CORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1636-i

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

PUBLIC ACCOUNTS COMMITTEE

BBC EFFICIENCY PROGRAMME

MONDAY 21 NOVEMBER 2011

ANTHONY FRY, ZARIN PATEL and MARK THOMPSON

Evidence heard in Public

Questions 1 - 84

USE OF THE TRANSCRIPT

1.	This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.
2.	The transcript is an approved formal record of these proceedings. it will be printed in due course.

Oral Evidence

Taken before the Public Accounts Committee

on Monday 21 November 2011

Members present:

Mr Richard Bacon (Chair)

Stephen Barclay

Meg Hillier

Fiona Mactaggart

Austin Mitchell

Ian Swales

James Wharton

_____________

Amyas Morse, Comptroller and Auditor General, gave evidence. Gabrielle Cohen, Assistant Auditor General, Oliver Lodge, Director, National Audit Office, and Marius Gallaher, Alternate Treasury Officer of Accounts, were in attendance.

REPORT BY THE COMPTROLLER AND AUDITOR GENERAL

The BBC’s Efficiency Programme

Examination of Witnesses

Witnesses: Anthony Fry, BBC Trust, Zarin Patel, Chief Financial Officer, BBC, and Mark Thompson, Director General, BBC, gave evidence.

Q1 Chair: Good afternoon and welcome to this meeting of the Public Accounts Committee, where we are looking at the BBC efficiency programme. We are joined by Mark Thompson, the Director General of the BBC, by Zarin Patel the Chief Financial Officer, and by Anthony Fry from the BBC Trust. You are all very welcome.

We start this afternoon with a commercial break. One of our members, Chris Heaton-Harris, has been inveigled-his own word is blackmailed-into taking part in a regional version of "Strictly Come Dancing". Members-and indeed members of the public, if they tune in-can see him doing waltz, jive and tango on Saturday 26 November by going to www.justgiving.com/ChrisHeaton-HarrisStrictlyNorthampton. If the ritual humiliation is not sufficient, Mr Thompson, perhaps we will ask you to run it on the national news, just to increase the amount of money he is raising for Macmillan nurses. That will be the last commercial break, because, of course, we do not do commercials on the BBC.

I would like to ask you about your settlement from four years ago, Mr Thompson. In preparation for the licence fee settlement in 2007, the BBC started talking about the efficiency frontier and claimed that it would not have been able to make any further efficiency savings beyond 2008. Yet the BBC is comfortably on track to exceed its targets and it delivered savings of £237 million in the first year of the programme. So my first question is, how can you be sure that the original 15% target was stretching enough in the first place?

Mark Thompson: The background to this is if you hit a target that is set, people always say, "Is it stretching enough?". If you do not hit it, it is "Grotesque incompetence".

Chair: We are not here to make your life easy, Mr Thompson.

Mark Thompson: I have come to the wrong Committee.

On the process of setting the efficiency target for the BBC back in 2007-the NAO Report goes into some detail about this-it is important to say this was not a kind of, as it were, self-set target. The management of the BBC, led by myself, certainly had views, and, indeed, we got some external help in trying to think about what we could do. The BBC governors also scrutinised this; they used some external objective to do so. Her Majesty’s Government also looked at this very closely. The final position of the BBC in the negotiations was that the BBC could hit an average target over the period of 2.5% in terms of efficiency. The Government eventually set a licence fee settlement based on the belief that the BBC could hit 3%, and the governors looked at that and accepted it. The governors eventually set a target of 3% for the BBC to meet.

Although there has been a debate with the various parties involved, notably, PKF-Pannell-

Zarin Patel: Pannell Kerr Foster.

Mark Thompson: Thank you very much. They were the consultants working for the Government, and there was a debate with them about where the so-called efficiency frontier lies. The answer is that as technologies have come in over the last decade or so, the BBC has found new ways of driving efficiency. The NAO’s report shows an organisation that has been trying very hard to achieve efficiencies and has done so in the period looked at in the report. Far from seeing a loss of quality of service, the objective metric suggests, as the NAO acknowledges, that the quality of services over this period has improved.

Q2 Chair: The issue now for you is that although you have done reasonably well on this programme so far, you have a further tranche of savings in the next five years up to 2016. The total is £600 million or £700 million, but £400 million of that is from further efficiencies. Was that number plucked out of the air? How do you know that is the right number?

Mark Thompson: I think there are two things. First, how can the BBC and I be confident that we can achieve a significant amount of further productivity savings? The answer is that, over the past few years, we have invested in a lot of new technology. The Committee and the NAO have looked at Fabric, the digital media initiative before, and that comes on stream. BBC North in Salford is coming on stream right now. We have about 1,600 people up there as of today, and many services are already being broadcast from there. Salford has a completely different way of working built into it. The new Broadcasting House project, which brings the whole of BBC news together with the London headquarters of BBC radio and television-again, with completely new technology-means that we can, we believe, go on driving efficiencies over the next few years.

But the answer is we started looking at efficiencies beyond this period-beyond 2013-when we started doing our strategic initiative "Putting Quality First". We spent well over a year working on that plan before last autumn’s licence fee settlement was even contemplated. So we spent a lot of time-again, working in some cases with external consultants-looking at how far we could go. What I would say about what we are now planning is there are some areas where we think we can achieve these efficiencies. There are some parts of the BBC where getting efficiencies without potentially damaging quality is getting much harder, and there are some areas we do not think we can cut further at all.

Q3 Chair: I go back to the beginning of my first question. In 2007, when you started this process, you were a lot more doubtful. Do you think it is fair to say that this very process-of being required to focus closely on efficiencies in the way you have done and to focus on finding costs to take out very finely and accurately without, if possible, causing damage-has enabled you to find things that you had perhaps not expected? That is not a leading question.

Mark Thompson: In the approach we have taken, to be honest, over many years-we did a very big and successful efficiency programme in the three or four years before this period started-we have tried to learn how to plan. There is often a slightly unhelpful debate about efficiencies in the public sector, but our experience of talking to the best private sector companies is that it is about planning strategically to take progressive gains through technology and new ways of working over many years, to constantly check what you are doing against public reaction and objective measures of quality, and, where you need to, to adjust your plans. If you have taken too much out of children’s programmes, stop doing it or put some money back. Rather than getting completely set on a master plan, it is about adjusting as you go in the light of experience and constantly, even when you have a programme going, asking the organisation to come up with fresh ideas, so that if you discover that something you thought you could save money on is, in reality, problematic for whatever reason, you have an alternative so that you can still hit your overall number.

Q4 Austin Mitchell: I can see that statements such as the one in 2008 mean that we end up not believing you, or that no one believes the BBC. You are saying, "Well, we’re at the frontier of efficiency savings," and you then go on and make even bigger efficiency savings. That is either because you are saying that that is part of a game of bluff at the start or because there were efficiency savings you didn’t know about and you didn’t know the cost of your own service. That then encourages the incoming Government to demand even bigger savings, on the grounds that you have delivered the first lot.

Mark Thompson: If I might say so, I think that your entire question is based on a false premise, which is that the efficiency frontier is some sort of permanent stationary boundary, and that once you arrive at it, that’s it.

What has happened even since 2007 is that the cost of some kinds of technology-cameras and editing equipment, for example-has come down. When I started in the BBC, the basic unit of kit was a £40,000 16 mm camera, and a 10-minute roll of film cost £400 in 1979. We now have outstanding cameras for a very small number of thousands of pounds, and video media that is essentially of nominal cost. The ways in which you can connect to the BBC, again using networks, have been transformed, and so the good news is that there are many parts of what we do across television and digital media-in common with other broadcasters, although in some of these areas we are ahead of others-where we are finding genuine productivity gains through automation and the use of new technology, and from thinking about how you make TV, for example, in a different way. There is still an important role for craft skills, for craft expert lighting and camera operators and editors, but there are many kinds of broadcasting we can do well with producers making their own content and that transforms the cost base.

There are also parts of what we do-I would say a growing number-where we are running out of ideas and technology. The answer is that we have had a leap forward in technology, which has moved that frontier out, and I believe that at the end of the current period we will be very close to the frontier. I cannot rule out further breakthroughs, but that is the nature of efficiencies. If you imagine that it is a once-and-for-all task and then you can sit back and say you’ve done it, that’s wrong. Because technology changes, you constantly have to worry away at whether there are different and new ways of making outstanding programmes for less money.

Q5 Austin Mitchell: Yes, but the problem for the friends of the BBC is: at what point does anorexia nervosa begin? At what point do you get so slimmed down by this constant pressure that the service deteriorates? Can you reach the extra savings now of £400 million on the basis of the savings you have made already?

Mark Thompson: I will let colleagues speak as well, but on that point I believe that the target we were set in 2007 was pretty stretching. Everyone thought it was. The public discourse at the time, by the way, was about worries about whether this was going to damage journalism. Almost no one in the political classes spoke up in favour of the proposed changes. There was a lot of worry about it. We have achieved that. I think that the present set is achievable, but it’s going to be even harder, and I accept that we are running out of road in terms of efficiencies.

Q6 Chair: Why is it that some divisions have apparently been able to do so much better than others? If you look at the chart on page 18, there is a column of the variance from the target savings, and Future Media and Workplace are way behind all the others. Why?

Zarin Patel: In Workplace, we had a very significant programme to exit all our empty buildings. As the BBC got smaller in this efficiency round, we needed less space, but then the recession hit and it was really hard for us to offload our properties-to either sell or sub-lease them-which is why the savings were delayed. But I am pleased to report to the Committee that despite the recession and the economic crisis that we appear to be facing, we have managed to sub-let some of our empty buildings and we will therefore recover that target by 2013, which is when this current programme ends.

Future Media and Technology was tough. This is one of the lessons that we have learned. As the Chief Financial Officer, you have to stretch the organisation and make it go slightly further than it is comfortable with. In technology, I suspect that we were over-ambitious about what Siemens, our then technology provider, could provide us with. One of the examples was video conferencing across all of our estate, so we would have less travel cost. It simply was not able to put in a good enough video conferencing system, so we were not able to realise those savings. One of the lessons that we have learned in Delivering Quality First is to be ambitious but then to have a process of monitoring to ensure that we are not over-ambitious.

Q7 Chair: Although I accept that some of your regionalisation may produce savings, someone in the BBC has told me about some of the things that are going on, such as people being flown to Belfast and being put up in hotels so that they can use edit suites in Belfast to edit content that is about London and that is created in London. That cannot be saving you money, can it?

Zarin Patel: No, it can’t be saving us money. I will look into that one because I am not aware of it. As part of our network supply, where we are trying to make sure that all of our content is made across the UK, there will be times, as the programmes move up there, that we want to fly people up there. Over time, our ambition is to ensure that those programmes are made in a creative base in, say, Glasgow or Belfast. Some of those costs will be transitional while we complete the transfer of our business across the UK.

Mark Thompson: If I can add-it is stating the obvious-for many years the BBC has been flying people from all over the UK to London and putting them up in London hotels to appear in London studios. If you are going to cover the entire UK properly, basing your studios in lower cost cities than London, will, in itself, save the BBC money over time.

Q8 Chair: You have £64 million of the remaining savings to be achieved in the current round. You describe it as "at risk". Why is it at risk and what will you do to safeguard it to make sure it is actually achieved?

Zarin Patel: The majority of the £64 million that is at risk-some £34 million-is in our television business. The television people are saying that we have taken out the majority of the savings. We have transformed our processes. The last two years will be much tougher and that might have an impact on programme quality on air. Therefore, they are paying extra attention to ensure that those final savings do not have that impact. That is why they call it "at risk". The management team prefer for divisions to call out where they think that savings will be hard to deliver because you can then focus management attention on it to ensure that it does not happen.

On technology, the risk is the one that I talked about, which is being slightly over- ambitious with our savings with technology. That does not mean that we stop trying to get those savings. In fact, this morning, Mark and I met our new supplier, a company called Atos, which has purchased Siemens. We were much more hopeful that we have a company here that will help us to deliver those savings over the next two years.

Q9 Chair: What will it be doing for you?

Zarin Patel: It has just purchased Siemens.

Mark Thompson: It has taken over the contract to supply many of the BBC’s technology needs.

Q10 Chair: That doesn’t fill me full of confidence because we did see Atos here when it was doing the contract to assess entitlement to disability living allowance and it was not the most successful hearing.

Q11 Stephen Barclay: May I come back to your answer to Austin? In paragraph 1.3, it says that you received £2.2 billion less than the BBC had asked for. Austin was asking about the gap between the estimated savings you put in in 2007 and what you actually achieved. Are you putting that fully down to technology? That seemed to be your earlier answer.

Mark Thompson: Which paragraph were you referring to?

Q12 Stephen Barclay: Paragraph 1.3, part 1, page 10. What I am trying to get at is that in 2007 you said that you were at the frontier of efficiency. You had just completed a three-year efficiency programme. Clearly, the efficiencies delivered are far in excess of what you were saying to the Department. When Austin asked you a moment ago, you talked about improvements in technology. I am just trying to understand whether that fully explains the gap.

Mark Thompson: There was common ground in the run-up to the 2007 licence fee settlement that the BBC would need to achieve efficiencies and indeed could achieve efficiencies. We believed that we had reached the frontier, but we also believed that new technology meant that the frontier was going to move. It was common ground that we could achieve efficiencies. There was a debate at the time about what efficiencies could be achieved. Where that debate crystallised was around the BBC arguing that it could achieve 2.5% efficiencies per year from 2007 onwards. The Government, who were advised by their experts, believed that the BBC could achieve 3%. The BBC governors accepted that and set 3% as a target.

Stephen Barclay: My question wasn’t about-

Mark Thompson: It wasn’t as if the BBC was saying zero and achieved over 3%; the debate came down to between 2.5% and 3%.

Q13 Stephen Barclay: But that wasn’t my question. My question was about the gap between what you said you could achieve and what you have gone on to achieve, and what explains such a big gap between those two things.

Mark Thompson: There are two things really. One of which is that the process of testing the plans each year and amending them, and asking each of the divisions of the BBC to come up with fresh ideas and efficiencies each year, has yielded more than the plan called for. We have been under some unexpected financial pressures over the period-for example, the need to pay rather more into our pension scheme than we predicted-so the additional money that we found has been put to good use. We have also been able to invest it in certain kinds of programme.

Q14 Stephen Barclay: Could you just quantify the gap-you are absolutely right that there is inflation, the extra contribution you put into your pension fund and the various other additional things that have expanded the gap-between what you said in 2007 and what you have delivered?

Zarin Patel: The efficiency programme targeted 3% per annum for five years, which is 15%. If the savings are delivered without any of the risks crystallising, we will deliver 17.5%, so an extra 2.5% over those five years.

Q15 Stephen Barclay: You were put in at 2.5%, so you have actually delivered an additional 5% of savings.

Zarin Patel: No, an additional 2.5%.

Q16 Stephen Barclay: But 2.5% for five years is 12.5%.

Zarin Patel: No, 2.5% over the five years. So 3% per annum was our target, and 3.5% per annum is what we anticipate delivering.

Q17 Stephen Barclay: What I am asking is what you initially said when you said, "This is what we could achieve. We are at the efficiency frontier."

Zarin Patel: 2.5% per annum, which was based on the external benchmarking that the BBC management team had done with Pannell Kerr Forster and PA Consulting.

Q18 Stephen Barclay: You said that it was 2.5%, but you have actually delivered 3.5%. In monetary terms, what is that worth? What is the difference?

Zarin Patel: A percentage point is worth £70 million. I am struggling to do the maths in my head.

Mark Thompson: Each percentage point is worth approximately £35 million per year in today’s money.

Q19 Stephen Barclay: Does that include the additional savings you made on the additional pension contribution? Does it include inflation?

Zarin Patel: No, it does not. When it came to the pension crisis, first of all, we sold a couple of assets and a couple of spare properties, so we had one-off capital receipts that allowed us to pay the pension deficit. The other changes we made were to services, rather than straightforward productive efficiencies. The NAO will point out that some of those savings will not count as productive efficiencies.

Q20 Stephen Barclay: What I am trying to get at is a monetary value for the difference between what you were saying to the Department in 2007 and what the reality has been.

Zarin Patel: We predicted we could deliver 2.5%. If we deliver the remaining programme over the next two years, we will deliver 3.5%, which is 15% versus 17.5%. That is 2.5%, which is about £100 million. On top of that, for the pensions, we have tried to make those savings not from productive efficiencies but from selling surplus assets and getting capital receipts.

Q21 Ian Swales: May I come to the link with the audience? The report mentions that you have various measures of performance-audience measures. Figure 5 shows that, although performance is quite good, anything up to 10% of these performance indicators have fallen by more than 5% since 2007-08. Will you say something about what is actually happening there? What things are deteriorating? Is there anything we should learn from that?

Anthony Fry: From the Trust’s viewpoint, we monitor service licences and service performance. It is important to recognise that it by definition, is a backward look, as opposed to a forward look. The BBC management measures performance, particularly audience satisfaction, on a regular basis-monthly, weekly. It is worth saying that, throughout all of this, one of the things the Trust has been anxious to ensure is that, to the extent that you can measure audience satisfaction, the savings that are being introduced do not impact on audience satisfaction and the delivery of quality. Let me ask Mark to say something particular about issues of quality.

Mark Thompson: If it is useful to you, we can come back with more data about precisely what is going on here. The mistake not to make is to assume that these are the same indicators or the same services each time. The model we have adopted is, if we see something flashing amber or red, to act and to try and move that indicator up. What I would expect is a shifting population of indicators, rather than one or two persistent offenders.

Q22 Ian Swales: I do not expect all the data, but can you give one or two examples of things that you have seen go off, and do you believe that they are to do with overshooting on the savings programme or what?

Mark Thompson: What is interesting here is that the question is multi-factorial. For example, if a particular reach or share number changes, it may be because of competitive factors rather than productivity factors. We were a little concerned about one or two of the indicators on our children’s output and therefore decided to invest some extra money into children’s to deal with inequality issues. We looked quite hard at one point at the audience figures for "Panorama", which have significantly recovered since then, and judged that it was more the very competitive climate of main channel television in the "Panorama" time zone-8.30 on a Monday-that was to blame, rather than quality factors.

Chair: Perhaps if you went back to the good old days, when "Panorama" started at 10 past 8 and was a longer programme, you might seize more of the popular imagination.

Q23 Ian Swales: The reason I am on this line of questioning is that there is, obviously, value for money in this context-it does not just relate to cost but to what is being delivered.

Mark Thompson: It is very important to say that we are tracking the whole time, with quality measures, when we ask the public, "Do you think it was high quality?", or "Do you think it was interesting?" So, always, we absolutely recognise that cost is not the only element in the equation.

Q24 Ian Swales: You have led me to my next question. To what extent have the public been involved in some of the decision making and choices that you have been making in order to deliver these savings? After all, they are your customers and clients.

Mark Thompson: Anthony can talk about consultation by the BBC Trust with the public. We track public attitudes to the BBC in real time, continuously. The headlines over the period-we are coming towards the end of the period-are that the public’s overall general impression of the BBC is at its highest certainly for nine years, and is probably at an historic high, and the average quality measures that the public give BBC programmes have got an extraordinarily high figure. If you take between 2004 and 2011, in 2004 64% of the public said that the BBC "maintains high standards of quality", today it is 78%, and 80% today are happy that the BBC exists, compared with 72% in 2004. Value for money has been moving in the right direction. Every measure you look at has been going in the right direction.

Q25 Ian Swales: My question was more about whether you are truly asking the public about what they value. The reason that I am asking is because I am not surprised that you mentioned children’s TV-that is something that I hear has gone right off and the BBC needs to do something about it. The other one is local radio, local news or local TV, where-let us say-the signs are concerning. My question is to what extent do you involve the public in the decisions that you are making?

Anthony Fry: One of the remits under which the Trust operates is about audience consultation. As you know, there are four national audience councils, which are serviced by the four national trustees, and those report to the Trust regularly. The first thing to say is that there is the sort of statistical analysis that Mark has been giving you some headlines from, which we receive every four months and which take us through exactly how the audience are responding. Then there is the extremely valuable-some would say anecdotal, but in my view it is none the less very important-stuff that we get from the audience councils.

Most importantly, it is actually making sure that the bigger decisions taken-you mentioned local radio in the context of DQF-are open to public consultation. Other decisions that the BBC has been involved in recently have also been open to public consultation. We take those public consultation exercises extraordinarily seriously. We will look at the results-by definition, at the moment we know what they are-and one of the balancing acts that the Trust has to do is to balance out what we are being told on particular issues by the audience and what we believe we have to achieve to satisfy our obligations under the Charter. The most difficult part about this, to be clear, is that the balancing act, and Mark was right to say this, is between how much the BBC is spending and what it is delivering for what it is spending. That involves difficult choices, and there is no point in kidding anybody around this Committee table that as a result of the recent settlement there will not be some very tricky choices. There is not a pain-free exercise that will mean the BBC can continue for ever more to deliver the same quality, the same range and the same scope of services for less and less money. That comes to Mr Mitchell’s point-there will be a breaking point at some point.

Q26 Ian Swales: Can you think of a case where you as a management team have said, "Right, we’re going to do this"? You have gone out for consultation, heard from the audience and radically changed what you have done.

Mark Thompson: A good example is Radio 6 Music. Incredibly detailed audience research recommended shutting it. It became a cause célèbre. Hundreds of thousands of people who had never heard of 6 Music started listening and discovered they loved it-including several Government Ministers. The audience of 6 Music has doubled-

Q27 Chair: There is obviously a lesson there. Have you thought of threatening to shut some other things in order to increase listenership or viewership?

Mark Thompson: The answer is it was obvious that we should withdraw the proposal. Local radio is a very interesting example. It illustrates a lot of the issues. We are targeting local radio with a much lower headline saving than most of the rest of the BBC. BBC Television is looking at 20%. Local radio is looking at 10%, only some of which is intended to be productivity. But of course, because of the high fixed costs in local radio for buildings and equipment, the cuts are deeper in terms of what they might mean for head count. The BBC Trust is currently asking the public very closely about local radio and BBC management will listen very carefully to what the public have to say.

Q28 James Wharton: Following on from Mr Swales, it leads me nicely into the area that I want to discuss. Both he and I have the same excellent local radio station-BBC Tees-which I believe is facing cuts of around 20%. Where you are looking at making these reductions in local radio, how have you assessed why some stations are potentially going to be hit more? How have you balanced that against national radio? There does seem to be a concern that some rather grander national-

Mark Thompson: Radio 4 in particular.

Q29 James Wharton: I do not wish to mention any names. They are being better protected, because of course you can hold them up as examples of national quality, whereas local radio, which so many people listen to and rely on, is perhaps more difficult to crystallise and hold up and say, "Look, this is the great programme that we’re delivering, because it is localised."-[Interruption.]

Mark Thompson: The Comptroller and Auditor General is making an improper suggestion1.

Amyas Morse: I think you should clarify that.

Mark Thompson: Firstly, the proposals on which the Trust is consulting the public represent real choices. We decided, for example, to save a very significant amount of money by sharing Formula 1 rights with BSkyB. It will save us in excess of £150 million over the contract. That is a choice, and it is a choice that is not popular with all F1 fans.

The team looking at local radio visited every single one of our 40 English local radio stations, and looked very closely at the circumstances of each single one of those stations. When you hear 20%, by the way, the local radio average is 10% and productivity is much less than 10%. However, it is true that the potential head count reductions in English local radio are closer to 20%. When, for example, staff or unions in the BBC talk about 20%, they mean not the headline savings figure-there are some costs we cannot save-but, essentially, the number of staff who might lose their jobs. I accept that that is a very significant potential reduction in staff.

We have looked very hard, station by station, at how we can protect core news, particularly news at breakfast, mid-morning, lunchtime and drivetime, with the expectation of sharing some programming in the afternoon and evening. Some 86% of listening to local radio takes place at breakfast and mid-morning, so we are trying to preserve the journalistic core of local radio and preserve our investment in the times of the day that the public are most likely to listen. That is where we are doing, in my view, the most important public service around supporting local democracy and bringing local news and debate to the listenership. It is a really good example. Local radio is an incredibly precious service, and if you look at the BBC proposals as a whole, local radio is one of the most protected services in terms of overall investment of all the BBC services. I accept that at the sharp end the numbers look pretty daunting.

Q30 Chair: It is also phenomenally cheap isn’t it? When you look at the breakdown of BBC expenditure, BBC 1 alone costs £1.4 billion, while 40 local radio stations cost £147 million-in other words, it costs 10% of what BBC 1 costs for 40 stations across the country that are, as has been said, of huge value. In our area of Norfolk, which has England’s premier BBC local radio station, the penetration is much higher than 10%; it is pushing up to 30% in some places.

Mark Thompson: To be honest, the thing about English local radio is that unlike you I do not particularly like to pick winners because I can make a very strong case for every single one. We looked at whether there was a case for merging, or even shutting, some English local radio stations, and again we decided not to do that. There was talk earlier in the process-which, by the way, came out of the radio community-about whether we should in some way combine or merge local radio with Five Live. Again, we decided that that would lose the unique character of English local radio.

Q31 Chair: What I am still not quite clear about, and it comes out in the report that the NAO is not clear either, is how you go about your comparisons, and the methodology. For example, in paragraph 13 the NAO says, "We did not see a detailed analysis of the costs and benefits of the outputs produced by each area." How do you compare the value of spending money on local radio with, for example, the value of spending it on BBC 1?

Mark Thompson: I do not know whether the NAO saw "Putting Quality First", but there are a great deal of data in that. It looks exactly at benchmarking each BBC service against each of our public purposes and various things such as reach, quality, impact and so on.

Q32 Chair: Can the NAO comment on that?

Amyas Morse: Just to say that we are looking at areas of expenditure, not at programming areas. That is what this refers to. To be clear, the point we were making, which I think the Trust has taken on, is that we believe that given the larger reductions you will be looking at in the future, you are going to need a more radical method of arriving at what things should and could cost, as opposed to doing what has been done against a target so far, which has been achieving incremental savings. That is a bit different from saying, "Well, if we started with a desire to get more radical reductions, what would be a target to go for?" We are talking about developing methods for doing that. The Trust has responded favourably to that, and we think that is the way to go. It is about cost re-engineering rather than simply efficiencies.

Q33 Chair: Mr Thompson, I do not want to stop you coming in, but Mr Fry, would you accept that you have some way to go in developing those methodologies?

Anthony Fry: I would say that given the journey that the BBC and the BBC Trust are on, in terms of enhancing efficiency, measurement, cost control, expenditure and so forth, it would be idiotic if we did not say, "It is a journey; it is not a one-off." Therefore, "Delivering Quality First" from 2011 is a considerably higher quality piece of work than the work that was done around 2007. I hope that the work that will be done in 2015 or 2016 and the time we come up to charter renewal will be a better piece of work again. Any organisation-not just governmental but also in the private sector-that did not say that would be very arrogant. We are improving all the time.

Mark Thompson: If I have understood the NAO’s point, this is about cost. In particular, it goes to the challenge of benchmarking and discovering best practice, whether internal or external. The NAO has been very useful-we talked about this before in the Committee-about trying to be inventive in an environment where benchmarking is hard. Oddly enough, in the area of local radio we are lucky. We have 40 stations, and internal benchmarking is very useful in local radio. I took your point, Chair, to be slightly different, and less about efficiency and cost and more about the allocation of money in the first place.

Q34 Chair: Yes. How you measure value.

Mark Thompson: We have done a great deal of work on that-we can send it to you-which tries to analyse the net public value of different services and relate that to expenditure. We have tried extremely hard to bring objective measures to bear to look at relative value. Frankly, that analysis led to a question mark about the net public value of 6 Music, which was triumphantly trumped by the public, as a result of the outcry, doubling their usage of 6 Music. It changed the numbers. As for BBC 1, I would say very straightforwardly that if you ask most licence payers what the licence fee pays for, BBC 1 comes first, far ahead of any other service. Of course, to do network, UK-wide television-with network drama and programmes like "Frozen Planet"-to the highest quality, world-standard quality, is an expensive business. The actual underlying costs of producing what we hope would be the world’s best general information and entertainment television channel are of a different order from those of even the very best local radio. It just costs much more.

Q35 Chair: Apart from reach, quality and impact, what further indices have you developed that you call objective to help you in this process?

Mark Thompson: We are very interested, for example, in whether services provide an original contribution; in other words, whether the public give them high marks for originality, freshness and innovation. One of the things the BBC Trust has pressed the management on, in particular over recent years, is this idea of boosting originality so that one of the things the public get from the BBC is a sense they are going to see new ideas, new artists, new programme makers and new formats.

Q36 Amyas Morse: Just for information-I genuinely don’t know the answer to this-do you have some objective measures that are not related to public opinion?

Mark Thompson: The answer is that in areas of quality, public opinion is a rather loose term.

Q37 Amyas Morse: I mean a methodology that goes into sampling what the public think. I am not criticising this; I can see why it is significant. I am just asking for information. Do you have some internal methods that are to do with-

Mark Thompson: Yes. First, there are mechanical methods. BARB in particular is mechanical about behaviours. Secondly, you can analyse, for example in digital services, the way people move between different websites in a way that gives you very powerful indications about underlying behaviours. Our view is that done over time and with sufficiently large samples-our Pulse panel involves many thousands of people-systematic questions about quality, originality and so forth, asked of representative, large samples of the public, are very persuasive.

Q38 Chair: Do you know yet what levels of sophisticated analysis you will be doing in two or three years’ time that you are not yet capable of doing but you can see on the frontier-"If only we could do that, we’d have a better quality of information"? Mr Fry, you did say you would be an idiot not to say that you would be improving and that you hoped to be better in future. Paint me a picture of what you hope that will look like in two or three years’ time.

Anthony Fry: That is the million dollar question. I don’t know the answer; if I did know the answer, I should be saying to them, "Do it now." The thing to remember as well is that we are not dealing with a steady state. We talked about efficiencies. We talked about how people view quality and how people value the services they value. That is why we take consultation very seriously. The other thing that adds complexity, of course, is that how people are accessing information is changing the whole time. If you had suggested even in 2007 the penetration of certain types of platform on which people are accessing media content in the broadest sense, most of us would have sat there and said, "That doesn’t sound very probable." We have to measure not only how the BBC is performing in its services in absolute terms, but how the BBC is performing as far as the audience is concerned in relative terms to other platforms.

Mark Thompson: I have just one more point to make. We are going through a really big revolution. We are probably going through it in some ways-because we need to, because of the nature of the BBC and the way it is paid for-before anyone else anywhere in the world. You can think about the 2012 Olympic games. You might well have thought as recently as Athens that essentially this is a television event; it is a piece of television over a few weeks. The Olympics games now, with the cultural Olympiad, the run-up and the torch relay, take up most of a year and they are going to be on television and radio and on computers, laptops, smartphones, BlackBerrys and Twitter feeds. The big translation is from thinking what the BBC does around two or three specific delivery systems-television and radio in particular-to a projection of sport or news where the public absorb it in lots of different ways. In other words, it is about measuring usage, consumption and satisfaction across different media, on the move and at home, and doing that systematically. We have done some very interesting work, and I hope, ultimately, that we will have measurement systems that capture the complete value that you get, for example, from news or from sport, irrespective of where you are sampling it.

Q39 Chair: Do you have such thing as a pessimism bias? We look at optimism bias in projects, but people are far more likely to pick up the phone to complain when they do not like something than to pick up the phone and say that something was absolutely superb, although you have a lot of superb output.

Mark Thompson: The overwhelming majority of contacts we get from the public are neither of the above; they are people seeking more information. The really big thing that the public typically want is that when they see something on television, hear it on the radio or see it on the website, they want to find out more. I think more than 90% of our contacts are neither praise nor complaints, though it is true that the complaints, which are a small proportion of the total, outweigh praise. Whether that is a national characteristic, human nature or whatever, I do not know, although you would be surprised at just how many messages of support and praise we get from the public as well, particularly when you have something like "Frozen Planet" on air.

Q40 Meg Hillier: If you will forgive me, Chair, I just want to touch on local radio. I feel that London should have its say here, as well as Teesside.

We have a different arena compared with when local radio was established; we have so much more competition. Even though it is a much smaller part of your budget than some of the big, world-class stuff that you do, is it that, because you see that competition and that there is a lot more choice for listeners, if there is a degradation in local BBC radio, people would have somewhere else to go? Is that factored into your thinking at all?

Mark Thompson: I think the public need for local radio, which is very different from commercial local radio, remains at least as strong as ever. So I would not claim that the need or public appetite for it has diminished-not at all. Perhaps you have not noticed, but in the period that you are discussing here with the NAO report, we set virtually no efficiency targets for local radio, because we thought that local radio was at a frontier. We made one or two small changes in a few stations, but essentially, we did not set a target. A number of things have happened to make us believe that we can. For example, we have rebuilt and brought new technology into quite a few local radio stations. We think that we have some opportunity, but much less opportunity than, for example, in the case of television.

Let’s see where we get to at the end of the consultation. If you imagine a scenario where the BBC presses ahead with its proposals in their current form, I would still expect to keep a really close eye on what is going on in terms of the quality, range and effectiveness of local radio. If it feels that it is dropping off, then we have to do something about it. We do not want to preside over the decline of England’s local radio.

Anthony Fry: We will look at the responses to the consultation incredibly closely, because we are very well aware at the Trust of how sensitive it is. It was a subject of considerable consultation and debate between ourselves and the executive. We will look at the nature of the responses we get and form our judgment about what to do in regard to that, on the basis of what people are saying. Obviously, if someone is simply coming along and saying, "I think it’s outrageous", that is not of itself a terribly helpful piece of response. If they say, "This will cause damage in the following ways," then we at the Trust will take that very seriously.

Q41 Meg Hillier: I think earlier, Mr Thompson, you said that you have ruled out merger. Is that actually ruled out, or is it just not on the table at the moment?

Mark Thompson: Well, it is not part of the present proposals, and I am completely against it. Our point about local radio is that it is local. If you make it less local, it loses its rationale.

Q42 Meg Hillier: Nevertheless, have you looked at all at any pooled content?

Mark Thompson: We are looking at two things. Interestingly, with the kind of variable geometry around England, pooling that works in one area would not work in another. We are looking at different pooling arrangements, absolutely with the managers and individual local radio stations involved. Having done a reasonably successful pilot in Yorkshire on pooling in the afternoon, we are looking at, in the evening, when overall listening is relatively low, a pan-England approach-the best of English local radio from across England.

Q43 Meg Hillier: Like "From Our Own Correspondent," but from the shires?

Mark Thompson: Yes, or "The One Show", or whatever.

Chair: I want to bring in Fiona Mactaggart. But first, before we move on, the CAG had a question.

Meg Hillier: Sorry, I have not quite finished. The other thing I was going to say was about listenership figures. If you are looking at these objective measures of quality, and at measures to do with value for money, which, as Ian Swales said, are complex, are you looking at listenership between BBC local radio and alternative commercial providers?

Mark Thompson: Yes.

Q44 Meg Hillier: How are you factoring that into your decision?

Mark Thompson: It is complicated. What the BBC is really interested in is delivered value to households in respect of the licence fee and, in particular, delivery of certain kinds of programming to households. The complication about radio is that people use BBC local radio for reasons that are different from their reasons for using commercial radio. There is very little music on English local radio; in large measure it is news, information and speech. For reasons that seem to be absolutely positive, it appeals particularly to people who do not find much else that is to their taste across commercial radio or BBC radio. The listenership of local radio is unique. Many listeners may be extensive users of BBC television, but may listen to no other BBC local radio and may not listen to any commercial radio.

Q45 Meg Hillier: May I go into some of the figures on your next group of savings? One that interests me is the increase in revenue that you are predicting, which I think is £40 million. Is that right, Ms Patel? There are huge issues. UK Gold was a bad example, was it not, of rights sold cheaply? Many good things are sold-BBC Worldwide comes into all this-but there are also huge issues about intellectual property and challenges. That figure seems quite low. Could you unpack it a bit, and explain why it is so low?

Zarin Patel: The BBC earns about £181 million per annum from rights gainers from BBC Worldwide, which commercially exploits through sales of DVDs and international channels. That is a significant amount of money that comes into the BBC already. We then have, within television, co-production money. For example, "Frozen Planet" will have been funded as much by the BBC as by international broadcasters who have put money in. That is about another £100 million per annum. The BBC has significant commercial income already. What we are trying to do in "Delivering Quality First" is to ask whether we can get better at that, and at finding the right international broadcasters and getting more value.

Q46 Meg Hillier: That sounds fine, but what about some of the historic stuff, because there are real challenges in intellectual property, and who owns what? Different people have rights to some of the income-producers, actors and so on-and that is a legal minefield to go through. Surely that must be a challenge.

Zarin Patel: It is a challenge, but the proposals are trying to see whether our existing IP framework can work better. It is not saying that we are going to shift the boundary of our commercial operations. That is something that the Trust will think really carefully about for the licence fee payer. Although £40 million per annum does not feel significant, it is additional to a fairly significant amount of commercial income from BBC Worldwide and from our own co-production exploitation.

Q47 Meg Hillier: What does the £40 million represent in percentage increase in total income? You have given us two figures, but I am not sure whether the £181 million and £100 million were totals?

Zarin Patel: They are totals. The £181 million is the per annum figure for the rights payments and dividends that we get from BBC Worldwide. The £100 million is directly into our programmes from international co-producers, so that is £280 million per annum on a licence fee base of about £3.5 billion, so just under 10%.

Q48 Amyas Morse: I am reflecting on the discussion about the shape of efficiencies and cost reductions, and how that is likely to go. I think you recognise, Mr Fry, that there is likely to be an expectation of efficiency gains every year, probably going on and on for ever, of around 2% or so, or not less anyway, and every now and again there will be a shift in the environment that will mean some adjustment, which theoretically could be up or down, depending on what it is. That is more or less the picture we should see going forward.

Mark Thompson: I think that is right. I also think you will see something else, which is reasonable. There may be an area of activity where you can take a significant step, and then in the next period you may leave that alone. For example, on overhead and central costs between 2004 and 2007 we took a very large amount of money out through outsourcing, new ways of working, and simply reducing. In this period, we did not feel that there was much more we could do. In the next period-the period under "Delivering Quality First"-we again expect to take deep overhead reductions.

The other thing is that you look at an area and then see what you can do, and if you get to a kind of frontier you have to leave things for a bit. My judgment is that there are quite a few areas now-in radio, increasingly in journalism and in one or two areas in television-where you are getting down to the business of a very small number of creative people working incredibly hard with pretty good kit-pretty good technology. It is not obvious to me where the next things come. I think that there are some areas where we are approaching a frontier, which in the end is about the human capital involved in making great programmes. I would say that, in a sense, it is not just the BBC but the country that has to figure out what it wants to do.

Anthony Fry: I would be disappointed if by the time that we are sitting around discussing the next charter and the next licence fee, the quality of that debate was not of a considerably higher order because of the quality of financial information, analysis and interpretation, which has increased and improved since the last time we did that. I think that the debate will be richer and it is for others to decide eventually what sort of BBC they want, providing what services and in what way and deciding the balance between the various ways of delivering those services.

Mark Thompson: One of the main benefits of having the NAO involved is building expertise and knowledge by the NAO, year after year after year, of what is going on in the BBC in this area.

Q49 Fiona Mactaggart: That is really the point that I found most interesting in the report-that the BBC has been pretty successful in making savings but it does not necessarily know whether those savings have impacted on the quality of output. That is what I read in the NAO report; the BBC does not always know if a particular action has led to a particular result. You might be able to measure what the public feel and so on, but the connectivity between savings and outcomes seems still to be just a bit of a rubber band. I am wondering what you have done-it is much easier if someone is paying you for something and you are putting in-to try to make you know better about that specific value for money. For example, are your savings going to have, over time, an audience reaction? You described how they did on 6 Radio, but will they elsewhere? I am not hearing that you know that yet.

Mark Thompson: But I think the challenge here is a fairly fundamental epistemological problem; it is multi-factoral. This is a period where a handful of individuals come up with "Strictly Come Dancing" and the revived "Doctor Who", so that Saturday night on BBC 1 suddenly feels like-to be fair, it happened slightly before this period-there is a real sense of the BBC rediscovering high-quality family-based entertainment on a Saturday. That is not to do with the cost per hours of those programmes; it is to do with brilliant creative people coming up with great solutions. That story-the story of the BBC’s creative success, led by its creative leaders but also by individual writers, directors, artists and so forth-is running alongside this. And it is extraordinarily difficult to isolate exactly what causes what.

Having said that, if the outcome is a public whose satisfaction and sense of quality is going up at the same time that you are driving costs down, at least that can give you the comfort of knowing a negative-that you did not end up reducing the public’s sense of value and satisfaction because of the money you took out. That, at least, is firm ground.

Anthony Fry: Can I go back to the start of your question, if I may? I actually think that it is extraordinarily difficult in a whole range of businesses. I am the chairman of a house builder, for example. I can save money in house building by putting in lower quality doors. What will that do? It will marginally increase my margin this year. In the medium term, if the doors are lower quality will I start damaging the perception of the quality of the house that is being built? Debate. I think that in a lot of businesses-not just a business like the BBC-these are tricky issues of how you get cause and effect.

What I think is that there is more careful monitoring, as far as it is possible, of the effects of changes in costs and delivery on the audience for the BBC than in most other businesses I have seen. With respect, I would be foolish to suggest to you that, suddenly, one day, the NAO and the Trust between them are going to come up with some fantastic measure that will do that. I think that what we have to do is continue-to go back on my journey-to try to make sure that we get an even closer grip on what it costs to deliver and how we can deliver it more efficiently and effectively without damaging the experience for the audience.

Q50 Austin Mitchell: I see that a quarter of the savings in this present round of efficiency savings came from allocative efficiencies, which means switching from less valuable activities to more valuable ones. What is less valuable and what is more valuable? Where was the switch made?

Zarin Patel: I would say "A History of the World in 100 Objects" on Radio 4. We reduced a lot of mid-level factual programming and put the money into "A History of the World in 100 Objects".

Q51 Austin Mitchell: So it involved judgments on the qualities of the programmes.

Zarin Patel: Yes, and that is what controllers will do. That is the example that resonates with me.

Mark Thompson: The decision in recent weeks to extend the running time of "The World at One" to 45 minutes is an interesting example of making a good programme, and, by the way, editorially, both its editor and presenter were very enthusiastic about the idea of a longer "The World at One". That actually means that some other commissions don’t have to take place, so sometimes it is about making a subtle mix change, which tries to build on your strengths. Formula 1 would be another example. Under the arrangement we have reached, we will continue to have half the Formula 1 races live; the other half will be recorded highlights. I accept that that is a slight diminution in service, but we thought that we would get sufficient-

Chair: Isn’t that an increase in service? You can get everything that happened without having to watch them go round and round and round.

Mark Thompson: These would be examples. That is not a productivity saving. It is trying to use the money you have in a way that still delivers real value for the viewer, but costs less.

Q52 Austin Mitchell: But those choices are going to be harder in the next programme of cuts of £400 million. You instanced the fact that you were able to save Radio 6 due to popular demand, and it now has a bigger listenership, but you are not going to be able to make that kind of decision, given the scale of cuts you have to make, to achieve £400 million. Two questions arise from that. First, last week the cream of the House of Commons-that is to say the Yorkshire and Lincolnshire MPs-were given breakfast by the Yorkshire and Lincolnshire regional executives, who said, "We’ve put up these plans and we can achieve these savings by doing this, that and the other." The whole thing was designed to take the onus for fighting them off their shoulders and putting it on the shoulders of MPs, who are whipped into a frenzy about "Save my local radio station", particularly "Save Humberside", because cuts on any scale have a disproportionate effect on smaller organisations. You have no choice, really, when it comes down to the kinds of cuts you have to make, if that is going to be the approach and if you can’t decide to save a programme because of popular demand. Can you guarantee that quality won’t suffer and that we are not going to face more repeats and less adequate coverage of world events because of these economies?

Mark Thompson: I believe that, with this settlement and these plans, we can deliver a portfolio of services from the BBC that will remain of very high quality, where the public’s absolute attitude to the quality of the content and the breadth of services will be undiminished. I have to say that one of the ways in which we will do that is by listening quite carefully to the public and adjusting our plans as we go, so this is about being responsive to the public in this consultation and thereafter. I believe that, although I think it is going to be harder than it has been in previous settlements, we can achieve that. In other words, at the end of the present charter, when Delivering Quality First finishes-at the end of 2016-the BBC can deliver a range of services, which the public will regard as at least as good as the services they get today, despite the savings we have to make; but it will, if I may say so, require more flexibility and sensitivity, and more leadership from the BBC, even than we have done in the past.

Austin Mitchell: Well, my thought for today is that our prayers go with you.

Mark Thompson: Thank you.

Q53 Stephen Barclay: Could I come back, Mr Thompson, to the point you made earlier about, potentially, 20% job reductions in some areas?

Mark Thompson: Some local radio stations, yes.

Q54 Stephen Barclay: That was the figure you used. As part of Delivering Quality First, how many jobs do you expect to be lost from the BBC?

Mark Thompson: Across the entire organisation?

Stephen Barclay: Yes.

Mark Thompson: Because this is not a kind of five-year plan, and because the outcome depends on creative decisions, for example, as between in-house production and indie production, which will happen in the future, I can only give you an estimate, but the estimate we shared with all of our colleagues, and our unions, was an additional 2,000 jobs-or posts-to be lost by the end of the period.

Q55 Stephen Barclay: Across the BBC group as a whole, how many people are currently employed, across all areas?

Q56 Mark Thompson: Twenty-two thousand is the group number.

Stephen Barclay: So we are looking at around 10%, give or take; and how many of those 22,000 work outside the UK?

Zarin Patel: I do not have that figure to hand, but it would be about 4,000 outside the UK in the World Service and Worldwide.

Q57 Stephen Barclay: Okay. Now, one of the areas I know you personally have put a lot of work into is around senior level remuneration. It is something the BBC chairman has described as a toxic issue. Can you just update us on, in terms of this year, what is the highest total remuneration any BBC manager will receive?

Mark Thompson: I think that will depend on the outcome of the results in our commercial arm, BBC Worldwide at the end of the year.

Q58 Stephen Barclay: But including those, just the ballpark figure: what sort of figure would you put as the highest amount?

Mark Thompson: Of any individual?

Q59 Stephen Barclay: Yes; any individual manager.

Mark Thompson: Well, as I say, it depends. It is likely, I think, to be somebody working in our commercial arm, and is likely to be the chief executive of BBC Worldwide. His figure will be determined on the out-turn of the results of BBC Worldwide. We can give you last year’s number, if that is useful.

Q60 Stephen Barclay: Well, the last available. You have looked at this closely. I know you have taken a deep personal interest in senior salaries.

Mark Thompson: This year the senior salary pay bill-

Q61 Stephen Barclay: Can you not give us a ballpark-you are talking, I presume, about Mr Smith: so what sort of figure does he earn?

Mark Thompson: A large part of John Smith’s remuneration depends on the delivery of increased profits, and therefore dividend back into the public service, so it will very much depend on what the out-turn for this financial year is, and it has been our view about the commercial activities of the BBC that it is in the public interest that we should drive profitability and dividend as hard as we can.

Q62 Stephen Barclay: Sure, I appreciate it is dependent on profit-sharing and annual bonus; but you seem reluctant to give me a figure. Can you not give me a ballpark figure?

Mark Thompson: I think the most sensible thing would be to give you last year’s out-turn.

Zarin Patel: In last year’s annual report, his salary was disclosed as £348,000, but he did step down from the executive board part way through the year, so the full year amount would be slightly higher than that.

Mark Thompson: The broader story this year is the total senior management pay bill will come down this year by 25% and head count will come down by 20%, and in DQF we have suggested that over the period we can reduce senior management numbers very significantly. Our aim is to get to an organisation where senior leaders represent no more than 1% of, as it were, the new lower head count.

Q63 Stephen Barclay: No; with respect, Mr Thompson, those are different issues to the one I am asking-an area that you have spoken about, which the chairman has highlighted as a toxic issue. I was just using the annual review, 2010-11. Ms Patel was suggesting his remuneration was around £350,000. I presume you have looked at it. You would know what senior people earn. You are not in a position to give us a ballpark figure.

Mark Thompson: If you include-

Stephen Barclay: Total remuneration. All things considered.

Zarin Patel: John Smith, as disclosed in our annual report last year.

Stephen Barclay: You were the person who mentioned John Smith, so if we take John Smith as an example.

Zarin Patel: Together with his commercial bonuses, as Mark has explained, last year, for the six months that he was on the executive board, he was paid £348,000. As Mark quite rightly said, his bonus schemes depend on exceeding Worldwide performance targets. Therefore, the value delivered to the BBC by his efforts goes to the £181 million of commercial income that we talked about earlier. If you look at the annual report, after all of the reforms total executive pay has gone down from £4.8 million to £2.7 million per annum on an ongoing basis.

Q64 Stephen Barclay: Perhaps I could give you some figures that are in the BBC Worldwide annual review 2010-11 report on directors’ remuneration-these are your own figures, which I had a look at last night. Yes, total remuneration has gone down. One of the reasons for that is, I think the head count has gone down. So that is one of the ways it has been-

Zarin Patel: No, the figures I quoted are on a like-for-like basis.

Q65 Stephen Barclay: Right, but let us take Mr Smith. His base salary is £440,000. Then, under the annual bonus scheme, this year he earned £138,000, plus a potential further £173,000, which he deferred. His actual annual bonus this year was £276,000, which equates to 27%, but he just took half of that because he is able to defer the half, and by 2014 he then qualifies for a further 25%. This year, he actually received an earlier deferred bonus worth £134,000. So if we actually just look at what he was paid this year, it is £440,000 base, then the annual bonus half that he took, which is £138,000, the deferred bonus from a previous year of £134,000, but he has obviously deferred more than that, actually net £39,000 more, then he also got this year-

Chair: Steve, can you get to a question? Nobody else has these papers.

Stephen Barclay: Yes, okay. These are available. What I am getting to is that Mr Smith was paid more than £1 million as a BBC manager this year. By my reckoning, if you add in the £172,000 from a profit share, £14,000 of taxable benefits, so-

Mark Thompson: The complexity is because of the deferring of-

Q66 Stephen Barclay: What I’m driving at Mr Thompson, is that a number of questioners have talked about local radio. We are talking about potentially 2,000 job cuts. Is it correct that one of your managers earned more than £1 million this year? Yes or no.

Mark Thompson: No.

Stephen Barclay: It’s not correct?

Mark Thompson: No. It is not correct. I am very happy to write to you with an analysis of the remuneration of John Smith. The really important point to make about Worldwide is that the BBC Worldwide that John became chief executive of six years ago had a turnover of £600 million and delivered profits to the BBC, which help support local radio and the rest of the public services, of £30 million. John has doubled the turnover-with his colleagues and with a lot of support from the BBC-of Worldwide and more than quadrupled the profits. The issue is very straightforward here. In my view, in the end it is a question of efficiency and whether it is worth-

Stephen Barclay: But selling "Animal Planet" was one way, because you’re right-

Chair: Steve, we have to move on. If you could send us a note. If there is anything you are unhappy about with the note, you can take it up offline.

Mark Thompson: One of the things we are charged with in our charter is commercial efficiency. We believe that driving commercial efficiency is good for the BBC, and for public services like local radio, but also good for the British creative industries.

Chair: Thank you very much. We look forward to the note. If we need to go further, we will.

Q67 James Wharton: I think this report, actually, is quite positive. I think you have achieved a lot in terms of driving efficiency, which makes a nice change from some of the reports that we see. One of the important factors though, and it is often a public misconception, is the difference between making straightforward savings-say, by cutting services-and actually driving through efficiency savings. I am pleased that, although there is some debate about the ability of any organisation to measure efficiency savings, there has been a clear effort to do so within this. My concern, though, is looking forward, because the savings that you are going to make going forward of £700 million, I understand about £400 million are going to be from further efficiencies and £205 million from changes to the scope of services, which I assume, in jargonistic terms, really means cutting things. My concern-I would like you to reassure me on this-is that savings that arise from cutting services do not fall into the efficiencies category. For example, were you to cut the cost of a local radio station, you might say, "That’s saved us £1 million," but that might lead to further efficiencies because you will need fewer human resources staff at head office and fewer people to liaise, and you will not need to produce as many editions of the in-house magazine or whatever, so you may then try to argue that those are efficiencies. Can you assure us you will have a rigorous process in place to ensure that where savings are made by cutting services, they are put in the right column and are not accidentally recorded as efficiency savings?

Mark Thompson: Yes, and we would expect to be audited by our own auditors and by the National Audit Office on the clarity of the definitions and how the definitions are applied.

Anthony Fry: From the Trust viewpoint, we are absolutely on the same page. We realise it is incredibly important that how the savings across the piece were delivered is properly understood, and that requires them to be understood in exactly the way you have described.

Q68 James Wharton: You believe you will be able to do that effectively?

Anthony Fry: We will make sure that we do everything that is humanly possible in terms of auditing to make that possible. By definition, at the margin, am I going to say to you, "Some stuff will slip through the net"? It almost undoubtedly will. Directionally, it is really important that we understand these things, because if we are asked at the time of the charter to justify what we have done over the period in which we have had this important responsibility, I want to be able to sit in front of whoever is quizzing me and say, "Yes, we have carried out our duties appropriately." I think this is an important point.

Q69 Ian Swales: Can I ask what might sound like quite a narrow question? Page 15 refers to the pension issue at the BBC. You re-evaluated the deficit in March 2011, resulting in an extra payment of £110 million in 2010-11, further contributions of £60 million in the current year and another £60 million next year. Can you tell us, first, what the actual position is and how much money will be taken out of the things you do as a result of the pension deficit? Secondly, what policies have you got in the pensions area, remembering the changes that are happening elsewhere in the public sector at the moment?

Zarin Patel: The BBC has been undertaking pension reform for a quite considerable period of time. In mid-2005, we closed our scheme to new joiners, so they moved to a career average scheme, where they had to work longer and we paid in less. As a result of the credit crunch in 2008, just like with every other pension scheme, we suffered a very significant deficit. That deficit was of the order of £1.6 billion, and we undertook further, fairly significant and very painful pension reform in the BBC. All new joiners will now just join a defined contribution scheme. Existing staff who are in the current schemes will have the choice of moving to a lower-cost career average scheme. All of those reforms, we think, will save the BBC about £500 million over the long term. We are left with a deficit of £1.1 billion, and the annual payments are broadly about £80 million per annum, if you average them over the 10 years. That is what we are paying for.

Q70 Ian Swales: Can I just be clear? In 2005, when you changed the scheme, did that apply only to new joiners?

Zarin Patel: Yes, it did at that stage.

Q71 Ian Swales: So anyone who was working for the BBC in 2005 is still in a final salary scheme?

Zarin Patel: A final salary scheme. We have an old benefit scheme where the inflation allowance is pretty high and a new benefit scheme where the benefits are just lower.

Mark Thompson: We have signalled some changes in that, as well.

Q72 Ian Swales: Are you planning any changes to the current scheme for existing staff?

Zarin Patel: Yes. For the current scheme, we announced these changes earlier in the year. What we are saying to current members of final salary schemes is that their pensionable salary will grow only by a maximum of 1%. If they get a pay rise of 2% or 2.5%, only 1% of that will be pensionable. That is a fairly significant reform. If people want to switch to a lower-cost scheme, we have put in a career average scheme. Those are pretty fundamental reforms. We are thinking about pension schemes in the very long term. Rather than doing continuous pension reform, which is very painful for staff and uncertain, the BBC needed real financial certainty about its pension costs and lower risk in more constrained times.

Q73 Ian Swales: So if we take the payments you have made in 2010-11, and you are planning to make another £120 million this year and next year, those are against £1.6 billion, yes?

Zarin Patel: No, £1.1 billion. The deficit was £1.6 billion; the pension reform that we put in place will mean that our pension costs, the pension deficit, will reduce by-

Mark Thompson: The reforms led to a credit being given.

Q74 Ian Swales: Okay. But basically, what the licence payer is looking at is that you are going to be taking £60 million-plus each year in order to fund these pension deficits.

Zarin Patel: So on average over the 10 years, it is £83 million per annum. During the two years while we are delivering quality first and will have considerable spend on restructuring, we have asked the pension scheme trustees to allow us to pay in slightly less. Then we will revert to a long-term payment of £80 million per annum.

Q75 Ian Swales: I am no expert on pensions. If we take the scheme that is now on offer, how would you say that compares with the sorts of scheme that are being talked about in the public sector generally?

Zarin Patel: I would say that for new joiners, it is a less rich scheme, and therefore a less expensive scheme for the licence fee payer. It is defined contribution, therefore completely limiting the investment risk that the BBC takes. The career average scheme requires our people to work longer-until the age of 65-it has a cap on inflation and staff pay more into the scheme as well. We benchmarked considerably against the private and public sector at the time.

Mark Thompson: I think it’s fair to say that overall, the BBC pension reforms are tougher than the majority of what has been contemplated. They have now been accepted, by the way.

Q76 Meg Hillier: I want to go back to the earlier point about BBC Worldwide and its profit. Last year, the profit went up 10.3%. That included the sale of Animal Planet for £96.4 million. To go back to my point, isn’t that £40 million revenue increase a bit pedestrian?

Zarin Patel: The sale of Animal Planet is a one-off capital receipt. It’s not ongoing normal business. The £40 million-

Q77 Meg Hillier: But doesn’t the 10.3% operating profit for BBC Worldwide last year include the sale of Animal Planet?

Zarin Patel: Yes, it does, but it would have been shown as an exceptional item below the 10% underlying profit growth. What happened at Worldwide was underlying profit growth in its ongoing activities of 10.3%. The sale of Animal Planet-and, this year, BBC Magazines-will result in one-off exceptional capital proceeds, which will be shown underneath the operating profit.

Q78 Meg Hillier: You still have other assets that you could be selling. In that £40 million over five years, it doesn’t look like you’re including any potential asset sales.

Zarin Patel: No, we are not.

Q79 Meg Hillier: That is interesting. Your own minutes from September this year say that the targets for commercial revenue should be at the lower end of estimates. I wonder why that is, given that BBC Worldwide is the commercial element of the BBC.

Mark Thompson: Can I have a go at that? For the BBC and the Trust, the commercial exploitation of what the BBC does has to balance two things, one of which is the need to maximise the value of what the BBC does commercially. The licence payer has invested in the content. If we can get more commercial residual value, which helps offset the licence fee, that is good, but we also have to think about the BBC’s brand, its values and what it stands for. There are certain kinds of exploitation that the BBC shouldn’t do. It is fair to say that we are continuing to debate how far you can push the commercial targets for the BBC without beginning to run the risk of undermining some of the BBC’s-

Q80 Meg Hillier: But Mr Thompson, nevertheless, there must have been estimates at a higher level for the trustees to agree to go for a lower end of estimate.

Anthony Fry: Let me say something about this. This is a huge conundrum with which the BBC-but more importantly, the BBC Trust-wrestles. How much push should you make on generating commercial revenues, and how do you go about doing that in such a way that you not only protect the brand, as Mr Thompson referred to, but do not trample all over other parts of the commercial sector? To give you an example, when I joined the Trust, it was not long after BBC Worldwide had acquired Lonely Planet. I do not need to tell you how much aggravation that has caused.

If you are a commercial media operator, you would do a whole lot of things to expand your business, including making acquisitions, that in the view of the Trust are inappropriate for an organisation that, at its heart, is publicly funded. We absolutely believe that the job of Worldwide is to generate through the exploitation of the BBC’s own intellectual property, which I should say has been generated out of licence fee payer money. We are obliged under the charter to ensure proper exploitation of that, but there is a balancing act.

Do we always get it right? Probably not, but the most important thing is to find the balance. There is the stuff that is impacting on commercial operators, who I can assure you spend a disproportionately large amount of time talking to people like me, saying "You shouldn’t be doing this and you shouldn’t be doing that." That is on the one side, particularly in the UK context. So the one balancing is, "What do we do in the UK in our Worldwide operations, and what do we do overseas, and how much licence fee payer exposure is there to the activities of Worldwide?" In reaching a conclusion about what we think is the right balance, you look at the total amount that you could generate from Worldwide and then you ask, "Will that have a law of unintended consequences, and do you have to hoe some of those activities back?"

Q81 Chair: I am going to draw this to a close shortly. There is just one thought I had which was: how much could you have saved if you had started all this earlier rather than waiting for the issue to be forced by the licence fee settlement?

Mark Thompson: The way I would put it is this, and it really is as the Comptroller and Auditor General said. We are engaged in a long-range process over many years. In this period, how are we going to do our efficiencies? We are going to do it because we have already made Fabric; we have already invested in Salford and in West 1. We have been on a road, and will go on being on a road, of trying to run the BBC as efficiently as we can, and we will fairly soon start planning for the period beyond the next charter.

The big caveat we are giving you is that there are quite a few areas-I am very happy to take the PAC to look at them-for example the one person making a radio programme, where further efficiencies look like they are going to be difficult to achieve. We have talked consistently today about local radio, and I readily accept that local radio is a good area of the BBC where, certainly beyond the present proposals, trying to make further efficiencies is going to be difficult.

Q82 Chair: There is one area that I don’t think we have covered adequately and that is the analysis of what things should cost. There is an interesting paragraph on page 27-paragraph 2.11-headed up, "Determining what activities should cost", which talks about the fact that for example in drama, "the production team treats the…budget as both a limit and a target and aims to allocate all the available funding to produce the best programme possible." You are going to be facing a tighter world, as we all know, so what are you doing to make sure that you have established to the right level of assurance what things should cost?

Mark Thompson: At one level, if you are a BBC drama producer, or if you are making "Frozen Planet", you of course want to get as many penguins in the shot as possible. You want the highest possible production value. Someone making a period drama for the BBC is trying to compete with Hollywood movies, which cost 10 times as much. Understandably, you are trying to do everything you can to deliver the best possible programme. The idea that you regard the budget as a limit as well as a target, I understand what is going on there. What I would say is that this takes us back absolutely to the whole debate that the NAO has rightly highlighted-but it must be said, it has struggled just as much as we have actually to get commercial counter-parties to open up. Incidentally, other commercial broadcasters who talk a lot about BBC costs do not like to open their own books-an interesting topic in itself. It is about benchmarking. If you cannot benchmark outside the organisation, how can you benchmark and learn both from best practice and from problems inside the organisation so that you are progressively testing what you do against better practice somewhere else?

Q83 Chair: Where do you go for your benchmarking? Who do you look at for your comparators?

Zarin Patel: Let me give you a good example: "EastEnders", which has been the subject of continuing drama series study. What we have done with the production team is that we took people from other producers, from "The Bill" and "Coronation Street", and got them, with a fresh pair of eyes, to reconfigure completely how we make "EastEnders". We have moved "Casualty" to Cardiff in recent weeks-again, a completely new production team that, with fresh eyes and other experiences, looks at how we can reconfigure those dramas. There is a mix of benchmarking, where you can, internal and external, but also bringing in new capability and insight. A fresh pair of eyes every three or four years will see things that the previous people did not see. You have to use a combination of things-no one thing is a silver bullet.

Mark Thompson: One more example. Very much in the light of one of the previous NAO studies on network radio costs, Tim Davie, the head of Audio and Music, invited John Myers, who is a very distinguished and experienced commercial radio player, to come in and look at our music networks, with his eye and his experience, to make recommendations. He did, and we published his findings-broadly positive, but some quite sharp points, all of which made the newspapers. We are also now asking John to have a look at local radio and, again, see whether our management conclusions and proposals make sense in his view. If we cannot get other commercial broadcasters as companies, can we use experienced commercial individuals to come in and help us? Can we look abroad? Can we look at what people are doing in other countries-other public broadcasters, but also other commercial broadcasters, so we can learn lessons from them as well?

Anthony Fry: Reverting to the very first part of that question, which was about if we had started doing this earlier, I would say to you-I have noticed this even in the three years I have been on the Trust-that the BBC has traditionally, like a lot of well-established organisations, been incredibly inward-looking, and incredibly not invented here. The thing that is most refreshing, and I pay full credit to the NAO for the work it has done both before I joined the Trust and subsequently in this regard, is that it has been making the BBC far more open to taking examples from outside and applying them. I think that has made a big difference.

Q84 Chair: I think that is an extremely good place to finish. You just said, Mr Fry, that scrutiny is a good thing-

Anthony Fry: Absolutely.

Chair: And we should probably have more of it. Thank you very much indeed for your time.