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Lord Peyton of Yeovil: My Lords, perhaps I may say a word before my noble friend replies. I am a little confused. When the noble Lord, Lord Thomson, rose I was under the impression that he would move an amendment very briefly and that my noble friend the Minister would reply and give him something. While I hate to disturb the cosy relationship which appears to exist between them, I should like to grab the opportunity--I do not have many--to say that there is a sensible provision in the 1990 Act. That is the one that we now seek to change. I hope that I am wrong, and I hope that my noble friend will not make too great a compromise in the direction of the noble Lord, Lord Thomson.

5 p.m.

Lord Inglewood: My Lords, I am grateful to my noble friend. At this stage in the debate I hope to make a few points which may be for the convenience of the House. I do not wish to curtail the debate, but I should like to make a contribution which may be helpful to those who follow me in the debate. Speaking as I do from the Dispatch Box, I hope that that will be a constructive way of approaching the matter.

The noble Lord, Lord Thomson of Monifieth, explained that his amendments to Clause 69 aim to provide by statute that Channel 4 should make no payments either to the Channel 3 companies or to the statutory reserve for the years from 1998 to 2002; and that no order to alter that regime may be made before the end of the year 2001.

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It is, of course, an implicit element of the noble Lord's amendments that the funding formula would remain in place. That is in line with the Government's approach. We have made clear that we want to retain the formula as a prudential measure, but to operate it with flexibility so that Channel 4 can retain significantly more of its revenue for programmes.

A key word here is "flexibility". We do not think it right to seek to determine at this stage the possible level of Channel 4 payments to Channel 3 companies two years or more from now. Nor is it, in our view, wise to rule out all possibility of further adjustment, either to those payments or to the payment of funds to the reserve, in the years up to and including 2002. Such an approach would be inconsistent with the need for flexibility in response to fast-moving developments in the broadcasting sector. The Government accordingly oppose the specific amendments which the noble Lord, Lord Thomson, has tabled.

As to timing, the noble Lord's amendment proposes changes to Channel 4 payments into the reserve and to the Channel 3 companies to take effect from 1998. I see no need to perpetuate Channel 4's payments into the reserve until 1998. At over £80 million the reserve represents a significant safeguard against a downturn in income. To respond to the noble Lord's particular anxiety, the Government's intention is accordingly to present an order to terminate Channel 4's future payments into the reserve shortly after enactment, to take effect as soon as possible.

The timing of adjustments to Channel 4's payments to Channel 3 is arguably more complicated. The noble Lord, Lord Thomson, proposes that new arrangements should come into effect from the start of 1998. That is the assumption underlying his earlier "gap year" amendment to which I have referred. It is also clear that it is a general expectation of the ITV companies that any new formula would come into effect from early 1998. The Government are not averse in principle to introducing changes from that date.

However, there is an alternative argument that no change should be introduced affecting any payment before the one to be made a year later, at the start of 1999. That is because Section 26(10) of the Broadcasting Act 1990 specifies that no order to amend the specified elements of the funding formula may be made before the end of 1997. Taking account of the lead times inherent in the formula, that would mean that the form of the formula contained in the 1990 Act would continue to apply until the end of 1998. If one follows that logic ruthlessly, the so-called "gap year" ceases to exist. Of course, the amendments which we propose do not apply to the specific elements in the 1990 Act formula to which I have referred, and there is no formal constraint. Nevertheless, the argument can be made that, based on the precise terms of the 1990 Act, any change to the funding formula should not affect payments before the one to be made at the beginning of 1999.

There is a balance to be struck here. On the one hand, the Government accept the concern that Channel 4's payments into the reserve and to Channel 3 have been higher than expected when the 1990 Act went through

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Parliament, and that early action should be taken to correct that. On the other hand, we recognise concerns expressed by the noble Lord, Lord Thomson, and widely echoed in the Chamber, at the prospect of a significant drop in Channel 3 companies' income from Channel 4 in the immediate run-up to digital investment and a year before they are able under the 1990 Act to apply to the ITC to renegotiate their licences. We must also remember that the payments under the formula are paid in the February of the year following the year for which they are calculated. It thus follows that the payment in respect of the year 1997 is paid in early 1998, and if there is a "gap year" in terms of cash flow in a calendar year, it can more accurately be said to be 1993, which was the year in which the Channel 4 arrangements in the Act came into effect, since no payments were made in respect of that year until 1994.

The Government's proposition is that we should proceed by a phased approach, which would seek to meet the interests both of the Channel 3 companies and of Channel 4. As a first step, we should seek to make an order on enactment to end Channel 4 payments into the statutory reserve with immediate effect. To put that into perspective, Channel 4's payment into the reserve for 1995 was £37 million. If our proposed order is agreed, the effect will be that in respect of the payment relating to 1996 and later years Channel 4 will have more revenue to apply to programmes. In effect, the gain as against earlier expectations will be equivalent to two years' payments into the reserve.

As a second step, we propose to introduce reductions to Channel 4 payments to Channel 3 in two phases. The first reduction would take effect from 1998; the second would take effect from 1999. It is too early to say what the new levels would be, but we have indicated that we expect significant adjustment in Channel 4's favour, and we are taking powers which would in principle enable us--if we so judge nearer the time and Parliament agrees--to reduce Channel 4 payments to Channel 3 to zero from 1999. Whatever the final level, there would be a stepped reduction towards it from 1998.

We believe that that phased approach will help to cushion the impact on Channel 3 companies of a reduction in their funding from Channel 4. At the same time, it should prove significantly positive in net terms to Channel 4, not least because uncovenanted gains from early capping of the reserve are likely to outweigh any phased payment to the Channel 3 companies in 1998.

I hope that that fairly full explanation of the Government's thinking has proved helpful. It is intended to find a way forward which is fair to all concerned.

Lord Birkett: My Lords, before the Minister spoke I had intended to say how strongly I support the amendments. How much happier I am to rise and say that what the Minister said is enormously encouraging. I hope that after the very helpful things that he said he will not think it churlish of me to remind him that the ITC view is that the funding should come down to zero from the beginning of 1998, exactly as proposed by the noble Lord, Lord Thomson, in his amendments. I confess that that is what I would have preferred. Since

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it is also what the ITC recommends, and since it is very much up in the air how the phased reduction in payments will work, I urge the Minister to consider very carefully whether he will not take the advice of the ITC and make the amount so small by the end of 1997 and the beginning of 1998 as to make no difference whatever.

When I said that I hoped that the noble Lord would not think me churlish I was simply going to say that the ITC is, after all, the generally acknowledged watchdog in this area of communications. I intended to remind him of the old adage that one should not keep a dog and bark oneself.

Viscount Astor: My Lords, I congratulate my noble friend the Minister on coming up with a very ingenious solution. It seems to me that he has gone a long way to solving the conundrum which was highlighted by the noble Lord, Lord Thomson, in discussion on an earlier amendment in relation to the gap of a year between the Channel 4 funding finishing and the ITV companies renegotiating their licences. My noble friend has come up with an ingenious solution. I think he is entirely right. We cannot tinker with any part of the formula without considering the problem as a whole, which he has done. It is an extremely good solution. I recommend it to your Lordships. I hope that the noble Lord, Lord Thomson, will feel able to withdraw his amendment as a result of my noble friend's announcement.

Lord Burnham: My Lords, the Minister gave an indication earlier that he would surprise the House with something that he might say with regard to the amendment. He has duly done so. However, one point worries me. The Minister may not be able to answer the question at present. What will be the balance as regards release of moneys to Channel 4 between the uncapping of the statutory reserve a year earlier and the moneys which the ITV companies will still receive from Channel 4?

I agree with my noble friend that everything the Minister said seems extremely helpful. We shall have to consider the matter more carefully when we see it in writing. I cannot speak for the noble Lord, Lord Thomson. It may be necessary to return to the issue at Third Reading, although it may not be traditional so to do.

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