BBC Annual Report and Accounts 2008/09

"Licence fee payers rightly expect to receive excellent value for money across all our services. To succeed in delivering more for less we continue to simplify and innovate in every aspect of our business."
Zarin Patel, Chief Financial Officer

The BBC offers a uniquely diverse and distinctive range of services; it is also funded in a distinctive way. We have commercial operations, including BBC Worldwide, but most of our funding comes from the licence fee, paid for by households across the UK. We also receive funding from the Foreign & Commonwealth Office to support the World Service.

Our funding gives us exceptional privileges and we have a responsibility to spend this money well. The first part of this financial review focuses on how we do this, especially in the face of the current economic downturn.

Our bottom line is value – for all our stakeholders

Another consequence of our unique status is that we do not have a ‘bottom line’ in the way that profit-making organisations do, but show a surplus or deficit each year.

Our group accounts show a surplus before interest and tax this year of £178.1million (2008deficit (£4.7million)), arising principally as a result of the way we have been funded. We have higher settlements in the early years which will help to fund our significant Charter commitments through to 2012/13, including the digital build and Help Scheme, the move to Salford and our network supply strategy.

Rather than a bottom line, what we do have is a very clear understanding of the value we can and should be creating for our stakeholders, and this translates into five key financial objectives:

Maximising our income by collecting the licence fee as efficiently as we can

There are two aspects to this: developing more cost-effective ways to collect and pay the licence fee, which also meet our customers’ needs, and keeping evasion as low as possible.

We saw a 12% increase in the number of people paying through the cash plans last year, which enables people to pay in smaller instalments over a longer period, and we’ve also provided more outlets where people can pay at their convenience. We have continued to promote online payments, which are cheaper to process, and more convenient for many of our licence fee payers. More licences were sold both this way and through the self-service phone line in 2008/09. Self-service now represents 35% of total transactions, up from 26% in the previous year.

The number of people paying through direct debit increased again this year from 66% to 67%. We are, as expected, reaching the maximum potential for this particular scheme, so we are now focusing on investing in other flexible payment methods. Our total collection costs (net of interest) went down again this year, to £119million or 3.4% of income.

Evasion rose slightly, from 5.1% to 5.3%, reflecting current economic conditions, but as this was offset by more efficient collection, the combined cost of both collection and evasion remained stable at 8.7% of our licence fee income. However, we expect to face further challenges in the next 12 months as lower levels of consumer confidence slow the growth in new households.

The BBC Trust recently carried out an independent review of our Licence Fee Collection, which consulted with licence fee payers before making a number of specific recommendations on how our approach should change. We have taken these on board, and will particularly be looking at how we communicate with licence fee payers, simplifying how people pay for their licence fee, and ways to target our enforcement measures more effectively.

Making the BBC as efficient as possible, and providing good value for money

The success of our efficiency programme is more important now than it has ever been. Under our new Continuous Improvement programme, which started in April 2008, we have been set a stretching target to achieve 3% cumulative efficiency savings each year or 15% of our cost base to 2012/13, which equates to about £1.9billion. Over this time we also plan to reduce headcount by 10% (1,800 posts), on top of the 10% achieved between 2005 and 2008 (1,900 posts).

We estimate that the Continuous Improvement programme will cost about £160million to implement over six years, and we have saved £237million since the programme started (£192million net of costs).

This is not a one-off programme of savings. From 2000-2005 we delivered over £2billion through efficiencies and other initiatives, and then achieved a further £347million of recurring annual savings,through the Value for Money programme, which ran from 2005 to 2008. These efficiency programmes principally targeted our fixed cost base; this means that the savings in our latest programme, as a proportion of our variable costs, are actually even higher.

The savings come from a number of initiatives, including changing the way we commission and make in-house programmes, centralising news production and introducing end-to-end digital tapeless production.

Licence fee collection/evasion %

Gross efficiency savings £m

So far, as a result of the changes made to the way we make our programmes, we have been able to invest more in technology, improving the capabilities of iPlayer and enhancing our on-demand capabilities, to make our Sport, News and Radio content available wherever and whenever our audience wants it. We have also invested in multiplatform programming and new services such as HD – this has already been a great success both for the 2008 Olympics, and for landmark programmes like Nature’s Great Events.

The final points to mention here are the Value for Money reviews. The National Audit Office completed two reviews in 2008/09, one on radio production, and the other on our management of strategic contracts. The first recognised that the aim of achieving nearly £70million of cumulative cash releasing savings in radio by 2012/13 is a challenging one. The report made a number of recommendations, which we were either already implementing, or will address now. Most of these relate to sharing good practice and insight, both inside and outside the BBC. The second review analysed 17 different contracts with a combined annual value of around £715million. The report recognised that the BBC has an above-average track record in managing major contracts and the savings we have secured have exceeded original expectations. Again, we are addressing the report’s recommendations, and focusing in particular on how we manage our supply chain more effectively.

Maximising the returns we make on programmes paid for by the licence fee

This is, in essence, what the main commercial arm of the BBC exists to do. BBC Worldwide sells the programmes we make across the world, so that licence fee payers get the highest possible return on the money they pay.

We are always looking for new opportunities to sell our output, formats and other merchandise in the UK and overseas. In 2008/09 BBC Worldwide’s total revenues were just over £1billion, including intra-group income and its share of joint venture income, up 9.5% on the previous year and the first time that revenues have passed this milestone. This is partly down to new investment this year, in channels, online and production, and partly the result of growth from our existing business. Particular highlights from our Global Brands business include Top Gear and Doctor Who. We have also launched 18 new channels worldwide this year, which brings our total to 42, contributing to growth in Channels revenue of 23%.

The magazines division has had a more difficult year, with both advertising and circulation suffering from the general decline in marketing spend that is now affecting the whole magazine market. Lonely Planet has delivered its first full year of revenues, but is also being impacted by the current economic downturn, which is slowing the travel and holiday market; however we are encouraged that the business still managed to grow its market share in the USA.

We had been hoping to build on the huge success of iPlayer with our proposal to develop a new video-on-demand service in partnership with ITV and Channel 4. Unfortunately the Competition Commission has ruled that this would be too much of a threat to other competitors in the emerging video-on-demand market. As a result we have had to write-down £9million of costs incurred, but we are still hopeful that we can find another way to generate the same returns for licence fee payers over the long-term.

Our partner in the joint venture 2entertain, Woolworths Group plc, entered administration at the end of 2008, so we have had to write-off both costs and unrecoverable debt, although 2entertain itself continues to trade well. Since then we have been exploring how best to resolve this issue in a way that protects the interests of licence fee payers.

BBC Worldwide’s statutory profits fell from £118million in 2007/08 to £86million this year. This is principally due to charges in relation to Woolworths (estimated at £15million including our share of the pension liability of 2entertain) and Kangaroo (£9million) and our ongoing strategy of investment.

BBC Worldwide statutory profit before interest and tax £m

Our global news business, BBC World News, has been impacted by the downturn in advertising activity in the year. Despite an increase in revenues of 12%, it has incurred a statutory loss of £3million this year.

We announced the sale of the Outside Broadcasts division of BBC Resources Limited, another commercial venture, at the start of 2008/09. We retained the Studios and Post-Production operations, and restructured them into a new business called BBC Studios and Post Production Limited. It has been a challenging year throughout the broadcast facilities market, with widespread reductions in turnover and revenues, as productions cut costs and looked for savings. At year end, the business made a statutory loss before interest and tax of £18million, mainly due to our restructure.

For more information see its service review, or see www.bbcstudiosandpostproduction.com.

Whilst the statutory results of the individual commercial businesses show a profit of £86million in BBC Worldwide, losses of £19million in Studios and Post Production and £3million in BBC World News, when consolidated into the group accounts, the group profit before interest and tax is reduced to £31million. This reflects the recognition of non-cash losses on foreign exchange financial instruments; these adjustments were not significant in 2007/08.

In general, our commercial operations are in good shape at the start of the new financial year. We await the outcome of the Digital Britain review, which may have longer-term implications for BBC Worldwide. The priority now is to make real improvements in some under-performing areas, while remaining agile enough to move quickly to seize new opportunities.

Spreading the benefit of the licence fee across the whole of the UK

The BBC is for the whole of the UK, from Belfast to Truro, Aberdeen to Brighton, Swansea to Middlesbrough. We are all passionately committed to nurturing the very best creative and production talent, right across the country. One way we are doing this is by aiming to have 50% of our Network Television production made outside London by 2016. The move to Salford is central to this strategy. We will also allocate 12% of our Network Television investment to the nations by 2012, rising to 17% by 2016.

We are reviewing what targets should be in place for our radio output in the coming year.

In 2008, total spend outside of London, expressed as a percentage of eligible spend (as defined by Ofcom) increased from 33% to 35%. In absolute terms, total spend including online, decreased from £984million in 2007/08, to £948million this year, reflecting the level of efficiencies made this year across all spend. We expect this number to increase as production moves out of London in line with our long-term network supply strategy.

Ensuring the licence fee supports the wider creative economy

Research has proved that the creative economy can be a significant engine for growth for the UK as a whole. According to the National Endowment for Science, Technology and the Arts (NESTA), industries like television, film, music and entertainment have grown twice as fast as the economy as a whole in recent years, and are a vital source of innovation and new ideas. The sector also contributes £60billion a year to UK plc.

The BBC is – and should be – a vital part of this. In calendar year 2008 we commissioned 37% of our television content from external production companies. Our total investment in the creative industries during the year was £1.1billion, or 33% of our annual licence fee income, which includes payments to artists and contributors. We are already exceeding the targets set for us by Ofcom on spend in the independent sector, and we are actively redefining the relationship between the BBC and the rest of UK media, and shifting the balance away from competition towards improved collaboration, by developing new and sustainable partnerships.

You can see evidence of this already, whether it’s in our new memorandum of understanding with ITV to share regional news infrastructure and resources to support provision beyond the BBC, or our proposal to share digital production technology and expertise which could help small independent producers make the transition to a fully digital future. The latter is particularly important. As NESTA point out, the UK creative economy is characterised by many small firms, few of which ever reach a significant size, and none that could hope to rival the big global players. Working with the BBC can make all the difference here, and we want to make our expertise and know-how go much further. This is especially important in the current downturn, when we can provide a more stable programme of investment than many of our commercial competitors.

Current and future challenges

Service licences

We are operating under the umbrella of a relatively new regulatory regime. In the last year both BBC Alba and BBC HD have spent less than forecast, due to timing differences against their original budgets, and as a result both of these service licences were breached. Some other licences are operating close to their thresholds, and these are under ongoing review. The control framework that oversees all our service licences is operating effectively, and we have improved our early warning reporting so that we can take action quickly if any are at risk of breaching their limits.

A new service licence budget was approved during the year for BBC Online, and the new BBC Alba service was licensed for the first time. From 2009/10, we will be making changes to the terms of the Children’s service licence, which will see spend transferring to CBBC and CBeebies from BBC One and BBC Two. The changes are being made to strengthen controls over editorial decision-making.

Digital switchover

One of our responsibilities under the BBC Charter is to help deliver digital switchover across the UK, and ensure that those most in need of support are aware of what this means, and get the assistance they need. Funds are set aside in the licence fee to allow the BBC to fulfil these obligations.

By the end of 2008/09, the Whitehaven and Selkirk transmitters in the ITV Border region had switched over, which covered 73,000 households, and 25,000 individuals eligible for the Switchover Help Scheme. The Help Scheme also supported a further half a million people in the Border and West Country ITV regions last year, in preparation for their switchover in 2009. Four more of the 14 ITV regions are also due to switch this year, which represents 5.4 million more households, or 20% of the UK population. Around two million older and disabled people in those regions will be eligible for the Switchover Help Scheme.

£603million of the current licence fee settlement has been ring-fenced to cover the Switchover Help Scheme for the period to 2012/13, and spend last year amounted to £24million. So far, only 1% of the population has fully switched to digital; although take-up of the scheme has been lower than expected so far, there is a real increase in activity from now until 2011. We will not be able to fully assess how much it will take to convert everyone until we have rolled out the scheme across a larger, urban region.

Digital UK is responsible for raising public awareness of digital switchover and has a total budget set aside from the licence fee of £201million to 2012/13. This body is administered jointly by the BBC and other broadcasters, and in 2008/09 it spent £26million.

Licence fee spend in nations/regions £m

Pensions

The BBC operates a defined benefit scheme for all staff, with a mix of final salary and career average benefits. The scheme is administered by a group of trustees who manage the pension scheme independent advisors.

During the past two years, we have looked for ways to secure the long-term affordability of the scheme, such as introducing career average benefits and increasing employee contributions.

This year, we have also introduced a ‘salary sacrifice’ scheme, which delivers savings to both employees and to the BBC; as you can see from Note 8, it changes
the way we account for pension contributions, increasing the proportion of employer contributions disclosed. The effective BBC and employee contribution rates for 2008/09 were 19.35% and 6.0% respectively, making a total contribution rate of 25.35%. As of April 2009, employees have been asked to increase their contributions to 6.75%, and there will be a further increase to 7.5% from April 2010.

The FRS 17 valuation shows a scheme deficit this year of £139million compared to a surplus last year of £528million. It has been a difficult year for those managing pension schemes, as equities, real estate, corporate bonds and alternative assets have all fallen in value. We look at our scheme performance over both short and long-term, where the outlook remains uncertain as the equity markets struggle to recover. The liability in this year’s accounts reflects the year’s market turbulence, though we hope to see signs of recovery in the medium-term. Full details of our pension costs and liabilities are included in Note 8 of the full financial statements (which can be found in our Download centre).

The last formal actuarial valuation of the scheme was as at April 2007, and this reported a surplus of £275million. An interim actuarial report in April 2008 indicated that the scheme had moved into a deficit of £470million, largely as the result of lower assumptions about the level of future investment returns. We expect the next formal actuarial valuation to be undertaken as at April 2010.

We remain committed to the defined benefit scheme and constantly review our approach to pension provision to effectively manage both cost and risk; however we also recognise that it must remain affordable to the licence fee in the long-term.

Key financial policies and standards

Treasury policies

Our treasury department manages and monitors all our financial risks, making sure that we have sufficient liquid funds to meet our obligations as they fall due, and that we comply with our borrowing limits, particularly those set out in our Charter and external loan covenants. It also manages our foreign exchange and interest rate risk exposures. All the department’s activities are governed by policies and procedures approved by the BBC’s Finance Committee, and overseen on a day-to-day basis by the Group Treasurer, with monthly reporting to senior management. Note 23 includes more information on this.

Critical accounting policies

The areas which require the greatest degree ofjudgement are as follows:

• our valuation of the pension scheme for FRS 17 accounting purposes includes assumptions on life expectancy, future investment returns, inflation, and salary growth, as stated in Note 8. We consult with the scheme actuaries to ensure that they fall within an acceptable range based on market practice, but different assumptions would result in a change to the level of surplus or deficit.
• provisions represent our best estimate of future liabilities and may involve assumptions to calculate redundancy costs, for example number of people and their level of remuneration.
• we operate a significant number of property and technology leases. As you can see from Notes 23 and 24, the decision to treat such contracts as finance or operating leases has a significant impact on our balance sheet.
• as we operate across a number of different countries and a number of different currencies, we are exposed to exchange rate fluctuations. The translation of foreign currency transactions, exchange rates used and treatment of foreign operations all impact on our financial statements.
• a number of indicators are assessed in deciding whether to impair or write-down an asset. These include reduced market value or a deterioration in economic performance. In many cases when conducting impairment reviews, we need to assess the future cashflows of an operation to decide whether it may be impaired, which involves making a number of assumptions about future performance.

International Financial Reporting Standards

We will be adopting IFRS from the year ending 31 March 2010. This is in line with the HM Treasury decision to do the same from 2009/10 onwards. In the meantime, the accounts continue to be prepared under UK Generally Accepted Accounting Principles (UK GAAP), although a reconciliation to IFRS is provided for information.

The main impact on preparing our accounts under IFRS will be in relation to leases, goodwill and employee benefits.

The pages following now contain our summary financial statements – income and expenditure, balance sheet and cash flow – and some other key financial information. Full financial statements and notes are can be found in our Download centre.

Zarin Patel
Chief Financial Officer
18 June 2009