Inquiry into the funding of the BBC: Submission from BECTU to the Select Committee for Culture, Media & Sport

28 October 1999

INTRODUCTION
1. The Broadcasting, Entertainment, Cinematograph and Theatre Union (BECTU) as a trade union with seven thousand members at the BBC (as well as many other freelances working there on a regular basis), has a strong interest in all of the issues raised by the Davies Report on The Future Funding of the BBC.

2. However, we have an overwhelming concern about the Report's privatisation proposals affecting BBC Resources Ltd and BBC Worldwide. We therefore focus exclusively on this issue in our submission. We strongly oppose privatisation and set out below the reasons why we believe these ill-considered proposals should not be implemented.

3. While much of the public debate so far has concentrated on the digital licence fee, we hope that the Committee will give full consideration to the arguments against privatisation - a matter which we do not believe has yet received adequate public attention.

   BBC RESOURCES LTD

4. The Davies Report simply states that the "BBC should sell the bulk of BBC Resources Ltd" (page 33). At a stroke the Panel is proposing the privatisation of the BBC's technical facilities for programme making, complete with four thousand staff. This reveals in our view not a boldness of vision but a misunderstanding of the broadcasting market.

   History of BBC Resources Ltd.

5. BBC Resources was only incorporated as Resources Ltd in 1998. At the time a period of three to five years was seen as necessary to build the business and develop a range of contracts. The Secretary of State for Culture, Media and Sport went on record with the view that "I want to make sure that this (incorporation ) cannot be used as a ramp for privatisation". (Guardian, 20 February 1998). Now less than two years later the Davies Report has undercut all of this and proposed a drastic change of course. The justification for this is inadequate and the consequences unacceptable, as we seek to show below.

6. The BBC already operates under the system of Producer Choice. This means that all producers are free to employ either in-house or external technical staff. BBC Resources is in no special position because there is now a very competitive UK broadcast facilities market, of which BBC Resources hold about 25-30%. There would therefore be no greater competitive pressure on BBC Resources if it were privatised than if it remained as at present. Nor is there any limitation on the use of private resources by the BBC if the management conclude this to be in their best commercial and creative interests. There is no doubt about the powerful effect of competition. Since the introduction of Producer Choice in 1993/4 efficiency savings have been running at about 9% a year.

   Funds from privatisation are not needed for digitalisation

7. The Report does not attempt to suggest explicitly that privatisation is a directly necessary means to pay for the BBC's digital transition. It recognises that sale proceeds should not be used for current expenditure but as a fund for the BBC's future capital needs, only part of which would relate to digitalisation. It is clear, however, that the Davies Panel (with one exception) believe the funding released by privatisation can contribute to paying for the BBC's transition to the digital era. Privatisation proceeds are included in the calculations on page 84 of the report.

8. We believe that the Panel's valuation of BBC Resources is a gross overestimate (as discussed below), but whichever estimate is taken, the funds released by privatisation are so small as to be irrelevant to solving the problem of paying for the BBC's digital programme.

9. The Report's proposals expect privatisation to produce £40million in each of the years 2002-3 to 2006-7, approximately half from Resources and half from Worldwide. But even if one accepts the improbably high capital valuation of Resources (£230 million), its privatisation would produce an income representing only around 8.7%[1] of the extra money proposed by the Report for the period 2001-2 to 2006-7. If we adopt the more realistic capital value of £100m, the income contribution from the sale of BBC Resources Ltd would be only around 5%[2] of the total additional money for digitalisation. On either valuation the claim that privatisation is necessary to produce funds for digitalisation is unjustified.

   The Valuation of BBC Resources Ltd.

10. No justification is given in the Davies Report for its valuation of BBC Resources Ltd at £230 million. We hope the Committee will receive from the Davies Panel the calculations on which the valuation is based. We believe it to be a gross overestimate for the reasons set out below.

11. We believe that the £230 million figure is derived from a provisional five year business plan for Resources Ltd prepared by the previous chief executive Rod Lynch at the time of incorporation, based on some broad initial assumptions. Its credibility was immediately undermined by an operating loss of £5 million in the first eight months trading. The plan has now been discarded by the BBC.

12. We have examined the separate elements which would affect the valuation and can find no supporting evidence for the Report's high valuation.

    • Staff
      There is no existing model within the independent facilities sector for a permanently staffed operation on this scale. The universal model there is for a small core of permanent staff, with an overwhelming majority of casual freelance labour. We do not believe any potential purchaser would be seeking to "buy" the workforce as it stands.

    • Equipment
      Resources' equipment is, in our experience , older than the industry average. Resources Annual Report values it at £101 million but admits this cannot be used as an estimated sale price [3]

    • Property
      We understand that property such as studio space currently used by Resources will remain with the BBC and would not be sold off.

    • Access to contracts
      Is this the prize justifying a sale price of £230 million? We think not for the following reasons:
      • Unlike the privatisation of BBC Transmission there is no guarantee of the BBC as a long term continuing customer.
      • Most of the BBC contracts held by Resources Ltd are not long term contracts. They are subject to the BBC's annual commissioning cycle and will often be on a show by show basis.
      • There is strong and increasing competition from other broadcaster- based facilities bidding for work, eg Carlton Studios (Nottingham), London Studios (LWT), 124 (Channel Four), Scottish, Yorkshire and Anglia. The broadcaster-facilities marketplace is already crowded, let alone the competition from the long established independent facilities houses.

13. Failing any other justification from the Davies Panel we see £100 million as a more realistic price, but even this benefit to the BBC is diminished by a number of hidden costs. There are:

    • Redundancy
      Previous BBC privatisations (Transmission, Finance) have involved the Corporation in paying compensation to the new employers to cover redundancy entitlements. On the basis of the current BBC redundancy arrangements we estimate this would result in a liability[4] of £120 million.

    • Pensions
      Recent case law suggests transferring employees may have a right to take their share of any surplus in their occupational scheme. This could remove £60 million from the BBC's pension surplus.[5]

    • Buying-In Future Facilities
      Given the BBC's role as a broadcaster of last resort, with no choice but to cover national events or crises - often at short notice - the Corporation could face a considerable escalation in costs when forced to buy in its technical broadcasting facilities from what will be a sellers' market. For example, large-scale technical facilities had to be mustered at short notice for the funeral of Diana, Princess of Wales. The BBC will provide 27 hours continuous coverage of the Millennium celebrations with worldwide links. This is matched by no other British broadcaster and is currently possible only because of Resources in-house facilities.

    • Public Procurement
      The requirements of the EU Directives covering some public contracts exceeding £250,000 could impose a formal, legally based and administratively costly procedure when using external facilities.

    Destruction of the World's Largest Integration of Technical and Programme Production Skills

14. BBC Resources is the largest single craft and skills base in British broadcasting. This is widely acknowledged within the industry. In 1998 Resources staff won nine of the prestigious Royal Television Society craft and design awards. It should be remembered that the Report itself said of Resources that "the BBC's important craft base and therefore its creative capacity must not be undermined." (p100).

15. The effects of privatisation would include :

    • The separation of the creative production process (creative grades such as producers and researchers who initiate and implement programme ideas) from its technical implementation through Resources. Despite the universal trends in broadcasting towards the integration of production and resources functions (including multiskilling), the BBC would lose a whole dimension of skills to the external market. Resources' has a track record of contributing to the development of new programme-making techniques such as desk-top editing and light weight picture gathering. Production and technical skills are likely to converge further in the future and this proposal would represent not a preparation for the digital future but a step back from it.

    • The loss of core functions such as master control and the engineering of communication links. These are critical functions which almost no other British or European broadcaster buys in from third parties.

    • The likely break up of Resources itself either during or immediately following privatisation . There can be no assumption of a single bid. More likely would be a cherry picking exercise in which individual elements eg editing, outside broadcasts, are separated off.

    • The future prospect of a further transfer of creative production staff to the external market. It would certainly be unusual for the BBC to be left with production staff in-house while technical staff were transferred out. Most major close competitors eg ITV, retain the whole range of functions in house. The alternative of the BBC declining into a publisher-broadcaster only rather than producer-broadcaster is sadly made more likely by the halfway house of Resources privatisation.

    The Loss of our Premier Technical Training Ground

16. The BBC remains the single largest technical training ground in British broadcasting. The Corporation invests more in training both in absolute terms (£30 million a year) and as proportion of payroll (2.5%) than any other British broadcaster. It trains for the whole industry, since many staff enter via the BBC then move on to work elsewhere.

17. All this would be lost in a privatised, casualised Resources. The largest technical training resource in British broadcasting would have been lost. It could be argued that other parts of the industry should make a greater contribution to training but until that happens the loss of the BBC's contribution would be disastrous. We must first face the question - who, if not the BBC, would train for the industry and how?

    BBC WORLDWIDE

18. The Davies Report proposal for Worldwide is "to sell a stake....sufficient to take the effective private involvement in its total external operations to 49% (page 33 of the report). The report is unclear on the precise method of implementing this . We oppose the 49% sell off.

19. Worldwide is not a commercially failing operation:
    • Worldwide has achieved a steadily rising cashflow back to the BBC: from £54million in 1997-8 to £81million in 1998-9 (including a £55million investment in BBC programmes).

    • Its 1998-99 results showed turnover up by 6% (to £446 million), pre-tax profit up by 67 % (to £20million) and operating profit moving from a £7million loss to a £12million profit. Group turnover has grown steadily by 12% per year over the last 5 years.

    • Programme distribution (i.e. television sales) grew by 7% to £135million, with profit in this aspect of the business up from £6million to £13million.

    • Despite the closure of 2 underperforming magazines, BBC total magazine circulation rose by 9%, in the context of an overall UK market decrease of 3%.

    • BBC publications as a whole include strong individual success stories by any standard
      • Radio Times, a continuing market leader, has maintained circulation of more than 1.4million.
      • Other BBC magazines are leaders in their field, including Home and Antiques (turnover up 17 %) and Gardener's World (sales of £10million).
      • Individual recent successes include David Attenborough's Life of Birds (a massive seller in book and video form) and Delia Smith's How to Cook (a million copies sold by early 1999).

20. The notion that a 49% sell off is necessary to inject a new commercial culture into Worldwide is false. Although the Davies proposal relates only to non channel activities the report does not reflect the existing extensive private investment in its other activities. The channel operations of Worldwide already have private resources of £210 millions invested. This money is to be found in its joint venture channels operated with Discovery and Flextech (UK Gold, UK Horizons and UK Arena). Virtually all senior executives have a strong commercial background eg Rupert Gavin from BT, Jeff Taylor from Sony and Peter Teague form Unisys.

21. The 49% sell off would however be positively harmful in the following ways:
    • It would limit BBC strategic control and therefore its ability to insure that Worldwide's activities are consistent with BBC policies and values.
    • As a consequence it would dilute the strength of the BBC brand (Worldwide's main selling point).
    • Conflicting strategies among the various external investors could result in an incoherent corporate strategy at Worldwide.
    • Long-term investment in programming and individuals is less likely to continue under the short term priorities imposed by commercial investors eg Worldwide's consistent backing for Teletubbies (despite early criticism ); the early promotion of what became the massive success of Walking with Dinosaurs; Michael Wood (writer and presenter of Alexander the Great); and TV chef Ainsley Harriott.
    • Cross subsidy within the commercial activities of Worldwide (eg Radio Times revenue arguably bought time for initially struggling titles such as Match of the Day) would be less likely if different parts of Worldwide had different external investors.

22. We fear that the BBC could be compelled to sell off half of its major commercial assets for a one off capital gain but at the cost of a long term and permanent reduction in rights and in income flow. Furthermore we believe that notions of corporate strategy, unified branding, long term investment and cross subsidy stand to be weakened if not destroyed in these circumstances.

23. The proposal is not in our view justified by Worldwide's track record nor by its prospects. Improvements in performance can be required - and are arguably being delivered - without the need for such a drastic measure. We hope the committee will withhold support for this proposal.

    CONCLUSION

24. We hope that the Committee will take full account of our arguments against privatisation and will conclude that the Report's proposals should be rejected.

25. We believe that the funding released by privatisation will make no significant contribution to the BBC's digital funding needs. In our view privatisation will be deeply damaging to the future of the BBC as our major public service producer broadcaster and could initiate a long term decline of the BBC into a publisher broadcaster.

26. We further question whether detailed operational decisions on the future development of Resources and of Worldwide are really the appropriate business of Government

27. We believe that a successful transition to digital broadcasting can be achieved without privatisation at the BBC. The Committee will perform a valuable service if it can give due attention - lacking in the public debate so far - to the privatisation issue. We hope that it will become clear that the future of the BBC and its component parts in Resources and Worldwide lies together not apart.

1. Total additional licence fee income plus privatisation income is £1147m. On the presumption that half the privatisation income is from Resources (i.e. Resources contribution is £100m), Resources delivers only 8.7% (ie £100m is 8.7% of £1147m).

2. Given that the total capital value of the privatisation is thereby reduced from £430m to £300m(only 69% of the previous total) we reduce the privatisation income generated by a proportional amount (69%) to £139.5m, giving a new total (licence fee + privatisation )income of £1086.5m. BBC Resources now contributes only a third of the capital value and therefore we presume a third of the income i.e. £46.5m, which is less than 5% of £1086.5m.

3. Note 1(e) of the Annual Report says that the equipment is not revalued on an on-going basis since they are "used within the company rather than being held for resale or investment potential"

4. Based on 4,000 staff with an average service of eighteen years each and average pay of £20,000

5. Based on 4,000 staff transferring out of a total of 16,500; total current surplus £250 million.