National Audit Office report on The BBC's strategic financial management

There is some uncertainty over the BBC's financial future. It generates some income from commercial activities, such as creating and selling television programmes, but remains heavily reliant on the licence fee.

In 2019-20, the BBC received £3.52 billion from the licence fee, a fall of 8% since 2017-18 due to the gradual withdrawal of government funding for free licences for over-75s. In August 2020, the BBC began charging some over-75s for their licences. The BBC estimates that, in the medium term, this policy could provide it with more than £500 million annually, less than the £745 million it would have received if government had continued to fund free licences for all over-75s.

In November 2020, the BBC began negotiations with government about the future funding it will receive from the licence fee and will be subject to a mid-term review of its Charter between 2022 and 2024. Government is also consulting on decriminalising licence fee evasion, which the BBC estimates could reduce its income by over £1 billion by 2027.

A falling audience share poses a risk to the BBC's licence fee income. Viewing habits have shifted dramatically in recent years, particularly among younger audiences. Although broadcast television remains the most common form of on-screen viewing, there has been a marked move away from watching television to streaming and online viewing on demand. Between 2017-18 and 2019-20 almost 450,000 fewer non-over-75 households bought TV licences due to these changes in viewing habits as well as increasing numbers of households qualifying for a free over-75 licence.

The BBC's financial flexibility is constrained by a range of factors. It is regulated more closely than other public service broadcasters which means there is a broad range of programming that the BBC must make that its competitors do not. Some funding is ring-fenced, such as for S4C, the Welsh language channel. The spending power of competitors has also increased the costs of producing some genres of programmes, such as high-end drama.

For three of the past five years, the BBC's costs have outstripped its income, with it making a loss of £119 million in 2019-20. The BBC budgeted for these losses and made use of its cash reserves, which fell by 23% between 2017-18 and 2019-20, to £401 million. Pre-COVID-19, it had budgeted for these reserves to fall further to £93 million by the end of 2020-21, and in April 2020 announced that it would need to make savings of up to £125 million due to the impact of the pandemic. The BBC has experienced some uncertainty over its income as a result of COVID-19, but it has performed better financially than it expected to at the start of the pandemic. Despite this, the BBC still plans to deliver savings of £125 million as there remains a risk the pandemic could adversely affect its finances.

In 2016-17, the BBC introduced a programme to deliver £800 million savings a year by 2021-22 to meet an expected shortfall in its finances. By 2019-20, it had delivered annual savings of £618 million, meaning it was broadly on track to meet its schedule. In 2020 it increased its annual savings target to £1 billion by 2021-22 due to the impact of COVID-19 and the decision to continue to offer free licences to some over-75s. It has delayed making major redundancies, which are the most challenging aspect of its saving programme. It also believes the areas in which it could make further savings without significant audience impact are limited.

The BBC has not always accurately estimated its project costs. For example, in 2018, the NAO reported that the BBC's construction project to renew the EastEnders set was due to be delivered 31 months late and more than £25 million over budget.¹In 2020, the BBC has sought to strengthen the governance of its critical projects to ensure that lessons are learned going forward. However, it is too early to assess how effective this has been.

In September 2020, a new Director-General took charge of the BBC. He has been clear that the BBC's four main priorities are: a renewed commitment to impartiality; a focus on unique, high-impact content; extracting more from online; and increasing commercial income. The BBC is yet to set out how its new strategic priorities will be funded but intends to do so by February 2021. It has also not analysed the impact of potential changes to the licence fee, such as an end to increases in line with inflation or the introduction of alternative funding models. According to the BBC, it had been too early to undertake such analysis.

The BBC considers that it delivers significant wider value to British and global society, but it has not conducted an economic analysis of this in almost 10 years. In November 2020, the BBC commissioned an assessment of the BBC's wider economic value to the UK in preparation for its negotiations with the government over the new licence fee settlement.

The NAO recommends that the BBC produces a long-term financial plan as soon as possible that sets out the next stage of its savings programme, and how it will fund its new strategic priorities. It should establish how it will monitor its wider economic value on a more regular basis and assess, a year from now, the effectiveness of its efforts to learn from its experiences of managing projects and reducing their costs.

Gareth Davies, the head of the NAO, said:

"The BBC faces significant financial challenges as it embarks upon licence fee negotiations and its mid-term charter review. It has made significant cost savings and has identified the need for more with licence fee income under pressure.

"As decisions about the licence fee are made, the BBC needs to develop a clear financial plan for the future setting out where it will invest and how it will continue to make savings. Without such a plan, it will be difficult for the BBC to effectively implement its new strategic priorities."

Notes for Editors

1. NAO report, December 2018:E20: renewing the EastEnders set