BBC strategic financial management

The BBC’s plans for an increased presence in the nations and regions seem unclear and disjointed. In March 2021, the BBC announced that it would increase programming spending outside of London by £700 million by 2027–28. However, the BBC is also planning a number of efficiency measures around the UK, including making 600 redundancies in its Nations & Regions division and reducing its regional news output. As a result of this inconsistency, it remains to be seen whether this means that the number of people it employs outside of London will increase or decrease. We are also sceptical about the BBC’s claim that viewers outside of London will have more of a voice as a result of relocating jobs to the regions, where these jobs are of national relevance, such as the production of national news. More generally, we are not clear how the BBC intends to find an additional £700 million for the nations and regions, given that it does not yet know the outcome of its licence fee negotiations, or how it will rationalise its estate in line with its new regional plans. We are also concerned that due to the apparent lack of clear, joined-up plans, there may be a risk that the BBC could end up making staff redundant in one area only then to rehire them in a separate area down the line, leading to unnecessary voluntary redundancy pay-outs. Recommendation: The BBC must be clear and transparent about what it is trying to achieve with its plans to increase its presence in the nations and regions, in terms of, for example, the value that this is designed to generate, both locally and nationally. These plans appear to be contradictory and muddled; we recommend that the BBC write to the Committee with a new, clear, achievable plan, within 6 months.

There is considerable uncertainty over the BBC’s financial future, which its financial plans do not appear to address adequately. The BBC Director-General has four new strategic priorities for the organisation—delivering high-quality 6 BBC strategic financial management content, developing the online presence further, growing commercial income, and a renewed commitment to impartiality. These will require increased investment, but the BBC was short on detail on how these will be paid for, other than through commercial returns and the BBC taking tough choices in areas such as content where it will probably have to make fewer programmes but ensure that their impact is high. The BBC is committed to making further savings in future, but appears unable to achieve its existing £1 billion savings target in full. In parallel, the BBC is currently negotiating with government on the future level of the licence fee. The BBC has not, however, modelled the impact on its finances of potential fundamental changes to the licence fee from 2022–23. We would expect to see clearer financial plans from the BBC, including how future investment will be paid for. Recommendation: The BBC should set out how it will achieve its £1 billion savings target by March 2022, and produce a revised financial plan on completion of the licence fee negotiations, incorporating the outcome of these negotiations and detailing how it will pay for new investment while continuing to make savings.

At times, the BBC has deferred difficult measures and ducked the hard choices necessary over cuts to frontline content. The BBC is candid about its view that, having driven down costs in back-office functions, it now sees no scenario in which it can avoid making tough choices about frontline services such as content. While we recognise that these choices are difficult, the BBC was unable to name any recent content cuts or future plans to cut content, despite plans to only produce 80% of its current programming. At this stage, we would expect to see a clearer articulation of which programming the BBC views as a priority going forward. This seems to be part of a general pattern of avoiding hard choices. For example, the BBC delayed more than once planned redundancies in its News and Nations & Regions divisions and its reforms to staff terms and conditions resulted in savings of less than 0.1% of the total staff pay bill over seven years. Recommendation: The BBC needs to take decisions about those areas of content it plans to cut from its programming and the financial and audience consequences of these cuts as a matter of urgency, and should write to the Committee within six months with more details of its plans in this area.

The BBC appears unambitious about setting targets for the financial returns generated by its commercial subsidiaries. The BBC’s net returns from its commercial activities, at under 6% of licence fee income, are not at a level to make a significant contribution to its overall income position. The BBC has recently set its main commercial subsidiary, BBC Studios, a target to grow its financial returns by a further 30% over the next five years. However, the BBC concedes there is potential to go a lot further than this and acknowledges that it does not know where the ceiling is on its commercial returns. The BBC could be more ambitious in its commercial plans by, for example, setting targets for how it will make greater use of its archive. The BBC considers that greater access to investment capital would help it to compete better and generate further growth in its commercial returns. However, its commercial borrowing is subject to limits, imposed by DCMS, which date to 2003. BBC strategic financial management 7 Recommendation: (a) Recognising the new international commerciality of competition, the BBC should be much more ambitious in its targets for commercial returns and be more ambitious in marketing and exploiting its archives, both for old and new programming; and write to the Committee, outlining its plans, within six months. (b) As part of the current licence fee negotiations, the BBC and DCMS should work together to review the current borrowing limits to identify whether they continue to meet the BBC’s business needs and future investment plans. 8 BBC strategic financial management 1 Understanding and reaching audiences

On the basis of a report by the Comptroller and Auditor General, we took evidence from the BBC about its strategic financial management.1

The growth of streaming has given people greater viewing and listening choices. According to the BBC, this change in behaviour has been reinforced by the pandemic as it has given people more opportunity to discover choice elsewhere.8 We asked the BBC what new plans it has to respond to the shift to online consumption and declining audiences more generally. The BBC stated that it must keep growing Sounds and iPlayer, although it is also wary of what it regards as too much personalisation of these services.9

The BBC also plans to reintroduce BBC Three to terrestrial TV, five years after making it an online-only service.10 We questioned why BBC Three is the answer to falling audience share among young people when it did not work last time. According to the BBC, ‘linear viewing’ proved to be very resilient over the last few years, as a result of which migration to online viewing has not happened as fast as anticipated. The BBC also stated that the return of BBC Three is not the only answer but one part of its plans for addressing the decline in audiences. Other measures included: looking at its content mix to ensure that its programming reaches all audiences and that younger audiences and underserved audiences feel it is relevant to them; the work it is doing to bring more audiences to iPlayer; and its recently-announced plans to expand across the UK in order to enable the more authentic portrayal of different regional communities.11 However, the BBC’s answers were unconvincing as to why, this time, it would be different, and bringing back BBC Three would indeed help to address falling audience share.12 Reaching audiences across the UK

The BBC has recently announced that it plans to reach out to audiences across the UK by increasing its spending on programming outside of London by £700 million by 2027–28.13 We asked the BBC how this ties in with the ongoing need to make significant financial savings, such as the forthcoming 600 redundancies in the Nations & Regions division. The BBC said that it understood the concern about whether this is new money, but assured us that, although the £700 million spending is already part of the existing TV and radio budget, it will be extra spending in the areas outside London and separate from the savings planned in its Nations & Regions division.14 The BBC also told us that, in network news, it is looking at moving 210 roles outside London over the next few years, but provided no further details on other role relocations or on the net job position out of London as a result of the redundancies in Nations & Regions and the relocated roles.15 We 7 Qq 25 to 27, 29, 30 8 Q23 9 Qq 4, 17 10 BBC Three to return as a broadcast channel in January 2022 - BBC Media Centre, 2 March 2021 11 Qq 5, 8, 10, 14, 16 12 Q 14 13 Q 31 14 C&AG’s report, para 2.16; Qq 31, 32, 89 15 Q 70 10 BBC strategic financial management pressed the BBC on whether the £700 million spending is guaranteed regardless of the licence fee settlement. The BBC responded that it regards everything to be subject to the licence fee settlement.16

The BBC told us that the move out of London has been designed to improve its representation in and portrayal of the regions, which will have a direct impact on audiences’ appreciation scores for the BBC. We queried whether the viewing public will notice any difference from the plans to relocate productions and national news teams if they are still producing similar kinds of programming. The BBC said that it believes that this does change the very nature of the editorial shape of programmes. It gave the examples of BBC Radio 5 live and 6 Music, which it said have a different feel given that a lot of the shows on these are produced in Salford.17 We also queried how regional audiences will continue to receive the regional news coverage that they value most when the BBC plans to move from an issue-based news agenda to a “story-led” news model producing more general news for national audiences. The BBC told us that its story-led model will provide the same level of news, but more productively created. Story teams will produce more general news content while still allowing individual programmes to have their different flavours.18

In recent years, the BBC has entered into complex ‘sale and leaseback’ arrangements to develop and finance its estate.19 To determine whether the new regional plans are joined up with these existing arrangements, we asked the BBC whether it could find itself in a position where it has sold off the ownership of a property, but still rent it back on a lease, and then need to relocate. The BBC replied that it does not think that this will happen, but, where it has property which is excess to its requirements, it will seek to sub-let that where it can.20

As part of its new regional plans, the BBC is intending to hire new staff. At the same time, the BBC is making hundreds of staff redundant across the UK. We challenged the BBC on how exactly the two align and whether the BBC risks offering voluntary redundancy packages to staff in one area only then to rehire them in a separate area down the line. The BBC believes that the risks of this are low as it plans to hire new staff with skills which are different to those who are taking voluntary redundancy.21 16 Q 40 17 Q 33 18 Qq 70, 79, 83 19 C&AG’s Report, para 11 20 Q 90 21 Qq 70, 79, 81 to 83 BBC strategic financial management 11 2 The BBC’s finances and commercial operations

The BBC faces a number of emerging financial challenges. These include:22 • A significant change in policy for over-75s TV licences which the BBC estimates will leave it £200 million a year worse off. Under the 2015 licence fee settlement, the government gradually withdrew its funding for free TV licences for all over- 75s, while the BBC was given statutory responsibility for deciding the policy regarding free licences to this age group from 2020–21. In August 2020 the BBC continued to offer free licences to those aged over 75 who are in receipt of pension credit and began charging other over-75s for their licences. • A sharp inflation in content production costs. The BBC reports that the costs of its non-continuing drama production have increased by nearly two-thirds over five years; • The financial impact of the COVID-19 pandemic. According to the BBC, this totalled more than £200 million to date and was balanced through a savings programme of £125 million and the cancellation of some events due to COVID-19. • A decline in overall licence fee income of £310 million between 2017–18 and 2019–20.

The BBC is currently approaching the end of a five-year savings programme, which targeted £1 billion annual savings by the end of 2021–22 to address the shortfall in its finances created by these challenges. The BBC’s net commercial income is not at a level to make a significant contribution to its overall income position. In 2019–20, £208 million of its commercial income was available for use on its public service broadcasting—under 6% of licence fee income.23 In November 2020, the BBC began negotiations with government about the future funding it will receive from the licence fee. The BBC will also be subject to a mid-term review of its Charter by government between 2022 and 2024.24 The BBC’s financial planning

On taking up his new role in September 2020, the BBC Director-General outlined four new strategic priorities for the organisation—delivering high-quality content, developing the BBC’s online presence further, growing commercial income, and a renewed commitment to impartiality.25 We considered that these priorities will require investment and we pressed the BBC for details on how this investment will be paid for, particularly in the context of the uncertain financial climate in which it operates. The BBC told us that the four strategic priorities each have different financial impacts and the necessary investment will come from commercial returns and through the BBC taking tough choices in areas such as content expenditure, where it will probably have to make fewer programmes but ensure that their impact is high.26 22 C&AG’s report, paras 6, 7, 1.12; Q 58 23 C&AG’s report, paras 12, 15 24 C&AG’s report, para 3 25 C&AG’s report, para 16, Figure 17 26 C&AG’s report, paras 16, 3.8; Q 39 12 BBC strategic financial management

In February 2017 the BBC introduced a programme to deliver £800 million savings annually by 2021–22, in order to help address the estimated shortfall in its finances resulting from the 2015 licence fee settlement and trends in inflation and licence fee payments. In 2020 it increased this annual savings target to £1 billion by 2021–22, reflecting the need to make extra savings because of the impact of COVID-19 and its decision to continue to offer free licences to some over75s.27

By the end of March 2021, the BBC expects to be more than £800 million through its savings programme, leaving around £200 million of savings to be achieved in 2021–22. However, it now appears that the BBC will only deliver around £950 million of its savings by the end of 2021–22, slightly short of its £1 billion target, as it advised that the annual efficiencies it delivers will reduce slightly to 1.6% in 2021–22, compared to 2% achieved in previous years.28 We asked the BBC for details on what savings would be made in the final year of its programme. The BBC said that it has a good understanding of what efficiencies it expects to deliver in the next year because it has just been through a detailed budget process. It gave the example of a planned reduction of 900 in its headcount as a saving that will count towards the total for 2021–22. The BBC said it intends to continue making savings post 2021–22 and is looking to exceed a government benchmark for areas it looked at of broadly 1% annual efficiency in each year to the end of its current Charter.29

The settlements that emerge from licence fee negotiations typically result in the BBC making some financial gains and some losses.30 We asked the BBC why, going into its latest negotiation, it was not better prepared, for example, by modelling potential fundamental changes to the TV licence such as a licence fee freeze (as occurred in 2010). The BBC said that it is fully prepared in those areas where it has full control of its arrangements, such as its commercial return and its cost base, but, where it does not have full control, such as changes to the licence fee, there is still plenty of time before the new settlement comes into force for it to revise its budgets.31 Making difficult choices

The BBC told us that its savings programme to date has focused primarily on support and back-office functions, with its indirect costs now among the lowest of comparable media companies. It said that, because those functions have now been cut to the bone, it is increasingly having to look at savings in audience-facing areas which have traditionally been protected, such as journalism and programme-making. The BBC suggested that there is no scenario in which it can avoid these tough choices, but said the licence fee payer would continue to get a very fulsome offer.32 We challenged the BBC to provide specific examples of where these cuts would hit. The BBC provided only one specific example: that of 150 redundancies among frontline staff in the news division.33

The BBC indicated that, in general, it will also need to make tough choices on programming, making less content but ensuring that the impact is high.34 The BBC has 27 C&AG’s report, para 12 28 Qq 32, 68, 71, 73, 74 29 Qq 72 to 74 30 C&AG’s report, para 1.5 31 Qq 34, 35 32 Qq 39, 46, 69, 74 33 Qq 67, 69 34 Q 39 BBC strategic financial management 13 previously announced plans to examine what it would do if it could only make 80% of its current content hours, in order to identify and prioritise content that is most likely to appeal to its various audiences.35 We pressed the BBC to provide specific examples of what content is going to be cut and the timeframe for these decisions. The BBC said that it had reduced the volume of factual programming in order to focus on big documentaries, but did not name any specific programmes or timescales.36 When asked about how it decided the trade-offs between universal content aimed at everyone and distinct content for a more discrete audience, the BBC said that it prioritises programmes of some scale but that are also delivering what is clearly special and what no-one else would do, with a deep connection to audiences.37

In addition to this uncertainty surrounding future frontline cuts, the BBC has delayed more than once planned changes to its News and Nations & Regions divisions which involve significant post closures. The BBC had identified early on in its efficiency programme the need for change in these divisions. However, it delayed introducing this until 2020, believing change here was likely to be difficult to implement and generate opposition from both its workforce and the public. It delayed these changes again in 2020 as a result of COVID-19.38

Staff pay is another high-profile area where the BBC has recently attempted reform. In 2018–19, the BBC introduced new terms and conditions for staff. The BBC calculated these changes would result in a net saving of £4.9 million in its pay bill over the seven years from 2017 to 2023, less than 0.1% of the total staff pay bill over that period.39 We challenged the BBC on whether these pay reforms were unambitious, especially at a time when costs need to be reduced in order to meet emerging challenges. The BBC argued that the purpose of these reforms was not to save money, but to align allowances, bring people up to a minimum standard and put in place a transparent way of managing pay. The BBC highlighted separate pay reforms it had made, including a pay freeze for all senior managers and no annual pay review for staff last year, and halving the number of senior managers over the last 10 years to 1.5% of its total staff base, compared to the market norm of 2.3%. The BBC considered that it had done a good job in dealing with competitive cost pressure for staff in certain areas, such as digital, at the same time as trying to keep its pay levels at a reasonable level and in line with inflation.40 The BBC’s commercial operations

In 2019–20, the returns paid by commercial businesses for the BBC to use on its programme-making were £208 million, equivalent to under 6% of licence fee income.41 The BBC Director-General has identified increasing commercial income as one of the organisation’s four strategic priorities.42 In March 2021 the BBC’s main commercial subsidiary, BBC Studios, announced a new target to increase commercial returns by 30% in the five years from 2022–23.43 We asked the BBC if there is room to be more ambitious 35 C&AG’s report, paras 3.3, 3.8 36 Q46 37 Q75 38 C&AG’s report, para 2.16 39 C&AG’s report, para 2.17 40 Qq 91 to 94 41 C&AG’s report, para 15 42 C&AG’s report, Figure 17 43 BBC shares detail of ambitious plans to build commercial income - BBC Media Centre, 10 March 2021 14 BBC strategic financial management in this target, which equates to a 4.5% annualised growth rate. The BBC considers this to be a decent base plan as the market is not going to be growing at 4.5% and so it beats the wider market rate. It believes it can go a lot further than that, but it does not quite know the limits of what it can achieve and says that more work is needed to understand this. However, the BBC cautioned about the need to be realistic, arguing that commercial returns will not replace the licence fee in the medium term.44

We asked the BBC if it had explored how it could increase income from BritBox, the streaming service it runs overseas and in the UK in partnership with ITV, and expanding its use of the BBC archive. The BBC responded that the number of subscribers to the overseas BritBox service was approaching 2 million and it was confident that these numbers will continue to grow. The UK service has reached half a million subscribers so far, but the BBC did not disclose its ambitions for growth in subscribers over the next five years as this is dependent on agreeing with ITV how much unique content goes into it and the continued supply of archive content. However, according to the BBC, ITV is looking for a healthy level of growth.45 The BBC told us that it has been able to sell some archive content through UKTV but this is very dependent on genre. Most of the archive has not been sold because it is live or factual programming, and there are challenges in finding the right model to sell such programming. However, the BBC said that it will keep considering the appropriate model to increase revenue from its archive, because digitisation may provide new opportunities. The BBC also informed us that it is interested in the potential for developing further products in the United States, such as news, where it can use direct-to-consumer and digital services to increase revenue.46

DCMS restricts the BBC’s total borrowing limit for commercial activities to £350 million, a level set in 2003.47 We asked the BBC if this limit holds it back from increasing commercial revenues and to what extent it is exploring this in current negotiations with DCMS. The BBC considers the current limit to be slightly out of date and in need of revision. It said greater access to investment capital would help it compete better and current profit levels would support a borrowing limit of £500 million. However, according to the BBC, potential for higher levels of borrowing and investment would require discussion with DCMS.48 44 Qq 48, 49 45 Qq 59 to 61 46 Q62 47 C&AG’s report, para 1.10 48 Qq 42, 43 BBC strategic financial management 15