Channel 4: Funding Formula

HL Deb 27 February 1995 vol 561 cc1380-98

7.51 p.m.

The Earl of Stockton rose to ask Her Majesty's Government whether they intend to abolish the Channel 4 funding formula which was intended as a "safety net" but has resulted in Channel 4 subsidising ITV companies to the extent of £57 million in respect of 1994 alone.

The noble Earl said

My Lords, to put the Question into its context, perhaps I may respectfully remind your Lordships of the statutory framework surrounding Channel 4. Under the Broadcasting Act 1990, if Channel 4's revenue falls below 14 per cent. of the joint advertising and sponsorship revenues of ITV, Channel 4 and Channel 5, the ITV companies would be required to support Channel 4. When Channel 4's revenue exceeds 14 per cent., then 50 per cent. of the so-called excess is paid to ITV; 25 per cent. goes to a statutory Channel 4 reserve fund and only the remaining 25 per cent. can be spent on Channel 4's own programmes. The statutory reserve already stands at £45 million and this fund would have to be exhausted, as well as Channel 4 falling below the 14 per cent., before ITV was asked for a penny. It seems to me that a compulsory insurance premium of £60 million a year is a trifle excessive.

Parliament intended the funding formula to be a safety net for Channel 4 and not a subsidy to ITV. The Member for Witney, my right honourable friend Douglas Hurd, who was then Home Secretary, announced the formula on 13th June 1989, although Channel 4 had not been consulted and the formula was entirely different from that which had been proposed by Channel 4 and endorsed by the Select Committee on Home Affairs in another place in February that year. It has also been endorsed by Ministers involved in the 1990 Act.

Let us therefore look briefly at the record of Channel 4 and also, because it is relevant, that of the ITV companies since the Broadcasting Act 1990 enshrined those policies in legislation. Channel 4 has lived up to its remit as an innovative and original company on the cultural and broadcasting scene in this country and, indeed, worldwide. The ITC is fully satisfied that Channel 4 is fulfilling its distinctive remit. It is worth noting that the only note of criticism in 1994 was that Channel 4 was just under the recommended 50 per cent. of British and European production —a direct result, I suggest, of the channel's lack of funds to invest in programmes, especially original drama.

Channel 4 has shown that its income is unlikely to fall below the 14 per cent. threshold during the present licence period. That view is endorsed by all major independent studies, including Zenith Media, the leading advertising media analysts. Channel 4 has proved that the remit set down by Parliament is viable in an increasingly competitive market.

A fortnight ago, Channel 4 handed over a cheque to the ITV companies for £57 million. For 1993, the cheque was £38 million. Yet the ITV companies' own forecasts were that the figure would be no more than £100 million over the entire 10-year span of the licence. Compare that estimate with payments to date of £95 million over just two years and I think your Lordships will agree that Channel 4 has exceeded expectations. I am sure that the noble Lord, Lord Hollick, will point out to your Lordships that the ITV company with which he is connected—Meridian—when calculating its bid, got it right and that it is entitled to its money.

The Chairman of Channel 4, Sir Michael Bishop, has given an undertaking in writing to my right honourable friend in another place, the Member for Loughborough and the Secretary of State for National Heritage, that, if the funding formula is abolished, Channel 4 will recompense bilaterally any ITV company that can demonstrate to the ITC that it has not already received the income it projected that it would receive from Channel 4 during the period from 1993 to the first review date in 1997.

I hope that the noble Viscount, Lord Astor, will be able, in replying to the Question, to justify the changes in the regulatory framework that have been allowed to the ITV companies since the passage of the 1990 Act. Not only has the ITC allowed the programme requirements to be relaxed—in particular to sustain GMTV—but the Government have changed the rule on ownership that has allowed Meridian to take over Anglia, Carlton to take over Central and Granada to subsume LWT. That is a significant rationalisation of the ITV companies, with commensurate cost savings that, in the case of Carlton alone, are estimated to amount to £100 million. In 1992 there were 13 advertising sales points; now, there are only five.

It is also worth noting that it is only since January 1993 that Channel 4 has been selling its own air time. Prior to that, it was handled by the ITV companies. The success of that can be seen by the recently announced figure of a total advertising and sponsorship revenue for 1994 of £393.9 million—an increase of 19.3 per cent. over 1993. Over the same period, ITV revenue grew by 8 per cent. but profits increased spectacularly by 194 per cent. in the case of the old Carlton and by 763 per cent. in the case of the merged Carlton/Central; by 100 per cent. in the case of Granada/LWT; by 83 per cent. for Channel and by 162 per cent. for HTV. I am sure that the noble Lord, Lord Hollick, will be able to give us a comparable figure for Meridian/Anglia.

However, all those dry and dusty numbers in millions of pounds are not what concerns the viewing public. Channel 4 has a splendid record not only in television but also in the film industry. It would be only a mild exaggeration to say that Channel 4 is the major, indeed nearly the only player in the financing of the British film industry. I am sure that many of your Lordships have seen or heard of films such as: "The Crying Game", "Howards End", "Riff Raff", "Shallow Grave", "Four Weddings and a Funeral", and "The Madness of King George". In respect of the latter I feel I must declare an interest. Last Friday I was privileged to see that film (which has been nominated for three Oscars) at Channel 4 itself, thus enjoying a benefit of £7.50 had I seen it in the West End or £3.50 had I waited until it arrived at my local flea-pit. Incidentally, it is worth noting that in 1993 Channel 4 films won more Oscar nominations than those of any other company, except Warner Brothers and in 1994 more than three of the major Hollywood studios put together.

Your Lordships will realise that "The Madness of King George" is an adaptation of the extremely successful play, "The Madness of George III", but, in order not to confuse the American cinema-going public, largely nurtured on sequels at present, the name was changed lest they might think that they had missed out on the "Madness of George" One and Two! If the depiction in the film of the proceedings in another place is accurate, noble Lords will find that not much has changed over the past two centuries.

Channel 4's television record is as impressive and, beyond mentioning drama series such as "The Rector's Wife" and "GBH" or the multicultural films such as "Bandit Queen", documentaries like "Beyond the Clouds", entertainment such as "After Dark" and "Drop the Dead Donkey" and Channel 4 racing, I believe its output speaks for itself. As an educational publisher, I can attest to the quality of its schools' programming.

If the subsidy to the ITV companies were removed—and in my view it was only ever imposed in some kind of quest for a spurious symmetry—the company would then be in a position to increase considerably its investment in both film and programmes, perhaps by the order of as much as £10 million to £12 million in the case of film and a larger amount in the case of programming, especially in original drama.

It is axiomatic in the industry that the best way of building viewer loyalty is through original drama, which is, of course, also the most expensive part of the schedule. In order to be effective, all art must be dangerous. Originality in any art form involves taking risks. I am sure that Channel 4's drama will continue to outrage some as it engages many. I am sorry to see that my noble friend Lord Orr-Ewing is not in his place, for I know that he has strong views on what is and what is not suitable for our television screens.

I should like also to ask my noble friend whether he has any plans to introduce legislation to regulate the digitisation of the terrestrial broadcast spectra. Channel 4 has set the pace. It has the first all-digital studio and broadcasting capability in the country and already transmits test simulcasts in the format. British television was always held to be the best in the world, but only because it was the most original and innovative. The best way to protect the most original of our broadcasters is to remove from them this unnecessary burden and allow them to do more and more of the good work that they have proved they can do.

It is insane to allow a minority channel to subsidise its richer competition, which already has over two and a half times as much to spend on programmes, although that is lower than was promised in its original licence applications. Let both Channel 4 and ITV thrive through the fruits of their labours. Channel 4's ability in the future to sustain its remit is best secured through allowing it to invest in programming now. Channel 4 blazed a trail with its use of independent production companies and helped to break restrictive practices in the industry. It has an excellent record in exporting programmes. Are this Government really going to tell the House that they are in the business of penalising success?

8.1 p.m.

Lord Donoughue

My Lords, once again we are discussing at root the disastrous effects of the appalling 1990 Broadcasting Act. This bizarre funding formula is only one part of the 1990 lunacy which has done so much damage to British television. But it is typical of the whole shambles. For it is bizarre —as the noble Earl, Lord Stockton, pointed out—for a minority channel to have to subsidise bigger and richer competitors on such a scale. It is intolerable that huge funds are being transferred away from making programmes to the bottom line and indeed to the directors' pockets in bigger companies.

I have no need and do not propose to repeat all of Channel 4's arguments. The noble Earl, Lord Stockton, did that well; and they have already been expounded with what might be called loud resonance by Mr. Grade. I am sure that they may be repeated again by noble Lords this evening. I simply say that Sir Michael Bishop's letter to the Secretary of State on 7th February is a devastating critique of the funding formula. But the letter has, in my view, not been answered and is indeed unanswerable. Despite that, ITV has made a few sensible points in response and I look forward to my noble friend making more.

It is true that ITV companies carry burdens. Channel 4 does not. It pays a levy to the Treasury and dividends to shareholders. Channel 4's advertising success is at ITV's cost. Therefore, stopping the subsidy would leave ITV even less funding to make its own programmes.

I am not impressed by one argument in the ITV briefing. It argues that: When their bids were made, the ITV companies expected"— and the word "expected" is underlined— to receive money from Channel 4", by this subsidy; and that these expected revenues, represent a significant part of the revenues on which their bids were made". That is quite strange. We understood that this funding formula was two-way—that it was a safety net to Channel 4. How could it be a safety net for Channel 4 if the ITV companies all expected it always to subsidise them and factored that into their bidding budgets? I might ask: what will happen if the situation is reversed and it becomes a safety net? How will some of those companies pay if in their budgeting they have depended on being paid? I am not impressed by that argument.

Nor does it impress me, or worry me, that Mr. Grade and Channel 4 have previously supported the funding formula. The fact that they previously supported "a bad case does not preclude them from finally seeing the light and now saying that it is a bad case. It certainly does not make it a good case. So I hope that we shall not hear too much of that argument.

We wait with interest to hear the Government's defence of the indefensible status quo in this situation. Certainly nothing that the Secretary of State has said so far—I must say that it is a commendable aspect of the Secretary of State that in the whole national heritage field he says very little—is convincing. The argument of no statutory time, which we assume, can be used against any change to any bad legislation. It has not deterred the Government from amending frequently their bad legislation on education and local government. Anyway, they have already found time, as the noble Lord said in opening—though admittedly by order —to amend the 1990 provisions to allow takeovers and to reduce the number of advertising sales houses. So there is no problem of principle or precedent here, just of practicality and priorities.

The Secretary of State's argument that there is still a continuing risk to Channel 4 without the safety net is hypothetical. Anyway, as was pointed out, statutory reserves of nearly £40 million already seem to cover that risk.

The argument that has been suggested that ITV deserves a return for setting up Channel 4 is clearly irrelevant. ITV did not set it up or have anything to do with its recent success. Nor are there any contracts to be broken between Channel 4 and ITV or the Government. The funding formula was established without consultation with Channel 4 and against the advice of the then Select Committee, simply by power of Parliament. It can be changed by the same process.

The arguments for doing so are in principle—I stress "in principle"—decisive. The one serious argument against on the Government's side is the practical one. This formula, although imposed, was part of what might be called the known rules of the game at the time. They can be revised anyway not far ahead, in 1997. It could be said that to take parliamentary time for primary legislation before then might not on balance be worth it.

I say to the Minister that I shall listen sympathetically to that argument, as to all practical arguments of the Government. If he puts that argument, I will listen sympathetically on three conditions: first, that he will admit that the 1990 Act—I mean admit in public, here in this Chamber—was an appalling mistake which nobody now supports; secondly, that he will apologise for it; and thirdly, that he will promise vigorously to examine the possibility of immediate compromise short of primary legislation.

One example is that he will promise to look at Channel 4's offer, which seems fair, and that on termination ITV will be relieved of its hypothetical obligation to Channel 4 and that all ITV companies will receive the full income for which they have budgeted for 1993 to 1997. Another example is that he will support and encourage any consensual compromise brokered by the ITC. It may be that a ceiling for Channel 4 payments will be included in a compromise. If I understand the formula correctly, at present it appears not to be a level playing field. The ITV safety net is limited to a maximum of 2 per cent., but the Channel 4 subsidy is open-ended. Therefore, there is scope for a consensual compromise. It should contain a guarantee that Channel 4 will spend the benefits of not having to subsidise on such a massive scale the rest of the ITV sector on programme-making and film production, not for instance on larger cigars for Mr. Grade.

This raises the very important question of investment in British film making which is closely related to the issues we are discussing tonight. The present silly funding formula transfers money from Channel 4, which appears to have a good record in joint film productions, to other ITV companies such as Carlton which I suspect have a more disappointing film production record. First, I ask the Minister how much Channel 4, Carlton, other ITV companies and indeed the BBC invest in film production. Secondly, will he ensure that any compromise that may be brokered—and we urge him to broker a compromise—involves a commitment to greater investment in the British film industry?

We are not here tonight to speak for or against one side or another. I confess that certain aspects of Channel 4 worry me, since some of its so-called minority programmes seem to appeal to what I consider to be undesirable minorities. However, it is always rescued by the excellence of its racing and music coverage. Our main concern is to rescue British television and films from the appalling consequences of the 1990 Act. That system, with its minimum quality requirements and open financial bidding, has failed, as we always said it would. It has failed both on quality and financially, as this debate shows, and will continue to show. In the longer term we need new criteria, with high quality requirements and a fair pricing formula subordinate to that. In the shorter term I shall be interested to see whether the Minister tonight has any proposal to get out of the mess which we are clearly in.

8.14 p.m.

Lord Thomson of Monifieth

My Lords, the House is grateful to the noble Earl, Lord Stockton, for introducing the debate. Very properly, he declared an interest. I gather that he received some modest hospitality from Channel 4 at the preview of a film. I have a much more serious declaration of interest. I am a member of the Nolan Committee on Standards in Public Life and therefore I must be very careful. I declare my interest as a former chairman of the Independent Broadcasting Authority who played some part in the original establishment of the Channel 4/ITV relationship. I also ought to declare an interest as a very modest pensioner in the defunct IBA. Finally, I declare a family interest. A daughter has been a senior executive of Channel 4 and has rather vigorously lobbied some of us. However, she left Channel 4 a few days ago to return to the BBC. I do not know what is to be made of this tangle of interests, but I hope that your Lordships' House will accept that I speak for myself and my party from this Bench.

Speaking as a former chairman of the IBA, I find it sad that there should be a slightly bitter multi-million pound quarrel between ITV and Channel 4. I am bound to say that in my days at the IBA the relationship between Channel 4 and the ITV companies was never an easy one. For all my skills as chairman of the Independent Broadcasting Authority, the relationship between Channel 4 and the IBA was not always a harmonious one, but I believe that that was in the nature of constructive tensions in these situations. Today, it is undoubtedly very much worse and to the detriment of British broadcasting.

It is clear that the deeply flawed provisions of the Broadcasting Act 1990 have created a situation that is unsustainable beyond 1997 and ought to be corrected before that stage is reached. Frankly, I find it puzzling that the present Secretary of State—of whom many of us had high hopes—should so resolutely have decided to do nothing about this. It is all the more puzzling because Channel 4 was a very great achievement of a Conservative Administration, in particular that of the noble Viscount, Lord Whitelaw, when he was Home Secretary. I believe that it is an achievement of which a Conservative Administration is entitled to be proud. To create an innovative, distinctive public service channel catering for minorities and entirely commercially funded is a remarkable achievement. Those interested in broadcasting quality and administration throughout the world are full of admiration for the creation by Britain of Channel 4.

I concede to the Minister who is to reply that the idea of having a safety net of IT revenue to preserve Channel 4's remit in the new situation after the 1990 Act if advertising failed was well motivated. But what we face is a familiar story of government politics in recent years. The noble Baroness, Lady Thatcher, when she was Prime Minister, wanted privatisation. There was resistance to that within the administration. They ended up with a compromise which turned out to be a cock-up. The present formula is grotesquely unbalanced, as the noble Lord, Lord Donoughue, pointed out. If things went wrong for Channel 4 there was a downside limit of 2 per cent. of ITV revenue as their legal obligation to help. If things went well for Channel 4 there was no upside limit to the subsidy that Channel 4 would have to give ITV. It was and is open-ended. That is unacceptable. It is something to which the Government should face up and do something about.

In practice, things have gone very well for Channel 4 because of its own efforts. The programmes are popular with their special audiences, if sometimes that proves infuriating to those with more conventional tastes. They have achieved a satisfactory market share.

Its new advertising department has sold that market share brilliantly. I tell the Minister that some of the bad feelings between ITV and Channel 4, which have not been helped by the personalities on either side, have arisen because Channel 4's marketing flair has reflected badly on the previous skills of ITV when they sold Channel 4's advertising. I well remember, when I was chairman, the arguments when ITV denied that it was not making the most of its opportunities to sell the advertising time on Channel 4. It cannot be right, because of a flawed formula, that Channel 4, which is a non-profit making public service corporation, set up by the present government, this year should subsidise the shareholders of ITV companies to the tune of £57 million.

Now that I am detached from all the arguments of the past, my benchmark in these matters is the interests of the viewers. The formula simply means that Channel 4 is deprived of that money for making programmes—including the films for which it has become famous and with which it has made an immense contribution to the British film industry—without any assurance that it will go on ITV programming rather than to ITV shareholders.

What are the arguments on the other side? I do not wish to rehearse what the noble Earl, Lord Stockton, said very fully about some of these matters, nor the arguments of the noble Lord, Lord Donoughue. The most persuasive argument adduced is what might be called the insurance argument. It is an argument that, although Channel 4 was not party to the original formula in the 1990 Bill as it went through Parliament—it was imposed upon it—nevertheless, it was an insurance policy against things going badly for it. One does not cancel an insurance policy even though things go well. That has always seemed to me to be the most persuasive of the practical arguments. But in all the circumstances, it is not a very realistic argument. No one who pays for an insurance policy would enter into an open-ended commitment to an uncertain increase in the insurance policy in circumstances where, as experience showed, we had less and less need for it. I feel that the Government need to look at the weakness of the arguments for facing up to making a change.

There is a final argument put by the Government; namely, that one cannot move the goal posts of the Broadcasting Act before the review of the Act, which is set for 1997, and in any case, there is no time for broadcasting legislation before then. But, as the noble Earl, said, the goal posts were moved. It was not done in a very dramatic way; they were moved within the terms of the Act because there was provision for orders in council. Nevertheless, the goal posts were undoubtedly moved with the major series of mergers that were allowed. I do not argue against that; but it took place. Equally, changes of a major character in the marketing arrangements were allowed to take place.

I simply fail to understand why the goal posts can be moved by the Government under pressure from the ITV companies in the merger field, taking advantage of the order in council procedure, and why they have steadfastly set their face against moving the goal posts to deal with what is a blatantly unfair system as it has presently worked out in the light of experience in terms of the revenues of Channel 4 and ITV.

Then there is the argument of not having time for new legislation. I want to try to smoke out the Minister, if I may, on this particular point on a wider front than simply Channel 4. The Government are now engaged in making new proposals for the new BBC Charter, Licence and Agreement. They have published a White Paper. On this side of the House we are glad that the licence funding of the BBC has been preserved. But in that White Paper there is provision for legislation. In order to merge the Broadcasting Complaints Commission and the Broadcasting Standards Council there has to be legislation.

I do not know what the noble Lord, Lord Hollick, will say from his point of view, but I well remember a speech that he made in your Lordships' House with which I greatly agreed. Before the Government moved the goal posts by allowing the kind of mergers in which the noble Lord's company has participated, he argued that the whole matter, including any plans that he had, should be put on the back burner until the Government's plans for the future of the BBC came before your Lordships' House and Parliament and that then there should be a comprehensive review of broadcasting policy to take Britain into the next century.

That is the opportunity that will lie before the Government later this year. There is no reason why, in the 1995–96 Session, there should not be a new broadcasting Bill. First, it would put right the glaring anomaly and inequity that exist with regard to Channel 4 funding. In addition, it would deal with all the other matters that arise in achieving a decent British broadcasting policy for the 21st century. It would involve, for example, the whole issue of cross-media ownership and looking at the other flaws in the present Broadcasting Act. It would also involve the very serious matter to which the Government should be giving attention; namely, doing something about the monopoly considerations of allowing non-domestic satellite broadcasters not only to be major new broadcasters on the British scene—it is right that they should be so—but also to be the toll keepers and gate keepers of the encryption systems that control whether other people can enter into that area. Some very big issues lie ahead. The new BBC Charter and Agreement and the associated legislation is an opportunity for the Government to put those things right.

I hope that the Minister will use his influence to urge the Secretary of State for National Heritage to throw off his diffidence—if that is what is affecting him, but I simply do not know—and show the necessary ambition and imagination in taking the opportunity in the next Parliamentary Session to put British broadcasting on the right basis to face up to all the competitive considerations of global broadcasting in the next century.

8.28 p.m.

Baroness Wharton

My Lords, as the co-vice chairman of the All-Party Media Group, I too am grateful to the noble Earl, Lord Stockton, for raising this Unstarred Question tonight and giving me the opportunity to contribute to the debate, although much of what I have to say has already been said.

I agree with the noble Lord, Lord Thomson, that Channel 4 has become a victim of its own success. For 10 years it remained a station catering for minority tastes and interests not covered by ITV. For that, it received 17 per cent. of the terrestrial qualifying revenue, which was reduced to 14 per cent. under the Broadcasting Act 1990. We have already heard how the revenue above the basic 14 per cent. is split. Channel 4 can lay claim to only 25 per cent. of its profit for its current expenditure.

Since 1993, with the ability to control its own advertising revenue, Channel 4 has gradually become more commercial in its own right and inadvertently finds itself in competition with Channel 3 rather than just complementing it. That success is causing Channel 4 to feel aggrieved. The sums of money (representing 50 per cent.) are very great and there is no reason to expect in the future that the amounts will decrease unless Channel 4, which is a public broadcaster having no shareholders, so chooses.

I kept all the notes supplied with the 1990 Broadcasting Bill. It is quite clear that the channel has come a long way from the one envisaged in that Act. The surplus that now arises reflects the aggressive and commercial way in which Channel 4 schedules its programmes and the fact that it is much easier for Channel 4 to sell its air time because it does so nationally and in macro-regions, whereas ITV has to do it on a purely regional basis. It makes its money by scheduling American imports, "Countdown" and "Brookside" in prime slots. I do not necessarily think that that is wrong, though there is some of Channel 4's scheduling that I do not like and would like to see less of. On the other hand, there is much that I admire. Channel 4's news programme at 7 o'clock is excellent and quite often better balanced than the news on other channels.

I must praise Channel 4 for its commitment to film making. It makes every effort to fund or part invest in the British film industry. It has subtly moved into the commercial sector while at the same time continuing to support new talent. The film, "The Madness of King George" is a brave move into the international market. Nigel Hawthorne and others have already been nominated for Oscars. It is Channel 4 at its best.

Returning to the issue of the 50 per cent. subsidy to ITV, is there not a case to be made, as the noble Lord, Lord Donoughue, said, for placing a cash ceiling on the amount paid rather than a percentage which varies? Better still, why not pay that ceiling amount into the ITV network centre to fund more Channel 4 and ITV original films and drama? Failing that, why not freeze the statutory reserve fund? It already stands at £47 million and is more than enough to see Channel 4 through to the next century.

I doubt that there is a risk of the ITV companies having to bail out Channel 4. It has proved, now that it is in control of its own revenue, that it is able to honour its obligations, and putting the extra 25 per cent. back into circulation would allow for more production. We are on the verge of digital television and, if that is to succeed, more material will be needed. I certainly do not wish to flick through repeats on each programme simultaneously. And, without wishing to appear mischievous, perhaps I may ask the Minister what would happen to Channel 4 were it to be privatised. Will the Government's Department of National Heritage consider bringing forward the review? After all, 1997 is a long way off and there is sufficient evidence to consider amending the funding formula now.

8.33 p.m.

Lord Hollick

My Lords, I must declare a number of interests, though not quite the myriad declared by the noble Lord, Lord Thomson. First and foremost, I am the managing director of MAI and we control two companies—as the noble Earl pointed out—Meridian and Anglia. My second interest is that I am a great supporter and admirer of Channel 4 and all its works.

I fear that I shall disappoint a number of noble Lords. First, the noble Earl asked whether I would give a forecast of profits for Meridian. I am afraid I cannot do that for that would make him an insider. Secondly, my noble friend Lord Donoughue suggested that I should not refer to the compelling case put forward by Channel 4 to the National Heritage Committee. I shall disappoint him on that because it is the most cogent and coherent case for the current arrangements. I hope that I shall not disappoint the noble Lord, Lord Thomson, because I shall remain consistent with the call I made two years ago for a comprehensive review. It is time for a comprehensive review of the financial arrangements—and we are talking only of one of the financial arrangements; there are many others with which your Lordships are familiar which operate within the commercial television sector and which have been somewhat overtaken by events.

Let us go back in time. Five years ago, when this matter was being discussed, it was a "Brave New World" with Channel 4 obtaining its freedom to sell; its future was unpredictable. The legislation brought in proposals to ensure that the methods of reconstituting Channel 4 and of tendering for the ITV licences would not destroy the existing strengths and character of the respective channels. The Channel 4/ITV funding formula was one of a number of elements introduced to make the ITV tendering process viable and to remove the threat of financial instability undermining the Channel 4 and the ITV system.

The Minister at the time, Mr. Mellor, said that the aim was to provide for the separation of Channel 4 from IBA control and also to give it guarantees of income. The aim of the Bill was to ensure that the income of Channel 4 Television Corporation could be reasonably predicted. Should the income fall below what was prescribed, there was provision for a top-up; if it was above, a clawback. The Minister also went on to say that the provisions had been painfully negotiated with Channel 3, Channel 4 and S4C. The absence of amendments to the clause suggested that a provision had been arrived at to which all could set their hands.

That was the position that arose out of the 1990 Broadcasting Act and it is the case that the ITV companies have to abide by—they have no other alternative—the rules set out in the Act.

What was the attitude of Channel 4? The document to which I referred earlier was an extremely good and detailed report submitted to the National Heritage Select Committee in October 1993 (it confirms what the Minister said in the other place): Despite the fact that the 'insurance policy' of the 1990 Broadcasting Act is proving to be very expensive, the Channel 4 Board still believes it is worthwhile…The Board concluded at the Bill stage of the 1990 Act that it would not lobby against the formula for reasons which still hold good today…in advance of any experience of directly selling out airtime we appreciated the uncertainty of the transition and our obligation to protect the long term downside risk in order to guarantee the remit. Equally the Board took the view that there was real value to Channel 4 in the Act's provisions, not least for viewers, because they included the cross promotion benefit and meant that Channels 3 and 4 could be encouraged to run as complementary services". That was October 1993 and a very full endorsement of the current arrangements.

The Earl of Stockton

My Lords, perhaps the noble Earl would give way. Can he say who was chairing the Channel 4 board at that point, in contrast perhaps to who is chairing it now?

Lord Hollick

My Lords, I am afraid that I cannot answer that. The paper was submitted by Channel 4, and those called by the committee for interrogation included the present chief executive of Channel 4.

In a little more detail, the paper went on to say, in our submissions to the Home Office we said that 15 per cent of [terrestrial qualifying revenue] was the minimum level of revenue we needed to maintain our programme spending, fulfil the remit and meet the extra financial obligations which the Act imposed". I believe that this is the heart of the matter. Channel 4 is on the record as saying that 15 per cent.—because of the rather complicated way that it works in terms of spending money, that means 18 per cent. of total advertising revenue, TQR as defined—would be enough for them to meet their remit, a remit which we all applaud and which is a great success. Therefore, at 15 per cent., they are able to deliver the programming that they are required to deliver.

Finally, this splendid document says, There is, anyway, provision for a review of the Channel 4 funding formula built into the Act in 1997. We would urge that the Select Committee and the Government await that time before seeking to reach any firm conclusions. That was Channel 4's position as of October 1993, and that position obtained until the spring of 1994. We then all saw, heard and experienced a considerable, powerful and eloquent campaign. The document sets out clearly what the position was with Channel 4, why it went along with the 1990 Broadcasting Act, the merits of the situation and also, in this final comment, it essentially said that under this arrangement it would be able to meet its remit and that if it did not work out satisfactorily we could wait until 1997. That is the Channel 4 position.

What is the position of the ITV companies? As I said earlier, when the ITV companies were considering the position of bidding for their licences, they had no alternative but to take into account the rules that were very clearly set out. The rules were set out not only in the legislation but also in the invitation to apply, which the noble Lord, Lord Thomson, will know is a detailed document setting out many conditions and assumptions. One of them was that we had to take into account Channel 4. We also had to take into account Channel 5. The Channel 4 funding formula was included in the invitation to apply.

The invitation to apply specifically said that no amendment would be made before the 1997 review date. Applicants for ITV licences were therefore required to submit confidential business plans and to take the formula into account in presenting financial projections of income, expenditure and operating profit for the first 10 years of the licence. On the basis of those confidential plans the ITC had to satisfy itself that the applicant could sustain the proposed service throughout the 10-year period. The existence of the formula —this was crucial for ITV companies not least those like Meridian which were coming into the industry for the first time—had the effect of smoothing the effects of change—we are going through a period of great change—in the share of revenue between the ITV companies and Channel 4. It therefore had the effect, crucially, of reducing the sensitivity of revenue projections in the confidential business plan and of reducing one element of commercial risk in tendering for an ITV licence.

The noble Earl, Lord Stockton, will recall that he moved the amendment which removed one of the great problems and headaches from the tendering process; namely, inflation. It was a late amendment. This was all done with the intent to smooth that process in order to make it more predictable. So far as Meridian was concerned, the Broadcasting Act enabled Channel 4 to sell its own advertising for the first time. As the noble Earl has said, Meridian anticipated quite accurately that under this arrangement Channel 4 would compete more effectively for advertising revenue because its performance to date understated that potential. Meridian therefore projected a positive flow of revenue from Channel 4 to Meridian throughout its licence period. The existence of the formula supported by primary legislation was an important factor in setting the level of the bid. We made a bid. We signed up for a licence on the basis of the conditions that were in the legislation and the conditions that were in the invitation to apply. We have signed up for a bargain and we accept that in 1997 this will come up for review.

The Government's response to this campaign has been to say that we must stick by the legislation and by the rules because to do otherwise would effectively amount, so far as ITV is concerned, to breach of contract. However, the letter from Stephen Dorrell to the chairman of Channel 4, Sir Michael Bishop, has within it the seeds of a possible way forward. He said: There will be a number of developments over the next few months which will bear on the issue, including the outcome of our current review of media ownership, and any decision ought properly to reflect the wider elements in the picture". I say "Hear, hear" to that. The letter goes on: You will also I am sure appreciate that any change in the formula would not be looked at in isolation, and would necessarily involve a review of where the money would go, as well as an examination of who should bear the revenue risk of Channel 4 and how they should be remunerated". In other words, one cannot take this one part of the legislation, this one part of the complex financial arrangements within commercial broadcasting, by itself; one has to look at all the other arrangements.

The other arrangements are quite important. I shall name three. First, there are the infamous cash bids, where we have a completely uneven terrain, with some people paying as little as £1,000 and some people paying as much as £45 million. Those bids come up for review in 1998, the year after the Channel 4 formula. There is a possibility there of taking these things together, but perhaps earlier. The small company subsidy is an important part of the landscape within ITV. The smaller companies are subsidised by the larger companies such as Meridian and Anglia so far as concerns the budget for network programming. They simply do not have the revenue base to pay their full share. Similarly, on transmission costs, we need only one transmitter for London—Crystal Palace. In the West Country there are several hundred transmitters because of the terrain. The arrangements within ITV, which I fully support, are that the larger companies pay a greater share.

Those are three examples of what I would call the fairly complex financial arrangements. To suggest that one of them —the Channel 4/Channel 3 arrangement—should be looked at in isolation is the wrong way forward. What we need to see is a complete review of all of these arrangements. I have considerable sympathy for the suggestion of the noble Lord, Lord Thomson, that if the Government had a mind to they would be able to find time to tackle these matters in a comprehensive way. Whatever the merits of the argument back in 1990, things have moved on since then. We have a very competitive world. We have some competitors—I am thinking of those in Sky—who pay very little for their right to broadcast. I shall not dwell on it, but ITV is expected to pay £4 billion over the 10-year period of its licences into the Treasury's coffers.

I should like to see a comprehensive review and I should like to see it being done quite quickly. I should be grateful if the Minister could confirm that my interpretation of the letter is correct and that he has it in mind that there is a linkage between these matters and that cross-media ownership is being reviewed. We are due to hear shortly. Perhaps the Minister can tell us the date when we shall hear it. Perhaps he can also tell us whether it will be possible to take these two issues together so that we can have a thoroughgoing review of these financial arrangements, something which I have called for on a number of occasions.

8.47 p.m.

The Parliamentary Under-Secretary of State, Department of National Heritage (Viscount Astor)

My Lords, I am grateful to my noble friend Lord Stockton for initiating this debate on a topic which is clearly of some interest to a number of your Lordships who have spoken this evening. All sides of the argument have been very well put, particularly by my noble friend Lord Stockton. He was supported by the noble Lord, Lord Thomson of Monifieth, and to a degree by the noble Baroness, Lady Wharton. The noble Lord, Lord Hollick, put the ITV case, if I may say so, very clearly. The noble Lord, Lord Donoughue, attacked the 1990 Act. He was not as clear as I thought he might have been on his party's view on the subject. He said—I thought it was intriguing—that he did not like the idea of the pockets of his noble friend Lord Hollick being lined. I shall have to leave that debate to the two of them.

The noble Lord also said that he would listen carefully if I admitted various things which he then went on to list. I shall have to disappoint the noble Lord at the outset by saying that I shall not admit any of the things which he suggested. Far from it: I shall actually say how successful the Broadcasting Act 1990 was.

Noble Lords

Oh!

Viscount Astor

My Lords, I am glad to see that your Lordships are fully in agreement with that sentiment.

There has been a great deal of interest and debate in the press about the effects of the Channel 4 funding arrangements. There has been much speculation on how the money which Channel 4 has paid to the Independent Television Commission for distribution to the Channel 3 companies might otherwise be spent on programming. Channel 4 itself has mounted a vigorous campaign, including expensive advertisements in the national press.

I therefore welcome the opportunity to restate the Government's intention and commitment to ensure the survival of Channel 4 and to preserve its special programming remit. I should say straight away to the noble Baroness, Lady Wharton, that we have absolutely no plans to privatise Channel 4.

Channel 4, which began transmissions in November 1982, has been a remarkable success. The aim of the Broadcasting Act 1990 in respect of Channel 4 was fully to sustain the unique programming remit of the channel. The Act accordingly requires Channel 4 to cater for tastes and interests not served by ITV and to encourage innovation and experimentation in the form and content of its programmes. It should also maintain a distinctive character of its own.

Prior to the Broadcasting Act, Channel 4 was a subsidiary of the ITC's predecessor, the Independent Broadcasting Authority. It received income from the ITV in the form of a fourth channel subscription from each of the ITV contractors. The subscription was 17 per cent. of the net advertising revenue of the ITV contractors from the previous year. Channel 4 received not less than 80 per cent. of this subscription, the rest going to fund S4C services. In return, the ITV companies sold Channel 4 airtime and collected the advertising revenue.

As your Lordships will remember, under the Broadcasting Act, Channel 4 became an independent organisation, a public corporation, subject to ITC licensing, but with the freedom to raise funds through advertising. However, to avoid Channel 4 being wholly dependent on this source of revenue, the Act provided a financial safety net which would act as safeguard against any erosion of the channel's remit.

Under the 1990 Act, Channel 4's prescribed minimum income for any year is set out at 14 per cent. of the total television advertising and sponsorship revenues received by all Channel 3 licensees: Channel 4, channel 5 and S4C. Any Channel 4 income above the threshold of 14 per cent. of national television revenues is divided according to a formula set out in Section 27 of the Act; 50 per cent. is distributed to the Channel 3 companies, 25 per cent. is placed in a Channel 4 reserve fund and 25 per cent. is retained by Channel 4 to meet current expenditure.

In the event of Channel 4's income falling below the 14 per cent. threshold, the difference is made up by drawing on the reserve fund and from a levy of up to 2 per cent. of total television revenues imposed on the Channel 3 licensees. The threshold figure may be amended by order but not until 1998. I have to tell your Lordships that during the passage of that legislation there was consultation with Channel 4 and others about its funding and that the Government took the views expressed into account.

In its first year of operation under the new arrangements, Channel 4 increased its share of viewers and proved to be extremely successful in attracting advertising. The result was that under the safety net arrangements it was required by the ITC to pay £38.2 million—that is to say, its income was 18.2 per cent. of total television revenues—to the commission for distribution to the Channel 3 companies. Following a further successful year, Channel 4 has this year been required to pay £57.3 million—its income was 19.8 per cent. of total television revenues to the commission.

Perhaps not surprisingly, Channel 4 has complained and has asked the Government to abolish the funding formula. This would require primary legislation. Channel 4 has argued that it has always been unhappy with the safety net arrangements and that the money which is going to the ITV companies would be better spent on high quality, British-made programmes, rather than going to the ITV companies' shareholders.

However, as many of your Lordships have said, this is not an issue which can be looked at in isolation. Others have a close interest. The ITV companies also have strong views, as we have heard from the noble Lord, Lord Hollick. They argue that the Channel 4 payments were an integral part of their business plans and the basis for their cash bids. If the Government changed the funding arrangements before 1997, it would invalidate the basis on which they had been asked to make their bids.

The Government have considered the arguments very carefully. My right honourable friend the Secretary of State for National Heritage met the chairman and chief executive of Channel 4 and the chairman of the ITV Association. He also had discussions with Sir George Russell, the chairman of the ITC.

We have concluded that to amend the formula through primary legislation at present would be wrong; that the burden of proof on those who propose to change the framework with primary legislation within which the Channel 3 licences were awarded is very heavy; and that the Government do not believe that those lobbying for change have demonstrated sufficient justification for changing the provisions of the 1990 Act.

The noble Lord, Lord Thomson, said that the Government have changed some of the provisions of the Act. That is absolutely right. I believe that bidders for the ITV licences will recognise that changes can be made under secondary legislation or by the ITC in the exercise of its discretion. However, they are entitled to expect that the framework of primary legislation under which they operate will not be changed during the currency of their licences except in ways that were clearly envisaged by Parliament in the 1990 Act.

The noble Lord, Lord Thomson, said that the Government need legislation for other things. We need legislation to allow BBC commercial services to be licensed by the ITC and to merge the BCC and the BSC. Again, that matter was discussed in the White Paper. However, taking the noble Lord's point, the earliest that the law could be amended would be 1995–96, so any change would not come into effect until 1997. Under the Act the Government can look at the formula by the end of that year in secondary legislation.

Lord Thomson of Monifieth

My Lords, I am grateful to the Minister for giving way on that point. I accept the argument as far as he has put it, but if we wait until the 1997 review, any legislative change following it will not take place until 1997–98 or even 1998–99. The gap of years is of critical importance to our argument about the balance of the way in which the resources go into programming.

Viscount Astor

My Lords, I understand the noble Lord's argument. However, the gap would be one year, as I sought to explain to the noble Lord.

We shall look carefully at what has been said on this argument. The noble Lord, Lord Hollick, pointed out that the opinions that have been expressed by Channel 4 are somewhat inconsistent. As the noble Lord said, it was only in October 1993 in a memorandum to the National Heritage Select Committee, which was investigating the future of the BBC, that it was stated that Channel 4's board would not lobby against the formula for reasons which still hold good today. It has given evidence to that effect. However, as the noble Lord also said, Channel 4 has changed its mind.

The provisions of the 1990 Act are there to ensure that Channel 4 survives in the long term. We appreciate that in the short term it is galling for Channel 4 not to be able to retain all the proceeds of its undoubted success. But it was expected at the time of the passage of the Broadcasting Bill that Channel 4 would make a surplus in the first few years but that its prospects would decline towards the end of the 1990s in the face of increased competition from cable and satellite channels.

Forecasts can, of course, change and I can assure your Lordships that we will keep the effect of the safety net arrangements under review. There are, however, practical restraints on changing the present arrangements. As I have said, changes to the formula would require primary legislation and there is, we consider, no question of bringing forward a government Bill to deal with this issue alone, given the many pressures on parliamentary time. Any changes would have to be made in the context of wider broadcasting legislation.