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

2  The negotiation process

The narrative of events

8.  In his speech to the Voice of the Listener and Viewer (VLV) in November 2010, one month after the CSR settlement announcement, BBC Director General Mark Thompson highlighted the unique nature of the negotiation process:

Setting the BBC's funding usually seems to involve months — or even years — of research, analysis and debate — not to mention gainful employment for an army of commentators and consultants. But on this occasion, the first time that people realised that a settlement was in the offing was when it was announced.[6]

9.  Because the negotiations for this historic and unprecedented mid-term BBC licence fee settlement were conducted quickly and in private, we judged it important to obtain from the BBC — and from Government — a narrative of events. BBC Trust Chairman Sir Michael Lyons told us that the negotiation process started on Monday 11 October when "officials from DCMS [the Department of Culture, Media and Sport] rang both the Trust to speak to me, and the Director-General, to say that the Government had a shopping list and was inclined to shift the responsibility for the over-75 licence fee".[7] He made it quite clear to us that

unequivocally the overture came from Government with a shopping list that included transfer of responsibility for the World Service, and much more significantly, as far as opening discussions were concerned, the proposal for the BBC to fund the costs for over-75 licence fee remission.[8]

As we explore in more detail later, potentially this proposal had profound implications — both for the BBC's finances and its independence. The singular status of the BBC is set out in a Royal Charter and Agreement between the Secretary of State and the BBC.[9] As set out in section 78 of the Agreement (Compensation for free television licences), when the BBC issues to any person a TV licence for which no fee is payable, the Secretary of State for Work and Pensions "shall pay to the BBC out of money provided by Parliament such sums as the Treasury may authorise" to equal what the licence fee payers would have paid to the BBC and the administrative costs incurred by the BBC in issuing the free licence.

10.  In his letter to the Chairman dated 9 March 2011, responding to the Committee's questions on the negotiations and settlement, the Rt Hon Jeremy Hunt MP, Secretary of State for Culture, Olympics, Media and Sport, provided further confirmation that:

Officials in my department informed the BBC on 11 October that the Government was assessing the scope for the BBC to take financial responsibility for some areas of spending currently covered by the Exchequer. Transferring the funding of TV licences for those aged 75 and over and the World Service from the Government to the BBC were two of the options under consideration.[10]

The Secretary of State further informed us that "both Liberal Democrat and Conservative Ministers were involved" in the decision to put these options to the BBC.[11]

11.  Right at the beginning of the negotiation process, Mark Thompson became the BBC's lead negotiator, taking an exploratory phone conversation with the Secretary of State on Tuesday 12 October and meeting him, with colleagues, on Wednesday 13 October in the Palace of Westminster.[12] Sir Michael Lyons was, however, at pains to point out to us that the BBC Trust remained in charge of the BBC's negotiations, stressing that:

The negotiations were essentially between the Trust and the Secretary of State. The Trust laid down red lines and the Director-General reported back to the Trust on the shape of the negotiations. The remit was set by the Trust, and the agreement, in the end, was one signed off by the Trust.[13]

Mark Thompson confirmed that "at all times, I was operating within a mandate and within clear parameters that had been laid down and agreed by the BBC Trust".[14] The Secretary of State similarly affirmed that during the negotiations he was satisfied that the BBC negotiators had the full authority of the BBC Trust and were in close contact with Sir Michael Lyons.[15]

12.  Against this background, negotiations appear to have started in earnest on Wednesday 13 October when Mark Thompson told the Secretary of State that the proposal to fund free licences for the over-75s through the licence fee was "wholly unacceptable to the BBC Trust and to BBC management as well".[16] Sir Michael Lyons summarised for us why the BBC was so opposed to this proposal:

That remission is firstly very expensive, secondly a welfare payment that we believe has no part to play in the BBC's funding, and thirdly an uncapped liability.[17]

Mark Thompson did, however, indicate that the BBC might be willing to absorb World Service costs. This came with the caveat that it would have to be part of a full licence fee settlement running to the end of the Charter period (2016/2017). It appears, therefore, that it was the BBC — not the Government — which first raised the prospect of a comprehensive licence fee settlement. Indeed, in his aforementioned speech to the VLV, Mark Thompson stated very clearly that "the idea of reaching a comprehensive funding settlement was ours".[18] We asked the Secretary of State if in fact the Government had pressed for such a settlement, but he responded only that "it quickly became clear that it was in the interests of both parties and of licence fee payers to finalise a new licence fee settlement".[19] Sir Michael Lyons explained that the decision to "debate an alternative, acceptable package in the context of a new licence fee settlement" was a means of fending off the over-75 licence fee proposal. [20] Mark Thompson further observed that it now became a key issue "whether it would be possible to include a multi-year licence fee settlement in the time between these conversations and the announcement of the CSR the following Wednesday".[21] This was an incredibly tight timescale to be locked into, and we consider the pros and cons of this decision to negotiate a wider licence fee settlement in more detail later in the chapter.

13.  On Thursday 14 October, the Trust endorsed the position taken by the Chairman and the Director General the previous day. Intensive negotiations between the BBC and DCMS continued on Thursday and Friday and into the weekend. It appears that the Secretary of State was loath to drop his original proposal for licence fee funding of free TV licences for the over-75s because on Sunday 17 October Sir Michael Lyons broke off discussions and wrote to the Prime Minister reiterating his opposition to this proposal, and highlighting the BBC's assessment that it would cost nearly £600 million to fund this commitment, necessitating drastic cuts to BBC services. In the letter, Sir Michael Lyons asserted that if the Government still wished to include this proposal in the CSR, then "the BBC will have no option but to cease all further consideration of an immediate settlement that incorporates funding for the World Service" and that "we will also need to make public our opposition to such a proposal and will clarify that it has not been agreed with the BBC, as the terms of the Agreement suggest it should".[22]

14.  This letter did not, though, have the desired effect because on Monday 18 October the Secretary of State informed both Sir Michael Lyons and Mark Thompson that the Government still had in mind to impose the full cost of the over-75s licences on the licence fee, prompting a further suspension of talks. We pushed Sir Michael Lyons on the seriousness of this impasse, receiving the answer that implementation of the over-75s licences proposal would have been a resigning matter for him and, he believed, for the Trust.[23] We also asked Sir Michael Lyons and Mark Thompson if the Government had tabled any other proposals that crossed the BBC's red lines. They explained that a Government proposal for the BBC to become a vehicle for "showing a large amount of information produced by the Central Office of Information — Government messaging — to the public" was also unacceptable to the BBC because it would have been a serious breach of the BBC's editorial independence".[24] They explained that this proposal too was raised several times during the negotiating process before the Government finally dropped the idea. We sent the Secretary of State specific questions inviting him to provide his own detailed account of the negotiation process. However, he responded in more general terms. He did confirm, though, that:

During the course of discussions, we discussed several issues, including the scale and scope of the BBC's commercial activities and the future carriage of public information broadcasts.[25]

15.  As Sir Michael Lyons observed to us, the media started to run with the over-75s licence proposal on Monday 18 October. Mark Thompson painted a picture of furious briefing behind the scenes as the BBC "made a lot of phone calls to a lot of our people across the political spectrum making clear our position on this issue of the over-75s".[26] He further explained that the BBC was not just concerned about the funding implications of this proposal, but also about what it would mean for the BBC's independence if it were to take on responsibility for funding a Government social welfare policy.

16.  Mark Thompson told us that "over the course of that Monday [18 October], the mood that was around that proposal [over-75s option] began to shift. By the early evening it was shifting very considerably".[27] Talks resumed on the Secretary of State's initiative, with the Government giving ground on the over-75s proposal, but bringing into play further additional responsibilities for the BBC to fund. At this stage, the issue for the BBC was, in Mark Thompson's words, "either accepting this deal on its merits or accepting the alternative that was a separate licence fee negotiation with Government on the original plan in 2011/2012".[28]

17.  On Tuesday 19 October the BBC Executive Board met and agreed that the draft proposals hammered out during the night represented a possible settlement. On this basis, the Trust considered the proposals during two teleconferences. The Trust has placed a record of these two meetings on its website.[29] This makes clear that the proposals the Trust considered became the basis of the final settlement, including the BBC taking responsibility for funding the BBC World Service and BBC monitoring; the BBC entering a form of partnership with S4C (the only Welsh language public service broadcaster) with the vast majority of the funding for S4C to come from the licence fee; the continuation of a ring fence of funds within the licence fee (currently used to fund the Digital Switchover Help Scheme) to fund broadband; and some funding to support the provision of local television. The licence fee would be set at £145.50 until 31 March 2017, with a Government guarantee of no additional obligations being placed on the BBC and/or licence fee revenues in this period, except by mutual agreement.

18.  The meeting note records that, during the first meeting, the Trust agreed, before supporting the proposed agreement, that it was vital for the BBC to retain full editorial and operational control over the World Service, and that the Trust should not enter into any agreement which reduced broadcasting plurality in Wales before supporting the proposed agreement. Trust members then delegated authority to the Chairman to agree the final exchange of letters with the Government and for resolving any outstanding issues.

19.  Details of the agreement subsequently came into the public domain on Tuesday 19 October, and were confirmed on Wednesday 20 October as part of the Government's CSR announcement. On Thursday 21 October an exchange of letters between the Secretary of State and the Chairman of the BBC Trust — both published on the Trust website — formally recorded the licence fee settlement reached. Intriguingly, Sir Michael Lyons also wrote a side letter to the Secretary of State the same day addressing his particular concerns about the scale and scope of the BBC. This side letter confirmed that the BBC was planning, subject to agreeing satisfactory commercial terms, to dispose substantially of BBC Worldwide's magazine business; would recognise publicly the principle that it should not launch services more local than its current offerings; and would propose a reduction in the budget of BBC Online by 25%. This side letter was not published on the Trust's website, though it was subsequently disclosed by the BBC in response to a request under the Freedom of Information Act.[30]

Settlement: Choice or coercion?

20.  We consider the outcome of the licence fee settlement in more detail in the next two chapters. For the remainder of this chapter, we consider the implications of the negotiation process itself. The first issue to get straight is whether the BBC had any choice with regard to entering into negotiations with the Government. The answer is that it did, at least in principle. The BBC's briefing note to the Trust of 14 October makes it clear that the BBC felt it had legal protection under its Agreement with Government to resist both the over-75s proposal and the World Service proposal — that is both the items on the Government's initial shopping list.[31] That at one stage the BBC withdrew from negotiations and that Mark Thompson could highlight to us an alternative option of waiting for a separate licence fee negotiation with the Government on the original plan in 2011-2012 (see paragraph 16 above) support this premise. When, therefore, Sir Michael Lyons observed to us that:

[...] there is a reality that Government decided to approach this issue in the closing stages of the Comprehensive Spending Review. Did the BBC have any real choice but to enter into discussions then? No it didn't[32]

he was perhaps making a different point, namely how difficult it would have been for the BBC in practice not to respond to the Government's overtures at this time. Implicit, perhaps, is the sense that the BBC feared what the Government might impose on the BBC from 2013 if it did not agree a final settlement in 2010. Indeed, Sir Michael Lyons told us that the Secretary of State used the option of a more fundamental review of the BBC as a threat during the negotiations:

There was, throughout these discussions, an attempt to condition that agreement by leaving the scope for a further examination of the scale and scope of the BBC to be conducted by the Secretary of State himself and that was another component of the negotiations where we were clear that that was out of the question.[33]

He also acknowledged a feeling in the BBC that it would have found it hard to rally wider sympathy if it was seen to "somehow enjoy some privileged separate position from the experience of the rest of the economy".[34]

21.  Nevertheless, the BBC did have a choice — both as to whether and then as to how it responded to the Government's overtures. It could, for instance, have focused on a smaller deal involving the more obviously CSR-related elements — that is the transfer of funding for the World Service and the BBC Monitoring Service from the Foreign and Commonwealth Office (FCO) to the BBC — without opening up the wider licence fee settlement and, in the process, opening up the possibility of taking on further additional responsibilities. It is fair, therefore, to consider the downsides of the Government's initial decision to involve the BBC in the CSR; the BBC's decision to respond by proposing wider licence fee settlement negotiations; and the Government's decision to accommodate this.


22.  One issue the Committee was particularly keen to consider, was how the negotiation process has affected the singular status of the BBC as an autonomous public body, independent of Government. BBC written and oral evidence to the Committee makes a number of references to the importance of retaining this independence. Its opposition to the over-75s proposal and the carriage of public information broadcasts proposal appears at least as bound up with issues of independence as it does with the financial impact. In his November 2010 speech to the VLV, for instance, Mark Thompson referred to the need for institutional and financial independence as well as editorial independence, and to the increasing danger, at a time of financial austerity, that Governments would underplay or even forget this. In that speech, he specifically cited the over-75s proposal as something which would have damaged the BBC's independence if implemented because "the BBC is a public broadcaster, not an arm of the welfare state". He also referred to the public information broadcasts proposal as "a fundamental and wholly unacceptable attack on the BBC and one we'd fight tooth and nail".[35] More recently, during an interview on The Media Show, Sir Michael Lyons stressed that protecting the independence of the BBC was a continuing challenge. [36]

23.  A number of commentators have, however, pointed out that, by being drawn into the CSR process at all, the BBC risked being seen as little different to a Government Department or Agency.[37] Arguably, the BBC's decision to let its Director General — and Editor-in-Chief — rather than the Trust, lead the negotiations with the Government was also unhelpful in terms of asserting a distinct identity for the Trust as guardian of BBC independence. The BBC Trust, as the independent governing body of the BBC, has a key role to play in protecting the BBC Executive from undue Government interference, so it is surprising that it did not seek to intercede between the Government and BBC Executive during the licence fee negotiations. Ironically, during our first oral evidence session, Mark Thompson himself made the point about the importance of the role of the Trust as a buffer between the BBC and politics:

[...]... 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. [...] The Trust is given [...] the task of holding the BBC to account for value for money [...] it is done as a constitutional safeguard to ensure that you don't have the BBC too close to the political process.[38]

Furthermore, the Trust has wider responsibilities than holding the BBC to account for its expenditure of public money. Key functions include setting the BBC's strategy and high level budgets, and representing licence fee payers' interests.

24.  Unsurprisingly, in evidence to us, the BBC was keen to counter any suggestion that it had compromised its independence by the manner in which it had chosen to engage in negotiations. Sir Michael Lyons made the point to us that the negotiations were conducted in "extraordinary circumstances".[39] Mark Thompson went further, asserting that:

[...] What this settlement means is that there will be no part of the BBC's activities that are, as it were, part of the scope of Government spending. [...] Because World Service and Monitoring have been paid for historically for many decades by the Government, part of the BBC had always been in scope for Comprehensive Spending Reviews. But in the next CSR, the BBC will not be in scope at all.

During his speech to the VLV, Mark Thompson also argued that, by concluding an agreement at this time, the BBC had protected itself from the risk of a "continuous and permanently open-ended debate" and that independence had been enhanced because the BBC had secured a settlement that prevented further attempts to "chip away" at its mission.[40]

25.  Sir Michael Lyons also defended his role in negotiations, telling us that he would not have expected to be involved in face-to-face negotiations because "in most commercial negotiations, you don't have the principals in the room conducting the discussion; you have agents of the principals during the negotiations".[41] We responded by expressing surprise that Sir Michael Lyons had not at least been present when the final decisions were made, particularly given the extensive involvement of the Secretary of State who told us that he attended four meetings with the BBC in the course of securing the licence fee settlement.[42]

26.  The Government's proposal to have the BBC fund the cost of free licences for the over-75s would have had a significant impact on the BBC's finances, and the present Trust and management clearly regarded this as unacceptable. This may well have made them more amenable to other suggestions and to the eventual outcome. It was inevitable that the BBC would be required to contribute to the effort to reduce the overall level of Government spending but the broadening of this negotiation into a licence fee settlement was not necessary and has weakened the distinction between the BBC and other publicly funded bodies.

27.  We recognise that the Government made the first move, that time was of the essence and that the BBC seized the opportunity to pursue a wider settlement, securing its immediate financial future. We consider, however, that the decision to leave the vast majority of the negotiations with the Government to the BBC's Editor-in-Chief and senior management further weakened the arm's length principle. In future licence fee negotiations, we would expect the Trust Chairman, as head of the independent Governing Body, to play a more prominent lead role, acting as a buffer between the BBC and Government.

Transparency and accountability

28.  A second issue that we were particularly keen to explore was the lack of consultation during the negotiations. In this respect, the negotiation marked a notable departure from the manner in which the BBC Trust handled the previous Government's proposal (in the Digital Britain Report) to allocate some of the licence fee to public service content on non-BBC services. Then Sir Michael Lyons wrote an open letter to licence fee payers, together with a rebuttal of the proposal to share the licence fee. He also commissioned research on licence payers' views and preferences in relation to the proposals. This time, as well as excluding licence fee payers from the negotiation process, the short time-scale and the link with the CSR effectively meant there was no opportunity for Parliamentary scrutiny of the proposals. This stands in contrast to Sir Michael Lyons's assurances to the Committee's predecessors in July 2009 — admittedly in a different context — that "the setting of the licence fee is a matter for Parliament, and indeed the use to which it is put".[43]

29.  The negotiating process was also in stark contrast to the BBC Trust's conduct of its Strategy Review, as evidenced, for instance, in the following Trust statement from 26 February 2010, prior to publication of the BBC Executive's own response to the review:

We will shortly be publishing the Director General's proposals, to find out what licence fee payers think of them and to test opinions and reactions to them from outside the BBC. This is consistent with the Trust's approach of basing all its work on the views and interests of licence fee payers.[44]

30.  It is worth considering within this context, Mark Thompson's comments in his speech to the VLV that:

setting the BBC's funding usually seems to involve months or even years of research, analysis and debate — not to mention gainful employment for an army of commentators and consultants […]

we entered the negotiations with confidence and I believe with the public's priorities and preferences front of mind […]

more time would have allowed more detailed discussions and more debate. But I'm sceptical, I have to say, that it would have led to a better or fairer agreement [...].[45]

There is something almost cavalier about the first assertion, just an air of the patrician in the second, and an element of complacency in the third.

31.  It was, though, the Government that made the initial decision to place financial imperatives over consultation and transparency. We asked the Secretary of State how he would justify to the licence fee payer and to Parliament committing more than £20 billion of public money (the value of the licence fee agreed for the next six years) without any opportunity for wider debate and consultation. In his written response, he observed that:

During four years as a frontbench spokesman for media issues I have publicly set out my views on the BBC and direction of travel in relation to the licence fee and had thought long and hard about these issues.[46]

It is, however, rather a big jump to get from the Secretary of State's previous pronouncements on the BBC to the actual terms of the settlement and the additional responsibilities now to be taken on by the BBC.

32.  If the BBC is to continue to benefit from a universal licence fee then it is vitally important that both licence fee payers and Parliament should have some involvement when far-reaching decisions about funding and the responsibilities are taken. It is regrettable that the decision to broaden the negotiations over expenditure into a full licence fee settlement meant that the opportunity for this was lost, thus undermining confidence in both the Government's and the BBC's commitment to transparency and accountability. We recommend that it should not become a model for the next round of licence fee negotiations for the post 2016/2017period.

6   The BBC and the new settlement, speech by BBC Director General Mark Thompson to the Voice of the Listener and Viewer (VLV), 24 November 2010 Back

7   Q91 Back

8   Q88 Back

9   BROADCASTING - Copy of the Royal Charter for the continuance of the British Broadcasting Corporation, Cm 6925, October 2006 and BROADCASTING - An Agreement Between Her Majesty's Secretary of State for Culture, Olympics, Media and Sport and the British Broadcasting Corporation, Cm 8002, February 2011  Back

10   Ev 63 Back

11   Ibid. Back

12   Q91 and summary of events Back

13   Q78 Back

14   Q78 Back

15   Ev 64 Back

16   Q92 Back

17   Q88 Back

18   The BBC and the new settlement, speech by BBC Director General Mark Thompson to the Voice of the Listener and Viewer (VLV), 24 November 2010 Back

19   Ev 64 Back

20   Q101 Back

21   Q94 Back

22   Letter from the BBC Chairman to the Prime Minister, 17 October 2010 Back

23   Q105 Back

24   Q138 Back

25   Ev 64 Back

26   Q107 Back

27   Q134 Back

28   Q135 Back

29   Minutes of the BBC Trust meeting, 19 October 2010 Back

30   Ev 62 Back

31   Spending Review - Latest Position, Confidential Briefing Note, 14 October 2010 (Released by the BBC under the Freedom of Information Act 2000). Back

32   Q86 Back

33   Q142 Back

34   Q86 Back

35   The BBC and the new settlement, speech by BBC Director General Mark Thompson to the Voice of the Listener and Viewer (VLV), 24 November 2010 Back

36   Radio4, The Media Show, 6 April 2011 Back

37   See for example FT editorial of 23 October 2011 Back

38   Q20 Back

39   Q86 Back

40   The BBC and the new settlement, speech by BBC Director General Mark Thompson to the Voice of the Listener and Viewer (VLV), 24 November 2010 Back

41   Q80 Back

42   Ev 64 Back

43   Culture, Media and Sport Committee, Fifth Report of Session 2009-10, BBC Annual Report 2008-09, HC 515, Q4 Back

44   Chairman's Statement on BBC Strategic Review, BBC Trust Press Release, 26 February 2010 Back

45   The BBC and the new settlement, speech by BBC Director General Mark Thompson to the Voice of the Listener and Viewer (VLV), 24 November 2010 Back

46   Ev 64 Back

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© Parliamentary copyright 2011
Prepared 19 May 2011