Memorandum submitted by the Department for Culture, Media and Sport

 

Background

 

1. The history of the BBC's commercial activities goes back a very long time and it is a long accepted principle that these activities are in the interests of licence fee payers.

 

2. The commercial operations and the issues surrounding them were considered recently in the course of the last Charter Review process. The Government took into account the concerns expressed about the commercial activities (see paragraph 5) and balanced these against the underlying principle, backed up by consultation and research, that the BBC should continue to operate commercial services in order to return value to the licence fee payer. The outcome was the approach set out in the 2006 Charter and Agreement, which allows the BBC to continue with its commercial operations but with various measures in place to address the concerns raised. The clauses primarily relevant to the commercial services are 68-74 of the Agreement.

 

Role of the BBC Trust

 

3. In relation to the commercial services, the BBC Trust has several roles. The Trust will:

 

(i) hold the Executive Board to account for ensuring that the BBC's commercial services are operated according to the four criteria which the commercial services must meet (ie. the services must fit with the BBC's Public Purpose activities; must exhibit commercial efficiency; must not jeopardise the good reputation of the BBC or the value of the BBC brand; and must comply with the BBC's fair trading guidelines and in particular avoid distorting the market);

 

(ii) set and apply the commercial service approval guidelines, including the approval or rejection of proposed transactions as required under the guidelines;

 

(iii) approve the BBC's commercial strategy and hold the Executive Board to account for delivering it.

 

Role of the BBC Executive

 

4. The Executive Board is responsible for:

 

(i) overseeing the activities of the BBC's commercial arm and exercising the BBC's functions in relation to the commercial subsidiaries;

 

(ii) approving targets and budgets, subject to the commercial strategy approved by the Trust;

 

(iii) ensuring that the business of the commercial arm is compatible with (a) the requirements of the Charter and Agreement and (b) high standards of financial management and control;

 

(iv) securing publication of an annual report and accounts relating to the BBC's commercial services.

 

5. The evidence is set out by reference to the specific matters which the Committee is proposing to examine.

 

The benefits and opportunities offered by the BBC undertaking a range of commercial activities in the UK and abroad

 

6. Much of what the BBC produces has continuing value which can be exploited in the interests of licence fee payers. That is why the BBC has been allowed for many years to run commercial services with a view to returning value to licence fee payers - for example, by reinvesting in programmes, thereby reducing pressure on the licence fee. The Government believes that it is entirely right for the BBC to maximise commercial revenue, in appropriate areas, to reinvest in programming and talent to the benefit of licence fee payers.

 

7. This policy is supported by the outcome of consultation undertaken during the Charter Review. 90% of people surveyed agreed that 'the BBC should raise as much money as it can from selling its programmes and other products'.

 

The potential risks to the BBC, licence fee payers and other stakeholders

 

8. The risks to the BBC and its stakeholders were fully examined during the Charter Review. Such risks included:

 

- the commercial services being sold or structured in a way that might give them an unfair advantage over competitors, leading to market distortion;

- commercial services being prioritised at the expense of the core duties of public

service;

- the commercial activities having no relation to the BBC's publicly-funded services;

- an absence of fairness and transparency in how the commercial operations were run

- cross-subsidy from licence-fee funded activities;

- too much cross promotion of the commercial services by the public services;

- whether the income received was being spent in the best way;

- whether the arrangements would deliver the best value for money. It could be the case that a sale or licensing of the asset creates better value for money for the licence fee payer;

- a negative implication for the BBC's brand or values;

 

9. The Charter and Agreement include several provisions to address these risks. They encompass:

 

- an obligation on the BBC Trust to have regard to the competitive impact of the BBC's activities on the wider market;

- the four criteria which the commercial services must meet (ie. the services must fit with the BBC's Public Purpose activities; must exhibit commercial efficiency; must not jeopardise the good reputation of the BBC or the value of the BBC brand; and must comply with the BBC's fair trading guidelines and in particular avoid distorting the market).

- an obligation on the Executive to submit a full and open assessment of the performance of the commercial services, including a statement of compliance with the four criteria.

- an obligation on the Trust to adopt a statement of policy on fair trading and hold the Executive Board to account for compliance with it;

- an obligation on the Executive to have a commercial strategy which has been approved by the Trust.

 

10. The BBC is, of course, subject to competition law, including State aid law.

 

The extent to which the BBC's commercial activities meet the criteria required of

them

 

11. Clause 69(5) of the Agreement specifically vests sole responsibility in the Trust for holding the Executive Board to account in ensuring that the commercial services criteria are satisfied.

 

The appropriateness and effectiveness of the governance framework for the BBC's

commercial activities

 

12. The Government remains of the view that the governance framework embodied in the Charter and Agreement is the right one. It is not, however, appropriate for the Government to undertake an on-going assessment of how well the arrangements are working now that the Charter is in force.

 

The future of BBC Worldwide and other BBC commercial subsidiaries

 

13. Clause 72 of the Agreement gives the Trust the approval powers for the BBC's commercial strategy generally (which must include the future of BBC Worldwide and other BBC commercial subsidiaries).

 

How the money returned to the BBC by its commercial operations is invested.

 

14. Under the terms of the Charter and Agreement, this is a matter for the BBC.

 

October 2008