Examination of Witnesses (Questions 1939
WEDNESDAY 18 JANUARY 2006
Mr Michael Grade CBE and Mr Mark Thompson
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
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.
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;
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.
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.
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.
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.
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.
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.
Is that a working assumption?
Mr Grade: No, there is no working assumption.
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.
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.
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 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 Dykeand
it is interesting to see the way the world has changedsaid
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 particularI remember because I had arrived
two weeks earlier as chief executivewas £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
You were swapping insults.
Mr Thompson: I was returning a kind thought
from a colleague.