BBC RESPONSE TO CULTURE, MEDIA AND SPORT COMMITTEE'S DETAILED OBSERVATIONS ON BBC 2002-03 ANNUAL REPORT

  Last November the Culture, Media and Sport Committee wrote to the then Chairman of the BBC, Gavyn Davies, making recommendations on how the BBC's Annual Report and Accounts could be made clearer. In this document we set out the BBC's response to these recommendations.

1.  The Committee found some difficulty in assessing the performance of the BBC against its objectives given that some were unspecific, some not readily measurable and some incremental without reference to the adequacy of current levels of activity. As discussed at the evidence session, we had some concerns over the statements within the Governors assessment such as reference to "a year of strong BBC performance" without accompanying reference to measurable achievements against specific objectives—especially qualitative and quantitative comparisons with other broadcasters (beyond comparative reach and share).

  The Governors' own review of the 2002-03 Annual Report led them to decide that there should be significant changes in their assessment of performance against objectives in future annual reports, much along the lines identified by the Committee. This section in the 2003-04 Report is more objective, more data-based and, where appropriate, more critical than last year.

  The objectives for 2004-05, published in this year's Annual Report, are focused on major pan-BBC priorities while the individual channel, service and genre objectives (as well as tier 2 and 3 commitments) are contained within the SoPPs. The measurable commitments and criteria by which the performance of BBC services may be judged are therefore now to be found in the SoPPs.

2.  It would be helpful if the report could include a clear statement of what the BBC needs to do in order to be achieving its public service remit and providing the added value compared to other broadcasters. The Chairman stated in the report that the BBC needed to provide a "richer and more ambitious" package than the commercial sector. This is clearly a reference to the BBC's vision but it would be helpful if clearer criteria could be set out against which the effectiveness of the Corporation in achieving this distinctiveness can be judged.

  The Governors agree with the thrust of this point and the 2003-04 Report goes further than previous Reports in reporting on the performance of each BBC service against its public service remit (as set out in the Statements of Programme Policy for 2003-04 published in April 2003).

  In Building Public Value the Governors outline plans for a new and comprehensive framework for the scrutiny of BBC services based on four key performance metrics—reach, quality, impact and value for money. In future the Governors will grant each public service a "service licence" which will set out the remit and performance targets that they expect to be met and the budget they have agreed for the service. Their performance against this licence will be monitored annually and the Governors will undertake comprehensive reviews of all services on a rolling basis.

3.  We would suggest that the use of more comparators to illustrate and analyse the BBC's use of resources, output and performance compared with other broadcasters (both TV and radio) would be helpful. In the same vein, we believe that this may be a useful tool (for internal and external scrutiny) for the future.

  We agree. In the 2002-03 Annual Report and Accounts, certain tables, or information within tables, were removed from the facts and figures section of the report. These have been reinstated in the 2003-04 report.

These are:

—  the competitor information in tables 1 and 2, 15-minute weekly reach by service and platform and Share by service and platform. Digital homes data for 2002-03 has been restated due to Freeview homes not being included in the digital definition last year;

—  the table detailing Range of peaktime UK-made programmes on network television (table 9). This table compares the BBC to ITV, Channel 4 and Channel 5; and

—  the table detailing Comparative cost per household of viewing/listening per hour. This table compares the cost of the licence fee with other forms of entertainment for each hour of viewing or listening (Sky family package, all pay television and video hire) (table 3).

4.  We recognise that the targets from the BBC's Statements of Programme Policy will be a matter for development in line with forthcoming Ofcom guidance. For our purposes, we believe that these could usefully be reviewed in terms of: a clearer correlation with the BBC's objectives; increased specificity, measurability and tackling the vaguer instances of bare incrementalism. Some of these targets also seem to be relatively undemanding and this raises a potential question mark over their usefulness (for instance we note that in 2002 Channel 4 exceeded all of BBC's Two's quantified Statements' targets and a majority of BBC One's). We suggest that it might also be useful to check performance against the Statements by external, as well as internal, audit.

  Ofcom published its consultation paper on Statements of Programme Policy (SoPPs) on in June, therefore the BBC's approach to SoPPs has not yet been informed by Ofcom's guidance.

  The BBC's SoPPs for 2004-05 are more detailed, more factual and more measurable than in the prior two years. In addition, the report on performance against the 2003-04 SoPPs in the 2003-04 Report is significantly more thorough than in last year's Report. The Governors' Review of Services (pages 24-67) is specifically a review of performance against SoPPs—and contains both quantitative and qualitative evidence.

  As to the specific hours commitments by service, these are floors, not ceilings. The commitments indicate that each channel or network will deliver programming of that type. They say nothing about quality and range within each genre. The BBC is committed to providing something for everyone. For example, in current affairs, BBC One offers "Real Story" and "Panorama". On BBC Two, it offers international current affairs through "This World". Licence Payers want to know that their needs are being met and they cannot determine that from a simple commitment to hours. The SoPPs for 2004-05 demonstrate a more sophisticated approach through their clarity and specificity. It is worth noting that the minimum requirement for news on BBC One has been increased in this year's SoPP from 570 to 1,380 hours. More importantly, they are an improved mechanism for holding the BBC to account.

  The comparison of BBC Two's targets with Channel 4's performance is interesting. BBC Two outperformed Channel 4 on every relevant indicator in 2003-04 except hours of religion, since the BBC concentrates its religious programming on BBC One. It could be argued that the outcome is more relevant than the target. It is also true that Channel 4 outperforms some (but certainly not all) of BBC One's targets. But BBC One's performance is significantly ahead of Channel 4's in many PSB genres. That said, the overall perspective is that since these channels have different remits, and audiences have different expectations of them, such comparisons are rather invidious and of limited value.

5.  We note that the report contains four targets relating to financial efficiency (under objective 8): licence fee collection; commercial activities; central overheads; and programme production costs. The first three targets are reported upon but relate to relatively small potential gains in comparison to the BBC's spending on production. Licence fee evasion currently represents £200 million (and improved collection must be subject to diminishing returns); the return from commercial activities was £142 million; and central overheads were £347.5 million. On this last point, we note that overheads were reduced by 2% during 2002-03 to 13% when measured as a proportion of increased expenditure on output. However, the absolute gain on 2001-02 was £1.5 million (or 0.43%). It would be helpful for future reports to explain the relationship between output and central overheads in more detail.

6.  The target to improve the efficiency of programme production while maintaining quality does not seem to have been reported on explicitly despite its obvious importance. Programme production is the BBC's core activity representing £2,378 million in 2002-03. The Governors' set out their awareness of a need to benchmark production costs and review effectiveness-based, value for money measures of performance. We believe that a statement of the progress of these initiatives would be extremely helpful in the 2003-04 report. We note from tables 2b and 7 in the report, that bald fact that the costs BBC1 and BBC2 output in 2002-03 was 17-19% greater than in 2001-02. This may be an occasion when comparative figures for other broadcasters, if available, would be useful. The ITC for instance, records that the programme budget for BBC1 exceeded that of ITV1 by between £100-200 million in 2001, 2002 and 2003.

  Objective 8 for the BBC in 2004-04 was to "Continue to increase the amount of money available to spend on the BBC's public services by enhancing the efficiency and effectiveness of the way the BBC operates".

  In discussing the performance of this objective, the Governors state that the BBC is making steady progress towards the target of putting an additional £3.3 billion into services through self-help initiatives between 1999-2000 and 2006-07. This target obviously includes significant savings in production costs, but it will be important to demonstrate, to the Secretary of State's satisfaction, that all aspects of this target are met, by the end of the Charter.

  The Governors also note in 2003-04 the improved efficiency of licence fee collection (evasion reduced to 5.7% from 6.7% in 2002-03), something which John Bourn praised in the recent NAO report on licence fee collection; increased cash flow from the commercial businesses (increased to £135 million from £124 million); and additional savings made in support costs (£29.3 million).

  The Governors do not go into more detail on the production efficiencies in this Annual Report but the BBC recognises that this is an area where a renewed push towards world class levels of efficiency is urgently called for.. The Governors detail the key challenge ahead—improving the efficiency of production processes and in particular the benchmarking of production costs. The Governors note that progress in this area has not been as rapid as expected, but state that a new Head of Value for Money has recently been appointed who will lead the review of these and other internal costs.

  This initiative is one of the four key reviews announced by the Governors, as part of a package of reforms associated with the renewal of the Charter.

  The financial review (p 98) explains the major movements in spend year on year, in both programme and overhead spend. Central overheads total £325 million, with a £4 million increase since last year due to the acceleration and early completion of a major IT project and short-term migration costs as the new Media Village buildings are occupied. There is therefore little relationship between changes in output spend and in central overheads as the latter tend to change as a function of central initiatives.

  Note 2b in the financial statements shows that spend on BBC One and BBC Two fell in 2003-04 compared to 2002-03. There are now a range of explanatory footnotes on page 110 on the movements in spending, between financial years, on each service. The movement in spend on BBC One and BBC Two is due to coverage of major sporting events in 2002-03, such as the Football World Cup and Commonwealth Games.

  We are keen to include comparisons with other broadcasters, but those other broadcasters do not want to disclose the information to allow us to do this. We will, however, renew our attempts to secure data from them as part of our VFM programme.

7.  Regarding cost targets in general, we believe the report would be enhanced by more information about and from, the BBC's internal financial performance measure and indicators to provide a comprehensive picture of the BBC's financial performance.

  The annual report currently contains most of the financial performance measures and indicators used internally in the "Broadcasting facts and figures" section of the report. These measures include: network television hours of output, radio hours of output, monthly bbc.co.uk and BBCi reach, monthly bbc.co.uk page impressions, cost per hour of originated programmes, distribution costs, cost per hour of originated programmes by genre, and creative spend outside the BBC. As noted previously, objective 8 also details the "self-help" target of £3.3 billion and the progress in meeting this by 2006-07.

  The other main measure of internal financial performance is comparison to the budget. It is not considered appropriate to disclose details of the BBC's internal budget in the annual report and accounts. However in Spring 2005, the Governors will grant service licences for each BBC public service which will specify the budget of each service, as well as its remit and performance targets.

8.  Some information on the report is presented oddly such as the increased expenditure on programmes. An outturn increase of expenditure of £616 million in the two years to 2002-03, against an expected increase of £450 million, is set out solely as an achievement. This presentation raises a potential question mark over the BBC's planning function and cost control system. Some further details of the value achieved from this extra "investment" would be helpful.

  We endeavour to provide the licence payer with an understanding of the movements in spending, cash etc, but appreciate that sometimes the explanations we have provided in the past have not been completely satisfactory. We have learnt from this. We agree that last years explanation for the increase in spending could have been fuller.

  The increase in spending from the amount planned in the strategy of 2000—£452 million to £616 million shown in last year's report was simply due to inflation. The £452 million figure is at 1999-2000 price levels and adding four years of inflation increases this figure.

  In the 2003-04 Annual Report and Accounts, you will see in the Financial Review and in the detailed note on the UK Public Service Broadcasting Group expenditure (note 2b) the following:

—  We have sought to refine the allocation of overheads.

—  The proportion of spend on programmes has remained at 88%, although overheads total £325 million, with a £4 million increase due to the acceleration and early completion of a major IT project and short-term migration costs as the new Media Village buildings are occupied. This, of course, means that inflation in overheads has been absorbed.

—  Of the total of £2 billion spent on transmitted programmes, 85% is spent on analogue output and 15% on digital output.

—  Overall spending on programmes fell by £38 million. This is mainly due to 2003-04 being a year low on major sporting events. Other than this, spend on analogue services stayed level. Spend on digital services did increase in 2003-04 and this is due to the new digital services, BBC Three, 1Xtra and BBC 7, having their first full year of broadcasting and their spend increasing accordingly.

July 2004