BBC governance: widening faultlines strengthen the case for a commission of inquiry

The electrifying first session of our public service broadcasting symposium on June 10th takes on even greater resonance in a week that has seen the publication of a series of key BBC documents and a major speech from the chairman of the BBC Trust, Sir Michael Lyons. David Elstein explains why.
David Elstein
12 July 2010

The electrifying first session of our public service broadcasting symposium on 10 June takes on even greater resonance in a week that has seen the publication of a series of key BBC documents and a major speech from the chairman of the BBC Trust, Sir Michael Lyons. David Elstein explains why.

Monday 5 July saw the publication of the BBC’s Annual Report and Accounts, along with the initial response of the BBC Trust to BBC management’s Strategy Review. The previous week, the Trust’s chairman, Sir Michael Lyons, gave a speech to the Voice of the Viewer and Listener (VLV), which can be found on our PSB Forum website. Taken together, these give us a real insight into fault lines within the BBC that can be traced back seven years, to two key decisions made by the Labour government: the creation of Ofcom and of the BBC Trust.  


Ofcom was explicitly a converged regulator, straddling two departmental jurisdictions – culture and industry – by combining telecommunications and broadcasting within its portfolio. The theory was that these technologies were converging, and so required a single regulator, which was created in 2003. As it has turned out, there has been very little regulatory convergence, and Ofcom spends most of its time on telecommunications and economics. Meanwhile, broadcasting responsibility was divided. The BBC fought a successful battle to be almost completely excluded from Ofcom’s overview. As a result, Ofcom’s statutory duty to monitor public service broadcasting has been largely ineffectual, given that over 90% of all money spent on PSB is by the BBC.


The second decision was to respond to criticisms of the old BBC Board of Governors – that they were both regulator and cheerleader for the BBC – with the creation of the BBC Trust in 2007, with a specific duty to protect the interests of licence fee payers rather than the BBC itself. The Secretary of State, Tessa Jowell, resisted the urgings of her own advisory committee, chaired by Lord Burns, to make the Trust a PSB Trust, allowing it to allocate licence fee money outside the BBC if it so felt fit. The result has been that whilst PSB outside the BBC has been withering, there has been a grinding of gears within the BBC as the Trust has tried to emphasise its separateness from BBC management. Adding to the structural pressure has been steady political criticism of the Trust for still not being sufficiently distanced from management (from both Labour and Tories) and of Ofcom for being too pro-active (from the Tories).


The specific areas of attack by the Tories – apart from the very existence of the Trust and its ability to keep BBC expansion in check – have been BBC salaries and talent costs. As we heard at the Forum's symposium, the BBC has been edging a retreat on these fronts, but far too slowly for the likes of Tessa Jowell, who accused BBC executives of wanting the benefits of the private sector (that is, pay comparability) with none of the risk. The BBC froze Executive Board pay, suspended bonuses indefinitely, pledged to cut £25m out of the £79m annual cost of the senior managerial grades, and declined to renew the eye-popping contract for Jonathan Ross. But that satisfied neither the politicians nor the Trust.  


One section of the Lyons speech which was – reportedly – hotly contested before delivery was precisely on executive and talent pay. It seems that Lyons’ desire to have top talent payments published – as has been the case with top managers for years – was strongly resisted by Mark Thompson, BBC Director General, so a last-minute compromise was struck, whereby bands of pay would be published along with the number of individuals in each band and the names of the highest earners.


Why the dispute? Thompson argues that publishing talent pay when no competitors do likewise might put the BBC at a disadvantage. Yet RTE has been publishing the specific salaries of its top ten presenters for the last 8 years (as Helen Shaw told our PSB Symposium last month), without any apparent negative consequences. The two most recent talent losses suffered by the BBC – Adrian Chiles and Christine Bleakley, both from The One Show – saw dramatic pay increases offered by ITV, rather than “a fiver above the published level”. Any agent worth his salt will try to use leverage to increase a client’s pay: and any BBC competitor determined to poach talent will quickly establish current levels of reward. It is improbable that “confidentiality clauses” can be – as Thompson has asserted – at the heart of his resistance: all the BBC has to do is inform its presenters that any future deal requires publication if it is above a certain level – take it or leave it.  


More likely, the BBC (and perhaps some not very effective agents) may be nervous that, if the top levels of reward are published, some disgruntled presenters may realize how far down the pay pecking order they are, and attempt to drive costs up. Yet it is surely not beyond the wit of BBC managers to handle pay relativities, even amongst the most ego-driven individuals; and priding yourself on how “cheaply” you have secured certain talent on the quiet, whilst blowing £6m a year on Jonathan Ross, is scarcely the mark of an enlightened hirer.


It is hard to conclude that this is anything other than a fake issue. The cost of talent last year, at £221m, was down on the previous year, and constituted 6.4% of licence fee income. Nine years ago, the figure was £188m, which was 7.9% of licence fee income. In other words, whilst the BBC’s licence fee income has been rising at over 4% per annum, talent costs across a wider range of broadcast outlets have risen by less than 2% per annum.


Lyons was also keen to announce that he had persuaded the BBC’s Executive Board, not just to freeze pay and forego bonuses, as previously announced, but also take an 8.3% pay cut (which would also apply to Trust members): all in the interests of delivering better value to the licence fee payer. This marked an interesting shift from the BBC’s position at our symposium, where “cuts in real pay” (that is, a freeze whilst inflation eroded value), benchmarking at heavy discounts to the commercial sector, and lower salaries for future hires had been offered as meaningful sacrifices, but had failed to impress. Again, as Helen Shaw pointed out, RTE’s Director General had agreed to a 25% salary cut, under similar pressures. If we analyze Executive Board pay in 2001 and 2010, we discover the average has risen from £257k to £477k – a rise of more than 7% per annum, far outstripping the rate of increase in licence fee income.  


If we accept that it was Lyons who finally drove through an actual cut in pay for the Executive Board, and who has led the charge to reduce the size and cost of the senior management tier, we can understand why one manager was quoted in The Daily Telegraph as describing Lyons as a buffoon who imagined he was delivering Meals on Wheels in Birmingham (Lyons built his career in local government in Birmingham).  


The result of the election has exacerbated the tensions at the top of the BBC. The Trust had been threatened with abolition by the Conservatives, prior to the election, and certainly its chairman, whose contract only runs to April, must fear being made a sacrificial lamb, even if the Trust is allowed to run the course of the present BBC Charter, which expires in 2016. But Lyons must also be calculating that demonstrating more distance from BBC management could restore the Trust’s credibility. Rejecting the management proposal, in March’s Strategy Review, to close Radio 6 Music, was the most newsworthy of the Trust’s initial responses to that Review; yet, more significantly, Lyons also cast doubt on the Review’s estimation that as much as £600m could be re-directed from within the BBC’s budgets to improve the distinctiveness of BBC output.


Reading the BBC’s Annual Report, it is impossible not to be bemused by the account from Zarin Patel, Chief Financial Officer, of how a 5-year programme of efficiencies will deliver nearly £2 billion of cumulative savings. Actions taken so far have “saved” £553m in 2 years, at a “cost” of £85m. These actions will continue to “save” (in remarkably precise estimates) £404m in the current year (BBC years run from April to March), £480m in the following year and £548m in 2012/3. Allowing for the “costs” of “savings” (redundancies, new equipment, and so on), the BBC will need to find a further £500m of “savings” by 2013 to reach their £2 billion target. The confidence that such savings will be found is only slightly less dismaying than the assumption that they are there to be found.


The breakdown of the “savings” so far is illuminating. 13% is from using fewer and cheaper staff and talent (total staff actually reduced by just 52 last year, from 24,038 to 23,986); 29% from using improved technology in production; 23% from better procurement, including outsourcing; 7% from modernisation of property and (again) technology; and 28% from switching budgets from “lower value” programming to “higher quality” programming (how that “saves” money is unexplained). In truth, we have seen such campaigns many times before, yet the cost of the BBC never actually reduces. If the Trust is sceptical about the Strategy Review’s promise to release £600m by 2013 to improving programming, why does it nod through these exercises in number-juggling?


Interestingly, the BBC is currently targeting spending at least 80% of the licence fee on “content” (or 90% on content and distribution, with no more than 9% on overheads). If we take the most restrictive definition of overheads in the accounts of £406.3m – so excluding such items as £79.5m on press and marketing – these currently represents 12.4% of total spending on UK licensed services. The content budget last year was 76.6% of that spending: so the 80% target is quite a stretch. Yet the BBC claimed to be spending 81% of the licence fee on “content” (as opposed to overheads and distribution) as recently as 2001 (when the target for 2004 was 85%!). What has happened? Ms Patel does not tell us.


I was checking the 2000/1 costs because Ms Patel had cited that year as one where collection and evasion cost 14.4% of the licence fee, as opposed to the current 8.7%. In fact, the 2000/1 report refers to the evasion rate as 5.2% (exactly the same as this year’s). The cost of collecting the licence fee in 2000 was actually £132m – slightly more than this year, but of course a higher percentage of total licence fee revenue in that year. So the correct total for collection and evasion in 2000 was 10.8%, not 14.4%. Perhaps Ms Patel will explain.


But the figures in relation to the licence fee reveal something else much more surprising. The BBC records 25.459m TV licences. Of these, 14.396m (68%) are paid by direct debit. A further 4.088m are paid by the government (on behalf of the over-75s). That leaves just 6.775m having paid in response to TV Licensing (the BBC’s collection arm). But a 5.2% overall evasion rate implies that there are 1.492m evaders, who comprise 18% of the 8.267m households (6.775m plus 1.492m) not locked in by direct payment. Those people who were shocked by the BBC’s sinister “we know where you live” anti-evasion campaign, and the figure of 168,000 evaders prosecuted in 2008/9 (nearly 30% of all non-motoring summary prosecutions), will find it somewhere between comforting and alarming that just 11.3% of evaders appear to be successfully pursued. The cost to the BBC of evasion has risen by 46% in the last 10 years. 


It seems that the licence fee – like inheritance tax – is a “voluntary” payment, made by those who either value the BBC, or don’t like to be lawbreakers, or can’t be bothered to fend off what turns out to be hollow threats of prosecution. If all the evaders were actually prosecuted, our courts would be completely swamped – their numbers exceed the entire total of prosecutions for all indictable and summary offences. The BBC, of course, does not pay for court costs.


Another stunning fact to emerge from the Annual Report is the deficit in the BBC pension fund, which is so large that it has actually pushed the BBC’s balance sheet heavily into the red – I suspect for the first time in its recent history. New assumptions about bond returns and future inflation rates – the kind of snapshot that all pension fund trustees have to take every year – triggered a deficit of £1.647bn, a vast change from last year’s £143m. It could have been worse – the negative movements of over £3 billion were partly offset by an improved investment performance; and the combination of contributions to the scheme and investment returns still exceeds payments to pensioners. Notably, the pension fund had a surplus of £1.7bn just 9 years ago, when even the most senior BBC executive’s pension pot rarely exceeded £500k. Today, pots of £3.5m reflect the surge in earnings in the last decade, amplified by the huge BBC contribution to pensions – until recently, three times larger than the individual’s.


The potential burden of the historic pension liability has already forced the BBC in 2006 to close its “final salary” scheme (such schemes are inherently at risk of being unfunded, compared with “defined benefits” schemes, where pensions are a direct product of actual contributions). Last week, the BBC dramatically reduced the potential benefits to existing “final salary” scheme members, by imposing a 1% annual limit from now to retirement on notional salary increases, irrespective of actual increases and promotions. Also, in future, BBC contributions will only match individual contributions. Experts predict that this will reduce pension payments by up to two-thirds in due course – a drastic step clearly designed to drive existing “final salary” people to switch to “defined benefits” schemes.


Of course, this will leave untouched today’s high earners. Such unfairness will cause additional resentment amongst junior BBC employees, and the consultation on the new pension proposals may result in a decisive rejection. Perhaps that is what BBC management would welcome: evidence for the new ministers that they are attacking public sector privilege. Yet Sir Michael Lyons may be out-flanking management in this direction, suggesting in his VLV speech and interviews afterwards that the BBC may not seek an increase in the licence fee for 2012: after all, why should the BBC be immune to the cuts that will affect great swathes of the public sector?


However, those listening closely to Tessa Jowell at our June Symposium will also have heard that she was disappointed at how the Trust had not moved quickly enough from being the BBC’s regulator to the licence fee payers’ champion. She seemed to regret rejecting the proposal from the Burns Committee to make the Trust the “Public Service Broadcasting Trust”, with the right to allocate licence fee funds on a contestable basis. As the symposium heard from Helen Shaw, this is the structure that the Irish government chose. Now, Secretary of State Jeremy Hunt is rumoured to be pressuring Sir Michael to agree to a change in name for the BBC Trust – to the “Licence Fee Payers’ Trust”.  


This would create even greater separation between the Trust and the BBC: but it would also beg the question as to how the BBC should be regulated, anyway. There is an opportunity to correct the structural errors in the division of responsibility between Ofcom and the Trust. Belatedly, the idea of a contestable element in the licence fee was championed by Labour in its attempt to divert the surplus within the licence fee that had been earmarked for digital switchover costs to underpinning regional news on ITV.


Unfortunately, the delay in pushing through the necessary legislation, and the fierce resistance from both the BBC and the Tories, put the scheme to create Independently Funded News Consortia at severe risk. It was finally halted by Jeremy Hunt last month. Instead, he plans to use the same cash pot to roll out broadband to rural areas. The BBC’s Annual Report, in revealing that £132m of the digital switchover surplus is to be returned to the government, says through gritted teeth that it was now up to the government as to how to spend the money: but it hoped “the funds will be used for purposes not inconsistent with the purposes of the licence fee”.


This put me in mind of the unforgettable words of Emperor Hirohito, broadcasting to the Japanese people after the atomic attacks: “the war has developed not necessarily to Japan’s advantage”. Tessa Jowell warned at our PSB Symposium that the BBC faced the fight of its life. What we are witnessing is an even larger struggle developing: how to regulate the BBC, how to defend public service broadcasting, and what to do about the licence fee. The call from Richard Collins for a Committee of Inquiry into the future of public service content could not have been more timely.

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