This is taken from The Guardian:

Brown dashes BBC licence fee hopes
· Below-inflation rise triggers jobs warning
· Funding set below level Jowell said is necessary
by Tania Branigan and Owen Gibson
Friday December 22, 2006

The BBC's hope for a generous increase in the licence fee to fund investment in programmes and the digital switchover was dashed last night when it emerged that Gordon Brown had enforced a below-inflation rise.

The corporation had sought increases above inflation to pay for investment in programmes, the digital switchover and the relocation of key departments to the north-west. But the sums revealed last night are far below the level hoped for, and lower than deemed necessary by the culture secretary, Tessa Jowell.

The licence fee, currently £131.50, will increase by 3% annually in the three years from 2007/8, 2% in the following two years and between 0% and 2% in the final year of the deal, Channel 4 News reported. A year's viewing would cost around £150 by 2013-14. The BBC did get the six-year agreement it was hoping for, rather than an interim deal.

Inflation as measured by the retail price index is currently 3.9% and the BBC had insisted it needed inflation plus 1.8% to meet its responsibilities. In the last few years it has received above-inflation rises.

The deal appears to confirm the fears of many within the organisation that Michael Grade's startling defection to ITV last month would hamstring it at a critical phase of the fee negotiations.

The package has to be approved by the prime minister and cabinet before discussions with the BBC begin. The Treasury is thought to have given some ground, giving the corporation up to £1bn more over the life of the deal than initially proposed. But unions warned last night the settlement would result in job losses.

Critics had already begun to question the negotiating tactics of Mark Thompson, the director general. He initially demanded a rise of inflation plus 2.3%. Although he subsequently reduced the bid, given Ofcom's decision not to charge for use of the digital broadcasting spectrum, he warned that a below-inflation rise would halt the move to Salford and the switchover. But earlier this week Ms Jowell announced that the £400m relocation bill would be written into the licence fee, effectively guaranteeing it went ahead, and that £600m would be ringfenced to help the most vulnerable people switch to digital. That undercut the BBC's case.

The agreement is front-loaded to ensure the BBC can pay for the costs of the move and digital switch.

Don Foster, the Liberal Democrat culture, media and sport spokesman, added: "This will be disappointing for the BBC. Their bid was excessive, but if they are going to deliver the things required in the charter, they would require marginally over the rate of inflation. This appears to be well below and will put huge strains on it." He pointed out that the BBC is meeting much of its increased costs by cutting 6,300 jobs to save £355m a year.

A BBC spokesman said: "Discussions about the licence fee settlement are continuing and we await a decision."

This is taken from the Financial Times:

BBC suffers licence fee blow
By Jean Eaglesham, Chief Political Correspondent
Published: December 21 2006 21:37

The BBC faces a cut in its future funding in real terms under a six-year licence fee deal agreed between government ministers that marks a significant financial setback for the broadcaster.

The deal agreed between Gordon Brown, the chancellor, and Tessa Jowell, culture secretary, is understood to give the corporation an average 2.4 per cent a year increase over the five years to 2011/12, equivalent to 0.45 per cent below the projected rate of inflation – the retail price index – over that period.

The new agreement breaks the historic link between licence fee increases and inflation. Instead, according to government insiders, the BBC will get annual increases of 3 per cent in 2007/08 and 2008/09 and 2 per cent for the next three years.

This will be followed by a negotiable increase of between zero and 2 per cent in 2012/13, depending on the costs of completing the UK’s transition to digital television – a process, funded out of the licence fee, that is due to be finalised that year.

The BBC said on Thursday night that discussions about the licence fee were “still continuing. We await a decision and an announcement in the new year.”

This tough settlement represents a political victory for the chancellor.

Mr Brown has been adamant that it would send the wrong signal to the rest of the public sector, ahead of next year’s very tight spending round, if the broadcaster won a guaranteed, real increase in its income.

Ms Jowell, who lobbied for the BBC to get at least RPI, is understood to accept that the deal is the best that can be achieved, given that Mr Brown had wanted to impose an even harsher curb of RPI minus 1 per cent.

Her negotiating hand was weakened within the government by the sudden departure of the BBC’s chairman, Michael Grade, to ITV last month.

She has also had to contend with independent reports, commissioned by her department, suggesting the broadcaster could achieve double the level of operating efficiency cuts it proposed in its licence fee bid. The deal will now go to the cabinet for formal approval, before being presented to the BBC and announced publicly next month.

The prospect of a real-terms drop in future income will alarm the BBC, which is already facing significant tension with the unions over efficiency cuts. The settlement is far less than the corporation had demanded.

Mark Thompson, the BBC director-general, scaled back the corporation’s seven-year licence fee bid from RPI plus 2.3 per cent to RPI plus 1.8 per cent in the autumn. But he insisted publicly that a settlement below this revised level would jeopardise the UK’s switchover to digital television and undermine plans to relocate some operations to the north-west.

These threats appear to have backfired. Ministers will make digital switchover and the northern move conditions of the licence fee deal, forcing the BBC to make much greater cuts than planned in other areas of its operations. The broadcaster had wanted to make a final decision on the move to Salford after the financial settlement was agreed.

Ms Jowell believes the benefits of the move are an important quid pro quo for the guaranteed income provided by the licence fee.

This is the BBC's own version of what's happening, taken from the BBC News website:

Ministers agree TV licence deal

The culture secretary and chancellor have agreed a below-inflation rise for the TV licence fee, the BBC has learnt.

The agreement reached by Tessa Jowell and Gordon Brown has not yet been approved by Tony Blair.

Under the plan, the fee would rise by 3% next year and the year after, and 2% for the following three years. The Retail Price Index is currently 3.9%.

The decision would mean the licence fee rising to £135.45 next year from its current level of £131.50.

By 2012, the cost of a TV licence is set to be between £148.05 and £151.

The level of increase is unclear for year six, because of the uncertainty over the financial cost of the changeover from analogue to digital TV.

That is well below the amount that the BBC had wanted viewers to pay - which included inflation-busting increases taking the figure to as much as £180 over seven years.

The BBC said discussions continued and it awaited an announcement in the new year.

New stance

The agreement would mean the BBC had failed to convince ministers of its case for an above-inflation increase, which it has often enjoyed in the past.

The settlement would also bring the BBC more closely into line with other public sector bodies, as the licence fee will not be linked to inflation at all in future.

BBC media correspondent Torin Douglas said it asked for the above-inflation rise to help pay for better programmes and the switch to digital television.

He added that the increase was also intended to pay for the move of many staff and programmes to Salford in Greater Manchester.

     
BBC LICENCE FEE RISES
Now: £131.50
Year 1: £135.45, up 3%
Year 2: £139.51, up 3%
Year 3: £142.20, up 2%
Year 4: £145.15, up 2%
Year 5: £148.05, up 2%
Year 6 - £148.05-£151, 0-2% rise

Sources at the Department of Culture, Media and Sport said that the Treasury had originally hoped to secure a settlement of 1.5% below inflation.

They added that as a result of their negotiations, they had secured about £1bn in additional funds over the next six years for the broadcaster.

However, the new fee agreement is expected to lead to the BBC cutting back on many of its plans, though it is not clear which ones.

Ms Jowell told Parliament this week that £600m to help elderly people switch to digital television would be ring-fenced and that the BBC's Manchester move should be able to go ahead under the settlement.

'Big questions'

Conservative shadow culture spokesman Hugo Swire added that the deal was a "huge defeat" for Ms Jowell, adding she had led the BBC to believe it would get a generous settlement.

He added: "The big questions now are what comes off the menu agreed between the government and BBC during the charter renewal process, if the BBC can deliver on all they have been told to by the government, and was the original figure submitted by the BBC grossly inflated?"

But BBC business editor Robert Peston said the deal meant the licence fee would rise broadly in line with the headline rate of inflation - the Consumer Price Index, which excludes mortgage payments.

"In theory this is less than inflation, in the sense that Retail Price Index is 3.9% at the moment. And I am sure the Treasury will claim this as a tough settlement," he said.

"But on a running CPI basis, I think it can be seen as broadly in line with inflation - the Bank of England's CPI target rate is 2%."

News of the deal comes just weeks after Michael Grade quit as BBC chairman during key talks over the licence fee.