Select Committee on BBC Charter Review Minutes of Evidence


Examination of Witnesses (Questions 1939 - 1959)

WEDNESDAY 18 JANUARY 2006

Mr Michael Grade CBE and Mr Mark Thompson

  Q1939  Chairman: Welcome again. We are in the last lap now of our investigation and we heard from the Minister yesterday that the White Paper is to be published shortly, which is something we have been hearing for the last few months actually, but we shall see what happens. May I start the questioning with the licence fee which is obviously one of the issues of interest? The Minister yesterday described your proposals as an "opening bid"; I quote. Is that how you see them?

  Mr Grade: Not at all My Lord Chairman. The process that led to the publication of the BBC's licence fee bid has been a very orderly process. It has been a process designed to reflect, as far as is possible, the views, the expectations of the licence fee payers. It began with the BBC's publication of the Building Public Value document which set out a potential vision for the BBC. That was refined by the Government in their Green Paper and in the Green Paper was contained a clear view of what the Government wanted from the BBC in the next charter. We took that away and we costed it; the management initially did the work. At that point, the governors got into the frame, scrutinised the costings which the management had presented, we brought in independent consultants working to the governors and not to the management, adjustments were made, there was a rigorous scrutiny of that, but 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. Based on what views we had received from the public on our vision, the Government, the department, the DCMS had done extensive research on the Building Public Value document which led to the Green Paper. So that bid is not an opening bid, it is a costing for the vision which has been endorsed by the Government. We go forward from there into the next round of conversations.

  Q1940  Chairman: So it is unlike the ministerial process that one or two of us are accustomed to for public spending, when you make a bid to the Treasury and you realise you are putting in too much because you can then cut it back. The Treasury make a bid back to you in which they argue friendly things like abolishing the old age pension or something of that kind and you then have an agreement at the end.

  Mr Grade: It is for the Government to decide what the process should be. What I am particularly pleased about is that we have a more transparent process now than we have ever had before. The BBC has gone public with its bid. That is now the subject of considerable scrutiny by the DCMS and their consultants and arising out of that hopefully will come a settlement which reflects the expectations and the needs of the licence fee payer.

  Q1941  Chairman: And are you working to try to reduce it?

  Mr Grade: The governors would certainly like the bid to be as low as is consistent with what the licence fee payers tell us they want from their BBC over the next ten years; absolutely.

  Q1942  Chairman: What I find quite difficult to understand is that the licence fee was first linked to RPI in 1988 and until 1998 each year's increase matched RPI or was below. Then from 1998, we have had a situation where it has been anything from RPI plus one point five per cent to RPI plus three per cent. Have BBC programmes improved to that extent over that period?

  Mr Thompson: 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 by launching entirely new digital services in television and radio, by investing more in interactive services and so forth. The Green Paper of 2005 is actually part of a bigger thrust of public policy which began at the end of the 1990s. The central part of the next stage in this digital build-out is the public policy around the switching of analogue television to digital television where, as you know, the Government see the BBC playing a central role. 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. It is quite possible for someone to say that actually the Government should not have asked the BBC to do that, but if you go back and look very closely, look at the settlement between the Government and the BBC in 1999, the letter from the Secretary of State, what the Government asked for was a number of new things from the BBC. The Green Paper asked for a number of additional new things from the BBC. If you look at like for like, if you look at the BBC's expenditure on like-for-like services over the entire period, the BBC has found efficiencies and is delivering existing services for less year on year in the period. However, because new things have been required the licence fee has grown in real terms, though it is also worth pointing out that over this period the licence fee has declined as a proportion of disposable income, not just for median households, but also for the poorest 10 per cent of households all the way through the period. So as a burden on even the poorest licence payers, it has declined.

  Q1943  Chairman: Your latest proposal is RPI plus two point three per cent, plus anything that is required in terms of social provision for helping disadvantaged people with the switchover, which the Minister regards as broadcasting policy and not social policy. The licence fee now is £126.50. What does it actually mean in real terms that the licence fee is going to be in seven years' time?

  Mr Thompson: In real terms, it would mean a licence fee of about £150 in today's money; if you take a median view of RPI over the period, probably a headline number at the end of the seven years of around £180.

  Q1944  Chairman: What concerns me and probably what concerns the Committee is that we support the continuance of the licence fee, as you know from our first report, but are you not concerned that the licence fee is going so high that the public are not going to accept the height that it has got to?

  Mr Grade: Let me say first of all that I and my colleagues on the board of the BBC do not regard the highest possible licence fee settlement as a badge of honour. We are there to represent the licence fee payers. We must argue for a licence fee which is as low as possible, but which is capable of meeting what the licence fee payers tell us they want from the BBC over the coming years. They want fewer repeats; that costs money. They want more local services; that costs money. There are several things in our bid which arise directly from what we presented to licence fee payers and what they have told us they want. There is a cost for that. We have to arrive at a number that the board can support, which we feel is consistent with what the licence fee payers tell us they are prepared to pay and which is consistent with us having a reasonable chance of delivering what it is they tell us they want us to do. The benchmark for resistance to price increases seems to me to be this statistic that Mark has described which is the percentage of disposable income in households at all different levels of income. That is a key benchmark for us and we need to see the licence fee continuing to fall as a percentage of disposable income.

  Q1945  Chairman: You also have opinion polls which actually show public acceptability, do you not?

  Mr Grade: 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.

  Q1946  Chairman: So very little resistance and that resistance is not getting greater at the moment? Is that what you are saying?

  Mr Grade: No; there is no evidence of that. Obviously it is for the governors and the trust in the future to keep very, very close indeed to that level. It terms of targeted help, which is the generic term for helping the lowest income groups to achieve digital switchover, in agreeing with the Government to use the licence fee for that purpose, it is conditional that it is not so onerous that it brings into question, or increases resistance to, the licence fee. It is also a condition that we must not be in a position where, in using the licence fee for this targeted help purpose, we have to cut services in order to meet that requirement. There is a large measure of conditionality in terms of our support.

  Q1947  Chairman: But will you put it up from plus two point three per cent to two point eight per cent?

  Mr Grade: We do not know yet.

  Q1948  Chairman: Is that a working assumption?

  Mr Grade: No, there is no working assumption.

  Q1949  Chairman: Do you regard it as broadcasting policy?

  Mr Grade: It is consistent with the BBC's mission to be universally available throughout the nations and it is entirely consistent with that.

  Q1950  Chairman: When it comes to free licences for the over-75s, that presumably comes out of social budgets, does it not?

  Mr Grade: Yes, it does.

  Q1951  Chairman: It seems a very odd division to make.

  Mr Grade: We are in a unique set of circumstances. The digital switchover is an unprecedented revolution in broadcasting.

  Q1952  Lord Holme of Cheltenham: I am very interested in what you have both said about efficiency savings and one of the things which worries me slightly is the notion that we discuss paying for your extra commitments and your extra responsibilities and the Committee can well understand the case you have made there. I am puzzled why RPI is taken as a given, why it is what they call in the European Union an acquis. Why do we assume that RPI should be and is a starting point, a sort of platform from which extra commitments are then costed? A lot of regulated utilities would have a model which had RPI minus and that is for a really good reason, which is that of course there are extra costs, salaries and wages go up and other costs go up, but, on the other hand, there are possibilities of operating more efficiently which would produce, for large organisations, at least an offset to those general inflation costs in society and would therefore represent an RPI minus model. There is a danger, both to the public and this Committee, in thinking about it, in assuming that the RPI is somehow a given from which you bounce upwards with extra commitments which need extra funding. I should really like to explore that, if you would.

  Mr Grade: Before I hand over to the Director General, could I just make a point about the RPI minus formulae for regulated utilities? They are virtually monopoly suppliers of the commodity to the public for profit, nothing wrong with that, but the calculation of RPI minus is based on an acceptable return on capital for the selling of a monopoly to the consumer; it is there for consumer protection. May I just make that distinction?

  Q1953  Lord Holme of Cheltenham: But you would not still argue that the pressure it engenders in driving down costs is a valuable one?

  Mr Thompson: What I should like to say is that at no point has the BBC suggested that it should not ensure that it achieves testing savings efficiency targets as part of a broader agenda of self-help, of finding the resources itself for what it needs to do. For a number of years now the BBC has, as part of previous licence settlements, been engaged in meeting targets for efficiencies agreed with the Government. In proposing this new licence fee bid for the next charter, again we said that part of the way in which the BBC should pay for its future is through self-help and through efficiencies. Indeed, if you average the efficiencies the Government asked the BBC to make in the last charter, two point eight per cent a year, in this bid we said that we believe we can stretch, on average over the next seven years, to three point three per cent per year; a figure above inflation. In terms of like-for-like services, the routine running of one of our radio networks, 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. In the bid, laying out the combination of what we believe are inevitable rising costs and, more importantly and by far the bigger element our costing, what we believe achieving what is set out in the Green Paper would cost, we arrive at a sum of about £5.5 billion over the next seven years. We believe we can achieve 70 per cent of that through becoming more efficient, absorbing our own rising costs, but also then making further efficiencies so that we can go as far as possible to meeting what we are being asked to do through our own resources. At the moment we are engaged in a programme of reducing the headcount of the BBC by some 6,000 to 7,000 people; one quarter of the organisation either leaving through outsourcing or many thousands of people being made redundant. We are engaged in by far the biggest efficiency programme that the BBC has ever been through. I should not want you to think that self-help and efficiency are not at the front of our minds. What we are saying though, and it really comes back to the first point, is that the mission for the BBC laid out in 1999 and even more laid out in the Green Paper is not like for like. It adds a large number of new elements and indeed some of the elements agreed in 1999-2000 are now coming on stream. We are about, in ten days' time, to launch the digital curriculum which is £150 million, a new educational service available to every child, every classroom in the UK, to support curriculum learning, done in partnership with the Government. It is going to be a wonderful service, but it is something entirely new. 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. If you look at what we are being asked to do, the list of new things is very long.

  Q1954  Lord Holme of Cheltenham: Thank you for that, it was extremely helpful and well understood. May I just ask, in terms of governance, which is a point of disagreement between our Committee and the BBC at the moment, taking the present model of governance, how far does the board, which Mr Grade chairs, represent the interest of the viewers, listeners, licence payers in pressing the management, Mr Thompson and his colleagues, to produce the best possible deal for those who pay for and enjoy the service of the BBC, rather than the natural pressures on management to meet these demands which are now being put on them? Is there a tension there?

  Mr Grade: There has been unprecedented independent scrutiny of the management's initial proposals in respect of the licence fee bid. Under the new governance arrangements which anticipate the way the trust will operate, there was a lot of tension, a lot of scrutiny, we the governors brought in PA Consulting and as a result of our own scrutiny and PA's scrutiny, considerable adjustments were made to the bid. This was why I was prepared and the board was prepared to support the bid when it went public, because we felt we had really gone through it and we improved the incentives to efficiency which are contained in the bid, what is colloquially known as self-help, which we did not feel were stretching enough and we pushed those a lot harder. We thought the estimates for the profits that the BBC's commercial activities were going to be able to contribute were over-ambitious. We pegged those back, which put pressure on the self-help targets and so on. There was an unprecedented, in the history of the BBC, level of independent scrutiny of the management's bid, but this was not a management bid designed to get the most amount of money possible. This was, as best we could at the time given the variables in the bid, as accurate a costing as we could get to at that time of what the Government had asked us to cost in the vision for the future of the BBC contained in the Green Paper.

  Q1955  Lord Peston: Essentially, what you are saying is that your first calculation will always be the cost of doing like for like over the relevant planning horizon and that makes perfectly good sense to me. Then you say there is a second bit, which is an outside force, really the Government. I am not sure whether they ask you to do things or tell you to do things.

  Mr Thompson: I do not want to be disingenuous about this. The BBC itself has, since the mid 1990s, believed that it could do a great deal in the digital space, that it could launch an effective website, that it could launch interactive services, it could extend its educational mission to projects like the digital curriculum. We have been enthusiastic about this development of the BBC. Crucially, it is for Parliament and the Government to dispose. Successive governments have felt that that was the right thing for the BBC to do.

  Q1956  Lord Peston: The bit where I cannot quite follow what happens in practice is that in addition to responding to outside suggestions, what you are really saying is that there are things you want to do: more programmes, different programmes, more channels, all sorts of things. You are an innovative body and you want to do those things because you think that is what the licence payer would want you to do. What I am not clear about is the process which lies behind that. Do you say to yourselves that you really could put on more drama but you need more money for it, therefore you have to calculate a licence fee which enables you to do that?

  Mr Thompson: May I begin from the management side and Michael might want to talk a bit about the role of the governors and potentially the future role of the trust. From the management point of view, I should distinguish between continuous incremental improvements for which we should all strive everywhere in the BBC all the time, without demanding bigger budgets and things which go beyond those. We want the Today programme, we want our classic adaptations of Dickens's novels, to grow in ambition and imagination and quality without putting more money into them. We talk and listen to our audiences all the time and sometimes our audiences ask us for things which go beyond what I would describe as incremental improvements. An example would be the balance of repeats and original productions on BBC1. We know, again it is reflected in the Green Paper, that there are widespread public views out there that, certainly as far as BBC1 peak time is concerned, that they would like to see fewer repeats and rather more original programmes. It comes out very strongly in almost all the research we do. Moreover, the public at large, licence payers at large, opinion formers, critics, some politicians also believe, and they are right, that the BBC should think very carefully about the balance between high quality documentary, drama, comedy, current affairs and so forth, proper investment in news and the use of some of the cheaper forms of factual programming, reality programming. If you look at the BBC1 schedule and you want to make significant switches from repeats and low-cost factual programmes on the one hand and Bleak House at £600,000, £700,000, £800,000 per hour on the other hand, you very quickly get into an economically very significant shift in investment. I am quite clear that it is what the public would like us to do. When we have programmes like David Attenborough's Life in the Undergrowth and Bleak House in the schedule, Stephen Poliakoff on Sunday, there is an overwhelming sense from the public and indeed from others as well, that the BBC is doing what it should be doing, but over the course of a year we are talking about literally tens and in some cases hundreds of millions of pounds which you cannot achieve by the kind of small per cent of changes. So we start gathering up a number of ways in which we could respond to what our audiences are asking for and then in addition there are ideas like the digital curriculum or like digital switchover which are, if you like, structural changes in the shape and character of broadcasting. Some of these we can very quickly value very precisely. We can predict very accurately the genre mix changes on BBC1. Other things, such as precisely what it is going to cost the BBC to build out the DTT digital terrestrial transmitter chain, are for commercial negotiation and it is less easy to be absolutely precise. We build that up into a model of what a BBC would look like which met the challenges of the future and also met the challenges put to us by our licence payers. Then we shape that into a complete economic picture and then propose that to the board of governors for them to consider.

  Q1957  Lord Maxton: My only concern about RPI, and in the past I have supported RPI plus on the basis of digitalising the archive, which is a very important part of the job you have to do, is that lower pricing in technology is what drives the RPI down to the level it is. You are in a technological business and therefore I do not understand why you are not, if you like, perhaps using more technology, for instance in the production of plays. I do not know how much technology you now use but it seems to me you can use a great deal of computer generated scenery and so on, which allows you massively to reduce the cost of production.

  Mr Grade: RPI is a measurement tool in common usage throughout industry, public and private sector. The key issue in terms of the BBC is what incentive to efficiency is built in to the BBC. How can the public be guaranteed that, where you have a fixed income laid out for, in this case, seven years, there is the incentive to efficiency. An incentive to efficiency has to be built absolutely into the water supply of the BBC. Where the current bid stands presently, the incentive to efficiency, a figure of something like 70 per cent of the incremental ambitious plans that the BBC has to meet licence payers' expectations and needs, is going to be paid for out of efficiency savings. The figure that Mark mentioned, three point three per cent per annum across seven years, assuming that to be above RPI, is a pretty ambitious target. We shall see whether or not the Treasury, the Government and so on, accept that interpretation of that number. I feel that it is pretty ambitious, given the base from which we are actually starting, which is that the value for money changes which are being implemented at the moment will make us as efficient as we can be, given what we know we have to do presently. So the key question is not what measurement tool you use. The key question is whether an incentive to efficiency is built into the financial infrastructure of the BBC spending plans that people can rely on, that is transparent and that can be policed and measured month-in, month-out by the trust, through the management accounts and so on and so on.

  Mr Thompson: Practically, in terms of programme production, we want to improve quality incrementally across our output, we want to deliver three point three per cent of savings across the BBC. Technology is one of the main ways we are going to do that and we believe we can do that with several thousand fewer employees than we have at the moment.

  Mr Grade: I should just like to add, if I may My Lord Chairman, a very brief coda to that. Historically, the BBC has been accused of generally being an expansionist institution. In some cases that is a fair criticism, in some cases it is not. What the governance reforms are designed to achieve going forward and are presently achieving are that before any expansion plans that the management wishes to propose to the trust or to the present board of governors, are even going to be considered, we have to be satisfied that these plans are underpinned by a clearly demonstrable support from the licence fee payers. This is not just the institution expanding for the sake of it, saying "Would it not be nice to do this?". Yes, it would, but is that what the licence fee payers want? The whole of the governance reforms, culminating ultimately in the formation of the trust are designed to put a check and balance in that natural state of any well-funded institution to go on expanding and so on. We have to be absolutely certain, and I am certain, that everything that is contained in the BBC's licence fee bid arising from the Green Paper has been tested against licence fee payers' needs and expectations. That is what is driving it.

  Q1958  Chairman: It is not the only thing you have been accused of in the past. The chief executive officer of Channel 4, Mr Mark Thompson, said that the BBC had, and I quote "a Jacuzzi of cash". I assume that those were in the old days before you got to the BBC.

  Mr Thompson: Perhaps I might remind you of the context. The then Director General of the BBC, Greg Dyke—and it is interesting to see the way the world has changed—said that Channel 4 was awash with cash. Now this was a time over the turn of the century when advertising as a whole had collapsed and Channel 4 in particular—I remember because I had arrived two weeks earlier as chief executive—was £40 million in debt at the bank and there was no money at all. I was just kind enough to point out that if anyone was sitting on cash it was he.

  Q1959  Chairman: You were swapping insults.

  Mr Thompson: I was returning a kind thought from a colleague.


 
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