Compliance 68 Annual Report and Accounts 2002/2003 The Governors have clear responsibilities under the BBC’s Charter to ensure that the BBC behaves responsibly and follows all applicable regulations and codes of practice. They must satisfy themselves that the BBC: . complies with all legal obligations . has an appropriate management structure . maintains sensible controls to protect its assets . adheres to its own guidelines and codes of practice On the following pages the Governors and independent auditors report formally on the BBC’s policies, procedures and compliance as follows: 1 Fair trading 68 2 Financial statements 71 3 Risk and control processes 72 4 Other corporate responsibilities 75 5 Governors’ remuneration report 76 6 Programmes, channels and promotions 80 7 Donations and acknowledgements 81 1 Fair trading Governors’ statement on fair trading Commercial activities and fair trading The BBC’s core purpose is to provide public service broadcasting funded by the licence fee. Licence payers’ investments, built up over many years, have produced a critical mass of talent and production capability for the BBC, together with an unparalleled archive of past programming. These assets have a secondary value, over and above their use on public service channels and outlets.The BBC has a responsibility to ensure that this value is properly developed commercially, and used to the benefit of licence payers. In pursuing commercial activities, the BBC is, like other organisations, fully subject to both domestic and European competition law. However, unlike other organisations, the BBC’s responsibility to trade fairly is reflected in further and more demanding requirements arising from its Royal Charter. In particular, the Charter requires the avoidance of cross-subsidy between the BBC’s publicly funded and commercial activities. Fair trading compliance procedures The BBC’s fair trading obligations are embodied in its Fair Trading Commitment, compliance with which is scrutinised throughout the year by a standing committee of the Board of Governors, the Fair Trading Compliance Committee (FTCC). The Committee is advised directly by independent auditors commissioned and managed by the Governance & Accountability department and by the BBC’s Head of Fair Trading and Head of Internal Audit, if necessary without the mediation of BBC management. All subsidiaries and commercial operations report to the Committee on their activities and all staff with commercial responsibilities are required by the Committee to be trained in the BBC’s fair trading policies. The management of the BBC’s fair trading arrangements is regularly tested by the British Standards Institute and these arrangements have been accredited with the ISO 9001:2000 quality standard.The last assessment conducted in November 2002 confirmed that the procedures are continuing to operate effectively. By their nature, fair trading judgements are complex, reflecting the constantly developing environment in which the media industries operate.Through the FTCC, the BBC’s Governors bring informed scrutiny and balanced judgements to bear on the important issues of policy that arise from the BBC’s engagement in commercial ventures. In its response to the Richard Lambert review of BBC News 24 against its DCMS approval, the BBC offered to consider explicitly on fair trading grounds the relationship between BBC News and BBC World every year.This would include commissioning a triennial benchmarking exercise for independent consultants to confirm that marginal cost pricing remains market practice and annual verification by external auditors that the marginal cost principle is appropriately applied in dealings between BBC News and BBC World. Following a report from external auditors, the Governors are satisfied that the marginal cost principle has been applied appropriately. Fair trading complaints Among the responsibilities of the Head of Fair Trading is advising the FTCC and the Executive Committee on any fair trading complaints which have been laid against the BBC.The Head of Fair Trading may be contacted at BBC, Broadcasting House, London W1A 1AA.The FTCC publishes a quarterly bulletin of the BBC’s response to any allegations of breaches of the Fair Trading Commitment. Events of the year External challenges During the year there were no formal investigations of the BBC’s commercial activities by external bodies, eg the Office of Fair Trading (OFT) or the European Commission. However, a number of complaints were made to the Board of Governors or to the Head of Fair Trading alleging that the BBC was in breach of its guidelines. . RM plc and others had issued a legal challenge to the BBC in the High Court.The claimants alleged the illegal use of state aid and that the BBC was acting ultra vires its Charter and Agreement with the Secretary of State. On 27 January 2003 the case was settled.The claimants and the BBC agreed that the claimants would withdraw the Annual Report and Accounts 2002/2003 69 judicial review proceedings on the basis that each side would pay their own costs. . RM plc also wrote to the BBC Chairman alleging breach of the BBC Commercial Policy Guidelines resulting from discussions with a potential distribution partner in the context of the BBC’s proposed Digital Curriculum service. An internal inquiry (see page 75) concluded that some preliminary discussions had taken place but that there was no systematic failure of the BBC’s fair trading processes. Following the inquiry, two senior members of staff decided to leave the BBC. RM plc also raised questions about the BBC’s compliance with the Public Procurement Regulations.The BBC has confirmed to RM plc that it is satisfied that it complied with these regulations. . The BBC received a complaint from TAC (a trade association which represents the interests of independents producing mainly for broadcasters inWales), challenging the terms under which BBC Wales had won an open commercial tender to supply Welsh rugby coverage to S4C.TAC suggested that the provision of commercial programming by BBC Wales to S4C is in itself a breach of the BBC Commercial Policy Guidelines.TAC also subsequently alleged that the BBC held and abused a dominant position in responding to the rugby tender. Following an investigation, the BBC confirmed it was satisfied that the supply of rugby programming by BBC Wales to S4C was not inconsistent with BBC Commercial Policy Guidelines. It also refuted any alleged market dominance while pointing out that a dominant firm would not in any event be precluded from competing fairly for business. . The British Internet Publishers Association (BIPA) wrote to the BBC Chairman raising a concern about the openness of the approval process for new BBC services and in particular the process for the BBC’s Online proposition (which gained initial approval in 1997).The letter also claimed that statements made by the BBC during legal proceedings brought by RM plc against the BBC’s proposed Digital Curriculum service, cast doubt on the value of the BBC’s Fair Trading Commitment.The BBC responded, explaining that the approvals process is now more open and there is full opportunity for interested parties to make representations to the BBC and to the Government on all new public service proposals from the BBC. In its response to BIPA, the BBC was not able to comment on the legal proceedings (which were ongoing at the time) but it made clear that it had a robust compliance infrastructure that has ISO accreditation and is subject to annual fair trading audits by independent accountants. The BBC remains fully committed to compliance with its fair trading obligations. . Sequence, a Welsh web development and hosting agency, wrote to the BBC Chairman asserting that BBC MediaArc, a commercial associate of the BBC, had unfairly won a contract to supply internet streaming services to the Welsh Assembly. In particular, Sequence alleged that the winning tender may not be commensurate with what might be expected to be earned in the market in the long term. After intensive investigation of the tender offer accepted by the National Assembly of Wales, and the costs of supporting the service, the BBC concluded that the margins added to BBC MediaArc’s estimated costs were sufficient to be consistent with market practice. . ITN wrote to the Secretary of the BBC challenging a statement made in the BBC Annual Report 2001/2002. The statement alleged that the OFT had rejected ITN’s allegation that a number of carriage agreements for BBCi (News) with third party portals were in breach of competition law. ITN disputed that the OFT had rejected its case.The BBC accepts that it was incorrect in stating that OFT had rejected ITN’s complaint and makes the following correction: The BBC Annual Report 2001/2002 stated that following an investigation by the OFT, under the Competition Act 1998, the OFT rejected ITN’s complaint which alleged that a number of carriage agreements for BBCi (News) with third party portals were in breach of competition law. Since publication of the report it has transpired that in fact ITN chose to withdraw its complaint following correspondence with the OFT. All external challenges are reported in the BBC Fair Trading Bulletin which is available from the Head of Fair Trading at BBC, Broadcasting House, London W1A 1AA or online at www.bbc.co.uk/info. Governors’ opinion The Governors consider that the policies contained in the BBC’s Fair Trading Commitment are consistent with the requirements of the Royal Charter and the accompanying Agreement.Through the FTCC, they have gained reasonable assurance that the system of controls and procedures designed to ensure that these policies are applied throughout the BBC has been operating effectively throughout the year. Independent Fair Trading Auditors’ report to the Governors of the BBC for the year ended 31 March 2003 We have audited, in our role as the BBC’s Fair Trading Auditors, the system of internal controls established within the BBC to provide the Governors with reasonable assurance that the BBC has complied with its published Fair Trading Commitment for the year ended 31 March 2003. Our instructions for this audit, which included the scope of work to be undertaken, were agreed with the Governors’ Compliance 70 Annual Report and Accounts 2002/2003 Fair Trading Compliance Committee.These instructions include agreement that our audit should be conducted in accordance with relevant auditing standards, agreement on the limit of our liability in respect of this work and agreement that our duty of care in respect of this work is solely to the BBC.We are satisfied that the agreed scope of our audit was sufficient to enable us to express the opinion set out below. Respective responsibilities of Governors, management and auditors The Governors are responsible for ensuring that the BBC meets all the requirements of competition law and trades fairly.They have established its Fair Trading Commitment, determine the objectives of the system of internal controls designed to ensure compliance with this Commitment and monitor the outcomes of those controls.They are also responsible for preparing the Governors’ Statement of fair trading compliance, as included in this BBC Annual Report, which includes a statement on fair trading. The BBC’s management is charged by the Governors with operating a system of internal controls designed to ensure compliance with the Fair Trading Commitment, including identifying and assessing risks that could threaten fair trading and designing and implementing responses to such risks. As the BBC’s Fair Trading Auditor, it is our responsibility to form an independent view, based on our audit work, as to the extent to which the BBC has established, and applied, a system of internal controls which provide reasonable assurance that it has complied with its Fair Trading Commitment during the year.We have reviewed specific decisions reached by the BBC on fair trading issues only in so far as this is necessary to form an opinion on the system of internal controls. Our audit was not designed to express an opinion on the quality of the specific decisions taken by the BBC with regards to fair trading.We have also reviewed whether the Governors’ statement on fair trading reflects our findings of the BBC’s compliance with its system of internal controls, and we report if it does not. This opinion has been prepared for and only for the BBC in accordance with our instructions which were agreed with the Secretary of the BBC on behalf of the Governors’ Fair Trading Compliance Committee.We do not, in giving this opinion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Basis of audit opinion We have carried out a programme of procedures and tests designed to provide us with the assurance that we were seeking. Our work consisted of enquiry and assessment to enable us to form a view as to whether an appropriate system of internal controls was in place.We also reviewed the processing of a sample of material transactions to provide us with reasonable assurance that the system of internal controls had been applied. As with any system of control, however effective, it is not practicable to ensure that no errors or irregularities have occurred without being detected. Our audit work was therefore designed to give the Governors reasonable assurance, but not certainty, as to the adequacy of the system of internal controls which were in place and being applied to deliver compliance with the Fair Trading Commitment during the year. Further, because fair trading issues require judgements which ultimately might be tested in a court of law, competition authority or elsewhere, there is always a risk of challenge even where the system of internal controls has been followed and decisions have been taken with the greatest care. Opinion In our opinion the BBC has established and has applied a system of internal controls which provide reasonable assurance that it has complied with its Fair Trading Commitment for the year ended 31 March 2003. PricewaterhouseCoopers LLP London Chartered Accountants 19 June 2003 Governors’ report on BBC World Service Trading Protocols BBC World Service is responsible for commissioning and scheduling its own programmes and for making programmes for its language services, but purchases English language programme making and technical and support services from other divisions of the BBC (the Supplier Divisions). BBC World Service also receives services from and supplies services to the BBC’s commercial subsidiaries (the Subsidiaries). It was agreed by a joint Foreign and Commonwealth Office (FCO)/BBC World Service Working Group that the BBC would draw up guidelines to govern the trading relationship between BBC World Service and other parts of the BBC, in order to ensure that BBC World Service maintains its distinctive voice and to preserve the clear separation between Grant-in-Aid and licence fee income.These Trading Protocols were approved by the Governors’ Fair Trading Compliance Committee (FTCC) in 1997. Each of the Supplier Divisions then drew up detailed agreements with BBC World Service, specifying: . the services to be provided . criteria to ensure the quality of the services . the cost of the services The FTCC is responsible for monitoring and reviewing compliance with the Trading Protocols.The FTCC receives regular reports from management on the effectiveness of the Annual Report and Accounts 2002/2003 71 systems and procedures in place to ensure compliance with the Trading Protocols. KPMG LLP (the external auditors) have reviewed a summary of the value of transactions and the related cash flows which have taken place during the year between BBC World Service and the Supplier Divisions and Subsidiaries. KPMG LLP have reported to the Governors that, in their opinion, the information contained in the summary of transactions for the year ended 31 March 2003 has been accurately extracted from the books and records of BBC World Service and the Supplier Divisions and Subsidiaries and has been properly prepared on the bases of cost allocation and apportionment methods set out in the agreements between BBC World Service and the Supplier Divisions and Subsidiaries and, on this basis, there has been no material cross-subsidy between Grant-in-Aid and licence fee funds or between Grant-in-Aid and the BBC’s commercial subsidiaries. Governors’ statement on BBC World Service Trading Protocols Following regular reports to the FTCC by the Head of Fair Trading and internal and external auditors, the Governors are satisfied that: . the Trading Protocols reflect the requirements of the FCO/BBC World Service Working Group . agreements are in place which are consistent with the Trading Protocols . there has been no material cross-subsidy between Grantin- Aid and licence fee funds or between Grant-in-Aid and the BBC’s commercial subsidiaries 2 Financial statements Statement of Board of Governors and Executive Committee responsibilities for the preparation of the financial statements The Governors and Executive Committee are required by the BBC’s Charter to prepare financial statements for each financial year which give a true and fair view of the state of affairs of the BBC and of its income and expenditure for that period. In preparing those financial statements, the Governors and Executive Committee are required to: . select suitable accounting policies and then apply them consistently . make judgements and estimates that are reasonable and prudent . state whether applicable accounting standards have been followed and disclose and explain any material departures in the financial statements . prepare the financial statements on a going concern basis unless it is inappropriate to do so In addition, the Governors and Executive Committee have voluntarily decided to comply with the accounting and disclosure provisions of the Companies Act 1985 and, where applicable, of the Financial Services Authority Listing Rules. They are also responsible for keeping adequate accounting records and taking such steps as are reasonably open to them to safeguard the assets of the BBC and to prevent and detect fraud and other irregularities. Report of the independent auditors to the Governors of the British Broadcasting Corporation (BBC) We have audited the financial statements on pages 85 to 121. In addition to our audit of the financial statements, the Governors have engaged us to audit the information in the Governors’ remuneration report that is described as having been audited, which the Governors have prepared as if the BBC were a listed company and which is thus compliant with Schedule 7A to the Companies Act 1985. This report is made solely to the BBC’s Governors, as a body, in accordance with the Royal Charter for the continuance of the BBC which came into force on 1 May 1996 (the Charter). Our audit work has been undertaken so that we might state to the BBC’s Governors those matters we are required to state to them in an auditor’s report and for no other purpose.To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the BBC and the BBC’s Governors as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of the Governors and Executive Committee and Auditors The Governors and Executive Committee are responsible for preparing the BBC Annual Report and the Governors’ remuneration report. As described earlier on this page, this includes responsibility for preparing the financial statements in accordance with applicable United Kingdom law and accounting standards. Our responsibilities as independent auditors are established in the United Kingdom by statute, by the Auditing Practices Board, our profession’s ethical guidance and, in accordance with the terms of our appointment, the Companies Act 1985 and the Charter. We report to you our opinion as to whether the financial statements give a true and fair view and whether the financial statements and the part of the Governors’ remuneration report to be audited have been properly prepared in accordance with the Companies Act as if that Act had applied to these financial statements.We also report to you if, in our opinion, the financial information on page 6 is not consistent with the financial statements, if the BBC has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding the Governors’ and Executive Committee remuneration and transactions with the BBC is not disclosed. In addition to our audit of the financial statements, the Governors have engaged us to review their corporate Compliance 72 Annual Report and Accounts 2002/2003 governance statement as if the BBC were required to comply with the Listing Rules of the Financial Services Authority in relation to these matters.We review whether the statement on pages 72 to 75 reflects the BBC’s compliance with the seven provisions of the Combined Code specified for audit review by those rules and we report if it does not.We are not required to form an opinion on the effectiveness of the BBC’s corporate governance procedures or its internal controls. We read the other information contained in the BBC Annual Report, including the corporate governance statement, and the unaudited part of the Governors’ remuneration report and consider whether it is consistent with the audited financial statements.We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Basis of audit opinion We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements and the part of the Governors’ remuneration report to be audited. It also includes an assessment of the significant estimates and judgements made by the Governors and Executive Committee in the preparation of the financial statements, and of whether the accounting policies are appropriate to the BBC’s circumstances, consistently applied and adequately disclosed. We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements and the part of the Governors’ remuneration report to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements and the part of the Governors’ remuneration report to be audited. Opinion In our opinion the financial statements give a true and fair view of the state of affairs of UK Public Service Broadcasting (the ‘Home Services’ in the Charter) and the BBC as at 31 March 2003 and of the deficit of the BBC for the year then ended and the financial statements and the part of the Governors’ remuneration report to be audited have been properly prepared in accordance with the provisions of the BBC’s Charter and the Companies Act 1985 as if that Act had applied to these financial statements. KPMG LLP Chartered Accountants London Registered Auditor 19 June 2003 3 Risk and control processes The Governors are appointed as trustees for the public interest to ensure that the BBC is properly accountable to Parliament, licence payers and to viewers and listeners. Part of this role requires the Governors to satisfy themselves that the BBC is applying the highest standards of corporate governance. The BBC follows the seven principles of public life set out in the Nolan Committee reports on Standards in Public Life. The Combined Code, issued by the London Stock Exchange in June 1998, sets out principles of good governance.The BBC voluntarily complies with the Combined Code to the extent it is applicable.The requirements of the Combined Code apply to the BBC with two exceptions. Firstly, those requirements relating to the appointment of non-executive directors are inapplicable as the Governors are appointed by the Queen in Council and their remuneration is set by the Secretary of State for Culture, Media and Sport. Secondly, those requirements relating to shareholders can only be applied to the licence-paying public, rather than shareholders, through the stewardship of the Governors. How the BBC has applied the remuneration principles is covered separately within the remuneration report on pages 76 to 79. Board structure The Governors are the members of the Corporation.They act as trustees for the public interest while the Executive Committee takes responsibility for day-to-day operations. Details of the Board of Governors and Executive Committee are summarised on pages 4 to 5 and 18 to 19. A register of interests for both the Governors and Executive Committee is maintained and may be inspected by written application to the Secretary of the BBC. The Board of Governors refers some matters to subcommittees. The main responsibilities of these subcommittees are explained elsewhere in this Annual Report as follows: Governors’ Programme Complaints Committee (page 62) Governors’ Fair Trading Compliance Committee (page 68) Governors’ Audit Committee (page 74) Governors’ Remuneration Committee (page 76) The Governors are supported by the Governance & Accountability department. Governance arrangements for commercial subsidiaries In July 2002 the Secretary of State approved the establishment of a new subsidiary, BBC Commercial Holdings Limited, to coordinate and manage the activity and Annual Report and Accounts 2002/2003 73 financing needs of the principal commercial subsidiaries.The BBC’s public service aims are enshrined in the company’s Memorandum of Association and many of its powers, including the power to appoint directors, are exercisable subject to prior approval of the Board of Governors.The new company replaces the old Commercial Board which was a sub-committee of the Executive Committee. Relationship with Parliament and licence holders The BBC lays its Annual Report and Accounts before Parliament. Governors or BBC Executives may be, and frequently are, called before Parliamentary Select Committees to answer MPs’ questions about the BBC’s activities and plans. Approval for new channels and services, public or commercial, must be sought from the Secretary of State for Culture, Media and Sport. BBC World Service is funded by Grant-in-Aid and is accountable to Parliament through the Foreign and Commonwealth Office (FCO). Although it is editorially independent its aims and priorities are agreed with the FCO. The BBC seeks to keep the public fully informed about its services and the way in which it operates, and to be open and candid about both successes and failures.The BBC will withhold information only where there is a genuine matter of copyright, contractual or commercial confidentiality at stake or where legitimate considerations of privacy apply. Information is made available, and audience views obtained, in a variety of ways, many of which are discussed elsewhere in this Annual Report.These include the BBC Statements of Programme Policy, internet services, public events and many publications. Accountability and internal control Financial reporting and going concern The respective responsibilities of the Governors and Executive Committee and the external auditors are set out on page 71. A review of the financial position of the BBC is included on pages 82 to 84.This, together with the Director-General’s review on pages 16 and 17, provides an assessment of the BBC’s performance and current position. The going concern basis has been adopted in the preparation of the financial statements as the Governors and Executive Committee believe that the BBC has adequate resources to continue its operations for the foreseeable future. Internal control The responsibilities in relation to internal control are clearly defined.The Governors are ultimately responsible for the proper use of public money whilst the Executive Committee is responsible for maintaining an adequate system of internal control and for reviewing its effectiveness. Such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material misstatement or loss. The Governors and Executive Committee consider that there is an ongoing process for identifying, evaluating and managing significant risks faced by the BBC.The process has been in place for the year ended 31 March 2003 and up to the date of approval of this BBC Annual Report and Accounts. It has been reviewed by the Governors and Executive Committee and accords with the guidance set out in the ICAEW’s guidance for directors, Internal control: Guidance for directors on the Combined Code. While an established system of risk management and control, including procedures to monitor and evaluate key risks, has been in existence throughout the year, the Governors and Executive Committee recognise the importance of ensuring that the process remains appropriate in respect of recent internal reorganisations and the expansion in the BBC’s services. The key control procedures operating during the year are described under the following headings: . risk management Each of the BBC’s top risks has a named owner on the Executive Committee who is responsible for ensuring that progress on the management of their given risk is reported to all of the Executive Committee on a regular basis.The BBC’s top risks and associated action plans have been reviewed during the year.The director of each division had a clear responsibility during the year for the identification and management of risks facing their business. Divisional management has progressed the review of risks associated with the achievement of their divisional objectives. Consideration of these risks includes a review in each division of the impact of the BBC’s top risks and reporting on the management of those risks via reports to the Executive Committee.The risks identified, and the actions planned in response, are maintained in a risk register in each division which is verified by BBC Internal Audit. . monitoring of controls BBC Internal Audit undertakes regular testing of control systems and compliance with core business processes under a plan agreed with the Audit Committee.This programme of testing, which is updated three times each year, is based on a continuing assessment of key risks.The results of testing are reported at each meeting of the Audit Committee which scrutinises the operation of the BBC’s controls throughout the year. Compliance 74 Annual Report and Accounts 2002/2003 . divisional controls The divisions’ management has responsibility for ensuring that existing controls and procedures are followed. Key controls over major business risks include maintaining and regularly updating risk registers, performance review and exception reporting. Reviews by BBC Internal Audit monitor the operation of divisional controls to ensure that they are consistently applied and, as a minimum, meet the BBC-wide control policy. . computer systems The BBC has established controls and procedures over the security of data held on computer systems. Arrangements are in place for computer processing to continue and data to be retained in the event of the failure of the BBC’s own data processing facility. . controls over outsourced transaction processing The majority of the BBC’s finance transaction processing (excluding BBC Worldwide and BBC World) is outsourced to a service company, Media Accounting Services Limited (medas) which is independent of the BBC.The Director of Finance, Property & Business Affairs has established monitoring procedures to review the performance of medas on a regular basis.These include regular review by BBC Internal Audit in a programme of work informed by a continuing assessment of key risks and issues. . licence fee collection The outsourcing contract for the collection of the licence fee was awarded to Capita from July 2002.The BBC monitors and reviews the provisions put in place by Capita to ensure the collection of the fee in the event of business interruption as well as other controls and reporting procedures. Safeguards are in place to protect the BBC’s collection data and alternative collection processes have been identified that may be adopted in the event of a failure of the core collection process. . whistle-blowing The BBC has a ‘whistle-blowing’ policy.The policy facilitates the anonymous communication to the BBC of any incident in which there is a suspicion that there has been wrongdoing. The process is administered by an independent external company to ensure anonymity. Each reported incident is notified to the BBC Head of Internal Audit who ensures that every incident is investigated, a response communicated and action taken as appropriate. . financial reporting and business performance The BBC has a comprehensive system for reporting financial results and business performance. During the year each division prepares monthly reports and accounts.These results are reviewed locally and the consolidated results of the BBC are reviewed at Executive Committee and Board of Governors’ meetings each month. Each financial year the divisions update their five-year plans and prepare detailed budgets for the following financial year. The annual budget of each division is reviewed by the Director of Finance, Property & Business Affairs.The overall budget is approved by the Director-General, the Executive Committee and the Board of Governors. The performance of each division is subject to continuous monitoring and at the end of the year every division is subject to a rigorous performance review verifying how effectively they had met their objectives. Governors’ Audit Committee The Audit Committee meets at least four times each year, and is charged with: . reviewing the effectiveness of internal control . approving and monitoring the BBC Internal Audit work plan . considering issues arising from external and internal audit work . reviewing management’s response to internal control issues . approving the external audit fee . discussing with the external auditors their strategy and plans . reviewing the independence of the auditors, specifically considering and approving any non-audit services . reviewing the performance and effectiveness of the external auditors . reviewing the external auditors’ reports . reviewing and approving the financial statements In reviewing the financial statements of the BBC the Committee considers any significant issues, and the appropriateness of accounting policies adopted in relation to significant or unusual transactions where more than one policy may apply. The Committee is comprised exclusively of Governors of the BBC. Members of the executive management attend meetings by request of the Committee. The Committee has considered the recommendations contained in the report of the Financial Reporting Council (issued January 2003), the Smith Report, and have implemented the necessary measures to ensure that the BBC fully meets those recommendations. Independence of external auditors Both the Committee and the external auditors themselves have safeguards in place to avoid the possibility of the auditors’ objectivity and independence being compromised. The Audit Committee regularly reviews the independence of its external auditors, currently KPMG LLP.The Committee Annual Report and Accounts 2002/2003 75 holds discussions with the external auditors without management being present.The Committee reviews the level of non-audit fees paid to KPMG LLP.Any significant consulting work is put out to competitive tender. Recruitment from KPMG LLP into any senior management position requires the prior approval of the Audit Committee. The BBC’s policies in relation to services procured from the external auditors are: . all non-audit services proposed to be commissioned from the external auditors must be notified to the Audit Committee . above an established de minimis level the planned work must be submitted to competitive tender and, in the event that the external auditors are to be awarded the contract, the prior approval of the Audit Committee must be obtained . the external auditors are specifically excluded from being considered for certain types of work where the effect could be to prejudice their ability to express an independent and objective opinion Events of the year The BBC’s system of controls, as stated above, is designed to manage risks rather than eliminate them entirely. During the year the BBC has reviewed lessons learnt from the following incidents, updating controls where considered appropriate. Oryx During the year the BBC settled a legal challenge with Oryx Natural Resources, paying damages and costs to Oryx.The claim for libel arose from a report contained in a special news bulletin on 31 October 2001.The BBC issued an apology for the incorrect report in November 2001.The BBC investigated the circumstances giving rise to the incorrect report and has taken appropriate measures to seek to prevent a recurrence. Digital Curriculum During the year the BBC identified that some inappropriate activities had taken place relating to the proposed Digital Curriculum service.The Digital Curriculum was at the time awaiting approval by the Secretary of State for Culture, Media and Sport.The BBC discovered that the activity that had taken place was contrary to disclosures in certain statements submitted to the court in preparation for the BBC’s defence of a legal action brought by RM plc. An internal inquiry was conducted by the BBC’s Head of Internal Audit on behalf of the Chairman of the BBC to establish why the activities had taken place. Following the inquiry two senior members of BBC staff decided to leave. RM plc subsequently withdrew its legal challenge with each party meeting their own legal costs. Statement of compliance with the Combined Code of Best Practice The BBC has complied throughout the year ended 31 March 2003 with the specific provisions in Section 1 of the Combined Code with the exception of those provisions relating to non-executive directors and shareholder requirements which, as discussed earlier, are not applicable to the BBC. 4 Other corporate responsibilities Ethical policy The BBC seeks to meet the highest standards of ethical, employment and environmental practice.The BBC has a code of conduct which requires its suppliers to operate on the same principles.This requires all direct suppliers, who in turn are required to supervise their sub-contractors, to observe best practice in the following areas: general employment practices, the employment of appropriate workers, worker insurance, working environment, respect for the individual worker, environmental standards, equal opportunities and freedom of association. Human resources The BBC continues to hold the Investors in People (IiP) accreditation across the whole BBC. It is taking active steps to improve its performance in all areas by a programme of rigorous self-assessment every year.The BBC invests a considerable amount of money and time in training and developing its staff as detailed on page 67. The BBC monitors staff views through an annual staff survey. It also has various consultation mechanisms including, at corporate level, the BBC Forum. Regular meetings are also held with the recognised unions:BECTU (Broadcasting Entertainment Cinematograph and Theatre Union), the NUJ (National Union of Journalists) and AMICUS (formerly the AEEU). Internal communication Progress in improving internal communication is measured by an annual survey of staff opinion conducted by MORI. The latest of these, conducted in December 2002, showed that the BBC continues to make progress in key areas of communication and remains one of MORI’s top ten organisations. Health and safety The BBC is committed to providing a safe and healthy place to work and to ensuring that its staff and other people are not placed at risk by its activities.To ensure the BBC drives continuous improvement against this commitment, and as a result of the heightened terrorist and conflict threats, the occupational health and safety and security functions have been brought together under one head, and their integrated offering made more accessible to programme makers and management. Compliance 76 Annual Report and Accounts 2002/2003 A significant amount of resource was geared to the issues surrounding the war in Iraq and response to the terrorist threat with pan-BBC and divisional procedures continually undergoing revision to ensure BBC journalists/crews in the field, overseas bureaux/offices, and UK sites and staff are provided with the means to do their jobs safely. The BBC continues to promote knowledge of and contribute to the development of safe practices within the broadcast and production industries through joint industry bodies. At an international level the BBC plays a key role in gaining industrywide acceptance of the need for the adoption of safe practices by all media staff engaged in newsgathering activities. UK reportable accidents for the past 12 months decreased from 65 to 48 and there were no fatalities. Of the reportable type incidents, 20 were ‘major injuries’.Taking the accidents which occurred to BBC employees in the UK, the accident incident rate per 100,000 employees for the 12 months was 188, representing a 26% reduction for the same group in the previous year. Suspected cases of occupationally related ill health seen by BBC medical officers also continued the downward trend from the previous year. In 2002/2003, the incidence rate of suspected cases of occupational illness (of all types) was 17.78 per 1,000 employees per annum.This compares with 19.47 per 1,000 employees per annum in 2001/2002. The requirements contained in the Government’s Revitalising Health and Safety challenge have required extensive internal review of the mechanisms for capturing and collating information.This has resulted in the adoption of a BBC-wide accident/incident database. The BBC was not subject to any HSE enforcement action and had no convictions for health and safety offences. During the coverage of the war in Iraq, there were two major incidents which led to the deaths of a freelance cameraman and a locally engaged interpreter and the foot amputation of a news team producer.A number of BBC personnel also suffered shrapnel wounds and their health is being monitored by occupational health. For a number of years the BBC has ensured, through application of its Hostile Environments Policy, that all those deployed to war zones receive an intensive six-day hostile environment training course. In addition, due to the nature of the conflict, the BBC introduced specific training for chemical, biological, radiological and nuclear threats including the issue of specialist suits and equipment. 5 Governors’ remuneration report This report sets out the BBC’s policy on the remuneration of the BBC’s Governors and of members of the Executive Committee.Although the BBC is exempt from the requirements introduced by the Directors’ Remuneration Report Regulations 2002 and those of the Financial Services Authority, the report has been prepared as if those requirements did apply wherever the disclosure provisions are relevant and applicable. Only the following sections of the Governors’ remuneration report are subject to audit: Remuneration received and Governors’ and Executive Committee pensions. Remuneration Committee: constitution and operation The remuneration policy for members of the Executive Committee is set by the Remuneration Committee, a subcommittee of the Board of Governors.This Committee deals with all matters relating to the remuneration of members of the Executive Committee and is accountable to the Board of Governors for the determination and maintenance of overall remuneration policy and review and agreement of Executive Committee basic salaries, bonus awards and benefits, including pension arrangements.The Committee considers the performance of individual members of the Executive Committee before recommending their annual remuneration and bonus awards to the full Board of Governors. The members of the Committee during the year were Gavyn Davies (Chairman), Baroness Hogg, Dame Pauline Neville-Jones and Lord Ryder. In addition, meetings are attended by the Director-General, who advises on matters relating to the other members of the Executive Committee and the overall performance of the BBC and by the Director of Human Resources & Internal Communications. Neither is present when matters concerning their own remuneration are considered. In its constitution and operation the Committee complies with the Combined Code on Corporate Governance.The Committee places high value on the independence of its decision-making processes. In consultation with the Director of Human Resources & Internal Communications and the BBC’s Head of Compensation and Benefits, the Committee takes specialist advice from external professional advisers on particular remuneration matters, particularly in connection with the consideration of external market practice. During the year, the Committee nominated and received independent advice from both Monks Partnership and the Hay Group on comparative market data to assist in the determination of pay and benefits for the Executive Committee. Governors: remuneration policy The Governors receive a fee determined by the Secretary of State for Culture, Media and Sport.They are additionally reimbursed for expenses incurred on BBC business. Expenses Annual Report and Accounts 2002/2003 77 regarded by the Inland Revenue as taxable are settled in full by the BBC, including any related tax payments, and reported as benefits in the table on page 78.The increase in annual remuneration notified for 2002/2003 was 2.5% for the Vice-Chairman and the national Governors, and 2.5% for the Chairman and other Governors (2001/2002 2.7% and 3.6% respectively). Executive Committee: remuneration policy The remuneration policy for Executive Committee members tries to balance the BBC’s status as a public corporation (and the expectation that all areas of spend, including executive remuneration, must deliver value to the licence payer) with the fact that the BBC operates in a competitive, commercial environment and needs to offer remuneration that enables it to attract, retain and motivate high calibre individuals with the skills and abilities required to lead the BBC. In doing so, the remuneration policy seeks to: . remunerate individuals fairly for individual responsibility and contribution, while providing an element of performance-related pay, reflecting the underlying performance of the BBC . take into account wider salary policy and employment conditions within the rest of the BBC and the relationship that should exist between the remuneration of Executive Committee members and that of other employees . have regard to the market median levels of total cash reward of relevant comparator organisations in both public and private sectors The Committee’s approach to policy going forward will continue to reflect these principles, underpinned by regular review and monitoring of remuneration policy and practice in organisations outside the BBC. External data reviewed by the Committee shows that salaries paid at main Board level across the private sector as a whole, and in the media industry in particular, are significantly higher than in the BBC for organisations of similar size and complexity, while the opportunities for annual and long-term bonus payments are also much greater. Conversely the pay levels for senior civil servants and other public sector managers are lower. The remuneration levels set by the Governors fall between the pay of the most senior managers in the public service and those in comparable commercial businesses to reflect the BBC’s unique position as a publicly-funded organisation operating and competing in a commercial industry. Elements of remuneration Basic salary Basic salaries are reviewed in August each year, taking into account external market levels and internal comparisons as well as the individual’s responsibilities and performance. The basic salary is paid as a fixed sum monthly in cash. Annual bonus During 2002 the Committee conducted a thorough review of the policy and approach to variable pay for Executive Committee members. Recognising the importance of maintaining a balance between basic salary and an annual bonus scheme reflecting individual performance and contribution, the Committee considered it appropriate for annual bonuses to have a maximum level of 30% of base salary and a mix of qualitative and quantitative targets and measures.This year, for the first time, the Committee exercised its discretion to adjust the level of payments to take account of broader external market considerations which has resulted in reduced average bonus awards, despite a very strong performance level against the BBC’s objectives. The achievement of BBC-wide objectives accounts for up to 30% of the maximum bonus, with the same level of award applying to all members of the Executive Committee, thereby reinforcing the value and importance of collective performance. Achievement of divisional objectives accounts for up to 40%, and individual performance and contribution for the remaining 30% of any award. For the year under review the targets related primarily to objectives which were set by the Governors and published in the 2001/2002 Annual Report. In the case of the commercial businesses (BBC Worldwide and BBC Ventures Group), the annual bonus plan is directly linked to the achievement of specific financial performance targets relating to sales, cash flow and PBIT. Whilst the maximum annual bonus opportunity is 30% in common with other members of the Executive Committee, the framework is based on: . for the Chief Executive of BBC Ventures Group, up to 80% of any award for the achievement of PBIT and cash flow targets and up to 20% for individual performance . for the Chief Executive of BBC Worldwide, up to 66% of any award for the achievement of sales, cash, and PBIT targets and up to 33% for individual performance Bonuses are reflected in the financial statements on an accruals basis for the performance period under review. Actual payments are made in July each year. A long-term incentive plan is also in place for the Chief Executive of BBC Worldwide which provides for a bonus of up to a maximum 20% of salary based on the achievement of headline BBC cash flow targets over a three-year period. The first three-year plan period in the scheme which commenced in April 1999 ended on 31 March 2002 and generated a payment to Rupert Gavin of 14.75% of salary. For the current and future years, any awards under the plan are reflected in the financial statements on an accruals basis. The Governors have also approved the establishment of a comparable plan to be put in place for the Chief Executive Compliance 78 Annual Report and Accounts 2002/2003 of BBC Ventures Group based on the achievement of financial performance targets. Benefits In addition to salary and bonus, the main contractual benefits provided are a car and fuel allowance, private health insurance, pension and life insurance.With the exception of the post of the Director of Nations & Regions, it has been the policy for some years that new appointees to the Executive Committee are not eligible for provision of a chauffeur-driven car.The Director-General’s contract provides for a chauffeur-driven car, but no additional entitlement to a personal car or fuel allowance. Pensions All members of the Executive Committee are eligible to participate in the BBC Pension Scheme which provides salary-related pension benefits on a defined benefit basis, with an accrual rate of 1/60th of the final salary per year of service, subject to the Inland Revenue earnings cap where appropriate. Only basic salary is pensionable.The scheme provides for early retirement on medical grounds and life insurance cover of four times salary. A variety of special arrangements has been made for those individuals who joined the BBC late in their careers whose earnings exceed Inland Revenue limits, including funded and unfunded arrangements outside the BBC Pension Scheme. Employment contracts The policy of the Remuneration Committee is for the contracts of employment of Executive Committee members to contain a maximum notice period of one year. Each contract expires on the 60th birthday of the director which is the normal BBC retirement age, but is subject to earlier termination for cause or if notice is given under the contract. There is no entitlement to any additional remuneration in the event of early termination other than in the case of termination on grounds of redundancy. Outside interests Where there is no potential for conflict of interest and with the prior agreement of the Board of Governors, members of the Executive Committee may hold external directorships. It is likely that not more than two external directorships may be held at the same time, of which only one should be in a commercial organisation. Governors assess such requests against rigorous criteria to ensure that conflicts of interest do not arise. Remuneration which arises from directorships agreed since the introduction of this policy in 1997, or subsequent to appointment, is paid to the BBC. During the year only two Executive Committee members held appointments as executive directors of external organisations. Remuneration received The remuneration of Governors or Executive Committee members appointed or leaving during the year is included in respect of their period of membership only. Total Total Fees Benefits 2003 2002 Governors £000 £000 £000 £000 Gavyn Davies (Chairman) 80 19 99 66* Dame Ruth Deech (appointed 23 October 2002) 7 2 9 – Sir Richard Eyre 15 2 17 17 Dermot Gleeson 15 8 23 22 Baroness Hogg 15 3 18 17 Professor Merfyn Jones (appointed 1 January 2003) 7 – 7 – Roger Jones (retired 31 December 2002) 20 1 21 30 Professor Fabian Monds 27 1 28 32 Dame Pauline Neville-Jones 27 7 34 29 Rt Hon The Lord Ryder (Vice-Chairman) 27 3 30 7** Angela Sarkis (appointed 23 October 2002) 7 2 9 – Sir Robert Smith 27 1 28 32 Ranjit Sondhi 20 1 21 22 Sir Anthony Young (retired 31 July 2002) 5 2 7 18 299 52 351 292 Governors who retired during 2001/2002 – – – 55 299 52 351 347 * Appointed Chairman part-way through 2001/2002 ** Appointed Governor part-way through 2001/2002 For three months, the fees relating to Sir Robert Smith were paid direct to Deutsche Bank, which released him for the required time to the BBC. Since July 2002 fees have been paid direct to Sir Robert Smith Annual Report and Accounts 2002/2003 79 Annual Taxable Total Total Salary bonus benefits 2003 2002 Executive Committee £000 £000 £000 £000 £000 Greg Dyke 368 88 8 464 469 Jenny Abramsky 211 45 18 274 273 Jana Bennett1 (appointed 20 April 2002) 216 47 181 444 – Glenwyn Benson 185 37 16 238 226 Mark Byford 235 54 17 306 294 Stephen Dando 221 49 2 272 222* Andy Duncan2 231 55 15 301 235* Carolyn Fairbairn2,3 122 32 15 169 248 Roger Flynn 231 65 18 314 243* Rupert Gavin 278 62 22 362 339 Ashley Highfield 230 45 19 294 294 Pat Loughrey 191 41 48 280 259 Peter Salmon 205 46 28 279 273 Richard Sambrook 222 49 16 287 260 John Smith 227 47 26 300 311 Michael Stevenson (resigned 23 January 2003) 151 – 24 175 233 Caroline Thomson 179 35 22 236 226 Alan Yentob4 228 67 26 321 302 3,931 864 521 5,316 4,707 Members who resigned during 2001/2002 – – – – 399 3,931 864 521 5,316 5,106 Payments under long-term incentive plans5 45 40 Payment to former director6 128 – 2 130 – * Appointed to the Committee part-way through 2001/2002 1) Included in the benefits for Jana Bennett is £167,000 in respect of costs incurred in connection with her relocation from the USA in order to take up her appointment with the BBC. A significant proportion of this amount arises from the grossing-up for tax purposes of the fees relating to the sale of her former home in the USA 2) The bonus figures for Andy Duncan and Carolyn Fairbairn include an additional payment of £5,000 each reflecting their contribution to securing the Digital Terrestrial Television (DTT) licences 3) Carolyn Fairbairn took a period of unpaid leave during the year 4) The bonus figure for Alan Yentob includes an additional payment of £20,000 in respect of his on-screen presentation activity during the year 5) The long-term incentive plan is in respect of Rupert Gavin 6) Michael Stevenson resigned from the Executive Committee but remained a member of BBC staff until 30 April 2003. £94,000 of the £128,000 was a payment in lieu of notice in line with his contractual entitlement Governors and Executive Committee pensions The BBC provides pension benefits to the Chairman of the Governors and to Executive Committee members. Details of defined benefit entitlements to Executive Committee members who served during the year are shown in the first five columns of the following table.The BBC also makes contributions to money purchase schemes in respect of certain members as shown in the last two columns. Gavyn Davies has waived his entitlement to pension benefits from the BBC in 2003 and 2002. Defined benefit schemes Defined contribution schemes Annual values Transfer values4 Increase in Transfer Transfer transfer Increase value of value of value less BBC Accrued in accrued accrued directors’ contributions Executive pension accrued pension pension contrib- to money Committee at 31 pension at 31 at 31 utions purchase member March over March March over schemes (age at 2003 year 2003 2002 year 2003 2002 31 March 2003) £000pa £000pa £000 £000 £000 £000 £000 Greg Dyke (55) 6 2 92 58 30 59 52 Jenny Abramsky (56) 126 8 2,566 2,279 275 – – Jana Bennett1,2 (47) 2 2 14 – 10 37 – Glenwyn Benson (55) 24 4 497 388 97 26 17 Mark Byford (44) 88 12 774 887 (124) – – Stephen Dando (41) 3 2 18 10 4 50 37* Andy Duncan (40) 3 2 18 10 4 40 21* Carolyn Fairbairn (42) 9 2 61 66 (10) 18 18 Roger Flynn (40) 3 2 18 10 4 40 22* Rupert Gavin (48) 8 2 75 67 4 36 35 Ashley Highfield (37) 4 2 21 16 1 40 34 Pat Loughrey (47) 83 8 888 979 (101) – – Peter Salmon3 (46) 32 10 337 281 52 32 21 Richard Sambrook (46) 90 11 936 1,007 (85) – – John Smith (45) 87 9 814 945 (147) – – Michael Stevenson (42) 13 2 107 123 (20) 22 18 Caroline Thomson (48) 45 3 543 580 (42) 24 16 Alan Yentob (56) 113 13 2,294 1,916 363 – – 424 291 Members who resigned in 2001/2002 – 5 424 296 * Appointed part-way through 2001/2002 1) Jana Bennett was appointed during the year.The increase in transfer values and in accrued pension in the above table is in respect of the period from her appointment on 20 April 2002 2) The accrued benefits shown for Jana Bennett assume that she will complete the two-year service period required before benefits can be claimed 3) The increase in accrued pension for Peter Salmon includes additional pension of £7,000 per annum arising from a transfer-in of £106,000 during the year 4) The transfer value of accrued pension benefits represents the estimated cost to the pension scheme of providing the pension benefit accrued to date.The value is affected by a number of factors, which include age of individual, pensionable salary, years of pensionable service and investment market conditions at the date of calculation (in accordance with Actuarial Guidance Note GN11). It is not a sum paid or due to the individual and therefore cannot be meaningfully added to remuneration.The effect of the investment market conditions on the transfer value varies according to the person’s age. For older members the calculation reflects the yields on index-linked gilts, while for younger members the calculation reflects the dividend yield on the FTSE All-Share Index. Over the year to March 2003, the index-linked gilt yield has fallen, thereby increasing transfer values linked to gilts, whereas the All-Share dividend yield has increased (due to falling market values), thereby reducing transfer values linked to equities.The effect of this is that transfer values have increased for older members and decreased for younger members Compliance 80 Annual Report and Accounts 2002/2003 6 Programmes, channels and promotions The framework of content regulation under which the BBC operates will change markedly during the year ahead as Ofcom assumes its statutory powers.This section reports on a number of editorial compliance matters, some of which will come partly under Ofcom’s auspices in due course. Upholding editorial standards The Governors ensure that the BBC maintains high editorial standards, monitoring its compliance with the BBC Producers’ Guidelines and with the Code on Impartiality and Accuracy included in them. Overall, the Governors were satisfied that in 2002/2003 the BBC had met the standards expected of it. They noted, nonetheless, a serious breach of the guidelines relating to product prominence in the Christmas episode of Absolutely Fabulous.This had been thoroughly investigated and appeared to be an aberration rather than an indication of serious problems on that programme or elsewhere; steps had been taken to avoid a repetition. The portrayal of real people in drama also raised issues for programme makers, particularly in the areas of consent, factual accuracy and privacy.The Governors also noted that striking the balance of audience expectations around the watershed hour was an increasing challenge. As a result of a Governors’ seminar, an internal project will look at audience expectations for new channels.The labelling of difficult content will also be addressed over the coming year. The Governors’ oversight of impartiality included introducing quarterly rather than half-yearly reporting and the introduction of assessment by independent external experts.Over the next year Governors will undertake more work to satisfy themselves that BBC output continues to meet the highest standards of impartiality. The Governors approve the BBC Producers’ Guidelines and all subsequent amendments, receive a quarterly complaints report from BBC Information, including complaints to the Programme Complaints Unit (PCU) and to BBC department heads, and conduct a twice-yearly review of editorial policy. The Governors’ Programme Complaints Committee (GPCC) considers appeals by complainants against decisions on serious editorial complaints taken by the PCU or by BBC management and reports monthly to the Board. On behalf of the Governors, the GPCC also ensures that complaints to the BBC are properly handled (see page 62). New service approvals All new BBC public services launched since 1 January 1997 require the approval of the Secretary of State for Culture, Media and Sport.The key terms of the approval are also contained in the Statement of Programme Policy for each of these services.The next section reports by exception on performance against the Statements for 2002/2003. BBC Statements of Programme Policy The BBC Statements of Programme Policy 2002/2003 included a large number of measurable commitments.Table 1 on page 122 shows that the BBC met these with the following exceptions: . 1Xtra: 1Xtra made a commitment to provide around 20% speech output, half of which would be news, documentaries and social action. In its first eight months on air, it has achieved 19.1% speech with 6.9% news, documentaries and social affairs. Radio & Music management have taken steps to ensure that 1Xtra is on track to achieve both these commitments over its first full year which will ensure it meets the terms of its DCMS approval. . Northern Ireland: BBC Northern Ireland committed to deliver 100 hours of politics in 2002/2003 but only achieved 77 hours, primarily due to the suspension of the Northern Ireland Assembly in October 2002. . English Regions: BBC English Regions committed to making all main regional news programmes at 6.30pm available on digital satellite but is now expecting to achieve this in October 2003.This is linked to the BBC’s decision to broadcast its services unencrypted on digital satellite. . Regional production: BBC Television said that at least 33% of network output across all BBC television channels would be made outside London and the South East.This year 31% was produced outside London and the South East – slightly down on the restated figure for 2001/2002 of 32%, despite increased investment (see Table 14, page 130). Last year’s figure has been restated following a review of the eligibility criteria to reflect changes in BBC output since the commitment was originally devised ten years ago. In future Ofcom will agree such targets with the BBC as part of its Tier 2 content regulation so further changes in the eligibility criteria will be published in next year’s Annual Report. UK programme quotas Under the Broadcasting Act 1990 the BBC has a duty to ensure that not less than 25% of the amount of time allocated to the broadcasting of qualifying television programmes is allocated to the broadcasting of a range and diversity of independent productions.The Director-General of the Office of Fair Trading (OFT) is required to report to the Secretary of State for Culture, Media and Sport periodically on the extent to which the BBC has, in his opinion, performed that duty. His report for the period 1 April 2001 to 31 March 2002 was published in March 2003. It concluded that while the BBC had achieved a satisfactory range and diversity of independent productions, it had not met the quota – achieving 21.8%. Recent takeovers by broadcasters of major independent producers have had the effect of removing their status as independents for the purposes of UK legislation and make it increasingly difficult for the BBC to meet the quota. If such Annual Report and Accounts 2002/2003 81 production companies had been counted towards the 2001/2002 total, the BBC would have met its hours target. The DCMS has acknowledged this issue and has committed to amending the relevant secondary legislation to reinstate suppliers such as Endemol which is a significant supplier to the BBC but which had its status changed following a takeover by a foreign broadcaster. Producers owned by UK broadcasters will still be unable to claim independent status. The BBC’s total commitment in 2001/2002 to external suppliers of qualifying output amounted to 27.5% of hours and 29.4% of spend. EU programme quotas in the calendar year 2002 European Community legislation requires Member States to ensure that broadcasters reserve for European works a majority proportion of their television transmission time excluding the time devoted to news, sports events, games, adverts, teletext services and teleshopping.The legislation also requires broadcasters to reserve at least 10% of their transmission time for European works (excluding works of the kind described above) made by independent producers. The BBC exceeded EU quotas in the calendar year 2002. Of the relevant BBC One and BBC Two output, 81% was of European origin (2001 79%) and 13% was made by European independent producers (2001 11%). Of the relevant output of all BBC channels (including BBC Choice – now BBC Three, BBC Four, CBeebies, CBBC and BBC News 24), 85% was of European origin (2001 88%) and 19% was made by European independent producers (2001 20%). European channel broadcasting regulation The BBC broadcasts two television channels in Europe, BBC Prime and BBC World. Both channels were originally operated by European Channel Broadcasting Limited, a wholly owned subsidiary of BBC Worldwide Limited, but on 1 December 2002 the Secretary of State approved the transfer of the business and assets of the BBC World channel to a new company, BBC World Limited, which became a wholly owned subsidiary of BBC Commercial Holdings Limited. Both channels are licensed by the ITC as satellite television services. In accordance with the principles on which the Secretary of State’s approval was originally granted: . arm’s length trading relationships were maintained between the BBC and the companies responsible for the BBC World and BBC Prime channels . the companies operating the channels complied fully with the BBC Commercial Policy Guidelines and the Fair Trading Commitment and with applicable provisions of EU law . the programmes shown on the two channels complied with relevant ITC codes and the BBC-made programmes were produced in accordance with BBC Producers’ Guidelines On air promotions: Office of Fair Trading undertaking Following the 1992 report of the Monopolies and Mergers Commission (on the publicising, in the course of broadcasting, of goods supplied by the broadcaster), the BBC gave an undertaking to the Office of Fair Trading to use only still trails to give information about BBC magazines.The terms of the undertaking also commit the BBC not to exceed more than seven minutes as an aggregate across a seven-day period in relation to on air promotions of BBC magazines on its television services. Although the legal obligation applies only to BBC magazines, the Governors’ Fair Trading Commitment commits to apply the spirit of the undertaking to all on air promotions of commercial products. During the period 1 April 2002 to 31 March 2003 the total on the BBC’s television services for all BBC magazines (including Radio Times) was 3 hours 10 minutes and 30 seconds of transmission (2001/2002 2 hours 25 minutes 30 seconds), which averages out at 3 minutes 40 seconds in a seven-day period (2001/2002 2 minutes 45 seconds). The total for all commercial products (including BBC Worldwide and independent products) was 4 hours 38 minutes (2002 4 hours 37 minutes 30 seconds) which averages out to 5 minutes 20 seconds (2001/2002 5 minutes 19 seconds) in a seven-day period. 7 Donations and acknowledgements BBC policy is not to make political donations. In addition to broadcast appeals detailed on page 65, donations to charities by BBC commercial businesses amounted to approximately £9,000 during the year (2002 £8,500). A total of £1.1million in copyright royalties was paid to Golden Jubilee Events Limited in respect of an agreement between the BBC, Golden Jubilee Events Limited and BBC Worldwide Limited in regard to producing, staging and broadcasting the Golden Jubilee musical concerts at Buckingham Palace in June 2002. Golden Jubilee Events Limited is a subsidiary of the Queen’s Golden Jubilee Trust, to which all of its profits are donated. The BBC acknowledges financial grants from the European Commission for various technical research projects.