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Lord Inglewood: Clause 64 aims to put S4C's funding on a reliable and predictable basis which will benefit both my department and S4C in their financial planning. The funding formula in the 1990 Act fixes the statutory payments made by my department to 3.2 per cent. of terrestrial national advertising revenue. The process of operating this formula is prone to significant fluctuations given the vagaries of the advertising market. Forecasts can vary from the actual amounts paid by several million pounds. This makes sensible planning of my department's PES provision very much more difficult. That was a point echoed by my noble friend and predecessor Lord Astor and my noble friend Lord Crickhowell. If we get the forecasts wrong--and forecasting is not an exact science--we can unduly and unfairly affect the interests of those other organisations which depend upon the department for money.

The funding mechanism proposed in the Bill takes as its starting point the payment to be made to S4C at the beginning of 1997 under the current formula, and it will be uprated annually thereafter by the RPI. That will put S4C's funding on a similar basis to that of the BBC.

This funding will be guaranteed. It will be free from political interference. And we have moreover built in an additional protection. The clause includes a power to fund S4C over and above the statutory formula to reflect the additional costs arising from digital transmission. I hope that that provides some comfort to the noble Lord, Lord Prys-Davies. Contrary to suggestions made in debate, the Bill's proposals have not been introduced simply as a means of cutting S4C's funding but as a means of making the whole financing process more predictable and reliable.

If we simply wanted to cut S4C's funding, the 1990 Act gives the Secretary of State the power to amend the percentage of total television revenues by order after 1997. That is not what this amendment is about.

The fulfilment of S4C's remit is not tied to any particular level of funding and the channel has other sources of money than the statutory payments. The Bill will enable S4C to widen its commercial activities. In that respect, as I indicated, we are looking to bring forward amendments to enable S4C to undertake additional commercial activities beyond its statutory function. I hope that that will reassure both the noble Lord, Lord Elis-Thomas and the noble Lord, Lord Geraint.

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However, having said that, I must have regard to the element of S4C's funding which comes from the taxpayer. In the period 1992-93 to 1995-96 the BBC's licence fee income increased by 14.6 per cent., while over exactly the same period S4C's statutory payments increased by 23 per cent. S4C has done extremely well out of the funding system since 1993. We must recognise the fact that there is a limit to the extent that S4C should continue to receive funding increases above inflation.

It is always very alluring when making such an argument to do what the noble Lord, Lord Geraint, did; namely, to imply that there is some money which one might have had a hope or an expectation of receiving and that if, somehow, one does not receive it, then that money is lost. Indeed, it is the kind of situation where a spinster aunt leaves her fortune to someone else. That is hardly a fair way of looking at the problem.

The order-making power in the Bill simply repeats the position in the current funding arrangements in the 1990 Act which enable the Secretary of State to take into account the costs of transmitting S4C. The order-making power is extended to digital. It is not intended to allow the Government to change S4C funding for any other reasons, nor does it in any way compromise S4C's independence. Government Amendments Nos. 176, 177, 180 and 181 narrow the wording of Clause 64 specifically to take account of fears expressed to me by S4C on the issue.

I join Members of the Committee who paid a tribute to the work of both the Welsh Authority and S4C in ensuring that the material broadcast on the Welsh fourth channel is of a high standard and appreciated by the majority of the Welsh population. S4C's success on analogue will, I am sure, be enhanced by the opportunities of digital broadcasting. The Government are committed to ensuring that proper arrangements are in place for S4C to continue to thrive. That includes the adequate provision of resources. We believe that what we propose, which is analogous to what the BBC enjoys, is appropriate for the purpose.

Lord Elis-Thomas: I am most grateful to the Minister for the assurances he has given. I am also grateful to Members of the Committee who have spoken. I can assure the noble Viscount, Lord Astor, and the noble Lord, Lord Crickhowell, that it is not my intention to cause PES difficulties for any government department because, in another life, I have to make PES bids to another department on behalf of the public body with which I am associated. Therefore, I do not want to create any upsets in terms of expenditure. I understand such disciplines precisely.

My concern has been that in the process of transition to the new world of digital the channel would have problems coping with the change. The Minister made clear that he is pointing S4C in the direction of level funding related to the RPI for its statutory payments but that he is also looking to other sources for greater commercial flexibility. We welcome that fact. Therefore, when the Minister returns on Report with further amendments in the area of commercial flexibility, we shall look to him to give further assurances that the legislation will allow the authority

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fully to exploit all the possibilities that may be open to it. I beg leave to withdraw the amendment with the indication that we shall certainly return to the funding issue on Report. We look forward to hearing more about the Minister's further flexibility on the commercial side of the development of the channel's activity.

Amendment, by leave, withdrawn.

Lord Inglewood moved Amendment No. 176:

Page 57, line 26, after ("means") insert ("the 1997 amount or such amount as may from time to time be prescribed under subsection (2B).
(2A) In this section "the 1997 amount" means").

The noble Lord said: In moving the amendment I shall with the leave of the Committee speak also to Amendments Nos. 177, 180 and 181. Since the publication of the Bill, S4C has expressed concern to me that Clause 64 gives the Secretary of State a broad power to alter S4C's funding annually. As I made clear on Second Reading, that is not the intention behind the clause. We have therefore brought forward this group of amendments to implement more narrowly our policy intention. This is what I referred to in my previous remarks. Our intention is to provide a steady and predictable income stream for S4C to enable both the broadcaster and the Government to plan properly for the future.

These amendments make clear that the Secretary of State can only increase S4C's funding from the 1997 levels in relation to the channel's transmission costs and for no other reason. They extend this provision to include digital transmission costs as well as analogue. I am confident that Clause 64, as amended, will provide a reliable basis for funding to enable S4C to continue its successful Welsh public service broadcasting. I beg to move.

On Question, amendment agreed to.

10 p.m.

Lord Inglewood moved Amendment No. 177:

Page 57, line 29, leave out from ("enacted)") to end of line 31 and insert--
("(2B) The Secretary of State may, if he is satisfied that it is appropriate to do so having regard to the cost to the Welsh Authority of transmitting S4C and the service referred to in section 57(1A), by order provide that the prescribed amount is to be an amount which is greater than the 1997 amount and is specified in the order.
(2C) Before making an order under subsection (2B) the Secretary of State shall consult the Welsh Authority.").

On Question, amendment agreed to.

[Amendments Nos. 178 and 179 not moved.]

Lord Inglewood moved Amendment No. 180:

Page 57, leave out lines 40 to 44.

On Question, amendment agreed to.

Lord Inglewood moved Amendment No. 181:

Page 58, line 1, leave out ("(2)") and insert ("(2B)").

On Question, amendment agreed to.

The Earl of Stockton moved Amendment No. 182:

Page 58, line 4, leave out subsection (2).

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The noble Earl said: In moving Amendment No. 182, which stands in my name and that of others, with the leave of the Committee I wish to speak also to Amendments Nos. 183, 229, 231 and 232. I suggest that, in view of the lateness of the hour, we also consider whether Clauses 65 and 66 should stand part of the Bill. The object of this group of amendments is to abolish in its entirety the funding formula for Channel 4.

At Second Reading I indicated that the formula set up in the 1990 legislation has gone badly wrong. Parliament intended it to be a backstop, a guarantee for the channel as it began to sell its own air time and a safety net whereby the ITV companies received a small insurance premium in the early years in return for a modest liability in the later years. I urge those Members of the Committee who may believe--or who have been led to believe--different, to read the words of my noble friend Lord Ferrers in his reply in the debate on the relevant clauses of the 1990 Act. The formula has now run out of control.

Tomorrow morning Channel 4 will hand over a cheque to ITV of £74,008,186 as the payment for 1995. That is more than £74 million. By the end of 1997 the ITV companies will have had £300 million against their expectation of £100 million over 10 years--an expectation on which they based their business plans when they bid for their licences. They have done very well indeed! More significantly, their liability has vanished. No one--I repeat no one--in the industry, or those whose business is to analyse the industry, forecasts that Channel 4 will need any payments in return. The ITC sees no case for any further insurance payments after the end of 1997. Only the Government appear to think that Channel 4 faces a hypothetical disaster, but they have failed to produce the figures, or the basis on which such a disaster is forecast.

After Second Reading of this Bill I took up the invitation of my noble friend the Minister and I wrote to him asking for figures to justify the Government's hypothesis. I am grateful to my noble friend for his reply which I received this morning. Sadly, his letter provided me with no financial forecast, no facts and no figures. It simply reiterated concerns about the rapidly changing sector. I will not usurp my noble friend in quoting in extenso his letter, but point out that no one is proposing to end the funding formula before 31st December 1997. Channel 4 is happy to pay until then, and will pay out the legitimate expectations of any ITV licensee which have not been met by then.

I shall have to take into account the views expressed by the Committee tonight. Unless my noble friend can satisfy me this evening, I fear that I may have to seek the opinion of the Committee.

Taking the charitable view of the Government's position, the only argument that is left to them is to say that the future of broadcasting may be clearer when we get closer to 1998. That is why, they say, they have taken powers in Clause 66 to adjust Channel 4's payments from that date.

How will matters be clearer in two years' time? For the Government to fix a new percentage payment in sufficiently good time before the beginning of 1998 the

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decision will have to be announced by the autumn of next year, just 18 months from now. At that point Channel 5 will only just have started broadcasting, and we shall be no clearer about the impact of digital broadcasting. Therefore, postponing the issue only prolongs the uncertainty for all concerned--the ITV companies as well as Channel 4--at exactly the time when, as a result of the rest of the Bill, Channel 4 and ITV are being encouraged to work together. That point was made forcefully by my noble kinsman the Earl of Arran and my noble friend Lord Astor in the debate on Amendment No. 146 earlier today. Just like the question of sport on television, this decision should be taken now to end uncertainty. I can assure my noble friend the Minister that this issue will come up again and again, not only in the remaining stages of the Bill in your Lordships' House and in another place, but time after time in the months ahead.

Parliament was wise enough to provide for the formula to be reviewed in 1997, halfway through the 10-year licences of both Channel 4 and the ITV companies. By that halfway point the ITV companies will have received £300 million--£200 million more than they themselves forecast. Given that under that formula the maximum payout from ITV in any one year is £40 million, even if Channel 4 lost money in each of the final five years ITV would have no cause for complaint. In fact, however, by 1997 the channel will have £150 million of reserves which would have to be lost first. It is inconceivable that a £40 million payment could be needed. Furthermore, £40 million in such circumstances would hardly protect the channel in the way that Parliament intended.

There is no more threat to the viability of Channel 4 in 1998 than there is now. Even if there were, a down payment of £300 million in premium for a maximum claim of £40 million is excessive by any standards. Given that there is no threat, there is no need for the formula.

Secondly, we need to be clear that the formula was never designed as a subsidy for ITV. Indeed, when the formula was registered in Brussels for clearance as state aid its objective was defined by the Government as:

    "continuation of quality programming on Channel Four".

Those cross-payments were not intended to assist ITV companies in complying with their licences. Nor are they anything to do with their regional programmes. In fact, each of the regional ITV companies makes far more in profits than it receives from Channel 4. None of them depends upon those payments. For example, Border Television, one of the smallest companies and one known very well to my noble friend the Minister, made profits last year of £1.9 million, and received £45,000 from Channel 4. Last year Carlton's two licences made £122.8 million profit. This week Carlton will receive £22 million from Channel 4. We have just seen Granada successfully buy up Forte for nearly £4 billion. It will receive £16 million from Channel 4.

No one could seriously argue that ITV's programmes could be threatened by the removal of the subsidy. Nor should its regional programmes be at risk. The

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companies are duty bound to comply with their licence conditions anyway before profits. In any event, the ITV companies' bids will be reviewed by the ITC in 1998. Nor do I think that the ITV companies can seriously argue that the formula was an integral part of their original bid. In total, they have received three times their expectation. They knew that the formula was up for review in 1997 and they made their commercial bids on that basis.

These payments have become nothing less than a subsidy to ITV. I thought that we were against subsidy. For almost every other industry we have stripped out subsidy. Why should these profitable ITV companies depend on the earnings of their competitor? The whole point of the 1990 Act was to promote competition, not to distort the markets, nor to create new subsidies. Channel 4 does not want a subsidy; why should ITV which is four times wealthier?

I am pleased that the noble Lord, Lord Hollick, has been able to use that wealth in such a spectacular fashion with his non-domestic colleagues in the new production centre which he announced today. Channel 4 is ready to face the future without subsidy, without special protection. Originally it wanted the formula scrapped when its perversity became clear. However, the board of Channel 4, led by Sir Michael Bishop, has made two important concessions. First, Channel 4 now accepts that nothing should be done until the end of 1997--the first point at which Parliament provided for a review. Secondly, it has offered to pay out at that point any unmet legitimate expectations of any ITV company in full: that is, the full payment that each company expected to receive up to 1997, as recorded in its 1991 bid document. The ITV companies knew then, of course, that the position could not change before 1997 but certainly could change after 1997.

My amendments accept that the payments, even at their inflated rate, should continue until the end of 1997. But then they should stop. In view of my noble friend's letter, I feel that I should point out that the ITC--the objective regulator of the whole industry--also believes that payments should stop then. Indeed, the ITC believes that the ITV companies should receive no further payments but retain a long-term liability--a much tougher proposition than anything I am asking for. If ITV companies really believe that they might have a liability, they ought to favour my amendments rather than oppose them.

The Government's proposals prolong the agony. They do not deal with the central issue that the formula is both unnecessary and damaging and they offer the prospect of a further two years' lobbying in final percentages. That is no way to run an industry. Good programmes take time. Good films can be two or three years in the making. That is no way to encourage ITV and Channel 4 to work together on the digital future mapped out so well in the rest of the Bill. Some Members of the Committee may feel that the campaign has gone on quite long enough. By scrapping the formula after 1997, we can end it now. Abolition is in the end the clearest answer. There will be no losers. The ITV shareholders already have their money. All the money retained by Channel 4 will be spent on

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programmes and films; 1,500 new jobs will be created. The viewers will gain, the lobbying will cease. Channel 4 and ITV can work together on a great digital future and on an equal basis. I beg to move.

10 p.m.

Lord Thomson of Monifieth: The noble Earl has put an eloquent and devastating case. I await with interest hearing how the Minister hopes to answer him. I remind the Minister that Channel 4 is a unique British achievement in the whole world of broadcasting. It is a small company by world standards. It has a high-minded and extremely limited remit to cater for tastes and minorities that are not otherwise catered for. It is wholly commercially funded through selling its advertising. It has proved that it can do that very successfully. If I may say so to the Minister, who is the first Minister from this House to have responsibility for broadcasting, it is a very great Conservative achievement. The Conservative Party and the Government should be proud of it. In political terms it was very much the achievement of his noble friend Lord Whitelaw, his neighbour in Cumbria. The Government should approach the question of the future of Channel 4 with a certain pride of proprietorship rather than in the somewhat hang-dog manner in which they seem to be approaching the situation.

That situation, as the noble Earl said, is not the result of the purposes of the financial formula. The financial formula was clearly designed as a safety net for the new circumstances that the Government, in their wisdom, created in the 1990 Broadcasting Act. The fact that it clearly was a safety net was recorded not only in the debates but, as the noble Earl said, was recorded by the Government in Brussels since it was registered as a state subsidy to Channel 4. In fact, as a result of Channel 4's enterprise and excellence, the situation has been an Alice in Wonderland one, in which the great, popular Channel 3 is heavily subsidised on the scale described by the noble Earl. The proper and wise thing to do now is to call it a day, wipe the slate clean and make a fresh start in relations between Channel 4 and the ITV system.

In any case, the 1990 Act contained a provision for a review. I do not want to go over the ground that the noble Earl recited in relation to the figures. They are of a scale to make the mind boggle. By the end of 1997 the ITV companies will have received three times what any of them stated collectively in various business plans when they bid for the contracts. It is sometimes said that we ought to preserve the ongoing subsidy for the time being because it represents compensation for the ITV companies in respect of investment they made in the establishment of Channel 4.

I can speak to that argument from a certain amount of personal experience. I was chairman of the Independent Broadcasting Authority at the time. The facts are that the ITV companies received in Channel 4 a partner with a limited remit whereas they might easily have had an entirely new competitor. They were also given the right to sell the advertising for Channel 4 in exchange for resources they made available in setting it up. They did not in fact do it very well. That is one reason why extraordinary figures emerged of Channel 4's success in

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selling its own advertising. However, I believe that over the 10 years they did receive a surplus of some £68 million in advertising revenue over the investment they made. Today the benefits to the ITV companies are on a massive scale. In 1995 Carlton received £21.9 million; MAI 13.1 million; and Granada £16 million. Granada, once a very great television company with other commercial interests in the catering and rental fields, now a very great hotel owning company with some television interests, received a subsidy of £16 million. It is a very extraordinary situation.

The ITV companies--I have much sympathy with a number of them--are making the most of what they believe to be the position of the small regional companies which we have just discussed at some length. Five small regional companies who, in many ways, give some of the distinctive character to the ITC system, as we have been arguing, together receive, not the £16 million that Granada receives nor the £21 million that Carlton receives, but £1.6 million. The implications in terms of Clause 63 are clear. On the basis that the noble Earl made the case in an unanswerable way, there are implications, if the correct decision is taken, for the Government, for ITV, the ITC and indeed for Channel 4.

As I said at the beginning of these proceedings, it is necessary to do a number of things. It is important to bring together the dates for the Channel 4 review and the dates for the review of the ITV licences so that some of the grotesqueries of the bidding system can be put right at that time. Incidentally, I tabled an amendment with which we shall no doubt deal on Thursday proposing that BSkyB is now sufficiently successful to make its contribution to qualifying revenue as a well established broadcaster dealing with a British broadcasting public. The amendment, in the name of the noble Earl, Lord Arran, is extremely important. We should have a government guarantee on the face of the Bill that the discounts which are part of the network system of ITV and which sustain the smaller regional companies will be guaranteed for the future.

Finally, I turn to the responsibilities of Channel 4 if the Government are wise enough to wipe the slate clean. It has a responsibility that is not being fulfilled as well as it ought to be in relation to the commissioning of programmes from the regions. I am told that a good deal less commissioning of programmes from the smaller ITV regional companies now takes place. I asked for figures from Channel 4.

It appears that Channel 4 spent £188 million last year in commissioning programmes. The statement is that £35.5 million of that was spent "outside the M.25". It is a curious and revealing description of Channel 4's idea of dispersing creative programme-making to the regions. It reminds me of an occasion when, as a Foreign Office Minister, I was asked to take action to disperse the Passport Office out of London. The Passport Office was extremely reluctant to go. Finally, it bit the bullet, came back to me and said that it had been extremely difficult but it had found a site in Ealing.

The amount that Scotland receives out of Channel 4's £188 million is £4 million. I do not feel that in Horseferry Road they have heard of the Goschen

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Formula and that Scotland normally expects to have 11 eighty-eighths of the United Kingdom's revenue. There is a long way for Channel 4 to go. So, while I am proud of its place in the broadcasting scene, the Government should act in support of the amendment moved so well by the noble Earl. Channel 4 has its responsibilities and, if the slate is wiped clean and we make a fresh start for both Channel 4 and ITV, I hope that Channel 4 will rise to those responsibilities. I am happy to support the amendment.

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