Select Committee on BBC Charter Review Minutes of Evidence

Examination of Witnesses (Questions 561 - 579)


Mr Pat Loughrey, Mr Mark Thomas and Mr Martin Brooks

  Q561  Chairman: Thank you for coming and also thank you for your hospitality since we have been here. I will not weary you with where we are up to in this inquiry because I think you know that, but suffice it to say we are in the second stage and now looking at a number of areas which we really were not able to do justice to in the first report, and one of those is the regions but more than that we are obviously particularly interested in what is called the move to Manchester. I wondered before going into the detail of the move and the advantages of the move and all that, which we have obviously had rehearsed to us this morning and indeed last night, if we could get the costs of this thing clear. At one stage it was being said that it would cost £50 million extra a year and basically it would not be in the black before the end of a 25-year period. I think it was the Managing Director of Granada who said there was no way that she would get a proposition like that past ITV. Can you tell me where we are? What is the best estimate of cost now?

  Mr Thomas: Yes, we can. As I indicated this morning, the original numbers were based on that model which was a lift and shift model.

  Q562  Chairman: "Lift and shift" means?

  Mr Thomas: Replicating what we had in London for sport, children's and Five Live and basically providing exactly the same facilities here. So that was the easiest calculation that could be done at the time when the BBC was figuring out what the global figure might be for this proposition. So that is where that number, which is around about £600 million for the total cost, came from and that is where the number of an annual cost of £50 million came from. As I also indicated this morning, the process that I have been engaged in with the rest of the project team has been looking at how those costs were arrived at and looking at ways of doing this more effectively. We talked a little bit about some of that this morning in terms of the way that the BBC would be part of the media zone and that would be a very different proposition to building another fortress. Going through that process we have been able to bring those numbers down significantly. In October we were able to present those headline numbers to the Governors. In terms of that big global figure of over £600 million, we have been able to bring that down by a third. That is now around £400 million. In terms of the annual running costs which were standing at £50 million we have been able to halve those so that is now around £25 million a year. The health warning here is that this is very much work in progress and we are still burrowing away at those costs. Indeed, the Governors have challenged us to go further. This is by no means a done deal in terms of the proposition. Equally, the other side of that is that some of these costs could go up as we try and nail them down further and further. There is an issue which is very delicate and sensitive at this stage around these numbers. You have seen this morning there are a number of parties, two councils in particular, who are interested in securing the BBC as an anchor tenant of their media zone, and each of those two councils have two sites and those two sites have developers so we are now in a very difficult series of negotiations to make sure we can get best value for the licence fee payer. In this forum it is hard for us to go much further than we have today. It is also true to say this morning that an awful lot of focus was around—and you made a trip yourself—the ITV Granada site and the 3sixty model was discussed. Those are elements of one of the potential media zones. You have not heard this morning about the potential models around those other three media zones which are quite different. There are lots of interesting ideas and how that feeds back to the BBC in terms of costs and numbers is exactly what we are engaged in at the moment. None of us knows which is going to be best value for the media zone proposition nor indeed which of them is going to be the most future-proofed. I know there was quite a bit of discussion around those models this morning. So that is where we have reached and I hope that gives you some confidence we are heading in the right direction.

  Q563  Chairman: Thank you very much, that is very clear. Just answer this: the £400 million that we start with, what does that cover?

  Mr Thomas: Basically the £400 million is the capital cost of all of the elements. That includes the cost of the building, the cost of equipping it with technology, and the cost of moving people in terms of the relocation packages but also in terms of the redundancy for those people who elect not to move. Now, the reality about that is the BBC through various financing methods will be seeking to pay for this as a revenue stream which is where the second number of £50 million (now half that) comes in, so that is why we are able to talk about this in terms of an annual cost.

  Q564  Chairman: I think I am getting a bit confused now. Is it a £400 million capital cost and then £25 million?

  Mr Thomas: Not in addition, no. It is the same number expressed differently. Basically, for example, we are not going to build a building ourselves. What we are going to do is rent a building so there would be an annual charge for renting that space and that is how we generate that second number. For the stage we were at in terms of costing like-for-like we had to do it in that way but the important number is the annual cost.

  Q565  Chairman: So in a sense £25 million a year wraps up within it that—

  Mr Thomas: — All of those other elements.

  Q566  Chairman: That is all within the envelope with the £400 million?

  Mr Thomas: Absolutely.

  Chairman: I see, I have got that.

  Q567  Lord Maxton: Are the local authorities offering you incentives?

  Mr Thomas: The local authorities have indicated this morning and the Chairman of the NWDA, speaking on behalf of both councils and his own organisation, has written to the Secretary of State and said that they believe that there is £50 million worth of benefit in the way that they can support the costs that the BBC would be bearing in this process. That is an element of these negotiations because on different sites it may be different amounts for different things.

  Q568  Lord Maxton: But if you are renting does that mean that you might get a rent that was less than economic or you might get rate support or rate relief of some sort, you do not know?

  Mr Thomas: I think all of those options are in play and it is really what is effective for them but also has the impact for us. Frankly, the BBC has that cost and it does not really matter which budget line it impacts from our perspective. Clearly it does from their perspective because of the economic and social regeneration.

  Q569  Chairman: Is this £50 million that you have just mentioned in addition to the £50 million from the development agency?

  Mr Thomas: No

  Q570  Lord Maxton: £50 million for Manchester's benefit.

  Mr Thomas: The £50 million that has been spoken about by the development agency includes an element from the councils, so whichever of the sites it is it is a total amount that the development agency has pointed out would be £50 million for Salford or for Manchester.

  Q571  Bishop of Manchester: Salford would put in the same amount as Manchester?

  Mr Thomas: We do not know the detail of it. All we know is that in the envelope that the NWDA is responsible for they are telling us it is £50 million.

  Q572  Chairman: But the outside support which is likely to come under the councils or development agency is £50 million?

  Mr Thomas: That is what they are saying.

  Q573  Baroness Howe of Idlicote: Can I just clear up one thing in my own mind because I may be getting it completely wrong. I thought the original estimated global figure was £50 million, now down to £25 million, which is half.

  Mr Thomas: Yes.

  Q574  Baroness Howe of Idlicote: Whereas £600 to £400 million is down a third. Can you explain that to me?

  Mr Thomas: I cannot. That is a level of financing and economics that is beyond me but I am sure we could provide you with written information as to how that works.

  Q575  Chairman: Do you have any working estimate? In effect, what you are saying is that negotiations are still very much on-going on this. You are being, not perhaps surprisingly, pressed from various quarters, including the Government, to come in with the lowest figure which is practicable.

  Mr Thomas: I think, as we indicated in the presentation this morning, obviously we are very focused, and the Governors are certainly very focused, on delivering value for money for licence fee payers. There is an element of the more that is not about lowest cost. I think that is where some of the confusion comes in. Comparing it to back office moves of businesses out of London, you can understand why that saves money. I think it was the Chief Executive of Manchester City Council who said wage costs are 20 per cent lower. They are as an average but, as I indicated as well this morning, for any vacancies that emerge in broadcasting at the very top level we are in a national market in terms of recruiting people so you are not going to get that 20 per cent advantage. You may for some of the starter grades and for some of the entry points into our business get some of that dividend but the calculation is not as simple as suggested.

  Mr Loughrey: Shall I say a little about that more formally.

  Q576  Chairman: Just let me ask one more question and I will ask you to do that. If further costs have come down from the original estimate, I assume the number of years to pay off has also come down. Have you any estimate on that?

  Mr Thomas: I think in a way that is a slightly misleading proposition. I think the original 25 years really related to the people costs. Basically we have an up-front set of costs of relocating probably half the number of jobs that we want to move up to Manchester, then we have potentially a redundancy situation, then we have potential recruitment costs. That is a very large number that that generates but that is paid back over a 25-year period on the basis that we would not have to pay for the London weighting that we pay in salaries to people working in London to any new vacant posts, so that would work itself through and over 25 years it would be a saving to the BBC to be operating in this market.

  Q577  Chairman: So now the headline figure has come down, has the number of years come down?

  Mr Thomas: No, not on the people costs because that number—

  Mr Loughrey: On the property costs.

  Mr Thomas: — The important thing around other costs, and this is why it is misleading about a payback of the whole thing is if you take that rental cost, in London we have a freehold property—Television Centre—so there is no cost on that, so the cost of renting a new facility in Manchester is a new cost. You never get a pay back on that specific cost so you are not really looking for a return on that over 25 years. The issue around property is what we may be able to liberate in the London estate to offset as a saving, and that is the subject of a vigorous debate at the moment that is taking place within the BBC.

  Chairman: Okay. I am not sure if we are going to get very much further on this point today.

  Q578  Bishop of Manchester: Can I just explore one thing before moving away from that and that is we were hearing this morning about the Bank of New York coming to Manchester. It may be that there are not really sufficient parallels when one explores it in detail, but it did seem from what we were being told that rather than a huge number of years that you have just been referring to and the Chairman has been referring to there would be a payback within five years. That is a pretty substantial organisation as well. There seems to be a huge disparity between the Bank of New York and the BBC.

  Mr Loughrey: I think I would be grateful if you looked at these financial issues in a wider context. Our objectives for this time are to fundamentally change the top line of the BBC's engagement with audiences. It is about equity for licence payers, it is about increasing the real output on the screen and on the air, about audience engagement and audience participation, all of which we have good reason to believe are in need of correction. There are many matrices to measure those. We believe that the creativity of the BBC has been significantly enhanced. These are top-line performance outcomes. We have across the country—for example, moving our pensions department to Cardiff—many back office arrangements and this is not one of them. This is not about cost-cutting and I am always wary of critics outside who measure us entirely on the basis that every move out of London must be for cost-cutting reasons, one stop short of a third world professional support service. That is not the objective here. We have very real reasons and a sense of urgency about changes in the commercial and industry market, about how the BBC must deliver better equity for licence payers. We are determined that we can deliver value for money but that is not our prime objective. The prime objective is equity of delivery and enhanced creativity for our audiences. There are many measures which are well-established in business by which we will determine success or failure on that.

  Chairman: To be honest with you, I used to be Secretary of State for Health and Social Security and at one stage I think I was responsible for about 40 per cent of public spending.

  Lord Maxton: That explains a lot!

  Q579  Chairman: That explains a great deal but at least we did not run out of flu vaccine in my time! We put a number of cases forward of that kind. The Treasury, on the other hand, will be interested in the money. So it would seem to me that is just a fact of life. I do not disagree with your aims but it does seem to me that the pounds, shillings and pence do have to be very clear and that is the one thing which really stands in the way, does it not, of this whole project?

  Mr Loughrey: I think there is some truth in that. That is why we have been so very robust with the costs—the pounds, shillings and pence. At the beginning of this process I have to tell you this team initially began to address this figure down rather than significantly up. As we measured the possible need for the BBC in Manchester, there was a horrible period when we were adding percentages rather than reducing them. We have taken a far more radical look at the possibilities and a much, much more open attitude to partnership than has been the BBC's tradition and we have reduced to the level that you have heard, 30 per cent in capital costs and 25 per cent in recurring revenue costs. I believe that is a very significant step in the direction you describe, Chairman, but I am also wary of being sucked into a very lop-sided matrix just about relativities with back office supply, which are honestly not comparable. We want to make a world-changing broadcast centre. We believe this can fundamentally alter the ecology of broadcasting in the UK and deliver better value for audiences than we have been able to do heretofore. That is a significant economic measure and I am in no way trying to evade the economic measure.

  Chairman: You have obviously made very substantial progress in the last few months, there is no question about that. I think we had better allow you to get on with your negotiations, and I am sure it is your negotiations outwards and inwards and with everyone in sight. The Bishop of Manchester?

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