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Lord Inglewood: I am sure we all agree that we have had an interesting and worthwhile debate about the Channel 4 funding formula which has generated a wide diversity of views. My noble friend Lord Stockton suggested, in moving the amendment, that Channel 4's long-term future was assured; that the statutory funding formula had already acted against its interests; that it no longer served a useful purpose; and that its retention would lead to annual conflicts about levels of payments--all of which, and much besides, led him to the conclusion that the formula should be abolished.
No one applauds Channel 4's success in recent years more than the Government. We want to safeguard its future as part of the core quality public service channels in the digital age. We have already debated this in general terms. In our view the right way to secure Channel 4's part is to retain the funding formula but to enable the Government to adjust the variables in that formula to take into account the economic realities of an uncertain future as they become apparent. Abolishing the formula outright could prejudice Channel 4's long-term future and we oppose doing that.
Perhaps it may help the Committee if I first explain the basis for the present formula and the Government's proposals to amend it before dealing with my noble friend's specific points. As already mentioned, Channel 4 was established in 1982 as a wholly owned subsidiary of the Independent Broadcasting Authority. The ITV companies sold Channel 4's advertising space and funded the channel by a subscription. The 1990 Broadcasting Act changed the arrangement. It provided for Channel 4 to
The funding formula was introduced by the 1990 Act as a response to anxieties that the new arrangements introduced for Channel 4 to sell its own advertising, rather than to rely on financing from Channel 3 as before, might have a damaging effect on its finances and that that, in turn, might damage Channel 4's ability to execute its remit properly.
The funding formula was accordingly devised as a means by which Channel 4 is, in certain circumstances, guaranteed funding from the Channel 3 companies should its income from advertising revenue fall below 14 per cent. of total national advertising revenue. As a quid pro quo for that arrangement, in essence a kind of insurance policy, any income which Channel 4 obtains from advertising revenue taking it above the 14 per cent. threshold is distributed according to a formula. Fifty per cent. of the excess goes to the ITV companies; 25 per cent. to a statutory reserve fund held by Channel 4; and the remaining 25 per cent. to Channel 4's current expenditure on programmes. However, should Channel 4's income fall below the 14 per cent. threshold, the funds which have accrued in the statutory reserve are used in the first instance to top up Channel 4's income so that it reaches an amount which is the same as 14 per cent. of total national advertising revenue. If and when reserve funds are exhausted, it is for the Channel 3 companies to fund the shortfall between Channel 4's income and the 14 per cent. threshold, up to a limit of 2 per cent. of total national television advertising revenue in any one year.
We have heard a lot about the level of Channel 4's payments to Channel 3 since 1993. It is fair to say that it was anticipated at the time the 1990 Act went through Parliament that Channel 4 would be profitable in its early years and that it would accordingly make payments to the Channel 3 companies. The Government are nonetheless aware that many people believe that the amount of those payments has been higher than was expected at that time, and we have taken that into account in proposing an amendment to the funding formula.
The Government's approach retains the basic framework of the funding formula. However, it includes the power, by order, to adjust the treatment of Channel 4's earnings above the 14 per cent. threshold which I have described. It also updates the definition of total national advertising revenue to include multiplex revenue as well as the other elements (including Channel 5 revenue) specified in the 1990 Act. It would not be right to change the rules applying to funding flows between Channel 3 and Channel 4 before 1997. To do that would be unfair.
The Government's approach has two benefits. First, retaining the formula will keep the safety net for Channel 4 in place as a prudential measure. I hear the arguments that that safety net is unnecessary, since Channel 4 has every expectation of being able to stand
No amount of media analysis one way or the other can make an inherently uncertain future any the less so. Channel 4's efforts to increase its advertising revenue have been extraordinarily successful, with its share rising from 14 per cent. to 21 per cent. of total national advertising revenue over the past four years, growth in revenue which has raced ahead of the increase in its share of the audience. That shows considerable success. However, we have to acknowledge that, as the financial advertisements put it, past performance is not necessarily a guarantee of future success. Indeed, as those of us involved in politics are aware--and I draw this point to the attention of the noble Lord, Lord Donoughue--there is scope for rapid and considerable fluctuations in opinion polls. The essential point is that we cannot predict the future with certainty. For that reason, I am sure that the retention of a long-term prudential framework is right and that we should not abandon the principle of having a safety net on the basis of two or three good years.
The second major characteristic of the Government's proposals is their flexibility. Clause 66 will provide powers for the Secretary of State, by order, to adjust payments from Channel 4 to Channel 3 companies downwards from their current level of 50 per cent. of Channel 4's income above the 14 per cent. threshold. It is too early to say what the new funding level will be, but there is scope to adjust the current distribution significantly and our intention will be to enable Channel 4 to retain significantly more of its revenues for programmes. Under the affirmative resolution procedure, Parliament will have an opportunity to debate the issue fully in due course.
Furthermore, included in these powers is one by which we can reduce Channel 4's payments into the statutory reserve. It may help the Committee to know of the Government's present intention so far as the reserve is concerned. The reserve currently stands at more than £70 million. Assuming no unexpected difficulties, it is the Government's present intention that the reserve would be capped at an appropriate level, with no further payment made into it unless circumstances changed. Even assuming no change in the level of payments to Channel 3, that would at a stroke double Channel 4's income above the threshold to spend on programmes. Thus, it would be able to provide the kind of extra programmes to which the noble Lord, Lord Birkett, referred.
In that context, undoubtedly one cannot accurately trace or follow any transfers of money which may pass from Channel 4 to Channel 3. After all, both of them are organisations which make programmes. As I also indicated, it is our intention to review the level of payments to Channel 3. It seems that there is little doubt that what the Government propose is not incompatible with what the ITC proposes because it hinges on the way in which the formula might be drawn up. According to the ITC, the way the problem should be resolved is by means of the proposed order-making power under which the flow of funds between Channel 4 and Channel 3 is reduced to nil. The funding formula should not be abolished altogether because it may still have a useful role to play in the longer term.
At this stage I cannot possibly predict what might be an appropriate amount of money to pass between the parties concerned. We are talking about the distant future. We wish to have in place a formula which can be activated as and when necessary and appropriate.
Before sitting down I wish to respond to one or two specific points raised in the debate. Questions have been raised about whether Channel 4's commercial success has been bought at the expense of its specific remit, to which I have referred. It is for the ITC to determine and monitor Channel 4's remit. Clearly, this is in principle a further potential element of uncertainty. The ITC's last annual performance review contained a good deal of praise for Channel 4's output. I know, however, that the ITC has registered various concerns, in particular in relation to the proportion of repeats. No doubt the ITC will take the comments of Members of the Committee into account in considering what, if any, tightening might be appropriate to Channel 4's licence.
A number of speakers have drawn attention to the scale of Channel 4's payments to Channel 3. I have already outlined the background to that and do not wish to go into it in great detail. I have acknowledged that the Government are aware of concerns on that score. However, it is important to be clear that Channel 4's payments do not represent one-way traffic. Although some of the companies in 1982 are not necessarily those which hold licences today, overall Channel 3 companies as a whole have paid more to Channel 4 since 1982: over £400 million in 1995 prices against £170 million the other way. I have also taken careful note of anxieties--particularly those of the noble Lord, Lord Donoughue-- that retention of the funding formula will lead to continuing bickering and lobbying in annual negotiations about the details of the formula. I do not see it as a serious problem. The Government will make matters quite clear in putting the proposed orders to Parliament in due course. They will be intended to last for a number of years, as I mentioned at Second Reading.
Those advocating abolition of the funding formula base their case on a very confident analysis of a very uncertain future. They are putting all their money on one horse. The Government's proposals have the virtues of prudence and flexibility to allow Channel 4 to develop as a quality public service broadcaster. Yet they maintain realistic, sensible and fair safeguards to ensure
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