Select Committee on BBC Charter Review Second Report

CHAPTER 2: THE LICENCE FEE

5.  The BBC has been funded by the licence fee since 1923. In our first report we stated that the licence fee system has been vital to building the strong and world renowned BBC of today. We recommended that the system of funding the BBC until 2017 should be through a licence fee.[2]

The link to RPI

6.  The licence fee was first linked to RPI in 1988. From 1988 to 1998 each year's increase matched RPI or was below. However, since 1998 the licence fee has risen by more than RPI each year. We therefore stated in our first report that "Licence fee settlements above RPI should only be agreed if there are exceptional reasons to justify the fact that they exceed the rate of inflation. Many organisations are able to reduce growth in costs below the level of the RPI and there is no reason why the BBC should not be one of them".[3]

7.  During this inquiry we asked Mark Thompson, the Director General of the BBC, why the BBC has needed settlements above RPI for the past eight years when it did without them before. He explained that "The fundamental change which happened at the end of the 1990s was the Government asking the BBC to take a leading role in helping to lead the processes of creating a digital Britain… From the late 1990s onwards, the Government was not merely asking the BBC to continue with its existing analogue age services, but to launch many new services and to take a bigger role involving capital investment and also the running costs of new digital services as part of a new vision for what the BBC should do" (Q  942).

8.  While it is understandable that the BBC should be given more money if it is asked to launch new services, it is not clear why this additional sum of money is on top of a baseline RPI rise. Mark Thompson explained that because of efficiency gains the RPI rise would not simply be used to maintain existing services, some of it would go towards new services "In terms of like-for-like services… we should expect to achieve RPI minus, to make deeper savings than we get from inflation, so we can take some of the money we save to put against the various new things which the Green Paper asks us to do… We accept the broad principle that the BBC should accept that it should absorb inflation and become more efficient like every other part of the public and private sector" (Q 1953).

9.  While we are pleased to have heard Mark Thompson's reassurance, we think the link to RPI gives the BBC less incentive to make economies and efficiency gains. We also believe that each bid should clarify and separate how much maintaining existing services will cost and how much new services will cost.

10.  While we accept that the rate of inflation is one relevant factor when considering the level of the licence fee we question whether the licence fee should be linked to RPI. We recommend that RPI should not be taken as a baseline for licence fee increases. We further recommend that, if the BBC is to launch new services, the Government should assess the BBC's funding needs on the basis of careful and robust costings without necessarily accepting that the BBC will need a licence fee increase above RPI.

The BBC's current bid

11.  In November 2005 the BBC proposed a licence fee increase from April 2007 of RPI plus 2.3 per cent a year for seven years. The amount of the BBC's bid will rise once the costs of providing targeted help with digital switchover are added (see chapter three). How much the targeted help will cost is not yet known. We calculate that if the rate of inflation over the seven years is the Bank of England's inflation target of two per cent then a RPI plus 2.3 per cent rise (i.e. 4.3 per cent annually) will result in a licence fee of about £180 in cash terms by 2014. In 2004-05 the BBC received just over £2.9 billion from the licence fee.[4] Based on the calculation above it would receive approximately £4.3 billion annually from the licence fee by 2014.

12.  The Government are still in negotiation with the BBC about its November 2005 proposal for the next licence fee settlement. The Minister for Media and Tourism, James Purnell MP, stated that the BBC's proposal was being considered by the Government as the BBC's "opening bid" (Q 1875). However, Michael Grade, the Chairman of the BBC, disagreed with the Government's assessment of the BBC's proposal as an opening bid. He told us that "what we presented to the public in that bid was as accurate a costing as we could possibly manage given the number of variables in it at that time… So that bid is not an opening bid, it is a costing for the vision which has been endorsed by the Government" (Q 1939). Although we note what Michael Grade said, we are sceptical that the BBC's proposal for the next licence fee settlement was made in the belief that it would be treated as anything other than an opening bid.

13.  Although Michael Grade asserted that the bid is as accurate a costing as the BBC could possibly manage (Q 1939) evidence suggests that it could be reduced. We have examined one part of the BBC's bid in more detail than any other. That is the cost of the proposed move of several BBC departments from London to Greater Manchester. The BBC originally estimated that this would cost between £530 and £640 million. In the four months since the BBC launched its licence fee bid the projected total cost of the move to Greater Manchester has been cut by 33 per cent (p 145).

14.  When we questioned Mark Thomas, the Director of the BBC North Project, he told us that the figure in the original bid was the "easiest calculation" based on a "lift and shift model" (i.e. replicating the same facilities as in London for the departments that are moving) (QQ 562, 561). The BBC has since told us that the costs have come down because "considerable work has been undertaken by the project team to turn the original plans for a high level strategy to a detailed implementation plan, a process which has allowed us to introduce efficiencies into the plans" (p 146). We will discuss the cost of the proposed move later in the report. Its relevance here is that our scrutiny of only one part of the BBC's licence fee bid has shown that the BBC's costings were rudimentary and could be significantly reduced. It is worthy of note that in a matter of a few months the BBC was able to reduce one part of its licence fee bid by 33 per cent (from approximately £600 million to approximately £400 million (Q 562)) and has admitted that the figure in the bid was based on the easiest calculation possible rather than on a real estimate of how best value could be provided.

15.  We also note that the BBC's current licence fee bid suggests that the Corporation will need £300 million to cover the costs of a possible future charge for the use of spectrum. This is a huge amount—it is more than 10 per cent of the money that the BBC currently receives each year from the licence fee payer. This cost is included despite Ofcom not yet having decided whether the BBC will have to pay for its use of spectrum or how much broadcasters might be charged for spectrum. Because the BBC face a possible spectrum charge during the next licence fee period it has included a notional charge—one it might not have to pay. We will return to the question of whether the BBC should pay for spectrum in chapter four but here we note that this is another very grey area of the BBC's bid.

16.  We are concerned that if the licence fee continues to rise then public opposition to the licence fee will grow. However, Michael Grade does not share our concern. He stated that "We and our sponsoring department have done a great deal of research which suggests, at various different levels, that there is very, very little resistance to the current levels and the projected levels" (Q 1945). However the fact is that audience figures for BBC television services are declining at the same time that the cost of the licence fee is rising. It is unfortunate that at a time when viewers have more alternatives to the BBC than ever before the costs for accessing BBC services should be rising. We believe this is likely to reduce public support for the fee.

17.  We therefore recommend that the BBC and the Government should work to minimise future licence fee rises. The licence fee should only rise significantly if there are exceptional and well substantiated reasons for it to do so.

Transparency of licence fee negotiations

18.  In our first report we recommended "that the criteria used in setting the level of the licence fee should be open and transparent. The role of the NAO should also be expanded to include responsibility for assessing the efficiency of the BBC and evaluating its funding requirements when the proposed level of the licence fee is set. It should be given the access necessary to do this. The NAO should advise Parliament accordingly"[5].

19.  We believe that an independent, objective and non-political assessment of the BBC's financial requirements would insulate the BBC from potential political interference. Such an assessment would inform parliamentary debates when Parliament is asked to approve the licence fee changes (at the moment Parliament can only approve or reject, but not amend, the statutory instrument the Government must present in order to change the level of the licence fee). Among the advantages of using the NAO, as opposed to a private firm, are that the NAO has a great deal of experience of working with public sector bodies and that the NAO has the full confidence of Parliament and the public.

20.  We are pleased that the BBC's current licence fee bid is being scrutinised in a more transparent way than any previous bid. Firstly, the BBC has put the details of its bid into the public domain. Secondly, the Department for Culture, Media and Sport has submitted the bid for review by outside consultants PKF. And thirdly, we learned from James Purnell MP that the final settlement "will also be based on a further round of industry consultation… along the lines of the Burns' seminars. It was very helpful for the Green Paper and we intend to do that for the licence fee session as well" (Q 1875).

21.  However, while we believe there has been progress in making the bid more transparent, we do not believe enough has happened. The National Audit Office should be involved in scrutinising the licence fee bid. Its report should be published in full. This would mean that for the first time the public and Parliament would have the information necessary to make an independent and informed judgement on the BBC's plans. We also believe that the BBC and the DCMS should be doing more than industry consultations, the public should be consulted as well. Until these two things happen the public will continue to perceive the licence fee negotiations as secretive and opaque. The licence fee is rising at an unprecedented rate and it is time that it was open to proper scrutiny.

The licence fee as a tax

22.  Since our last report there has been a significant change in the position of the licence fee. In January 2006 the Office of National Statistics re-classified the licence fee as a tax. Previously, this payment had been classified in the National Accounts as a service charge. Explaining the change the Office of National Statistics (ONS) says "in line with the definition of a tax, the licence fee is a compulsory payment which is not paid solely for access to BBC services… A licence is required to receive ITV, Channel 4, Channel 5, satellite, cable". [6]

23.  We are not convinced by this argument not least because it has been the case that a licence has been required to view any television channel in the UK for many decades. Nevertheless the decision means that from now on the licence fee will be recognised as a form of hypothecated taxation.

24.  Reclassification of the licence fee as a tax also has the consequence that the BBC is reclassified from the public non-financial corporations sub-sector to the central government sector.[7] The status of the BBC is thus also affected by this decision and it becomes a central government body. This change also affects the Welsh broadcaster S4C.

25.  When announcing its decision the ONS tried to offer some reassurance that "These classifications are solely for the purpose of producing National Accounts and the statistical products based on them. This has no implication for the independence of these broadcasters".

26.  In spite of this we are concerned about the consequences of the ONS' decision. The reclassification of the BBC as a central government body could have serious implications for its independence. There are various subgroups of public body that come under the title central government body. The only existing one that the BBC could conceivable fall into is the category of a non-departmental public body.

27.  The Cabinet Office guidance on non-departmental public bodies shows that the sponsoring department of such a body has significant powers over it. For example the sponsoring department has a role in designating who the body's accounting officer will be, in approving the form of the annual report and accounts, in determining audit arrangements, in reviews on the grading and loading of posts and in setting pay remits.[8] The reclassification of the licence fee as a tax, and of the BBC as a central government body, could therefore have significant implications for the BBC's independence. We urge the Department of Culture, Media and Sport first to spell out the implications of these changes and second to explain how the BBC's independence will be safeguarded in light of them.

28.  The licence fee is now classified as a tax and we note that for the first time the Government have started to use it as such. They are using it to cover costs that should be covered by general taxation, in particular the costs of providing targeted help with digital switchover. As we will discuss in the next chapter, over 75s are currently given a free television licence funded from general taxation as part of the Government's social policy. By proposing to fund targeted help with digital switchover through the licence fee, the Government have introduced a type of "top-slicing" for the first time. This is a profound change to the constitutional position of the BBC. By doing this the Government can raise taxation without being seen to do so.

29.  As long as the licence fee is being recognised as, and treated as, a tax then our argument that Parliament should have a chance to properly scrutinise it becomes even stronger.

30.  If the Government accept our recommendation setting out an enhanced role for the NAO then Parliament will at least have the necessary background information to make an informed judgement about the licence fee. In addition the Government must also find a way to enhance parliamentary scrutiny of this new tax.

31.  Currently Parliament is asked to approve a statutory instrument when the licence fee changes annually. The figure in this statutory instrument is in line with the agreement between the BBC and the DCMS which governs the level of the licence fee for a finite period of time. For example, in 2000, annual licence fee increases of RPI plus 1.5 per cent were agreed until 2006. And each year Parliament has been asked to approve a statutory instrument up rating the fee in line with this formula. The BBC is now hoping for a similar long-term settlement having bid for a formula of RPI plus 2.3 per cent between 2007 and 2014

32.  Parliament is not given any opportunity (beyond hearing a Government statement) to scrutinise the licence fee formula agreed by the BBC and the DCMS. We believe this is wrong. Parliament should be able to scrutinise the proposed licence fee agreement which forms the basis upon which it will be asked to increase the licence fee each year.

33.  We recognise the value to the BBC of knowing what its funding basis will be more than one year ahead. We think this provides the BBC with an important measure of stability. However we question whether it is sensible to agree a formula valid for as long a period as seven years.

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2   First Report of Session 2005-06; para. 119 and para. 132. Back

3   Ibid; para. 12. Back

4   BBC Annual Report and Accounts 2004-05, page 94. Back

5   First Report of Session 2005-06; para. 137. Back

6   Office of National Statistics, News release: Classification of public sector television, p. 1. Back

7   Office of National Statistics, News release: Classification of public sector television, p. 1. Back

8   Cabinet Office guidance - NDPBs: A Guide for Departments - September 2004 Back