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Viscount Astor: My Lords, I support the argument put forward by my noble friend Lord Crickhowell. As he said, we are now in the third round of this debate. If that proves anything, it proves that my noble friend the Minister, by giving two substantial concessions to Channel 4, instead of making it absolutely satisfied, aroused in Channel 4 an appetite for more and more. To give more would be a mistake. The amendment of the noble Lord, Lord Thomson, seeks further to amend the Government's compromise amendment. I believe that the Government's compromise has balanced the interests between ITV and Channel 4. Peace has broken out. There is no conflict any more.

It is right that we should not seek to prescribe precisely what the levels of the payment should be from January 1998, therefore allowing discussions to take place before the end of 1997. I share the Government's view that a review should be conducted at that time, when judgments can be made about the impact of competition. The noble Lord, Lord Birkett, said that he can see into the future more clearly than we could in 1990. He may be right. He may have a better crystal ball than us. But I have to say to the noble Lord that Channel 5 will come before us and the experts in the industry say that by the year 2000 it could be taking 7 per cent. of the revenue. We know that satellite and cable will expand rapidly and the Government say that digital and satellite will come before us very quickly. It is important that the Government should maintain flexibility. The Government made substantial concessions to Channel 4. We do not know what will happen. No one will lose anything by retaining this flexibility. I therefore urge your Lordships to reject the amendment.

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Baroness O'Cathain: My Lords, as the noble Lord, Lord Thomson, said, we had full and frank debates on the Channel 4 funding formula during the Committee and Report stages and as a result the amendments tabled on that issue were withdrawn. At the same time the Government announced that they would cap Channel 4's reserve fund, thereby increasing its programming budget by at least £30 million or by 10 per cent., and that they would review the formula in 1997 with the intention of reducing the money received by ITV. In the light of that it seems to me that Channel 4 has already done very well out of the contribution to the debate in your Lordships' House and I would therefore urge your Lordships to hold back from giving Channel 4 any further concessions.

My main reason for this seemingly hard line is that, as the Broadcasting Bill reaffirms, the present formula was designed to remain in place until 1998, when it could be amended following a review in 1997. It should really be at that point and not before that the exact levels at which the formula should be set for the future are debated. We really will, as many noble Lords have said, have a clearer idea by the end of 1997 of the impact of Channel 5 and of the growing importance of cable and satellite.

The amendment tabled by the noble Lord, Lord Thomson, obviously pre-empts the end of 1997 review by specifying the precise amount of money to be received by ITV. It has been clear from the outset of this debate on the funding formula that it is only one part of a very complicated web of funding arrangements which sustain both Channel 4 and ITV. Any change to any part of the arrangements could therefore have a serious and damaging impact on the UK's commercial television sector. I honestly do not believe that it is good practice to fiddle with one part of a contract, if one likes, while leaving the other untouched.

The intention of the amendment is effectively to bring forward the 1997 review without giving due consideration to the many factors at play. That could result in a decision being made in this House that would damage the quality of service provided to viewers. Noble Lords will remember that in Committee I pointed out the apparent disinterest of Channel 4 to spend its increased programme budgets on UK material, preferring instead to invest in cheap US programmes. Since that date I have had a letter from the chief executive of Channel 4, Mr. Michael Grade. He says,

    "You may not know that the Board of Channel 4 has committed publicly to spending every penny of its revenues released by abolition"--
that is abolition of the funding formula--

    "on British film and television production (and training). The whole purpose of redressing the funding formula iniquity is to substitute home grown for imports".
Despite that, like my noble friend Lord Crickhowell, I support the amendment produced by my noble friend the Minister. Channel 4 has the assurance that the review will take place at the end of 1997 and we should wait until then. Therefore, I urge your Lordships to reject the amendment.

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6.30 p.m.

Lord Inglewood: My Lords, the noble Lord, Lord Thomson of Monifieth, explained that his amendment to Clause 71 aims to provide on the face of the Bill that Channel 4 should make no further payments to its reserve and that the payment from Channel 4 to Channel 3 companies for 1998 should be set at 15 per cent. of Channel 4's income above the statutory threshold; and that no payments should be made for the four years thereafter. With your Lordships' permission, in my comments on this amendment, I shall also speak to government Amendments Nos. 18 and 19, which have been referred to and which cover related issues.

As I have explained on previous occasions, the Government want to retain the Channel 4 funding formula as a prudential measure but to operate it flexibly so that Channel 4 can retain more of its income for programming. I have indicated our intention to take early action to cap Channel 4's payments into the reserve, and Amendment No. 19 duly makes this possible. As to Channel 4's payments to Channel 3-- in effect, an insurance premium against the guarantee of minimum income payable by Channel 3, which will remain in force--I explained that the Government intend to proceed by a phased approach, with the first reduction taking effect from 1998 and the second from 1999. Our overall expectation is a significant adjustment in Channel 4's favour. Amendment No. 18, which I have tabled, will in principle allow a reduction in Channel 4 payments to Channel 3 to zero from 1999. This general approach is intended to establish a way forward which is fair to all concerned.

The amendment of the noble Lord, Lord Thomson, reflects the Government's thinking on continuation of the funding formula, on immediate termination of payments into the reserve and on the phasing of reductions of Channel 4 payments to Channel 3. I very much welcome this growing consensus on the way forward. But there is a significant difference as against the Government's approach in the proposal to set the precise level of Channel 4 payments to Channel 3 for each year from 1998 to 2002 on the face of legislation. The Government's view is that this approach is a mistake, for reasons both of principle and of practicality.

As far as the proposal to set a 15 per cent. payment for 1998 is concerned, it has been argued that it is necessary to establish certainty for Channel 4 now. I do not find this argument convincing. Even were we to establish a figure now, there would remain uncertainty for Channel 4 as to the actual amount of their payment for 1998. After all, that will depend on two variables which cannot yet be established. The first is the level of the total television revenues for the relevant year, which forms the basis for the threshold above which the formula comes into effect; and the second is the level of Channel 4's own revenues for 1998. For those reasons I believe that the arguments based on certainty are perhaps overdone.

In response to the point made by the noble Lord, Lord Birkett, I am not persuaded that 15 per cent. is necessarily the right figure. That will need to be established against updated estimates of television

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revenue, market and sectoral developments and other relevant matters nearer the time. That point was made by my noble friend Lady O'Cathain. For those reasons the Government are opposed to the proposition that Channel 4's 1998 payments should now be set at 15 per cent. on the face of the statute.

The second limb of the proposal put forward by the noble Lord, Lord Thomson, is that Channel 4's payments for the four subsequent years from 1999 to 2002 should be established by statute at zero. As I indicated, the Government's own amendment would in principle allow zero payments from that year. But here also it is simply too early to take a final and definitive view of payment levels up to six years from now. Moreover, establishing the figures in primary legislation, as the amendment proposes, would rule out all prospect of subsequent adjustment in the years up to 2003 were that to be deemed sensible subsequently. Such an approach would be inconsistent with the need for flexibility to respond to fast-moving developments in the broadcasting sector. For those reasons the Government oppose this element of the amendment of the noble Lord, Lord Thomson, as well.

The Government recognise that it must be for Parliament to decide on the precise levels of funding to be established within the revised formula. That is why we have proposed that they should be set by order subject to affirmative resolution. Such an approach is wholly in line with the approach which Parliament adopted in relation to variations to the formula in the 1990 Act. It allows well-informed judgments about appropriate levels after proper consideration and consultation at the appropriate time. It is consistent with the need for flexibility, which is a key principle underlying the formula itself.

My noble friend Lord Stockton expressed some concern about the Government's policy. I can do no better than other noble Lords have done and refer to the second day of the Report stage of the Bill. With the leave of your Lordships, perhaps I may quote:

    "As a second step, we propose to introduce reductions to Channel 4 payments to Channel 3 in two phases. The first reduction will take effect from 1998; the second will 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".--[Official Report, 7/3/96; col. 443.]

The importance of that passage is that it is clear what our policy is. I appreciate that some noble Lords may not agree with it and might wish that it were something different. However, bearing in mind the appropriateness of Parliament taking a final decision, it is a perfectly proper way to proceed. It also indicates to the world generally what our policy is now. As I explained, we take the view that this is not the right time to decide a final figure for what might be a significant amount of money at some considerable time in the future.

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There is one final point I wish to touch on. It has been argued that we must finalise the amounts of funding now in order completely to clarify matters. I believe it is clear that the amendment of the noble Lord, Lord Thomson, would not achieve that because of the very nature of the formula we are talking about which contains a number of variables that interrelate. As my noble friend Lady O'Cathain said, that in turn is part of a wider matrix of the funding arrangements for Channels 3 and 4 broadcasters.

As regards Channel 4 funding arrangements, we have put forward a proposal, supplemented by the amendments I have now tabled, which, we believe, as my noble friend Lord Crickhowell, acknowledged, attempts to strike a balance between all the relevant interests and retain sufficient flexibility to establish fair figures. It is for those reasons that I hope the amendments will commend themselves to your Lordships.

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