119.  The BBC has been funded by the licence fee since 1923 when the first wireless licence was issued. In 2005 a colour television licence costs £126.50 and a black and white licence costs £42.00. Although only those people who own a television receiving device have to pay the licence fee it is important to remember that the fee funds all BBC public service activities including radio and on-line.

120.  We believe that the licence fee system has been vital to building the strong and world renowned BBC of today. The reliability of the licence fee as a funding source, coupled with the fact that it makes the BBC independent of commercial considerations, has enabled the BBC to develop the programming and services on which its reputation is based. However, we believe that nothing, however well regarded, should be exempt from analysis and we therefore ask whether the licence fee remains the best method of funding the BBC. We also note that the last licence fee settlement (agreed in 2000) was 1.5 per cent above retail price inflation (RPI) annualy and the BBC's most recent licence fee bid is RPI+2.3 per cent annually. Licence fee settlements above RPI should only be agreed if there are exceptional reasons to justify the fact that they exceed the rate of inflation (see para 200 for our proposals as to how the BBC's current licence fee bid should be handled). Many organisations are able to reduce growth in costs below the level of the RPI and there is no reason why the BBC should not be one of them.

The future of the licence fee

121.  Lord Burns observed that as competition grows for viewers and fewer people watch the BBC, it will become more difficult to defend the licence fee (Q 244). Sir Christopher Bland stated in his evidence that once the BBC's audience reach falls to 50 per cent then a "universal licence fee is really hard to justify" (Q 1046).

122.  These views were supported by Lord Macintosh of Haringey, who as Minister for Broadcasting at the time, stated that "support for the licence fee is in very considerable part based on the fact that a very high proportion of people watch the BBC and listen to BBC Radio and if in future that comes under threat from the growth of multi­channel television and radio, then the issue will have to be looked at again" (Q 128).

123.  However the licence fee has the advantages of being simple and straightforward. It is a generally well understood and accepted method of funding the BBC. Revenue created by the licence fee is stable and secure, more predictable than other means of funding, and allows for long term planning of its public services by the BBC. In evidence to us, Ofcom stated that an effective, strong, and independent BBC, properly funded by the licence fee, should remain the "cornerstone" of PSB (pp 98-99).

124.  The Government have stated that for the foreseeable future the licence fee will remain the best way of paying for the BBC. They propose that the licence fee will remain unchanged during the lifetime of the next Charter (Q 131). The BBC remains committed to the licence fee. It asserts that financial stability and freedom from commercial pressure allows it to invest in a wide range of quality and distinctive UK programming while maximising public value.[42] The licence fee is supported by all the terrestrial broadcasters and BSkyB. The House of Commons Committee stated that while the licence fee is "regressive and unfair on the disadvantaged in society, the evidence we received clearly indicates that there is no other viable and credible alternative which would ensure the current universality of access".[43]

The Government's proposals for reviewing funding

125.  The Government have proposed that during the course of the next Charter, towards the end of digital switchover, a review will be conducted to consider alternative funding methods for the BBC. (They also propose a second review to consider using public funding to support wider PSB including Channel 4's long term position. We consider this in paras 142 to 154.)

126.  Several of our witnesses opposed a review of BBC funding. The Public Voice coalition stated that an interim review would destabilise the BBC just when the Government expects it to lead digital switchover. The Producers Alliance for Cinema and Television (PACT), the UK trade association representing the commercial interests of independent media production companies, also rejected calls for a funding review. It stated that "The BBC should have security of funding for the period of the Charter to enable it to invest in new technology and content. Any review that resulted in reducing the licence fee could result in "short termism" on the part of the BBC management and bring uncertainty to the content supply markets" (p 251). The Broadcasting Entertainment Cinematographic and Theatre Union (BECTU) argued that a funding review would in effect create another Charter review in five years time (p 476). We note these concerns, but Lord McIntosh of Haringey assured us that it is the Government's intention that such a review will not result in any change to the funding method of the BBC before 1 January 2017 (Q 131). The BBC in its response to the Green Paper agrees that it makes sense to review its funding. However, partly because of its role in building digital Britain, it urges the Government to postpone the review until after digital switchover is completed.[44]

Alternatives to the licence fee

127.  We considered three alternatives to the licence fee: advertising, subscription and grant-in-aid.

ADVERTISING AND SUBSCRIPTION

128.  We found little support for the introduction of advertising (or sponsorship) on the BBC. Michael Grade told us that the BBC could not maintain its present level of services if it had to compete for commercial revenue through advertising and sponsorship (or subscription) (Q 34). All witnesses from the commercial broadcasting sector opposed advertising on the BBC. In evidence to us, Charles Allen, the Chief Executive of ITV, asserted that BBC entry into the advertising market would depress the advertising revenues that support PSB on the commercial terrestrial channels (Q 490). Equity argued that the option for viewers to withdraw from BBC services by not subscribing "could lead to a significant fall in income unless the cost of subscription increased, which may in turn exclude those on low-incomes who would be priced out of the market." Equity questioned how subscription finance could be applied to radio services (p 489).

129.  However, there was some support for subscription funding of the BBC. Mark Armstrong, Professor of Economics at University College London, argued that state subsidy was no longer required to ensure provision of PSB. He pointed to the BBC's own research that showed 80 per cent of its viewers would pay the licence fee as a subscription service (QQ 1066-1067). This position was supported by Professor Martin Cave, Director of the Centre for Management Under Regulation at Warwick University, who suggested that digital technology "would extend the possibility of subscription and …[would] extend the possibility for a much more efficient and comprehensive collection of licence fees" (Q 1086).

GRANT-IN-AID

130.  Direct grant-in-aid involves the Government giving public money directly to an organisation. Michael Grade told us that direct grant-in-aid would undermine the BBC's independence (Q 34). However, we note that the BBC World Service, which enjoys a well deserved reputation for quality and impartiality, has been funded by a direct grant-in-aid from the Government since its creation in 1932. The Canadian Broadcasting Corporation (CBC) also receives direct Government funding on an annual basis. However its evidence indicates that annual funding is problematic. CBC's funding is subject to changes in governmental priorities and is vulnerable to political swings. For example in the 1990's it experienced a 29 per cent real decline in its annual Government grant following a change in Government priorities (p 482).

131.  The experience of Canada suggests direct grant-in-aid funding, which is subject to short term changes, may force broadcasters to adopt more flexible and shorter-term employment and commercial contracts than would otherwise be the case. Programme development could also be undermined, with a focus on safe, tried and tested genres and formats, to the detriment of ambitious and innovative projects. Moreover, direct state funding would break the link between the licence fee payer and the BBC. The licence fee performs a valuable function in holding the BBC directly accountable to the public.

132.  We support the Government's proposal to review alternative funding methods for the BBC once the effects of digital switchover are clearer. We recommend that the system of funding the BBC until 2017 should be through a licence fee. We support the Government's decision to conduct an interim review of methods of funding but this should not be conducted until after the completion of analogue switch-off.

Evaluating and setting the licence fee

133.  When setting the licence fee the Government should consider the BBC's PSB mandate, its efficiency and the BBC's financial bid. The bid is determined by BBC management who are called upon to justify it in negotiations with the Government. Thus far, the BBC has made its licence fee bid without independent verification or external assessment. Currently, approval of the level of the licence fee, as negotiated by the Government and the BBC, is conferred though the submission of an affirmative instrument to Parliament. However, Parliament has no effective powers of scrutiny or inquiry concerning the process of determining the level of the licence fee as proposed by the Government.

134.  We believe that the process for granting BBC funding should be transparent and public. The House of Commons Committee thought so too.[45] The Government's response to the House of Commons Committee's recommendation said only that the forthcoming funding review will "take independent advice on a range of issues including the value for money of the BBC's existing services and will take account of the public's views".[46] In line with this commitment, the consultancy firm PKF have been appointed to provide the Government with expert advice on a range of issues including value for money of the BBC's existing services.

135.  On our visit to Germany we took independent evidence from the KEF (Kommission zur Ermittlung des Finanzbedarfs der Rundfunkanstalten) an autonomous body that uses 16 independent auditors to assess the funding needs of the two German public service broadcast networks. Herr Rainer Conrad, the Chairman of the KEF, told us that he makes recommendations on the level of the licence fee at 4 yearly intervals. In 1994 the German Federal Constitutional Court ruled that setting the level of the licence fee should not be a political decision because this compromised the freedom of broadcasting. The Constitutional Court therefore ruled that the Bundesländer (federal states) had to accept KEF's determination. However, the Minister President of a federal state can reduce the fee if s/he believes citizens will not be able to afford it (Q 1531).

136.  The AltmarkTrans judgement by the European Court of Justice in 2003 established that where enterprises receive public funding, the level of that funding must be clear in advance and must be objectively and transparently determined.[47] Funding should not exceed what is necessary to discharge public service obligations and, where provision is not the result of a public procurement tender, costs must be shown to be reasonable in comparison to a comparable commercial operation.

137.  An independent assessment of the BBC's financial requirements would insulate the BBC from potential political interference in its finances by providing an objective and non-political assessment. It would also inform parliamentary debates on the affirmative instrument that Parliament is asked to approve each time the licence fee is changed. In Germany this assessment is carried out by independent auditors. One body which could effectively and efficiently carry out this responsibility would be the NAO. Among the advantages of using the NAO, as opposed to a private firm, are: the NAO does not charge the Government for the work it undertakes; the NAO has a great deal of experience of working with public sector bodies; and the NAO has the full confidence of Parliament and the public. In chapter three we outline why we believed the NAO should have full access to the BBC for conducting value for money reviews. We recommend that the criteria used in setting the level of the licence fee should be open and transparent. The role of the NAO should also be expanded to include responsibility for assessing the efficiency of the BBC and evaluating its funding requirements when the proposed level of the licence fee is set. It should be given the access necessary to do this. The NAO should advise Parliament accordingly.

Collecting and enforcing the licence fee

138.  The Broadcasting Act 1990 gave the BBC powers to undertake licence fee collection. The BBC has sub-contracted licence fee collection to the company TV Licensing. Collection costs totalled £150.8 million in 2003/04 and amounted to 5.4 per cent of total licence fee income. Since 1991/92 the cost of collection has remained broadly unchanged. However, significant reductions in enforcement costs have been secured: these fell from 12.7 per cent of total licence fee income in 1991/92 to 5.7 per cent of total licence fee income in 2003/04.[48] In "Building Public Value" the BBC proposes to reduce further licence fee collection costs by increasing the number of direct debit payments from 55 per cent to 80-90 per cent and through paperless on-line licensing.[49] However, in Germany we heard that the collection costs for the German licence fee were 2.08 per cent.[50] We asked the BBC whether the German and UK figures were comparable. The BBC explained that a direct comparison is not possible as costs are considered differently in Germany. The BBC was unable to supply us with comparative costs because it has not carried out a comparative study of licence fee collection costs for nearly a decade. However we were told "the time seems right to revisit this work so, over the course of the next year, we will undertake a further study of collection costs and evasion through Europe" (p 443). We are pleased that the BBC has been stimulated by our inquiry to undertake such a study. We believe the costs of BBC licence fee collection and enforcement appear excessive and we recommend that the BBC continues to improve the cost efficiency of its licence fee collection and benchmarks its performance against other similar systems, such as that in Germany.

139.  Using television receiving equipment without the appropriate licence is a criminal offence subject to a maximum fine of £1,000. In 2003 a total of 96,872 people were prosecuted in the UK for licence fee evasion. No-one can be imprisoned solely for licence fee evasion. However, if an evasion fine is not paid, then magistrates have the power to impose a prison sentence. In England and Wales, 28 people were imprisoned in 2004 for non-payment of licence evasion fines (the average sentence was 14 days). In Scotland 18 people were imprisoned in 2004 (pp 476-458).

140.  We believe that non-payment of the television licence fee should be dealt with in the first instance by fixed penalty notice. We do not believe that prison sentences should be used to punish fine evaders. In 2002 the Government stated that "Court time spent dealing with minor offending should be freed up to deal with more serious crimes". With specific reference to the licence fee they said "We aim to pursue the extension of the fixed penalty system, and will consult on how this will work in practice".[51] Three years after this statement was made the Secretary of State told us that this matter is still under consideration (Q 1850). We do not understand why it is taking so long for the Government to come to a decision on this issue.

141.  We recommend that, at the earliest opportunity, non-payment of the licence fee should be decriminalised and brought into line with civil offences through the use of fixed penalty notices and civil court orders.

Funding PSB beyond the BBC

142.  The BBC is not the only public service broadcaster. All terrestrial television broadcasters have public service obligations in return for the Government allocating valuable analogue spectrum at below market rates, as an indirect form of subsidy. These obligations include independent and regional production quotas and a requirement to broadcast news, current affairs, religion, arts, education and children's programmes. However the value of the incentives provided by the Government is decreasing and it is therefore important to consider how to maintain a plurality of public service broadcasters in the future. Ofcom has suggested that if the BBC were to become the UK's sole public service provider, there is a risk that audience tastes would be conditioned by the commercial majority rather than the public service minority; and that producers, writers, editors and other talent would be heavily influenced by the needs of the commercial sector alone.[52]

143.  As audiences fragment across digital channels, commercial terrestrial broadcasters' share of viewing will continue to fall. This reduces the value of their air-time to advertisers. We heard evidence from both ITV and Channel 4 that the value of their analogue spectrum, in relation to advertising revenues, will decline until analogue switch-off (QQ 476 and 263). Ofcom foresees a time when terrestrial commercial broadcasters reject public service obligations, and the accompanying incentives, and choose to become entirely commercial digital broadcasters instead. Lord Currie of Marylebone, told us that if diversity in PSB is not addressed now, then "in ten years' time or even five years' time we will have a monopoly provider of public service broadcasting" (Q 470).

144.  This is why the Government proposes, towards the end of digital switchover, to review using public funding to support PSB beyond the BBC. There are three main ways in which public money could be given to support public service programming on advertising financed and commercial broadcasters:

a) an enhanced licence fee;

b) a "top-sliced" or "contestable" licence fee;

c) through a Public Service Publisher.

AN ENHANCED LICENCE FEE

145.  Ofcom recently proposed the introduction of an enhanced licence fee.[53] This would mean increasing the cost of the licence fee and distributing a proportion of the new income to eligible commercial public service broadcasters and/or Channel 4. It would require the public to accept paying more for their licence fee while still receiving the same amount of PSB as they do at the moment. We believe that it is very unlikely that the UK public will accept paying more for their television licence for a range of programming comparable to that they now receive.

A "TOP-SLICED" OR "CONTESTABLE" LICENCE FEE

146.  If increasing the overall level of the licence fee is ruled out, then another option is a contestable or top-sliced licence fee. A contestable licence fee would mean the public paid the same amount to support PSB but different broadcasters, including the BBC, could bid for some of that money to support PSB projects. A top-sliced licence fee is similar but, as its name suggests, the majority of the fee would be reserved for the BBC with a proportion sliced off for other broadcasters. Michael Grade told us that "top-slicing" the licence fee would undermine the BBC's accountability for use of the licence fee and weaken the link with the public (Q 35). Greg Dyke also cast doubt on this type of system. He referred to the danger to long-term planning of distributing money on a project-by-project basis (Q 398).

147.  ITV supported the idea of competition for licence fee funding and suggested distribution via a "public service fund", rather than by a stand alone body (p 119 and Q 489). The Satellite and Cable Broadcasters Group believed that "contestable public funding is the most appropriate way to achieve a plurality of top-quality providers of desirable content, and to ensure that the widest possible range of ideas and voices are made available to consumers" (p 237). Lord Burns preferred contestable funding to top-slicing (Q 244). He advocated a Public Service Broadcasting Commission that would coordinate direct funding of public service obligations from the licence fee (Q 226).

148.  We are not persuaded by either a contestable or a top-sliced licence fee. We are concerned that they would weaken the BBC's capability to produce a broad range of public broadcasting. There would no longer be one body accountable to the public for the use of the licence fee and this could weaken the public understanding of and engagement with PSB. We also note that the public value highly the lack of advertising on the BBC. If each public service broadcaster had only a proportion of the licence fee all would be likely to seek advertising to support its programming. This might result in the end of advertising-free broadcasting.

A PUBLIC SERVICE PUBLISHER

149.  Ofcom has proposed a free-standing and independent "Public Service Publisher" to commission and produce public service programmes directly to a number of broadcasters from funds provided by the licence fee or by general taxation (estimated at £300 million—about 10 per cent of current licence fee revenue). The Government have invited Ofcom to prepare further and more detailed proposals on the possible form of a Public Service Publisher. We think this is the right approach, more evidence is required about whether advertising funded broadcasters will cease to provide public service content and services and more evidence is required about possible new public service providers, some internet based, who might have a claim on public funding for provision of public service content.

150.  Gavyn Davies expressed doubt that a Public Service Publisher could produce a viable alternative to the BBC with so little money. He told us that the result may be expensive programming shown to small minorities and ignored by the vast bulk of the audience (Q 396). The Satellite and Cable Broadcasters' Group argued that the commercial, multi-channel sector is already supplementing the four designated Public Service Broadcasters by providing specialist factual, history, nature, and art channels (although we note some of the programmes shown by these channels are BBC products). It rejects Ofcom's Public Service Publisher proposal, which it believes will simply provide another publicly funded competitor to the commercial sector (p 237).

151.  We doubt that the Public Service Publisher will provide a sufficient degree of long term financial security for commercial PSB. We are concerned that it would incur significant transaction, legal and distribution costs with little return to the licence fee payer. Therefore, at this time we do not believe it is possible to support Ofcom's proposal.[54]

A NEW SET OF INCENTIVES FOR PSB?

152.  The plurality of PSB is currently supported by indirect subsidies and incentives for ITV, Channel 4 and Channel five. It may be possible to design a new set of incentives, fit for the digital age, to ensure these channels continue with their PSB activities. While in principle Channel 4 supported a measure of competition for the licence fee, its Chief Executive, Andy Duncan, told us that it would prefer the continuation of indirect, rather than direct subsidy from the Government (Q 274). Channel five supported this view and advocated a new compact between commercial broadcasters and the regulator (p 128).

153.  Channel 4 asked for three main forms of indirect assistance to secure its future. First that the BBC should fund digital transition costs, which Channel 4 estimates to be £20 million per year for five years. Second, that Channel 4 should be guaranteed a suitably prominent position on "Electronic Programme Guides", which are likely to become the primary source of TV scheduling information. And third, ring-fenced funding of additional infrastructure costs to protect editorial independence (QQ 274, 275 and 263). Ofcom have agreed that consideration should be given to funding the one-off costs associated with Channel 4's digital roll out and is considering other aspects of Channel 4's proposed compact.[55]

154.  A plurality of terrestrial PSB providers is an important and valued feature of broadcasting in the UK. However, we are not convinced by the argument that ITV and Channel five need public help to continue screening a full range of programming including some public service content. We are more sympathetic to the position of Channel 4 which is in a unique position as a not-for-profit public corporation with a distinctive remit set out in legislation. We believe that there is a case for a new set of indirect financial incentives to secure the future of Channel 4. These should neither require the public to pay more nor reduce the BBC's claim to all the licence fee funding. Accordingly, Ofcom should keep the funding and performance of Channel 4 under review.

43   First Report of the House of Commons Culture, Media and Sport Committee: A Public BBC: Session 2004-05: HC 82-1para 134. Back

44   Ibid, p. 4. Back

45   First Report of the House of Commons Culture, Media and Sport Committee: A Public BBC: Session 2004-05: HC 82-1, para. 141. Back

46   Department for Culture, Media and Sport, Government Response to the Culture, Media and Sport Select Committee Report on 'A public BBC', Session 2004-2005, p. 10. Back

47   European Court of Justice, Altmark Trans GmbH, Regierungspräsidium Magdeburg Vs Nahverkehrsgesellschaft Altmark GmbH (Case C-280/00). Back

48   TV Licensing Annual Review 2003/04, p. 3. Back

49   Building Public Value, Renewing the BBC for a digital world, p. 21-22. Back

50   As quoted in an extract of Schon Gezhalt (the annual report, Geschäftsbericht 2004, of the GEZ, the Gebühreneinzugszentrale der öffentlich-rechtlichen Rundfunkanstalten - the German licence fee collection agency. See http://www.gez.de/docs/gb2004.pdf ) kindly supplied to us by Professor Dr Eberle from the ZDF legal department in Germany. Back

51   "Justice for All: Responses to the Auld and Halliday Reports" (2002), p. 70. Back

52   Review of the BBC's Royal Charter: Ofcom response to the Green Paper, June 2005. Back

53   Ibid. Back

54   First Report of the House of Commons Culture, Media and Sport Committee: A Public BBC: Session 2004-05: HC 82-1, para. 120. Back

55   Ofcom review of public service television broadcasting, Phase 3 - Competition for quality, p. 11. Back