Select Committee on Culture, Media and Sport Minutes of Evidence

Examination of Witnesses (Questions 1-19)




  1. Mr Davies, I welcome you and your colleagues here this morning. If you permit me to do so, I especially welcome Lord Ryder since it is the first time that we have seen him at one of these meetings. As you point out in your annual report, these meetings take place because of an offer by yourself and your predecessor that we should have a session, questioning you about your report and accounts. We appreciate that. We appreciate the fact that you have embargoed the report until after this session ends, and I think it appropriate to place on record that I myself at the moment am working on a programme for the BBC. Mr Davies, would you like to make an opening statement?

  (Mr Davies) Briefly, Chairman. First of all, it is rather an inversion of normal practice that we would invite ourselves round to see you, but we are very grateful to you and the Committee for having us. We think that this is the only public or private organisation that is subjected to this kind of parliamentary scrutiny on the day it publishes its results. This is part of our plan and our intention: that the Governors have intended for some time to become more accountable, and it is part of the reforms to governance that we announced in February, shortly after we met this Committee on the previous occasion. I think that the Governors have now more clearly delineated their responsibilities in the areas of accountability; setting objectives; compliance, especially with fair trading; setting strategy, and regulating output. This has been my first year as Chairman of the BBC. I think we would all agree that it has been a year of remarkable events: September 11; war on terror; the funeral of the Queen Mother and, more recently, the Golden Jubilee and the World Cup. I believe that the BBC has faced enormous challenges in covering these great events but has done it magnificently, and I hope you would agree with that. Between a half and two-thirds of the nation have typically turned to the BBC when these events have occurred. This role in unifying the nation remains profoundly at the heart of what the BBC does. On a more mundane level, we have hit all of our major financial targets for the last 12 months, the key one being that we have now reduced the amount of money that we spend on bureaucracy in managing the BBC down to 15 per cent of the total budget. We are therefore spending 85 per cent of our revenue on programmes or programming, and that is a target we have hit two years early. As you have said many times, Chairman, the prime barometer of the health of the BBC is whether it is making great programmes. I would argue that this year we have delivered on that. We have spent £270 million extra on programming this year, derived in large part from saving money on bureaucracy and other efficiency gains. We have achieved higher ratings this year, but that is not primarily what we are about. I think it more important that we have made higher-quality programmes of greater range and distinction. We could all think of our favourites. The Blue Planet; Clocking Off; The Way We Live Now; Walking with Beasts; Conspiracy; A History of Britain; Only Fools and Horses; Radio 3's World Music Awards—I could go on for a long time. Having said that, we recognise that there is more work to be done at the BBC. Not all of the objectives the Governors set last year have been met in full. Some of them remain work in progress. We think that we need more progress in improving the culture and creativity of the organisation; in improving its ethnic mix in terms of staffing, and its appeal to young and ethnic minority audiences. We did not succeed in launching BBC3 or the Digital Curriculum. We would still like to do both, if we get the go-ahead from the Government. For next year, the Governors have set an objective of further extending the range and quality of our core services, and we have said particularly in arts and current affairs. In summary, therefore, we think that we have had a good year. We think that we have had a year of progress, but we are not yet the finished article and we have lots of work to do.

  Chairman: Thank you, Mr Davies. Before I call John Thurso to start the questioning, could I point out to your colleagues as well as yourself that any one of the six of you who feels that they would like to answer any question that comes up, please feel free to do so.

John Thurso

  2. You talked in your opening remarks about accountability and openness and you set out that objective on page 16 of the report, objective 10. There is a difference between openness and accountability. I am not, in this question, concerned with the openness and the public; I want to focus quite strictly on corporate governance, which is very much something that is internal within the organisation. I think it has been admitted that in the past the relationship between the Governors and the management favoured the management perhaps slightly more than the Governors. Looking to the future, in order for the Governors to operate as an effective regulator there needs to be a healthy and dynamic tension between those two bodies. Much of what you announced you were doing in February sets out to do precisely that. Can I ask you first of all whether you agree with that and what progress you are making, and whether you feel that the Governors as a body have sufficient weight, strength and support to enable them to fulfil their role in that dynamic relationship?
  (Mr Davies) I do not think that I would agree with your premise that somehow the balance between the Governors and the Executive was out of kilter prior to last year. It may sometimes appear like that from outside the BBC, but from inside the BBC I believe that the scrutiny that the Governors give the Executive—guidance, strategy-setting, objective-setting—has always been rigorous. It certainly has been in my time at the BBC. What I felt prior to February—and the Governors and the Executive both bought into this fairly wholeheartedly—was that we needed to make some changes to our procedures, in order to clarify to the outside role, and maybe also to ourselves, what the role of governance was. One of the key things is to define what the two boards do, relative to each other. We have only had three or four months under the new system, but my feeling so far is that it has helped. The role of the Governors as a supervisory body and the role of the Executive as an operative body have been clarified. The business that comes to the two boards reflects that. I hope that Parliament and the public are becoming more comfortable with this, but we will have to wait and see over the next two or three years.

  3. With regard to the setting of objectives—because clearly that is a very central part of the way you are taking things forward—objectives are really only as good as the criteria which you use to measure their success, and the quality of the objective itself. What are your systems, or how do you go about establishing those criteria? How can you assure me that these objectives—9½ out of 10 of which, or whatever, have been met—are actually testable objectives and ones that stretch the management?
  (Mr Davies) This is a key question. In our judgement—and I fully accept that much of this is subjective—we think that about 8½ out of 12 were met last year, and we think that we have made some progress on the others. I do not think that on any of them we failed to make some genuine progress. However, one of the things that we did feel in February we should do was to improve our objective-setting framework. We have therefore done a couple of things. The first is that we have had a much more vigorous debate between the two boards on the objectives for next year. The ones we have set for next year have been thoroughly "scrubbed" by both the Executive and the Board of Governors and then, in joint session, by the two boards coming to a final view. I can tell you that the Governors did make some fairly significant changes to the objectives which were suggested by the Executive. There are two other things that I would like to mention. One is, in future and for the first time, we are allocating individual Governors to monitor individual objectives, not on a single-to-single basis but on a double-to-double basis. Each objective will have two Governors and each Governor will have two objectives to monitor. We hope that keeping the board informed through the year will be much more effective by that mechanism. We have appointed a new head of objectives and compliance in the governance and accountability office—a gentleman whose job it will be independently to inform the Governors and to measure how the BBC are doing on these objectives. I take your point. I think that we could do better on objectives, and I hope that we will do.

  4. The compliance officer would report to whom?
  (Mr Davies) The compliance officer reports to the Secretary of the BBC and, through him, to me—not to Greg.

  5. Can I ask another question entirely unrelated to that, which I suspect probably should go to the Finance Director, Mr Smith? It relates to the balance sheet and to the notes pertaining to the balance sheet which, if my memory serves me, were notes 12a and 12b on pages 91 and 92. What I am interested in is the quality of the balance sheet in terms of the quality of the assets, and how you go about establishing what is the quality of those assets. As we all know, assets can be stated in many different ways, and they can be fluffy or very solid. I notice that in your revaluations you do not, for example, follow the corporate practice of the triennial revaluation; you take a valuation and more or less leave it there. Do you feel that these assets are all hard and ones that you could put your hand on your heart and, in a fire sale, say, "Yes, they will go for that"? That is the first question.
  (Mr Smith) It is probably best if you look at page 73 for my answer—the balance sheet itself. The main thing to say about your question is as follows. First, we rarely put on the balance sheet anything other than hard assets. There are some exceptions which I will explain in a moment, but it is rare. So, for example, some companies would have a very large figure on the balance sheet, being what they would describe as intangible fixed assets: things like brands or trade marks, which are only of value temporarily and put on the balance sheet, based on a series of valuations at a particular point in time. We rarely do that. Nearly all of the assets on the BBC's balance sheet are very hard—as you can see. You have pointed to note 12. £761 million is land, buildings and other very tangible fixed assets, which are all stated at cost—apart from a very small revaluation which was done in 1993 when the BBC's internal market was introduced. At that point the assets were revalued, to allow different parts of the BBC to trade with each other. The value of the uplift from that valuation is only £6 million on a balance sheet of £2.4 billion. The only intangibles on the balance sheet are in note 10, £15 million—largely goodwill. In answer to your question, therefore, most of our assets are very hard. You mentioned the corporate practice of triennial revaluation. It is optional and we have opted not to, as have many other companies. We would prefer our balance sheet to be very prudent.

  6. I cannot remember which FRS it is. I have a suspicion that it is 15, but it is to do with this matter. The point about revaluation is that in any organisation there is as much danger in undervaluing the assets, which leads you to one set of management decisions, as in overvaluing them. The two halves of my question are, first, is it reasonably conservative and, second, is it not so conservative that in actual fact you have well understated the true value of the business?
  (Mr Smith) If you said what would be the value on the BBC, that would of course be an entirely different figure. However, the BBC's balance sheet largely comprises assets it is using for itself. It does not comprise assets that it is selling on to other people, which would be the normal situation for many companies. We are therefore in a different situation. The important thing for us is that it is as prudent as makes sense, bearing in mind the business that we are in.

  7. There could be an uncharitable way of looking at that, which is that this is a set of assets that has been built up out of the licence fee over many years, and it is much better for you to understate them and not draw attention to them, rather than to state a true value of how much public money you actually have on your balance sheet.
  (Mr Smith) There is no intention or desire or effort put into trying to hide any of that. I just think that it would be a mistake to try to value the BBC, or value the brands that comprise its programmes; and then have to do that every single year, and report to people on the basis of something which is an entirely subjective matter. By putting our assets on an historic cost, there is no doubt about that. That is what it costs; there is no argument about it—and that is the prudent thing to do.

  8. I would wholly concur with you in regard to intellectual property, because the value of intellectual property is an absolute minefield, as the dotcom bubble showed us. With regard to tangible assets, however, if we are saying that you have bricks and mortar—particularly if they happen to be in, say, the Home Counties and they have not been revalued since 1993 or 1996—you could be looking at a valuation 50 per cent higher than that which is in the balance sheet. There is no argument as to whether it is appropriate that you should or should not have your assets. Clearly you should have your assets, but is it not appropriate that, in a set of accounts which sets out what you have been given in the past and what you are using on behalf of the public, the public ought to know more accurately what it is you are using on their behalf? There is no implied criticism in that; it is merely a thought—that it would be nice to know more broadly accurately what assets you are operating on behalf of the public.
  (Mr Smith) As I say, I think that what we are doing is entirely sensible, bearing in mind the business we are in, and it is prudent—and, of course, it complies absolutely with all FRSs under company law.
  (Mr Davies) I think that when the Statistical Office published the assets of the public sector, which from memory was a year or two ago, it did put the BBC's assets into that calculation. I think that there has therefore been an attempt to do something along the lines that you have suggested. Am I right?
  (Mr Smith) Yes, the National Asset Register.
  (Mr Davies) I think that this is done for a somewhat different purpose and perhaps more accurately gives the sum total of cash which we have turned into fixed assets through time, rather than the current resale value of those assets.

  9. Do you have an audit committee?
  (Mr Davies) We have an audit committee, the chair of whom is Pauline Neville-Jones.

  10. Could I suggest—and not ask for an answer—that the audit committee might like to look at it.
  (Mr Davies) It will be done.

Mr Bryant

  11. On page 10 you say that the digital services were costing £278 million last year. If you add on the digital transmission costs of £52 million, that takes you to £330 million, which is more than 10 per cent of the licence fee. I think that this is the first year that is true. I thought there was a commitment that those costs would not go above 10 per cent.
  (Mr Dyke) I do not think we ever made a commitment. If you look at what we are spending on our digital services, they are split in different ways. There are the on-line services. When I first joined the BBC there was much excitement about what could be the value of the BBC's on-line services. What would be the value of it if you ran the most popular on-line service in Europe? We all know that the value is very limited and the on-line service is clearly a public service. We have all discovered from the dotcom boom and collapse—as have many of the newspapers in this country—that on-line information per se has no revenue base, and therefore there is no business. There are undoubtedly all sorts of businesses that will develop out of the on-line world, but it will not be the giving of wholesale information. It is therefore a classic public service. You have that. There is a duplication of transmission costs with digital and analogue, but we have to do that while we still have the analogue switching. You then look at our digital television and radio services—all of which are using capacity that was gifted to us and was the intention of successive governments. It was certainly the intention of the last Government.

  12. I am sorry, this is not quite the point.
  (Mr Dyke) The point is that I do not think that we ever said we would only spend 10 per cent.

  13. You did actually, in several annual reports.
  (Mr Dyke) But it was inevitable that, as we produced new services and went to the Secretary of State to get consent for those services, our expenditure would grow. There are now something like 46 per cent of homes and over 50 per cent of the population who can receive digital. We support and look forward to the situation that all the main political parties support, however, and that is that at some stage in this decade there will be an analogue switch-off. At that stage our digital services will be received by everybody. I concede that there is a problem in the period between then and now, in the sense that people are paying a licence fee for services that they cannot receive.

  14. Just to correct you, historically the BBC has made two commitments on digital services. One was that they would not go above 10 per cent of the licence fee. The second was that any programmes that were made outside these figures would always be shown on BBC1 and BBC2 first. That is certainly no longer true, is it? Sometimes you use new programmes that are made and they are put on BBC4—or BBC3 as it will become, I guess—deliberately to get people to take up digital services.
  (Mr Dyke) On the second, in developing BBC4 in particular, hopefully BBC3, and News 24 and the Children's Channel, there was a commitment to the Secretary of State in relation to the amount of new, British-originated programming that would be on those services.

  15. Which I accept, but that does lead you to the logical problem that it seems to me you have had for a substantial period, namely that large amounts of BBC licence fee money, which would be raised in constituencies such as mine—and an increasing figure, more than 10 per cent of the licence fee—are now going on services which it may be very difficult for them to receive, and they will not even see it first on BBC1 and BBC2.
  (Mr Dyke) We accepted that. We believe that all three political parties believe—and it is not a political point in any way—that, some time during this decade, we will switch off the analogue signal and everybody will have digital. That is our intention. If that was not the intention, then I agree with you—I think we would be in some difficulty.
  (Mr Davies) I remember some of the numbers to which you are referring, which I think were given to my panel three or four years ago when I was doing the licence fee review. I think that they have been superseded by the licence fee settlement that came out of that review. Essentially, in that settlement, broadly this path of digital expenditure was agreed with the Government. If anything, we have been slightly below the intended path because we have not been able to launch BBC3.


  16. I want to follow up what you are talking about. Let us look at the table to which Chris Bryant has referred on page 10. Your total licence revenue is £2,591 million. Your expenditure on digital services is £278 million. Let us take away from that the £8 million on digital radio and the £100 million on BBCi—the Internet. In order to be scrupulously fair, let us take that away. I then work out that what you are spending on digital services is something like 8 per cent of the licence fee.
  (Mr Davies) That is precisely correct.

  17. If we turn to page 109 and look at the percentage of the audience you are achieving for these digital services, on which you are spending roughly 8 per cent of the licence fee, we see that among all homes—because 56 per cent of homes do not at present receive digital television—there is not one of those services that is being watched by more than 0.7 per cent of the available audience. Even in digital homes the only ones which go above 1 per cent are BBC Choice at 1.5 per cent, and CBeebies at 1.3 per cent. The percentage for BBC4 is 0.1 per cent on both measurements, and the percentage of BBC Knowledge, which is the same thing, is 0.1 per cent. How can you conceivably justify spending £1 in £12 on services like this, which are being watched by fewer than one in a thousand of the available TV audience?
  (Mr Davies) First of all, you are right that, in the initial stages of a new service, you would expect to spend rather more on the service than you might find utilisation by the licence payers, in a table like that which appears on page 99. That is predominantly because these are new services and we do not yet have universal coverage in terms of digital access for all our licence payers. That is one thing. The second point I would make is that, when we have launched new services in the past on radio and on television, something very similar has happened. I am certain that in the early days of BBC2 we spent much more on the production of programmes and the transmission of BBC2 than the share of viewing it initially won. There are therefore time lags involved here. The third point I would make is that some of the programming, especially on CBBC and CBeebies, that is, originating for those channels, does then appear elsewhere. It appears on BBC1 and BBC2. I do not think that it is valid, therefore, simply to add up these figures. As I say, some of the digital services are available on BBC1 and BBC2 via analogue transmission.

  18. If you are talking about BBC News 24, all you are doing is filling in dead hours on the analogue services. Also, BBC News 24 has been running for several years now. Nobody can say that it is being run in. Yet, even among digital homes, it is only 0.5 per cent of the available audience. We discussed this before we invited you in this morning and I, for one, was not able to understand it. If you look at page 13—
  (Mr Dyke) Before we do that, can I point out that if you take page 108 as opposed to page 109, page 109 is talking about ratings and page 108 is taking about reach, i.e. it is talking about how many people at some stage watch it. The figures there, of course, are very different. You will see that at some stage during a week 15 per cent of people in digital homes watch BBC Choice. You will see that 7.7 per cent watch CBeebies. I do not think, therefore, that ratings in the digital world is what it is about. It is about how many times do people come in and use those services at some stage during the week.

  19. Mr Dyke, by using those words "at some stage" you have anticipated the next question I want to put to you. If you look at page 13, point 2, third bullet point, you say, "BBC4 launched to critical acclaim in March 2002 and attracted an audience reach of five per cent in digital homes in its first month on air". That is the first part of the question I want to put to you. There you say it "attracted an audience reach of 5 per cent in digital homes in its first month on air", yet on page 109 you tell us that BBC4's share of the audience was 0.5 per cent. Are you therefore telling us that after its first month it lost 90 per cent of the people who were watching it?
  (Mr Dyke) You are comparing share with reach. They are two different figures.

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