BBC Licence Fee Settlement and Annual Report - Culture, Media and Sport Committee Contents

Examination of Witnesses (Question Numbers 1-75)

Sir Michael Lyons, Mark Thompson and Zarin Patel

8 September 2010

Chair: Good morning. Can I welcome you to the Committee's annual session on the BBC Annual Report and accounts? I would like to welcome back to the Committee Sir Michael Lyons, the Chair of BBC Trust, Mark Thompson, the Director General, and Zarin Patel, the Chief Finance Officer of the BBC.

  We have a lot of ground to cover this morning, but I would like to invite Phillip Davies to start.

Q1 Phillip Davies: Can I start off about your MacTaggart lecture that you made recently. Different newspapers seem to take out different elements of your speech to focus on in their reporting of it. I just wondered what was the single most important message you thought we should take from your lecture?

Mark Thompson: I think my own summary would be that what I was saying in that lecture was, I believe, contrary to the views of certain others: that we have a very strong tradition of quality broadcasting in this country, which the British public strongly support and which is the envy of many other countries around the world. It faces issues, in particular the question of how much money can be directed into original British content and British talent, and there are some issues which we need to work through, but these are issues which can be potentially solved by the industry working together and with the right public policy.

Q2 Phillip Davies: Do you not think it was strange that you seemed to devote so much time doing what you might call sticking the boot into Sky, or certainly talking about Sky, when there are so many problems and issues within the BBC that perhaps you might have wanted to focus on instead?

Mark Thompson: Well, it's quite interesting, isn't it, Mr Davies? If you read the speech—I don't know if you've had a chance to look at it—I went out of my way to say that I thought Sky was an important and very successful part of the broadcasting landscape; that they brought great innovation to bear; that they stood for, not against, quality broadcasting. So, on the contrary, I went out of my way to congratulate Sky on their success.

  I went on to say one thing, and only one thing, which is that it seemed to me that, given the scale of Sky's activities and their profits, they could look at whether or not it made sense to invest some of the money they get from their subscribers, rather more than they currently do, in original British productions, but that is very much in the context of regarding Sky as a British success story and an important part of the equation.

  So, in other words, I don't accept the first part of the premise of your question, which is that I launched a full-scale attack on Sky. On the contrary, I think Sky is a very successful British company and should be congratulated on their success.

Phillip Davies: Yes, it's like starting a comment with, "With all due respect", isn't it? Your premise might have been to say "With all due respect to Sky", but it was what you went on to say.

Mark Thompson: If I may say so, I didn't just say that. I said, in terms, that they had been a major contributor to the success of our industry.

Phillip Davies: A commercial business like Sky, which has proved itself very successful, clearly delivers what its customers want and that is reflected in its success. Do you not think it is a bit rich for a person, the head of a publicly funded broadcaster that gets £3.5 billion a year landed on a plate in front of them, to start lecturing a commercial organisation about what they should be doing to look after their customers?

Mark Thompson: Well, I don't accept the premise of the question.

  Phillip Davies: You were telling them about what they should be doing in terms of investing in this and investing in—

Mark Thompson: All I pointed out was that we've had a history where successful commercial companies—and particularly I'm thinking of ITV and the regional companies that made up ITV—have had an outstanding record in investing in British programmes and British talent, and that is the background and a big part of the success story of British broadcasting. It has not just been the BBC investing in independent production, in British stars, British writers and British actors; it has been commercial companies as well. That is a significant part of the reason our broadcasting is exceptionally good and I think it's not unreasonable to suggest that might be part of the solution going forward.

Q3 Phillip Davies: Is it not the case that Sky spend somewhere in the region of £1 billion each year investing in Britain and the creative industries in Britain, and is it not true that the BBC probably spends somewhere in the region of about £100 million a year investing in Hollywood studios?

Mark Thompson: I think if you look at the amount of money that BSkyB invest in original British television production, and in particular I would say beyond the news and sports categories, and compare it with the historic level of investment made by ITV plc and by companies like Granada, Yorkshire and Thames before that, you will see it's a very different picture.

I want to be quite clear: this is part of a story about what is the best way in which, by the BBC reforming and spending as much as it can on original production, by looking hard at what it would take to get a really strong ITV, Channel 4 and 5 who can afford to invest in British production; Sky is one part of the story. I think they're a success story. I do think they could do more investing in British production but I also think we need to work together to try and see if we can find ways of ITV, Channel 4 and 5 having the ability to invest more, and for the BBC to reform itself, to reduce, by the way, the amount of money it spends on acquisitions, and it, too, to spend more of the licence fee on original British production. I think in a way it's all a bit less controversial than you're making it sound.

Q4 Phillip Davies: Can I just touch on sport, because you seem to indicate that spending on sport—and Sky does a big thing on sport—is less important than other sorts of content that the BBC covers. Is it not crucial that as the BBC has gradually been removing itself from certain sports—things like horse racing spring to mind—is it not essential that companies like Sky are providing something that the BBC has been gradually backing out of?

Mark Thompson: I would absolutely say again that it is not only Sky's right but it is completely reasonable for them to invest very heavily in sports rights, which indeed they do, but to be honest you could have a BSkyB which was investing extremely strongly in sport and still able to spend significantly more than it currently does on other forms of British TV production.

Q5 Phillip Davies: I don't want to cover the ground that other people are going to cover, but it seems to me that your MacTaggart lecture was something that you have been building up to for a year from James Murdoch's speech the previous year. What would you say to people who think that your speech was due to the fact that James Murdoch rattled you a year ago with his speech in the MacTaggart lecture?

Mark Thompson: I think it is deeply silly, if I may say so straightforwardly. I think that is ridiculous. The speech wasn't obsessed with James Murdoch, he may have had a couple of mentions, most of them light-hearted, nor was it obsessed with BSkyB. What the speech was obsessed with was how we can take an industry which I have worked in for decades, which I continue to believe is outstanding and world class, and what we can do to make sure it remains strong in the future. That is what the speech was about.

  Chair: Paul Farrelly.

Q6 Paul Farrelly: Thanks, Chair. Mark, you said it was time for Sky to pull its weight in its investment in UK original content and you also said it was time for Sky to pay some carriage charges. In a sense, you could have been seen then as pressing the right buttons, trying to hit Sky in its pocket and in its patriotism. There was another issue that you mentioned which in a recession pressed another button, which was the contribution of the UK, particularly the independent sector, to exports and the need to support the industry in tough times by carrying on supporting creative investment. Can you expand on that and also on the extent to which the independent sector agrees, given that the dilemma for people looking at the BBC is that it is always the elephant in the room, to be encouraged in its public service broadcasting but to be restrained so it does not crowd other entrepreneurs out.

Mark Thompson: I think there are a number of elephants in the room of which the BBC is one. It's a room which is not quite an elephant house but there are a lot of big players and big global players who are now a significant part of UK media. Again, it's a fairly straightforward point. It's demonstrable, and this Committee has done some work on this, that we have a moment now, an opportunity, whereby a British set of perspectives and values and British talent are of more interest to audiences around the world, and to broadcasters and other media players around the world, than has been true in the past. That stretches from the World Service and the incredibly high trust and authority that the BBC's World Service and its other global news service have around the world, to the fact that you have independent companies coming up with entertainment formats created in this country which are world beaters; "X Factor", "Strictly Come Dancing" will be examples of that but there are many others. What I said in Edinburgh was that one of the things that makes that possible is because we have a national culture and a reservoir of talent which is exceptional, I believe. We also have the great benefit of making content in the English language which travels around the world.

Another critical success factor has been the high levels of investment that are placed in original production in this country, much higher than other European competitors. That to some extent is under threat currently because of changes particularly in the advertising market. And it seems to me that one of the things I was trying to say in Edinburgh is one of the things that policymakers should look at: are there ways in which that pot of money that is available to invest in talent, which can be exported and which could be part of a success story for this country, can be protected and possibly grown?

Sir Michael Lyons: Do you mind if I just try and gently bring us back to the Annual Report and accounts, just to underline that one of the things the Trust has done throughout this last year in its deliberations on the Strategic Review and the Director General's "Putting quality first", is to make strenuous efforts to hear the views of other people in the wider communications industry. It has been very notable, and indeed you will see that reflected in our initial conclusions on the Strategic Review, that far from a consistent message of get the BBC down in scale and size, get it off of our landscape, there was a very balanced discussion about the areas that people want to see the BBC doing different things and more. So, I think there is an issue here, as the Director General was underlining, of redefined relationships within the communications industry, changed behaviours perhaps from the BBC, clearer boundaries, certainly, but a co-operative future which everybody can gain from and the nation will gain from.

Q7 Paul Farrelly: The very clear message, because we are coming to the Strategic Review now, was that if you clobber the BBC you clobber the British industry and its ability to contribute to national wealth through exports. The link is as direct as that.

Mark Thompson: I certainly said, and believe, the argument that if you reduce the BBC's ability to invest in the independent sector, let's say, there would not be a commensurate increase in investment from elsewhere. The experience in many countries around the world is that a reduced licence fee, or reduced public intervention in broadcasting, does not lead to a rise in market-based investment in content but that investment just shrinks and that would be bad for the creative industries.

Q8 Dr Thérèse Coffey: Moving on to strategy, I am going to take a very narrow view and I will be honest, Mark, I think you have had advance notice of this question because I asked it at the all-party group.

I also need to make a declaration of interest. I worked for the BBC until very recently and, due to an administrative error, I was overpaid and I am still repaying that. So I need to make that clear.

It is very simple. In the role of what we must do in the future and what is nice to do and similar, I will ask a very straightforward question: do you think it is still necessary for the BBC to have its own four charities? The partnership model the BBC has with Comic Relief and Sports Relief, where the BBC brings its creative talents and puts on a fantastic show, does the BBC need to be in the process of employing people, with all that entails, to do charity decisions and similar?

Mark Thompson: Firstly, it is worth saying that we take steps, as you know, with trustees to make sure these charities are operated in a way which is independent of BBC management and independent of the BBC. I have to say that all of the charities with which the BBC is associated, the ones which depend on UK public support, all of them have been very successful in raising money for what I do believe are very good causes. But I certainly think that although I believe that the current charities we have, each of them can be justified, I don't believe that there should be a kind of process by which every few years the BBC launches new charities. I think we have more than enough charities which are directly associated with the BBC at the moment. So, in other words, I think that what we have at the moment is justifiable. I don't believe it should go any further than it does currently.

Q9 Dr Thérèse Coffey: I appreciate that the charities operate, effectively, independently but they are still the people you have to care for in your staff review and your staff exercises, and I just wonder if that is unnecessary given that creativity and excellence is the true skill that you bring to these activities. Why not raise the money and basically give it to other charities to deal with?

Mark Thompson: You will understand that obviously by far the majority of the activities the BBC occupies in this space are done in partnership with entirely external charities, like the Disasters Emergency Committee. We recently broadcast an appeal for Pakistan; £60 million raised from the British public already. That is obviously done in partnership with the DEC, our partnership with Comic Relief and the many charitable appeals that we launch on television and radio for other third-party charities.

  Where we are at arm's length, in other words where we are involved in the administration of charities—for example, Children in Need—we take every step to ensure that all of the administrative costs of the charities are as low as they possibly can be so that as much of the public's donations goes to the good causes involved. So we do try always to ensure that all of the charities we're involved in operate absolutely at best practice in that way. As I say, I believe that the charities we have at the moment are justifiable. I would not want to see the BBC going further into this field, precisely because at a moment when we are focusing on partnerships there are so many potential partnerships as an alternative route for the BBC to take in this area.

Q10 Dr Thérèse Coffey: Moving further then into elements of strategic review, one of the questions I would like to bring up is that, a couple of years ago, in 2008, there was a staff survey. More than half the staff believed the BBC was not heading in the right direction. I understand a more recent survey has been done on that. Now, I know you did quite a comprehensive roll-out of education and discussion about the Strategic Review within the staff. Has that percentage changed? Do more of your staff now think that the BBC is heading in the right direction?

Mark Thompson: Yes, they do. We haven't yet shared the results with our staff themselves, but most of the key indicators about strategic direction, but also about staff satisfaction and clarity from staff about strategy, have moved significantly and are much more positive now than they were two years ago. In fact, 2008 itself was an improvement on previous surveys, but for 2010, talking to MORI, they said that they thought that the improvement on many of the most important questions in the survey were some of the most striking they had seen in any staff survey of any organisation.

  By the way, just for the sake of clarity, since that survey was conducted we have had a separate significant issue, which we're working through at the moment, which is the announcement of the pension proposals, and there have been, to put it politely, lively conversations inside the organisation. So I'm not going to try and claim this proves there aren't any issues in the BBC.

Thérèse Coffey: No, but that is not Strategic Review in a way, if you like, of the essence of the BBC.

Chair: We will be coming on to that I think. Jim Sheridan?

Q11 Jim Sheridan: Thanks, Chair. Can I just refer to the pace of change in the BBC, and I think the figure will be £600 million by 2013 to implement these changes and efficiencies. I was just reading from the brief that the Trust has decided to engage its own advisers to work alongside the executive. Who are these advisers?

Sir Michael Lyons: This is an announcement as part of our first reaction to "Putting quality first". It is part of discussions which I'm sure we will spend a bit more time on about the remainder of this licence fee period and ensuring that, despite the very considerable efforts that the BBC has been making to identify efficiency savings, we're putting as much pressure on as possible in times where we know it is going to be very difficult for licence fee payers to find any increase in the licence fee.

  In that exercise, we will be relying on the external auditors to the BBC. We've also had some initial discussions with the National Audit Office about whether they too might play a part in validating this extra work required this summer, which we will be learning the results of in the next week or so.

Q12 Jim Sheridan: What will be the estimated cost of these advisers?

Sir Michael Lyons: I don't think they are going to be very high. Obviously, the majority of this work is being undertaken by Zarin Patel and her staff. The role of the external advisers is basically to validate that work rather than to go and do it for themselves. The Trust, of course, retains the freedom, if it needs to, to bring in further external help if it's not satisfied with the results that we receive at our next meeting.

  Jim Sheridan: The reason I ask is I have a very jaundiced view of advisers or external consultants, particularly at a time when you are laying people off in the BBC, sacking people. People are a bit frustrated when you are making efficiency savings by making people unemployed but at the same time bringing in external consultants who do not necessarily do the job required of them.

Sir Michael Lyons: Mr Sheridan, I absolutely agree with you and that would be absolutely the approach of the Trust and of the BBC more widely. Let me underline again: most of this work is being undertaken internally by BBC staff, but let me also say that I think we would also be failing in our duties if we did not question as vigorously as we can, and sometimes that needs to be reinforced by some external skills brought in. That is indeed why we bring the National Audit Office in to do our value-for-money studies.

  Jim Sheridan: The costs will be made available in due course?

Sir Michael Lyons: I am very happy to share all the costs with you.

Q13 Jim Sheridan: Can I also move on to what we call the more distinctive programming and editorial priorities. There are some people who would argue that there is no more distinctive programming than watching football, or indeed rugby, and there is a school of thought, particularly in Scotland, that the BBC exploited the position that Scottish football was in maybe a couple of years ago with the derisory offer that they gave to show Scottish football. Given the fact there is no variation in the licence fee and also the fact that the money that goes into Scottish football goes to the grassroots, would you accept that there is a disproportionate discrepancy for what has been allocated to football south of the border as opposed to football, and indeed rugby, north of the border?

Sir Michael Lyons: Apart from commenting by saying that the BBC is clear that it needs to serve all audiences and get better at serving the different and distinctive needs of different audiences, I think these are really questions for the Director General.

Mark Thompson: I just want to say that you can imagine that when you come to sports rights, where the BBC is, quite rightly and properly, competing with many other interests, many other broadcasters—some of them fully commercial, some of them other public service broadcasters—for the rights and where there is a real limit to how much the BBC can spend and where in some rights, including football, we've seen a period over many years of inflation in the cost of these rights, we're faced constantly, Mr Sheridan, with quite difficult choices.

  Now, what is interesting is, firstly, these are proper markets. In other words, these are markets where we are legally required, and also morally required, to go in as one bidder amongst many. We go in there attempting to achieve the best value-for-money for licence payers and, exactly as the Chair says, trying to find the best fit of programming, and in this case rights, for audiences, absolutely also trying to reflect on the different interests of different parts of the United Kingdom and, in particular, on trying to make sure that Scottish licence payers get a good deal and get in a sense the right mixture of programming. Even in the context of Scotland, we're balancing how much we spend on journalism, how much we spend on football, how much we spend on original Scottish television drama, documentary, comedy, and so forth.

  I have to say that my own view is that, in the context of Scotland and football, I don't believe that we've made wrong choices, but I have to say I don't apologise for the fact that sometimes we go in and try to acquire rights which we believe are the right rights to acquire but we try to acquire them at the lowest possible price.

  Jim Sheridan: I can understand that, you are in a fierce market, but the difference between the money that the BBC pays to English football, taking into consideration the quality of the product, the population size, et cetera, there is a distinctive case to be made to suggest that definitely the BBC exploited the situation that Scottish football was in a couple of years ago. I understand you have to look after the payers, but you are a public service as well.

Mark Thompson: Absolutely, but these are markets where it is appropriate I believe for the BBC to go in, in the context of the supply and demand of that particular market. I think that if somebody heard we had felt an obligation to pay much more than the market rate, I tell you now that there would be competition complaints about us distorting the market. Indeed, that has sometimes been claimed about the BBC and certain sports rights.

  The point about the BBC is that, obviously, it is a public body, but whether it is acquiring rights, whether it is acquiring staff or executives or talent, it is in factor markets which are commercial markets and we're under an obligation to operate in those markets as other players would. We're not the only public body. Many public bodies have to do that, by the way.

Q14 Jim Sheridan: Just finally, Chair, I am reliably informed by the people that know these things that trying to get an understanding about your negotiations and what the values are and what values are attributed, that it is very difficult to get that information from the BBC. Is that the case?

Mark Thompson: If we take sports rights, these are commercial markets with a presumption of confidentiality which, believe me, is occupied by every single other player. If the BBC reveals, either in the middle of a negotiation, before a negotiation or even after a negotiation, precise details of what has been done, the danger is that you hobble the BBC's ability to get the best price on behalf of the public; and secondly, you run the risk of distorting the market because sometimes the BBC might be the only bidder or only one of a couple of bidders.

  Jim Sheridan: But the other people are not publicly funded.

Mark Thompson: No, but none the less in a commercial negotiation if you insist that one of the parties to that negotiation reveals everything and no other party—neither other bidders or the seller—does, the danger is you end up distorting the market and also reducing the value-for-money that the public will get from the eventual purchase.

  Jim Sheridan: I do not necessarily agree but I will leave it there. Thanks, Chair.

  Chair: Alan Keen?

Q15 Alan Keen: Sir Michael, can you tell us if you have had discussions with the new Secretary of State about the governance of the BBC? Is there anything you can tell us about that, if you have had discussions?

Sir Michael Lyons: I am pleased to say that very soon after the Secretary of State took up his post we had an initial meeting, an amicable initial meeting. He introduced the issue of the Government's clear view of the importance of the independence of the BBC and the fact that the Government would not be seeking to reopen the Charter during its life up until 2016. We then had a discussion about some of the concerns he has, and he is not alone, but equally it's not a unanimous view, on the current governance arrangements of the BBC, and that dialogue continues.

  I don't think it is in his or the BBC's interests for me to go any further until those discussions are complete, but once they are I'm very happy to speak to this Committee and others about them.

Q16 Alan Keen: Can I ask, Mark, this is an issue I have raised before a number of times, especially straight after the problem that arose after the previous chair of the governors, I think he was then, Gavyn Davies, and Greg Dyke had to step down. I raised it then because it was clear that when there was a problem Gavyn Davies was acting as chair of the governors but also almost as a non-executive chair. He was often involved in not the technical but moving further than Sir Michael is able to move in his current position on to the other side, the management of the BBC and policy. Just to try to illustrate, I remember asking Michael Grade in one of these sessions, when he was chair of the Trust, wasn't he, I think? Am I right?

Sir Michael Lyons: No, he never took that up.

  Alan Keen: He never took that up?

Sir Michael Lyons: No.

  Alan Keen: When the discussions were going on I said to Michael Grade, "If you were restricted to just the equivalent now of the Trust as chair, would you not be wasted by not being able to use some of your talent that you have and your experience in the industry?" I am saying that to try to illustrate what I am talking about.

Sir Michael Lyons: Do you mind if I have a first bite at that before Mark refers to the experience that he had?

  Alan Keen: Yes. What I was going to say was, before you start your answer, with you, Sir Michael, being restricted to the Trust as chair, is Mark missing a non-executive chair? I have had a long experience in the private sector, in industry, and it is rare for companies to operate without a non-exec chair who is involved in the practical management and policy areas. Do we need an extra chair?

Sir Michael Lyons: I will leave Mark to give you his own views on those questions, but let me firstly pick up this use of the word "restricted" which you've used on a couple of occasions. I think it's not a helpful word in the context of the new governance arrangements. The Trust, despite how some would like to characterise it, is the governing body of the BBC. It is there to protect the independence of the BBC and to more vigorously challenge the executive on behalf of licence fee payers than many believe the former structure was able to do; so not limited, more powerful on behalf of licence fee payers. That means that there is a clear separation in terms of editorial and day-to-day business decisions, but let's be under no misunderstanding, the strategic direction is set by the Trust.

Just to give you my own personal view on this, one should not be bound by too simple a model of how companies operate because in practice they operate very differently, depending on the chemistry of chairs and chief executives. Mark and I meet very regularly to discuss the full range of BBC business. I'll leave him to discuss whether that could be strengthened in any way. And indeed, let me underline that when you look a little more widely into European experience, you find very successful companies operating with two-tier boards, a supervisory board which not completely but in some ways is analogous to the Trust model where you're seeking to protect a particular interest, and in this particular case it's that of licence fee payers.

Mark Thompson: I think the three tests I'd want to apply to any governance model for the BBC is: does it help defend and strengthen the BBC's independence; does it ensure there is appropriate accountability so the public can be assured that their interests are being put first and the BBC is serving the public in the right way; and thirdly, is it workable? Is it a system which can be made to work? And I have to say I believe, notwithstanding the critics, that the current governance arrangements pass all three tests.

  It is true, I think, that precisely because of the danger that you point to of a chairman of the governors being perceived, rightly or wrongly, as being too close to management, that the 2007 Royal Charter puts somewhat greater distance between the governing body, BBC Trust, and management. It does add, however, on the executive board, non-executive directors. We currently have some very experienced non-executive directors—Marcus Agius, for example, chair of Barclays plc, is the senior non-exec—who are there to offer advice and support to the management side of the BBC, as well as this governing sovereign body, the BBC Trust, above it.

  Of course I read any amount of column inches about the Trust. I believe that when you get right down to it, independence, accountability and, of course—pragmatically— workability are the three criteria, and I have to say I think the current arrangements pass all three tests.

Q17 Alan Keen: That is good to hear. Could I ask: there have been various discussions and people have expressed opinions on whether it is possible to democratise the BBC to represent the people who pay the licence fee more so than is the position at present, and I know very well the difficulties of having a massive membership voting for various policies and things, and I understand that extremely well from my own work experience over many years, but what is the latest thinking on being able to give more direct representation to the licence fee payers?

Sir Michael Lyons: Well, the most important thing I am sure is that the people who are paying a licence fee in this country believe that the BBC is focused on their interest, making best use of their money and is independent of political and commercial pressure. As we know, all of those issues are valued highly by the public. Of course, you can speculate—and I know some have—on different ownership models. You might look to history as to whether or not demutualisation of former public institutions has improved accountability and performance on behalf of those who pay, and you might sometimes question whether that has had the impact that people expected of it.

The most important issue here—future Governments can consider in whichever way they want the right model for the BBC—the job that we have in hand, is making sure that we're open so the public can see what is being done and we're focused on their interests and their interests alone. I don't want to take up too much time now but I am very happy to go into our track record to date on all the key indicators.

Q18 Alan Keen: Yes, there is certainly an analogy with Tesco, Morrisons, et cetera. I am very happy that they do what I want because they know what I buy and what I don't buy, and there is democracy in the BBC in that way.

And just before I finish could I ask you, Sir Michael, do you agree with me that I think

that Mark was too soft on Sky in his MacTaggart lecture?

Sir Michael Lyons: No, I don't think that is going to do him any good making a comment on that sort of question here today. I'll just leave it today. He gave a very able set of answers earlier on.

  Chair: Thérèse Coffey?

Q19 Dr Thérèse Coffey: If I suggest to colleagues that my perspective perhaps on the BBC Trust is that it is almost like IPSA: it was created in reaction to a crisis and has evolved into something that has rather gone beyond and perhaps—

  Chair: It can't be as bad as that.

  Thérèse Coffey: I am trying to use an analogy and that is why I said that, but I will leave that for a separate discussion.

However, I recognise what Mark has just said that it passes the tests of that. Is there any reason to think that perhaps if there was a new way of governing or almost going back to what it was before, you have six non-executive directors to your 10 and also the enhanced role of Ofcom in certain aspects of regulation, which the BBC already has to comply with to a certain extent, do you not think there is an opportunity almost to say, "This was the solution for the time but we have moved on from there"?

Also, specifically, Sir Michael, I personally think that the costs of running the Trust are pretty high and that some people would do this job for almost next to nothing. Is there anything you could suggest to say how the BBC Trust could save considerable sums?

Sir Michael Lyons: Let me go the one step that I can towards you on this, which is to absolutely and unequivocally acknowledge there is no perfect governance model for any organisation, and the BBC is more challenging than most.

  I disagree with you about whether or not the Trust was born out of a crisis. The Trust was born out of continuing concern to hold the BBC better to account for the way that it used public money, its impartiality, the way that it served some parts of the United Kingdom which still feel that there is further to go in meeting the needs and interests of those different audiences, and that it sometimes was too introspective, too interested in the welfare of its staff, not interested enough in the interests of those who pay the bill. That is the debate that took place. Of course, there were two different models at that time: those arguing that the governors could do better, and I think it is interesting to look at the very last period of the governors where they did take a more vigorous approach to some of these issues than you might believe was taken previously. Others argued that you needed, as you are in part suggesting, much more stringent external regulation of the BBC and indeed the creation of a regulatory body solely for the BBC alone. Out of the discussion which reflected on the need for more challenge but also the need to protect the independence of the BBC and to avoid a model which step-by-step would start to make the programme and editorial decisions affecting BBC output—instead you should come up with what is undoubtedly a complex model of the Trust, which is the sovereign body of the BBC but distant somewhat in its responsibilities so that the public can more clearly see the process of challenge.

  The other point I would agree with you is: have we had to breathe life into that model? Yes, we have. And has there been continual controversy around it? Yes, there has, in part because we have tackled some quite difficult issues, not the least of them being senior pay within the BBC as part of the value-for-money, not the least of them being the need to recognise that nearly true is not a good enough editorial standard for the BBC and that from time to time mistakes made even by the best journalists need to be picked up if we are to improve in the future.

  Dr Thérèse Coffey: Do you want to say anything about the cost of the Trust itself?

Sir Michael Lyons: Of course, and forgive me, I wasn't trying to duck that question at all. What you now see, absolutely open for scrutiny and challenge, is every penny of what the Trust spends. The Trust has led the way—let me say not only in the BBC but across the public sector—in volunteering details of the money that it spends. Previously, the cost of the governors was concealed within BBC accounts. Is the Trust more expensive? Almost certainly, yes, it is because the Charter lays down in some detail specific requirements for a separate advisory group, which is the Trust unit, and for processes to challenge BBC decisions. They are all part of that greater accountability.

  You know, as I do, that this same debate takes place about the costs of democracy in this country. People add up the cost of local government and central Government and say, "Surely it would be possible to do all this more cheaply. Business does it more cheaply". The truth is that openness, transparency and accountability are costly processes.

  Dr Thérèse Coffey: Due to a confidentiality clause I signed when I was a BBC employee I will not go any further, but I think that the National Audit Office, if they do get in, may start to probe the costs and some of the decisions that are being made. So, I just mention that.

Sir Michael Lyons: I don't know about "when they get in". The National Audit Office are an important partner in the process of seeking value-for-money. The Trust invites them to be a strong partner in that. The important point—and I think you might agree with me strongly on this—is not to breach the issue of the independence of the BBC in the role that the National Audit Office is accorded.

  Thérèse Coffey: Yes, I do agree.

  

Q20 Adrian Sanders: The reality is that the BBC and the BBC Trust are not accountable in the way that Government and Ministers are, and I think the question is that in the interests of transparency and accountability why shouldn't the accounts be fully open to the National Audit Office and fully subject to the Freedom of Information Act?

Sir Michael Lyons: The BBC has no special privilege in terms of the Freedom of Information Act, other than for matters relating to journalism, but let us take the wider question that you ask me. There is an important difference between the BBC and Government Departments in that it is independent and that has not only been an important principle of 80 years in the life of the BBC but something that the public feels very strongly about. Part of the reason why they value the BBC is because of its independence, not only of political voices but also of commercial interest.

  Adrian Sanders: That is a very separate issue to accountability and transparency. The fact is, like Government, you are funded by what people consider to be public funding. That is the similarity.

Sir Michael Lyons: Let me address the similarities.

Adrian Sanders: The independence is not the issue.

Sir Michael Lyons: Well, I am going to come back to that. It is not the only issue, I absolutely agree, and it is not a defence against proper scrutiny, transparency and openness. We are completely agreed on those points. What we have to be careful of is in seeking greater openness, transparency and accountability we don't slip into some damage to independence.

  Let me come to your point: does the BBC need to be accountable to the public? Yes, it does. At the moment the Charter clearly and explicitly charges the BBC Trust with being responsible for that accountability. That is why I am here today. Are we doing that job as well as we can? Let me come back to it. The Trust has led the way in the public sector in the argument for greater transparency. We work closely and effectively with the National Audit Office. We have gone so far as saying on public record that if the National Audit Office would like to be the auditors of the BBC we have absolutely no objection and they should tender the next time this is up against the commercial companies, including the one that currently does that job. So there is no boundary here, it is about finding the right way to engage the National Audit Office in the search for value-for-money, in the process of openness and transparency, in preparation for accountability—and here is the rub—without compromising the issues of independence. Of course, the NAO is not just another auditor, it is an agent of Parliament, and so getting the detail of this right is very important, without losing sight of the points on which we would agree.

  Adrian Sanders: I think the bottom line for most people is that if you want to get to the bottom of how the BBC is spending its money in comparison to other bodies that are funded by a tax, what we have in a sense is a barrier between the public and the BBC which is the Trust. Can you imagine in local government if you had a trust set up that looked at the accounts of that council and said to the council taxpayer, "That's all right, don't worry, they're spending money correctly", and the public could not, as they can at the moment, find out every detail about how their money is being spent. We cannot do that with the BBC. Either we accept it is public money or we don't. You are a public corporation, you are not a company, and therefore I think the public should have that right and I know that the coalition Government are very keen on having a commitment to give the NAO full access to the BBC's accounts in order to ensure that transparency.

Sir Michael Lyons: I do want to come back on this a little bit later because I do not want to have left the impression that I disagree with you on the importance of clear accountability for the BBC; for the public to be able to see how their money is spent; for the BBC holding itself open for discussion at this Committee and more widely in public life; all of those I absolutely agree with you.

Does the Trust take seriously its responsibility for both challenging expenditure within the BBC and making sure that people understand what money is being spent on? Yes, it does and I don't think there is any room to criticise that role and I underline that the National Audit Office has been an ally in the way that we do that job.

  Let me now come to the last part. I am very clear that the coalition Government has included in their public commitments a commitment for the National Audit Office to play a larger part and to have freer access to the BBC's accounts. That is a matter at the moment of discussion between the Trust and the Secretary of State about how that is achieved; not if it is achieved, how it is achieved. An important part of that, of course, is that it should not be done in a way which compromises the independence of the BBC, and I was very heartened to hear the Secretary of State give public assurance that he agrees with that principle. Let me assure you that we have entered into those discussions very genuinely. They have taken place over this summer between representatives of the Secretary of State's Department and the BBC on a constructive basis, and I am confident that we will get to the right place. I say again there is no obstacle here to the right of the NAO playing a part in this search for value and accountability within the BBC and certainly no obstacle provided by the Trust.

Mark Thompson: Can I just add a small constitutional point? The challenge, in a sense, in framing any governance model for the BBC is about how you balance two things: the need for the BBC to be independent of political influence and, above all, separate from Government, versus accountability. What happened in the 2007 Charter is the BBC Trust is formed and the Trust is given—if you like, Parliament delegates to the Trust—the task of holding the BBC to account for value for money. Unlike other public institutions who are directly accountable to Parliament, it is done as a constitutional safeguard to ensure that you don't have the BBC too close to the political process. You can argue whether that is the right thing or the wrong thing but that is why it is laid out, and it is laid out very clearly in the Charter that the BBC will be unlike other public bodies. Yes, it gets public money but it will be unlike other public bodies in the matter of how it is held to account for value-for-money, specifically because of the need to keep it independent of government and the political process for its editorial reasons. That is why. So the reason it feels like an oddity is it is intended as an oddity and it is to defend the editorial independence of the organisation.

  David Cairns: Can I jump in for a second on that one?

  Chair: Okay, quickly, David.

Q21 David Cairns: On this point about the need to keep clear water between yourselves and the Government of the day, clearly there was some controversy the other week when you went to Downing Street with a particular memo. Do you think that that conversation that you had in relation to how the BBC was going to portray the Government's agenda on cuts was, firstly, appropriate; and secondly, do you think that the way in which it was reported has done some damage?

Mark Thompson: It is hard to talk about the reporting. Most newspapers were sensible enough not to report it at all. It was a completely unremarkable meeting, like many other unremarkable meetings I have had previously in Downing Street with politicians and officials of other Governments, and I have with all major parties. I'm the editor-in-chief of the BBC and I frequently talk to both officials and also to politicians. I even occasionally have meetings with the Chair of this Committee, for example. Sometimes the BBC's coverage comes up; sometimes we ask about responses, attitudes and perspectives on past coverage; sometimes we're looking for interviews and for access. The same is true when I meet officials and politicians from leading Governments in other parts of the world as well. It is just part of my daily round of work as editor-in-chief of the BBC and can I assure you it is wholly unremarkable. This meeting was like many others.

  

Q22 Paul Farrelly: I just wanted to come back to the National Audit Office, but before that I am glad to hear that there is no implication of your visit to No. 10 that you are allowing No. 10 to become über editor-in-chief of the BBC.

Mark Thompson: I promise you I would get in front of a microphone immediately if there was ever an attempt by any political party to influence the editorial content of the BBC in any way, or to take charge. I give you an absolute assurance that hasn't happened with this Government or the previous Government. I have been doing this job for six years. I have to say of my general experience of all the political parties—this may to some extent be in the aftermath of the Hutton crisis—I have very few complaints of any of the political parties in terms of what you might describe as bullying or an attempt to influence or engage in anything improper. I have to say that is not my experience of the political parties we have in this country.

  Paul Farrelly: That is good to hear. Can I just come back very briefly to the National Audit Office because I am a little bit concerned that some misleading analogies are being used here in the sense that the BBC is resisting involvement of the National Audit Office and, therefore, it has something to hide? Clearly, when auditors like KPMG are engaged there are terms of engagement. You all understand the scope of the audit. You all understand the end product, which is to give a true and fair view of a company or a corporation's financial affairs.

  I am not sure in all the reporting of this that I understand what the end product is supposed to be from the National Audit Office involvement. And local government, which Adrian raised, have a very clear knowledge of the end product even if it is the Audit Commission that audits them because it will be a similar document like this. It won't be a document that, without agreement, will go into all the salaries, for instance, of all the employees above a certain level. So do you have an understanding, despite the toing and froing, of what the end product would be if the National Audit Office were to get involved?

Sir Michael Lyons: Let me say I think this is not a discussion that is complete at the moment. I think it is very important that at the end of those discussions everybody is clear about exactly what the right expectations of any changed arrangements are. At the moment, from my perspective, they focused on two quite separate issues: who are the auditors of the BBC? As you say, at the moment they are currently KPMG. The standards are clear. They are absolutely clearly laid down. Could the National Audit Office do that job? Possibly, and if it wants to, if it is interested in it, that should be a matter of open competition the next time it's up, and we have made it abundantly clear the Trust has no problem with the NAO expressing interest at that time.

  Secondly, although not in every organisation, here separate discussion is around value-for-money exercises. The National Audit Office is an important ally in these exercises. They have a strong voice in which areas to conduct their studies in, but at the moment those are subject to agreement by the Trust. It is not impossible to imagine them having greater freedom to name the areas they want to go in and I don't think the Trust would be unwilling to consider that as the way forward. There just need to be a few ground rules then about how those are conducted. There has been, let me admit, a little bit of tension in recent years, as the search that the Trust has led for greater examination of value-for-money has more rigorously tested what information can be safely put into the public domain without impairing the negotiating position of the BBC, and step-by-step the boundaries have been slightly redefined as a result of those discussions. There is no general problem of the NAO having the information that they want to do their job and it is in the Trust's interests that they should have it.

Q23 Paul Farrelly: One final follow-up: might the Trust itself be open to the National Audit Office looking at the way the Trust goes about its work to ensure procedurally that value-for-money is occurring?

Sir Michael Lyons: Of course. Why not? Absolutely. It can do that now. I don't think that would naturally present itself as one of the top items, although Dr Coffey might take a different view, but I have absolutely no objection to that. The issue is making sure that the current issues of accountability are not put to one side and the Charter ignored in this process, but the search for transparency and value continues.

  Chair: Louise Bagshawe?

Q24 Louise Bagshawe: Staying on the subject of value-for-money, if I could link it with senior executive pay, Mr Thompson, you are one of 41 senior BBC managers that earn more than the Prime Minister. Your basic salary is approximately three times that of the Prime Minister; approximately double that of your predecessor. I'm interested as to how it's justified. It's justified because it's comparable to other chief executives in commercial companies, other broadcasters; very different from other senior executives across the public sector and I have perfect amounts of sympathy with that.

What I am worried about, though, is the perennial question of value-for-money and how the BBC is handling it. In the last year the BBC spent more on television, more on radio and more on online at a time when other commercial broadcasters were in fact cutting their costs: ITV by £117 million, Channel 4 by £56 million. Can you ensure that the business discipline that you bring, which is the justification for your very high salary, will prove to licence fee payers that the BBC means what it says about value-for-money?

  If I could give one other small example, the public sector broadcasting headcount has been increased by 160, we read in this report. That is attributed to a consolidation in advance of the move to Salford. I find it a bit interesting that consolidation in this case apparently includes hiring more staff instead of hiring fewer staff and I just want to be sure that when value-for-money has been prioritised—both by you and by Sir Michael and the BBC Trust—that it is being delivered because I do believe there is a perception out there that the BBC is always talking about value-for-money for the licence fee, but when you look at what is being spent and you look at jobs being increased we don't in fact see that coming through.

Sir Michael Lyons: If you don't mind me just starting on this. It is quite a wide-ranging question. There are two particular areas of focus, the second on staffing and judgments made by the Director General and the first on senior pay; although the bridge between them is not lost on me. I think I ought to answer the issue about pay policy. Would you prefer the Director General to begin with his answer on content spend and staffing?

Q25 Louise Bagshawe: I think it is perfectly valid for you to talk about senior pay, whether that will be at all brought in line with other public sector bodies. But I'm reasonably content about senior pay being at the level that it is because of the commercial expertise, the parallels with other commercial companies brought in, but that has to include delivering value-for-money. That is the point of the justification of the salaries.

Mark Thompson: I would accept that in full. I mean BBC senior pay, much discussed in the newspapers, is manifestly high compared to many other public bodies; compared to other broadcasters, rather low. We've seen yesterday senior executives of BSkyB and their pay. I think chief executive Jeremy Darroch, a colleague and friend, had £2.7 million total remuneration last year and that's a market rate. So our policy on senior pay, for all senior managers, is to go for a very significant discount to the market; to pay much less than people could get if they were working in the private sector in broadcasting because it is a great privilege to work for the BBC and because it is paid for by the public. You are absolutely right, it is very important that the BBC drives as much value-for-money as it can.

  Now, firstly on senior managers, we are committed to reducing the number of senior managers. I inherited a BBC with about 700 senior managers. We have committed to taking that down. We have already taken it down. It is currently at 605 senior managers in the BBC in August this year. We have committed to taking it down by 18%, which will take it to about 510. If we can go further and run the BBC in a leaner way—I absolutely appreciate times are tough and it's appropriate that the BBC should be as efficient and should operate with as few managers as it can—we will take it further than that. We have frozen senior management pay. We have frozen bonuses. We are looking very hard at pension supplements. In my view there should be the same pension offered to everyone in the BBC. I think it's likely that pension supplements will simply be removed in their current form altogether. That will have a further significant effect on pension supplements and you will know that executive directors are also working this year and next year for 11 rather than 12 months' pay.

  More broadly, staff numbers are on the way down. The trajectory of staff numbers at the BBC is down. There will be some individual variations in that year-on-year but we are committed to running the BBC with as few people as we can do whilst maintaining or, where we can, improving the quality of our services. So you are seeing, you have seen and you will continue to see, the number of people working for BBC go down. More generally, we are in the middle of a value-for-money programme that is on track to deliver and the NAO, by the way, are helping us with the methodology and will come back to see whether we have achieved it. We will deliver 15% savings. This is on the back of a previous programme that delivered as much as that again.

  I absolutely expect, from beyond the present life of these settlements, to move into further efficiencies. I think between the start of this process and the end of the licence fee, you will see, in terms of like-for-like costs in the BBC, something like 25%, possibly slightly greater, coming out of like-for-like costs in the BBC. And so I think that those people who think that the BBC somehow thinks it is separate from the rest of the public sector and is not going through the same disciplines are simply wrong about this.

Q26 Louise Bagshawe: Does it concern you that last year the BBC in fact spent more across television, radio and online at the time when other broadcasters were in fact cutting their costs? You have income totalling roughly £5 billion, £3.5 billion of which is licence fee income. There is a suggestion that the BBC is so cushioned by the licence fee that it's not bringing in the sorts of cost cutting that we see across the public sector or across the private sector.

Mark Thompson: I think you have to be a little bit careful here. The nature of our television and radio broadcasting market is that there are fluctuations in commercial media. There are periods where their income is going up much more steeply than the BBC licence fee and there are periods where it dips. Over time, the story has been of commercial media growing and the BBC's share of revenue across the broadcasting economy reducing.

Once, famously, the BBC was 100% of the market. We were 45% of the market some years ago. We are currently about 25% of spending. That will reduce over coming years. So, again, looking at it over a period of years, our share of investment, the money and the revenue that is coming into broadcasting is going down. I have to say I think it's a benefit of the licence fee and of a multi-year settlement to the licence fee that you get steady investment from the BBC even though there are fluctuations in the commercial market.

  I mean the other way of looking at what you've just said is if you're an independent producer, at a time when it is harder for Channel 4 and ITV to commission programmes, at least the licence fee means there is a consistency of investment from the BBC and particularly at a time when the BBC is shifting the balance of its spend outside London. That means if you're an indie working in Glasgow or you're working in Cardiff or Greater Manchester, at least what the BBC is investing in new programming remains steady. It is important to say that the programming we do, so much of it is so different from what other broadcasters do. I mean we're in the middle of the Proms season and we're broadcasting dozens of Proms. Nobody else is doing that. I think that if symbolically you cut back the number of Proms you're broadcasting on BBC 4 because ITV's advertising has reduced, it would be crazy.

Q27 Louise Bagshawe: I do think there is a danger though perhaps of confusing inputs with outcomes. It is a question of whether you are spending more on television, on radio and also online and what you are receiving back from it and how you focus administrative costs, other kinds of operational costs, and so forth, at a time when other broadcasters are cutting costs.

  Mark Thompson: I agree with that. Although you will have seen the overall story about the costs of running the BBC are today: they are roughly half what they were at the end of the 1990s. We've said we want to take another around £100 million out of those costs each year and try to transfer that money into investment in services for the public.

  Louise Bagshawe: Okay, thank you.

Q28 Chair: On the question of the number of senior managers in the BBC, about a year ago a former employee of the BBC wrote, "Right now we have a BBC that is suffocated by massively over-remunerated and not terribly bright middle managers; people who have failed ever upwards and have been removed from the difficult and genuinely creative business of making stuff people want to watch or listen to". That seems to be a criticism that was widely voiced and that, to some extent, you accept in that you are now drastically reducing the number of people at that level.

  Mark Thompson: If I may say so, Mr Chair, the impression one could get from such a quote is that, as it were, the numbers of senior managers has been increasing at the BBC and it's been decreasing. As I said, we have already seen a decrease of 100 and we are now committed to looking hard at whether, at every level of the organisation, we can run the organisation with fewer managers still. So we have been tackling this. Where we can, some of the big jobs in the BBC, Director of Nations and Regions, Director World Service, the first of those two jobs abolished altogether, simply removed; the second of those two jobs combined. Closing jobs, merging them, simplifying structures.

  You've heard me say this before; we're committed to accelerating that process and you will see, I think, a fairly dramatic change on this front. Now, it's not because we haven't regarded this as an important topic over the last few years. We have and we've taken action. We do accept, though, that the challenge across the entire public realm in this country of, to use in a sense the Government's words, "Can you do more for less? Are there other ways of doing things?" is a challenge that the BBC should take seriously as well. And I want to be quite clear that the BBC Trust has been particularly consistent in insisting that we take this entire area of activity very, very seriously.

Sir Michael Lyons: I don't want to say much about that, John, but, given that we had the discussion earlier about current governance arrangements and previous governance arrangements, it is worth underlining. The Trust came into being in 2007. Even in that year it was discussing the issue of the right expenditure on senior management pay, not only because of public anxieties that, of course, grew when people became aware of exactly what was being paid but also because of anxieties inside the organisation.

If you look at the history of senior pay at the BBC you have to go back to at least 1989 to understand the different decisions that were taken that led to the position that the Trust inherited. We have been very clear, to begin with by detailed private discussions with the Director General, about the direction we wanted to move in. That was reflected early on in agreement to suspending bonuses and then, more recently, in the setting of the 25% target for the reductions in the cost of senior management. As the Director General has underlined in some detail, that is well under way and has now been further accelerated because of what we found when we went out to consultation on the strategic review; that how much the BBC pays its senior managers and its top talent remains a niggling area of concern for the public and one that gets in the way of, I think, a proper appreciation and a wholehearted appreciation of the work the BBC does.

  Chair: Jim Sheridan, very briefly.

Q29 Jim Sheridan: I understand the commitment of reducing staffing costs but can you give the same commitment and determination that the external consultants will be reduced as well?

Sir Michael Lyons: I think we can show that the BBC is absolutely sparing in the extent to which it uses external consultancy but, Mr Sheridan, you know from your own experience sometimes it is more efficient to bring somebody in externally than to insist upon having those skills on call all of the time. The BBC has to take that approach to much of its on-screen talent and sometimes it's right that it should take that approach to some of its professional talent. But we can give you more details.

  Do you want to say anything, Zarin?

Mark Thompson: I think Zarin might be able to help with the kind of controls that are in place about consultancy spend.

Zarin Patel: So probably about four or five years ago the BBC habitually spent somewhere between £25 to £30 million per annum on consultants; not just management consultants but consultants to help us think through a new way of building our properties or to think about what's happening in technology. What we have done since then is to reduce the areas in which we allow consultancy spend. So every consulting assignment above £100,000 has to be signed off by me and my assignments have to be signed off by Mark and that has brought down the amount we spend; so the physical amount we spend.

But we also thought hard about which consultants we want to work with and to make sure that we give quite a lot of work to single consultants so we get massive discounts to their framework rate and they build their understanding of the BBC so they can do what we want them to do much faster and harder. On efficiency, being able to take 15% of our cost base out of the five years, which is what we are in the middle of. I've had to use a number of people, who have experience in other industries about how to reduce that cost, and that's a good use of consultants.

The key thing when you use a consultant is to know what you're using them for, to have an end date and then to ensure that the knowledge they bring you've transferred to your own staff so you don't have to keep using the same consultants over and over again. You're building your own capability.

Q30 Chair: The other issue that this Committee has focused on in the past is transparency and, in particular, the publication of bands of salaries and the numbers in it. You will be aware that five months ago there was a leak of an exchange of emails from within the BBC where the BBC reward manager said, "We purposefully changed the bands in an attempt to make it less obvious how many of the employees were above £100,000." And the BBC reward director on a salary of £196,000 replied, "We're sticking to the salary bands in the note, aren't we? We're doing it to deliberately disguise the number in the over £100,000 band." I think you have accepted that that was a wholly unacceptable practice. Can you tell me what action followed it?

Sir Michael Lyons: Can I just deal with the headline issue and then leave the Director General to talk about the staffing issue because I think it is very important to underline that we announced in the summer, as part of a package of measures to further respond to public anxiety about how much was paid to top talent—both managerial and on-screen—that we were accepting this Committee's recommendations for the right bands to publish that information in the future and were happy to acknowledge that recommendation had come from you. We went on further to raise the question of whether it might be in the public interest to be clearer about those who earn the most from the BBC, in terms of on-screen talent, although not going so far as putting salaries beside names. But let me leave the Director General to comment on what, as you say, was a wholly unacceptable suggestion.

Mark Thompson: I think you should judge us by our actions and you'll have seen that we have moved to a position of routinely publishing the salaries, the expenses, the hospitality registers and so forth for, now, I think, 107 of us senior managers. So we have gone far beyond where the BBC was a few years ago and its disclosures in the Annual Report. Moreover, Mr Sanders raised FOI. The BBC has tried to fully comply with FOI from day one. There was no attempt to hide behind any excuses around FOI. There are areas to do with the BBC's editorial business where we sometimes have used a derogation to make the case that a particular fact should not be disclosed but I believe that our record on FOI is a good one, in terms of complying with FOI.

As I say, we are now committed, Chair, to very, very extensive routine publication and if there are ways in which we can extend that we will. I'm just happy to say, from my side of the BBC, I welcome the suggestion from this Committee on more detailed bands of on-air talent. We will absolutely readily do that and you'll see in the Annual Report for next year much more detailed bands as a result. I am not suggesting that every single individual in the organisation has got this message from day one but, believe me, we are absolutely committed to—

Chair: It's not a question of not getting the message. This was "an attempt to deliberately disguise the number in the over £100,000 band".

Mark Thompson: If I may say, sir, we've now moved to a form of routine publication.

Q31 Chair: I quite accept you have changed the practice. What I want to know is who decided to adopt a deliberate strategy to disguise the number in the over £100,000 band?

Mark Thompson: But it wasn't adopted. I mean what you have here is an e-mail suggesting something that didn't happen.

Q32 Chair: Clearly it was felt by a very senior member of your staff that this was what was desirable in the interests of the BBC. Was it his decision?

Mark Thompson: The point is the suggestion in the e-mail was not adopted and I certainly would not want to defend what was said in that e-mail.

Q33 Chair: Well, what I am saying is: did anybody suffer disciplinary action?

Mark Thompson: The most important thing I want to say here is that our practice has been, and will continue to be, to publish, extensively, information and, as far as we can, to comply with FOI as well.

Chair: Yes, but did anybody suffer disciplinary action?

Mark Thompson: It has been made quite clear to the individual involved that that was a wholly unacceptable e-mail to have written.

Chair: But no action was taken?

Sir Michael Lyons: Could I just ask Zarin Patel to just say a further word to supplement what the Director General shared with you?

Zarin Patel: When the proposal was put to the people who were thinking about this we absolutely rejected it out of hand because it was not the right thing to do, and we had a very serious discussion with the manager concerned about that sort of approach to it. I am confident that we formally rejected it and we didn't even think that it was the right thing to do at the time.

Sir Michael Lyons: Indeed. I mean the point was made it was not an acceptable proposal to have made.

Chair: He is one of your most senior staff members on an extremely high salary, but no action was taken?

Mark Thompson: You will recall at the time that the manager involved did issue a public apology for the e-mail. So, in terms, the proposal should not have been made. It was made clear at the time that the proposal should not have been made. The proposal was rejected. The individual apologised and our subsequent actions have demonstrated this is not and never has been BBC policy.

Q34 Louise Bagshawe: Mr Thompson, do you not accept that licence fee payers will not think that is at all good enough? You have here a very senior executive at the BBC in so many words saying that he is deliberately setting out to obscure pay from the public. If I may just finish, is this not a classic case of when we see terrible things go wrong and somebody comes in front of a camera and says, "Lessons have been learned", but no actual discipline is taken? I find it extraordinary that you seem to think a mere apology and a talking-to is sufficient in this case.

Sir Michael Lyons: Do you mind if I just intervene here with just two comments? The first one is: in terms of running any large organisation, it is always a matter of judgment whether the most efficacious way forward is discipline or re-education and it's not as if there was some substance to this debate. There is a proper concern within the BBC about the dangers of putting things into the public domain that enable competitors to see how much is being paid for the most expensive on-screen talent.

Now, I'm clear and I'm on record now as saying I think we have to go further in explaining to the public how their money is used. Further still, even beyond the bands that the Committee has suggested, perhaps by naming those who receive the biggest income from the BBC. But I am absolutely sensitive to the fact that it would not be in the interests of licence fee payers if the outcome of more transparency was that it proved impossible to retain some of the talent that is high in the public's affections. So it's not as if there is no issue here. There is an issue. It doesn't excuse that behaviour or that suggestion but there is an issue underlying it on which people have a right to have—

  Louise Bagshawe: I can see the fundamental—

Mark Thompson: I don't want to give you the impression for a second that this was not regarded as wholly unacceptable. But I also want to say that I believe that an immediate public apology from a manager who had never previously blemished their record at all—in particular, given that this suggestion went nowhere and was immediately rejected, I think by the management group with both Zarin and me, it never led to any action or any harm being done. Even to put it in an e-mail is unacceptable and required an apology, but it never reflected the policy of the BBC and, as I say, for an individual who previously had an unblemished record, it seemed to me that a reprimand and a public apology was an adequate response.

  Louise Bagshawe: He was on £200,000 a year and not even to have received a warning, I don't think licence fee payers will be very happy with that. But I accept much of the rest of what you said.

  Chair: Philip Davies?

Q35 Philip Davies: It wouldn't be a BBC Annual Report without a certain amount of political correctness creeping its way in, and we haven't got time to go into it in great detail—

Mark Thompson I look forward to this moment every year.

Philip Davies: I will gloss over the proud boast of the EastEnders all-black episode

and I will probably also gloss over the guff at the start of your diversity section that says that you want to recruit and develop a diverse work force that is representative of the contemporary British population. Given that a certain proportion of the British contemporary population are rapists and murderers, I presume that the BBC does not want to make sure that it has a certain quota of rapists and murderers on its books. So we will just accent that as guff that you tend to get in these things.

Mark Thompson: I think we should want to reflect the British public and the people who pay for and own the BBC. It's not an entirely reprehensible objective, I'd suggest.

  Philip Davies: So you are having a quota for rapists and murderers? I mean it's just guff, isn't it?

  Paul Farrelly: Chair, to be helpful to the stenographer, can you explain to the Committee how we spell guff?

Q36 Philip Davies: The point is that you say that you want to be representative of the—I think it's guff but you're very clear about this. In the very next paragraph you go on to say, "Given that we have an ethnic minority population in this country of 8%" and you then go on in the very next paragraph saying you want to be representative of the British population and that you have a target for the BBC work force of 12.5% for people from an ethnic minority. Now, how on earth can you, with your own two paragraphs, marry those two things up? Because one clearly does not reflect what you have put in your first paragraph?

Sir Michael Lyons: Well, let me have a first bite of this, if you are happy for that, Mr Davies? Unequivocally the Trust is clear the BBC needs to serve and reflect the whole of Britain—its whole population in all its diversity—and believes that it has further to go in fully representing every different audience. Some of that is about ethnicity but also it's about where people choose to live and the different cultures in different parts of the country. I think you'll find, although this is really the Director General's territory, the target here relates, of course, in part to where the BBC finds its bases and so it reflects those labour forces from which it draws its staff.

Mark Thompson: That's exactly the point.

Q37 Philip Davies: But you are a national broadcaster. You are not a regional broadcaster, you are a national broadcaster.

Mark Thompson: No, but we're also obviously a physical employer with major bases in some of the UK's biggest cities where the mix of population is very different. The target is much lower than the ethnic population of some of the bigger cities than of London. It is slightly higher than the overall UK national average. But the key thing is what we have tried to do with these targets. These are not kind of blind quotas where we are insisting on or taking improper or overly aggressive approaches to management. The right thing to do with all of the things we're trying to change in the BBC, around representation and around where we make our programmes, is to work with the grain of talent and to make sure that we are getting the best people into the organisation. We're open to talent from wherever it comes, which is why they're not quotas. They are targets and we think that is the right way forward.

We don't want to end up excluding talent from the organisation but nor do we want to end up with artificially employed people who are not the best candidates, the best people for the job to hit some quota. What we are trying to do is to reflect back to this country the experience of contemporary Britain and to find access to all the different talents that exist in this country but in a way that kind of goes with the grain of talent and goes with the grain of the population.

Q38 Philip Davies: In your journalism trainee scheme 40% join from an ethnic minority; 33% join in the journalism talent pool from an ethnic minority. You are the one with the targets. If you just believe in recruiting people on merit and merit alone, which is the system I would commend to you—that you should be colour-blind when you're recruiting people, you just recruit the best people for the job—you shouldn't need targets. Targets and quotas are interchangeable terms.

Mark Thompson: If I may say so, in my view and certainly the way I use those two words, they're not. Quotas are numerical objectives that we hit. So we have a minimum quota for independent production that is 25%—25% of qualifying television production must come from the independent sector. We hit that number. It's a statutory quota. We hit it. Indeed we strongly exceed it now; we're over 40%. So there are quotas that are requirements on managers to hit. A target is not something that we require managers to hit, or require them to distort judgments in an interview panel to hit. Our managers are required to find the right people and the best people. There are a number of training schemes where we do seek a higher number of ethnic minorities. We are allowed to do that legally, and we do it in areas of the BBC where we think there is a strong case for going out and seeking new talent for the BBC from across the population, including those groups who are less represented in those areas of the BBC.

Q39 Philip Davies: Do you think it helps community cohesion to say to somebody who is white, who wants to go on a training scheme, who is particularly well suited, "I'm sorry, you're not there because we're deliberately upping our number of people on this particular scheme from a particular ethnic minority"? You should be calling these people on merit. Don't have targets. Just have people on merit.

Mark Thompson: All I would say, Mr Davies, is that we literally have received tens of thousands of contacts from the public each year, many tens of thousands from people who want to work for the BBC. In surveys of graduates we are always very close to the top—and for arts graduates at the very top—of institutions people want to work for. There is no danger, it seems to me, of putting anyone off working for the BBC because there is such a strong desire from many members of the public to come and work for us.

Chair: I think we do need to move on. Adrian Sanders?

Q40 Adrian Sanders: Pensions are an issue that is raising its head, in terms of your financing. How does the BBC justify the employer contribution holiday that it took between 1988 and 2003 and isn't this the real problem?

Sir Michael Lyons: No, it isn't the real problem. The problem of pension fund deficits is not peculiar to the BBC. It's not peculiar to the BBC amongst other public organisations, it is across the economy. It is in part about the sluggish performance of equity markets in recent years. It is in part a reflection of increased longevity and the fact that when, particularly, defined benefit schemes were first introduced people did not have anything like the life expectancy that they now have. So it is a national debate in which the BBC finds itself not insulated from that debate. It is very clear, and we focused on this over the last few years, that as we approach the further valuation with strengthened pension fund regulation—no objection to that at all—and a stronger voice for pension trustees, there would inevitably be demands for further, additional employer contributions from the BBC to help to bridge the deficit.

The Trust has been unequivocally clear, has shared the view with the Director General that, whilst we have to get the right balance between the interest of licence fee payers and internal staff, there simply was no room to significantly increase the costs of the pension fund contribution and so pension fund reform was the only alternative. It is simply misleading to suggest that somehow the problem has been created from that pension fund holiday. At the time, of course, the BBC, like other bodies up and down the country, saw the very good performance of equity markets in particular as an opportunity to relieve the pressure, in the BBC's case on licence fee payers; in the case of local authorities and others, on taxpayers.

Zarin, do you want to say a bit more because you have been really leading on this.

Zarin Patel: I will just add one thing. Of course in those days excessive surpluses in pension schemes were taxed, so you were forced to think about a different way of relieving surpluses. Employee benefits were increased as well and when the BBC foresaw that pension costs were beginning to increase, we increased our contributions into the scheme. So I think the pension holiday was of its time and has not let to these changes. There are real fundamental changes going on in the pensions world, which you all know, but the BBC's income is not inflation proofed any more. It hasn't been since 2005 and therefore our ability to withstand those kinds of financial shocks is much lower than it has ever been before as well. So this is really the moment for us to act for the long term in making pension reforms.

Q41 Adrian Sanders: While you are answering questions could I ask: why has the BBC used the windfall benefit of £334 million due to changes already made to its pension scheme to increase its in-year surplus rather than reduce its pension liability?

Zarin Patel: It does both. In April 2009, the pension scheme trustees estimated that the deficit was some £2 billion. So one of the things we have been doing, as well as the pension reform we have announced recently, is when people retire early we don't reduce their pensions. We have changed that agreement, so if you retire early you get a reduced pension in a cost-neutral way. That has led to a saving in the deficit of about £334 million and you will see in the accounts that our deficit is lower, at £1.6 billion. So we hope that when the formal valuation for April 2010 is announced, that those changes we have made, the changes we are making now plus the changes we made on pension augmentation, will reduce the deficit and therefore the burden on the licence fee payer. They are part of the same thing.

Q42 Adrian Sanders: Roughly, what is the deficit at the moment?

Zarin Patel: The pension scheme actuaries haven't formally given us the numbers but we believe it will be somewhere between £1.5 billion and £2 billion.

Q43 Adrian Sanders: And what was the saving from the holiday?

Zarin Patel: I don't have those figures to hand.

Q44 Adrian Sanders: It was around about £1 billion, wasn't it?

Zarin Patel: I don't believe it would have been that high but, as I say, I don't have the figures to hand.

Adrian Sanders: Around about £1 billion.

Zarin Patel: I am not sure that would be the right figure.

Q45 Chair: You are now facing a position where you have had a ballot of the unions with over 90% voting in favour of the strike action.

Mark Thompson: Yes, if we could just put that context: only a minority of BBC staff are unionised and the turnout in the ballot was 50% to 60%.

Q46 Chair: Let me give you another quote by a different employee of the BBC who says, "The chasm between what is being demanded of the vast majority of the staff and the cushion of privilege that protects its top executives has resulted in a level of rage that I have not seen since I joined the corporation as a trainee 25 years ago". You plainly do have a major problem in getting across what you want to do.

Mark Thompson: Let's just step back though. Around the country many, many private companies have been going through, and some are still going through, the pretty painful process of pension reform, in very similar terms to what is happening at the BBC. Indeed, many private companies have taken a decision they simply cannot justify carrying on with defined benefit schemes at all and have simply shut their defined benefit schemes and are moving entirely to defined contribution. Now I have to say that has been greeted in companies across the UK by staff members and unions with real dismay, sometimes anger and indeed sometimes industrial action. The idea that pension reform is one of the most sensitive and difficult forms of reform to achieve, is almost universally true.

Now partly because of the publicity focus that the BBC gets—centre of British public life and with much media fascination with the BBC—that can feel magnified, but the process that we are going through at the BBC is very similar to processes which have been going on and will continue to go on in many other private sector companies. Also, let's see where John Hutton gets to with his review for the Government of public sector pensions. I suspect you will find other public bodies also going through this process.

Right now we are in the middle of a consultation period with our staff and with our unions. Before you conclude anything about what is likely to happen at the end of that dialogue, all I would say to you is: I would like to see what happens. We said, and I have said publicly to all of my colleagues in the BBC, we are listening quite acutely to the points they are making about pension schemes, in particular around the proposal we made about the defined benefit side of the contribution. Many members of staff are unhappy with a couple of proposals we have made, in particular one which is to put a 1% cap on future growth in pensionable pay in the defined benefit side of the scheme. I expect in the coming weeks to have reflected on what they have said and to look at whether we can amend our proposals in the light of that.

All I would say, Mr Chair, is: we are in the middle of a process. I believe it is a necessary process. My ambition is that we find the right balance between affordability and justifiability on behalf of the licence payer for how much we spend on the BBC pension scheme, with fairness and equity to staff. If we can adjust our proposals in the light of what staff are saying we will do that, although we have to hit the affordability test and you and others would criticise us if we did not do that.

I am also committed to, as far as we possibly can, making sure that pension arrangements at the BBC are fair up and down the organisation and that they apply to senior people just as much as they do to junior people, so that you do not get what your quote is suggesting, which is a two-tier system where senior people get one deal and everyone else gets another one.

Q47 Chair: But the problem you face is exactly the same, that the vast majority of relatively low-paid BBC employees, looking at savings and cuts, resent the number who are paid very considerable sums at the top; exactly the same. In a survey of the top 10 individuals in the public sector who have the biggest pension pots, positions two, three and four are held by members of the BBC. When you have somebody like the Deputy Director General, who is going to retire on a pension of £215,000 a year at the moment—that is not his pay, that is a pension that is going to be more than the Prime Minister is getting paid at the moment—you can understand why people resent it.

Mark Thompson: Just a couple of points I would make in response to that: firstly I have to say that many senior people in the BBC are on absolutely standard pension terms. Indeed, the Deputy Director General is an example of that, he has simply been part of a traditional final salary scheme and the reason he is going to have a large pension is because he has worked for the BBC for many, many years and paid into the pension pot. It has been exactly the same pension. The Deputy Director General joined the pension scheme pre-1989. Many thousands of other colleagues in the BBC have exactly the same terms and it is a large pension because of many, many years of public service.

The second thing I want to say, just for the avoidance of doubt, certainly in the broadcasting world, is the ratio between top pay and median pay in the BBC is low. It is low. It is not high. It is not as if the gulf between senior pay and average pay in the BBC is unusually high, by the standards of the rest of the media it is unusually low. There is actually a very tight ratio. It is still much larger than historic ratios but, compared to anywhere else where people can work in media, ratios are relatively low. So although sometimes it is implied that you are talking about an unusual gap in terms of terms and conditions or pay, between the top of the organisation and the middle or the bottom, in the business the BBC is in, in broadcasting, these are quite tight ratios.

Q48 Chair: But do you accept that the fact that if there are individuals, like Alan Yentob and Mark Byford and John Smith, who have these huge pension pots it is going to make it far harder for you to get this message across to your staff?

Mark Thompson: What I would say is, like many organisations, in a sense we have a legacy position on pensions which is complex. It is complex for rather good historical reasons. It is also complex because of the fact that you have all sorts of people. Around the top table at the BBC you have people who have stayed in the BBC for many years. They are now, interestingly enough, in the minority. I think of our executive directors only one is someone who has only ever worked for the BBC. You have people who have moved around in their careers—I have done that—and have very different pension arrangements. Out on the ground you have people who are working together some of whom have long-range BBC pensions, others who are freelancers who have no pension arrangements at all.

I would be surprised if any member of this Committee thought that we were trying to do the wrong thing here: the objective is to try to move from our legacy position on pensions to a set of arrangements which are fair, which apply evenly across the organisation and which do not mean that the public are paying too much for pensions inside the BBC.

I think that there is a bit of a pattern whereby necessary reform, which everyone in a sense basically accepts is almost certainly necessary reform, ends up being criticised and to some extent there is even an attempt to undermine it going on. We have to do this. I believe the public would want us to do it. It is necessary. It is manifestly financially necessary. I would just say to you that if you believe that pension reform at the BBC—the fundamental reform—is a good idea, support it.

Chair: I am not criticising your intention to try and reform your pension arrangements in the BBC. I am criticising the fact that certain individuals have managed to accumulate sums which most people think are far and away in excess of what they should be.

Mark Thompson: But please do not imply that they have done anything other than pay into a very standard scheme. The historic BBC pension scheme was like that of many, many other private sector companies, indeed some public sector organisations. What these people are guilty of is paying into a pension scheme over many years.

Chair: They have done nothing wrong. The fault lies with the BBC pension scheme, and it is the fact that places two, three and four in the top 10 are occupied by employees of the BBC.

Sir Michael Lyons: Just one observation. I do not want to get deeply into this. I am not sure it is a fault of the pension scheme. If it is a fault at all, it is of those who sought to set senior salaries within the BBC, before 2007, without adequate reflection of the position of staff who had been there a long time and enjoyed a very substantial asset in terms of the defined benefit scheme. I think it is less about the pension scheme and takes us straight back to the debate, from 1989 onwards, about senior pay at the BBC where I would concede, if you look at that with the benefit of hindsight—and probably at the time—those responsible should have been clearer in seeking to identify those posts where there needed to be an external market benchmark and those posts which essentially would be recruited internally from people who were already part of that benefit scheme.

Mark Thompson: Without wishing to disagree with my Chair in the slightest—

Sir Michael Lyons: Which we do from time to time.

Mark Thompson: —one further reflection is that these pension schemes were not unusual in our industry. In other words, if you worked in ITV for many years or you worked at ITN or worked at Channel 4, very similar. In other words it is not as if the BBC was having a different kind of pension arrangement than was available elsewhere in media. Again, if you benchmarked the BBC's pension arrangements and looked at the likely final pensions of people across the rest of the industry, they would have been very similar. This was very much in line with what other broadcasters were doing.

Sir Michael Lyons: Without wanting to disagree with my Director General what it opens up is the debate about what the right benchmarks are for the BBC, whether they are the industry benchmarks or whether they are public sector benchmarks. The truth is that the BBC has to find its way between those two sets of norms.

  Chair: Jim, very quick.

Q49 Jim Sheridan: This is the perfect opportunity to bring in an external consultant to look at the pension.

Sir Michael Lyons: Could you give us some advice on who it might be?

Jim Sheridan: Follow the lead of parliamentarians in this place and bring in an external consultant to advise you on how best to look at your pension scheme.

Sir Michael Lyons: We do take advice but we are careful not to pay too much for that advice.

Q50 Louise Bagshawe: Just to check, for clarity, very briefly, that your proposal is not simply to close the final salary scheme and keep accrued rights, it is to continue it for existing employees who are in that particular box—

Mark Thompson: But with some significant changes, of which the 1% proposed cap on the growth of future pensionable pay is the most significant. The point of this is in a context of short-term issues around the market valuation of the assets in the scheme but longer-term issues like, for example, the long-term issue of longevity. A BBC male employee retiring at 60 has an average life expectancy of 88.5 years, that is 28.5 years after retirement—in the light of the risks, as it were, to the liabilities in the pension scheme, the idea of the 1% cap is to reduce the risk of the liabilities of the scheme growing beyond our ability to support the assets to meet them. That is the point.

Louise Bagshawe: Thank you. I just wanted clarity.

  Chair: Paul Farrelly?

Q51 Paul Farrelly: We are moving to the licence fee. One of the strange things that happened after the MacTaggart, Mark, was that you then gave interviews which suggested that you might not want to take the whole of the licence fee increase this year. That was outside the MacTaggart.

Mark Thompson: I was asked one question about the 2%. The most important point I made there was that it is a matter for the BBC Trust, which I think I can pass over to Michael.

Paul Farrelly: What is the position?

Sir Michael Lyons: The position is that, as part of the Trust's responsibility, enshrined specifically within the Charter, the Trust is considering what the BBC needs and balancing that against the demands that would represent on the licence fee payer. So as part of our reflections on the strategic review we have done some detailed work on the remainder of this licence fee period and our concern is sharpened by the position that we know the British public is in, facing prospects of higher taxation, and so we are doing our job. We are reflecting on what the BBC needs, even in this licence fee period before we even start talking about the next licence fee period. This is evidence of the Trust doing what I have been very clear and on record as saying: the Trust is here to represent licence fee payers. Its first interest is asking for no more than the BBC needs to do a good job.

Q52 Paul Farrelly: Remind me: when is the licence fee next due to go up?

Sir Michael Lyons: In April of next year by 2%. That is part of the five-year agreement. Let me underline that the five-year agreement is a very important part of the constitutional surroundings of the BBC, to protect its independence, but nonetheless the Trust has a responsibility, explicit in the Charter, to consider even within the five-year settlement what the BBC needs from year to year.

Q53 Paul Farrelly: So have you then proposed, and to whom, that the licence fee be frozen?

Sir Michael Lyons: No, not at all. We have not reached any decision. We are very carefully, in conjunction with the Director General and his staff, reflecting—and it would not be without its consequences, so very carefully reflecting—whether that is at all possible or what its implications would be and that is exactly where the matter rests at the moment.

Paul Farrelly: So it is in the pot.

  Sir Michael Lyons: It is in the melting pot.

Q54 Paul Farrelly: And have you had any assurances at all from the Government since the election about the minimum level of the future licence?

Sir Michael Lyons: None at all. The Secretary of State was clear with me at our very first meeting that he regarded discussions about the licence fee as a matter for the future, and that seems appropriate.

Q55 Paul Farrelly: So everything is up for grabs. Just covering the ground, there was a recent paper from the Adam Smith Institute putting forward a voluntary subscriptions model. What was your reaction to that? Was it, "They're away with the fairies" or "They would say that, wouldn't they"?

Sir Michael Lyons: I think there is properly a debate about how the BBC is funded, both the scale and the way in which that is collected. The licence fee has been a robust way of connecting use of broadcast services and a contribution to something which is the stronger in my view—very much the stronger—for being the subject of universal funding. I think you would change the nature of the BBC if you made it an organisation which had to basically play to, with, its audience if you like—obviously it does serve audiences, but too strong a connection there and you would have a very different sort of BBC.

Mark Thompson: To me it goes very deep. Manifestly, the BBC produces some services which are very popular with the public. You could turn the BBC into a subscription business like Home Box Office—HBO—in the States. But what happens is you are running a subscription business, you focus on those households who can pay the most and you exclude people who don't pay a subscription from seeing what you do. Millions and millions of people watched BBC 1 on that Tuesday night after the election when the new Government was being formed. The microphone comes out at No. 10; Gordon Brown comes out, resigns. The camera goes to the Palace. Many millions of people are watching that and it was a national moment. The Battle of Britain commemorative celebrations coming up will be in their way a national moment, as the World Cup was.

To me the BBC is not-for-profit, where every household is worth the same to us, every single household. We don't favour one household over another because we get more money from them. Where there isn't a profit motive for the controller of BBC 1 or the controller of Radio 4, they are actually thinking about what is the best service for the public—I am not saying you can't change that, but just be aware of the scale of the change you are proposing if you suggest it.

I'm not suggesting you are suggesting it. The Adam Smith Institute suggested it.

Q56 Paul Farrelly: Just one point. Clearly all the income from the BBC is not from the licence fee. There is £293 million of grant-in-aid that comes to fund the World Service. If you were the Foreign Office looking at possible savings and looking at your surplus, it might be a juicy plum for cost cutters to go for.

  What discussions has the BBC had about the future of the size of the grant-in-aid that funds the World Service?

Sir Michael Lyons: There are discussions going on at the moment across Government expenditure. We absolutely understand that. There is pressure, every Government Department is looking at how it can accommodate the demands that are being made and that has clearly led to a discussion about the BBC World Service and BBC Monitoring. Those discussions are robust. The BBC is clear that this is amongst the most valued parts of the BBC's output, both in terms of its standing in this country but certainly across the world. We are talking about an audience of 180 million in the last year, so very modest expenditure for the BBC and Britain to have its voice heard by that large an audience, and an area where we believe in terms of demonstrated value-for-money and its very considerable improvements in efficiencies in recent years that there is everything to be proud of.

The point that we have made in those discussions, and Mark may want to say more, is that in a world where it is often much more cost-effective to seek to influence than to invest in defensive capability, the exercise of soft power, this is far from an area where you should be spending less: it is an area where you could get really great advantage by spending more.

Mark Thompson: Going on to add to that, the grant-in-aid to the World Service is absolutely in scope for the comprehensive spending review and is being considered and analysed in the ways that other parts of public expenditure are.

Q57 Paul Farrelly: It is £293 million in the Report and accounts for the last financial year. What scale of cuts has been advanced?

Mark Thompson: The parameters of the conversation about this part of the Foreign Office expenditure I am sure is the same as the rest of the FCO and the rest of Government, that is, the Treasury asking exactly the same questions and setting exactly the same benchmarks as every other part of Government. In the end this of course is a matter for Government and rather than trying to speculate now where we might get to, manifestly these are some of the most cost-effective and leanly run parts of the entire BBC and significant cuts in grant-in-aid would have a very significant effect on services. At the same time, it is very important to say that the BBC recognises that in those parts of the BBC which are funded by grant-in-aid and directly by Government but also true of the BBC more broadly, we recognise we are in a situation alongside the rest of the country where there are—

Q58 Paul Farrelly: Time is running short. I just want to pin you down. Is it 25%, the scale of cuts that have been advanced, or 40%?

Mark Thompson: All I want to say is that my understanding is that the FCO, like every other Government Department, is having the same conversation, with the same parameters, with the Treasury, as other Departments, and the same essential questions are being asked about every part of the FCO's expenditure to include the money it spends for grant-in-aid.

Paul Farrelly: So it could be at least 25%.

Mark Thompson: What I say is that there is no difference in the way this part of central Government expenditure is being thought about than any other part. Just the point about "surplus": the BBC's finances—I will pass you over to Zarin here—are run absolutely on the basis of achieving by the end of the licence fee settlement a situation where we have no borrowings and have fulfilled all of our commitments, including our commitments around the analogue-to-digital television switchover. That is going very smoothly at the moment. Do you want to talk about this as well?

Paul Farrelly: No. I think time is too short.

Sir Michael Lyons: A very quick postscript if I can, Mr Farrelly, which I think you are probably well aware of, but just so everybody is clear. The BBC is inhibited from using licence fee payers' money for the World Service so any cut that is imposed here actually will be a cut in the service. There is no way to avoid that.

Paul Farrelly: We don't have time for the implications but I am sure they will out in due course.

Chair: Can we move on to the issue of relocation north. I am going to ask David Cairns to come in.

Q59 David Cairns: Thank you. I want to ask about the BBC's Out of London strategy and what the Annual Report calls "representing the UK, its nations and regions".

  Obviously the biggest issue in this agenda at the moment is the relocation to Salford, Media City. There has been some whingeing in some quarters in the media about people not wanting to move north. I was wondering what your assessment was of the reality of that and whether or not you were confident that sufficient executives and talent would be prepared to relocate in order to make a success of this?

Mark Thompson: I am confident, actually. I am confident. Amongst our executives the most senior executives, the Director of BBC North and his number two, have both made it clear that they will be buying in the north and will have bought and will have moved there fully by the end of the transition. Once the transition begins next year, they will be working fully in the north already. Of the rest of the management team, quite a few of them already live in the north. Many others are moving immediately.

The nature of what we are asking people to do, picking up their lives, their families, children in schools with exams and so forth, in individual cases, at every level of the organisation, presents some challenges. But what is interesting is: firstly, I believe we are going to have a management team absolutely based in the north, living in the north. It was said when we first proposed BBC North that no one would move from the south. However, the percentage of staff in those departments who have chosen to move to the north, 46%, is much, much higher than most organisations, public or private, achieve in relocation. I think we are going to end up with a pretty much optimal mix in Salford of a significant number of people, say 46% of those departments who are moving, who bring their experience, their talent and their skills to bear, but also plenty of opportunity to create jobs and to get new people who are already based in the whole of the north of England to come and work with us in Salford. So I feel very, very confident about the progress we are making.

David Cairns: I'm glad to hear that. I appreciate the sensitivity that you have towards your members of staff. My two-word reply to people whingeing about moving north is, "boo hoo".

Mark Thompson: You have to remember that for quite a few of our licence payers, Salford is south rather than north anyway.

Q60 David Cairns: You took the words right out of my mouth.

I think some of my colleagues want to talk about the cost of all this in a minute, but if I can just move on for a second and ask about the production targets for nations' and regions' original production. A couple of things: I have always regarded this as a target but given what you said about targets earlier on you have made me a bit queasy. Can you just confirm that these targets—

Mark Thompson: These targets are quotas.

David Cairns: Good. I shall start using the word "quota" now that I know there is a difference.

Mark Thompson: In other words, we made a solemn commitment about hitting them on a particular day and we will hit them and I have to say I think at the moment we are running ahead of target.

David Cairns: The date is one I was going to ask about. In respect to production in Scotland, after a few really disastrous years where we went backwards and ended up below 3% of spend, we have seen some really good progress. I think we are up to 6% now.

Mark Thompson: Yes, it has pretty much doubled.

David Cairns: Yes. It's great and that's very good.

Mark Thompson: And some of that backward movement, if I may say so, Mr Cairns, was adopting the slightly tougher, and in my view better, Ofcom target. It was a truer reflection of the real position.

Q61 David Cairns: Yes but I mean some of that was Ofcom but some of it was just the reality that once "Monarch of the Glen" went, once "Balamory" went, nobody had thought to commission programmes in the pipeline to take up the slack. Anyway we have seen progress. That's good.

My beef—as you know, Director General, because I have raised this with you on many occasions—is the target/quota to get to the population share as a floor and not ceiling, in your phrase, is 2016, which is a long way away. Would you not now take this opportunity to bring that date forward to say 2013 or 2014, which could send a tremendous signal? I know you say you are going to hit it early but the value of doing this is to send a tremendous signal to the very independent sector, that you mentioned earlier, which is suffering because of STV, ITV and Channel 4's reduction in budget; you are sending them a real signal that the BBC is now going to be meeting these targets much earlier and at a time when they are struggling would be a tremendous boost for those organisations.

Mark Thompson: At the slight risk of sounding like Mr Davies, what I want to say is: I believe what is incredibly exciting about getting from our 3% or so to 6.1% in Scotland—and the same about Wales and Northern Ireland as well—is we have done it with the right talent and the right programmes. Alongside the numbers and the kind of industrial policy, you can put "Wallander" and you can put a whole set of great programmes, some of the specialist factual programmes we are doing for network television in Scotland; we had that fantastic BBC 4 season about Scotland as one example.

I'm keen to get on and if we can hit these numbers sooner we will. What I don't want to do is to get to a situation where, because we drive a target artificially hard, we end up commissioning output which doesn't work for audiences across Scotland and across the UK. Now let's see where we get to. I don't rule out the idea of being able to hit the numbers early. We are ahead of target currently and I absolutely understand the appetite for achieving that. I think you know this is absolutely an established core piece of policy for us. We are achieving success on the ground. If we can move further and faster, we will do. It is a floor. It is absolutely a floor and there is no reason at all why potentially the numbers couldn't be higher.

Sir Michael Lyons: You will perhaps excuse me just jumping in at this point to underline that just as you look at the history of the last four years, this unequivocally is one of the achievements of the Trust. The BBC's commitment to it is evidence of the Director General taking up issues that the Trust gave a very strong direction on but here you have targets set by the Trust being progressed and being met and a very real and palpable outcome for licence fee payers in the three nations.

Q62 David Cairns: I applaud that. If I can move beyond the kind of industrial strategy then to representational and cultural aspects of this.

  The King Report identified some serious flaws and problems, and incidentally it was the north west of England, I think, which felt most under-represented by the BBC, not Scotland or Wales or Northern Ireland. Clearly progress has been made on the King Report. It is evident on the screen. Where do you think progress remains to be made? What do you think the BBC is not getting right in this whole agenda where progress requires to be greater?

Sir Michael Lyons: Can I just have a first bite of that? Because this is a very live debate of the last year and you touched on it in some of your earlier comments. It is the issue of portrayal, whether or not the lives and experiences of people in different parts of the country in their full diversity is reflected in the BBC's output. This is something that the audience councils have been pressing the Trust to see further progress on. There has been a very, very positive and detailed discussion with controllers and programme makers within the BBC and for me an expression of the commitment to seeing this issue more aggressively addressed in the future, evidenced in Jana Bennett's—head of Vision—speech in Cardiff just a few months ago, a very clear acknowledgement that the BBC has more to do and a very creative approach to how that is going to be achieved in the future.

Mark Thompson: I would say that I think across the UK we have more to do, in terms of on screen-portrayal in fiction of contemporary life, culture, experiences across the whole UK. So beyond historical pieces, beyond genre pieces, beyond science fiction, in the context of Wales, where we are doing a lot of good work, and indeed some rather interesting and artful forms of contemporary portrayal are creeping into all those areas, but trying to reflect to some extent simply the sense of what it feels like, what the world feels like, what experiences feel like, what social and political life feels like in these different areas, specifically in fiction.

Q63 David Cairns: And do you think on news and current affairs that you have got there?

Mark Thompson: Well it is interesting. Over the course of this year we are at the moment with the Trust and the Audience Council of Scotland heavily involved in this, asking the Scottish public, the Scottish licence payers, their view about whether or not in our news and current affairs we are reflecting the politics and the kind of news and the debate about the big issues of the day in Scotland, and we do similar things elsewhere in the UK as well.

The underlying indications, the growing success of Reporting Scotland in viewing figures but more broadly public attitude, both to our news hour between 6 pm and 7 pm and more broadly to our news in other places, is pretty positive.

Chair: I think we are going to have to move on because we are running out of time very fast. I am going to bring in Philip Davies very quickly.

Q64 Philip Davies: Would you not accept that this move north has been a bit of an expensive farce? Despite what has been reported to be the Rolls-Royce of relocation packages, you still have all of these people up in arms about it. That is to gloss over the fact that just moving a load of southerners up north does not make it much more representative. It doesn't make it more northern just to move a load of southerners from the south up to the north. We'll gloss over that fact. Isn't it the case that Chris Hollins, your BBC Breakfast sports reporter—and they appear to be the ones leading the revolt—said, "What is most disappointing is that I don't think the move is an economic decision or an editorial decision". I know points have been made that you won't get the Prime Minister popping in to your breakfast show to discuss something. It will be a lot harder to get some of those top people to come on to your show, but it is merely a political decision. Isn't this the upshot of gesture politics?

Sir Michael Lyons: Firstly, let's just be very clear of the BBC's commitment to serving all audiences and a recognition, which has evolved in recent years, that where you base people does influence their view of the world which, I think, looking at a committee which represents much of the United Kingdom, you might well agree with me on. So the fact that this was going to be testing, I think, was understood. I'll leave the Director General to talk about the costs and management of that process but, in terms of reshaping the BBC so that it better represents the United Kingdom of today, I have no doubts at all that this is an important strategic decision.

Mark Thompson: Well, to me it is absolutely, first and foremost, an editorial decision but something also about the relationship between the BBC and the public across the United Kingdom. The point that licence payers in the north-west were those who perhaps felt least represented, certainly across Great Britain, amongst our licence payers tells part of the story. We want to get closer to licence payers across the UK.

Economically it is going to mean many, many jobs and, over time, hundreds of millions of pounds spent in the north of England for independent producers, for suppliers, for the craft industry.

Also the other thing is, remember the BBC is only in a sense part of the story of what is happening in Salford. We are like an anchor tenant and many other parts of the creative industries, local universities, many other bodies, are gathering around this new site, the so-called Media City, in a way which is potentially transformational for Greater Manchester, for the north-west and for the north of England, in terms of a large world-class critical mass of talent and expenditure. I don't apologise for the idea of using the licence fee as a kind of way of investing and making a statement which brings other money and other economic activity. It is a good use of the licence fee, as long as on air it makes a difference.

Now occasionally my colleagues somehow suggest that if you move north of Watford gap all talent and creativity disappears. It's nonsense. Granada over decades produced some of the best programming in the world, world-class programming—"Jewel in the Crown" springs to mind; "Brideshead Revisited"—from Manchester. Great live programmes; over many years a great daytime programme broadcast from Liverpool with, what a surprise, big guests: major politicians turning up to be interviewed.

I think that it is desperately parochial to imagine that the only place you can do that is the glorious environs of Shepherd's Bush in London. I believe that talent is available across the UK. The BBC should be spending the licence fee across the UK in the nations, in the rest of the UK. And do you know what? I think if we produce great programmes, I think you will find politicians, possibly even some people on this Committee, may be prepared to appear on these programmes. So until we get there, there will be naysayers, and of course I understand that for individuals this is a disruptive process, but Salford is potentially a really important thing, not just for the BBC, not just for the industry, but for the public as well I believe.

Chair: The prize for patience goes to Damian Collins who has been sitting here waiting. Damian?

Q65 Damian Collins: I just wanted to come back to your investment in BBC television and in creative content, particularly given it was so much a theme of your MacTaggart lecture as well. Obviously your accounts set out your income last year and the previous two years as well. I notice in that period of time your income went up by £375 million but your investment in creative output only went up by £5 million, and I wondered why there wasn't more investment of your added income in creative content?

Mark Thompson: I will hand over to Zarin in a second. We are very clear about this, in putting quality first, the strategy we published earlier in the summer: we are going through a period where we are spending money on infrastructure. Sometimes people imagine it is Salford but by far the biggest single thing that is happening—it is happening sufficiently smoothly, interestingly it never seems to come up in this gathering—is we are playing the leading role in switching this country from analogue television to digital television and that has involved, quite apart from a targeted help scheme and the pan-industry marketing funding, for the BBC it has also meant an enormous bulge of expenditure. Across the BBC we are also moving from analogue broadcasting centres, like Television Centre, to a radically different way of doing broadcasting and production. That is W1; it is Salford; it is Pacific Quay in Glasgow; it is essentially a complete retooling of the organisation. So at the moment we have significant distribution and infrastructure costs which are going through the system. What I was trying to make clear in the MacTaggart, and it's a centrepiece of "Putting quality first" is: as quickly as we can we want to get back to a position where the overwhelming majority of spend from the licence fee is into content, distribution is kept as low as it can be and, above all, the other costs of running the BBC are reduced further so that we can spend more on content.

Zarin Patel: I have nothing to add to that.

Q66 Damian Collins: I appreciate what you said but I think in the MacTaggart Lecture you pointed out that "£1 out of the commissioning budget of the BBC is £1 out of the UK-created economy. Once it has gone it has gone for ever". But as I said over the last three years you are spending £16 million less on investment in programming from independents. Presumably you do not assume that money is gone for ever?

Mark Thompson: What we are trying to do and many of the things we're doing—I mean the digital television switchover ultimately means we can switch off analogue and save money, because we are currently broadcasting both on analogue and digital; ultimately there will be a saving from that. Our new broadcast technologies that we are investing in will mean that we can spend less on some of our own productions so that the amount available in the commissioning pot will get bigger. The costs that we're going through at the moment will, all of them—sometimes in some areas like Salford it will take some years before we get there—in all cases they're designed to leave us with a BBC which runs in a leaner way and where more money can go on the screen.

Zarin Patel: Our 15% efficiencies come not just from overheads and doing things differently, they also come from reducing the cost of production. So Pacific Quay, our first completely tapeless environment, is reducing its cost base both in content and in overheads by 30% over five years. We will begin to see that impact on the numbers as well.

  

Q67 Damian Collins: I accept all that, but my interpretation behind a number of the things you said in MacTaggart, particularly with a nod towards the licence fees, the Government has a period where it needs to look at saving money. It is right that the licence fee is considered as part of that too when the country is feeling the pinch. You have big investments, big structural costs. The amount you spend on programming might go up and down. The creative economy copes with that and you painted a picture of this incredibly brittle flower that if you take a pound out of it has the direct knock-on effect for the creative economy from which it may never recover. In light of what you said, would you see that as a slightly over-dramatic representation?

Mark Thompson: Well, I think if it was £1 let's not worry about it. If it was £500 million or £1 billion let's worry about it. So manifestly I'm not suggesting that any adjustment at all to the BBC's funding means "one move and the baby gets it". It's not that at all. But the argument I was taking on was an argument which is a sort of crowding-out argument which says: all you have to do is reduce the BBC's funding and others will step forward immediately to put the investment in. That was the argument I was saying I don't believe is the case. So I said of course look at the licence fee in terms of value-for-money, of course look at it in terms of the public's willingness and ability to pay. Absolutely legitimate. But just be careful about believing those people who say, "All you have to do is reduce the licence fee and the market will step forward and take their place".

Q68 Damian Collins: Just a couple of quick questions I wanted to ask. Obviously your global budget for content, BBC 1 and BBC 2, is £1.5 billion. That gives you quite a lot to play with and fluctuations to the licence fee are relatively small beer compared to that. Do you think you can still meet your commitments to investing in the creative economy once these big infrastructure costs are out of the way within that budget?

Mark Thompson: I think there are, putting quality first, areas where we would say still—and the public certainly tell us—there are improvements they would like in these services. Let me give you a couple of examples: many people believe, and it is the Trust's view as well in their review of these services, that our daytime services on BBC 1 and BBC 2 would be better if they were more distinctive and there was a wider range of genre represented. More drama, for example; perhaps rather fewer leisure programmes; fewer repeats—[Interruption.] I heard someone say fewer cookery programmes. These kinds of mixed changes in daytime require extra investment. Should the BBC have fewer acquired programmes, spend less on acquired programmes and Hollywood? Again, it is a point that has come up frequently in this Committee over the years. I think we would agree. However acquired programmes are much cheaper than original British programmes. If you take an hour of an acquired drama out of the schedule and replace it with an hour of origination, you might be taking an hour out which costs £50,000 or £30,000 and replacing it with one that costs £600,000. Now you could say: why not replace it with a repeat? But again the public are very clear, particularly on BBC 1 peak time, they don't want more repeats. So what would the public wish us to do with BBC 1 and BBC 2? They would like a richer mix of programmes. So I would say of course there are pressures on us: can you do these television networks for less money? But I would say much of the pressure from the public is to try and spend more money which is why in a sense one of my emphases at Edinburgh was: how much can we save from what the BBC does off screen and put it on screen to improve the quality of our daytime, for example, and to mean that there is more original drama on BBC 2?

Damian Collins: Yes. I imagine if you said to Archie Norman you have £1.5 billion in the bank to cope with programming he would probably take it.

Mark Thompson: At some point I'd be very happy to do with the Committee a comparison of the expenditure and programme mix of ITV 1 and BBC 1. It's a very interesting topic. Increasingly BBC 1 and ITV 1 are doing very different kinds of schedule, they're spending broadly similar amounts of money but in very different ways, and I'd be very happy to take the Committee in some detail through in a sense what these mixed issues look like.

Q69 Damian Collins: I certainly mean to take you up on that but obviously we haven't the time to do that today. The last question I want to ask, which is slightly answered already, was in the Annual Report you talked about doing fewer things better. In your remarks you highlight the things the BBC does well and you would like to see more of but did not say that much about what you should be doing less of in terms of actual output?

Mark Thompson: Well I think that acquired point is a good one. I think that in the end there are so many avenues for the public in finding good acquired programmes. Channel 4 runs a lot of acquired programmes, so does 5, Sky 1, many, many channels where you can get acquired programmes. The role for the BBC: BBC 1 was once dominated in peak time by "The Virginian" or "Kojak" or "Dallas". It was a big part of what people expected from the BBC. It is a much smaller role now. We will still occasionally buy pieces that other broadcasters perhaps don't want. "Mad Men" would be a good example of a BBC purchase which does, I think, add something to our networks and which the public really take to. Perhaps not vast audiences but people who really—

Damian Collins: I watch it.

Mark Thompson: It is interesting: David Hare talking about "Mad Men" in one of the papers this morning was a real treat. But no, I think acquired programmes will be a really good example of something I think we should do less of, spend less on and put the money into original British production instead.

Chair: I am going to try and fit in two short subjects very quickly. David Cairns?

Q70 David Cairns: It will be brief because of time, but it's about radio. Clearly the 6 decision has come and gone. Where does this leave you? There seems to be a slight divergence between the Trust and the executive on the vibrancy and distinctiveness of the offer. You wanted to close Radio 6 to make 1 and 2 more distinctive. Now 6 is staying open, so a couple of headlines on where we are in terms of the strategy in radio, with particular reference to 1 and 2?

Sir Michael Lyons: It isn't part of the Government's structure that the Trust and the Director General have to agree on everything and indeed we've had some criticism for not more frequently exposing to public scrutiny the debates which do take place, which are often challenging. I think getting the balance of that right between how much of that discussion is open is I think a matter for reflection.

Now let's turn to the Strategic Review: the Trust rejected the proposal to close BBC 6 in its current form believing that the arguments didn't stand up as a result of the consultation analysis we've done. But what that proposal did do was to bring into really quite sharp relief the two big strategic issues sitting behind it. The first of those—the greater distinctiveness of Radio 1 and Radio 2—very much the subject of the service reviews that the Trust had undertaken earlier in the year, requiring both stations to work more energetically to distinguish themselves from each other and to serve a rather different audience demographic.

The second issue, of course, is the absence of a coherent digital strategy—not an issue for the BBC alone because it immediately brings in the issue of where the Government stands on DAB radio for the future. So where we are at the moment is the Director General is now working on both of those issues, recognising those are the big issues, the big strategic issues, and 6 continues perhaps for ever but certainly until both of those big issues are clear to us.

Mark Thompson: I think Michael answered that very clearly. We have had, I believe, a real success with our television portfolio, including our digital channels, in helping encourage the public to move from analogue to digital television. We are not alone in that, Sky has done a great deal to help with that and so have others. But we know that our digital television channels have made a significant difference in people wanting to take digital television up. We have yet to see the same level of success with digital radio. We are very committed to digital radio. We support the Government's and indeed the previous Government's ambitions around moving towards analogue-to-digital switchover in radio as well. The challenge for the BBC is coming up with a portfolio of services which firstly encourage people to sign up on digital radio, but in ways which support the rest of the radio market rather than producing adverse competition.

We need to make sure that the core mainstream channels, like Radio 1 and Radio 2, are sufficiently distinctive, are really doing something different from their commercial counterparts, but also that we have a range of attractive but also distinctive new digital services.

  So I think this is a hard sudoku. It's not absolutely straightforward because there are a number of different things going on, and I take the BBC Trust's response on 6 Music I think in the way it is intended which is there are bigger things at stake here. Go back and look at the broad radio strategy and that's what we're doing at the moment.

  Chair: Damian?

Q71 Damian Collins: Yes, briefly, on Worldwide, I referred earlier about income growth and obviously a good degree of that has come from Worldwide's input. I was just interested in your views on what the future scope was for added revenue from BBC Worldwide and in particular, as you mentioned in MacTaggart, the iPlayer going international and being a subscription service and what your views were on the sort of income that would bring in?

Sir Michael Lyons: Let me make just a very first brief comment just to underline that this is again a very complex area. The Trust work on the commercial review very clearly illustrated this is not just a one-way avenue of growth in Worldwide, extra income for the BBC. There are a whole set of tensions, competitive impacts and risks that are involved in that. You have seen this year us expose the results of that strategic review and very specifically say there is more to be done on the global strategy into which Worldwide sits. So this is in part a work in progress, but I'm very happy for the DG to share his thinking on that.

Mark Thompson: I think, as we know we've talked about it often here, there have been all sorts of points of controversy and tension around the edges of what Worldwide does. What I want to say is the reason that Worldwide now is a division of the BBC which makes £145 million profit rather than £30 million, which is what it did a few years ago, is to do with the fact that it is effectively exploiting BBC intellectual property here and increasingly around the world. The global appetite for great British content is growing. Our effectiveness in exploiting it has been growing. In particular, the great attraction to us of On Demand is that in many markets—take the United States—we've been essentially forced to wholesale our content to other broadcasters where the BBC's brand is not very visible. Often, particularly in co-production deals, it will not be a BBC voice, it'll be a voice from an indigenous broadcaster. What is exciting about On Demand services—I mentioned in the MacTaggart, the US iTunes site—is it is a direct access for consumers, in America, Australia and many other countries around the world, to our content, and there is a real appetite for it.

So although I recognise that we have to tread very carefully here—the BBC is a very big public body and it now has a very big commercial arm as well—others quite understandably in a sense want to be sure the BBC knows what its boundaries are here, but the opportunity to get great BBC and, more broadly, British content in front of consumers around the world has never been greater, and things like an international iPlayer are very exciting prospects.

Damian Collins: If you look at what HBO has done with "John Adams", the enormous investment in a programme beyond probably what a British broadcaster could invest and its ability to exploit that around the world, it is a tantalising example of what can be done.

Mark Thompson: Absolutely, and by the way we have already got our own examples: programmes like "Planet Earth" or "Life". I know the numbers for "Planet Earth"—and "Life" will be similar—but for "Planet Earth", probably on BBC 1, the licence payer is paying for perhaps £400,000, £350,000 an hour. The programme costs £1.2 million to make and the rest of that is coming from international co-production and pre-sales, and yet Worldwide is making a substantial profit on programmes like that as well. I mean with "Planet Earth" we sold I think 3.5 million DVD box sets in the United States alone.

What is very interesting is that many of the things that work best for us internationally are very, very core to the BBC and what people would most expect from the BBC in this country as well. It is not about bending the BBC brand it is about looking at what the BBC stands for in the UK and around the world, and using that as the way of reaching global audiences.

Sir Michael Lyons: That's absolutely the point on which the DG and the Trust are agreed, that issue of not allowing the brand reputation to be risked or stretched.

Chair: Paul Farrelly has one very small, quick question.

Paul Farrelly: It is a small question, Chair, with about three parts to it.

Chair: No, can you make it one part?

Q72 Paul Farrelly: I wanted to return to the accounts, which is why we are here, on Worldwide and Lonely Planet. Not because I am a Lonely Planet obsessive but because the reaction by the BBC and the Trust to the controversy about Lonely Planet, to my mind, was a classic case of the BBC even alienating its friends. Secondly, there are issues of the Trust still following through on pledges it made, in terms of monitoring whether the BBC had spent its money wisely.

So could I just ask Ms Patel: the BBC paid £89.9 million for 75% of Lonely Planet, itself a large price, but there was a put option, exercisable up to the end of last October, for £28.8 million of the rest. What has happened to that put option? There is no mention of it in the accounts.

Zarin Patel: The put option still exists and with the mutual agreement of the holders of the put option—they wanted to extend their holding—so the put option is now exercisable, I think it's January 2011.

Q73 Paul Farrelly: Okay. How much is the digital investment in Lonely Planet?

Zarin Patel: Mark, sorry, we are sharing one set of accounts for efficiency.

Sir Michael Lyons: We lent one copy to the Committee I think is the other reason.

Zarin Patel: One of the major things that has happened to Lonely Planet this year is a huge investment in its digital platforms and we are seeing real success in that.

Paul Farrelly: How much?

Zarin Patel: I'll just come to that in a minute if I can find the right page, so bear with me a minute. There we go. It's on page 32 if you have the Worldwide annual report. So Worldwide's underlying performance internally has grown from £43 million to £51.4 million.

Paul Farrelly: Yes, I know. I can see that. I just want the number for the investment.

Zarin Patel: The investment would have been about £5 million. But the return from that is really transforming Lonely Planet's business from a book publishing business, which is declining, into digital revenues very successfully.

Q74 Paul Farrelly: Okay, final question: this is one for the Trust to mull. For the investment that has been put into Lonely Planet, plus the acquisition cost and the potential liability for the rest of the acquisition price, I would ask the Trust to reflect on whether a profit—I assume it is at the operating level but I cannot quite reconcile it going through the accounts—of £1.9 million on sales of just over £50 million is a worthwhile return on investment after three years, given that Lonely Planet before you acquired it was making £1.1 million after tax in the year to June 2007? It is just an issue for the Trust on following through on whether the BBC has got its numbers right and spends its money wisely.

Sir Michael Lyons: Well, we will take your advice to reflect on it. It has been a matter of very considerable reflection since that investment was made. The Committee knows that the Trust, having completed its commercial review, has unequivocally said that there will be no mergers or acquisitions of this scale in the future in the United Kingdom but we have equally said that this investment rests on the merits that were made at the time. We must now see—and we are watching it carefully—whether it delivers that promise. But your warning is well taken.

Mark Thompson: Two sentences from me: firstly, Lonely Planet will always and remains seen as a long-term investment where we knew there was going to be a period of investment to achieve what we wanted to do with the brand on television and in digital media. I believe that's going well; secondly, BBC Worldwide is manifestly a portfolio business with lots of different businesses around the UK and the world. If you step back and look at this portfolio of businesses it is performing extremely well in the public interest, with both sales and profitability strongly increasing over the years and delivering more money, therefore, straight back to the British public and for the licence fee.

  Chair: Thérèse?

Q75 Dr Thérèse Coffey: My question is about the profitability of BBC Worldwide: given the strength of the BBC brand, its sub-brands, the lengths BBC Worldwide has gone to save the Stig, to try and protect that brand value. Zarin, or anyone really, I am just interested to know, I think the latest EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) percentage is 14%. If you look at someone like Nestlé, Danone and similar they are looking at EBITDA of 20% or 21% as their aim. My challenge would be: should you not be trying to exploit an even higher value, given the lack of investment that you need to make as BBC Worldwide in its assets—the BBC is doing that for you?

Zarin Patel: One of the things we do with Worldwide is compare ourselves against other global media companies: in print, in publishing, in DVD and digital as well, and 14% is a really good performance for that. Don't forget media businesses require constant investment, so we're not like a Nestlé where you have a large production factory that you can really put volume through. "Dancing with the Stars", which is hugely successful for us, will require investment for a replacement, so the investment cycle in these businesses is much higher. But what we do is we compare ourselves against other media.

Mark Thompson: And we can provide comparisons.

Dr Thérèse Coffey: But you do not need to provide the brand of the BBC, you are investing in that.

Mark Thompson: Sure, and I am very happy to write to the Committee, if you would like it, with the comparators we use—UK and global comparators—to establish the benchmarks for the EBITDA margin and PBIT and so forth. But we believe that against proper and reasonable comparators the fundamental ratios in Worldwide are very strong.

Sir Michael Lyons: I'd just like to say that in that commercial review the Trust came face to face with these choices and was clear that profit maximisation is not the simple message for BBC Worldwide.

Chair: I am going to stop it there. We could go on still for some time, but I thank you very much for coming.

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Prepared 19 May 2011