Joint Committee on The Draft Communications Bill Appendices to the Minutes of Evidence


APPENDIX 85

Supplementary memorandum submitted by ITN

  In its oral evidence to the Joint Committee on 19 June, the BBC was questioned in detail about its fair trading arrangements.

  Committee members and the BBC witnesses alike made extensive reference to ITN's written evidence and—in the absence of ITN witnesses appearing before the Committee—we thought it would be useful to clarify some of the points raised. We are grateful that you have agreed to accept this additional written submission, and are happy for it to be published alongside our first paper submitted to the Committee on 10 June.

  In responding to ITN's concerns about the proper enforcement of the BBC's Fair Trading Commitment, the BBC had four standard responses, each of which were deployed during the evidence session on 19 June. They are:

    —  ITN has misunderstood the issue and the BBC's commercial activities are already subject to external regulation by the OFT.

    —  ITN's case is based on alleged breaches of fair trading, none of which has been upheld by the OFT.

    —  The BBC's fair trading arrangements have been given a "clean bill of health" in a Government commissioned study conducted by Professor Richard Whish.

    —  Parliament and Government—reinforced by the recommendations in the Davies Review of BBC funding—have instructed the BBC to supplement licence fee income with revenues from commercial services, but commercial rivals are seeking to restrict the BBC's access to commercial markets.

  ITN believes that all four points are—at best—disingenuous, and fail to address the legitimate concerns we have raised in our submission to the Committee. We hope that the Committee will find it useful if we address each of the four points raised by the BBC, which in turn might help clarify the public policy position.


(1) ITN HAS MISUNDERSTOOD THE ISSUE AND THE BBC'S COMMERCIAL ACTIVITIES ARE ALREADY SUBJECT TO EXTERNAL REGULATION BY THE OFT

  ITN has never denied that the BBC is subject to competition law. But as the BBC publicly conceded for the first time during its evidence session on 19 June, the Fair Trading Commitment is a set of safeguards on and above competition law, which are solely enforced by the BBC Board of Governors. The Commitment was designed to protect the use of the licence fee and to prevent the BBC from exploiting its unique privileges to "crowd out" rivals in solely commercial markets. Copy correspondence between ITN, the BBC and the OFT—already submitted to the Committee—provides demonstrable proof that while the OFT (and in future OFCOM) has responsibility for enforcing the Competition Act (1998) in the communications sector, the BBC Board of Governors remains exclusively responsible for enforcing the Fair Trading Commitment.

(2) ITN'S CASE IS BASED ON ALLEGED BREACHES OF FAIR TRADING, NONE OF WHICH HAS BEEN UPHELD BY THE OFT

  This argument is deeply misleading. All of the cases outlined by ITN in our submission to the Committee specifically relate to infringement of the BBC Fair Trading Commitment, not competition law. They concern BBC commercial services that have been supplied at below market rates (and sometimes free of charge) which are unlikely to breach the Competition Act (1998) and therefore are not issues that could be investigated by the OFT. But they do break the terms of the BBC's Fair Trading Commitment, which explicitly requires the BBC to charge a fair market rate for its commercial services and deliver a return to the licence fee arm of the Corporation.

  In short, the OFT has never upheld a complaint about the BBC's Fair Trading Commitment, because it does not enforce it.

  By contrast, ITN did submit a formal complaint to the Board of Governors about a specific breach of the Commitment by the commercial news service, BBC World. Despite providing the Governors with definitive proof that BBC World was being supplied free of charge to WLIW21 in the US—in clear breach of the Commitment—the Governors refused to uphold the complaint.

  Indeed, Baroness Young of Old Scone (then the Governor responsible for Fair Trading) wrote to ITN on 25 July 2000 claiming that all commercial deals are subject to confidentiality, so she could not respond to our specific complaint, but that the management of BBC Worldwide had assured her that the BBC World deal fell within the terms of the Fair Trading Commitment. A copy of our letter to the BBC and Baroness Young's response is attached.

  We do not believe this was an adequate or transparent response to what was a serious complaint and have no confidence in the Governor's enforcement of the Commitment.


(3) THE BBC'S FAIR TRADING ARRANGEMENTS HAVE BEEN GIVEN A "CLEAN BILL OF HEALTH" IN A GOVERNMENT COMMISSIONED STUDY CCONDUCTED BY PROFESSOR RICHARD WHISH

  In its evidence session, the BBC countered criticism about the enforcement of the Fair Trading Commitment by referring to the (favourable) review of the Commitment conducted by Professor Richard Whish in May 2001. Once again, this is misleading. The review, "examined the BBC's Fair Trading Commitment and Commercial Policy Guidelines which are designed to ensure that the BBC does not compete unfairly with commercial companies" (footnote: DCMS press release 8/5/02). In short, Whish only examined whether or not the rules—as drafted—were sufficient to regulate the BBC's commercial activities. The review did not examine the actual enforcement of the Commitment.

  Indeed, when ITN contacted DCMS to make a submission to the Whish review, detailing specific breaches of the Fair Trading Commitment and the demonstrable failure of the Board of Governors to take our formal complaints seriously, we were explicitly told that these issues fell outside Professor Whish's remit and that we should not make a submission.

  The BBC's assertion to the Committee that actual compliance with the Fair Trading Commitment has been sanctioned by the Whish report is therefore completely untrue.

(4) PARLIAMENT AND GOVERNMENT—REINFORCED BY THE RECOMMENDATIONS OF THE DAVIES REVIEW OF BBC FUNDINGHAVE . . . INSTRUCTED THE BBC TO SUPPLEMENT LICENCE FEE INCOME WITH REVENUES FROM COMMERCIAL SERVICES, BUT COMMERCIAL RIVALS ARE SEEKING TO RESTRICT THE BBC'S ACCESS TO COMMERCIAL MARKETS

  The BBC is quite right that both Parliament and Government have sanctioned the Corporation's entry into commercial markets as a means of supplementing licence fee income. Unlike many commercial operators, ITN believes this is a laudable objective and that BBC Worldwide should be allowed to enter any commercial market it wishes to.

  However, in entering commercial markets with deals that clearly breach its own Fair Trading Commitment, the Corporation is breaching the checks and balances put in place to protect commercial markets from a potential dominant BBC. In doing so, it is actively fuelling opposition to an otherwise sensible policy objective, which cannot be in the public interest.

The Essence of the Debate

  It is ITN's belief that the BBC has deployed each of these arguments as a diversion, in the hope of complicating the Committee's deliberations about the future enforcement of the BBC's Fair Trading Commitment. So whilst we feel it is important to address each of the arguments in turn, we also believe it is worth briefly re-stating why ITN remains so concerned about this issue.

  Over the last three years ITN has encountered frequent and demonstrable breaches of the BBC's Fair Trading Commitment. We have tested the existing regulatory regime by submitting a formal complaint to the BBC Governors about the operation of BBC World in the US market. Their response was clearly inadequate, but neither the OFT nor the Government itself has any direct locus on the enforcement of the Fair Trading Commitment, so ITN had no other body to take forward its complaint.

  When ITN challenged the BBC about this clear regulatory failure, Gavyn Davies publicly denied that enforcement of the Commitment was even the responsibility of the Governors. As the correspondence we have submitted to the Committee clearly demonstrates, the OFT confirmed ITN's understanding that responsibility for enforcing the Commitment rests with the Governors. In short, seven years after the Commitment was first published and four years after the Competition Act became law, the BBC Board of Governors cannot even agree with the OFT about exactly who has responsibility for enforcing the Commitment. Under these extraordinary circumstances, how can ITN, other commercial rivals and consumer groups have any confidence that the Fair Trading Commitment is being properly enforced?

  Unusually, the solution to this public policy problem is comparatively simple. In its draft Bill the Government has set out how and why OFCOM will take responsibility for enforcing the Competition Act (1998) in the communications sector. Indeed Gavyn Davies himself has made it clear that he believes all forms of economic regulation should be externally enforced.

  By recommending the addition of a new clause in the draft Bill that empowers OFCOM to enforce the Fair Trading Commitment, Parliament would not only solve this clear regulatory failure, but would also be supporting a policy solution that fits squarely with both the Government's (and Mr Davies') belief that economic regulation should be externally enforced. In so doing, such a clause would eliminate the majority of concerns expressed by commercial operators and consumer groups about the detrimental effects of the BBC's commercial activities, protecting diversity in emerging markets and thereby upholding the public interest.

  We hope that your Committee will feel able to recommend this approach in your final report.

  Finally, we note that you have asked the BBC to produce a paper for the Committee that pinpoints the key differences between competition law and the Fair Trading Commitment. ITN warmly welcomes this suggestion and hopes that this signals the seriousness with which the Committee takes this issue. However, the correspondence between ITN, the OFT and the BBC that has already been submitted to the Committee shows a clear difference of opinion between the BBC and the OFT about these issues. We would therefore urge the Committee to seek separate guidance from the OFT about its understanding of the differences between competition law and the Fair Trading Commitment, and that both papers are published as part of your final report.

  In the mean time, if ITN can be of any further assistance to your inquiry, please do not hesitate to contact me.

June 2002


 
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