UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 494-i

House of COMMONS

MINUTES OF EVIDENCE

TAKEN BEFORE

THE COMMITTEE OF PUBLIC ACCOUNTS

Wednesday 17 MARCH 2010

 

THE BBC'S management OF THREE MAJOR ESTATE PROJECTS

 

BBC TRUST

MR JEREMY PEAT

 

BBC

MR MARK THOMPSON, MS CAROLINE THOMSON and MS ZARIN PATEL

Evidence heard in Public Questions 1 - 109

 

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Oral evidence

Taken before the Committee of Public Accounts

on Wednesday 17 March 2010

Members present:

Mr Edward Leigh, in the Chair

Mr Richard Bacon

Mr Ian Davidson

Nigel Griffiths

Keith Hill

Mr Austin Mitchell

Mr Alan Williams

________________

Mr Amyas Morse, Comptroller and Auditor General, and Mr Keith Hawkswell, Director, National Audit Office, gave evidence.

Ms Paula Diggle, Treasury Officer of Accounts, HM Treasury, gave evidence.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

THE BBC'S MANAGEMENT OF THREE MAJOR ESTATE PROJECTS

Examination of Witnesses

Witnesses: Mr Jeremy Peat, Trustee for Scotland, BBC Trust, Mr Mark Thompson, Director General, Ms Caroline Thomson, Chief Operating Officer, and Ms Zarin Patel, Chief Financial Officer, BBC, gave evidence.

Q1 Chair: Good afternoon. Welcome to the Committee of Public Accounts. First of all I would like to mention the Speaker and Deputy Speakers of the Legislative Assembly of Ontario who are with us this afternoon and also the Clerk of the PAC of Swaziland. You are all very welcome. Today we are considering the Comptroller and Auditor General's Report on The BBC's Management of Three Major Estate Projects. We welcome back to our Committee Jeremy Peat, who is a BBC trustee. Am I right in thinking this might be your last appearance before us, Mr Peat?

Mr Peat: I leave the Board of Trustees at the end of this year, so unless we complete another report and come to a hearing in that period this is likely to be my seventh and last appearance.

Q2 Chair: Thank you very much. We are very grateful to you for coming before us. Of course we welcome back Mark Thompson, who is the Director General. We also have Zarin Patel and Caroline Thomson with us. The BBC has been involved in delivering four major estate projects over the past ten years and we have already reported on one of these, the White City development. That was in 2005. Together these projects cost more than 2 billion. It is a lot of money. There are obviously some concerns in the Report about the way phase one of the Broadcasting House project has been carried through, although there have been some recent improvements in the management. However, Mr Thompson and Mr Peat, I would like to pursue some of these problems with you. Mr Thompson, we know that the problems on Broadcasting House cost the licence fee payers over 100 million. How did you allow this to happen?

Mr Thompson: These three projects represent a very, very big modernisation and transformation of large parts of the BBC, its main central London headquarters, BH, our headquarters in Scotland and our new Salford headquarters. Taken together, I believe this has been a very successful programme indeed. It will leave the BBC with state of the art digital facilities. The way the projects were constructed meant that the current licence payer has not had to have money diverted from services to pay for the capital investment involved. That has been organised in a different way and we have maintained our services. At the end, the BBC is ending up with a property portfolio which costs less than the property portfolio it replaces. The underlying picture of fit for purpose buildings enabling the BBC to deliver the service of the future, with costs lower than when we started, is a story of success, but it is true that the first phase of Broadcasting House encountered a number of problems. The building itself, Broadcasting House, is a listed building. When work began on the refurbishment part of the building, it was discovered that the so-called Regent Street disease was present in the building. This is an eating away of the underlying metal structure of the building which needed much more refurbishment and replacement than was believed necessary. There were some other issues with the construction of the project as well. In 2004 we thought it was necessary to take steps to put this project back on track and that involved some changes to the leadership of the team operating and driving the project, a new head of property, a new project leader on the project itself. I had arrived in June 2004 as Director General and very quickly I then started talking to and working with the then Board of Governors to make sure that the governance of the project was put in place. As the NAO Report acknowledges, from mid-2004 we started getting the project back on track and essentially, although it took us some time to fully stabilise the project, BH and in particular phase two of BH has got back on track, and phase two of BH is currently on schedule and somewhat below budget. We think we took a project which did have some difficulties with it, where there was a cost overrun, and we now have it back into place. One of the issues pointed out by the NAO - I think we would accept this - is that, when in the early years of the decade Broadcasting House phase one was approved, inadequate provision was made by way of contingency. It seems to me, to be honest, if an adequate contingency had been put in place at the start of the project, this is a project which would not have overspent.

Q3 Chair: Ms Thomson, you appeared on BBC Newsnight, your own media outlet, when there was quite a lot of controversy about this at the time the NAO Report was published, and you said, "The level of overspend on the early stage of Broadcasting House, while a lot of money and while it should not have happened, was 5% of the total cost of the project. That actually compares very well with a lot of other public building projects. The NAO itself has had an office building project at the moment which is 7.5% over budget." Would you like to justify that statement?

Mr Thompson: I think ---

Q4 Chair: I was asking Ms Thomson that. She made the statement, not you, Mr Thompson.

Ms Thomson: Clearly we should not have had an overspend on phase one, as I said. However, 5% overspend does compare well with a number of other projects, not just the NAO's own offices but for example Portcullis House which I think was 18% overspent.

Q5 Chair: You said on your own media outlet, "The NAO itself has an office building project at the moment which is 7.5% over budget." Will you please justify that statement?

Ms Thomson: Yes. That was based on a report to the PAC, the papers which I have somewhere.

Q6 Chair: Did you check this figure with the NAO before you spoke about it?

Ms Thomson: I checked it with the PAC papers.

Q7 Chair: Did you check it with the NAO before you made this statement?

Ms Thomson: No. I checked it with the PAC papers.

Q8 Chair: What would you feel like if the NAO made a statement about the BBC without checking with you first?

Ms Thomson: I suppose I would prefer them to check with me first.

Q9 Chair: Would the Comptroller and Auditor General like to comment on the accuracy of this statement that Ms Thomson made on her own media outlet?

Mr Morse: In the outturn the project will cost more than the original budget, that is true, but the reason for it is because of unknowable defects at the start of the project and not because of any element of project management.

Q10 Chair: It is slightly different in this case. May I ask the NAO officer who compiled this Report, how much of this 100 million overspend of the BBC might be put down to unknowables?

Mr Hawkswell: It is very difficult to quantify the unknowables but there were knowables within that 100 million, if I could put it that way. There were about 28 million-worth of scope changes and 55 million-worth of that 100 million is what we might call knock-on costs from the fact that the Broadcasting House one project was delayed. That meant that the lease had to be extended on Bush House and some technology costs had to be incurred because of the delay on the Broadcasting House project.

Q11 Chair: Is this statement right, Ms Thomson, because you made the statement on Newsnight so presumably it is accurate. You were trying to say that the NAO building is 7.5% over budget. You have said that any overrun that was made was entirely due to unknowables. You have just heard the NAO say that 28 million of your overrun was due to matters which you should have known about if you had a proper business case. Either what you told Newsnight was true or it was not. If it is not true, you should apologise to the NAO.

Ms Thomson: First of all, I did not say it on Newsnight, just for the record.

Q12 Chair: Where did you say it?

Ms Thomson: Probably on the ten o'clock news.

Q13 Chair: I am sorry to make such a terrible mistake. You used your own media outlet ---

Ms Thomson: I would quite like to answer the question if you give me a minute.

Q14 Chair: You used your own media outlet to not tell the truth about the NAO.

Ms Thomson: I told the truth about the NAO in that the document which I had access to, which was the report to the PAC, showed this was what it indicates. Unfortunately, I am not in a position to comment on whether the NAO overspend was on knowables or unknowables because I do not have access to any more detailed information. You are in the fortunate position that you have more detail of the BBC's information because we are being transparent and letting the NAO in.

Mr Thompson: Let me read from a note by the C&AG to the PAC about the building. It talks about the outturns, "This will increase the total amount of funding approved for this project from 77.4 million to 83.24 million, an increase of just under 7.5%". Shall we talk about knowables and unknowables? The 28 million in BH one, the increase of scope, unquestionably included new things that the BBC believed it wanted to do in this building which it had not known about at the time of the original approval of the project. Let me give you an example within the 28 million. In that time, the BBC World Service successfully argued the case for and got approval from the Foreign and Commonwealth Office to launch two new television services, an Arabic television service and a Persian television service. It was decided, as part of the long range plan for the whole of the World Service to move into the new Broadcasting House that it made more sense, rather than launching these services at Bush House, building television studios and then transferring them at the end of the project to Broadcasting House, to launch them in the building, so two new services. One of them is now a 24-hour a day service. The Persian service, I believe, is 12-hours a day. One of the things we added to the scope of Broadcasting House to save money in the long term was facilities for two new Arabic and Persian television services. That was an increase in scope. It is not unreasonable, it seems to me, to vary the budget. There was no way that the people who originally submitted and approved the original Broadcasting House project could have known at the time that these services would come into scope. There are other service changes and other adjustments in the budget, but my own view is to say that I am sure that the National Audit Office, just like the BBC, finds that actually these projects take a sufficiently long time to develop and sometimes the precise mission of the organisation and therefore its needs change; secondly, also, you sometimes come across previously unknowable and therefore eventualities that you are unable to plan for. It seems to me that it is a better process to try and adapt and develop these projects. Specifically the Scottish project for example, we changed the scope to reflect the fact that we believed the studios should be equipped for high definition rather than just standard definition television. That affected the technology spend. I think the idea that you adjust these things as you go is not an unreasonable one.

Q15 Chair: For the sake of the record, the NAO project was delivered on time whilst yours was four years late. Do you think, Mr Thompson, it would have helped if there had been a proper business case set out on these projects at the beginning, so you would set out exactly what you want? We saw this problem before in White City, did we not? Was this a failure on your part not to set out in a proper business case exactly what you wanted to achieve?

Mr Thompson: The point I have just tried to make is exactly what you want to achieve in an industry like the media ---

Q16 Chair: Or what would be delivered, rather, may be a better way of putting it.

Mr Thompson: I think my view is that across these projects the basic business case and business proposition was put well. Best practice, to be honest, has changed over this period but where we would accept that the early cases, particularly for the Broadcasting House project, were not as complete as they should have been is in the identification up front of the benefits that could be realised. That is an area where we are now seeking to improve the way - and indeed I believe we have already improved the way - that we set out our cases. Having said that, as I said at the start though, there is absolute evidence that we have and will deliver with these projects actual benefits to the licence payer who will end up with properties and facilities which are cheaper than the ones they have replaced.

Q17 Chair: Mr Peat, you have now prepared the Trust's new guidance on issuing business cases, have you not? A lot of these projects were started under the previous regime of the governors. How have you changed the culture of the BBC to ensure that the licence fee money is spent with more care, with a proper business case setting out at the beginning what is going to be delivered? You are obviously trying to change the culture. What success do you think you have had?

Mr Peat: I think we can demonstrate a considerable amount of success but no-one would claim that we have everything absolutely right yet. What I am pleased that we are able to have confirmed by this NAO Report is that the second phase of Broadcasting House, the project at Pacific Quay and the project that is underway at Salford Quays all have been or are set to be delivered on time and on budget. That to me is significant success in this very difficult world of major property projects. I think that is success. What happened so far as the Board of Governors and then the Board of Trustees were concerned is that we saw, part way through the first phase of Broadcasting House, that all was not well, as did Mark as Director General and his colleagues. We brought in external consultants from Ernst & Young to help us to look at the project, how it was being specified, how it was being managed, and to help us to help the BBC to get it back on track. Ernst & Young worked very closely with us and we made all their reports available to the National Audit Office. They produced excellent reports that helped us to set the scene for the continuation of BH into phase two and helped us to be better prepared for the PQ and Salford Quays projects, as did the report on White City which you referred to earlier, which came in during this period. We made significant changes with the Executive to the approach. We made sure that high quality project management was in place for each and every one of the projects as it went forward and I do not think the management had been adequate in BH phase one for various reasons. I think the demonstration of our success is in this NAO Report, which shows a very positive and desirable outcome for the three projects I have referred to, but all is not yet perfect. It has been demonstrated in the NAO Report that at times we are not setting out with total clarity what is required in business cases. As you mentioned, we are revising our protocols which will be published shortly and we are setting out in those protocols the requirement of exactly what is required in business cases. We also now have the Programme Management Office in place, which is staffed with very senior and effective people, and we at the Trust receive regular reports from the PMO on all major projects and how they are developing. We have better processes. We will require better articulation of benefits going forward. We have the PMO in place and we have the successful delivery of those three projects I have referred to. Clearly, BH phase one was a disappointment. The overrun in time and in cost was not satisfactory, but I think we are much better placed now and we accept all the recommendations in this Report for how we can further improve things.

Q18 Chair: I am very grateful for that response, Mr Peat, because it is quite clear from the way you speak that you are admitting quite frankly the problems and you are not just acting as an apologist for the BBC. You approved Salford Quays in 2007. It did not include delivery dates. That is still three years ago, but we are still waiting for the detail of the benefits that it will deliver. I just wonder whether you are still struggling in the Trust to change the culture in the BBC. Obviously the previous answer you have given was a very honest answer. There had been problems. You are trying to turn it round. You are getting more expert people in the Trust, but I wonder whether you are still finding it difficult.

Mr Peat: Others may be able to provide finer detail but I think it is a slight misunderstanding as to this lack of time lines in the Salford Quays approval process. I was engaged in this as a member of the Finance and Compliance Committee and on the full Trust. Salford Quays came to us several times in several guises as the process was developed. We certainly saw full time lines for the project at different stages in that process. If they were not in one particular project, it was not because they did not exist; it was because there was a knowledge assumed that we all had and it was part of the overall understanding of the project. I accept there was not full articulation ex ante of the benefits and that is part of the process that needs further tidying up, but I think on the time lines all of us in the Trust knew what those were and they were articulated in other papers.

Q19 Chair: I do not want yet again to get into the same argy-bargy with you about the NAO having full access rights, but I would like to ask the Treasury, what is your latest thinking on whether you believe in the Treasury that the National Audit Office should have full access rights to the BBC?

Ms Diggle: There is a very powerful case for public audit of public resources to make sure that Parliament and the public can be reassured that Parliament's wishes about use of public resources are being carried out. We have not achieved that everywhere. The direction of travel is quite clear because we have just achieved NAO audit of the FSA. We plan to make further advances in that direction.

Q20 Mr Williams: May I say I was fascinated by the remarks from the Treasury in that it appears, for some reason, the Treasury loses the battle every time with the Department of Culture. I would have thought it would be the other way round but I would not expect you to comment on that.

Ms Diggle: I do not think I can say very much more, Mr Williams.

Q21 Mr Williams: I do not think you should. We like you too much to lose you from the Committee.

Ms Diggle: I have probably built in a bit more colour than I should have.

Q22 Mr Williams: Can I turn to the NAO. If you had been regularly auditing these accounts for some years as we have asked, is there any remote possibility you might have picked up that something was wrong in one or other of the projects a bit earlier than it was discovered?

Mr Hawkswell: Undoubtedly, if we did audit the accounts of the BBC, our day-to-day knowledge of the BBC would be superior just by virtue of being there and absorbing what is going on in the organisation, looking at the transactions going through the organisation's books. Yes, it would certainly be helpful.

Q23 Mr Williams: Part of the cost of keeping you out is the mess we are dealing with today?

Mr Morse: First, we have been aware of these issues for some time so I am not going to suggest they came as a great surprise. It is one of the reasons we were so keen to carry out the study on the instructions of the Trust.

Mr Peat: It is the reason we asked you to carry out a study.

Mr Morse: Exactly. That is fine. Be that as it may, we were keen to do it and you were keen for us to do it. If you are in an organisation as auditor, one of the things you have most concern about and a right to give general comment about is the control environment. Therefore, when you are looking at the position of whether or not objectives are really clearly set, the BBC is a strong organisation with a lot of management capacity and a very powerful advocate for whatever its current management views are. There is nothing wrong with any of that but the ability of the auditor to be heard on the record by statutory right, to comment and press for improvement is something which allows you to have a different role from the role, however valuable it can be, to do these reports, and I hope they are valuable. The BBC is certainly being more and more open with us in access to records. The reason that we do not see that as the same as being in the audit role is because of that ability to take the overview of what the control environment is like, which is really the role of the statutory auditor.

Mr Peat: Would it be helpful if I gave some further thoughts that we have had on the role of auditor following the discussion we had at our last meeting?

Q24 Mr Williams: Of course it would. That would be very helpful. I might have got there eventually, but it is helpful to have it brought forward.

Mr Peat: Obviously I went back to my chairman and discussed with the Trust the issues that you and others had raised about the role of auditor. We have looked at the position under the Charter Agreement and considered matters very carefully. We certainly believe that we have to abide by the arrangements set out in the Charter Agreement where the Trust is given the responsibility for ensuring value for money, for approving the BBC's auditor and for presenting the annual accounts to Government and Parliament. As you know, following that presentation, members of the BBC Trust and the Executive give evidence to the Culture, Media and Sport Select Committee. Our view is that, in order to carry on with this role, and indeed to maintain the BBC's independence which we have discussed before, we need our auditor, whoever that may be, to report directly to the BBC and the Trust. We also, as we discussed last time, require an auditor with a range of experience covering media, international matters, commercial matters and indeed the public sector. We have reflected and we would be very happy to consider the NAO as an auditor if they wish to tender for the contract when it is next renewed, which is likely to be in about 2012. They would of course need to demonstrate they were the best people and they would need to work within the current Charter framework, reporting to the BBC and the Trust. It is for the C&AG to consider whether this is something they could undertake within their present arrangements. I thought you might wish to note that we have reviewed this and that is our present thinking.

Q25 Mr Williams: C&AG, is the answer yes?

Mr Morse: That is a very helpful response and of course I appreciate it fully but why we need to think about it carefully is because what we have to be very careful of is that this does not take away from our statutory independence. I know you understand that, Mr Peat, and therefore we need to consider that carefully and how we can respond.

Mr Peat: I have here a note that it may be necessary for the NAO to go through some legal work, to work out whether this is appropriate. I would also note that what we have done in the course of the first months of this year is to agree with the C&AG an enhanced protocol whereby there is access to further materials, risk reports, audit reports, board minutes and the like, to add to the information available. We are trying to be as transparent as possible to the NAO because we value their work very highly.

Q26 Mr Williams: I now wish I was not retiring because I would like to be here for your next appearance before this Committee. Sadly, I will miss it. Thank you. That is a positive response and I appreciate that fact. Can I put to you three situations and just ask you to confirm whether they are correct or not? In the Siemens Technology contract, you overstated the projected savings by more than 10 million a year. That is correct, is it?

Ms Patel: I do not have the figures to hand but there were certainly comments in the NAO Report about the completeness of our costing and business cases.

Mr Thompson: Nonetheless, the savings through that contract were very, very substantial and by any possible value for money criteria the contract has delivered very substantial savings to the licence payer. In other words, had we not entered into that contract the licence payer would be much worse off than if we had.

Q27 Mr Williams: I know you never lose; you just would have won with more. On the second proposition, for the White City two development, you missed out 60 million of costs. Is that correct?

Mr Peat: If that is taken from the NAO Report as discussed, then I am not going to question it.

Q28 Mr Williams: For Pacific Quay, you increased the budget by 60 million over three years?

Mr Peat: For Pacific Quay I can answer fully. There was a project put to the Board of Governors in 2002 which was then revisited by the BBC Executive. It was increased in scale to allow for more activities by the BBC in Scotland. It was increased in technology scope to make it the first fully HD broadcasting centre, rather than the last fully SD broadcasting centre. The budget was then revised. It was taken back to the Board of Governors in 2005 and the figure of just over 180 million was approved at that stage. It was delivered to that budget, so the project was changed significantly between the 2002 figures and 2005.

Q29 Mr Williams: Just so I am clear, you have therefore agreed three points. You overstated projected savings by 10 million in one; for White City, you missed out 60 million of costs and for Pacific Quay you had to budget for an extra 60 million.

Mr Peat: The project changed significantly for Pacific Quay and it came back to the Board of Governors. The new, revised project increase in scale and technology cost was fully evaluated and approved.

Ms Thomson: Could I just add on Pacific Quay, I think the confusion occurs because the first approval given by the Board of Governors was a conditional approval. It was conditional on the finance being raised to build the project and they were told they could not spend any money on the project until they came back and had confirmed that the arrangements for the development were in place and the finance was in place. They did that two years later. During that two year period, we changed our broadcasting strategy to increase the amount of programming we were requiring from Scotland so the size of the building had to increase. They spent 12 million on design but that was all they spent in that two year period. They came back for final approval, having had that conditional approval, when they had the money and the development agreement in place.

Q30 Mr Williams: The facts are the facts.

Ms Thomson: The facts are indeed the facts.

Mr Thompson: That Pacific Quay delivered on time and on budget is the central fact.

Ms Thomson: And it has delivered 32% savings for BBC Scotland so it has been a very significant value for money proposition.

Mr Thompson: Please do not try and pretend this is some sort of debacle.

Q31 Mr Williams: No; it is just a mess.

Mr Thompson: In your view.

Ms Thomson: I have to say not in the NAO's view.

Q32 Mr Williams: If you do not mind, I ask the questions. You answer the questions that I ask. Could the reason for your conversion to the National Audit Office be because your internal auditors have been rather nasty to you? They actually said that the lack of relevant expertise in assisting the Broadcasting House project team was without precedent. Do you feel proud of that?

Mr Peat: I have already accepted that the first phase of Broadcasting House was unsatisfactorily managed and lessons have been learned since then. In sending the report out, we accepted that we regretted what had gone wrong.

Q33 Mr Williams: It is not about the project. It is about your control of it. That is what they are talking about. You did not provide the adequate expertise to get the right results. It was without precedent, it was so bad. That is the issue, not the fact of buildings and so on.

Mr Peat: What I am trying to get across is that I am accepting there were failings with the first phase of Broadcasting House. I am suggesting we learned major lessons from them and, for the second phase of Broadcasting House, for Pacific Quay and for Salford Quays, there have been significant improvements as shown by the NAO Report. Nothing is yet perfect. There are further improvements to be made, which we are working on, and I believe that there is a record of success in improvement but that does not take away that the first phase of Broadcasting House was not as well handled as it should have been.

Q34 Mr Williams: Because you have answered at such length, I will not go beyond this question. Do you realise that one of the fundamental errors as far as this Committee is concerned - and we have hammered it to department after department - is varying contracts after they have been agreed? It is Christmas Day for the contractor. When you vary a contract, you are over a barrel. You cannot go to anyone else. You cannot get competitive bids, so you are caught with it. Is that self-evident?

Ms Thomson: I would agree with you entirely. I was brought in to manage the BBC's property portfolio at the end of 2006 and the first lesson I learned was that the one thing you do in building projects is you control variations. That is why on Broadcasting House phase two we have had fewer than ten variations. That is why it is coming in on time and slightly under budget, with any luck. Certainly that is what the estimates are now. Whereas on Broadcasting House phase one, we undoubtedly did not control the change requests well enough and that is something we have owned up to and learned the lessons from.

Q35 Mr Williams: In fact, you not only did not control them. You went in a rather round about way at not controlling them. During phase one of Broadcasting House the BBC circumvented the contractual relationship with the developer by liaising directly with the subcontractor on contract variations. It is one mess piled on another mess.

Ms Thomson: That was indeed, quite openly, one of the problems with phase one of Broadcasting House that we learned the lesson from. We put a developer in place and then the relationships did not work out properly and we dealt directly with the subcontractor rather than with the developer. That is why we put it right. The Board of Governors called in the internal audit and then Ernst & Young. They helped us a lot to get a better structure in place. We put in the settlement and we have not done that in phase two. As the person responsible for phase two, I can tell you I have regular meetings with the developer and on every occasion he has said to me that the BBC's behaviour has been exemplary in how we have handled phase two. My point is simply not that we did not make mistakes. I think you are trying to have an argument, if I may say so, about something where we are actually in agreement, but we have learned the lessons from those and in phase two the proof of the pudding is in the eating.

Q36 Mr Williams: We paid for it.

Ms Thomson: We did not, actually.

Q37 Mr Williams: The licence fee paid for it. You learned the lesson but the public paid for it.

Mr Thompson: Even in phase one of Broadcasting House, the numbers of variations are, by the way, not exceptionally large for major public contracts. It was one of the weaknesses we recognised in phase one. I came on to the scene as Director General in the summer of 2004. The fact that there were too many variations being requested and that the controls of variations were not good enough was one of the problems with the project. A second problem with the project was it was too complex and there were one or two engineering and design aspects of the project which were too complex. One of the first things we did was to simplify the project and to work out a simpler way, in particular, of getting phase two to work - quite a painful process in some ways - so that we could make sure that phase two delivered on time and on track. If you track, if you like, the way the BBC has dealt with these very big projects - Broadcasting House phase one, Pacific Quay, Broadcasting House phase two and Salford Quays - you can see, and the Report is rather clear on many of these lessons that have been learned.

Chair: Poor Mr Williams. His period of questioning lasted over 15 minutes but he only had about two or three minutes and, ladies and gentlemen, you had over 12 minutes, so can we please have crisper answers. It is not fair on my colleagues. I know the BBC talks for a living.

Q38 Mr Mitchell: Just looking back, the BBC has form on Broadcasting House, has it not? I can remember - I do not know how long ago it was - first of all you were going to move everybody out and go to White City. Then you were preparing luxurious offices. Then you moved everybody back and now you are doing something else. In view of this history, one, should you not have been in a position to know what the faults of the building were and that it was going to cost more when you came to do this major refurbishment and, two, should you not have been in a better position for controlling it and managing it?

Mr Peat: I am going to say, to an extent, what has been said earlier. We are not disagreeing. I am not disagreeing that there were failings with the way in which the first phase was handled and it could have been handled a lot better. We knew that. We discovered that. We tried to deal with it as best we could. We brought in external advisers. We learned lessons. What I am keen on in the context of this Report is whether we have learned those lessons effectively going forward.

Q39 Mr Mitchell: That history does make it look as though you did not know what the hell to do with it.

Mr Peat: There were a lot of very difficult decisions ---

Q40 Mr Mitchell: It is a fundamental decision.

Mr Peat: There was a fundamental decision as to whether to refurbish Broadcasting House or to move everyone to a greenfield site, which was a difficult decision and one that was taken many years ago. Some of the actual problems when Broadcasting House was refurbished were known in advance. Some of them were identified as the project developed including this existence of the Regent Street disease. Maybe a lot more should have been known but what I am really interested in is whether we have learned from those mistakes and whether we are well placed to deal with the projects going forward.

Mr Thompson: The two basic ideas behind the property strategy were, firstly, to consolidate the BBC's operations in London essentially around two sites. Having had well over 100 sites across London, all sorts of antiquated and not fit for purpose facilities, the idea was to congregate around two sites. One, a refreshed Broadcasting House to do the BBC's journalism and radio, and a second West London site with television production and multimillion production as a core. The other thing that has happened in recent years is a strong sense the BBC should also be investing and making programmes across the UK. That is why we have also invested in major headquarters particularly in Greater Manchester and Glasgow. It is a very simple idea which is fewer, fit for purpose buildings ready for the BBC in the future.

Q41 Mr Mitchell: Given that you knew the problems, should you not have set aside a bigger contingency reserve?

Mr Thompson: Yes. In phase one there should have been a bigger contingency reserve. Had such a reserve been in place, the project would not have been overspent.

Q42 Mr Mitchell: Now at the end of the day, here is this iconic building which I am quite enthusiastic about. You need to retain it but you are not retaining it because it now passes to a developer. You have 10%, you can buy it back if you put up the other 90% at the end of 30 years but effectively you are not going to be able to afford to do that, so an iconic building associated with broadcasting, with the BBC, central to you, is lost.

Ms Patel: Shall I just explain how the sale and lease back works? When we undertook the development, we granted 150 year long leasehold to the special purpose vehicle, but we still retain a very strong residual interest. At the end of the 30 year occupational lease we can either review the lease, buy back the building or the building can be sold if we decide to move elsewhere. The BBC shares in the economic interests of lapsed time so we have not sold all of our freeholds without getting value and without retaining a proper economic interest in the long term.

Q43 Mr Mitchell: You have less and less control because as problems have multiplied you have transferred more and more responsibilities to the developer, both at Broadcasting House and in Manchester.

Mr Thompson: What we were able to do both with Broadcasting House phase two and with Salford Quays was more effectively hand responsibility and risk to the developer with tight control over variations in a way in which we were not fully successful with Broadcasting House phase one. That business of successful risk transfer is one of the reasons why the remaining projects so far have proven more successful in their progress, because the developer much more fully than in phase one is holding the risk. I think that has been an improvement. If I can also make the obvious point, the BBC exists to serve the public with outstanding programmes, and where we can more effectively get the facilities we need via leasehold and other financing arrangements rather than sitting on very large scale freeholds, we believe that is in the public interest.

Q44 Mr Mitchell: I want to move to Manchester, unlike some of your staff.

Mr Thompson: If I may say so, that is a complete myth. The average run rate of other public institutions moving from London to other cities around the UK is of only 15/20% of staff agreeing to move. The numbers we are getting between 40% and 50% of staff are unusually high. Often the press try to imply that this is a very low number. Actually, it is an unusually high number of people deciding they would like to be part of this project.

Q45 Mr Mitchell: The move to Manchester, while I am all in support of it because I like stuff moved to the North, does look a bit like a leap in the dark. Let us start by asking why you did not want to go ahead with the proposal that came up from Granada, when Granada was a healthy organisation, of a media city on which you both developed?

Ms Thomson: When we took the decision to move North, we looked at a number of cities and we came to the conclusion that the Greater Manchester conurbation was the right one. We then did a very exhaustive search and we looked at four options initially, one of which was indeed Quay Street with Granada, one of which was staying in our existing site in Oxford Road and developing that and then there were two new sites. We did a proper public procurement style exercise and we looked at value for money. Quay Street did not stand up on value for money. We ended up with the two, the choice being between the site in Manchester and the site in Salford.

Q46 Mr Mitchell: It was not just that you wanted to be on your own and keep yourself separate?

Ms Thomson: No.

Q47 Mr Mitchell: That would have been a healthier development.

Ms Thomson: If I can say, we are very keen indeed that ITV should come to the Salford Quays site if at all possible. I have been doing quite a lot personally to try to help move that forward. We want to be as much as possible on a site which has many occupants.

Q48 Mr Mitchell: Now, here you are, in a sense, it is a leap in the dark or is it the Irwell or the Manchester Ship Canal? I am not sure what the water is. I have seen the building.

Ms Thomson: It is the Ship Canal.

Mr Thompson: I could take you for a swim.

Q49 Mr Mitchell: I would not fancy that. You are not certain that it is going to work because, according to the Report, 2.6, you have only 418 staff who have confirmed the transfer to Manchester, but there are going to be places for 2,500. You are either going to have to coerce them in some way or cut down the use of the building.

Ms Thomson: First of all, we have 800 staff already in Manchester, so they are part of the 2,500.

Q50 Mr Mitchell: You are moving the Television Centre on Oxford Street?

Ms Thomson: Oxford Street is closing and one of the benefits we will get which is not in the figures here is the sale of Oxford Road as a result of that. Those 800 are moving. We have never envisaged that of the 1,500 other jobs that are going everyone would move. To be honest, that would be a bit peculiar because one of the points of doing all of this is to do some economic regeneration and create job opportunities and so on and indeed to recruit new people with different perspectives from the north of England. We have about 45% of our staff who have decided, as Mark was saying, to move, which is rather a high run rate by comparison with other people who shift. We have already started looking for recruits for the new jobs. I think the recruitment website has been going - Mark launched it about three weeks ago, it is very interesting - there are 5,000 people registered on the job websites.

Q51 Mr Mitchell: I am going to interrupt you because a lot of estate agents in Hebden Bridge are dependent on your answers. You have cut down the amount of studio space. You have cut the costs by cutting down the studio space. Did you do that as a saving or did you do that because you did not have the staff to staff it?

Mr Thompson: Neither. What is happening is that throughout these projects you are constantly looking at what you are going to need in terms of the programmes and services you are delivering. The underlying point is that the shift of many forms of production into location production, rather than studios, means that our expectation is of a slightly lower need of studios for the programmes and services we deliver to the public than the previous plan.

Ms Thomson: We have not cut the studio space. The studio space is being provided by the developer and remains the same. All we have done is cut the guarantee of our usage of it and we have done that for the reasons Mark was outlining.

Q52 Mr Mitchell: Why have you put yourself at the mercy of Peel in respect of purchase of studios and equipment? I would have thought the BBC would have big purchasing power on its own without putting itself in hock to a developer who can charge you anything.

Mr Thompson: That is not true because there will be long range, not just guarantees, but also contracts which guarantee we get a very good deal with these studios. The point is we are moving in Salford Quays from a philosophy, which I accept may well have been the right philosophy for the BBC through much of its history, of in a sense building and owning fully specially designed, special purpose, integrated buildings for broadcasting like Pacific Quay and indeed like Broadcasting House. Salford Quays is the next step forward. What we are saying is a combination of office space which can be expanded or contracted, depending on the BBC's mission, and access to world class facilities but where again someone else is taking the risk in terms of the capital investment and the running of those facilities, gives this organisation greater flexibility as we go forward because we are building now for media which is changing every three or four years, rather than getting locked into bricks and mortar and technology which a generation ago you might have been able to use for 10 or 20 years - if you go to Quay Street in Manchester, Granada, just like we are in Shepherds Bush, is running studios which were built in the 1950s - television, media and radio are all changing. Salford Quays is an attempt to get a really flexible set of facilities which we can adapt and change without being trapped into the wrong kind of technology for too long.

Q53 Mr Bacon: I would like to start with Broadcasting House. I know you have said that phase one was in many respects poorly managed. There is no point in going over that or arguing about it because you have acknowledged it. Mr Peat, you are about to say something.

Mr Peat: I was just suggesting that you should be allowed to continue with your question.

Q54 Mr Bacon: I am under advisement to treat you very gently, Mr Peat. Last time I encountered you in this Committee The Daily Mail said that you boiled. I am not sure whether that is true.

Mr Peat: I did not notice it.

Q55 Mr Bacon: I do not want to make you boil.

Mr Peat: Thank you, Mr Bacon.

Q56 Mr Bacon: Do you folk get any training before you appear in front of this Committee?

Mr Peat: Yes.

Q57 Mr Bacon: Does it cost money?

Mr Peat: No, not to my knowledge.

Q58 Mr Bacon: Who does it then, if it is free?

Mr Peat: In terms of the training for coming here, there are a lot of BBC people who very much enjoy the prospect of being able to ask us as difficult and nasty questions as they can. There is no shortage of volunteers and they do not need extra pay for it at all.

Mr Thompson: It is not training. We will have a couple of conversations and ask each other questions as well. There is no formal training.

Q59 Mr Bacon: It has the same kind of informality about it as the approach that you initially adopted on phase one. The thing that staggers me about it is not that you admit you got it wrong, because obviously the Report is very clear about that - it was only 2003 when the project started - but that you were going into the business of spending what you thought was going to be 990 million, it is now slightly over a billion. The notion that you could spend such a huge sum of money without first putting in place a full scoping, which the Report says that you did not, and without identifying all the criteria properly at the outset, which the Report says was not done, is really quite startling. I find it difficult to understand. Then I read on page 24 something which one of my colleagues referred to earlier about the internal auditors. This is talking about the Pacific Quay project where it says, "... some early staffing decisions were made on the basis of who was available rather than who was best for the role, which may have contributed to a finding in the BBC's post project review" - that was an internal review, I take it - "that 'it was sometimes difficult to engage senior staff in decision making about their area as some seemed to either not fully understand their responsibilities or take them seriously enough.'" At the top there it says if it is an organisational structure that is going to be effective it has to have the right staff with the right mix of skills and experience in position at the right time. At the risk of labouring the point, the next paragraph talks about the auditor's comments on Broadcasting House "... showing a lack of relevant expertise on or in assisting the project team which was without precedent..." and that "... 'the project director ... did not have experience of such a large-scale transformational project.'" The point about all that is it is so obvious that you would not do that. It is so obvious, if you are going off and spending 991 million, as you thought, of somebody else's money, that you would put all of those systems in place to start with properly to make sure you got it right. Does it not say something rather eloquent about the culture that was prevailing in the BBC at the time in terms of using public resources?

Mr Thompson: The first thing I want to say is from literally the first day I arrived back as Director General in 2004, where already some issues with the first phase of this project had been identified and actions taken, making sure that we got the right people involved in Broadcasting House and across the property portfolio became one of the top two or three things in my mind. For the first two or three years as Director General, stabilising the Broadcasting House project and making sure it was back on track was a critical priority.

Q60 Mr Bacon: I understand that. From what I have seen and read and your answers so far, it looks like you were aware of it very early on. You got to grips with that. What I am really asking is: how on earth did we get into this position in the first place? What was it about the culture that allowed that to happen, that you could go ahead and spend so much money without these controls in place in the first place?

Mr Peat: I think there is one other issue that merits mention, which is that for Broadcasting House phase one there was an arrangement entered into with Land Securities, which was an attempt to transfer some of the risk and some of the management to that organisation. There was a feeling, I believe, that by bringing them in and their professionalism one had to have less full on project management within the organisation. What was learned was that did not work.

Q61 Mr Bacon: Anyone will tell you that you still need to be an intelligent customer.

Mr Peat: Yes, indeed. I am agreeing with you, but there was at least some feeling that the LST role reduced it. I am delighted, quoting back the NAO to you, Mr Bacon, that there is a reference to the fact that the BBC has since strengthened its project teams by recruiting individuals with relevant skills from industry. "The BBC addressed the weakness by appointing an experienced project director for Broadcasting House in January 2005 and for Salford Quays the BBC has recruited staff from the construction industry and appointed people with experience of relocation projects". We did learn and there was some reason for thinking that the LST would help, but we have learned from this experience.

Q62 Mr Bacon: Are you saying that, if there was another project, you are completely confident that all the required scoping of the project, all the required definition of the benefits, all of the required budgeting, projection and contingency work and so on would be done in the right order in the way that it was not in the early phases of these projects?

Mr Peat: We have been given a specific recommendation as the BBC Trust by the NAO. I would like to say that that has three elements to it. First of all, that we should make clear the evaluation criteria. There are four main criteria: affordability, value for money, fit for its strategy and furthering the public purpose.

Q63 Mr Bacon: Indeed, and one of the comments in the Trust's report said that you took very seriously the NAO's conclusion that although the investment case improved with each project none contained all four of those elements, not one.

Mr Peat: Which is why these are already in our protocols but they will be set out far more clearly in the revised protocols and that will be a requirement. Secondly, we will continue to require and will reinforce the need to make sure that BBC Finance, Zarin's people, and the Executive board, including the non-executive directors of the BBC, have appropriately reviewed cases before they come to us. We will when necessary bring in external advice. For Salford Quays the BBC Trust brought in Deloittes to provide external advice to help us to make sure that project was well developed. We have picked up all three elements of this recommendation. We will have a full action plan for implementing it and my chairman and Mark Thompson have already exchanged letters. We are getting a full report on 31 March from Mr Thompson on the way forward. We will be doing everything we can, not just to say we are going to follow it through, but to set the processes in place that require it to be followed through.

Mr Thompson: Caroline, as the chief operating officer of the BBC, is personally responsible for all of these projects. We have set up the Project Management Office. We have monthly meetings. I see monthly reports from the Project Management Office which is looking at something which this Report does not deal with, which is we are engaged in projects - Broadcasting House, Salford Quays, digital media initiatives and three or four other projects - which have complex interdependencies. They relate to each other. One of the particular things we want to do is make sure the organisation co-ordinates across major projects as well as within them. We now have all of that in place.

Q64 Mr Bacon: In the Report at paragraph (d) on page nine, talking about the Programme Management Office, it says, "... the BBC should make sure it not only provides guidance and advice" - that is to the PMO - "but also acts as a single centre of corporate expertise with the capacity to identify the best way to translate the BBC's business requirements into well-defined solutions ...". Is it doing that now already?

Ms Thomson: Yes.

 

Mr Thompson: I believe it is, yes.

 

Mr Peat: And we are receiving at the Trust at one of our committees quarterly reports from the PMO.

Q65 Mr Bacon: What about the previous paragraph where it says, "At Salford Quays there will be ongoing contracts for the availability of critical services to manage, and the BBC will need to make sure", will need to make sure, it says, "that those responsible have the commercial and legal skills necessary to monitor whether services are provided as specified". Now, are those all in place?

Ms Thomson: Yes, they are. We have a new director who is running the project and who is going to run BBC North, and he is recruiting a team at the moment and looking precisely for these sorts of skills.

Mr Thompson: Your point about being an intelligent and effective customer is exactly right. Irrespective of whether one is getting services from an external contractor or a number of contractors, it is still incredibly important that you get the right people in place, so we would agree with this recommendation and we believe we are putting steps in place to make sure we have got the right people.

Q66 Mr Bacon: I am glad you say that because I think that the skill to contract properly is probably one of the absolutely core competences.

Mr Thompson: If I may say so, I would say that actually the BBC is in the journey; we are modernising a great public institution. The contracting skills came earlier than how do you manage and run a contract after you have done the contract. As Jeremy hinted, I think, one of the problems with Broadcasting Phase 1 was a slight over-reliance on the contractual phase and not quite enough focus on how do we, as the ultimate client, manage this business.

Q67 Mr Bacon: You have got to look at it as a whole-life thing, have you not? Can I just ask you about the Olympic Media Centre. I was interested in your reply to Mr Mitchell about not having bricks and mortar and in 30 years' time who knows what the BBC's needs will be, but we will have after the Olympics this enormous Media Centre which has 50 megawatts of electricity going into it, which is enough to power a reasonably sized city, and enough communications capacity to communicate with the entire planet, which is exactly what it will be doing in 2012. Have you got somewhere on the back of an envelope a little team of people who are looking at that as a possibility? It is obviously, given all this property strategy that is going on, likely to be superfluous after the Olympics, but have you got somebody thinking about what might be being done with that from the BBC's point of view or whether you might be able to be involved?

Mr Thompson: I shall be fairly straightforward about this, that our long-range strategy has been about the consolidation in London, and the consolidation over the last three or four years has become more radical as we have taken the decision to sell Television Centre and not replace it. Part of the story is that we in Television Centre cease to be a part of the BBC, we have some office buildings in West London and we have Broadcasting House, and then we have much of our output by the end of this Charter, the majority of the BBC's public service staff and a majority of TV and multimedia production, based outside London, so we are not looking for additional facilities in London, we are shrinking our footprint in London, so it is not obvious to me, and I do not want to rule things out, but the BBC is not looking for another enormous digital broadcast centre in London.

Mr Peat: It might make sense for Mr Thompson to have a word with Baroness Ford who is running the Olympic Legacy Centre, or it is already happening.

Ms Thomson: I am about to see her.

Q68 Mr Bacon: Good. I have run out of time, but I would just like to ask Mr Peat one final question. Some years ago when The Da Vinci Code came out, it stated on your CV that you were on the Committee of the Rosslyn Chapel.

Mr Peat: That is correct.

Q69 Mr Bacon: And you denied having found the Holy Grail in answer to my specific question on this point. I notice now that you are no longer on the Committee of the Rosslyn Chapel. Is there something you want to tell us?

Mr Peat: I do not believe that I was sacked because I took the Holy Grail away with me! I found that the joy and preoccupation with the BBC was such that I did not have sufficient time to devote to looking after that marvellous building, especially with so many visitors coming, and they had less need of my financial input because they were doing very nicely, thank you.

Q70 Chair: Well, if you think we give you a bad time, we gave even more of a bad time to the Olympic Legacy Authority (?) over this building, the Media Centre, but we are just hoping this afternoon that you might take it on. It is 300 million for two weeks' work. Even by your standards, that is quite a lot, but unfortunately not?

Mr Thompson: Well, Caroline is going to see the head of the Legacy Authority, but it is not obvious to me that the right thing for the BBC is to take on another enormous building.

Mr Bacon: Mr Thompson, you could finance it personally out of your salary!

Q71 Mr Davidson: I start from the perspective that I support the BBC and I support public sector broadcasting and, as I have said to Mr Peat before, this is actually for your own good, even though it might not always appear that way. The intention is to try and help you beat off vested interests, like Rupert Murdoch and the like, but there is an issue of culture, I think. At the beginning of this, we were just discussing the responses you were giving and you very clearly give the impression that you do not like being questioned by oiks like us and that really we are beneath your level, and I think that that is not particularly helpful. This is intended to be a co-operative venture, we are intending to try and help you and maybe it was just unfortunate at the beginning because things seem to have mellowed a bit since, but I just thought I would mention that for the general edification of the company.

Mr Peat: May I just say that, if any of us have given the impression that we resent being questioned by any member of this Committee, that is entirely wrong; we are very willing to come to this Committee. What I always want to do is to get down to talking about value for money and how we can improve it. You may sometimes feel I am taking umbrage when I feel that we are getting off the subject, which matters and which is dear to my heart as a member of the BBC Trust, which is delivering value for licence fee-payers. You can ask me about that until the cows come home.

Q72 Mr Davidson: Yes, I remember in a reception you held, I referred to you, I think, as "Mr Grumpy" and everybody knew who I meant at the time!

Mr Peat: They call me "Mr Happy" at other times!

Q73 Mr Davidson: Yes, indeed, at Christmas possibly! Can I come back to the Pacific Quay and to the fact that in 2002 the building was estimated at 126 million and then in 2005 the estimate was 188 million. Now, I have heard people speak at length about how this changed, and this smacks to me of the same sort of approach that the Ministry of Defence takes. They get an agreement for a minesweeper, they expand the size, the capacity and the function and, before you know where you are, you have got an aircraft carrier. I am anxious that what seems to have happened here is that you got an agreement and then you just started expanding and, if you did not realise these other things were coming down the track that led you to justify the expansion, then where is your planning capacity? Do you understand our anxiety?

Mr Peat: I understand your anxiety completely. Now, this was in the days of my predecessor, Sir Robert then and now Lord Smith, who obviously took the responsibility, as the BBC Governor for Scotland, very seriously and was very keen on making sure that the Pacific Quay was fully equipped to deliver more network commissions, more programmes from Scotland and also very keen that it was a modern, new facility rather than an outdated one, so, in between 2002 when the original estimate was made, and 2005 when the final project was signed up, two things happened. First, the BBC agreed that it wished to be more ambitious about how much to deliver, and we have subsequently had the Network Commissioning Review and, I am glad to say, there is good progress happening in Scotland on additional network supply for the BBC and that is in large part because the Pacific Quay is there ----

Q74 Mr Davidson: I understand that.

Mr Peat: ---- so the scale has increased, and then ----

Q75 Mr Davidson: I know that.

Mr Peat: ---- and then we had to have HD and I do not think anyone in 2002 would have appreciated how quickly HD was going to become the future.

Q76 Mr Davidson: Well, let me separate those two things. Having the best of intentions about expanding what you wanted to do, I do not understand why that could not be seen in 2002. I perfectly accept that yes, perhaps HD was a technological development which could not have been foreseen in any way in 2002 and it was only in 2006, but I think you can see how that potentially is a never-ending process. Presumably, there are more things that have happened since 2006 that you could also expand on, and it is a question of value for money. My anxiety is that the BBC often gives the impression of being like a kid in a sweet shop and, if it is there, you want it and there is then the issue of value for money and what is attainable and achievable.

Mr Peat: I agree entirely, and I am not trying to avoid your question at all. I personally believe that between 2002 and 2005 the BBC actually developed a greater out-of-London vision and, rather than trying to be hideously London-centric, as it has been described in the past, it tried to think of developments out of London. As part of that process, which Lord Smith encouraged and I continue to encourage, it was accepted that there could be a case for more happening in Glasgow and that required a bigger building, and I think it has worked tremendously to the benefit of the broadcasting sector in Scotland, but we need to do more to make the most of it and I think that that extra scale has been justified.

Q77 Mr Davidson: I understand that. Mr Thompson?

Mr Thompson: We are essentially close to tripling the amount of network television production in Scotland from 2002-03 to 2016, but the important point to make here is that the plan is partly about building and growing Pacific Quay and building Salford Quays and it is also about closing down and selling Television Centre. This is not an estate which is growing, it is actually shrinking in overall terms and there are large disposals in the mix as well as ----

Q78 Mr Davidson: Yes, that is right, but you understand the point that there is an element of minesweepers becoming aircraft carriers as your ambitions develop?

Mr Peat: I understand that.

Q79 Mr Davidson: What I do not quite understand in all of this, and I do not know whether the NAO looked at that, is whether or not the larger project was as good value for money as the earlier project and to what extent did simply your ambitions grow because there was more money available. It is the question of the rigour with which you approach things. I am happy with what has happened in Pacific Quay, but, I must confess, I do not know how much less I would have been happy with Pacific Quay had it been 10% less or how much more happy I would have been had it been 10% more. I am just not entirely convinced that the process that you go through that arrives at these figures is sufficiently rigorous.

Mr Peat: Well, I can give two examples where I believe there have been significant benefits. One is that partnerships have evolved with others and there has been a capacity to share some of the space with others to the benefit of the broader broadcasting sector. The other is that I think it is a 32% saving in the current costs within Scotland over a five-year period, which is significantly above the saving in other locations, but I cannot give you a comparison between one project and the other.

Q80 Mr Davidson: Well, can I just clarify with the NAO what their view is.

Mr Morse: These additional benefits are understandable and these changes are understandable, but the truth is that the reason we cannot be clear whether it was all good value for money or not is because the looked-for benefits were not set out, as our Report says, at great length in the first place. The reason why that matters is because it keeps everybody honest because it is exactly as you say, otherwise you keep on adding things on and it all seems like a good idea at the time and, if projects go on for a long time, you can keep on; it is called 'scope creep'. It is quite a good idea to deliberately build things into the way that you manage projects to make it very difficult for that to happen. Really, what we are saying is that you just need to defend that as strongly as possible. We are not saying that some of these things were not good things, but just saying that a pretty tight grip on that is necessary, otherwise you find every expansion is only upward.

Mr Thompson: All I would say though, and we would accept that point about the laying out clearly of the benefits, is the other thing which, in a way, is a slight drawback of this key approach that we have necessarily taken is that that big picture of the complete estate, the complete technology support for the BBC and those other large decisions, eg, to shut down television centre, are enormous steps for the BBC to take and that is not in the mix and it needs to be if you want to understand the whole picture.

Q81 Mr Davidson: I have only got three hours to ask questions, so we are going to have to move on slightly! One of the things which causes me a bit of anxiety, for example, is that there is mention in paragraph 2.28 where I think there was a saving on the contingency which got spent, and at one point in the Report, I think it was 1.15, there was evidence of a 3 million saving because stuff that was in a truck got moved inside, but you still spent up to the budget, so there is 4 million saved, but you still spent up to the budget, so you just get the impression that there was a budget there and you were going to spend up to it. Unless there was 4 million of additional spend which, by coincidence, balanced those savings, then it does look to me as if there is a lack of discipline there.

Ms Thomson: I think what you are referring to on Pacific Quay is the use of the contingency and, first of all, it is worth saying that that was properly authorised spend, but it was also ----

Q82 Mr Davidson: By whom?

Ms Thomson: By me, by the two of us.

Q83 Mr Davidson: So you authorised this additional spend?

Ms Thomson: Yes, we authorised this additional spend.

Q84 Mr Davidson: Well, you authorised your own spend. I can understand that.

Ms Thomson: No, this was not my spend, this was BBC Scotland's spend. We have a separate Finance Committee approval process.

Q85 Mr Davidson: Is there any other spending that they wanted to do that you did not authorise?

Ms Thomson: As someone who manages the other building projects, and I did not manage Pacific Quay, I am frequently not authorising spend.

Q86 Mr Davidson: Sorry, if you do not manage this project, how then did you authorise the spending on this one?

Ms Thomson: Because we have a Finance Committee which authorises spending and the specific provisions on the sign-off of the Pacific Quay contingency was that they could not spend it without Finance Committee authorisation. Zarin, as Chief Finance Officer, is the Chair of the Finance Committee, and I am a member of it. I just also want to come back to this point about scope creep because the evidence does not bear it out.

Q87 Mr Davidson: No, the way that the system works is that we ask you questions and we have a limited amount of time, and I understand the tactics of stalling, I have done it myself on occasions, but I do not want to do it here. Coming back, there is 1 million of contingency and they have 3 million saved from this equipment which was moved in from a truck, and I would have thought, all other things being equal, that the building would then have come in at 184 million, was it, but no, it came in at the spend. You can see how in those circumstances you just wonder about whether or not there is the rigour there about your controls.

Ms Patel: Shall I try and help the Committee? First of all, let me take the 3 million for an OB truck. Pacific Quay has got two studio spaces, Studio A, which is a large studio which we have fitted out for HD, and Studio B where we took a decision at Finance Committee, which was endorsed by the Governors at the time, that we should not take the risk of fitting that out to HD because we could not be absolutely certain of getting commissions. Therefore, we went for a very low-cost option and a flexible option and we put studio lighting in the thing and we put in an OB truck, and that has borne out to be the right thing to do.

Mr Thompson: That has the same use as a studio, but you do not have the capital cost of a permanent studio, and that is the point.

Ms Patel: So that was Studio B. In using the contingency, the full process that I went through was this: that the bond that financed Pacific Quay only allowed that money to be used on the building and we could not hand it back until right at the end of the 30-year lease and all of the costs and risks ----

Q88 Mr Davidson: Sorry, you could not hand it back?

Ms Patel: We could not hand it back until the end of the lease, which is the financial structure around PQ, but at the time -----

Q89 Mr Davidson: Sorry, you got yourself into a position so that, if you saved money, and suppose it had been 20 million, you are saying, you had to spend it and you could not hand it back?

Ms Patel: Let me try and explain. Because Pacific Quay ----

Q90 Mr Davidson: I think I understand it fine actually. I do not think that needs to be explained. Unless I am mistaken, you are saying to me that you saved the 1 million and you had to spend it because you could not hand it back?

Ms Patel: We could not hand it back until the end of the lease.

Q91 Mr Davidson: I do not think I need to any more on that particular point, thank you. The final point I wanted to ask, and I have raised before, is about your personnel in the BBC and how you are basically public school boys from Oxbridge, which does not apply to all of you, I understand. You mentioned that you are recruiting lots more people from the North.

Mr Peat: Yes.

Q92 Mr Davidson: Can you give us a note, indicating that they are from a different social background and that the pattern is different, because I think you have in the past said that you are trying to change the intake.

Mr Thompson: I can tell you myself that we have got partnerships and I have been up there to meet the students at the University of Central Lancashire, the University of Teesside, and we are typically looking for graduates, but ----

Q93 Mr Davidson: Fine, so give it to us in writing. That is what I am asking for.

Ms Thomson: We have not done the recruitment yet, but it will be about a year and a half before we have done the recruitment, but we can certainly do that.

Mr Thompson: We can actually give you a note about the approach that we are taking and it is very much to your point.

Q94 Mr Davidson: I want some evidence really, I think.

Mr Thompson: Okay, we can provide that.

Q95 Mr Bacon: I have a question which is slightly outside the scope of this property estate report, but is to do with the recent well-publicised controversy about the decision to close Radio Six and the Asian Network. I have not written to the Trust yet about this, but, since you are here, you may want to comment on it. I have had a number of letters and emails from constituents who listen to Six Music and the things that they said are along the lines of, "I might be in a small minority, but I value Six Music hugely, and isn't the whole point that the BBC provides for, and serves, minority audiences, like me", the people who are writing to me, "rather than doings things that can be done commercially?" It is fairly obvious that there are lots of things that the BBC does, like Radio One and Radio Two, that are now very well established and that could easily be done commercially. I know that this is a proposal which Mr Thompson, who is sitting there, has put up on behalf of management to the Trust, but would either of you like to comment on it?

Mr Peat: I will be very brief. We have the strategic review proposals which are out for consultation at the moment. As far as the Trust is concerned, we will be listening to the results of that consultation and we will then see whether the Executive wants to put any specific proposals to us with regard to Six Music, the Asian Network or anything else. If they do, then we will go to the Charter Agreement and see if we need to do a full public value test or any other approach and then make a decision, but at the moment it is consultation and we will listen to what the consultation tells us.

Q96 Mr Bacon: When does the consultation close?

Mr Peat: It is a three-month period which is already under way.

Mr Thompson: Let me in brief say that Six Music is actually a high-quality service, and shutting or proposing to shut any BBC service unquestionably is painful for those people who listen, watch or use the service. Six Music, there is a relatively small number of people who really rely on it. The number of people who only listen to Six Music amongst the BBC radio stations across the UK of 60 million people and 25 million households is about 4,000 people, as it were, exclusively using Six Music, so it is quite a specialist service. We have concluded that we have currently got, depending on how you count them, nine UK-wide radio networks and we believe that actually there is a strong case for us making a slightly smaller number which we can put more quality programmes into and drive digital radio better with. You should see the decision, the painful decision, to propose shutting Six Music alongside our desire to make, in particular, Radio Two substantially more distinctive and to include a lot more specialist music programming on Radio Two. I am not suggesting we can, if you like, preserve and transfer everything on Six Music, but we want to make sure that we think it is right to go ahead with two rather than three popular music stations into the future as we think two is enough and should be enough to give the public a really broad range of experience of popular music, but we want to see, in particular, Radio Two become strikingly more distinctive and more different from commercial radio.

Q97 Chair: Well, I tend to agree with Mr Bacon, not that I care a damn about Six Music, which I have never listened to in my life as I only listen to Radio Three. So few people apparently listen to Radio Three that it would be cheaper to telephone the Radio Three listeners than actually put it on the radio. I am sure that is apocryphal, but you are shaking your head. You would never dare close down Radio Three because it is listened to by people like me and a load of other arty-farty people, but Six Music is fine, is it not?

Mr Peat: I can assure you that any formal proposal to close Six Music will be subject to full and transparent consideration by the BBC Trust, and you and Mr Bacon and anyone else will have an opportunity to comment as much as you wish.

Q98 Chair: Of course, yes!

Mr Peat: And we will listen very carefully to you.

Mr Thompson: Can I emphasise, we are not shutting Radio Three!

Chair: Thank you very much. There would be a row if you did that!

Q99 Mr Davidson: I have one final point and perhaps you could give us a response to this in writing if it is easier. We went to see the Olympics and we have seen the preparations that they are making for the Olympics, and we were very impressed by the efforts they are making about training and local recruitment. I think it would be helpful if you could give us a note, just indicating what efforts and what targets you had and whether or not you met those in terms of training and on construction, your role as client basically for the development. As I think I have indicated before, I know that, for example, the BBC in Glasgow still buy their sandwiches from the West End rather than buying them from anywhere locally and are clearly not having the economic impact in the area in which they sit that we would want, so perhaps you could give us something back about that, please.

Mr Peat: Certainly.

Q100 Chair: I am not going to have another spat with you about Gary Lineker's rooftop terrace, Mr Thompson, because we went through that at such length last time, but in The Daily Telegraph on 17 March, and being in The Daily Telegraph it must be right, apparently the cost, they say, is not 250,000, which we were having that spat about, but it is now 573,000.

Mr Peat: I would suggest you read the attachment to my letter of 11 March which sets out the fully agreed position between the NAO and the Executive.

Q101 Chair: Yes, your letter of 11 March. Thank you for reminding me.

Mr Peat: What a shame!

Q102 Chair: I had almost forgotten to ask you about this letter.

Mr Thompson: Would you like me to talk about it?

Q103 Chair: No, give us a note because we had about ten minutes on Gary Lineker's studio last time.

Mr Thompson: The Telegraph story is essentially wrong in almost all the particulars.

Mr Davidson: I find that difficult to believe!

Q104 Chair: Okay, we take your word for it. Your latest letter to us, Mr Peat, we are not very happy with it because all we wanted to ask you was about the total cost of the talent and we were not asking for individuals, but once again you have taken, we think, the sort of extreme legalistic view. We are at an impasse now, are we not? We have asked for information and you are refusing to give it to us, are you not?

Mr Peat: Well, I can simply repeat what I said to this Committee last time and what I said in the letter, which was that we are quite prepared to give you what we gave to the NAO, which is the breakdown between talent and staff costs by the category, provided that is treated in confidence.

Chair: Well, I am afraid, this is a committee of the House of Commons and we have to do things in public.

Q105 Mr Bacon: Mr Peat, your statement earlier about the National Audit Office possibly becoming the auditor and that you would invite them to tender was interesting and it was a welcome step forward. The reason that you used to give for not having the National Audit Office as the auditor was in a long, rather convoluted sentence which mentioned editorial independence, and I never quite saw the sequiturs in it, but there appeared to be some justification that revolved around not having the NAO involved because it would, in some not clearly specified way, compromise your editorial independence. It always looked a little spurious because of course the NAO audits the BBC World Service, which is a byword internationally for editorial integrity. My question is: are you no longer adducing the argument about editorial independence in relation to the National Audit Office?

Mr Peat: Mr Bacon, I think the very long conversations we had in previous meetings before the last one, in meetings from 2005 through to 2009, were much more about full and open access of the NAO in all aspects. The discussion we had a few weeks ago was specifically about the role of auditor and that is the specific response I have given you today, so our previous discussions were on a different matter where my views have not changed.

Q106 Mr Bacon: I recall, though I do not have the transcript in front of me, that the justification for not having the NAO doing the audit revolved around the potential, "perceived" - was the word you used - threat, however slight, to editorial independence.

Mr Thompson: If I can just intervene, those conversations were not about, my recollection, the NAO "doing the audit", in other words, the overall audit of the BBC, but it was about whether or not the NAO should have "an unfettered access" in the context of the value for money studies.

Q107 Mr Bacon: But, if the National Audit Office had full and unfettered access in the same way that it does statutorily for all other bodies that are publicly funded, which was what the conversation was all about, then it would follow, as night follows day, that the National Audit Office became the auditor.

Mr Thompson: No, not at all, and the terms of the audit are laid out very clearly in our Royal Charter. It is a separate issue, there are two things. It is not obvious that, if the NAO is the BBC's auditor reporting to the BBC and the BBC Trust with a published audit which is then laid before Parliament, that is exactly the same as an NAO study done of some other statutory body.

Q108 Mr Bacon: I am taking it that there would need to be a very small change in the law in order to provide for the NAO the kind of statutory access that this Committee has been seeking for a long time. My real question is that your previous concerns about editorial independence no longer stand. Is that what you are saying?

Mr Peat: No, I have always said that I reserve the right to be prepared to limit, the BBC Trust reserves that right to be prepared to limit, in case there is ever any risk to the editorial independence of the BBC. I have never had any evidence that that is likely through the work of the NAO, but, given the Royal Charter, we reserve that right. For the audit position, which is what was raised by Mr Williams and others, I have given the response today which was an attempt to make progress.

Q109 Chair: Well, ladies and gentlemen, that concludes our hearing, which is our last hearing with you in this Parliament. May I say, Mr Peat and Mr Thompson particularly, thank you very much for answering all of our questions. We will obviously want to report this and, as this will be our last Report, we will obviously want to report our relationship, but I think we have made progress today, Mr Peat, and we are very grateful to you.

Mr Peat: Thank you, and can we again thank the NAO for a very valuable Report.