Examination of Witnesses (Questions 561
- 579)
TUESDAY 22 NOVEMBER 2005
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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