JOINT COMMITTEE ON COMMUNICATIONS, ENERGY AND NATURAL RESOURCES debate -
Wednesday, 31 Mar 2010

Revised Budget: Discussion with Broadcasting Authority of Ireland.

Chairman

The joint committee has invited representatives of the Broadcasting Authority of Ireland to speak with members on the issue of its revised budget. I welcome Mr. Michael O'Keeffe, chief executive officer, Ms Celene Craig, deputy chief executive officer, and Mr. David Higgins, head of finance.

Before we begin, I draw witnesses' attention to the fact that members of the committee have absolute privilege but this same privilege does not apply to witnesses appearing before it. The committee cannot guarantee any level of privilege to witnesses appearing before it. Further, under the salient rulings of the Chair, members should not comment on, criticise or make charges against a person outside the House or an official by name or in such a way as to make him or her identifiable. I invite Mr. O'Keeffe to make his presentation.

Mr. Michael O’Keeffe

I thank the committee for inviting us back to discuss this issue. This meeting is a follow-on from our meeting with the committee about a month ago. I wish to speak about the revised budget on which we have been working since we last appeared before the committee. I wish to provide some details on the key areas of savings and how we will bring those about. The key impact of that is on the levy payments that broadcasters will make. Therefore, I want to give the committee some information on that issue. I will then speak on the next steps.

We came out from an authority meeting last Monday where the decisions were made on the budgets and savings and, obviously, there are a number of next steps that automatically follow. I wish to speak on those.

Senator Joe O’Toole

The last time the witnesses appeared before the committee they spoke about a revised budget. Is this a revised, revised budget, or is this the same revised budget?

Mr. Michael O’Keeffe

The budget has been revised from the €7.6 million that would have been identified to members at the last meeting.

Senator Joe O’Toole

At the last meeting.

Mr. Michael O’Keeffe

Yes.

Senator Joe O’Toole

That was already a reduction on the previous budget.

Mr. Michael O’Keeffe

Yes.

Senator Joe O’Toole

So it is a revised, revised budget.

Mr. Michael O’Keeffe

Absolutely.

Deputy Simon Coveney

The €7.6 million was not a revised budget. My understanding is that the €7.6 million was the budget presented to the Minister in January——

Mr. Michael O’Keeffe

That is correct.

Deputy Simon Coveney

——for which he gave approval.

Mr. Michael O’Keeffe

That is correct.

Deputy Simon Coveney

Since our last meeting, Mr. O'Keeffe made it clear that he was in the process of revising that budget and this is the conclusion of that process.

Mr. Michael O’Keeffe

Yes.

Deputy Liz McManus

There is another cost on which I would like clarification as to where it fits in this, namely, the cost from 1 October to 31 December 2009 which amounted to approximately €1.5 million.

Mr. Michael O’Keeffe

I intend to deal with that issue in the presentation.

Deputy Liz McManus

It would be helpful, frankly, if that was in the budget. As far as I am concerned this cost has been glossed over from the very beginning. We only discovered by asking the Minister enough questions, that he was forced to answer, that this money was also outstanding. It would have been helpful, with all due respect, if that was declared in the setting out of any budget.

Mr. Michael O’Keeffe

Clearly we are drawing the distinction. However, I intend to address that issue in the presentation. If there are any questions on it I will address them also.

That is basically what we have been doing. I will now give some background on what we have done since we last appeared before the committee. The first issue was that the authority approved a work plan at its meeting in late February. We then met members of IBI and met this committee. At both of those meetings we indicated that we would be undertaking a rigorous review of the budget that had been in place. We had intended to submit invoices to stations during March. We wrote to them in the middle of March to inform them that we were deferring the sending of invoices for the levy pending the conclusion of the revised budget exercise. No invoices have been sent to stations. We felt it made more sense to send them invoices based on the revised budgets that we had undertaken. We completed that exercise in recent weeks and made a submission to the authority at its meeting on Monday. It accepted the revised budget we presented to it. I shall now talk about what is involved in that.

The next slide shows the original budget, which we presented to the committee, and the budget that is now proposed. I have given some background on the areas of change we have introduced in this period. The first and obvious major point is that the budget now stands at €6 million. I have broken it into three or four headings where we have made the changes. Our largest subhead in the budget would cover the finance, governance and people area. That also includes the functions of the authority and committees. It would include the engineering function and the capital expenditure anticipated for the year. I have put all that into that particular area. When we have a more detailed budget available, which will be posted to our website shortly, it will break out all this. Rather than go into too much detail I have put it into thee key headings.

Members will see that we have reduced the amount envisaged in this area from €4.7 million to €3.9 million. Some of the key areas were as follows. We have had reductions in administration, premises, consultancy and audit. Many of these related to the fact that our VAT recovery status has been confirmed. That has allowed us to significantly reduce costs, particularly in those areas. We have also established that we might have overestimated the cost of financing for the period and have reduced that element. We have made some savings in IT development. It is an area we would like to develop and review in the organisation. We have pushed back probably into next year some of the work we planned to do in that area. That has allowed us to recoup approximately €300,000 or €400,000.

The second major saving under this subhead would be in the broadcast funding scheme. As members will know the Comptroller and Auditor General is responsible for auditing our accounts. We have received agreement in principle from the Office of the Comptroller and Auditor General that we can recoup a higher level of overhead costs from the broadcast funding scheme. That scheme consists of 7% of the licence fee, an increase from 5%. We have traditionally been allowed to recoup up to 10% of that, which we have never done. We are recouping a greater amount of apportioned overhead costs now that the scheme has been made permanent. We are also recouping a greater level of staffing and direct costs.

Deputy Liz McManus

How much? What is the percentage?

Mr. Michael O’Keeffe

We are taking a further €400,000 savings out of that. However, it will be well within the 10%. We will not spend anywhere near the 10% we are permitted to spend under that scheme. However, we are satisfied that we can take a further amount out of that. That is where the second element of that saving will come.

Deputy Simon Coveney

Mr. O'Keeffe is proposing to take €400,000 out of the independent broadcasting fund. Is that what it is now called?

Mr. Michael O’Keeffe

The broadcasting funding scheme.

Deputy Simon Coveney

Is that not calculated in the Broadcasting Authority of Ireland's budgetary figures here?

Mr. Michael O’Keeffe

We have taken it out of that, so some of the savings have come from there. The key part of this exercise is what we recoup levy. These are administration costs and are covered in the scheme so we are not recouping levy on those.

Deputy Simon Coveney

Is this a revised budget or is this a revised expenditure programme that comes from the levy? There is a difference.

Mr. Michael O’Keeffe

It is a revised budget, but we have effectively excluded costs related to the broadcast funding scheme. Under the Act we are obliged to produce a separate set of accounts for the broadcast funding scheme. That is a new provision in the 2009 Act. Effectively any costs related to the broadcast funding scheme are now put into a separate account. That would have obviously included direct costs, costs for overheads and the cost of salaries. There will be an apportionment of those going across into the broadcast funding scheme account. We have managed to get further savings from that point of view. We are not taking anything we should not take.

Deputy Liz McManus

With all due respect, as I recall when this was being debated in the Houses, this fund was for broadcasting. It was not for the Broadcasting Authority of Ireland. It was a fund ring-fenced for broadcasting.

Mr. Michael O’Keeffe

Absolutely, and that has not changed.

Deputy Liz McManus

It has actually. There is less money in the pot at a time when broadcasting is in severe difficulties. One of the welcome aspects of the change in the law was that there was to be more money going into the work of broadcasting and not into the work of regulating it.

Mr. Michael O’Keeffe

There is.

Deputy Liz McManus

Some €400,000 has been taken out. What is the total amount Mr. O'Keeffe expects on funding?

Mr. Michael O’Keeffe

The total amount permitted is 10%, which is €1.3 million. We have under-recovered from the broadcast funding scheme in recent years. As the scheme has now been made permanent we are recovering a greater amount of the costs. However, we are still well within the 10%. I do not have a figure to hand.

Deputy Liz McManus

Mr. O'Keeffe does not know.

Ms Celene Craig

While we cannot say definitively what the licence fee will yield in the current year, the total value of the fund this year should be in the order of €13 million. As Mr. O'Keeffe has said the total amount we are permitted to recoup from that under the terms of the scheme is up to 10%. There are staff costs, some direct costs and an apportionment of some overhead costs.

Mr. David Higgins

It is less than €400,000.

Ms Celene Craig

So the total is less than €400,000 as a percentage of €13 million.

Deputy Liz McManus

Just to finish the point——

Chairman

The Deputy may make a final point and then we must let Mr. O'Keeffe finish his presentation.

Deputy Liz McManus

With all due respect, we have a difficulty here. We do not have accounts or estimates. I am afraid that will lead to a messy meeting and there is no way around that because we do not have the information to which we are entitled. I am sorry if we are interrupting Mr. O'Keeffe, but it is because it is very difficult to get a handle on this. How much money was taken out of that dedicated fund for broadcasting last year in order to pay for managing the regulator?

Ms Celene Craig

I do not have the figures to hand. There were two accounting periods in 2009. The staff costs last year were somewhat higher. They have been reduced in the current year.

Mr. Michael O’Keeffe

Approximately €600,000.

Ms Celene Craig

That €600,000 comprises staff costs and direct costs. The overall cost of administering the scheme is reducing in the current year, reflecting the fact——

Deputy Liz McManus

So how is the Broadcasting Authority of Ireland saving money?

Deputy Simon Coveney

The €600,000 last year would have been well above the 10% because the figure for the independent fund was less than 7% last year.

Ms Celene Craig

No, it was 5%. The value of the broadcast funding scheme was approximately €10 million last year.

Mr. Michael O’Keeffe

We were well below 10%. We have always kept administration costs well below 10%.

Deputy Simon Coveney

If the figure last year was 5%, which would have been approximately €10 million——

Mr. Michael O’Keeffe

To clarify, the percentage of the licence fee is 5%, which is €10 million. We were entitled to take 10% of that €10 million for the administration of the scheme but we took only €600,000. That is the proportion of €10 million to which I am referring.

Ms Celene Craig

It is 6%.

Mr. Michael O’Keeffe

We do not have all the details with us but we have always, very deliberately, operated well below the 10% and will continue to do so. The exercise we are undertaking involves making savings on the levy payments broadcasters will be charged by apportioning a greater amount of costs to the broadcasting funding scheme.

Deputy Simon Coveney

The authority is saving €400,000 but also reducing the funding available.

Ms Celene Craig

We are reducing the overall cost——

Deputy Simon Coveney

And the percentage.

Ms Celene Craig

We are increasing some of the areas of cost we will recoup, but we are keeping down the overall costs of the scheme in other ways by reducing direct costs.

Deputy Michael D’Arcy

I have a brief question on this issue.

Chairman

This is the last question I will allow before asking Mr. O'Keeffe to resume his presentation.

Deputy Michael D’Arcy

Is Mr. O'Keeffe saying that the authority is reducing the levy that is being charged to broadcasters——

Mr. Michael O’Keeffe

Yes.

Deputy Michael D’Arcy

——by taking moneys from the broadcasting fund that is available to broadcasters?

Mr. Michael O’Keeffe

We are doing so within the——

Deputy Michael D’Arcy

I understand that but the point is that the authority should be doing what it is doing within its own budget. Instead it is robbing Peter to pay Paul.

Mr. Michael O’Keeffe

No.

Deputy Michael D’Arcy

Mr. O'Keeffe just said the authority is keeping the levy on broadcasters down by consuming more of the broadcasting fund.

Ms Celene Craig

It is a small additional amount. We are recouping some of the overhead costs.

Deputy Michael D’Arcy

My point is that the authority should seek to reduce its costs internally on all occasions.

Mr. Michael O’Keeffe

We are seeking to do so.

Deputy Michael D’Arcy

That is what everybody else in business is doing.

Mr. Michael O’Keeffe

It is what we are doing.

Ms Celene Craig

The overall costs of the broadcasting scheme, notwithstanding that we are recouping some of the overhead costs, are coming down.

Senator Joe O’Toole

They are coming down from 6% to 4%.

Ms Celene Craig

Yes, that is the approximate saving.

Deputy Simon Coveney

I do not know why the delegates even raised the issue given that it is reducing the actual percentage.

Mr. Michael O’Keeffe

The reason we address it is because we are focused today on the levy on broadcasters. We are effectively levying them by €400,000 less as a result of the exercise we have undertaken.

Deputy Liz McManus

It is difficult to understand what is being done here. Is Mr. O'Keeffe saying that under the original budget of €7.6 million, the authority was planning to take nothing from the broadcasting fund for overheads?

Mr. Michael O’Keeffe

We never did that.

Ms Celene Craig

Traditionally, all we recouped were direct costs and staff costs.

Deputy Liz McManus

If the figures were in front of us we would not have to ask these questions. What was the figure corresponding to the sum of €400,000 when the authority was working with a budget of €7.6 million?

Ms Celene Craig

In the context of the €7.6 million budget, it would have been the total amount, which is approximately €400,000 less €40,000.

Mr. David Higgins

That is correct.

Ms Celene Craig

Yes, it was approximately €360,000.

Deputy Liz McManus

In that case, why is this figure included since it makes no difference and has nothing to do with the reduction?

Ms Celene Craig

No, there is a saving to broadcasters because we have reduced other areas of the scheme costs. One of the areas that has increased is the apportionment of overhead costs which now goes to the scheme. Overall, all of the scheme costs are down. The recoupment of the overhead cost effectively creates a saving on the amount of the rest of the BAI's budget on which levy will be charged.

Deputy Liz McManus

Perhaps I am being stupid but I do not understand what the delegates are saying. The original budget figure was €7.6 million. The delegates are saying that part of the reason they can reduce that figure to €6 million is via recoupment of broadcasting funding scheme costs. That is a key area of saving. However, as I read it and from what the delegates are telling me, there is no difference in this regard as between the new €6 million budget and the €7.6 million budget. The figure is still around the €400,000 mark.

Mr. Michael O’Keeffe

It is a mechanism for reducing levy payments. We are apportioning a greater level of costs to the broadcasting funding scheme. That is how we have done it.

Deputy Liz McManus

What was the BAI going to apportion under the €7.6 million budget?

Deputy Simon Coveney

Was it €360,000?

Ms Celene Craig

Yes.

Deputy Simon Coveney

That is coming down from €600,000 last year for managing a smaller fund. Is the authority succeeding in reducing costs to that extent?

Ms Celene Craig

The €360,000 would not have included the direct costs. The key reduction in the cost of the overheads associated with the fund arises from a reduced number of staff. There was a larger number of staff working on the fund last year. We restructured the operation of the scheme in such a way as to reduce the number of rounds and so on, although the amount of the fund is the same. We have managed to reduce staff numbers and direct costs, meaning there is a saving back to the scheme. In addition, there is now a charge to the BAI in regard to overhead costs that was not charged to the scheme heretofore by its predecessor, the Broadcasting Commission of Ireland. That amounts to some €40,000 in the current year. This is a reduction in the amount upon which levy will be charged and an increase in the operational costs of the scheme. However, because the other scheme costs have reduced, there is an overall reduction in costs.

Chairman

We will allow Mr. O'Keeffe to complete his presentation after which members may put questions to the delegates.

Mr. Michael O’Keeffe

As I explained, changes under this heading have given us an overall reduction of €800,000 in that area. I have put the three operations areas together, namely, policy, compliance and contract awards, which reflects the authority and the two statutory committees. The main changes arising in this regard are in the policy area. In the original indicative budget every single item in the new Act would have been included in the first year. When we considered the work plan and the revisions thereto, we concluded that we will not, for a variety of reasons, be in a position to deal with everything in the first year. Therefore, we have moved some material back into year 2 and other material will be started later than originally envisaged. Between the policy and compliance areas, where there were policy development issues, we have managed to find a saving of another €770,000. The contract awards area is practically unchanged because there is not much activity in that area in the current year.

The third main area of savings is under the communications and sectoral development subhead where we have primarily undertaken a significant reduction in the BAI communications budget. We have examined issues such as public relations services, statutory advertising, publications, translation costs, public awareness raising, digital terrestrial television, awareness raising, and so on. We also decided not to proceed with a broadcasting conference we planned to have later in the year. All of these have brought a saving in the region of €400,000. We have left sectoral development untouched, which is the subhead that goes directly back to the industry. We considered it more appropriate to review items that affected what the BAI was doing internally rather than externally. Therefore, we did not make any adjustments to sectoral development costs.

In summary, our key areas of savings arise under these four heads: first, the finalisation of the work plan has allowed us to reduce costs in that area; second, the changes in VAT status and general administration services have yielded savings; third, we have made savings in terms of the recoupment of the broadcasting funding scheme; and, fourth, we have had significant reductions under the communications subhead. In regard to depreciation, although the budget is at €6 million we will be charging levy payments on the basis of €5.7 million. We have excluded depreciation charges from the levy payable on the grounds that the levy includes capital expenditure and therefore it would not be appropriate to include depreciation charges for levy calculations. We are reducing the amount further that we will recover in regard to depreciation.

Deputy Simon Coveney

What was the rationale in this regard in the context of the €7.6 million budget?

Mr. Michael O’Keeffe

We had some staffing issues and resources issues when we were drawing this up. Mr. Higgins joined us in the last month and undertook this part of the exercise. He took the view that it was inappropriate to charge the levy and that the amount would always have come out of it.

What are the implications for the levy to be paid by the groups and how are payments being apportioned across the groups? Larger groups are going to pay 81% of the levy, with RTE paying €2.1 million, and 19% to be paid by smaller groups. The two national television services will pay a range between those two figures in the slide, while five large radio stations — two national, the two largest Dublin stations and the largest Cork station — will pay the range between the other figures shown in the slide. We will publish these figures in more detail on our website.

I have broken these into five different groups covering all types of broadcasters and listed the number of broadcasters involved in each. The first group is the next level down from the larger group, including some of the other city stations, based on income. There are seven of those, they are well-established stations. The second group includes many of the well-established local radio stations, such as Tipp FM, Midlands 103, WLR and Highland Radio. The third group, consisting of seven stations, includes some of the newer local stations that would have been licensed later than the existing stations, and some of the newer regional services. The fourth commercial group consists of the very new or niche services, such as those in the Dublin area and the new stations we have licensed in the recent past. The slides show the annual payment ranges for each of those stations.

The final group is the community sector, with most of those paying the flat fee of €750. There are 24 groups in this category, those that are paying more than that are community stations that get significant Government grants, and such grants are included in the calculation of the levy. These groups, therefore, pay a percentage based on that.

Those are the groups and their nature. We will have more information but the invoice they get, which will be for a quarter of that amount, will be sent out in the next couple of days.

Senator Mary M. White

Is that €750 to €8,000?

Mr. Michael O’Keeffe

Yes.

Senator Mary M. White

That is still a lot of money.

Mr. Michael O’Keeffe

The €750?

Senator Mary M. White

Yes.

Mr. Michael O’Keeffe

For a community station?

Senator Mary M. White

Absolutely, for a small business €750 is a hell of a lot of money.

Chairman

We will allow Mr. O'Keeffe to complete his presentation.

Mr. Michael O’Keeffe

The final slide covers what happens next. We will issue invoices for the current quarter, the first quarter of 2010, in the next day or so for the first quarterly payments.

Deputy McManus asked about the fourth quarter of 2009. We are in discussions with the Department on the status. We have presented our final outturn for the fourth quarter of 2009. In our letters to the stations in mid-March we said we would defer the issuing of any invoices for that period, pending the clarification on what is to happen for that period. Those discussions are ongoing. We will not be issuing any invoices for that period until we receive clarification on the way the BAI will be funded in that period. We will announce what will happen following the discussions at the appropriate time.

We approved the budget at the authority meeting on Monday and have submitted it to the Department. We are in discussions with the Department on the format and how it should be presented, and the level of detail to be presented. Those discussions are ongoing and we intend to publish the budget within the next week or two, depending on those discussions with the Department. All of the detail will be published over the next few weeks, as we had promised.

After that, we have a statutory obligation to have a three-year budget for the 2011 to 2013 period by the end of September and we will begin work on that immediately. That will be done in parallel with the work we are doing on the development of the three-year strategy of the organisation. The budget must reflect the strategy so we hope to have our work completed and submitted to the Minister by the end of September as required under the statute.

Deputy Simon Coveney

The delegation may have sensed some frustration coming from Deputies and Senators when trying to understand the figures. The reason for that is that we are aware of the pressures radio and television stations face financially. The levy will add to those pressures and will undoubtedly result in radio stations having to lay some people off to meet the payments.

We have an obligation to ensure that under the new regulatory model which we have all played a part in establishing, we provide the necessary regulatory rigour and services at the minimum possible cost to broadcasters so we can ensure the vast bulk of money raised through advertising and other methods goes towards helping them to build a business and provide a service, be it community or nationally-based. That is the context in which our frustration has arisen, not just in this meeting but at the last one as well.

The very idea that under a new regulatory model, Oireachtas Members would be asked to allow a levy order to pass through the Oireachtas without having any accounts or detailed estimates to examine, is not the way we should be doing business and is not the way the BAI should start out.

Even today, when we are being asked to examine revised estimates, we have no real detailed figures, we have headline figures for generalised areas. It would have been preferable if the BAI had published the detailed estimates before now and given us a chance to look at them so we could ask specific questions.

It is proposed that the BAI will save €800,000 on finance, governance and people. We have no real detail on how the BAI will do that. Does it impact on the number of people employed and salaries? Where will the savings be made? In less than a year the BAI is planning to save €800,000 from the figures for the previous estimate on finance, governance and people. Significant savings are being proposed in other areas of which we have no details, apart from some of the gaps that Mr. O'Keeffe has filled in during his oral presentation today. Deputies who have been asked to provide the oversight that is necessary for this new regulatory model cannot do the job unless those figures are provided. My understanding is that the BAI has a legal obligation to publish the estimates under section 37(7) of the Act. The estimates of income and expenditure will be published shortly by the BAI on its website with the consent of the Minister. That was back in January.

Mr. Michael O’Keeffe

That relates to the three-year estimates. The Act is very specific on that. I accept that the scenario is not ideal. This is the first year of the BAI. We only approved the workplan. We only had the authority fully in place in February. At the first opportunity we set up a workplan. One cannot construct a budget properly without a workplan.

Deputy Simon Coveney

The workplan was all wrong — to the tune of 27%.

Mr. Michael O’Keeffe

No, it was not all wrong.

Deputy Simon Coveney

If we had not made a big issue of the levy, radio stations and broadcasters across the country would be paying €7.6 million this year. We still do not have the detail of the estimates. I accept that the BAI has come a long way since the €7.6 million.

Mr. Michael O’Keeffe

May I respond to that point? We were only with the authority on Monday. Clearly between Monday and Wednesday, we are not going to be able to give the detail. We offered to appear before this committee. We rang the committee because we were conscious of the issues raised by the members three weeks ago and that there was a range of concerns. We could have delayed and offered to come before the committee after Easter, when we would have had an opportunity to put things together. However, we felt as a courtesy, that we should come before the committee before we would send out invoices to the broadcasters. We need to send them out this week because we are out of money. We made a call that we should come before the committee after the budget was approved to show the areas we have identified to make savings. We recognise that we are not coming to the committee with a detailed budget but we have gone with a detailed budget to the Department and we are having discussions with it and that material will be available within the next number of weeks. I accept the level of detail I am giving today——

Deputy Simon Coveney

After the invoices have been sent out?

Mr. Michael O’Keeffe

The timing of this is not ideal. We approved a workplan in late February. We revised a budget during the month of March and approved it at the end of March. We recognise that the timing is not ideal. Those are the choices we faced and it was a balance of whether to come back and give the committee information or to delay and come back in a month's time and give members more detailed information. We can still come back in a month's time.

Deputy Simon Coveney

I am conscious that my colleagues want to question the delegation, so may I put three or four questions?

When the Minister came before this committee we asked him how the BAI was surviving at present because it has not had a levy and was not getting money from the Department. We asked how it is paying its staff. He responded that cash reserves had been built up in the BCI over a period of years which is now the BAI, and it is surviving on those cash reserves. How much money was in the cash reserve and is that being excluded or are broadcasters for the first year of budgeting getting the benefit of cash reserves in terms of reductions?

I wish to question Mr. O'Keeffe on the actual baseline levy and on how the levy will operate. Has the BAI calculated the baseline levy? Will it be 2.75% or is it 3%? The calculation criteria are in the presentation. Broadcasters with an income of €250,000 up to €1 million will be paying a baseline levy. Broadcasters that are earning between €1 million up to €10 million will be paying a baseline levy minus 0.25%. For those earning more than €10 million, it will be minus 0.5%. Can the BAI give us the figure of the baseline levy today so that we can start to give broadcasters some information on what they are likely to be paying? Has the BAI considered how it will deal with broadcasters who can make a creditable case that they cannot pay? Will the BAI insist on payment and in an extreme scenario put businesses under financial pressure that they cannot bear or is there flexibility to carry over payments into the next financial year? How will the BAI deal in a professional and realistic way with broadcasters who are under significant pressure and cannot afford to pay the levy?

The BAI is being asked to have a three-year budget in place by September 2010. This will be welcome from everybody's perspective, because then people can plan on a three-year basis rather than on a three-month basis. Does the financial year run from January to January or September to September?

Mr. Michael O’Keeffe

January to January.

Deputy Simon Coveney

The current budget that the BAI is trying to put together is potentially the last quarter of last year plus 12 months of this year.

Mr. Michael O’Keeffe

No. This budget is for January to December 2010. The budget we will put together for September is January to December 2011 onwards.

Deputy Simon Coveney

The actual budget for the last quarter of 2009——

Mr. Michael O’Keeffe

We have an actual outturn of €1.3 million for that period.

Ms Celene Craig

The actual expenditure figures for quarter 4 are €1.3 million.

Deputy Simon Coveney

Which need to be recouped from where?

Ms Celene Craig

It will either be by way of a levy or from some manner arising from discussions with the Department.

Deputy Liz McManus

May I express our appreciation to the delegation from the BAI that they have come before the committee. It is appreciated. The delegation probably knew they would have to endure rigorous questioning.

It is quite clear that the only reason the budget has been produced is because broadcasters themselves, local radio stations in particular, raised their very real concerns and they were heard by politicians to the point where the committee unprecedentedly looked for the levy scheme to be dropped. The fact that there has been a reduction in the budget is a good move but it still raises quite a number of questions.

In relation to the discussions with the Department, can we take it that there will be no changes as a result of these discussions and that we will not find next week that another €500,000 has been loaded on the BAI?

Mr. Michael O’Keeffe

No.

Deputy Liz McManus

Second, could I advise the BAI and I will be advising the Minister also, if there is any attempt to load another €1.4 million, it will be resisted fiercely. It is interesting to note that this is not a party political issue. Government Deputies have put their necks out because they understand the importance of their local radio stations, and the idea that somehow money that has been spent already from the reserves could be loaded on the budget is totally unacceptable. I alert Mr. O'Keeffe to that fact.

I am concerned that the chairman of the new authority is not here. I understand he has job commitments but it is not fair for the chief executive to have to deal with this committee today because a chairman and board have been appointed. They are making decisions and we need feedback on the view of the board, which is the ultimate manager of all this change. I have great respect for the person involved but I record my dissatisfaction that the committee has not had the chance to meet the chairman. The chief executive officer has come before us on a number of occasions.

It seems that there is a real danger as a result of the political backlash that work will not be done this year and will be put on to next year. Will the chief executive give an assurance on this? The budget will be depressed this year and increase significantly next year as a result. I can think of particular activities that have been omitted from this year's workplan and which I will refer to later. We need an assurance that this will not happen and that the change is real rather than cosmetic.

We must consider the levy calculation. The larger stations and broadcasters are, in a sense, not paying in a proportionate way as much as the smaller stations. There appears to have been some improvement but the formula still militates against the smaller broadcaster. Ability to pay has not been written into the process and the authority is still dictating the amount as it relates to a particular category.

Specifics have been raised by the Independent Broadcasters of Ireland. It indicates that no direction has been given regarding the types of income which could be included or excluded in the income on which the levy is calculated and that items such as death notices, an integral part of the public service remit of some local radio stations, should not be included as qualifying income. That is a simple point on which we should get an answer. Local radio stations provide a range of public services such as death notices but will that be seen as income with respect to the levy?

The BAI is proposing that the 15% sales commission be subtracted from qualifying income prior to the levy being calculated but the argument from the IBI is that the commission on sales is closer to 25%. The disconnect between the BAI's formula and the reality in terms of income for smaller radio stations, in particular, is a concern, as well as how the system is operating in a recession.

We received a very interesting e-mail regarding Ocean FM in Sligo. It made the same point about the larger broadcasters paying proportionately less but also compared the experience with the BAI and the experience of the same operators in Northern Ireland. This goes back to my fundamental objection to the whole project, which is that we should have had one regulator and there would have been cost efficiencies as a result.

The company running Ocean FM has six local radio stations in Northern Ireland. Some of these are very big, with one in Newry covering a population of 60,000 and one in Derry covering a population of 200,000. The total bill for regulation last year was £10,000, or approximately £1,600 per station on average. There is a great gulf between how the regulator is charging broadcasters in Britain and how it does so here. Britain has a streamlined regulatory system compared with ours and there is a lesson to be learned in this. The Minister keeps telling us that having one regulator would not have saved money but we now have clear evidence. It is not a decision for the BAI and I do not expect it to deal with the issue but there is clear evidence for the argument for one regulator.

I went looking for the financial statements of the Broadcasting Commission of Ireland. As we could not get exact figures on the BAI, they would have held some comparison. I find we must go back to the financial statement from 2007 for any published statement. Why is that?

Mr. Michael O’Keeffe

I will answer that.

Deputy Liz McManus

I welcome the addition of Mr. Higgins as he is a pretty valuable resource. There was a problem relating to the work in finance because some people left around the time of the change. Do we have a new position in the BAI? Was the embargo breached or is this consultancy work? What is the status of financial management and control in the BAI? What are the VAT changes and why is the BAI being treated differently than before because we kicked up? Was the process in train anyway?

I note that one of the reductions is in the communications area. Mr. O'Keeffe mentioned DTT. We have an obligation to change to this system but the public does not necessarily know what is involved, and many will need help in meeting the change. The proposal will eliminate that awareness programme. One of the issues that has come up every time DTT has been discussed has been the creation of public awareness. I am concerned that we are now losing it.

The 2007 BCI accounts have €1.2 million allocated to property, which includes rent and rates, etc. That seems to be a large chunk of money. I do not know what the new property figure is but I would be very interested in finding out. It seems to be an inordinate amount to spend on housing a regulator. That could be taken from a budget of €6 million so the area should be looked at.

Deputy Jimmy Devins

As with other speakers, I welcome the delegation before the committee. I will be very brief as some of the issues have already been covered. It strikes me that the kernel of the problem for local stations — I admit an interest in that Ocean FM is my local station in Sligo — is that there is a feeling of a degree of disproportionality in how the levy is being applied. I note the point made by Mr. Tim Collins, who also has stations across the Border. His very strong contention is that they are paying between 20 and 25 times more in the Republic of Ireland than for a similar service in Northern Ireland. Will Mr. O'Keeffe give his views on that?

The point was also made that much of the advertising coming to local stations is directly from the person doing the advertising. As a result there seems to be a 25% surcharge. The larger stations, such as the national stations, are able to use agents and, as such, have an exemption from the 15% commission agents would receive. I would like clarification on that.

The kernel of the problem is that smaller stations feel that they are paying more, proportionately, than larger stations. As a result it is having more of an impact on the ability to survive.

Mr. Michael O’Keeffe

I will ask Ms Celene Craig and Mr. David Higgins to respond to some of the issues. I invite Ms Craig to respond to the first question from Deputy Coveney on cash reserves.

Ms Celene Craig

The net current assets of the Broadcasting Authority of Ireland on the day of its dissolution amounted to approximately €1.5 million. We have been utilising some of those funds for working capital purposes and since that time those reserves have now virtually been depleted and we are entering into a phase where we will have to commence borrowing to fund the activities of the authority. One of the options the authority examined was how it might deploy those reserves, those assets. It took the view that it would use those for working capital purposes. On the basis of a budget of €5.76 million, €1.5 million would approximate to three months' working capital. So far as the model of the levy requires us to invoice in arrears, there will obviously be a working capital requirement going forward. It is the authority's intention that it will use that for working capital purposes because, although we have the powers to borrow, it has been indicated by our parent Department and also the Department of Finance that they are concerned that borrowing is not a longer term option for us. Given that broadcasters might be slow to pay the levy, in so far as it is invoiced quarterly in arrears, the proposal is to use that for working capital purposes because there is no headroom in the manner in which the levy model operates.

Deputy Liz McManus

Will broadcasters be charged for the three-month period?

Ms Celene Craig

As Mr. O'Keeffe has said we are still in discussions with the Department to ascertain if there is some other means of funding the authority for quarter 4.

Deputy Simon Coveney

Such as?

Mr. Michael O’Keeffe

There is a range of options. There is a provision in the Act whereby Exchequer funding can be used in the first year. That is an option. The dilemma we have, as Ms Craig has pointed out, is that the terms of our borrowing are that we must have that completed. We have it for 12 months and we must have it completed. We are only being paid in arrears. The Deputy has raised the question of ability to pay. There may potentially be broadcasters who have issues and problems with the levy. There are a number of issues that can impact on our ability to fund ourselves and our ability to come out of that borrowing requirement. This is the type of discussions we are having with the Department.

Deputy Jimmy Devins

Has the Broadcasting Authority of Ireland had any result from those discussions?

Mr. Michael O’Keeffe

No.

Deputy Jimmy Devins

If there is a local broadcaster who says it cannot afford the levy, what will happen?

Mr. Michael O’Keeffe

In regard to the local broadcasters, in our first letter to them in early February we informed them they would receive two invoices to be paid by the end of March. One of those invoices was in respect of the fourth quarter for 2009. We have deferred that invoice and we have advised them accordingly until we have this clarification. The local broadcasters are aware that an invoice they were expecting to receive in early March has not been sent to them. That issue is still under discussion with the Department.

Chairman

So instead of receiving two invoices they will receive only one.

Mr. Michael O’Keeffe

They will receive only one. We are having discussions in regard to what happens with that particular timeframe.

Deputy Jimmy Devins

Will those invoices include the tail end of 2009?

Mr. Michael O’Keeffe

No, not the first one.

Deputy Liz McManus

Not the first invoice.

Deputy Jimmy Devins

Not yet. It is going to come. They are not——

Mr. Michael O’Keeffe

Potentially, it could come. The purpose of the discussions is to ascertain whether there is a mechanism that can be used so that it will not be——

Deputy Jimmy Devins

So they will not have to pay at all.

Mr. Michael O’Keeffe

Yes. That is the nature of the discussions.

Deputy Simon Coveney

Because the authority did not have sufficient cash reserves to cover the last quarter of last year——

Mr. Michael O’Keeffe

We did have cash reserves.

Ms Celene Craig

We did have cash reserves but the authority has taken a prudent view that we will require those cash reserves for working capital purposes because we invoice for the levy quarterly in arrears.

Deputy Simon Coveney

Essentially, will broadcasters have to pay in 2010 for five quarters?

Ms Celene Craig

We do not know the full answer to that question yet. They may have to, but depending on the outcome of the discussions with the Department they may not.

Deputy Jimmy Devins

We will be delighted to hear how the discussions are progressing.

Mr. Michael O’Keeffe

They are at an early stage. We could not say——

Deputy Jimmy Devins

Mr. O'Keeffe sounds like a politician.

Mr. Michael O’Keeffe

With regard to the actual baseline levy——

Ms Celene Craig

I do not have that information in front of me. We took the budget figure that was approved by the authority on Monday. It was put into the formula by PwC to work up the figures. It is a different percentage overall for everybody because of the sliding scale. We do not have the information in front of us. We literally just got——

Deputy Simon Coveney

I cannot accept that answer. It is a different figure for everybody but the baseline figure is not a different figure.

Ms Celene Craig

No, it is not.

Deputy Simon Coveney

The way in which this is calculated is that there is a baseline figure and one takes off 0.25% depending on how——

Ms Celene Craig

The baseline figure is the same for everybody. I am simply saying we do not have it in front of us right now. We took the budget figure. Once it was approved it was given to PwC yesterday to input and compile as against all of the broadcaster information. It is an outsource activity.

Deputy Simon Coveney

Can the witness give the committee an approximation of what the figure is? Is it 3.5% or 2.5%?

Ms Celene Craig

I would think it is closer to 2.5% but I will be happy to confirm and come back on that issue. We do not have the figure in front of us right now.

Mr. Michael O’Keeffe

That material was only provided yesterday because obviously we only had the authority meeting on Monday. That information will be readily available very quickly and we will come back on it.

The third issue raised was around the deal with broadcasters who claim they cannot pay. We have to operate on the basis that we must collect levy from all broadcasters. Clearly we have tried to set the levy. We have reduced the budget bearing in mind the whole issue of ability to pay. Members will see from the slides the ranges of levy people are paying. That takes that issue into account. Some 81% is being paid by larger broadcasters while 19% is paid by 30 or 40 broadcasters. They are scaled on the basis of the revenue they have got. We take——

Deputy Simon Coveney

There is a counter-scale to that. Let us assume the baseline levy is around 2.7% or 2.8%, a percentage of their income, smaller broadcasters are paying that full percentage while broadcasters such as RTE would pay less than 1% of income. One can spin it either way but the reality is that smaller broadcasters spend a much higher percentage of their income on the levy than larger broadcasters, even though the actual sums involved are much bigger for the larger broadcasters because they have much bigger incomes.

Ms Celene Craig

It was decided——

Chairman

Senator Mary White is trying to get in.

Senator Mary M. White

I wish to raise three points. Given that the authority is able to pay the levy for the last quarter of 2009 from its reserves, will it be scrapped?

Mr. Michael O’Keeffe

Our position on that is that we are not invoicing on that at present. We are in discussions with the Department in regard to whether it will be levied on the industry or paid through another source.

Senator Mary M. White

Is it correct to say the authority would like to pay it from the reserves?

Mr. Michael O’Keeffe

We are not saying that. We will have discussions with the Department. We have an obligation to cover our costs but we will have discussions with the Department. Pending the outcome of those discussions we will not be invoicing stations for that period.

Senator Mary M. White

Depending on those discussions——

Chairman

That matter is parked for the time being. We discussed that issue while the Senator was out.

Senator Mary M. White

Sorry about that.

Chairman

That last quarter is parked and the authority is in discussions with the Department.

Senator Mary M. White

Okay. The second issue concerns a letter from the independent broadcasters on the qualifying income prior to the levy being calculated. If the value of the advertisement is €1,000, less 15% to the advertising agency, would it not be proper to calculate the levy on €850? The smaller groups are represented by a sales group. They pay 10% on the €850. It would be more just for the smaller groups to pay on their net income rather than their gross income.

Ms Celene Craig

They will not pay the levy on the 15% commission. Everyone who pays commission at a rate above 15% pays levy on that amount. The levy is equal for everyone to that extent.

Deputy Liz McManus

That is not acceptable. The pain may be spread equally but one could argue that it is not. If the commission is 25% and not 15% the authority does not have a right to apply 15%. The authority cannot determine how the market operates. In very difficult times the market operates in the way it does.

Deputy Timmy Dooley

The smaller stations, because of their situation, must pay greater commissions to sales people within their organisations. The larger stations, given economies of scale, are better off. Therefore, technically there is not an equivalence. Smaller stations must pay a greater commission and do not have the benefits of economies of scale. Could the proportion associated with commission be removed completely from the income which is reckonable for the levy? Alternatively, could a method be found of taking the first €1 million of revenue out of the calculation altogether? The levy could then be applied to income above that. That would make the greatest sense as it would give a level of equality.

Chairman

What radio stations are paying their agents is verifiable. Many of them are working purely on a commission basis. One could easily see what they are being paid and that would equate to the advertising revenue they are generating. The case being made is very fair.

Ms Celene Craig

All sorts of things are excluded from the levy. Many elements of income are not regarded as qualifying income for the purpose of the levy. A cap of 15% was set, recognising that there had to be some limitation. In some instances the concept is quite notional and 15% was seen as a fairly standard rate. The point has been made that one group is charged 23%. In any revision of the statutory order, the authority would have regard to that percentage. There are all sorts of exemptions for the purpose of calculating the levy. They vary, to a greater or lesser extent, from one broadcaster to another.

Deputy Liz McManus

They are not in the statutory instrument.

Ms Celene Craig

The definition of qualifying income is in the statutory instrument.

Deputy Liz McManus

Not in relation to commission.

Ms Celene Craig

We have capped it at 15% under the statutory instrument.

Mr. Michael O’Keeffe

That is a standard practice in a number of other jurisdictions.

Deputy Liz McManus

Are the witnesses saying nothing can be done about that because it is in the statutory instrument?

Ms Celene Craig

In a revision of the statutory instrument we could certainly look at that in the future.

Mr. Michael O’Keeffe

There was a gross figure when we had the Independent Radio and Television Commission levy. We did consider going with a gross figure. The problem with a net figure is that it makes matters more complicated because people look for ways to net down the figure they must pay. We did not go for a gross figure because we felt it was unfair but it is much more simple to operate. There is a simple gross figure and everyone must pay a figure based on that. We did not use that method because we do not think it is a fair system. However, that system was operated in the past. We went with a net system but capped it at 15%.

Deputy Timmy Dooley

Do the witnesses accept that 15% is on the low side, based on industry knowledge?

Ms Celene Craig

No, 15% is probably the norm. In one case the figure is 23% but 15% is the standard rate which applies across all of the advertising agencies.

Deputy Timmy Dooley

There are different categories of sales. The agency sale, for example, will come from a larger type of advertisement. There are also the sales associated with someone in an office somewhere who, in order to generate activity, is charged up to 25%. Stations are left with no choice but to pay that at present because of the difficulty in the economy. The cost of the more general localised revenue is closer to 25%. The BAI is looking at only one revenue stream associated with advertising.

Mr. Michael O’Keeffe

We set that figure to have a particular percentage to use as a maximum. As the year progresses we will look at this. We have the option to look at the revision of the order and we are committed to doing that, depending on how this operates in practice.

This matter has been raised with us by stations. We could have gone with a gross figure but we decided not to do that for reasons of fairness. We will review this over the course of the first year of operation.

Deputy Timmy Dooley

Could it not be done on an individual basis, based on a station's returns? Each station must have its accounts audited and will show the cost of sales and the level of commission in the audited accounts. Could it not be done on that basis? That is the fairest way to do it. It will vary from station to station. Community or local radio stations are largely dependent on local businesses. In many cases, the person involved is paid commission only and it is up to 25%. A station broadcasting to a densely populated urban area will get advertising revenue predominantly from agencies which have the accounts of larger brands and 15% might be appropriate there. Community or local radio stations, which are the ones I am familiar with, will have a very different advertising profile. The cost of generating that business in the current environment is very different from two or three years ago, when all one needed was someone on the end of a phone booking advertising. It is now a particularly hard sell.

Ms Celene Craig

Local stations may often use more direct sales staff as agents. Their costs and the commissions associated with them could be offset against the amount which qualifies as income for the purpose of the levy. One could argue that stations which operate in a more national sales context could be harder hit.

Increasing the level of commission would reduce the amount of qualifying income over all. However, that would merely push up the percentage of the levy which needs to be charged because we are only operating a cost recovery model and not a flat rate. A flat rate would be disadvantageous to the smaller stations.

Deputy Timmy Dooley

That is a valid point but it, at least, does not affect the viability and survival of a station. A levy on a direct cost has a direct impact on the viability and survival of a station. Many of these stations are providing a service. While they may be commercial, they are not in profit mode at present. If I were running a local radio station I would be happier if I could at least cover my costs before I incurred a levy. I would like to deal with potential profit or loss and then calculate a levy. Levying revenue which is required for the basic operation of a station forces some stations into an unviable position.

Deputy Liz McManus

This was a statutory instrument passed in Dáil Éireann. Let us not start laying the blame. Deputy Dooley had his opportunity.

Senator Mary M. White

There has been a dramatic reduction in the BAI budget. The purpose of Oireachtas committees is to look after the interests of the people of this country. It is a great example that this has occurred. I say well done on the €1.6 million reduction. Some local radio stations are big commercial bodies. They are all under serious pressure because of the drop in advertising revenue by more than 30%. That goes without saying. To return to what Deputy Dooley said, the pressure on smaller private radio stations and community radio stations is even greater. I know what it was like when I started my own business. A bill for €750 would almost give one a heart attack. Local radio stations provide a public service. It is not just a straightforward commercial enterprise. They include the community and give a voice to it. It is a tremendous benefit to be able to talk on local radio, for example, Midlands Radio, about issues aired in the Oireachtas. The broadcast of obituaries is a public service. That is a good example of letting people know a death has occurred.

I wish to clarify the point about an advertising agency charging €1,000. Is it the case that the levy will not be on the €1,000, it will be that amount less 15%?

Mr. Michael O’Keeffe

As it currently stands, we will levy on the amount less 15% but we will review the operation of that measure in the current year. Subject to review, the charge will be on €850.

Senator Mary M. White

What is the case with smaller operations that need a sales group to act on their behalf?

Mr. Michael O’Keeffe

As things currently stand the maximum reduction from the gross will be 15%.

Deputy Jimmy Devins

Just to be absolutely clear, if an agent puts in an advertisement the station is currently allowed to deduct that before the levy is calculated, whereas if an employee of the station gets the advertisement and he or she charges direct commission of 20% or 25%, is that already included in the calculation of the levy?

Mr. Michael O’Keeffe

No. It is up to 15%.

Deputy Jimmy Devins

But it is still directly included. That is the argument local stations are making.

Mr. Michael O’Keeffe

I understand the argument.

Deputy Jimmy Devins

I know it is a statutory instrument but is the point we are making being taken on board?

Mr. Michael O’Keeffe

We understand the arguments that are being made to us. They have been made directly to us by stations as well. We will review the position. We have committed to reviewing the operation of the statutory order in the first year of its operation to see what effect it will have.

Deputy McManus's first question is easy to answer. The budget will not be increased. If anything, I will continue to look at ways in which we could reduce the budget. We make that commitment in terms of everything we do. We will continue to do that. The budget will not be increased from the figure we have set out today.

We touched on the second issue, namely, our costs for the end of the year. The chairman is the full-time chairman of the equality commission. This week he has already spent a full day with the Broadcasting Authority of Ireland. I discussed the matter with him last week. He has a major engagement in Belfast today. He simply could not make it to the meeting. He asked me to convey his apologies. He could not be present for today's session. He was anxious to be present but it simply was not possible.

Deputy Liz McManus

I accept that fully but I am disappointed. Does the authority have a vice chairman?

Mr. Michael O’Keeffe

No, not yet anyway.

Deputy Liz McManus

It might be an idea to have one.

Mr. Michael O’Keeffe

The next point was that larger stations are not paying proportionately.

Deputy Liz McManus

I raised an issue before that on back-loading.

Mr. Michael O’Keeffe

Yes, my apologies. I have not skipped it. One of the reasons that the workplan has been reduced is due to resources. The Broadcasting Authority of Ireland is the same as everyone else. We are affected by the embargo. We are operating with the same resources we had when we were the Broadcasting Commission of Ireland and as is evident in the 190 page Act, significant additional functions were added which we must undertake within existing resources. That has been a challenge for us but we will continue to deliver it as best we can. We will plan next year on the basis of what we can achieve.

We do not envisage that our resource situation will change in 2011 or future years. We are familiar with what is going on in the wider public service and we are affected by that. We have not depressed our workplan for those reasons. We have identified areas where savings will be made on an ongoing basis. I referred to four areas in the presentation. The workplan is potentially the area where more could potentially be achieved but we do not envisage that the workplan we will operate in the next four years will be radically different to the one we have at present. That is a long answer to the question. The workplan has not been depressed from that point of view. The Deputy will have an opportunity at the end of September to see whether my words bear fruit in that regard.

We do not agree that larger stations are not paying proportionately on the levy calculations. We do not agree with that in terms of the system that we operate, which we think is a fair system. As we said earlier, the larger stations are paying 81% of the total but they are not covering 81% of the regulatory activity. There is no question about that. We feel that the order gets the balance right in terms of the proportion that people pay but——

Deputy Liz McManus

If we are trying to impose a fair burden on everyone, is it not a question of assessing the income?

Mr. Michael O’Keeffe

What is paid is based on income. The four groups are based on income criteria. The other option with the levy was simply to go with a flat fee.

Deputy Liz McManus

Yes. I appreciate that.

Mr. Michael O’Keeffe

That would have meant that one group, namely, RTE, would have paid a huge proportion and the rest would have paid a lot less.

Deputy Timmy Dooley

Where is the problem?

Mr. Michael O’Keeffe

We discussed with the committee previously why we did not go with that option. In terms of the system, the regulator paying for the regulation and the fairness principle, we believe the model we have is correct. The other option is a flat fee and we have not gone with that on this occasion.

Deputy Jimmy Devins

Is it true that in Northern Ireland they pay proportionately?

Mr. Michael O’Keeffe

I will come back to Northern Ireland when I reply to the question on Ocean FM. We have covered the question of ability to pay. We are aware of the circumstances of stations. We have an obligation to get the levy but we hope the activity we have carried out and the way we have banded the stations will address those issues. We are conscious that is an issue and we might be faced with that in the coming months.

We have dealt with the point about the 15%. In reply to the point about Ocean FM and Northern Ireland, Ofcom is funded by the same mechanism in the United Kingdom but there are huge economies of scale involved. The reality is that 700 to 800 work in Ofcom but because of the size and scale of the broadcasters——

Deputy Liz McManus

Ofcom also deals with the regulation of the communications industry.

Mr. Michael O’Keeffe

I accept that. I will not get into that debate today.

Deputy Liz McManus

Mr. O'Keeffe is not the right man but I would like to engage on the matter again.

Ms Celene Craig

Under Ofcom's regulation, the broadcasters are only charged in relation to the broadcasting regulations, so there is no saving there from the telecom side.

Deputy Liz McManus

There is a significant saving in terms of the amount they have to pay.

Mr. Michael O’Keeffe

There is a huge economy of scale.

Deputy Liz McManus

There is a huge economy of scale and part of it is because there is only one regulator.

Mr. Michael O’Keeffe

I would not accept that. That is a different debate, Deputy.

Deputy Liz McManus

I think people north of the Border might disagree with Mr. O'Keeffe.

Mr. Michael O’Keeffe

It is an issue of economies of scale. It is a different debate. It is the responsibility of another person.

Deputy Liz McManus

That is correct.

Mr. Michael O’Keeffe

Let me clarify the status of the BCI 2008 financial statements, which were completed by the Comptroller and Auditor General only in December 2009.

Deputy Liz McManus

Why are they not laid before the Houses?

Mr. Michael O’Keeffe

They have been submitted to the Department. They were completed only in December 2009.

Ms Celene Craig

The Comptroller and Auditor General signed off on them on 23 December 2009.

Deputy Liz McManus So they have been with the Department ever since?

Ms Celene Craig

Yes.

Mr. Michael O’Keeffe

They should be laid before the House very shortly and they should be available.

Deputy McManus asked about the status of the financial management. Mr. David Higgins is on a short-term contract to cover a vacancy at senior level due to maternity leave. He will be with us until the end of July. We have permission from the Department to cover this vacancy and have not breached the embargo. His input has been very valuable.

Deputy Liz McManus

If he saved BAI €1.6 million, he has certainly earned his keep.

Mr. Michael O’Keeffe

Write that down.

Deputy Liz McManus

Is the BAI still employing PricewaterhouseCoopers on an ongoing basis?

Mr. Michael O’Keeffe

Yes, for a 12-month period.

Ms Celene Craig

There is a second position of financial management with the authority and that post is on secondment from PricewaterhouseCoopers.

Mr. Michael O’Keeffe

We gave details of that to the committee on the previous day we were before the committee.

Deputy Jimmy Devins

There are suggestions that when the report was being prepared by PwC, all the relevant people were not contacted.

Mr. Michael O’Keeffe

When the report was prepared we contacted the different groups, so we would have contacted Independent Broadcasters of Ireland, IBI, the umbrella group for broadcasters. With the nature of the report, PwC would have contacted RTE, TG4, TV3, the national radio stations and IBI representing the local radio stations and CRAOL representing the community stations. They did not go beyond that to individual stations.

Deputy Jimmy Devins

That is the point. May I draw Mr. O'Keeffe's attention to the situation in Northern Ireland, which I think is the kernel of the problem. The information I have is that the charge is calculated on the listenership basis proportionately and also on turnover, in other words, the greater the turnover the greater the fees for Ofcom. Is that true?

Mr. Michael O’Keeffe

I honestly do not know. There are different mechanisms for calculating a levy, for example the size of a country, the size of the market, and the model used. What we tried to do, and there are different views as to whether we have been successful — was to use the model that most fairly reflected the situation in Ireland, bearing in mind the cost of running the function. That is what we were trying to do with the levy model.

Deputy Jimmy Devins

The message that members are trying to get across is that the perception among the local radio stations is that they are being unfairly targeted.

Mr. Michael O’Keeffe

I hear what the Deputy is saying. I take his point. What we have been trying to do is to address some of the issues they have raised. My colleague, Ms Craig, will deal with VAT.

Ms Celene Craig

Because the BAI is becoming self-financing and providing a regulatory service to broadcasters, we sought and received approval from the Revenue Commissioners to be registered for VAT. We can recover any VAT incurred on our expenditure and that would not have been the case with the BCI. That process was put in train in mid 2009, but it was confirmed only in late January 2010. We have been able to make those adjustments to our budget to reflect the charge for VAT in areas of expenditure.

Mr. Michael O’Keeffe

We have cut the significant budget for digital terrestrial television, DTT, awareness, but have not completely removed it. The Department of Communications, Energy and Natural Resources has formed a group that includes us, BAI, ComReg and RTE, which has as part of its remit, the issue of raising awareness of the digital switch over and analogue switch off. Given that we expected developments to have taken place sooner than they did, we may have over-estimated the budget that would be required. We are not ignoring the issue.

Deputy Liz McManus

In regard to the VAT changes, I must have missed something. Will Mr. O'Keeffe explain that to me?

Ms Celene Craig

BCI would not have been registered for VAT but because we, the Broadcasting Authority of Ireland, is charging a levy to broadcasters, we sought and received the approval of the Revenue Commissioners to have VAT recovery status. We received confirmation of that in late January so that we have been able to take out any VAT charges that would have been incurred in the normal course of expenditure in the BCI context. We can now recover that VAT. We have reduced some of our areas of expenditure to reflect the fact that we can recover VAT.

Chairman

Will the Broadcasting Authority of Ireland charge VAT?

Ms Celene Craig

We will charge VAT. The broadcasters themselves can reclaim that.

Deputy Liz McManus

So there is VAT payable on top of the levy?

Ms Celene Craig

The levy invoices will issue with VAT but broadcasters will be in a position to——

Deputy Liz McManus

What is the rate of VAT?

Ms Celene Craig

VAT is charged at 21%.

Deputy Liz McManus

Will VAT be charged on top of the levy and the broadcasters will have to recoup it?

Ms Celene Craig

Yes, and they can recover the VAT as part of their VAT expenditure.

Deputy Liz McManus

Is that above the figures that we have been given by the BAI?

Mr. Michael O’Keeffe

Yes.

Deputy Liz McManus

VAT has not been included in the figures from the BAI.

Ms Celene Craig

No. We took out the VAT from the areas of expenditure. That is one of the measures that has allowed us to reduce our costs from €7.6 million. At that time, we had not received confirmation from the Revenue Commissioners that we had VAT recovery status.

Mr. Michael O’Keeffe

Property was the final issue and I will ask Mr. David Higgins to comment on it.

Mr. David Higgins

In terms of the current process, I have worked through the exercise and compared the spend in 2009, and the spend is roughly similar. I am not familiar with the 2007 accounts, so I would need to——

Deputy Liz McManus

The figure in 2007 was €1.2 million for everything.

Mr. David Higgins

I think that might include depreciation.

Deputy Liz McManus

What will it be for 2010?

Mr. David Higgins

It could be something similar. The 2010 account would include depreciation, but the details I have do not include that. However, if I include depreciation it should be something similar.

Deputy Liz McManus

That is a great deal of money. That is €1.2 million from a budget of €6 million.

Mr. Michael O’Keeffe

We have two properties.

Deputy Liz McManus

Why does the BAI have two properties?

Mr. Michael O’Keeffe

We have the old Independent Radio and Television Commission, IRTC, premises which are rented out and we receive an income. We took a 35-year lease in 1989, as one was obliged to do in those days, but the property has been rented out for the past number of years.

Deputy Liz McManus

But the BAI is in another property?

Mr. Michael O’Keeffe

Yes, we have been since 2003.

Ms Celene Craig

We required extra space. The IRTC premises was quite small and was insufficient for the BCI, which was expanding at the time due to its remit under the 2001 Act. We had intended, and made many efforts to try, to dispose of that lease, but we were not successful. We were successful, however, in subletting it and we continue to sublet it.

Deputy Liz McManus

How much income is coming in?

Chairman

Is the rental income covering the cost of the lease of the property?

Mr. Michael O’Keeffe

At the moment it is.

Ms Celene Craig

At the moment it is but there is pressure to bring down the rental cost.

Mr. Michael O’Keeffe

Significant pressure. The biggest element of expenditure is the rent on the property we are in at present, which is in the region of €500,000.

Deputy Liz McManus

The lease on the old building ——

Mr. Michael O’Keeffe

Yes.

Deputy Liz McManus

Is the BAI not even covering its costs with the rent it is getting?

Mr. Michael O’Keeffe

We are at the moment, but we are under pressure.

Deputy Liz McManus

Is that in the 2007 accounts?

Mr. Michael O’Keeffe

It should be.

Deputy Liz McManus

Okay. I cannot say I saw it, but——

Ms Celene Craig

There is a review of the rental charges that we create. In turn, we will also have rent reviews so we will look to keep those to a minimum in order to minimise any impact on the BAI.

Deputy Liz McManus

The rental income here is €170,000, which is only 10% of the actual cost of property.

Mr. Michael O’Keeffe

The main costs in property relate to the BAI premises.

Deputy Liz McManus

That is right. That is an awful lot of money. Even if we allow for the rental, there is still well over €1 million involved, which is one sixth of the BAI's entire budget. All I am saying is that I think this is a lot of money.

Deputy Timmy Dooley

There is some concern about the BAI's levy of the different stations, where RTE is treated as one business unit rather than its individual components, as opposed to some of the conglomerates of radio stations that are treated individually. Accepting that it only has one contract with the BAI, there is a view that there is some shelter or benefit for RTE in this area.

Mr. Michael O’Keeffe

The straightforward answer is that this the way the Act is structured. We must treat them as a single entity under the Act, so any change would require an amendment to the Act. I am aware of this from some of the other groups.

Deputy Timmy Dooley

The Act is there, but at the end of the day, the BAI must find an equitable methodology of applying the levy. Is there a way in which the BAI can recognise the greater potential of those groups than some of the smaller stations, albeit in a way that the groups are treated as one unit? It could then set a threshold of, say, the first €1 million in revenue, below which there is no levy. That system would address those larger stations that have the benefit of economies of scale.

Mr. Michael O’Keeffe

That would require a change in the statutory instrument.

Deputy Timmy Dooley

Is it not the case that the statutory instrument would be largely prepared in consultation with the BAI?

Mr. Michael O’Keeffe

We have committed to review the effectiveness of the operation over the course of the first 12 months.

Deputy Timmy Dooley

Will that point be taken into account at that stage?

Mr. Michael O’Keeffe

That point has been made to us by others as well.

Ms Celene Craig

We considered the effect if we treated RTE's radio and television services separately. We did this as an academic exercise, and it did not work out very differently from the overall amount to be paid. We wanted to ensure that there was a balance between radio services and television services when applying the regulation model that we selected. There was not going to be any great difference.

Deputy Timmy Dooley

In that modelling exercise, did the BAI examine the exclusion of the first €1 million or so from revenue?

Ms Celene Craig

No, we did not.

Deputy Timmy Dooley

Would the BAI consider that exercise for its review process?

Ms Celene Craig

Is the Deputy referring to the exclusion of the first €1 million of every company's revenue?

Deputy Timmy Dooley

Across the board.

Ms Celene Craig

We can certainly do that. At the end of the day, there will still be a levy to be charged.

Deputy Timmy Dooley

I agree with Ms Craig. We all recognise that there is a budget which must be funded through the levy. If the first €1 million or so is excluded, the percentage will have to be greater on the remaining revenue, but it will focus to some extent on those that have reached a survival level at least. It should not put stress on the capacity to survive and operate.

Ms Celene Craig

We can certainly look at that. We tested the model rigorously under the fairness principle, but we can look at this option.

Deputy Jimmy Devins

It is all about proportionality and the perception that there is fairness.

Senator Jim Walsh

I apologise for being late, and I do not want to rehash what was already said. There has been a reduction from the original budget of €1.6 million, of which about half is finance, governance and people. Is there a breakdown for each of those headings? Where were the significant savings made?

Chairman

We have gone through that.

Senator Jim Walsh

Fair enough. Did the board sign off on the original €7.6 million? If that happened, it raises questions about the board. Was the budget as presented by the witnesses originally accepted unchanged by the board and by the Minister? We set a target the last day of somewhere between €4 million and €5 million, yet the BAI is still in excess of that. What further savings can be effected, given our economic difficulties?

Deputy Dooley spoke of exempting the first €1 million of turnover. Can the witnesses provide the change in the percentage of turnover being levied? There was a suggestion made the last day that it should not exceed 1% of turnover, but that there should also be a relationship to profitability, with a figure not exceeding 10% of such profitability. I am concerned about the impact to all broadcasters, but especially the smaller broadcasters, where €50,000 to €60,000 can affect the viability and the quality of the delivery of the programmes. Larger organisations can absorb these charges.

Mr. Michael O’Keeffe

The first budget was a draft indicative budget. It was based on the inclusion of all elements of the budget. The board approved it with a proviso that we would bring it in at or below €7 million, and it then encouraged us to bring it down as far as possible. It was on that basis that the board signed off.

Senator Jim Walsh

It was signed off at €7.6 million, but with a request——-

Mr. Michael O’Keeffe

The request was to bring it down to a minimum of €7 million, and below that if possible. We have covered the reduction earlier.

Senator Jim Walsh

That is fair enough.

Ms Celene Craig

The model is currently not based on profitability. It is not based on the idea that a levy be charged only where a station is profitable.

Senator Jim Walsh

Will it be amended to reflect that? It does not make sense if the broadcaster is delivering quality programming, but because of the economic environment, is operating under a deficit to which we must now add the levy. This would make the whole operation insolvent. That does not make any sense from the point of view of public broadcasting.

Ms Celene Craig

If we were only to levy stations on the basis of their level of profitability, we might potentially generate no income at all. There are many factors——

Senator Jim Walsh

That is the real world.

Ms Celene Craig

There are many factors impacting on profitability. The fundamental businesses that operate broadcasting services in this country are fairly sound and relatively profitable. One of the key issues that impacts on profitability is the cost of financing the buy-out of stations and services. That has added considerably to the bottom line of profitability. I do not think it is workable to impose a levy solely on profitability, not least because there is a potential for manipulation. I do not use that word in the sinister sense, but the system would be open to manipulation if that is how the levy was charged. It would create no certainly at all for the BAI. The experience of the IRTC is that profitability would not be a basis upon which a levy model would successfully operate.

Senator Jim Walsh

What about reducing the €6 million to between €4 million and €5 million? The BAI was at €5.2 million last year. It is difficult to justify any increase on that. I would have thought that the board would be looking for a decrease.

Mr. Michael O’Keeffe

We have undertaken the exercise to bring the budget down as low as possible, bearing in mind the functions. While I will not labour this point, there is a whole range of additional functions we must undertake, for example, those related to the public service broadcasts. For the last full year of the BCI, 2008, when we did not have those functions, we had expenditure in the region of €6.3 million. We have looked at areas right across the organisation where we can cut that figure down but we must undertake certain functions under the Act and an inevitable cost arises from those. I gave the commitment to Deputy McManus that just because we have undertaken this exercise and brought it to a certain level, does not mean we will stop looking at areas where we can reduce expenditure. We will continue to do that and, in areas where we can reduce it, we will do so. We are as conscious as the committee members in regard to the state of the industry at present, and we reflect that in what we do.

Senator Jim Walsh

What of the question of reducing the percentage to something nearer 1%?

Ms Celene Craig

The statutory instrument has been drawn up to reflect the levy model and it would require a change in that statutory instrument.

Senator Jim Walsh

It can be changed. That is merely a formality.

Mr. Michael O’Keeffe

We have committed to review the operation of the levy over the first 12 months.

Senator Jim Walsh

I ask the Chairman that we would arrange at an early stage to have the board in. I am not at all happy that a newly-appointed board would have signed off on a budget of €7.6 million. It raises serious questions about both our selection and also the Minister's nominees in that regard. Given the economic climate, this appears to be somewhat unconscionable.

Chairman

Have we covered everything?

Mr. Michael O’Keeffe

I believe so.

Chairman

On behalf of the committee, I thank the delegates for coming in at short notice to answer the questions of committee members. We will see them again but, in the meantime, I thank them for attending.