Joint Committee on The Draft Communications Bill Minutes of Evidence


Examination of Witnesses (Questions 765-779)

MR JOHN MCVAY, MR ANDREW ZEIN, MR PETER BAZALGETTE AND MS EILEEN GALLAGHER

THURSDAY 27 JUNE 2002

Chairman

  765. Quite unusually this morning we have had a specific set of proposals from PACT, so before we move into questioning, we have the Bill team here. I wonder if the officials would like to comment on the proposals.

  (Ms Ager) Ministers have yet to take a decision on them. We will be putting advice to ministers shortly but we wanted to listen to PACT's evidence here before doing so.

  Chairman: At the end of this session then we will come back to you in case you want any clarification on that.

Paul Farrelly

  766. There is a great deal of interest in the proposals to relax the rules on media ownership and this Committee has heard evidence from all the vested interests, the major broadcasters and to a very great extent you can characterise their evidence by saying, "They would say that, wouldn't they?" One thing that is very important is the opportunity we have in this session with you to get evidence from independent producers, people who represent the independent section. Channel 4, I do not know whether you have seen their evidence, but it is very strong and we would like to hear any comments you would like to make on the sort of evidence that they have put in. Can I end up by asking a general question? What effect do you expect the proposals to relax the rules on media ownership to have on your members' interests?
  (Mr Bazalgette) For independent producers the key issue in the broadcasting market is the number of buyers, not who owns the buyers, and so were greater foreign ownership to lead to fewer buyers in the sector and greater vertical integration then producers would be very concerned. Were it on the other hand to be merely an investment in our creative industry we should not put that on one side because in Britain we like to see inward investment in industry and generally speaking we want to see foreign investment in our creative industry as well and that could be positive, but were it to lead to a smaller number of buyers, a smaller number of broadcasters in the market, we would be seriously concerned.
  (Mr Zein) I think the key point is that although vertical integration is fine in the commercial sector, taking into account the broadcasting sector with the other obligations of public service broadcasting there is a need to protect that because the danger is that with vertical integration the conflicting considerations of the broadcaster and the producer and the distributer stifle the commitment to getting best programmes on the screen and thus fulfilling public service obligations.
  (Mr McVay) There is a real danger that broadcasters who control rights will also be able to spread across a range of other delivery platforms and move into other media platforms as well which we think is detrimental to the interests of consumers. One of the key things that we are very interested in is being able to have a more competitive environment for the supply of content and distribution so that we can actually have not solely a range of people making projects and programmes but that people can have intellectual property ownership as well and that will allow the content and ideas of those people across a broader range of platforms.

  767. Given the commercial reality and the differing strengths of different groups in the world you live in, and I do not think that implies that we are endangering all prospects of selling programmes to American applications in particular, but where do you think the balance in reality will lie given the proposals to allow foreign ownership given the proposals to treat the five(?) differently from ITV? In this world will the balance come down on the side of fewer, more vertically integrated broadcasters or more investment, more innovation, as the Secretary of State would like us to believe?
  (Mr McVay) We think that with the specific requirements in the Bill to have a competition test in terms of general duties and also a specific code of practice for the supply of content into those broad vertically integrated broadcasters there is a danger that we end up with a sole broadcasting system where we have three or four large blocks which are vertically integrated either with content coming from elsewhere or actually being production houses in their own right. We think there is an opportunity in the scrutiny as the Bill goes forward to put in some real safeguards for creative entrepreneurs in the UK.
  (Ms Gallagher) Channel 4 is our main channel in many ways and I personally think that with the reference about in-screen(?) to largely broadcasting, especially if you have Sky and Channel 5 being able to cross-promote a single ITV and a very powerful BBC, you can see that Channel 4, who commission a lot of small independents, could be in a very weak position, so we do have sympathy and fear for that scenario taking place.
  (Mr Bazalgette) To answer your question with not a perfect prediction, your question very much puts the focus on how competition authorities are going to be given the job to interpret that in the future, because if we have a commitment to have strong competition in the broadcasting business between broadcasters, platform owners and programme suppliers, then the future will be very good but it really puts the focus on how the competition authorities are going to be constituted and what powers they are going to be given. It is very important.

Mr Grogan

  768. The code of practice and the 25 per cent—is it either/or and if you are quite happy for the 25 per cent to roll on if the code of practice is fully in place, and is that not very brave given that there will be all sorts of disputes over how the code of practice works and so on? Are you not really saying that there should be a quota?
  (Ms Gallagher) I do not think we are saying either/or. Our view is that ideally the sector would not need a protective quota. If there is real competition in the market and broadcasters actually commission the best ideas, we would be very happy to take our chances as independent companies to compete. However, the truth is that the quota, which was increased in 1998, actually created the independent sector. If it was not for the quota broadcasters would have continued to favour commissioning their own programmes and probably 95 per cent of all programmes would have been commissioned by broadcasters, so in many ways the quota encourages competition. We are saying that with vertical integration we think that the broadcasters would naturally do what they wanted to do all along. It is fair to say that with over 20 years with the quota clearly it has been used as a ceiling and not a floor. For instance, it is notable that broadcasters just make the 25 per cent quota year after year. I was a broadcaster for 19 years at Granada and sat round the broadcasting table and heard companies putting pressure on independents and saying, "You are half a per cent over the drama quota this year. Please make sure you do not do that". That is the main problem with that, and this is why we are trying to focus away from the quota. It is important at the moment until there is a real market but the big problem for us is trade because 25 per cent of a very good deal or 50 per cent of a very good deal is still a very good deal. The problem for the industry is that if they do not have the intellectual property rights they cannot hold on to that to grow their businesses, so, although over 20 years the independents have shown themselves to be creatively very strong, the problem is that commercially they are very weak with very low margins, the lowest in Europe as we understand it. That is why we are looking for a code of practice, to give us some kind of return, to have fair and transparent terms of trade from broadcasters.

  769. We have had a letter recently from Chrysalis who suggest that perhaps they do not go along with everything that the PACT position indicates and they have made other suggestions, for example, instead of 25 per cent of programmes why not 25 per cent of spend because they point to the fact that a lot of the independent people have made brilliant sports programmes or late at night or whatever. Another suggestion has been 25 per cent of new media as well that broadcasters are involved in. There is a range of suggestions here. How would you react to those?
  (Mr Bazalgette) I think Chrysalis's suggestions prove just how creative the independent sector is—a range of ideas, diversity of competition and a good supply of ideas. I applaud the fact that they have written to you but I do not necessarily back their ideas. To say replace the quota with a value rather than our system is arguably a backward step. What we are saying today is, can we build on the quota of 1988 to move towards a properly productive, competitive, diverse programme supply market, and therefore we are less concerned with trying to prop up the market intervention of 1988 or interpret it in another way. It has been needed and is still needed but we are saying let us move forward to more competitive markets. Chrysalis's suggestion of re-interpreting it as money rather than our suggestion is tinkering and it is if you like supporting market intervention and we are saying that in the long term we should not need market intervention; we should have a market.

  770. The definition of an independent company first of all: are you all London luvvies really? For example, if Border Television made programmes for the BBC would that not be supporting a regional production base and equally virtuous if Endemol produced it? Secondly, what would your view of the future be? Would it be a world where everything was made by independent production companies or do you recognise that for some people their creativity might be enhanced in a secure environment, in a producer/broadcaster environment? They are not all necessarily as dynamic and thrusting as you and wanting to argue the toss and break down proper terms of trade. Maybe there is a different way to creativity for the producer/broadcaster.
  (Mr Bazalgette) With your permission I will take the second question first. We think it is terribly important that the BBC has a very strong production base. We think the BBC has a critical role not only in the broadcasting environment but also in our culture and we think also simply as a trainer. I owe my career in broadcasting to the BBC. I was trained by the BBC. I owe the BBC a lot. We think the BBC should have a strong production in-house and we think it would be strongest were it open to a little more of what you might call competition of good ideas. That is all we are saying. We are talking about a small change which we think can have a big result. We support in-house production. That connects to your first question which I can put as Border Television versus Endemol. It sounds like a football match. The point is that in the future were there to be a properly free competitive market in programme supply and in ideas and funding and all the rest of it, you would not need market intervention and Border Television would supply as many programmes as freely as any other independent production company. That would be the ideal.
  (Ms Gallagher) We very much support the idea that there is a real position for broadcasters that have their own production arms, but there is a difference between these two bodies. We can have a large organisation, especially when there is much more competition for ratings. What tends to happen is that decisions are much more centrally made. Instead of being bottom up from independent ideas it is top down with senior executives telling programme departments what the advertisers want and it was very much this style of, "Could you give us an ITV version of Casualty?", and the BBC would be saying, "Can we get a BBC version of Bad Girls?" That kind of centralised decision making is something that has to be because of the scheduling but what we need is creative clusters and groups who are developing their own ideas from the bottom up that can pitch into that system. Without that I think you do get a very centralised ideas, very centralised decision-making. What we need is a creative input, having a strong sector that can research and develop from the bottom up as a very important part of the creative mix.

Chairman

  771. Andrew, John, is there anything you want to add?
  (Mr McVay) I just want to say that PACT is very committed to supporting a production base outside of London and we have worked very hard with Channel 4 and other broadcaster to try and make sure that our independent production companies can access commissioning opportunities and we have worked very hard in terms of business development. One other area we actively support is companies who are supporting the skill sector with training and organisation for the industry. This year PACT's contribution to that was the only contribution that was increased whereas the broadcasters' contributions were decreased. We are very proud of that, that year on year we have increased that contribution to training programmes.
  (Mr Zein) Just one other thing, listening to the luvvies concern, we and a lot of other independents have set up regional production offices. We do that at the behest of Channel 4 and Channel 4 are the people who provide us with the work to service those offices. One of the issues they brought up in their submission was that they wanted more regional remit, so we are working with everybody to bring in regional voices to the screen.

Baroness Cohen of Pimlico

  772. We have been talking a lot about competition issues. I wanted to pick away at what your version of a proper competitive market would be. I have now understood that you do not wish to divorce the BBC's distribution base from its production base. What do you want? I mean not just from the BBC but generally in the market do you want to divorce Sky from platform ownership, from their transmission? What is it you are after?
  (Mr Bazalgette) The best thing to do is to refer to the code of practice. The first point we suggest in the code of practice is that commissioning of programmes and therefore access to the inspection and the funding of the programmes is transparently for the best ideas and we do not believe that is currently the case. We look, for instance, at the fact that the independent quota of the BBC has been treated as a ceiling and since 1988 it has not varied more than one per cent from the 25 per cent of qualifying programmes. Essentially it has been treated as a quota for 75 per cent in-house production rather than as a way of opening up ideas. That is the first point. I will let my colleagues go to other points in the code of practice.
  (Mr McVay) The intention of the code of practice is to create a level of an open and transparent playing field for all suppliers of content to public service broadcasters. The situation where we are just now is that we have the independent production quota and a production for in-house production which was intended to force the market to be more open and create more competition to the benefit of the consumer. We have done a lot of work with our leading city economists who have looked at how the market is structured and their conclusion is that unless there is more competition in the supply of content and distribution of content there is a significant loss of value ultimately to the consumer as we go forward with the broadcasting industry. The code we see as an open and level playing field which means that all public service broadcasters have to satisfy basic requirements of transparency, fairness, producer choice or supplier choice. For instance, if you want to make a programme, do you want to choose it to be a fully funded route or to be a licence fee route, so that you can actually share in some of the success and value and have some of the intellectual property value of the product that you are creating? Other companies like Granada on production would also be using the code to make sure that there was fair and transparent trading.
  (Ms Gallagher) The danger of the code is that it does not sound very dramatic. I am not suggesting that we do without it. Obviously, looking over the last few years when the code was made up, some members would want to go to 50 per cent quota, some might be saying that we should have the equivalent of American deals with ten per cent and divide up the broadcaster from the product. We went through all this and our view was that a seemingly small change that we are asking for can make huge difference to our environment. The problem we have in producing drama is the environment as it is. If you go into a company that has got 49 per cent of all spending, as the BBC has, it has a very strong market position. You almost cannot afford not to work with them. There is no negotiation; this is what is decided. Then you realise that you are not in a competitive market and there are very few places you can go with your product. We thought very hard about how we could open that up without damaging broadcasters, because we want powerful broadcasters. Without powerful broadcasters with money you will not have high quality programming. This is the way in if you like to get some kind of real market and we think if we can get this code we can work hard for broadcasters and, critically, with OFCOM because they understand our business and they have been given powers to act and intervene positively to make sure there is competition in the market. We think that this could transform the market. It is that which we want to open up today. It may not sound a lot but it will make a huge difference.
  (Mr Zein) The other thing to say is that it is an extension of what was recognised a number of years ago when they were setting up ITV and they had a very well funded, powerful broadcaster in a dominant position and you needed to protect the supply of content to that broadcaster. Whether this panel sits today or in three years' time there will always be someone who dominates broadcasting. We are not BBC bashing but it is that just at this present moment in time there is one powerful broadcaster who, as well as setting the terms which they operate with their suppliers, also set the terms of the way the market operates. If you have a buyer who buys 49 per cent of programming the terms that they buy it at are adopted by the other suppliers. If we are talking about vertical integration and further investment from overseas, which will create megalith broadcasters, that is where we are coming from in the code of practice, a sort of all-encompassing framework which is implementable and that is the key to it. Although it looks very little it very much forms the framework for what is being successfully implemented at ITV which is regulated, that has never been the cause of disputes or appeals or problems either for the ITV network, which needs to remain competitive, or for its suppliers.

Lord Crickhowell

  773. I have a great deal of sympathy with what you are saying about competitive markets and I confess to starting with a slight prejudice on codes of practice because I see rigidities. I also understand what you have been saying about setting the terms. I do just wonder from my own rather limited experience whether you are not drawing a slightly simplistic picture of a more complicated situation when you give a picture of these large in-house production units. I lived through the painful process of being a director of HTV at the time of re-starting the largest TV studios ever built in this country just before I joined the board and a very large number of employees faced with survival, having to reduce our workforce very substantially. A very large number of our employees set up as production units or services of one kind or another, occupied our own studios and paid rent and we moved into the situation where we were largely sub-contracting a great deal of our work for obvious economic reasons. I am no longer involved but I am not sure that this idea that it is all a sort of nice, simple, tidy production unit is quite the reality. Even on the last two occasions when I had been approached by the BBC to do programmes, it has been done by small independent companies who are producing programmes for the BBC. I just wonder if the picture you are painting of large production units employed by companies is quite the reality and has not the real competitive world of falling advertising revenues and excessive bid prices created a competitive market of its own which is giving you slightly more opportunity than perhaps you have indicated?
  (Mr Zein) In an interview you said you were created by two small independents of the BBC, which is symptomatic of the size that people get to. The pressures caused by advertising revenue decline have meant that broadcasters have focused even more on leverage of profit out or reducing the cost of programme supply. That has just exacerbated the problem.

  774. Except that you want to employ fewer permanent staff of your own and go out to get your programmes done by others, so in a sense it is generating a business outside the television unit.
  (Mr Zein) I think the extension in the quota originally did lead to a rationalisation and the quota did help develop the sector, it did lead to price and creative competition, so that effect of broadcasters becoming more efficient at their own production has happened. It has been an increasingly competitive landscape so they have looked at squeezing suppliers because there is nothing they can do to bring more money into the system.
  (Mr McVay) There are occasions where companies will source more production from independents, but overall trends, and these are trends across the BBC since 1944 to 2000, their average was 26 per cent; for ITV from 1995 to 2000 it was 31 per cent, so the idea that there is an upward trend is not the case because the variables on that were plus one per cent over that period for the BBC and for ITV a move of plus seven to minus three per cent over that period, so it is often in line with the market conditions. There is not an upward trend. In fact, all the research over the past five years show that there is a downward trend.

  Chairman: I think you made the case very well in this area under question one. We could get into too much detail.

Lord Hussey of North Bradley

  775. First of all, I am delighted to think that the BBC are benchmarks and I am very interested in all your comments. I am particularly interested because I actually had something to do with this. At the time the independent quota was first introduced I thought it was rather a good wheeze. The BBC thought it was a very bad wheeze, but I very much encouraged them to do it. It is half encouraging if I may say to hear what you say. It seems to me that very considerable progress has been made but perhaps I could sum it up as some reports I used to get at school, "Could do better"?
  (Mr Bazalgette) Yes, I think that is very fair.
  (Mr McVay) I think we can do better and I think we can do better by realising that there is more value in investing in these creative entrepreneurs and developing properties which can actually go to the international and global markets. We have had about 20 years of creative success. We have had 20 years of investment in some of the best that the UK has to offer. We are now at the point where the Communications Bill offers a springboard to these people to open up the domestic market, to allow investments to flow to the companies, to develop properties that can go into the global markets. We have had some success as creative entrepreneurs in the UK to do that and survived the Teletubbies and a whole lot of titles produced and developed by independents, but we can do a lot more and I think that is one of the key things we feel, leaving the quota aside because we often get bogged down in that, that the opportunity we have is about how do we take the best opportunity for these companies to go into the global markets and this Bill represents that opportunity.
  (Mr Bazalgette) I do not think anybody should underestimate the passion for ideas that there is in the independent sector and how important that is going to be to the economy in general and the creative economy specifically in the next seven years when intellectual property is going to have a much more important role in the economy. Independent production companies are relatively small companies on the whole whose focus is on creativity and creating ideas. They are not broadcasters and distributors. They are not leviers of advertising. They do not have a number of concerns and their sole income comes from the value of their ideas. We believe we have only just started. We are now exporting programmes all round the world. A disproportionate number of the new ideas on television come from the independent production sector. 60 per cent of the programmes that won awards at the last BAFTA came from the independent production sector. That is disproportionately large number compared to the 25 per cent quota but that is just the beginning. Again we are saying that it is only a small change to give a small spurt to the independent production sector, but it could have a very big effect on not just entertainment and information for people to enjoy in their homes but also on the economy, exports and the rest.

  Lord Hussey of North Bradley: Let us hope that this visit will prove to be a very good beginning.

Paul Farrelly

  776. I wonder if I could mix the two themes you have just been talking about and ask the same question in two stages. To avoid the dangers of some of the changes that have been proposed in this Bill, why do we not have the best of both worlds and insist on reciprocity, insist that the 20-20 rule is kept for Channel 5 as long as ITV and adopt your code and build on the quotas?
  (Mr Bazalgette) The last bit of your question about adopting the code I think we warmly support, but I think that the reason there was a nanosecond pause before any of us came forward to answer the first part of your question is this. For us the issue is not who owns the companies or how many there are, as we said earlier. Therefore PACT has not taken a very strong position on the issue of foreign ownership and reciprocity in the States and so on. I would observe that to insist on reciprocity in the States, which I am told by my those who know more about foreign affairs than I do is not going to be forthcoming, would be a ban on American ownership for the time being, so that is the practical result. We would focus on the number of buyers and we would really want to see the competition authorities ensuring there were a number of buyers in the market place as well as a good number of suppliers.
  (Mr Zein) Reciprocity comes from the ability of being able to take our ideas into the US but the limit on that is not placed by US regulations; it is placed on our ability to retain those ideas in the first place. It is something the independent sector has achieved great success in. Peter talked about the over-performance in terms of awards. It is also true in terms of exports. Sixty per cent of format income to the UK comes from independents. We only make 25 per cent of programmes, whether it is The Weakest Link or Millionaire, Survivor, Coupling. These are the programmes where individuals have focused on exporting them overseas and made it happen. That is where the barrier lies.

  777. What do you think about the best of both worlds, Eileen?
  (Ms Gallagher) I can see real dangers in American ownership and the closing up of the number buyers in particular. Also, without protection—I hate the word "protection"—for UK production but if it was allowed that the schedules were filled with American programming then I think we would have lost a huge amount of entertainment in this country in the value to taxpayers and so on. I have a view that if something like that happened it would take us all by surprise and I think we are still digesting and trying to have a vision of what that might look like. I think that needs a lot of working and thinking through in terms of what would this really mean. I suppose I have more fears than happiness about the suggestion in many ways. What we are saying is that with our code of practice we are very focused that this will make the difference for us but we have real sympathies with Channel 4 in terms of a vision of what might happen in that scenario.

  778. This is the second part of the same question. We have been focusing on Channel 5 and reciprocity but one thing we have not focused on is what is what will happen subject to competition. You talk about ceilings, not floors. What effect has ITV's emergence so far had on regional commitment, regional production and what are the dangers for the future?
  (Ms Gallagher) In terms of ITV, and I worked with ITV for 20 years and am very familiar with the structure, the first thing about ITV is that it is the model for us of a broadcasting organisation because it was legislated for in the 1990 Act where they set about an independent network centre and it was made to choose programmes evenly amongst producers in-house, shareholder producers, or independent producers. Also, if you are dealing with ITV you are able to keep your intellectual property rights. This transforms an independent business. My company makes Bad Girls and because we own the property rights we can have a whole cluster of creative companies around us. We have our own broadcasts as well as an independent distributor who has got two million sales overseas, an independent video distributor with half a million sales. I am now working with a very small company, Pixel Fish, to design an interactive video game. They set up on the strength of that contract and hopefully next year they will be doing a Bad Girls musical. We are savagely exploiting that because it is ours and you can only do that because of the ITV deal where we are able to hold on to the intellectual property rights. I know that there are proposals to protect the independent network centre. However, I think the single owner would have to be very careful that the one example of a broadcaster that worked, because of the regulation that created it to work, goes away because we do not have an ITV and we only have the other broadcaster, the BBC, which does not give rights to independents, then the industry dies. There is also a case for having a strong ITV and making sure it continues with its revenue. I would have said that a single ITV will probably happen at some point when the revenue diminishes to a certain level but we would have to ensure that we kept the one structure created by government that has helped us with that.
  (Mr McVay) One way to make sure that the benefits of the ITV network arrangements for producers of the code of practice will be introduced is that they apply to all other such broadcasters. The point about ITV's activities recently under the agreement of the ITC/ITV charter for bases in the regions is disturbing for many of our production companies outside London because what we are trying to create is a mixed economy for creative entrepreneurs and you cannot just leave it up to Channel 4 to do that. Channel 3 must continue with its commitments. We estimate that as being 1,500 hours cut in the proposals from ITC and ITV which is deeply damaging to many small nascent companies who supply very good regional programming on a regular basis to the delight and enjoyment of many of their viewers across the UK. What we want to see is an arrangement that secures investment in the key production centres outside of London to ensure that we have a diversity of voices and representation and also business voices, not just in London, a network across the whole country. It is a very important issue and again the Bill is quite vague in this area and we would like to see that toughened up a lot more. We welcome Tessa Jowell's recent speech about the Government's commitment to that but we would like to see that become more specific.

  Chairman: Careful, John. You are beginning to sound like a regulator.

Lord McNally

  779. I have been very impressed by the good marks you have given Channel 4 and I think that is certainly in line with my thinking about the future of Channel 4. What strikes me is the enormous opportunity the BBC has missed in the last 20 years to build up a similar goodwill with the independent sector. It would have been equally to the BBC's advantage if you had come along and said equally warm things about the BBC instead of giving strong evidence that they have done no more than the minimum. I think what duty was inviting you to do was to say that the BBC should try harder, not that you should try harder. The Secretary of State, in launching her Bill, described the licence figures as venture capital for the whole of British broadcasting. Surely that is one way that the BBC should be using that licence fee, as venture capital for the independent sector.
  (Ms Gallagher) We definitely think it would be in their medium to long term interests to do that. It is very clear that the BBC have got the partnership with the independent sector where they want to make the independent sector strong so that it can compete internally. It would be a much better quality for them. What has happened is that this change of management in the BBC has meant in-house producers feeling very left out or not given enough confidence, the emphasis being on building them up. Unfortunately, it has been at the expense of the independent sector in many ways and we have found that the deals have got a lot worse. My own measurement of fees was basically do not think of negotiating because it is for us to decide . It is almost impossible for an independent who does drama to hold on to your rights at all. You have got to take the fully funded route. If you ask for a licence fee route it will be the licence fee that makes it impossible for you to cover the deficit, which is about 60 or 70 per cent. That is because, as I understand it, the BBC as a broadcaster prefers to hold on to its rights. It does not relish the idea of rights going outside. If the independent sector is just hired by the job and paid by the hour, there will not be a sector but just a whole bunch of freelancers, exactly the same as those freelancers within the organisation, and they do not have a mixed economy. I think the whole issue that if profit goes out of the BBC it is money lost to the taxpayer is just disingenuous frankly because if there is a real market as there is in sport you have to pay for the real market. The real market in Hollywood has to pay the market rates. There is a lot of argument about the market rates being pretentious, which is quite right, but in the area of controlled production very much looking forward to seeing controlled prices, then the deals are what they would take them to be. I want to work for the BBC and we want the BBC to be strong and we think this is in their long term interests. Enlightened self-interest is in very short supply for a lot of organisations.


 
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