§ 3.14 p.m.
§ LORD SHACKLETON
My Lords, I beg to move that the draft Television Act 1964 (Additional Payments) Order 1969, laid before the House on April 21 last be approved. The purpose of the draft Order now before your Lordships' House is to provide for a modest increase in the yield of the television levy. It is a matter of history that the community has to be provided with a proper share in the value of the profitability created by the concessions granted to the Independent Television contractors, concessions which enable them to benefit from an asset at public disposal. We are not debating to-day the history of Independent Television; we are debating only the draft Order before us. But I should like briefly to set this draft Order in its historical perspective.
When commercial television in Britain was first established it was not at the start a paying proposition. Since this is a field in which many noble Lords declare an interest, I will also declare my prejudice, which I think is well known to the House, and certainly was known at that time, against independent commercial television. I do not retract anything I said then. But Parliament decided that commercial television should come into existence, and I should like to pay a tribute now, and a very genuine one, to the interests who pioneered commercial television in the early days and made a go of it and, in particular, have given us some high quality programmes.
The tide quickly turned after a yeas or two. Income grew far ahead of expenditure; profits grew and grew. And that phrase was coined which has passed into folk lore, but which I cannot bear to repeat, uttered by the noble Lord, Lord Thomson of Fleet. The first step to correct this situation was taken in the 1961 Budget, in which the then Chancellor of the Exchequer introduced) a television advertisement duty at a flat rate 89 of 11 per cent. But this duty turned out to be the wrong way of dealing with the problem, and accordingly the 1963 Television Bill introduced a new solution—the additional payments, which have become generally known as the levy.
These payments took the form of rental payments, additional to the rentals due to the I.T.A. for meeting the latter's costs in providing a transmitter network and in supervising and controlling the programme contractors. These new additional rentals were to go into the Consolidated Fund and thus reduce, so far as they went, the burden of public expenditure which would otherwise have fallen on the ordinary taxpayer—and in these days this includes us all. I must emphasise that these additional payments were and are rental, not tax. This was made very clear by the previous Administration. If I may express it in another way, the levy is no more a tax than the rentals paid by tenants of Crown property. Here is something which is at public disposal.
Time has shown that Independent Television has survived the original levy and has continued to thrive. The levy came into operation in July, 1964, at rates previously provided for in the 1963 Act (and in the 1964 Consolidating Act) and has remained in operation at those rates ever since. Naturally we, and in particular the Chancellor of the Exchequer, have watched its progress. In the summer of 1967 officials of the Department of my right honourable friend the Postmaster General began discussions on facts and figures with their opposite numbers at the I.T.A., as a preliminary measure to enable the Ministers and the Authority to begin considering jointly whether the scale needed revision.
The main finding was that profits before tax of the Independent Television companies taken as a whole were running at well over 40 per cent. on capital employed. Profits were shown to be likely to decline because of the companies' new commitments in colour television and the Independent Television Authority's decision to introduce a fifth major contractor. These extra factors would more than offset the reduction in the Authority's own rentals. But past profits had been very substantial—I do not think anyone would dispute that—and it might well have been thought that an increase in the levy was overdue. My 90 right honourable friend therefore asked the Authority to consider whether there was scope for adjusting the scale of levy so as to increase the yield while still leaving the contractors with a reasonable return on their capital.
The noble Lord, Lord Aylestone, and his colleagues in the Authority strongly advised my right honourable friend against any increase. So long as the Addison Rules are with us, I am sure that this is an area where it would be particularly difficult for the head of a body of this kind himself to debate an issue; and since he cannot speak for himself I must straight away defend him against any charge that in the long discussions which, as the Act requires, preceded the decision he and his colleagues did not make crystal clear to my right honourable friend their assessment of the future prospects of Independent Television.
None the less, the decision was for the Government, and Her Majesty's Government concluded that in the circumstances there was scope for an increase to give about £3 million extra in a full year; and this increase, as your Lordships know, was announced in the Budget speech. If applied in full to the current independent television contract year—the year ended July 28, 1969—this increase would still have left the companies with a return on capital, on the Authority's estimates, of 18 per cent. or so before tax, over the system as a whole. As your Lordships know, there are various ways of calculating return en capital, and that is why I preferred the rounder figure of 20 per cent. that I used on the last occasion.
Although the Authority felt unable to agree with the decisions to go for an extra £3 million, the Authority and the Government were able to reach total agreement on the fairest way of distributing the additional requirement. The Authority and the Government were able to convince each other that the distribution, which, of course, involves some contribution from companies who previously paid no levy at all, and a slightly greater contribution than before from the larger regional companies, was the fairest possible way in the circumstances of providing the Independent Television companies with the chance to achieve a roughly equal return on capital. Thus 91 this part of the decision was a fully agreed one.
My right honourable friend the Postmaster General has reported in another place the assurances he received from the Independent Television companies that they had no criticism to offer of the Authority's actions. They had, so he tells me, assured him also of their determination that, come what may, the quality of the programme in Independent Television would not be allowed to suffer. Their assessment of their financial future bore out the Authority's general assessment of future trends and added to it a forecast that in the year ending July 28, 1970, return on capital over the system as a whole would fall to about 10 per cent.
This latter forecast had not been available during the consultations between my right honourable friend and the Authority, but I understand that the Authority are convinced that it is correct. But this, even so, was an estimate. The facts were that, whatever the future might hold, the companies who enjoyed programme contracts before 1968 had been able to achieve a return on capital almost three times as great as the average for industry in the same period. I am well aware of the dangers of comparisons of this sort—it is never easy to get other than broad orders of magnitude and indications—but in an industry which may be at some risk, this risk had paid off very handsomely.
We shall see how things go. Her Majesty's Government are confident that the modest increase in the levy now proposed need create no insuperable difficulties for the industry. Your Lordships will have noted the pledge that my right honourable friend the Postmaster General gave in another place, but I should like to repeat it. He said:I give an undertaking to the House that we will keep the position under review and, if the contractors' worst fears as expressed to us are realised, we shall be ready to consider making a further Order reducing the impact of this charge.He then added:This pledge cuts both ways. If things turn out better for the companies than we have foreseen, we would also have to consider whether it should be increased."—[OFFICIAL REPORT, Commons, 16/6/69; col. 176.]92 But this, my Lords, is staring into the crystal ball, and I do not propose to say anything further than that I think my right honourable friend's statement could not be fairer. I beg to move.
§ 3.25 p.m.
§ LORD DENHAM
My Lords, the noble Lord the Lord Privy Seal will be aware that we on these Benches do not like this Order. We believe that the higher levy which it introduces imposes an unfair burden on the bigger companies, and an intolerable burden on the smaller ones. The noble Lord, Lord Aylestone, speaking of this proposal when it was in the Budget, said:This is competition with one hand tied behind our backs.The size of the additional levy is worrying enough. but it is exacerbated by the method of its assessment. I know that the method of payments based on revenue rather than on profits was introduced by a Conservative Administration, but the effectiveness of this is very much affected by the size of the levy. While the levy is relatively small, it can be an encouragement to efficiency when it becomes dangerously near to the break-even point it becomes an incentive to cut standards. There is not now the same potential of increasing revenue that there was in 1963.
This is no longer a question of by how much we should cut excessive profits. There is a danger of eliminating profits altogether in some cases, or at least of reducing profits below a reasonable level where risk capital is involved. Noble Lords opposite may not accept that capital in Independent Television companies is risk capital. But there is a vast amount to be spent on conversion to colour, which was very fairly mentioned by the noble Lord. The major companies are having to find £8 million or more for this colour television, and it may not be a success. For most people the cost of a set is prohibitive. But even if it is a success, it may not bring in extra revenue. The B.B.C. get an automatic increase in revenue, through the licence, for every set sold. The independent companies have no guarantee that any more will be spent on advertising than was spent on 93 black and white television. Some of the smaller companies may make little or no profit at all after the levy. The major companies, on whose output and prosperity the programme strength of I.T.V. as a whole depends, must have a reasonable profit margin. Perhaps the time has come to calculate the Treasury's share on profits rather than on income.
There has been a lot of talk in both Houses about what percentage profit constitutes a fair return on capital, taking into consideration the risks involved. Perhaps the noble Lord, Lord Shackleton, will tell us what are his views and those of the Government on this point. After what his right honourable friend said when this measure was debated in another place, it is important that we should know. The noble Lord has read out the undertaking of his right honourable friend, and I do not propose to repeat it. What he has said seems at first sight to be sweet reasonableness, but it seems to me that on closer consideration, it introduces an extraordinary new concept. What he is in fact suggesting might be done in the future is the fixing of profits by tax, or, if the noble Lord prefers the word, by this levy. What the Minister was in effect saying was that if, as a result of the increased levy, profits fall too much below the percentage figure that he presumably has in mind as a fair return on capital, he will reduce the levy; if they go about that percentage, the levy will go up so that the Treasury will take the excess. What is the figure that the Postmaster General has in mind as a fair profit on capital?
My Lords, if Her Majesty's Government are going to predetermine the profit that a company is to make, whether it does well or badly, whether it is wise or foolish, where is the incentive? Why bother? We know that the Party of noble Lords opposite dislike private enterprise. Up to now their policy has been to attack the private part of the combination. With this new suggestion they are leaving the private and killing the enterprise. I hope that they will think very strongly before carrying out what I believe is implicit in the Statement of the Postmaster General.
§ 3.32 p.m.
§ LORD SHAWCROSS
My Lords, I hope it may not be improper if I seek to detain your Lordships for a few minutes 94 longer on the consideration of this Order. If the Lord Privy Seal tells me that I am in any way in breach of the Addison Rules, I will immediately bow to his better judgment, although I am assured that I am not in breach of the Rules. But I must at the outset disclose a clear and obvious interest in the subject matter of this Order in this respect: a month or two ago I was nominated by the Independent Television Authority to be—and in fact I am now—the chairman of one of the largest of the contracting companies. Your Lordships must discount what I say about this Order to what ever extent you may think right because of that affiliation of mine. Perhaps I may he permitted to add, since we are dealing with the profits of the television companies, that my own financial interest is one which in no way depends upon the profits that the companies make. I have no interest in the equity of these companies. and at the moment I am inclined to think that this perhaps is a fortunate fact.
At my age I should have known better, but I confess that when I was invited to take the appointment as chairman of one of these Independent Television companies, I was quite starry-eyed about the possibilities of increasing the popularity and the quality of the Independent Television programmes. I was convinced, too, that competition from the independent companies was one of the factors which would continue to ensure high quality on the part of the B.B.C. I must admit that at that time I shared the illusion which the noble Lord the Lord Privy Seal appears still to have, that there would be no lack of money with which to improve the qualities of programmes. But, my Lords, this was not so. I had not been in the job many days before I found that the real problem was not how to spend more money on improving the quality of programmes, but how to make both ends meet, and ensure that there was remaining some reasonable remuneration for the capital which had been invested in the business.
This increase in the levy is bound to have grave repercussions on the economic viability of the independent television companies, and I think consequently upon the public interest. Some of your Lordships may have a different view, but my own view is that the success of these companies is a public interest. Of course 95 this levy—and I am not blaming the present Government for this at all; it was not their fault—is wrong in principle. I do not mean simply because it is a discriminatory levy on television advertising, but because it is charged on gross revenue, regardless of the cost of earning that revenue. If it is justifiable at all—I repeat, if it is justifiable—it should come as other rentals come: and the noble Lord the Lord Privy Seal saw fit to describe this as a rental, although it is a very curious form of rental capable of fluctuating up and down at the whim of the Government of the day. If this is a rental, if this is a justifiable charge, by whatever name one chooses to give it, upon the revenue of the television companies, it should come after charging the costs of earning that revenue; in other words, upon the profit before tax. It was suggested in another place that to charge it in that way could not be done because of the risk of evasion. That is not so. The risk of evasion is no greater than such risk as may exist in the case of corporation tax, profits tax, ordinary income tax, all of which are taxes on revenue, after allowing for the costs of earning that revenue. In this case, with the Independent Television Authority acting as a constant and strict invigilator, the risk of evasion is indeed so much the less.
Your Lordships are concerned now, however, not with the principle of the levy, but with the proposed increase. As the noble Lord has said, the decision to make that increase was based upon the assumption that television companies were earning profits running at the rate of over 40 per cent. The noble Lord seems to have forgotten that this is a levy imposed upon new contracting companies. Some of them, it is true, are old companies with slightly different franchises. Some of them are entirely different companies, new companies which have had no participation in those large profits which now are a matter of history. These are profits being earned by new companies under new contracts, which have only six years of certain permanence to run. It is simply not true that the profits earned by these companies are of the order of 40 per cent., or anything like it. In the year ending this July, the year 1968–69, during which the new contracts have been running for 11 months, 96 the profits appear to be running at something a little under 20 per cent. For the coming year, 1969–70, ending July, 1970, the companies are now, as I know, working on budgets which show returns of 10 per cent., or very much under 10 per cent. in some cases.
This return is obviously and utterly inadequate to attract the introduction of capital into this very important industry. These companies will be left with no alternative but to make the most drastic and painful cuts in their expenditure. This is not a time when one sees much opportunity of increasing the revenue the companies earn—not a time when one can expect any great increase in advertising appropriations. It is not open to the television companies—and I am very glad it is not—in the way that it is open to one or two theatrical producers, who can, for a time, attract voyeurs to their theatres by the deliberate exploitation of pornography. We cannot profiteer in pornography. We have to provide—and I am glad that we do—good programmes for family audiences, and it is very difficult to see how the television companies can in present circumstances increase their revenue; it follows that they must drastically cut their costs.
My Lords, if the Government wish—and, contrary to all indications, one must assume that they do wish—that this country should maintain, and indeed lead in, the high quality of its television, and I would add also its radio, programmes, and the interrelation of the independent companies and of the State system is not to be denied, they must permit the independent companies, not excessive, not inordinate, but reasonable and fair remuneration for the capital which is invested in them. This increase in the levy is going to make that quite impossible.
§ LORD SHACKLETON
My Lords, may I interrupt the noble Lord to make just one point? He made a reference to radio programmes. I was not quite sure what the significance was.
§ LORD SHAWCROSS
My Lords, the noble Lord may have observed and will no doubt be familiar with the fact that there has been much consideration in the public Press of the finances of the B.B.C. and the possibility that they too 97 may have to cut the quality of their programmes because their finances are inadequate. While, of course, I have no greater interest in the quality of programmes on the B.B.C. than other Members of your Lordships' House, I think it important from the point of view of the public at large that the quality of both television and radio programmes should not be allowed to deteriorate because of financial stringency.