S4C Efficiency Targets 2013 – 2017

1. Introduction This paper sets out the S4C Authority’s proposals to the BBC Trust in relation to the requirement for the proposed Operating Agreement (the “Agreement”) to set a target for efficiencies to be achieved in S4C’s operations during the term of the Agreement. The proposed efficiency targets in this paper assume that the DCMS funding will continue at the current level of £83m per annum until 1 April 2013.

The Authority’s first priority is to ensure that S4C provides high quality services, on television and relevant digital media platforms that meet the needs of its audience. It is also of paramount importance to ensure that the investment made in S4C’s services delivers appropriate value for money.

As a result of the Government’s Comprehensive Spending Review (“CSR”), the quantum, formula and source of S4C’s funding have changed dramatically since October 2010. In 2010, S4C’s grant in aid income from DCMS was to be £101m1. As a result of the CSR, S4C’s total public income has already reduced to £90m in 2011 and £83m in 2012. The reduction in S4C’s funding, between 2010 (being the last year before S4C’s grant in aid income was cut) and 2015 (being the last year of the current CSR) will be over 36%, in real terms. By 2017, if the £7m currently provided by DCMS were not to continue, the cut facing S4C would be closer to 42% in real terms. In all its forecasting, S4C has made the assumption that DCMS funding will continue at this level.

S4C’s current efficiency and scope reduction programme is designed to enable S4C to operate within the current challenging financial settlement, and to maximise the investment in content. In order to achieve this the Authority has approved a budget that eliminates any material headroom for the foreseeable future.

Current projected reduction in S4C’s public income between 2010- 2017

To put the severity of S4C’s funding reduction in context, S4C’s total public income in 2012, £83m, will be the same as the amount allocated to S4C’s content budget alone in 2010, and also the same level as S4C’s total public income in 2003. In this situation, it is inevitable that reductions in service scope as well as productivity efficiencies have been necessary. Difficult decisions will continue to be necessary in terms of programme priorities, with obvious tensions between the ambitions to deliver both audience reach and range of content.

The detail of the current funding arrangements between the Authority, the Trust and DCMS mean that the total amount of S4C’s public income is known for the period from April 2013 until March 2015. Further, the Trust and the

1 During the year, S4C experienced an in-year reduction of £2m. - 1 -

Authority have also agreed funding arrangements for the Authority for the period from April 2015 to March 2017 2. This agreement ensures that the Authority’s funding from the Licence Fee is co-terminous with that of the BBC, and therefore provides S4C with certainty in relation to a large percentage of its public income for a five year period.

In addition to the amount of funding agreed between the Authority and the Trust, the Secretary of State also has a statutory duty 3 to ensure that arrangements are in place for S4C to receive funding that is sufficient for it to provide its public services in 2012 and each subsequent year. The Secretary of State has not yet set out the amount that he believes is sufficient for the period following the current CSR. Given therefore that the totality of S4C’s income for the periods 2015-16 and 2016-17 is not yet known, it is not possible to set a final meaningful and realistic efficiency target for these periods at this point.

The Authority however has proposed a target for efficiencies during this period that assumes that DCMS continues to provide £7m per annum. If this funding were not to continue at the current level, the Authority proposes that it should discuss and agree with the Trust a realistic efficiency target for these two financial years at such date as the Secretary of State discharges his statutory duty for the period 2015-2017 and beyond.

2. Performance of S4C’s Services The Authority is keen to ensure that the quality of services delivered by S4C is not adversely affected by the severe reduction in its funding, and has emphasised to S4C’s Executive that efficiency measures should be developed and implemented with the needs of the audience always in mind.

S4C’s services delivered a comparatively good performance in 2011, with a small increase in the main performance measurement, namely reach. Nevertheless, there is no room for complacency given the need to deliver a high quality service with a significantly reduced overall budget.

In 2011, the average weekly reach 4 of the S4C service in Wales was 474,000, compared to 467,000 in 2010, and throughout the UK, was 618,000, compared to 616,000 in 2010. As an indicator of the awareness of the S4C service, annual reach in 2011 was over 5m. There was also a considerable increase in the number of online viewing sessions through the Clic and iPlayer services – up from 1.6m viewing sessions in 2010 to 2.5m in 2011. On average, the appreciation of different kinds of programmes (using AIs) also compared favourably with other PSB channels.

3. Ensuring Value For Money The S4C Authority is committed to ensuring that the financial investment made in the S4C service provides the best possible service and the best possible value for money for the audience. Despite already ensuring that the majority of S4C’s expenditure relates to content or services for audiences, the Authority is committed to ensuring that the amount invested in content and services increases in future and that the investment in content also delivers enhanced value for money.

2 It is understood that the element of funding for the period 1 January 2017 to 31 March 2017 will be dependent upon the continuation during this period of the BBC’s Royal Charter. 3 Section 31 of the Public Bodies Act 2011 4 Using the standard BARB 3 minute weekly measure. - 2 -

In 2011, 79% of the expenditure of S4C’s public income was invested in programmes commissioned by S4C; 17% related to costs including technical costs (such as playout, distribution and transmission of S4C’s services), access services (such as subtitling and audio description), communications and marketing, research, commissioning costs, and broadcast licences; and just under 4% of S4C’s public fund expenditure related to S4C’s overheads.

Apportionment of S4C’s public fund expenditure for 2011

As well as a reduction in S4C’s direct costs, S4C has also been scrutinising the value for money provided from the budget invested in S4C’s content. A number of external reviews have been commissioned by the S4C Executive to enable S4C to benchmark its tariffs with other similar broadcasters. The results of the reviews currently available indicate that S4C’s cost per hour is already competitive with other broadcasters, and also that the cost per hour of S4C’s content in 2011 provided greater value for money than in 2010.

Average cost per genre for S4C’s commissioned content in 2010 and 2011

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4. Existing Efficiency and Content Scope Reduction Programme S4C is already implementing a comprehensive efficiency and content scope reduction programme across its activities. In 2010, the Authority put in place a programme of efficiency measures and certain service reductions designed to maximise the investment that could be made each year in S4C’s content. The Authority tasked the Executive with undertaking a root & branch review of S4C’s activities to restructure S4C’s operations and ensure that the amount invested in S4C’s content would be maximised by ensuring efficiency savings and scope reductions in S4C’s internal costs. To date, these measures and reductions have realised over £2.5m in savings and further savings are expected to be realised in the current year.

As part of the Authority’s review of S4C’s activities, a number of scope reductions, as well as efficiency savings have been identified as not delivering value for money for S4C’s audience. The Authority has identified S4C’s high definition terrestrial simulcast, Clirlun, as a service that in the current climate is not able to deliver value for money for S4C’s audiences, and has approved proposals by the Executive to cease provision of the service before the end of the year. This scope reduction should continue for the period of the Agreement, and the benefit of this reduction for the content budget will form part of the target of the current efficiency programme and the targets set out below. The cash released from this service reduction will be invested in the content budget for S4C’s standard definition service, and therefore provide greater value for money for S4C’s audience.

In 2011, S4C commenced a restructuring programme, designed to reduce S4C’s headcount and staffing costs. Already, 31 posts have been closed, and a round of compulsory redundancies is currently underway that will lead to the closure of a further number of posts. S4C’s workforce has reduced from 165 FTEs at the beginning of 2010 to 125 FTEs in December 2011, and will reduce further following the completion of the current restructuring programme.

Efficiencies to be delivered during the term of the Agreement, over and above further efficiencies within S4C, will include various collaborative projects with BBC Wales where both organisations will identify opportunities for cooperation and efficiencies. This work is ongoing and is being informed by the work of the already established Joint Partnership Board (“JPB”). Efficiencies identified by the JPB, and delivered by S4C’s Executive will be included within the target proposed by the Authority below.

5. Proposed Efficiency Targets The Authority has already set S4C a target to ensure that by 2014 the reduction in the amount spent on S4C’s internal costs is no less than the reduction in the content budget resulting from the cut in S4C’s public income. In 2010, S4C’s content budget (not including costs directly associated with the programme service) was £83m. By 2014 it is currently estimated that the minimum amount that will be invested in content will be £67m. This equates to a reduction of 19%. The Authority is therefore expecting to see S4C deliver efficiency savings and scope reductions of in excess of 20% between 2010 and 2014, and for the cash released as a result of these savings to be invested directly in S4C’s content and services for audiences.

The Authority however notes the BBC Trust’s wish to use 2012 as the baseline against which to benchmark future efficiency savings. In order to avoid the perverse consequence of halting savings currently in train (so that they may be applied in future years), it proposes that the figures used as the baseline should be those approved by the Authority as the budget for 2012, in accordance with the provisions of the Agreement relating to S4C’s budget. It then proposes that the efficiency savings and scope reduction target for the period 1 April 2013 to 31 March 2015 should be a total of 15% as compared with the 2012 budget (which equates to a target of 5% during 2012 against the 2012 budget and a further target of 10% for 2013-14 to 2014-15). (The Authority’s 2010-2014 target of 20% equates to 5% per annum, on average and the same average percentage is thus applied to the three year period between 2012 and 2015). The achievement of the above efficiency savings in certain cases may be dependent upon the availability of capital investment on behalf of S4C during this period.

Subject to the continuation of the £7m per annum that is currently provided to the Authority by DCMS, the Authority proposes that for 2015-2016 and 2016-17, the target for efficiencies should mirror the provisions of the Trust’s proposal to S4C made in October 2011 in relation to funding during this period. The Trust’s proposal was based on a reduction in the contribution from the licence fee based on the same level of efficiency that the Trust is setting for BBC Wales in the period. This equates to an efficiency target of just under 1% in both years.

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6. Monitoring Delivery of the Efficiency Programme The Authority will place significant focus on monitoring the implementation of the efficiency targets, both in terms of financial delivery and also the quality of service delivery. These tasks will be assigned to the Authority’s relevant committees, namely the Audit and Risk Management Committee (“ARM”) and the Content Committee. External assurance will also be a central part of the monitoring strategy, including seeking assurance where relevant from the Authority’s Internal and External Auditors.

The Authority will use its Performance Measurement Framework to ensure the expected quality of service is maintained and also that the targets within the framework are achieved. The ARM will oversee assessment of performance by the S4C Executive in delivering the requisite level of cash releasing internal efficiencies on a regular basis to ensure that the overall target is being achieved across the relevant period. The ARM will also be responsible for ensuring that monitoring of the efficiency programme is included within the scope of the auditors’ annual work plans.

The Authority will ensure that PriceWaterhouse Coopers, the Authority’s internal auditors, will undertake an audit of relevant systems to ensure that robust processes are put in place by the S4C Executive to enable it to deliver the relevant efficiencies. Grant Thornton, the Authority’s external auditors will undertake work to ascertain whether the efficiency programme is delivering the expected amounts and that these amounts are re-invested in S4C’s content and audience services budgets.

The Authority will also consider seeking other forms of assurance and review during the period as necessary.

The Authority will report to the Trust on achievement against delivery of the efficiency targets alongside the general performance reporting requirements contained within the Agreement, and the BBC Trust Member for Wales, in consultation with the Chair of the Authority, will also provide regular reports to the Trust relating to the performance of the S4C services. The Authority will also report publicly on S4C’s performance in relation to the efficiency target in its Annual Report and Statement of Accounts and other publications on an ongoing basis.

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