Broadcasting Bill [H.L.]

HL Deb 13 February 1996 vol 569 cc588-626

House again in Committee on Clause 63.

Lord Kirkhill moved Amendment No. 163:

Page 56, line 7, leave out ("a significant reduction in").

The noble Lord said: I spoke earlier to Amendment No. 163, which I linked with Amendments Nos. 164 and 165. I have nothing further to add to what I said earlier. I beg to move.

Lord Prys-Davies

In view of the procedure before the dinner break, I shall concentrate on one question.

I hope very much that the word "significant", or words "significant reduction", will be removed from the clause. If the word "significant" is to remain in the Bill I invite the Minister to identify the meaning which it is intended the word should have in the context of the Bill. It has many shades of meaning, and I should have thought that, if not tonight at least at Report stage, a definition would be useful both to the commission and to the broadcasters.

Lord Crickhowell

I do not wish to get involved in a debate about the exact meaning of the word "significant". I listened to what the noble Lord, Lord Hooson, with all his legal expertise, had to say on the subject earlier. It would be interesting at some point to have some clarification.

I wish merely to observe that, unless I entirely misread the clause as it stands, the drafting of my amendment seems to be preferable to that of Amendment No. 163, which seems to make nonsense of the clause. If one takes out the words "a significant reduction in", and does nothing further, I am not sure that the provision makes sense. However, one can remove the word "significant" and the provision then has a real meaning.

Lord Inglewood

In the context of the amendment, we feel that the key point in the group of introductory words in subsection (4) is whether or not the regional character of the service is likely to be prejudiced. It seems to us that that should be the focus of the aspirations that we have as legislators. What we are not convinced of is the extra hurdle that the degree of reduction in any particular measured aspect of the service should itself be significant. It may fail to address the core point. We are concerned about a reduction in regionality. We feel that it is important that we focus on it.

As I said in respect of the earlier amendments, we wish to consider all of them as a group in order to refine them. We are all trying to achieve the same end in the group.

Lord Kirkhill

In the light of the Minister's remarks and the points which he made earlier, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 163A not moved.]

Lord Kirkhill moved Amendment No. 164:

Page 56, line 15, leave out ("or").

The noble Lord said: Again I wish merely to move the amendment formally.

Lord Crickhowell

We should not pass quite so quickly over this amendment. When we started the debate I indicated that in my view it is the most crucial and it would have been much better to have had a debate on it. I have some sympathy with what the Minister said about not trying to impose a set of definitions that are too restrictive or to tie the hands of the commission too far. However, we are not doing that. Clause 63(3) draws attention to three aspects of the provision which should concern the commission: the quality or range of regional programming; the quality or range of other programmes which contribute to the regional character of the service; and the quality or range of the programmes included in the nationwide system of services. In a sense, the amendment is an attempt to give definition to what we are talking about in regional programming.

Amendment No. 164B, in my name, refers to the degree of editorial control and the extent to which the service is managed by persons with sufficient knowledge of the area. That is fundamental. As has been observed during the debates we have had, knowledge of the area and production of programmes within the area are a fundamental factor in successful regional programming.

I understand that my noble friend will wish to go away and consider the amendments and that I shall not receive an answer from him tonight. However, I ask him to consider the amendment with special care. I believe that nothing is more important for the defence of the regional principle than that we protect the position of the people who produce programmes who have real regional knowledge and involvement. The noble Lord, Lord Thomson, suggested that one can produce a programme by getting into a helicopter and flying a crew up from London to produce a programme which purports to be regional. However, it will not be regional in the real sense of the word unless it is produced by people who have knowledge of, sympathy with and understanding of the part of the country that they are portraying. That is what we must defend.

Lord Prys-Davies

I support Amendment No. 164B which also happens to be in my name and is grouped with Amendment No. 164. We believe that it is important that editorial control of the regional programmes is located in the region. There are at least two reasons why we consider it to be important. First, there is the duty in subsection (4) to have: offices or studios situated within the area for which the service is provided". That phrase is not as reassuring as it purports to be, unless the editorial control is also within the region. Secondly, if the regional broadcasting is not to be put at risk it seems to me that the editors and heads of programmes should be located at the point of contact with the people of the region. They should therefore be regarded as part of the local scene.

Amendment No. 164B can be distinguished from Amendment No. 164A because the former refers specifically to editorial control. If the Government are minded not to accept the amendment, then I should have thought that today or at Report stage we should be enlightened as to where editorial control will be located in the absence of a reference to any duty in the clause. Are we to assume that it is therefore to be left to the discretion of the new owner who may, by choice or otherwise, become intolerant of genuine diversity?

Lord Elis-Thomas

I have a problem with the amendment. I suspect that I am sometimes a bit of an old-fashioned liberal, therefore I flinch from putting a phrase such as "editorial control" on the face of legislation. Here we have the difficulty of deciding what is appropriate for legislation on the face of the Bill and what is appropriate for discussion with the ITC and the regulator. I can see where we are trying to go. The Minister has already indicated that he will talk to the ITC about the regional tranche of amendments. However, it is important to remember the principles that we brought out: that regional programming in music, current affairs and all the cultural output should continue to reflect the region from wherever the ownership or inward investment into a company may come. That is the issue to which we shall need to return; namely, how is it possible to maintain a framework in which regionalism is celebrated and where there is additional outside investment into the region through the new ownership of a regional company without undermining that regionality. I suspect that the balance lies somewhere between what the ITC does as a regulator and what is on the face of the Bill.

Lord Inglewood

I am most grateful to the Committee. This is obviously an important point and we have heard some helpful comments. Many of the difficulties relate to the core point made by the noble Lord, Lord Elis-Thomas. It seems to me that the "production" and "editing" that the noble Lord, Lord Kirkhill, wishes to add to the criteria that the ITC must examine are both encompassed within the wider concept of "making" a programme, reductions in the local proportion of which are included in the criterion at subsection (4)(b) of Clause 63. It may be that there are loopholes in the definition or that there are ways through via the mechanisms of programme-making which need to be addressed. I believe that the noble Lord, Lord Donoughue, seeks in his amendment to close a loophole whereby some parts of the production process could be performed outside the licence region. I shall certainly ask the ITC whether it would welcome some clarification or expansion of the concept of making a programme spelling out the position of particular component activities like production and editing. However, I rather doubt whether the idea of seeking to nail down where decisions are taken as opposed to where people are employed or processes carried out is practically enforceable, necessary or even directly relevant to regional character.

I see a similar problem in enforcing the amendment proposed by the noble Lord, Lord Crickhowell, who seeks to have the ITC judge by whom editorial control is exercised and the extent to which managers of a company are knowledgeable of the region served. It is perhaps unreasonable to burden the ITC with criteria that are not readily measurable and may be subject to challenge. The point about managers of companies having knowledge seems to imply that a manager could never be brought in from outside. There are a series of difficult problems with which we must try to get to grips. However, I see that there may well be a point to address. I hope that the undertakings I have given to consult will reassure the noble Lord.

Lord Kirkhill

When I moved the amendment I did not speak to it for reasons I have indicated. I thought that we covered the ground rather well earlier. In particular, the noble Lord, Lord Thomson of Monifieth, made the key point, and with success. I am now content to leave the Minister and his officials to consider all the comments made. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendment No. 164A not moved.]

Lord Crickhowell had given notice of his intention to move Amendment No. 164B:

Page 56, line 22, at end insert (", or (d) the degree of editorial control exercised from within the area for which the service is provided and the extent to which the service is managed by persons with sufficient knowledge of that area,").

The noble Lord said: I am grateful for what my noble friend had to say on this amendment. He identified possible difficulties. The company of which I am a director, which covers two regions, believes it a good idea not to have the people from our Bristol office and south west region trying to produce programmes in Wales, and vice versa. We find that editorial control has to be exercised by those who are involved. Although we have executives who cover both, and the general management of the company covers both, the production of programmes is in the hands of people who come from one or other region. That is the point I seek to identify. I should be grateful if my noble friend would discuss it with the ITC and consider it further before Report stage.

[Amendment No. 164B not moved.]

[Amendment No. 165 not moved.]

Lord Kirkhill moved Amendment No. 166:

Page 56, line 23, leave out ("may") and insert ("shall").

The noble Lord said: I beg to move.

Lord Prys-Davies

Again, I should be grateful for some explanation from the Minister. I find it very difficult to reconcile the power in Clause 63(3) dealing with regional programmes and that in Clause 63(4) referring to the regional character of the service. The power in subsection (3) relates to the quality and range of programmes and is mandatory. The power in subsection (4) relates to proportionality and is not mandatory. Is that lack of consistency a mistake? If not, will the Minister explain why there should be two inconsistent approaches?

I am puzzled also by this possible situation. If the change of control leads to a marked reduction in the time given to the regional programme, is it intended that the commission shall not be under a duty to vary the licence, even though it can be demonstrated that it is prejudicial to the regional character of the service? That would be an extremely odd result.

9.15 p.m.

Lord Inglewood

Perhaps I can respond to the specific point made by the noble Lord, Lord Prys-Davies. The way the provision has been drafted is deliberate. The matters referred to in subsection (3) are those which it is felt are inherently such that it would be appropriate for the commission to vary the licence as a result of them occurring; while those referred to in subsection (4), if in reality they are prejudicial in the manner referred to by the noble Lord, would lead to a variation in the relevant circumstances.

We do not feel that if, for example, there was a five-minute shift in time, that would be something which should automatically trigger the variation. We intended to ensure that the ITC, as the authority which deals with the matter, had sufficient flexibility to be able to respond in a common sense way to what happened. As I said in my remarks when we began to debate these amendments before the dinner break, we are not endeavouring to entrench the status quo; we are endeavouring to make sure that the regionality, as it is manifest in the Channel 3 services covered by this provision, remains. That is why we felt it appropriate to have a degree of discretion in this regard in order to enable the system as a whole to be sufficiently flexible to evolve as the world moves forward.

Having said that, I am proposing to take all these clauses away to look at them. While we are not necessarily convinced by Amendment No. 166, I shall take it away to discuss it with the ITC.

The Earl of Kinnoull

In relation to subsection (3), if the change appears to be prejudicial, then under the three circumstances listed the commission shall vary the licence. I understand that. In subsection (4) the word "If' appears again, which indicates that on both occasions the commission has the right to consider whether or not to proceed, but on both occasions the term is prejudicial. I do not understand why there is a difference because on both occasions the word "If" appears at the start of the subsections.

Lord Inglewood

I hope that I can answer my noble friend satisfactorily by saying that, by definition, what the noble Lord, Lord Prys-Davies, was postulating was a change in regionality which does not jeopardise the quality and range of regional programmes, otherwise subsection (3) would apply. The provision seeks to deal with a lesser range of potential mischief. It is important that we do not completely corset the existing arrangements and pickle them so that there is no scope for any kind of evolutionary change in the event of the ownership of the licence which is underpinning the service changing.

Lord Kirkhill

I indicated that I did not intend to say anything at this stage. However, in view of the contributions that have been made in Committee, I am tempted to make a few remarks.

The purpose of Amendment No. 166 is to replace the option to vary a licence with a duty to vary a licence. The Minister indicated earlier that he would consider all the points which have been made, but perhaps he might give consideration, as a matter of consistency within Clause 63, to the suggestion that subsection (4) should follow the example of subsection (3) where "shall" is used rather than "may". It is a point to which I am sure he will give consideration. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 167 to 169B not moved.]

Lord Kirkhill moved Amendment No. 170:

Page 57, line 6, leave out from ("is") to end of line 8 and insert ("designed to be of particular interest to and to be first broadcast for—

1. (a) persons living within the area for which the service is provided (or any part of it), or
2. (b) in the case of a programme which is produced by or for a body holding the licence in respect of that service and one or two other bodies holding regional Channel 3 licences, persons living within that area and the area or areas for which services under those licences are provided' ").

The noble Lord said: I wish to make a number of remarks relative to Amendment No. 170. The term "regional programme" appeared widely in the Broadcasting Act 1990 and it has been used many times in debate. Everyone has a fair idea of what it means. Yet I suspect that we would probably all offer a slightly different definition. In fact, the whole of Clause 63 is about definitions. What we need to do, if we can, is attempt to define more carefully the question of what is or what is not a regional programme. The clause attempts a definition—I welcome that—but the definition is incomplete.

To find a definition of a regional programme, I turned to the ITC, which issued a very detailed description to TV companies in November 1992. Amendment No. 170 embraces the ITC's definition. As the clause stands, it defines a regional programme as being, of particular interest to persons living within the area for which the service is provided".

That could apply both to regional programmes, as in subsection (3)(a) of the clause, and to those described in subsection (3)(b)—those other programmes which contribute to the regional character of the service.

I come from an area where angling and hill climbing are very popular. Grampian Television has been mentioned once or twice today, not by me but by other Members of the Committee. If I give the example of Grampian it is because I live there. If it were to acquire an angling programme from RTE in Ireland and one about hill climbing from NRK in Norway, those programmes might be of great interest to those of us who live in the North of Scotland but they would nevertheless not be regional programmes. My amendment, by emphasising that the programme is designed for local viewers and is normally to be first broadcast for those viewers, ensures that simple acquisitions from elsewhere are insufficient to qualify as regional programmes.

Paragraph (b) of the amendment allows for the ITC's willingness to accept a very limited number of co-productions among ITV companies as regional programmes in more than one area. For example, in Scotland there is a significantly different pattern of religious worship from that which exists in the rest of the United Kingdom. In recognition of that, both Grampian and Scottish Television work together to produce weekly church services from the Church of Scotland, the Scottish Episcopalian Church, the Free Church of Scotland and so on. The few but legitimate regional co-productions such as these create the need for the second part of this more complete definition; or at least that is my view. In the light of the Minister's co-operative stance in our earlier discussions, I hope that between now and the Report stage he will give some thought to my concept.

The Deputy Chairman of Committees (Lord Brougham and Vaux)

I should point out that if Amendment No. 170 is agreed to, I cannot call Amendment No. 171.

Baroness Dean of Thornton-le-Fylde

I wish to speak briefly to Amendments Nos. 170 and 171. I listened to the earlier debate about Grampian. As someone who does not live in Scotland or come from it, I imagined that Grampian covers the whole of Scotland, Scotland being an entity. My noble friend Lord Dubs, who intended to speak on this issue but cannot be with us, said that his mind was finally made up on the thinking behind Amendment No. 171 when, while waiting to take the Skye ferry recently, he bought some petrol. He thought that it was very expensive and said to the petrol attendant, "This is very expensive petrol". The attendant replied, "But it is the same price as everywhere around here. What do you mean that it is expensive?" My noble friend said, "Yesterday I bought some in Glasgow". The attendant said, "Have you not heard of the North-South divide?"

I have a home in the West Country. Devon and Cornwall is covered by West Country TV. People in Devon call a "foreigner"—and that is me, from Cornwall—an "Emit". If one is in Cornwall people from Devon are called "Grockles". Therefore, one may feel that one is talking about a regional area, but one is not. There are individual identities within the region. That is why this Amendment No. 171 at first glance may seem a little nit-picking, but it is not. It is not just within the region but throughout it, as we see it.

Lord Inglewood

Having heard this debate I have concluded that if each of your Lordships were to separately draft the clause we are debating each draft would be quite different. As I said in my earlier remarks, we shall consider all these matters with the ITC. We are certainly not convinced that the solution offered here by the amendment of the noble Lord, Lord Kirkhill, will necessarily get to the heart of the issue as we want to. We believe that it is rigid. The amendments proposed by the noble Baroness may in fact be treating a largely imaginary problem.

The reason for that is that the powers to impose new licence conditions in Clause 63—new Section 21A(3)(a) and (4)(a) to the 1990 Act—are designed to cover not just regional programmes as specified by the definition we are now considering, but also other programmes which contribute to the regional character of the service. If either or both of these are felt to be threatened in quality, range or quantity, then the ITC can impose new licence conditions. So to that extent it should not greatly matter whether a programme comes within the expressed definition of "regional".

As I said, we propose to discuss this matter with the ITC and to take into account the debate we have had this evening. It has considerable experience of enforcing licence conditions designed to preserve regional identity. I hope that that will reassure the Committee.

The Earl of Kinnoull

Before the noble Lord withdraws the amendment, perhaps I may ask my noble friend one matter. The statement that the commission put out in November 1992 was a fairly long one and, I imagine, it was issued to all licensees and companies involved. It very much covers the amendment which the noble Lord has moved. I hope that when my noble friend talks with the commission he will take into account the fact that it is already common knowledge what the definition was as they saw it. I hope that it will be expanded into the Bill and make it clearer.

Lord Inglewood

I am grateful to my noble friend for those comments. Unfortunately, I am not in a position to comment specifically on the document to which he referred. As I said, when we debate these matters with the ITC that will be done in the round and in a co-operative spirit, bearing in mind the debate that we have had here this evening.

Lord Kirkhill

I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

[Amendments Nos. 171, 171A and 172 not moved.]

Clause 63 agreed to.

[Amendments Nos. 173 and 174 not moved.]

Clause 64 [Funding of Sianel Pedwar Cymru]:

9.30 p.m.

Lord Elis-Thomas moved Amendment No. 175:

Page 57, line 25, at end insert ("("the adjusted amount")").

The noble Lord said: We now come to two funding debates, which may take a little time. I do not want to extend the time taken by the Committee, but the funding issue is of importance both to S4C and Channel 4. We shall come to that a little later, but not too late. The funding issue is important because television is not only a producer and distributor of programmes, but also an economic activity in its own right. It is a major service industry. Indeed, it is one of the major service industries in the United Kingdom. The role of S4C as a service industry in Wales was described both on Second Reading and earlier in today's debate. I need emphasise only the importance of the authority's ability to be able to invest in programme-making in different centres of production throughout Wales and to be able to sell its product both nationally and internationally. It has production centres in Cardiff, Swansea and Caernafon—I declare an interest as a resident of the Royal Borough of Caernafon—which have created a system of media presentation within Wales which reflects those different communities with their linguistic and community diversity.

It is essential for the future development of the channel and for the maintenance of employment in that service industry of television in all its production centres in Wales that the funding of the channel should be adequate. There is a long history to the funding formula we are discussing. The Bill proposes to change the funding formula from one based on 3.2 per cent. of total advertising revenue to one based on the 1997 level of funding plus RPI with an unspecified amount—that is part of our difficulty—to cover the cost of digital transmission. It is argued that that gives the department and S4C stability for planning purposes. We accept that. I also accept that the existing formula on its current basis presents a public expenditure problem for the department and a certain insecurity in terms of planning for the channel. The problem is that total television revenues have consistently risen at a higher rate than RPI, and that pattern is projected to continue.

The problem that S4C has as an authority is that the formula on the face of the Bill leaves it with less funding than is produced by the existing formula at a time when it has additional expenditure, when the digital service becomes an added expense, and when other channels, such as Channel 4, will be benefiting from increased advertising revenue. The existence of Channel 4 in Wales, which we all welcome, is a matter for debate later. We welcome the proposals in the Bill to extend Channel 4 throughout the United Kingdom, but that may result in an advertising revenue problem for S4C.

The authority is seeking—I know that the matter has been discussed in detail with the department—to retain a link between the funding of the authority and commercial revenues so that the authority can benefit from the rise in terrestrial television advertising revenue. The proposal in this and the two linked amendments is that there should be an adjusted amount, which is the base funding plus RPI, but that the supplemental amount, the increase, should not be greater than 3.2 per cent. of total advertising revenue, thus keeping the current formula. The amendments propose a compromise between the existing formula and the position set out in the Bill.

The funding formula is to change in 1998. That will be the first year of digital transmission. .Although the formula gives the authority a more secure footing, as was indicated, it does not enable the authority to have a sufficient base to continue its level of production or to be able to fund the additional cost of the digital service. I do not want to go back over the history of the formula. Briefly, it is this. In the early 1980s the formula under the Broadcasting Act 1981 required the IBA to fund what were described as the "reasonable outgoings" of S4C. It was also required to fund Channel 4. Funds for both were obtained from the fourth channel subscription, which was then a levy on the ITV companies. The position at that stage was negotiated by the IBA. The fourth channel subscription was set at 17 per cent. of total commercial revenue (NAR) for the previous year and was shared between Channel 4 and S4C on an 80 per cent./20 per cent. basis so that S4C then received 3.4 per cent.—that is, 20 per cent. of 17 per cent.—of the previous year's NAR, by agreement. I go back to that to indicate the complexity of the original formula that was set out in legislation.

The transmission costs were then paid by the IBA. That system worked well for S4C. Following the 1990 Act, the ITV contractors emphasised that the funding for S4C should come from a different source. At the same time, advertisers were calling for Channel 4 to sell its own airtime. That was introduced with the so-called safety net, to which we shall come later, for Channel 4.

In 1989, the Home Office, the department then responsible for broadcasting, discussed with S4C a different funding scheme, comprising a direct grant from government of 3.2 per cent. of the previous year's NAR which would have allowed S4C to keep the revenue from the sale of its own airtime, but it would have had to pay the transmitter cost out of that total sum. That became, in effect, the position in the 1990 Act.

The period 1989 to 1991 was not a buoyant one for NAR, but ever since there has been real growth. That is what has created the problem and why the Government have felt the need to cap the present funding formula. Our concern is that in the present legislation the proposal that from 1998 S4C funding should continue at the 1997 level in real terms with an RPI link, will mean that for the first time, which is why I have gone over the history, S4C's revenue will not be linked to the ITV Channel 4 commercial advertising revenue, but will be frozen in real terms.

It is important that the department reconsider that decision not to link the S4C funding to operational market forces in this area. It cannot have it both ways. Either S4C is granted further commercial flexibility if it is to be capped in that way, or it has to have its revenue linked to the market movement in the whole media sector that we are discussing.

S4C's own advertising revenue has been buoyant, but as I said earlier there may be competition in future years as Channel 4 becomes available in Wales. So the levelling off of income is coinciding with a period of additional costs because of the need to develop the digital channels. Those are not merely transmission costs. That is why I have proposed in the amendment one formula that maintains a link with the commercial market movement of revenue in terms of income, but also provides flexibility for the department in terms of the way it wishes to control public expenditure in this area.

I am not pressing this solution as the only one, but I should like assurances from the Minister when he responds that he will look again at the break that has been made between S4C's income and the relative movement of the market in this whole area. There should be particular financial provision for S4C at a period when analogue and digital are being broadcast together to ensure that the channel is not placed in an unfair situation in relation to what is happening in the development of the other broadcasters that we have been discussing during the Bill's progress. I beg to move.

Baroness Dean of Thornton-le-Fylde

I shall not detain the Committee too long because equally important amendments are down on the Marshalled List. We support the amendment because we feel that what the Government expect S4C to face in 1998 is a cutback in funding which, over the next three years, is projected to be £27 million potentially. Digital is coming on stream, and at the same time the Bill introduces and envisages a new relationship between S4C and Channel 4 which will mean that S4C will have to produce a great deal more of its own programmes to take up the availability of the channel space that it will have. We believe that during that time S4C needs some stability but clearly the Government do not wish to maintain the present formula. While the Minister's amendments are helpful and recognise the problem, they do not go far enough. Amendment No. 175 is in many ways a compromise. It will leave the ceiling at 3.2 per cent. but it could be less depending on the fortunes of the industry in regard to advertising revenue. If there is a downturn in advertising revenue, S4C will experience it, as will other commercial channels.

We believe that Amendment No. 175 is worthy of consideration as are the linked Amendments Nos. 178 and 179. I had intended to speak of the importance of the Welsh language service but in view of the hour I shall say only that I support the amendments.

Viscount Astor

Having looked at the amounts of money that S4C has managed to collect in recent years, I am concerned about the amendment. I understand that under the formula in 1993 it was £56 million; in 1994 it was £58 million; and in 1995 it was £64 million. That represents a percentage increase of 4.4 per cent. in 1993; 10.2 per cent. in 1994; and 14 per cent. in 1995. S4C has done pretty well. In fact, it has done a great deal better than most others; for example, the BBC under the percentage increase in the licence fee. It has had extremely generous treatment.

What worries me about the amendment is that it seeks to link the amount of guaranteed total revenue to a share of all the new channels which are coming on stream. It includes all advertising. I accept that the noble Lord's amendment provides a ceiling of 3.2 per cent., but bearing in mind that the whole pot is becoming much larger than I suspect the Government thought in 1990—and probably more than S4C then thought—I believe that the limit put on by the noble Lord's amendment is perhaps slightly over-egging the pudding. I am all for Channel 4 receiving funding but I wonder whether the Government's proposal is more sensible because it gives the Government an ability to choose the figure.

As the noble Lord said, this is a difficult area for the Department of National Heritage because if it gets its budget wrong—indeed, if it gets wrong the budget for total television advertising—it will suddenly find that all the money it had intended to spend on other parts of the department has gone on Channel 4. I am sure that the noble Lord will recognise that and the Government appreciate it. I wonder whether we should be hung up on the figure of 3.2 per cent. and I should be interested to hear my noble friend's comments. I believe that we must arrive at an equitable formula but I am not sure that this amendment achieves that.

Lord Geraint

I listened with interest to the remarks of the noble Viscount, Lord Astor. As a Welshman—and I am sure that many others will share my view—I believe that the S4C channel has been a success for the Welsh people, their nation and its language and culture. I am delighted that the Government and others have spent so much money on the channel. It is a worthy cause and I hope that more help will be given to our channel in Wales.

I wish to comment on Clause 64 and the proposed new subsection (3A) in Amendment No. 179. I am bemused by the preamble to the Bill. It refers to the financial effects of the Bill and states simply that Clause 64, revises the funding formula for the Welsh Fourth Channel". There is no mention of whether this is a revision with the effect of making public expenditure savings. The fact is that while the current formula—I repeat, the current formula—does not produce certainty because it depends on the variability in advertising revenue it has produced growth in S4C's income in real terms. That is because advertising revenue has been climbing on a trend higher than the RPI.

It seems to me that there is some deliberate element of public expenditure reduction. The calculations supplied to me show that on current projections S4C will lose some £27 million cumulatively by the end of the century. That is not a very good prospect. It is not a small amount for an organisation facing the extra expenditure of digital broadcasting which goes beyond the additional costs for transmission.

I realise that the new firmula will not operate until 1998. But the effect of the cut is immediate in that year and cumulative thereafter. All public bodies have to keep their housekeeping in order. But the fact is that S4C's administrative overheads are low. The 1994 annual report states that over 90 per cent. of the channel's public funding is spent on programme services. That is a wonderful achievement in itself. I can understand how the Government would want certainty in a formula and to be certain that the new formula produces lower expenditure—and rightly so. But that treatment comes over as somewhat harsh for an organisation which has so many achievements to its name.

I hope that I express the mood of the Committee when I ask the Government to think again. I am sure that they will do so. There should be room for some transitional arrangements for the S4C channel to cushion the change over, say, the next five or 10 years, corresponding broadly to the period over which we expect analogue broadcasting to be phased out.

I make a final plea. I am sure that the noble Lord will support S4C's argument. To date, he has taken a realistic attitude of S4C, and rightly so. I am sure that he will continue to give that support to our Channel S4C.

9.45 p.m.

Lord Crickhowell

I do not doubt that anyone who knows me can doubt my support for S4C and Welsh broadcasting. The name is almost engraved on my heart. I was Secretary of State at the time of the controversy that gave it birth and was intimately involved in the decisions that led to that happy event. Therefore, I want to see the company thrive and prosper. I am perfectly happy to hear arguments which say that the Government must be asked to pay a reasonable amount to meet the additional costs that may arise from the introduction of digital broadcasting and such things.

I do not believe that it does S4C any service to produce a formula which is indefensible. I have been around for rather a long time dealing with public expenditure issues. I know perfectly well what happens when a department's budget is wrecked by something which does not stand up to examination. I know what will be the attitude of the Treasury.

We have heard about demands for certainty. In the last year or two the Channel 3 television companies have not lived through a period of certainty but through a period when their share of advertising revenue has been falling because of the arrival of a successful new channel. We are in a period of unprecedented change and the arrival of new channels. It worries me that we are being asked to guarantee a formula which is related to total television revenue. A situation may arise in which, for example, Channel 3 or Channel 4 companies see falls in their share of total revenue but, apparently, a formula which guarantees a percentage for S4C. My worry about that is that far from safeguarding S4C, it will be so open to attack that certainty will be very quickly removed.

Therefore, I am not at all happy that the formula in the amendment moved by the noble Lord, Lord Elis-Thomas, actually gives S4C what it wants. I do not think that it will stand up to examination in five, six or seven years' time against the totality of the situation and the comparative position of other companies. Therefore, I ask the Minister to consider very carefully the arguments that have been put forward for a sound formula to support S4C. But I express quite serious reservations as to whether the formula suggested by the noble Lord, Lord Elis-Thomas, will do what he wants it to do. Indeed, I thought from his reaction to some of the comments made by my noble friend Lord Astor that he may understand that there are some weaknesses in the proposed formula which will need further consideration.

Lord Prys-Davies

I shall not repeat what has been said by the noble Lords, Lord Elis-Thomas and Lord Geraint, except to say that broadly, I am in full agreement with their sentiments.

I propose to take a narrow approach to the new funding formula. The Government propose a new funding formula and there are siren voices from the department advising S4C to abandon the existing formula and seek the shelter of a guaranteed sum. Basically, that is the message that has been given to S4C.

But the board and officers of S4C said, "Well, we would have to pay a very high price for that guarantee". That price will be substantially less income for S4C to develop its services at a time when they have to be developed. Therefore, its ability to compete with its competitors will be put in jeopardy.

Was it the Government's intention, by changing the formula, that S4C should receive significantly less funds in future? If that was not their intention but they are persuaded by the board of S4C that that will be the result, will they please reconsider the formula?

Lord Inglewood

Clause 64 aims to put S4C's funding on a reliable and predictable basis which will benefit both my department and S4C in their financial planning. The funding formula in the 1990 Act fixes the statutory payments made by my department to 3.2 per cent. of terrestrial national advertising revenue. The process of operating this formula is prone to significant fluctuations given the vagaries of the advertising market. Forecasts can vary from the actual amounts paid by several million pounds. This makes sensible planning of my department's PES provision very much more difficult. That was a point echoed by my noble friend and predecessor Lord Astor and my noble friend Lord Crickhowell. If we get the forecasts wrong—and forecasting is not an exact science—we can unduly and unfairly affect the interests of those other organisations which depend upon the department for money.

The funding mechanism proposed in the Bill takes as its starting point the payment to be made to S4C at the beginning of 1997 under the current formula, and it will be uprated annually thereafter by the RPI. That will put S4C's funding on a similar basis to that of the BBC.

This funding will be guaranteed. It will be free from political interference. And we have moreover built in an additional protection. The clause includes a power to fund S4C over and above the statutory formula to reflect the additional costs arising from digital transmission. I hope that that provides some comfort to the noble Lord, Lord Prys-Davies. Contrary to suggestions made in debate, the Bill's proposals have not been introduced simply as a means of cutting S4C's funding but as a means of making the whole financing process more predictable and reliable.

If we simply wanted to cut S4C's funding, the 1990 Act gives the Secretary of State the power to amend the percentage of total television revenues by order after 1997. That is not what this amendment is about.

The fulfilment of S4C's remit is not tied to any particular level of funding and the channel has other sources of money than the statutory payments. The Bill will enable S4C to widen its commercial activities. In that respect, as I indicated, we are looking to bring forward amendments to enable S4C to undertake additional commercial activities beyond its statutory function. I hope that that will reassure both the noble Lord, Lord Elis-Thomas and the noble Lord, Lord Geraint.

However, having said that, I must have regard to the element of S4C's funding which comes from the taxpayer. In the period 1992–93 to 1995–96 the BBC's licence fee income increased by 14.6 per cent., while over exactly the same period S4C's statutory payments increased by 23 per cent. S4C has done extremely well out of the funding system since 1993. We must recognise the fact that there is a limit to the extent that S4C should continue to receive funding increases above inflation.

It is always very alluring when making such an argument to do what the noble Lord, Lord Geraint, did; namely, to imply that there is some money which one might have had a hope or an expectation of receiving and that if, somehow, one does not receive it, then that money is lost. Indeed, it is the kind of situation where a spinster aunt leaves her fortune to someone else. That is hardly a fair way of looking at the problem.

The order-making power in the Bill simply repeats the position in the current funding arrangements in the 1990 Act which enable the Secretary of State to take into account the costs of transmitting S4C. The order-making power is extended to digital. It is not intended to allow the Government to change S4C funding for any other reasons, nor does it in any way compromise S4C's independence. Government Amendments Nos. 176, 177, 180 and 181 narrow the wording of Clause 64 specifically to take account of fears expressed to me by S4C on the issue.

I join Members of the Committee who paid a tribute to the work of both the Welsh Authority and S4C in ensuring that the material broadcast on the Welsh fourth channel is of a high standard and appreciated by the majority of the Welsh population. S4C's success on analogue will, I am sure, be enhanced by the opportunities of digital broadcasting. The Government are committed to ensuring that proper arrangements are in place for S4C to continue to thrive. That includes the adequate provision of resources. We believe that what we propose, which is analogous to what the BBC enjoys, is appropriate for the purpose.

Lord Elis-Thomas

I am most grateful to the Minister for the assurances he has given. I am also grateful to Members of the Committee who have spoken. I can assure the noble Viscount, Lord Astor, and the noble Lord, Lord Crickhowell, that it is not my intention to cause PES difficulties for any government department because, in another life, I have to make PES bids to another department on behalf of the public body with which I am associated. Therefore, I do not want to create any upsets in terms of expenditure. I understand such disciplines precisely.

My concern has been that in the process of transition to the new world of digital the channel would have problems coping with the change. The Minister made clear that he is pointing S4C in the direction of level funding related to the RPI for its statutory payments but that he is also looking to other sources for greater commercial flexibility. We welcome that fact. Therefore, when the Minister returns on Report with further amendments in the area of commercial flexibility, we shall look to him to give further assurances that the legislation will allow the authority fully to exploit all the possibilities that may be open to it. I beg leave to withdraw the amendment with the indication that we shall certainly return to the funding issue on Report. We look forward to hearing more about the Minister's further flexibility on the commercial side of the development of the channel's activity.

Amendment, by leave, withdrawn.

Lord Inglewood moved Amendment No. 176:

Page 57, line 26, after ("means") insert ("the 1997 amount or such amount as may from time to time be prescribed under subsection (2B). (2A) In this section "the 1997 amount" means").

The noble Lord said: In moving the amendment I shall with the leave of the Committee speak also to Amendments Nos. 177, 180 and 181. Since the publication of the Bill, S4C has expressed concern to me that Clause 64 gives the Secretary of State a broad power to alter S4C's funding annually. As I made clear on Second Reading, that is not the intention behind the clause. We have therefore brought forward this group of amendments to implement more narrowly our policy intention. This is what I referred to in my previous remarks. Our intention is to provide a steady and predictable income stream for S4C to enable both the broadcaster and the Government to plan properly for the future.

These amendments make clear that the Secretary of State can only increase S4C's funding from the 1997 levels in relation to the channel's transmission costs and for no other reason. They extend this provision to include digital transmission costs as well as analogue. I am confident that Clause 64, as amended, will provide a reliable basis for funding to enable S4C to continue its successful Welsh public service broadcasting. I beg to move.

On Question, amendment agreed to.

10 p.m.

Lord Inglewood moved Amendment No. 177:

Page 57, line 29, leave out from ("enacted)") to end of line 31 and insert— ("(2B) The Secretary of State may, if he is satisfied that it is appropriate to do so having regard to the cost to the Welsh Authority of transmitting S4C and the service referred to in section 57(1A), by order provide that the prescribed amount is to be an amount which is greater than the 1997 amount and is specified in the order. (2C) Before making an order under subsection (2B) the Secretary of State shall consult the Welsh Authority.").

On Question, amendment agreed to.

[Amendments Nos. 178 and 179 not moved.]

Lord Inglewood moved Amendment No. 180:

Page 57, leave out lines 40 to 44.

On Question, amendment agreed to.

Lord Inglewood moved Amendment No. 181:

Page 58, line 1, leave out ("(2)") and insert ("(2B)").

On Question, amendment agreed to.

The Earl of Stockton moved Amendment No. 182:

Page 58, line 4, leave out subsection (2).

The noble Earl said: In moving Amendment No. 182, which stands in my name and that of others, with the leave of the Committee I wish to speak also to Amendments Nos. 183, 229, 231 and 232. I suggest that, in view of the lateness of the hour, we also consider whether Clauses 65 and 66 should stand part of the Bill. The object of this group of amendments is to abolish in its entirety the funding formula for Channel 4.

At Second Reading I indicated that the formula set up in the 1990 legislation has gone badly wrong. Parliament intended it to be a backstop, a guarantee for the channel as it began to sell its own air time and a safety net whereby the ITV companies received a small insurance premium in the early years in return for a modest liability in the later years. I urge those Members of the Committee who may believe—or who have been led to believe—different, to read the words of my noble friend Lord Ferrers in his reply in the debate on the relevant clauses of the 1990 Act. The formula has now run out of control.

Tomorrow morning Channel 4 will hand over a cheque to ITV of £74,008,186 as the payment for 1995. That is more than £74 million. By the end of 1997 the ITV companies will have had £300 million against their expectation of £100 million over 10 years—an expectation on which they based their business plans when they bid for their licences. They have done very well indeed! More significantly, their liability has vanished. No one—I repeat no one—in the industry, or those whose business is to analyse the industry, forecasts that Channel 4 will need any payments in return. The ITC sees no case for any further insurance payments after the end of 1997. Only the Government appear to think that Channel 4 faces a hypothetical disaster, but they have failed to produce the figures, or the basis on which such a disaster is forecast.

After Second Reading of this Bill I took up the invitation of my noble friend the Minister and I wrote to him asking for figures to justify the Government's hypothesis. I am grateful to my noble friend for his reply which I received this morning. Sadly, his letter provided me with no financial forecast, no facts and no figures. It simply reiterated concerns about the rapidly changing sector. I will not usurp my noble friend in quoting in extenso his letter, but point out that no one is proposing to end the funding formula before 31st December 1997. Channel 4 is happy to pay until then, and will pay out the legitimate expectations of any ITV licensee which have not been met by then.

I shall have to take into account the views expressed by the Committee tonight. Unless my noble friend can satisfy me this evening, I fear that I may have to seek the opinion of the Committee.

Taking the charitable view of the Government's position, the only argument that is left to them is to say that the future of broadcasting may be clearer when we get closer to 1998. That is why, they say, they have taken powers in Clause 66 to adjust Channel 4's payments from that date.

How will matters be clearer in two years' time? For the Government to fix a new percentage payment in sufficiently good time before the beginning of 1998 the decision will have to be announced by the autumn of next year, just 18 months from now. At that point Channel 5 will only just have started broadcasting, and we shall be no clearer about the impact of digital broadcasting. Therefore, postponing the issue only prolongs the uncertainty for all concerned—the ITV companies as well as Channel 4—at exactly the time when, as a result of the rest of the Bill, Channel 4 and ITV are being encouraged to work together. That point was made forcefully by my noble kinsman the Earl of Arran and my noble friend Lord Astor in the debate on Amendment No. 146 earlier today. Just like the question of sport on television, this decision should be taken now to end uncertainty. I can assure my noble friend the Minister that this issue will come up again and again, not only in the remaining stages of the Bill in your Lordships' House and in another place, but time after time in the months ahead.

Parliament was wise enough to provide for the formula to be reviewed in 1997, halfway through the 10-year licences of both Channel 4 and the ITV companies. By that halfway point the ITV companies will have received £300 million—£200 million more than they themselves forecast. Given that under that formula the maximum payout from ITV in any one year is £40 million, even if Channel 4 lost money in each of the final five years ITV would have no cause for complaint. In fact, however, by 1997 the channel will have £150 million of reserves which would have to be lost first. It is inconceivable that a £40 million payment could be needed. Furthermore, £40 million in such circumstances would hardly protect the channel in the way that Parliament intended.

There is no more threat to the viability of Channel 4 in 1998 than there is now. Even if there were, a down payment of £300 million in premium for a maximum claim of £40 million is excessive by any standards. Given that there is no threat, there is no need for the formula.

Secondly, we need to be clear that the formula was never designed as a subsidy for ITV. Indeed, when the formula was registered in Brussels for clearance as state aid its objective was defined by the Government as: continuation of quality programming on Channel Four".

Those cross-payments were not intended to assist ITV companies in complying with their licences. Nor are they anything to do with their regional programmes. In fact, each of the regional ITV companies makes far more in profits than it receives from Channel 4. None of them depends upon those payments. For example, Border Television, one of the smallest companies and one known very well to my noble friend the Minister, made profits last year of £1.9 million, and received £45,000 from Channel 4. Last year Carlton's two licences made £122.8 million profit. This week Carlton will receive £22 million from Channel 4. We have just seen Granada successfully buy up Forte for nearly £4 billion. It will receive £16 million from Channel 4.

No one could seriously argue that ITV's programmes could be threatened by the removal of the subsidy. Nor should its regional programmes be at risk. The companies are duty bound to comply with their licence conditions anyway before profits. In any event, the ITV companies' bids will be reviewed by the ITC in 1998. Nor do I think that the ITV companies can seriously argue that the formula was an integral part of their original bid. In total, they have received three times their expectation. They knew that the formula was up for review in 1997 and they made their commercial bids on that basis.

These payments have become nothing less than a subsidy to ITV. I thought that we were against subsidy. For almost every other industry we have stripped out subsidy. Why should these profitable ITV companies depend on the earnings of their competitor? The whole point of the 1990 Act was to promote competition, not to distort the markets, nor to create new subsidies. Channel 4 does not want a subsidy; why should ITV which is four times wealthier?

I am pleased that the noble Lord, Lord Hollick, has been able to use that wealth in such a spectacular fashion with his non-domestic colleagues in the new production centre which he announced today. Channel 4 is ready to face the future without subsidy, without special protection. Originally it wanted the formula scrapped when its perversity became clear. However, the board of Channel 4, led by Sir Michael Bishop, has made two important concessions. First, Channel 4 now accepts that nothing should be done until the end of 1997—the first point at which Parliament provided for a review. Secondly, it has offered to pay out at that point any unmet legitimate expectations of any ITV company in full: that is, the full payment that each company expected to receive up to 1997, as recorded in its 1991 bid document. The ITV companies knew then, of course, that the position could not change before 1997 but certainly could change after 1997.

My amendments accept that the payments, even at their inflated rate, should continue until the end of 1997. But then they should stop. In view of my noble friend's letter, I feel that I should point out that the ITC—the objective regulator of the whole industry—also believes that payments should stop then. Indeed, the ITC believes that the ITV companies should receive no further payments but retain a long-term liability—a much tougher proposition than anything I am asking for. If ITV companies really believe that they might have a liability, they ought to favour my amendments rather than oppose them.

The Government's proposals prolong the agony. They do not deal with the central issue that the formula is both unnecessary and damaging and they offer the prospect of a further two years' lobbying in final percentages. That is no way to run an industry. Good programmes take time. Good films can be two or three years in the making. That is no way to encourage ITV and Channel 4 to work together on the digital future mapped out so well in the rest of the Bill. Some Members of the Committee may feel that the campaign has gone on quite long enough. By scrapping the formula after 1997, we can end it now. Abolition is in the end the clearest answer. There will be no losers. The ITV shareholders already have their money. All the money retained by Channel 4 will be spent on programmes and films; 1,500 new jobs will be created. The viewers will gain, the lobbying will cease. Channel 4 and ITV can work together on a great digital future and on an equal basis. I beg to move.

10 p.m.

Lord Thomson of Monifieth

The noble Earl has put an eloquent and devastating case. I await with interest hearing how the Minister hopes to answer him. I remind the Minister that Channel 4 is a unique British achievement in the whole world of broadcasting. It is a small company by world standards. It has a high-minded and extremely limited remit to cater for tastes and minorities that are not otherwise catered for. It is wholly commercially funded through selling its advertising. It has proved that it can do that very successfully. If I may say so to the Minister, who is the first Minister from this House to have responsibility for broadcasting, it is a very great Conservative achievement. The Conservative Party and the Government should be proud of it. In political terms it was very much the achievement of his noble friend Lord Whitelaw, his neighbour in Cumbria. The Government should approach the question of the future of Channel 4 with a certain pride of proprietorship rather than in the somewhat hang-dog manner in which they seem to be approaching the situation.

That situation, as the noble Earl said, is not the result of the purposes of the financial formula. The financial formula was clearly designed as a safety net for the new circumstances that the Government, in their wisdom, created in the 1990 Broadcasting Act. The fact that it clearly was a safety net was recorded not only in the debates but, as the noble Earl said, was recorded by the Government in Brussels since it was registered as a state subsidy to Channel 4. In fact, as a result of Channel 4's enterprise and excellence, the situation has been an Alice in Wonderland one, in which the great, popular Channel 3 is heavily subsidised on the scale described by the noble Earl. The proper and wise thing to do now is to call it a day, wipe the slate clean and make a fresh start in relations between Channel 4 and the ITV system.

In any case, the 1990 Act contained a provision for a review. I do not want to go over the ground that the noble Earl recited in relation to the figures. They are of a scale to make the mind boggle. By the end of 1997 the ITV companies will have received three times what any of them stated collectively in various business plans when they bid for the contracts. It is sometimes said that we ought to preserve the ongoing subsidy for the time being because it represents compensation for the ITV companies in respect of investment they made in the establishment of Channel 4.

I can speak to that argument from a certain amount of personal experience. I was chairman of the Independent Broadcasting Authority at the time. The facts are that the ITV companies received in Channel 4 a partner with a limited remit whereas they might easily have had an entirely new competitor. They were also given the right to sell the advertising for Channel 4 in exchange for resources they made available in setting it up. They did not in fact do it very well. That is one reason why extraordinary figures emerged of Channel 4's success in selling its own advertising. However, I believe that over the 10 years they did receive a surplus of some £68 million in advertising revenue over the investment they made. Today the benefits to the ITV companies are on a massive scale. In 1995 Carlton received £21.9 million; MAI 13.1 million; and Granada £16 million. Granada, once a very great television company with other commercial interests in the catering and rental fields, now a very great hotel owning company with some television interests, received a subsidy of £16 million. It is a very extraordinary situation.

The ITV companies—I have much sympathy with a number of them—are making the most of what they believe to be the position of the small regional companies which we have just discussed at some length. Five small regional companies who, in many ways, give some of the distinctive character to the ITC system, as we have been arguing, together receive, not the £16 million that Granada receives nor the £21 million that Carlton receives, but £1.6 million. The implications in terms of Clause 63 are clear. On the basis that the noble Earl made the case in an unanswerable way, there are implications, if the correct decision is taken, for the Government, for ITV, the ITC and indeed for Channel 4.

As I said at the beginning of these proceedings, it is necessary to do a number of things. It is important to bring together the dates for the Channel 4 review and the dates for the review of the ITV licences so that some of the grotesqueries of the bidding system can be put right at that time. Incidentally, I tabled an amendment with which we shall no doubt deal on Thursday proposing that BSkyB is now sufficiently successful to make its contribution to qualifying revenue as a well established broadcaster dealing with a British broadcasting public. The amendment, in the name of the noble Earl, Lord Arran, is extremely important. We should have a government guarantee on the face of the Bill that the discounts which are part of the network system of ITV and which sustain the smaller regional companies will be guaranteed for the future.

Finally, I turn to the responsibilities of Channel 4 if the Government are wise enough to wipe the slate clean. It has a responsibility that is not being fulfilled as well as it ought to be in relation to the commissioning of programmes from the regions. I am told that a good deal less commissioning of programmes from the smaller ITV regional companies now takes place. I asked for figures from Channel 4.

It appears that Channel 4 spent £188 million last year in commissioning programmes. The statement is that £35.5 million of that was spent "outside the M.25". It is a curious and revealing description of Channel 4's idea of dispersing creative programme-making to the regions. It reminds me of an occasion when, as a Foreign Office Minister, I was asked to take action to disperse the Passport Office out of London. The Passport Office was extremely reluctant to go. Finally, it bit the bullet, came back to me and said that it had been extremely difficult but it had found a site in Ealing.

The amount that Scotland receives out of Channel 4's £188 million is £4 million. I do not feel that in Horseferry Road they have heard of the Goschen Formula and that Scotland normally expects to have 11 eighty-eighths of the United Kingdom's revenue. There is a long way for Channel 4 to go. So, while I am proud of its place in the broadcasting scene, the Government should act in support of the amendment moved so well by the noble Earl. Channel 4 has its responsibilities and, if the slate is wiped clean and we make a fresh start for both Channel 4 and ITV, I hope that Channel 4 will rise to those responsibilities. I am happy to support the amendment.

Lord Birkett

I too support the amendment to which my name is attached. Between them, the noble Earl and the noble Lord, Lord Thomson, have made such a comprehensive survey of the history and finance of the matter that I do not need to add to it. It adds up to an unanswerable case. However, I should like to emphasise one small element which they did not. It relates to the programmes which would be made.

At Second Reading I told your Lordships exactly what Channel 4 thought—and I agreed—would be possible had it not had to pay the sum to ITV. But today the position is very much more dramatic. At Second Reading I talked about what Channel 4 would have done with £56 million or £57 million, which is what it paid last year. This week it is paying £74 million. I have added up all the programmes which it has carefully budgeted at £74 million. No fewer than 88 new programmes would result; some of them single programmes, some of them complete series, and some of them major films. That would be very good news for the viewers of this country, because Channel 4 makes programmes and films very well.

The film and television industries are much more closely interlinked than ever they were before. Anyone can tell the difference between a cinema and a television screen. But it is often quite difficult to know on which of those screens a new film will appear, so interlocked are the media. Not only would the 88 new programmes be wonderfully good news for the viewers of this country, but they would be wonderfully good news for the talented programme and film makers of this country. A shot in the arm is what they have needed for years and there are very few places to look for that shot. This would be something so valuable to the industry and so valuable to the viewers that it simply cannot be neglected.

Baroness Birk

It certainly does not seem as though six years have passed since I was embroiled in the details of the last Broadcasting Act. However, technology has moved on since then. The Bill now before us recognises that technological change has created a range of new opportunities in the media. Channel 4 remains committed to its full public service programme remit but admits much tougher competition than there was at that time. However, the funding formula imposed on it in the Broadcasting Act 1990 is draining the corporation of funds badly needed to invest in British programmes.

It was never the intention of Parliament that the funding formula should be anything but a safety net provision for an innovative channel specifically targeted at minority audiences which were not catered for under the system at that time. How anxious most of us were at that time to ensure its success during its transition to financial independence. Instead, the funding mechanism has become an expensive millstone round Channel 4's neck, depriving viewers of new British programmes and films and in the process creating a regular, risk-free windfall for many ITV companies.

It is the viewers who suffer from a lack of new programmes. It is employment which is penalised, since the money paid out can provide around 1,500 new jobs. As has already been said three times, but I think it is worth pressing it yet again, this week Channel 4 will pay £74 million to ITV. Last year it handed over £57 million. In 1997 it will have paid £300 million. It really is a victim of its own success. That is all wrong. The funding formula's sole purpose was to sustain Channel 4, not to subsidise ITV. Given ITV's profitability and its mergers and takeovers, its shareholders should not suffer from the abolition of the funding formula.

In 1990 we agreed to the formula for the best of intentions, but the formula has not worked out because Channel 4 has been much more successful than we estimated in 1990. In this Bill we now have an opportunity, as was pointed out by my noble friend Lord Thomson of Monifieth, to review the situation. The Government have argued that the future for Channel 4 is uncertain, which is why I think there should still be a fall-back position, but have failed to provide evidence to back that up. The ITC also wants it to have a fall-back position just in case it needs help. But again it failed to provide evidence to sustain that. Channel 5 is coming two years later than expected and its programmes will be competing primarily against ITV and not against Channel 4, as was once thought. For the safety net to operate after 1997, Channel 4 would first have to lose, as has been pointed out, £150 million, which is 30 per cent. of its annual advertising revenue, and a further £150 million to consume its reserve fund.

The National Heritage Select Committee has unanimously recommended the abolition of the funding formula since it hinders investment in the British film industry. As a past governor of the British Film Institute, I would much prefer to see the revenue earned by Channel 4 being ploughed back into British film and programme production. If the channel did not have to subsidise ITV, it would be able to invest in 12 new "Film on Four" projects for this year alone.

We have a duty to promote the British film industry and to ensure that the viewing public has the chance to see more films like "Four Weddings and a Funeral" and "The Madness of King George III". The Government's proposals, as set out in the Bill, provide only further delay in solving the failure of the formula. It will ensure continuing dispute between ITV and Channel 4 at a time when they will be expected to work more closely together with digital television. That is not good for either organisation or, I suspect, the Ministers concerned who will be the recipients of further informative lobbying material.

We can play our part in rewarding that success and enable viewers to have more of what they so clearly appreciate. I hope that the Government will think again and secure the future of independent film and programme production companies up and down the country by allowing Channel 4 to use all its earned revenue for much needed investment in this important British industry. I urge the Government to accept these very sensible amendments, if only to save the rain forests which have been ravaged in the lobbying efforts of those concerned.

10.30 p.m.

Viscount Astor

The noble Lord, Lord Thomson, said that my noble friend moved the amendment and made an elegant and devastating case. I agree that my noble friend certainly made an elegant case, but I put to the Committee that it was neither devastating nor convincing. I shall take a moment to explain why.

Much has been said about the funding formula, but two things are clear. In 1990, Channel 4 welcomed the protection that the formula provided. Also the ITV companies based their bids for the 10-year licence on the formula and the terms of the Act. Channel 4 has done much better than many expected—indeed, better than it expected itself—and it has gained an estimated 21 per cent. of the advertising revenue share. As a result, it has had to pay sums over because it is over the 14 per cent. One could say that it agreed a very expensive insurance policy. It was an insurance policy because if it had gone wrong the ITV companies would have had to pay money to Channel 4.

My noble friend the Minister has taken the view that the formula under the 1990 Act should be reviewed at the end of 1997, but that it should stay in place. The ITC has also said that the formula should stay in place, but that the payments should be set at zero. Michael Grade has now said that he believes that the formula should remain until the end of 1997, which is a change from his previous position, but that it should then be abolished.

There are many arguments which have been made to promote that cause. The first is that it would enable Channel 4 to plough back more money into domestic production. That sounds reasonable and the noble Lord, Lord Birkett, made a case. We have to look at what the consequences will be for other small, regional ITV franchisees. Let us look carefully at the claim that abolition would increase domestic production.

Channel 4 does not owe its success to homemade programming. One of the reasons that it is successful is that it has cleverly imported ready-made programmes From America. The audiences love them. That is the reason for their success. I know from my own experience at home, wrestling and battling to get hold of the remote control, that programmes such as "Cheers", "Frazier", "NYPD Blue", "Roseanne" and many others are popular.

It is interesting that in fact, although Channel 4's income rose from £251 million in 1992 to £394 million last year, over the same period the number of US programmes broadcast on Channel 4 actually increased from 992 to 1,443. Channel 4's income has grown in recent years, but so has the level of imports. So I am rather sceptical of the simplistic argument that giving more money to Channel 4 will automatically increase domestic production. A simple analysis of the ITC annual report demonstrates that once the special payments from Channel 4 to ITV, and from ITV to the Treasury are taken out of the equation, there is no difference. Comparing the ITV and Channel 4 franchisees, both spend the same percentage, some 50 per cent. of net revenues, on original UK production.

The Earl of Stockton

Does my noble friend have a comparable figure for investment in British film industry production, particularly in terms of bringing on a script to the point of production?

Viscount Astor

The funding formula has nothing to do with the film industry. This is about Channel 4. It is a separate matter.

Channel 4 has been able under the existing rules to increase its programming budget by 44 per cent. over the past three years: not a bad record when you consider that it has also been able to spend £62 million on a new building. What we must also remember is that although Channel 4 pays some £60 million to the ITV companies, it does not pay any levy to the Treasury. The ITV franchisees actually pay over £370 million to the Treasury, plus corporation tax and dividends to shareholders.

Channel 5 arrives next year, paying about £22 million in licence fee to the Treasury, and is forecast to gain a 4 per cent. share of total television advertising in its first year, rising to 9 per cent. in 2002. It is very important to retain the flexibility and not haphazardly change the rules. With Channel 5 taking a large chunk of revenue, and many more satellite and cable channels about to be launched, who knows what will happen?

The Government must have the flexibility. Much has been said about the smaller ITV companies. We all agree about the importance of regional programming, which we discussed earlier, but without the possibility of support post-1997 those companies could be in great danger. The amendment removes the possibility of support post-1997. We all agree that the larger ITV companies will not need the money after 1997—they might not get any of it—but this amendment removes the formula and the flexibility. If we tinker with the arrangements in this way, we put some of those companies in grave danger. Therefore, I hope that my noble friend the Minister will firmly resist the amendment.

Lord Palmer

This is becoming a fascinating debate and, although I do not agree with the noble Earl, I almost tore up my speech because what he said was so convincing.

I feel that I must declare an interest as a small shareholder in the smallest television company, Border TV, which as many of your Lordships may know has just 1 per cent. of the viewing population. The sheep outnumber the viewers by 5:1. Border TV produced 0.6 per cent. of total ITV revenue.

Many of us have been lobbied vigorously on the question of Channel 4 funding. There is a danger that we will all become hopelessly confused by claim and counterclaim, by endless references to "reserve funds", "percentages of qualifying revenue", "cash bids", and so on.

The Broadcasting Act 1990 guaranteed that the funding formula would stay in place unchanged until the end of 1997. Going back on that guarantee would mean the Government acting in bad faith. That would be a great pity at this particular moment. I think that even Channel 4 is beginning to accept that a deal was made and a deal has to be adhered to. The shareholders of the ITV companies invested money on that basis. It would be quite wrong to change it.

I accept that after 1997 the argument is more complex, but I believe that it would be entirely misguided to alter one element of the financial balance within the Broadcasting Act while leaving the others unchanged. As a result, we should not abolish the funding formula at the end of 1997. The two channels (ITV and Channel 4) have battled out this issue in the press and elsewhere. The Government's reaction set out in the Bill represents a fair compromise: keeping the funding formula in place but enabling the Secretary of State to regulate a flow of funds from one channel to the other after "the end of 1997".

We have also to remember, as the noble Viscount, Lord Astor, said, that Channel 4 does not pay any tax to the Revenue. When one thinks of the enormous tax bill that the ITV companies pay (£370 million) and that is before corporation tax, we must be extremely wary of this. Nor must we forget that, as it is a publicly owned company, it has no requirement to make profits.

I suspect that in the longer term the right solution will be to spread the payments that the ITV companies make to the Treasury more widely across the whole broadcasting industry, including Channel 4 and the cable and satellite broadcasters. That would create a genuinely more level—although I hate the expression—playing field for the whole of the broadcasting industry. Even so, I do not believe that that should be the intention of the Bill.

The right thing to do is to keep the Channel 4 funding in place along with the other financial aspects of the broadcasting legislation, and review them all at the same time at the end of 1997 or even during 1998. I believe that it would be good for British broadcasting, fair to all the companies, and, above all, the right decision in the interests of good government.

Lord Burnham

Before the noble Lord sits down, may I ask him whether, as a shareholder in Border Television, one of the smallest companies, he can confirm that in 1995 it made a profit of £1.9 million, whereas its subsidy from Channel 4 was £44,405. If that is so, it is scarcely an absolutely vital element in the survival of Border Television.

Lord Palmer

I am not sure how I should answer that other than to say that Border Television has for many years been struggling, but under new and dynamic management it is proving to be a much more successful company. Indeed, the share price went up to over £3 this morning. I am not sure how I can reply more logically to the noble Lord.

Baroness Hayman

I shall not detain the Committee long at this time of night, but I shall say a few words in support of the amendment which has been so well argued by the noble Earl, Lord Stockton, the noble Lord, Lord Thomson, and others. I support the propositions that have been put forward, but I shall not follow in all the details the contributions that have just been made.

It seemed to me that the noble Viscount, Lord Astor, was arguing that because, in effect, Channel 4 had taken out an expensive insurance policy for itself in 1990, from 1997 onwards it should take out an expensive insurance policy for the small ITV companies. That cannot be right.

Mention was made earlier of the tendency of broadcasting legislation to predict the past. The provisions in the 1990 Act that we are discussing had the effect of achieving the opposite of what they intended. What was intended in the funding formula as a safety net for Channel 4 ended up, in effect, as a subsidy for the ITV companies. That is what happened. Those were the provisions that were put in place, and those are the provisions that will stay in place until 1997. We have to consider whether it is right that we should continue that situation.

Channel 4 is different from the ITV companies. That takes us into the taxation issues. It is different because of its clear public service responsibility. As has been said, the original proposals were registered as state aid with the European Union in order to sustain quality on Channel 4. I am not sure that anyone could argue that the effect of what has been done has been directly to sustain that quality. However, I believe that in reviewing the funding formula there is an opportunity to fulfill those obligations about sustaining quality in the public service remit if those retained services are not syphoned off into the ITV companies but will accrue to investment within the film industry—I think that the film industry is most relevant here because of the closeness between film and television industries—and to employment in production in the television sector. We should welcome and encourage the willingness that Channel 4 has shown to guarantee that surpluses would be put straight back into programming and to welcome the ITC having a role in overseeing this, and perhaps looking into the issues of regional programming and commissioning as mentioned earlier.

We would be making a great contribution to the future success of Channel 4. It has been a great success and an asset to public service broadcasting in this country. A great deal has been said about the turbulent times ahead and the vast changes that we envisage in broadcasting. In view of that, it is even more important that we should be supporting and sustaining Channel 4's public service remit and not devaluing it by sustaining present funding arrangements beyond 1997. For that reason, I support the noble Earl tonight.

The Earl of Arran

I believe that the amendment has been rottenly argued by my noble kinsman Lord Stockton and I am sorry that on this occasion blood is most certainly not thicker than water. I totally agree with the remarks made by my noble friend Lord Astor.

There is no excuse for failing to understand the intricacies of Channel 4's finances because Channel 4 has spent a huge amount of money making sure that we all know about it. Its version of the story tells us of award-winning programmes never made and of opportunities unfulfilled. Channel 4 claims that it has been bled of finance. However, Channel 4 can afford to make a lot of noise because it is now a huge success. When the station began no one believed that to be possible so a funding formula was invented. It is a little like a seesaw. If Channel 4 is struggling ITV will back it up, but if Channel 4 prospers ITV becomes the beneficiary.

I am delighted that Channel 4 is doing so well and I am happy to pay tribute to the considerable commercial acumen of the Channel 4 managers. But their accompanying chorus of bleeding hearts really is a little hard to swallow. We hear a great deal, and we have heard a great deal tonight, about how much the TV giants receive from Channel 4's coffers. We hear nothing at all about the sums that go from Channel 4 to the small ITV companies; money that is never squandered but pays for valuable regional programmes. That money was part of the deal and effectively part of the legislation.

The points, very simply, are these. The Channel 4 funding formula was designed to last until 1998. The Channel 4 funding formula is still essential to small companies. Without it their corporate plans would be thrown into total disarray. Without it their pledges to the ITC would be seriously hampered and without it their viewers would suffer. There may be faults in the funding formula but they can be properly addressed on schedule towards the end of next year. Until then, the whole of independent television should stick to the letter of the binding agreement. A promise is a promise and I suggest that we break it at our peril. I strongly urge my noble friend the Minister not to accept this amendment.

Lord Elis-Thomas

I wish to support the amendment and briefly to point out what appears to me to be a great inconsistency on the part of Members of the Committee who have spoken against it. We have dealt successively tonight with two funding formulas. The outcome of both cases has been different from the predicted intention of Parliament. In one case, the case of S4C, the noble Viscount argues that the formula should be amended because it has been too generous to the authority. In the case of Channel 4, he argues that the formula should not be amended because it has been providing revenue for ITV companies.

Clearly, we cannot have it both ways. If the formula were going through the public expenditure procedure, no doubt he would be in favour of amending the formula. In this case the formula is taking out of public service broadcasting and is providing added value for what is becoming an increasingly commercial sector. It is taking money out of programme production into the interests of shareholders.

It is for that reason, because potential revenue for production is not being utilised for production, that I support the amendment and make it quite clear that so far as concerns the future of the independent production centre throughout the United Kingdom, there is more future in terms of programming invested in Channel 4 than there is invested in the profits of the current ITV companies.

Lord Crickhowell

I am moved to intervene in the debate by the two speeches from the Cross-Benches. The noble Lord, Lord Birkett, suggested that there would be a great increase and huge flood of new productions from British companies, if the formula were done away with. We have just heard the suggestion that it will somehow be much more valuable and better managed in the hands of Channel 4 than in the hands of the ITV companies.

The noble Lord, Lord Elis-Thomas, pleaded very strongly and correctly earlier in the day for regionality. So far as Wales is concerned, if the money were taken away from HTV, it would to a certain extent come out of programmes made in Wales and the programme-making capacity that we have. It simply is not true that there would be a great upsurge in programme making. The truth of the matter is that there would be more programme making by one channel and less programme making by another. People can take sides as to which could produce the best programmes and whether there is virtue in the one or the other. But the idea that there will be an enormous increase in UK production as a result of such change is, I believe, simply nonsense.

I understood that my noble friend Lord Stockton made a most eloquent speech. It was a most persuasive argument for standing where we are. He told us very clearly that he did not propose a change until the end of 1997 and that everyone should stick to that point. We have a formula which provides for a review in 1997 but at that point it allows the Government to take account of whatever the situation may be at that stage. We all know about the difficulty of making forecasts.

I am not one who argues that necessarily the existing proportions should continue to be paid right through for 10 years. My noble friend Lord Stockton made quite a case for change after 1997 and no doubt my noble friend the Minister will consider that very carefully at the appropriate time. But we had a timetable for review and people made their plans accordingly. As we argued in an earlier debate, there was a parallel provision made in the 1990 Act but with a gap of a year which would enable a review of the licences for the new companies. As the noble Lord, Lord Thomson of Monifieth, observed, that again is a very strong case for bringing together those two things. We need to look again, at the appropriate time as provided by the legislation, at whether change is needed. But at the same time, the companies which made their bids under the previous arrangements need the ability to have a chance to have those licences reviewed, and the two things should happen together.

I shall make only one other observation. It has been made in much more detail and very eloquently by my noble friend Lord Astor. We have heard a tear-jerking plea on behalf of the fourth channel, but we heard very little of whether there was any merit, in the light of everything that has happened and the unexpected success of the company, in considering whether some modest contribution might be made to the Revenue by that channel. I must say that I am at a loss to understand why, if we are to have a level playing field, one channel should provide a huge subsidy to the Treasury and the other should not. It seems to me that if we are to review matters, perhaps we should not review just one item of the package but have a more fundamental review. I suspect that my noble friend Lord Stockton and those who press him to argue the case in this Chamber would not be quite so happy to have a wider review of the total financing arrangements.

The Earl of Stockton

Before my noble friend sits down, I should tell him that I would be entirely happy to have a wider review. I should point out that Channel 4 pays corporation tax. There are two questions that I should like to ask my noble friend. He has declared an interest in Harlech Television, a company which bears the name of my revered and respected noble uncle. Is that position remunerated? If so, does he accept that, therefore, part of his remuneration comes indirectly from Channel 4?

Lord Crickhowell

The other day I inquired of the Clerks about the way in which one should treat declarations of interest. Of course, I have declared my interest. It must be a direct and meaningful financial interest to prevent me from arguing the case. But I doubt whether my accountants would be able to calculate even a minuscule consequence for me brought about by a change in the formula.

Baroness O'Cathain

I declare an interest. I was a director of Channel 4 but before the 1990 funding was put in place under the 1990 Act.

In 1993, the National Heritage Select Committee took evidence from Channel 4 on the subject of the funding formula and Channel 4 said that during the passage of the 1990 Act it had not objected to the funding formula and did not want to lobby against it now for the reasons that stood then. That was only 1993. Of course, it has been a great success and we must hand it to Channel 4 for that.

But from 1993 to 1996, Channel 4 has spent some £81 million over the amount that it had budgeted for its programmes. Therefore, in those circumstances it cannot plead poverty. But of that £81 million, it reduced its expenditure on programmes from the UK and other sources by 2.5 per cent. and increased its expenditure on US programmes by 66 per cent. in 1994 alone. Therefore, all the arguments that we have heard this evening have been most persuasively put but they really do not hold a lot of water.

I think that it is sad that we have two organisations here—ITV and Channel 4—which are both very successful in producing programmes, commissioning programmes and buying in programmes which the customer obviously likes. They should not be fighting with one another and bandying statistics and figures all over the place. I believe intrinsically that an agreement is an agreement. An agreement was made. It has fewer than two years to run. Why do we not leave it at that? I shall certainly not support the amendment.

Lord Desai

I merely rise to note that in this country, success causes more problems than failure. Had Channel 4 lost a great deal of money, we would all have sympathetically given it even more and we should not be having this debate.

The ITV companies took a gamble which was highly successful. They made three times more money than they thought they would do, even on their best expectations. It seems to me that it is very strange to claim that the small ITV companies would be devastated if they did not receive that money for ever and ever. If their planning is that bad, they do not deserve to be in business.

For my money, it does not matter whether the companies commission British productions or import American or Chinese productions. They are in a free market and can do what they like. If we do not believe that, we should not have an independent television sector. We should oblige them only to make British programmes and nothing else. That is not a valid argument.

The valid argument is that something unanticipated confronted us in 1990. We took a gamble. We now know that that fear was unjustified. Is there any reason to continue the arrangement which was extremely successful for those on one side of the bargain but not for those on the other side? One can reward people for one gamble, but one should not continue to do so forever. I believe that the noble Earl's point is perfectly valid.

At the end of 1997 I believe that we should abolish the formula. No other reconsideration would make any sense. Even if the Government were to reconsider the matter, I would be surprised if they came to any other conclusion except that put forward by the noble Earl. Therefore, why do we not make the decision now?

11 p.m.

Lord Donoughue

Members of the Committee can be very proud of themselves; we have indeed had a most lively debate. I believe that it is now seven hours since "kick off", and things are still going very well. It has been said that the funding formula was established as an insurance police to protect Channel 4 and we can recall why. It was in case the channel did not attract the advertisements or in case the audience was small. The latter has proved not to be so and that is wholly to its credit. It was also to protect the channel should the competition, the satellite or cable competition hit their adverts. That has not happened either, mainly because the introduction of Channel 5 has been delayed and satellite and cable are expanding primarily in subscription, not in advertisements.

That is the history of the matter and we have had figures put forward from all sides of the Committee. Clearly, it is a very complex issue and the funding formula is obviously not working as intended. I believe that that is one of the few areas of total agreement by all Members of the Committee. Payments of £175 million between 1993 and 1995, and rising, were never envisaged and are clearly, and understandably, intolerable to Channel 4. Indeed, had those of us who were in this place at the time known about those figures by looking into the crystal ball, the 1995 formula would never have been introduced or been accepted. What was seen as a small insurance policy has become a massive levy on Channel 4's profits and success. The resentment in that respect has been clear from the majority of contributions made by Members of the Committee from all sides.

As the formula is not working, how and when do we change? I believe that the "when" is easier to answer, because the end of 1997 would be a natural break. In response to some speakers who have pointed out that Channel 4 has changed its position—which is often seen as a bad thing—I should say that I know that that was actually a concession on the part of the channel to try to make life easier for us. The "how" of the matter is more difficult. Anyone seeking a compromise, as some of us have, has not found it easy to bridge the interests of both sides. As the massive flow of briefing paper has demonstrated to us, bottom lines were speaking very loud. I feel that the hyping of the issue by both sides has not helped us in the bridging process; it has certainly not helped us politically.

To end the formula totally and soon, as proposed by the noble Earl, Lord Stockton, would lead to many disadvantages and threaten the budget cash flows of ITV, thus causing pain throughout the regions. I believe that the noble Viscount, Lord Astor, was very sensible in that respect. I do not believe for a moment that most of them budgeted for this bonanza. However, having said that, to continue the subsidy for a long period at the present rate would be an intolerable and unacceptable levy on the marvellous success of Channel 4. The fact that the better Channel 4 performs the more it suffers is something which upsets many of us.

There is an additional factor involved about which there has been some disagreement. If the money were kept in Channel 4, there is no doubt that it would mainly go into domestic programme production and films in the future. It is important to mention films because Channel 4 has a very good record in that respect. Channel 4 has generously promised, in advance, to do more of that in future. Therefore I would say to the noble Viscount, Lord Astor, and to the noble Baroness, Lady O'Cathain, that Channel 4's performance in the past is not relevant to what it will do in the future as it has made clear promises as regards better performance on domestic programme production and continuing expenditure on films whereas, as we know, some 50 per cent. of that money when passed to ITV goes straight to the shareholders and the directors, as the noble Lord, Lord Elis-Thomas, stated so powerfully. That is not pleasing to anyone who cares about the health of British TV where we want the maximum invested back in the production industry.

The Government's compromise formula has not had much show in all the exchange of heavy artillery from the two sides. I thought it not a bad opening shot. But its flexibility—flexibility is a virtue which we do not often see—is in a way its disadvantage, leaving the Secretary of State apparently deciding the matter each year. That is the last thing I want. It is like the racing industry and the bookmakers arguing each year about the levy, as they used to do. It creates the danger of annual battles over the formula distribution. That would institutionalise the present battle, and that is not desirable.

I have some sympathy with the ITC approach of keeping a kind of sleeping formula in case one needs the insurance but making zero cash payments after 1997. Our position on this side is clear but not brutal. We believe the matter should be settled for the end of 1997 and not left in further doubt for future battles. It should be seen within the context of the overall taxation net for broadcasting where there are many inequalities from which, on the whole, the ITV Channel 3 companies suffer. They make overall an unfair over-payment to the Revenue while others make a lesser payment. I am pleased that the matter will be raised again on Thursday because it is an important context in which to consider what is a much smaller financial issue—the funding formula. We on this side expect the date—1997—to be important as we expect a Labour government to have been comfortably in office for some time when we take the decision. We expect to do so in relation to the several considerations I have outlined.

Lord Inglewood

I am sure we all agree that we have had an interesting and worthwhile debate about the Channel 4 funding formula which has generated a wide diversity of views. My noble friend Lord Stockton suggested, in moving the amendment, that Channel 4's long-term future was assured; that the statutory funding formula had already acted against its interests; that it no longer served a useful purpose; and that its retention would lead to annual conflicts about levels of payments—all of which, and much besides, led him to the conclusion that the formula should be abolished.

No one applauds Channel 4's success in recent years more than the Government. We want to safeguard its future as part of the core quality public service channels in the digital age. We have already debated this in general terms. In our view the right way to secure Channel 4's part is to retain the funding formula but to enable the Government to adjust the variables in that formula to take into account the economic realities of an uncertain future as they become apparent. Abolishing the formula outright could prejudice Channel 4's long-term future and we oppose doing that.

Perhaps it may help the Committee if I first explain the basis for the present formula and the Government's proposals to amend it before dealing with my noble friend's specific points. As already mentioned, Channel 4 was established in 1982 as a wholly owned subsidiary of the Independent Broadcasting Authority. The ITV companies sold Channel 4's advertising space and funded the channel by a subscription. The 1990 Broadcasting Act changed the arrangement. It provided for Channel 4 to become a statutory corporation, selling its own advertising space. It set out Channel 4's remit to broadcast a suitable proportion of matter calculated to appeal to tastes and interests not generally catered for by Channel 3, with special emphasis on innovation and experiment in the form and content of programmes.

The funding formula was introduced by the 1990 Act as a response to anxieties that the new arrangements introduced for Channel 4 to sell its own advertising, rather than to rely on financing from Channel 3 as before, might have a damaging effect on its finances and that that, in turn, might damage Channel 4's ability to execute its remit properly.

The funding formula was accordingly devised as a means by which Channel 4 is, in certain circumstances, guaranteed funding from the Channel 3 companies should its income from advertising revenue fall below 14 per cent. of total national advertising revenue. As a quid pro quo for that arrangement, in essence a kind of insurance policy, any income which Channel 4 obtains from advertising revenue taking it above the 14 per cent. threshold is distributed according to a formula. Fifty per cent. of the excess goes to the ITV companies; 25 per cent. to a statutory reserve fund held by Channel 4; and the remaining 25 per cent. to Channel 4's current expenditure on programmes. However, should Channel 4's income fall below the 14 per cent. threshold, the funds which have accrued in the statutory reserve are used in the first instance to top up Channel 4's income so that it reaches an amount which is the same as 14 per cent. of total national advertising revenue. If and when reserve funds are exhausted, it is for the Channel 3 companies to fund the shortfall between Channel 4's income and the 14 per cent. threshold, up to a limit of 2 per cent. of total national television advertising revenue in any one year.

We have heard a lot about the level of Channel 4's payments to Channel 3 since 1993. It is fair to say that it was anticipated at the time the 1990 Act went through Parliament that Channel 4 would be profitable in its early years and that it would accordingly make payments to the Channel 3 companies. The Government are nonetheless aware that many people believe that the amount of those payments has been higher than was expected at that time, and we have taken that into account in proposing an amendment to the funding formula.

The Government's approach retains the basic framework of the funding formula. However, it includes the power, by order, to adjust the treatment of Channel 4's earnings above the 14 per cent. threshold which I have described. It also updates the definition of total national advertising revenue to include multiplex revenue as well as the other elements (including Channel 5 revenue) specified in the 1990 Act. It would not be right to change the rules applying to funding flows between Channel 3 and Channel 4 before 1997. To do that would be unfair.

The Government's approach has two benefits. First, retaining the formula will keep the safety net for Channel 4 in place as a prudential measure. I hear the arguments that that safety net is unnecessary, since Channel 4 has every expectation of being able to stand up for itself in future. We do not feel that it is responsible to be so sanguine. The broadcasting industry is going through a period of intense change. Indeed, I doubt whether there has ever been a period of such change. There is a plethora of uncertainty, arising from the launch of Channel 5, the advent of digital terrestrial television and the projected expansion of the cable and satellite sector, with scope for several hundred channels to be available in future. As the ITC has acknowledged, the outlook for Channel 4 into the next century is uncertain. Some forecasters anticipate a downturn in Channel 4's share of net advertising revenue, in particular as Channel 5 develops in the early years of the next century.

No amount of media analysis one way or the other can make an inherently uncertain future any the less so. Channel 4's efforts to increase its advertising revenue have been extraordinarily successful, with its share rising from 14 per cent. to 21 per cent. of total national advertising revenue over the past four years, growth in revenue which has raced ahead of the increase in its share of the audience. That shows considerable success. However, we have to acknowledge that, as the financial advertisements put it, past performance is not necessarily a guarantee of future success. Indeed, as those of us involved in politics are aware—and I draw this point to the attention of the noble Lord, Lord Donoughue—there is scope for rapid and considerable fluctuations in opinion polls. The essential point is that we cannot predict the future with certainty. For that reason, I am sure that the retention of a long-term prudential framework is right and that we should not abandon the principle of having a safety net on the basis of two or three good years.

The second major characteristic of the Government's proposals is their flexibility. Clause 66 will provide powers for the Secretary of State, by order, to adjust payments from Channel 4 to Channel 3 companies downwards from their current level of 50 per cent. of Channel 4's income above the 14 per cent. threshold. It is too early to say what the new funding level will be, but there is scope to adjust the current distribution significantly and our intention will be to enable Channel 4 to retain significantly more of its revenues for programmes. Under the affirmative resolution procedure, Parliament will have an opportunity to debate the issue fully in due course.

Furthermore, included in these powers is one by which we can reduce Channel 4's payments into the statutory reserve. It may help the Committee to know of the Government's present intention so far as the reserve is concerned. The reserve currently stands at more than £70 million. Assuming no unexpected difficulties, it is the Government's present intention that the reserve would be capped at an appropriate level, with no further payment made into it unless circumstances changed. Even assuming no change in the level of payments to Channel 3, that would at a stroke double Channel 4's income above the threshold to spend on programmes. Thus, it would be able to provide the kind of extra programmes to which the noble Lord, Lord Birkett, referred.

In that context, undoubtedly one cannot accurately trace or follow any transfers of money which may pass from Channel 4 to Channel 3. After all, both of them are organisations which make programmes. As I also indicated, it is our intention to review the level of payments to Channel 3. It seems that there is little doubt that what the Government propose is not incompatible with what the ITC proposes because it hinges on the way in which the formula might be drawn up. According to the ITC, the way the problem should be resolved is by means of the proposed order-making power under which the flow of funds between Channel 4 and Channel 3 is reduced to nil. The funding formula should not be abolished altogether because it may still have a useful role to play in the longer term.

At this stage I cannot possibly predict what might be an appropriate amount of money to pass between the parties concerned. We are talking about the distant future. We wish to have in place a formula which can be activated as and when necessary and appropriate.

Before sitting down I wish to respond to one or two specific points raised in the debate. Questions have been raised about whether Channel 4's commercial success has been bought at the expense of its specific remit, to which I have referred. It is for the ITC to determine and monitor Channel 4's remit. Clearly, this is in principle a further potential element of uncertainty. The ITC's last annual performance review contained a good deal of praise for Channel 4's output. I know, however, that the ITC has registered various concerns, in particular in relation to the proportion of repeats. No doubt the ITC will take the comments of Members of the Committee into account in considering what, if any, tightening might be appropriate to Channel 4's licence.

A number of speakers have drawn attention to the scale of Channel 4's payments to Channel 3. I have already outlined the background to that and do not wish to go into it in great detail. I have acknowledged that the Government are aware of concerns on that score. However, it is important to be clear that Channel 4's payments do not represent one-way traffic. Although some of the companies in 1982 are not necessarily those which hold licences today, overall Channel 3 companies as a whole have paid more to Channel 4 since 1982: over £400 million in 1995 prices against £170 million the other way. I have also taken careful note of anxieties—particularly those of the noble Lord, Lord Donoughue— that retention of the funding formula will lead to continuing bickering and lobbying in annual negotiations about the details of the formula. I do not see it as a serious problem. The Government will make matters quite clear in putting the proposed orders to Parliament in due course. They will be intended to last for a number of years, as I mentioned at Second Reading.

Those advocating abolition of the funding formula base their case on a very confident analysis of a very uncertain future. They are putting all their money on one horse. The Government's proposals have the virtues of prudence and flexibility to allow Channel 4 to develop as a quality public service broadcaster. Yet they maintain realistic, sensible and fair safeguards to ensure its continuing economic security and underpin its enduring wider success. It is for these reasons that the Government disagree with those who advocate the abolition rather than the reform of the funding formula.

The Earl of Stockton

It would clearly be churlish of me not to recognise that the Government have moved their position. Until recently, the Department of National Heritage maintained that the formula was part of a complex set of arrangements. I am glad that they now recognise that it is no such thing, but simply and solely an insurance policy for the benefit of securing Channel 4's public service programme remit.

I thank my noble friend for his suggestion of a cap on reserves and his assurances that a flexible approach will be taken by his department. I remind him, however, that where I go horse-racing you tend to do better if you bet on one winner than if you put your bets on several horses. But perhaps his experience in the north-west is different.

My noble friend Lord Astor spoke eloquently about the threat in the post-1997 era to the small ITV companies. I remind my noble friend that threats are not restricted to small companies. In many cases the bigger they are, the harder and easier they fall.

I still believe that keeping the formula would be a mistake, as do a number of noble Lords. I was interested that my suggestion for a compromise received the support of my noble friend Lord Crickhowell. It was about the only one of my suggestions that did receive his support. I cannot believe that I heard him aright in his suggestion that I put forward this amendment for other than purely altruistic motives. I am sure I misheard him.

My noble friend wants to persuade the Committee that his solution is better than a simple abolition. If that is the case, he has to produce a slightly clearer exposition before the Bill leaves this House of the Government's real intentions. Do they really intend to fix the percentage for the five-year period—or will the period be longer or shorter? Will these arrangements come for another two years and then start over again for a another fcur or five years? They say now that significantly more of the channel's money should be retained for programming—but how much more?

As we agreed last week on the sports issue, it is surely better to have certainty now, before the Bill leaves this House, so that all concerned can get on and plan their businesses. Furthermore, ITV and Channel 4 must work together for the digital future. The necessary co-operation will be hard to achieve while they are still in conflict.

Unless my noble friend can persuade us that he has the answers t these questions, we shall have to return to the principle of abolition as a much more straightforward solution at a later stage of the Bill. However, in the meantime I beg leave to withdraw the amendment.

Amendment by leave, withdrawn.

[Amendment No. 183 not moved.]

Clause 64, as amended, agreed to.

Clause 65 agreed to.

[Amendment No. 184 not moved.]

Clause 66 [Application of excess revenues of Channel Four Television Corporation]:

[Amendment No. 185 had been withdrawn from the Marshalled List.]

Clause 66 agreed to.

Lord Inglewood moved Amendment No. 186:

After Clause o6, insert the following new clause— POWERS OF CHANNEL FOUR TELEVISION CORPORATION AND SIANEL PEDWAR CYMRU TO PROVIDE DIGITAL SERVICES. (".—(1) In section 24 of the 1990 Act (Channel 4 to be provided as licensed service) after subsection (4) there is inserted— (5) The Corporation shall also have power (subject to and in accordance with Part I of the Broadcasting Act 1996) to arrange for the broadcasting of Channel 4 in digital form as a qualifying service (within the meaning of that Part). (2) In section 57 of the 1990 Act (functions and duties of Welsh Authority) after subsection (1) there is inserted— (1A) The Welsh Authority shall also have power (subject to and in accordance with Part I of the Broadcasting Act 1996) to provide a further service as a qualifying service (within the meaning of that Part), and to arrange for the broadcasting of that service in digital form." ").

The noble Lord said: I have already spoken to this amendment. I beg to move.

On Question, amendment agreed to.

Baroness Trumpington

I beg to move that the House do now resume.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

House adjourned at twenty-four minutes past eleven o'clock.