The future of public service broadcasting Contents

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Annex: Funding for public service broadcasting

1.Funding is at the heart of the public service broadcasting debate. The purpose of this annex is to examine how other countries that support public service broadcasting have chosen to modify funding models to accommodate technological, social or political change. We focus primarily on Western Europe where publicly funded media is most developed as a system.

2.The overall theme is that a significant minority of public service broadcasting countries in Europe have attempted to move away from the model of a licence fee attached to device/media use; in each case this has resulted in significant (and often unforeseen) disruption. In a number of cases, the change has made public service broadcasting funding less stable and has eroded broadcasters’ independence from politicians. It is worth noting that none of the countries addressed in this annex have a public service broadcasting system that is as entrenched, and whose value to the local population is as widely acknowledged, as that of the UK.

The shift away from the licence fee

3.There is a noticeable trend in the EU away from maintaining a traditional licence fee model tied to device use. In most instances, this has led to a universal fee implemented either as a household/individual fee (e.g. Finland, Germany, Sweden) or as a state grant (e.g. Iceland, Netherlands, Romania). This shift has been driven by a variety of factors, six of which are outlined below:

• The increased number of people accessing radio and TV through computers, smartphones and tablets, which has made a licence fee tied to ownership of a TV set and/or radio anachronistic.
• The issue of free-riders, where people continue to access public service broadcasting content and services without paying a licence fee.
• Difficulties and costs of collection and enforcement.
• A perceived unfairness where flat licence fees are not tied to people’s ability to pay.
• Questions surrounding the legitimacy of, and public dissatisfaction with, the licence fee.
• Governments seeking to reduce the independence of public service broadcasters (PSBs).

The challenges of making the change

4.Changing the funding model for public service broadcasters is consuming of time and energy for regulators and broadcasters alike. In most cases democratic consultation has been required, which can lead to challenges to the legitimacy of public service broadcasting and legal challenges to the new system (see the German and Finnish cases detailed below). For example, in 2015 Switzerland’s proposal to shift from a licence fee tied to radio/TV set ownership to a universal fee payable by households and businesses,277 led to a vociferous anti-public service broadcasting campaign by small businesses facing increased fees, culminating with a referendum on public service broadcasting.278 In this case, proposals to change the funding model put the very legitimacy of public service broadcasting at risk and challenged the social consensus. Although the referendum result was strongly in favour of public service broadcasting, the Swiss PSBs had to make concessions which led to reductions in revenues.

5.The experiences of countries such as Germany, Finland and Switzerland suggest that the disruption of moving to a new funding model is only merited where the perceived legitimacy of the existing system has collapsed. In countries where there are low evasion rates, safeguards against political interference, continued public support and adequate funding for public service broadcasting, it could be argued that there is little to be gained from the disruption of shifting to a new model. At present, these conditions broadly apply to the UK but this could change if evasion rates were to increase, public support for the BBC and/or the licence fee was to decline, or the BBC was subject to further cuts to its funding (for example, from decriminalisation of TV licence fee evasion).

The trade-offs in different funding models

6.All models for publicly funding PSBs involve trade-offs between:

a)Sustainability: whether it provides stable and adequate funding to enable PSBs to fulfil their remits.

b)Political independence: the extent to which government is able to interfere in the level of funding in ways that could undermine the ability of PSBs to hold governments to account.

c)Legitimacy: the extent to which the funding model appears fair and is supported by the public.

The implications of shifting away from the current UK licence fee

7.In Table 2, we highlight some of the potential implications of shifting away from the licence fee model currently in place in the UK.

Table 2: Implications of shifting away from the current UK licence fee model

Advantages	Disadvantages
The ability to create a more progressive funding model based on ability to pay, rather than a flat fee.	The licence fee is the most stable and predictable form of funding for publicly-funded public service broadcasting.
Requiring all citizens to pay regardless of media use removes free-rider problems.	Requiring all citizens to pay regardless of media use could be unpopular and seen as unfair.
A simpler model could address the anachronism of the licence fee being tied to live TV and iPlayer viewing, but not radio and PSB content distributed via the internet (including social media).	Could be hugely disruptive for the BBC (and S4C) and direct energy from programme-making towards defending public service broadcasting as a concept.
Reduced collection and enforcement costs.	Can be costly to implement a new funding model.
Could address the financial deficit that the BBC might face if decriminalisation of TV licence fee evasion is introduced.	Non-licence fee funding models are more open to political interference.

Principles and practices of publicly funding public service broadcasting

8.Within the European Broadcasting Union (EBU) area in 2019, the vast majority of public service broadcasting funding (77.6%) was public.279 Of this public funding, 59.9% was from a licence fee.280 A number of European countries (Sweden, Norway, Denmark) have shifted, or are planning to shift, to an alternative source of public funding, such as a household/individual fee or state grant. Most PSBs in Europe combine public funding with other revenues, including advertising, programme sales/IP, sponsorship, pay services, merchandising, and charitable grants. In 2019, within the EBU area, commercial sources accounted for only 18.9% of total revenue for PSB.281

9.Levels of funding equate with spend on public service content, relevance and legitimacy. Data from EBU members in 2019 revealed that better funded PSBs spend more on content. Severe cuts to funding are strongly correlated with a decrease in programming expenditures.282 There is also a strong correlation between PSB operating revenues and TV/radio market share. Properly funded PSBs have the resources to compete in their markets, retain talent, attract audiences and fulfil their public service remits. Funding cuts can lead to a downward spiral: less funding = less relevance = less legitimacy.283

The four core principles for funding public service broadcasting

10.In 2017, the EBU proposed four principles that can act as a guide and benchmark against which to measure different funding models for PSB.284

• Stable and adequate
  • This enables long-term investment and innovation and ensures PSBs have the funds to fulfil their remits.
• Independent from political interference
  • This enables PSBs to fulfil their role as trusted sources of objective and impartial information.
• Fair and justifiable
  • Citizens must understand what they pay and why in order to ensure continued legitimacy.
• Transparent and accountable
  • This is essential to ensure legitimacy and trust in PSBs.

Terms and conditions for publicly funding public service broadcasting

11.The funding models for PSB vary according to the terms of payment (who is required to pay, at what level and under what conditions) and the conditions for funding (how and by whom is the amount of funding determined).

Terms of payment

• Device-dependent: tied to use/ownership of a TV set, radio, computer etc. as is typical for licence fee models.
• Use-dependent: tied to use of particular services, such as live TV/iPlayer, as in the UK.
• Flat fee: everyone pays the same. More typical in licence fee models.
• Variable fee, according to ability to pay. More typical in household/individual fees and state grants.
• Reductions for certain groups (e.g. the disabled, those on benefits). Typically, funding for PSB is only paid by adults.
• Individual, per household and/or from businesses/organisations.

12.Where there has been a shift away from the licence fee in recent years it tends to be towards variable fees that are not device/use dependent and so are paid by all citizens.

Conditions of funding

• Government sets level and length of funding settlement. This can undermine the political independence of PSBs and, therefore, their legitimacy and trust.
• An independent body sets the level and length of funding. Independent bodies provide fewer opportunities for political interference in PSB funding.
• Indexing of funding. The level of public funding can be indexed to other measures (e.g. in line with cost of living, or dependent on ensuring a specific income level for PSBs).
• Allocation of funds. The funding can go directly and wholly to the PSB organisations or can be used to fund other media activities.

Evaluation of the principal public funding models for public service broadcasting

Licence Fee

13.There are variations to licence fee models, but this broadly refers to public service broadcasting funded directly through purchase of a licence by individuals, households and/or businesses/organisations. Licences are often tied to specific technologies (e.g. TV set, radio, computer) or sometimes to a media use, as in the UK. With the rise of internet-delivered TV and radio, there has been a move towards divorcing licence fee payment from the TV set and broadening it out to include ownership of other devices, such as computers, smartphones and tablets.285

14.Licence fee levels can be set by independent bodies or directly by government. Independent bodies can help to limit government interference in both the level of the licence fee and how much of that income comes to PSBs or is diverted to other areas.

15.Licence fees require collection, which can be undertaken by:

• State department—can undermine independence.
• Independent body—less scope for political interference.
• Third party organisation (e.g. telecoms provider, post office or electricity provider)—can lead to problems if the organisation (e.g. telecoms provider) has no interest in enforcing collection. Can cost more as the fee for collecting the licence fee needs to be negotiated with the commercial company. Tends to be adopted by Southern European countries (e.g. Portugal) where the licence fee is very low and so could be harder to adopt for more substantial licence fees.
• Subsidiary of public service broadcasting—generally the least expensive and most efficient option with lower evasion rates.

16.There is evidence to suggest that there is no clear link between the cost of the licence fee and evasion rates in Europe. Higher evasion rates have been linked to lower legitimacy of public service broadcasting, lower risks for non-payment and a lack of effective procedures to collect and enforce payment.286 Table 3 summarises the advantages and disadvantages of the licence fee model.

Table 3: For and against the licence fee model

Advantages	Disadvantages
A stable and predictable form of income, although this can depend on the length of licence fee settlements.	Collection: there are costs involved in determining who is required to pay and collecting fees.
Independent from political interference, although this can depend on how the level and length of the licence fee is set.	Enforcement: there needs to be some kind of penalty for non-payment of the licence fee.
Accountable to the public as citizen, creating a direct link with the public.	Free-riders: people can avoid paying and still use public service broadcasting services.

Household/Individual Fee

17.There are variations within this model, but it generally refers to the funding of public service broadcasting through a household or individual fee that sits outside of the state budget and is sometimes (as in Germany) still referred to as a licence fee. In this model, funding for public service broadcasting is not tied to the ownership of a specific device or the use of particular media services. As with other public services, all citizens pay, regardless of their use of public service broadcasting. Depending on how it is established, the household/individual fee can be collected at source (removing the costs of collection) and can be income-based or include exemptions for certain groups. A number of countries have shifted from the licence fee to some form household/individual fee in the past decade, most notably Finland and Germany. Table 4 summarises the advantages and disadvantages of the household/individual fee model.

Table 4: For and against the household/individual fee model

Advantages	Disadvantages
Simplicity: could minimise evasion and the cost of collect and/or enforcement if funding can be deducted directly and is payable by all citizens.	More easily subject to political interference and/or pressure than the licence fee. Would need to be set up with safe-guards to minimise the possibility of political interference.
Fairer and more progressive than a flat licence fee, depending on the terms of payment.	Can be less transparent than a licence fee.
Not tied to specific devices or types of media; all citizens pay.	Payable by all citizens, including those who do not use public service broadcasting so could be unpopular.

State Budget

18.In this model, public service broadcasting is funded directly through state budgets, either directly from government or indirectly through subsidies. As with the household/individual fee, funding for public service broadcasting is not tied to the ownership of a specific device or the use of particular media services: all citizens pay, regardless of their use of public service broadcasting. Funding through state budgets requires no special collection or enforcement and can be progressive by being income-based or including exemptions for certain groups.

19.A number of countries have shifted from the licence fee to funding through state budgets. However, the shift to state budget funding is associated with attempts by governments to curtail the independence of, and financing available to, PSBs. For example, both the Netherlands (in 2000) and Iceland (in 2009) moved from a licence fee to state budget model which led to accusations of politically-motivated interference in the funding of public service broadcasting and cuts to the provision of original programming.287 In Denmark the shift from a licence fee to direct taxation, which will come into force from 2022, has been interpreted as an attempt to reduce the independence of DR (the Danish Broadcasting Corporation) as a PSB and limit its ability to hold government to account.288 Table 5 summarises the advantages and disadvantages of the state budget model.

Table 5: For and against the state budget model

Advantages	Disadvantages
Simplicity: could minimise evasion and the cost of collection and/or enforcement if funding can be deducted directly and is payable by all citizens.	Easily subject to political interference and pressure. Less transparent than a licence fee.
Potentially fairer and more progressive than a flat licence fee, depending on the terms of payment.	Might not be cheap/simple to implement.
Not tied to specific devices or media, so all citizens pay.	Payable by all citizens, including those who do not use public service broadcasting, so could be unpopular.

Other funding models

Advertising

20.A number of European PSBs supplement public funding with additional income derived from advertising. It is unusual for PSBs in Europe to be wholly funded by advertising. Advertising tends not to be favoured as a primary model for funding public service broadcasting because it is oriented to the market/consumer, rather than to the public/citizen. It can, therefore, lead to a de-emphasis on certain forms of programming that are less economically viable such as children’s content, investigative journalism, arts, and minority language and regional content. It also lacks the transparency of forms of public funding, such as a licence fee. Income from broadcast advertising has also been declining, particularly with the rise of online advertising subject to different regulatory requirements, making advertising an unstable form of income for public service broadcasting.

Subscription

21.A subscription-based model has not been adopted by any country within the EBU as a mechanism for funding public service broadcasting and is generally not regarded as a public service broadcasting funding model. This is because it is not universal and misses the central role of public service broadcasting as a ‘merit good’ that contributes to the creation of a stable, democratic and peaceful society. Merit goods are goods and services that create positive benefits for social welfare but that people are likely to under-consume, and which ought to be subsidised and/or provided free at the point of use so that consumption does not depend on ability to pay.

22.Subscription services are not an adequate funding mechanism for merit goods because they are only available to those who choose (and can afford) to subscribe and only have to provide content for their subscribers. In addition, subscription would require considerable implementation expenses and the creation of some form of conditional access that is not current possible for FM, AM and DAB radio or Freesat and Freeview TV.289

Taxation as a supplement to public funding

23.Historically, a range of taxes and levies have been used to support the financing of domestic audio-visual production, including levies on cinema admissions (France), private broadcasters (Finland, Estonia), the purchase of certain media and copying devices, such as blank CDs/DVDs and VCRs/DVDRs (Japan, America, Canada, 25 EU-member countries), and internet service providers (ISPs) (France). This form of taxation is a supplement to other forms of public funding and is usually accessible to both commercial and public service providers to support domestic audio-visual and news production. It is often used to tax those who benefit from content production but do not support it financially. It can also reduce the dependence of public service broadcasters on advertising and open up competition.

24.A number of submissions to our inquiry have proposed the introduction of such levies to address the rise of global platforms and subscription video on demand (SVoD) services. However, there are disadvantages to this model for funding public service broadcasting. It requires a new mechanism to collect and distribute the revenue, which could be costly to set up and open to government interference. Revenues from profits on, for example, ISPs and SVoDs, are not stable and the costs can be passed on to advertisers or consumers, particularly given that in many countries there is little competition in these sectors. This could, by turn, harm internet adoption.290

Donations

25.The United States of America’s system is the clearest example of funding public service broadcasting primarily through individual donations and corporate sponsorship. Donation models do not ensure protection from the state or the market and are not a stable form of revenue. Donations are subject to economic downturns (recessions) and require directing resources to fundraising. They will favour content oriented to those who donate. It could be argue that, financially, a donation model is not realistic in the European context: the GDP of the USA in 2010 was around $15 trillion, approximately double that of the five wealthiest countries in Europe combined (France, Germany, Italy, Spain and the UK). Despite this wealth, public service broadcasting in the USA received less in federal public funding in 2008 than YLE received in Finland with a population of 6m and a GDP or roughly $246 billion. The USA’s funding model for public service broadcasting is arguably not sufficient enough to ensure stable and adequate funding for PSBs and is likely to generate even less per capita revenue in less wealthy economies.291

Case studies: Finland and Germany

Finland

26.In 2013, Finland shifted from a licence fee to a progressive ‘tax’ paid by all individuals on a means-tested sliding scale to fund its public service broadcaster, YLE. The rationale for shifting away from the licence fee was to address declining revenues for YLE, the anachronism of tying licence fee ownership to the TV set, free-rider problems, the practical challenges of collecting and monitoring the licence fee and the perceived unfairness of a flat fee for economically disadvantaged households. In 2012, licence fee evasion rates for individuals in Finland were around 11% and for corporations up to 25%.292

27.As in Switzerland, the proposed shift to a new funding model led to significant debate about public service broadcasting, opening up space for considerable lobbying from commercial media who demanded a narrower definition of YLE’s public service broadcasting remit, particularly online, and advocated for funding from direction taxation.293 Although these criticisms were rejected, YLE had to invest time and energy in promoting the value of public service broadcasting.

28.The public service broadcasting tax introduced in Finland is paid by individuals on a means tested progressive scale, with those earning least paying nothing. The aim was to expand the number of people paying in order to reduce the fee paid. Although referred to as the ‘PSB tax’, it is better understood as an individual fee or compulsory excise duty that is not dissimilar to the German household fee discussed below.294 Individuals over 18 years old pay up to €163 per year, depending on their income and individuals who earn less that €14,000 p/a pay nothing. This is a reduction from the €252 licence fee payable before the 2013 reform. Corporate entities with a taxable income per year of at least €50,000 are liable to pay the public service broadcasting tax at a rate of €140 and 0.35% of taxable income over €50,000 up to a maximum of €3,000 p/a.295

29.After the introduction of the public service broadcasting tax, YLE’s income has increased from €432.4m in 2011 to around €475m per year.296 The tax has been successful in terms of ensuring adequate funding for public service broadcasting, partly because of a supportive political climate. The fund has also been set up to safeguard against political interference, sitting outside of the state budget.

Germany

30.Germany’s PSBs were funded by a combination of a licence fee and advertising before 2013, with KEF, an independent organisation, responsible for setting the level of the licence fee. The rationale for shifting away from the licence fee was largely the perceived anachronism of tying the fee to specific receiving devices given the proliferation of online video and streaming services. However, the licence fee was also unpopular with the public and there were concerns about free riders. Changes to media use were also leaving German PSBs ARD and ZDF with an expected reduction in funding of around €1bn by 2020.297

31.A household fee paid by everyone was favoured because it made the monitoring of the possession of a receiving device obsolete. It was also designed to be a simple system that would maintain the current total amount of licence fee income for Germany’s PSBs. In addition, the independent organisation responsible for setting the level of the licence fee (KEF) was retained to decide the level of the household fee in order to limit political interference. The fee is collected by a third-party organisation, the Bietragsservice.

32.Various legal complaints were filed against the fee, often related to the impact of the reform on businesses, churches and local municipalities, which had to be dealt with by the Federal Constitutional Court.298 These legal challenges were finally resolved in favour of the fee in 2018.299 Initially the household fee was set at the same level as the licence fee. In 2013, an evaluation by KEF found that this would lead to an expected budget surplus of €1145.9m for 2013–16 and so the monthly fee was recommended to be reduced by €0.73 to €17.25 from 1 Jan 2015.300 In 2019, the fee stood at €17.50 per month (€210 p/a).

33.In 2018, academics Phil Ramsey and Christina Herzog modelled the financial impact of the UK shifting from the current licence fee to a household levy along the lines of the German system, based on all adults (even over-75s) contributing.301 They claimed that with a 0% evasion rate, a similar household fee in the UK could raise more revenue than the current licence fee and so could lead to reduced costs to the public. With a 3.6% evasion rate the household fee would raise slightly more revenue than at present. However, 5% of German households refuse to pay the household fee and at this rate of evasion in the UK, there would be little financial benefit to the taxpayer from shifting away from the licence fee. However, if a household fee was attached to council tax it could be more progressive than the current licence fee model, enabling those on lower incomes to pay less.