Expenditure

2013/14 was the final year of Foreign & Commonwealth Office (FCO) funding for the World Service prior to becoming licence fee funded. As well as delivering planned savings of £12million in the year a further reduction in Grant-in-Aid income of £2million on £240million from the FCO was mitigated by savings in restructuring costs and accommodation spend.

After its move to New Broadcasting House last year and its co-location with BBC News teams, the organisation will continue to pursue building synergies and therefore savings with the wider BBC.

Focusing spend

The BBC concentrates its expenditure on the production of programmes and other content and its delivery to audiences and users, and the essential infrastructure to support this. Year-to-year spend can vary significantly because of the cycle of major sports events, and total content spend reduced by 4.9% to £2,406million (2012/13: £2,530million) this year which was largely due to additional investment in our coverage of the London Olympics last year.

No service licences spent above the regulated baseline threshold during 2013/14. BBC Parliament service licence was the only service to underspend by more than 10% as it delivered additional efficiency savings, especially in its overheads, without compromising editorial performance.

The BBC must invest in technology and property infrastructure to enable new ways of working which will deliver both enhanced content and financial efficiency savings to fund the BBC’s DQF strategy. Last year the write down of DMI increased our expenditure for these two areas to £357million, and expenditure this year is lower at £271million. This is to be expected given the historical spend on technical infrastructure in MediaCity UK and in New Broadcasting House, the financial benefits of which continue to be seen. Our expenditure on all infrastructure and support costs reduced by nearly 13% this year, as it fell from £675million to £589million. An analysis of these costs are set out in the table below.

Expenditure: UK Public Service Broadcasting (UK PSB) group expenditure

* Included within BBC News channel are production costs of £26.8million, Newsgathering costs of £21.2million and other costs of £0.7million (2013: production costs of £27.2million, Newsgathering costs of £17.8million and other costs of £0.2million).
† BBC Online spend is monitored by annexe (relating to editorial areas of the service). Non-annexe spend covers costs relating to central editorial activities such as the BBC Homepage, technologies which operate across the service and overheads. The spend for each annexe was: News, Sport & Weather £47.8million (2013: £43.8million), Childrens £9.3million (2013: £8.5million), Knowledge & Learning £15.7million (2013: £18.7million), TV & iPlayer £11.1million (2013: £12.2million) and Audio & Music £11.7million (2013: £13.3million), giving a total annexe spend of £95.6million (2013: £96.5million). Non-annexe spend was £10.9million (2013: £6.5million).
*** Under the terms of the latest licence fee agreement, The BBC has committed to contribute funding toward broadband rollout across the UK and funding for the development of Local TV channels.
‡ In order to reflect the full cost of UK PSB group expenditure by service, finance lease interest is included, although it is not included in the group operating expenditure.

Infrastructure and support costs are made up of:

Halfway through the DQF programme, more than half of the savings target of £700million has been delivered with savings to date of £374million, higher than our targeted figure for this point of £367million.

Our annual savings achievement is reviewed by our auditors, KPMG LLP. It will also be examined by the NAO in 2014/15 following up on their report, of November 2011, which commended the way the BBC manages the delivery of efficiencies.

We are doing this by taking advantage of new technologies and ways of working to reduce costs, reprocuring key contracts, increasing commercial income, and addressing concerns around talent costs and top management pay and expenses. Throughout our efficiency programmes, there has been particular focus on rationalising and modernising our operating estate which will continue as part of DQF.

We have sought to protect our production activities as much as we can, but we have found productivity savings in Television by reviewing procurement deals, by improving our asset utilisation and by controlling talent spend. We have also mitigated the impact of inflationary increases in our long-term sports rights deals.

We have placed particular emphasis on finding savings in those of our activities that do not directly face our audiences. We have re-procured our security contracts, and exited both Television Centre and our White City building. We have also put new rosters and supplier management arrangements in place to streamline our Facilities Management workflows and eliminate duplication, and we have reviewed our Marketing and Audience activities. We have invested in new systems and processes to reduce headcount in our Finance division.

The speed of delivery of our plans for West London, as well as the redevelopment of Television Centre, both carry a level of risk. However, we are still on track to deliver the remaining savings by 2016/17.

All these savings are essential to generate the cash required to continue to develop the BBC’s content and distribution, and thus ensure we are able to continue to provide licence fee payers with the quality and range of services they are entitled to expect from the BBC into the foreseeable future.

Prudent financial management means we have ended the year with £526million of cash and cash equivalents. This provides a sound base as we absorb World Service’s running costs in 2014/15 and deliver on our other strategic ambitions. The provisions we hold for restructuring costs have fallen to £54million (2012/13: £81million) as provisions raised predominantly in 2012/13 were utilised in 2013/14.

The rationalisation of our estate has continued this year, and will continue in future years as we exit White City and refurbish Television Centre. This is reflected in lower plant, property and equipment values and higher depreciation charges outweighing additions in the year.

Summary Consolidated Balance Sheet
For the year ended 31 March 2014

The accounting pension deficit (as defined by IAS 19) has reduced to £1,516million compared to £1,617million a year ago. The major reasons for the reduction is the payment of additional amounts under the agreed pension deficit recovery arrangement as well as changes in the valuation assumptions. The accounting valuation is only a ‘snapshot’ at a particular date in time, and is therefore sensitive to short-term market fluctuations.

The most recent actuarial valuation was completed in 2013 and showed a funding shortfall of £2,054million and a plan has been agreed between the BBC and the pension scheme Trustees detailing the contribution amounts to be paid by the BBC over a 12-year period commencing in 2014. The next formal actuarial valuation of the Scheme is expected to be performed as at 1 April 2016. We are continuing to look at ways to reduce the volatility in the Scheme to provide greater stability for long-term financial planning. We believe the agreed funding plan represents a sensible and affordable plan to address the deficit, without adversley affecting programmes or pension scheme members. We will continue working with the Trustees to ensure the Scheme delivers best value to members and licence fee payers.

In light of the BBC's strategic priorities, the ability for the BBC to afford significant increases in pension cost is constrained. The BBC considers itself to have a strong and enduring brand and covenant and, consequently, has a high degree of confidence in its ability to meet pension liabilities as they fall due. At the same time as we agree a plan with the BBC Pension Scheme Trustees to repair the predicted actuarial deficit in the Scheme, we are continuing to look at ways to reduce the volatility in the scheme to provide greater stability for long-term financial planning.

The increase in the pension deficit has moved the BBC Group into an overall net liability position. As there is an extended time scale for addressing the deficit, this is not regarded as a significant financial risk for the BBC or believed to jeopardise our ability to pay our obligations as they fall due. Current pension contribution levels are provided for within our latest financial plans, and the projected out-turn from the current review of pension funding can also be accommodated.

The BBC’s cash balance of £526million at the end of the year will be used to help fund a number of imminent financial pressures and, together with future efficiency savings, deliver our Strategic Initiatives. These include:

• „„the new obligations for World Service in 2014/15 of £245million;
• „„the continuing obligations for S4C, Local TV and Broadband, budgeted in aggregate at £230million in 2014/15; „„
• circa £103million of spending on our Strategic Initiatives including iPlayer+, myBBC, increased investment in the arts and our television drama portfolio; and
• „„the next annual pension deficit recovery payment (£100million).

Summary Consolidated Cashflow Statement
For the year ended 31 March 2014

The BBC is a committed and prudent tax payer in all the countries in which it operates. Its commercial operations undertake appropriate and legitimate tax planning measures in accordance with the spirit and intention of all laws and regulations.