Because of the way the project was financed,
the BBC did not know whether the return to the private sector
shareholders was within the limit specified in the contract, and
the BBC was unlikely to secure a share of any refinancing benefits.
The principle has been accepted that the public sector should
share in gains that arise when projects are refinanced. Public
bodies should recognise that obtaining refinancing benefits, and
identifying returns to the private sector, is more straightforward
where financing is linked directly to the project in question.
The National Audit Office report states that the
partnership with Land Securities Trillium was unlikely to achieve
refinancing benefits for the BBC. However, as the report was being
finalised, the BBC did re-structure the lease, achieving a saving
to the BBC of £63m in today's money. In a competitive tender
exercise, the decision to appoint Insight (LST) was based on the
fact that over the life of the deal, this contractor offered the
lowest price to the BBC. In addition to the £63m savings
the BBC achieved, LST produced cash benefits to the BBC of £33m
over the first four years of the partnership.
5. The BBC's plans to cut staff and move others
to Manchester increase the risk of space and technical capacity
at White City 2 being under-utilised. While the BBC expects the
new buildings to be fully used, its focus should not be exclusively
on White City 2 but on achieving the most cost-effective solution
to its accommodation needs, taking account of the whole of its
estate. The BBC should not hold on to property which it does not
need or which cannot be used cost-effectively.
The precise details of accommodation requirements
in the future will be at least partially dependant on the progress
of the BBC's own cost savings initiatives and the outcome of the
discussions with HM Government on the level of the licence fee
in the next Charter period from January 2007. Nevertheless, even
assuming the move to Manchester goes ahead the London premises
are expected to be significantly rationalised with concentration
of activity into 3 sites of which the new development on the White
City site is key.
6. More than two years after the Energy Centre
was completed, the space for a combined heat and power installation
is not being used, and the BBC is paying for the empty space.
This space, together with vacant office space in the Energy Centre,
has cost around £1 million a year, and the BBC should put
the unused space to productive use as soon as possible.
The empty space for the combined heat and power plant
comprises 2,335 sq ft or 1% of the total project and will be fully
utilised when the final phase of the site is bought on stream.
The vacant office space is currently a shell and core building
and fit-out for occupancy commences this year.
7. The BBC did not follow public sector good practice
in several important respects on this project. There is guidance
from the Treasury and the Office of Government Commerce on estimating
whole life costs, monitoring returns to the private sector, obtaining
refinancing benefits, and integrating design and construction.
The BBC would benefit from drawing on this guidance.
The BBC welcomes the PAC's recommendations and will
endeavour to incorporate this guidance in future projects, where
practicable.
8. The Comptroller and Auditor General's work
is providing fresh insights about the BBC's use of public money,
but is being done under arrangements which end in 2006. The Comptroller
and Auditor General should have a continuing role beyond 2006,
which should include full access rights enabling him to identify
and select subjects for examination.
The BBC welcomes the work of the Comptroller and
Auditor General and the NAO. The Communications Act, agreed by
all parties at the time, has been successful and has provided
the BBC with many valuable lessons learnt.
BBC believes that this arrangement best balances
parliamentary scrutiny of licence fee expenditure with the editorial
independence of the BBC and should be maintained. The BBC is therefore
working with the Comptroller and Auditor General to ensure a similar
agreement is reached for a continuing relationship post 2006.
| 
