BBC Trust

Transactions between the BBC’s commercial services and licence fee-funded services are being conducted fairly, in line with rules preventing market distortion, and with fair prices being paid, an independent review commissioned by the BBC Trust has found.

An independent review of 'transfer pricing' transactions where the BBC’s commercial services buy rights to BBC programmes and content, or pay to use BBC premises or services, was commissioned by the Trust from Ernst & Young (EY)

The review looked at twelve case study deals, including arrangements between the BBC and BBC Studios & Post Production (now known as BBC Studioworks, as of May 2016) for the production of EastEnders and Holby City; BBC Worldwide’s acquisition of content rights for BBC programmes across a spread of genres including The Wrong Mans series 2, legal drama Undercover, and Special Forces: Ultimate Hell Week; and agreements for the provision of support services and for the use of the BBC brand.

The review found that in the majority of cases, transfer pricing processes and procedures were adequate and had been applied correctly. In all cases, fair prices have been paid for use of BBC content, brand, premises or services, there are a number of areas of good practice, and there are no breaches of State Aid law.  In particular, in all the cases involving BBC Worldwide – where the arrangements had the highest value - appropriate practices were followed  and fair transfer prices paid.

EY identified some specific areas for improvement, and the BBC Executive has put in place procedures to implement the recommendations.  Issues identified by EY included:

• A need for regular review points in open-ended contracts, including regular price benchmarking, to avoid the risk of the original contract departing from current market practice.  In their action plan, the BBC has committed to reviewing relevant agreements by the end of the current financial year.
• A need for improved record-keeping and documentation in some areas. The BBC has committed to create a central repository of fair trading advice, contractual agreements with the commercial subsidiaries
• Greater clarity over when a deal should be considered ‘significant’, with clear trigger points requiring referral to the BBC’s fair trading team.  The BBC has in response committed to provide a definition for the term ‘significant’ and to update internal procedure documents and training accordingly. The updated internal procedure will be published on the BBC website.
• There were some cases where, although no breaches of the guidelines were found, EY considered that arrangements departed from a strict interpretation of the BBC’s Fair Trading Guidelines and current market practice.  In their action plan, the BBC has committed to conduct a review of the relevant arrangements by March 2017, and to introduce more consistent charging principles for central functions.  
• EY also recommended that regular random testing of transactions should be conducted in future, to assess whether correct procedures have been followed.  The BBC has committed to extend existing sample testing and include more sample transactions testing.

The Trust has accepted EY’s findings and recommendations and believes that the implementation plan submitted by Executive, and published today, addresses satisfactorily all of EY’s recommendations, paving the way for a more accountable and transparent transfer pricing regime.

BBC Trustee Suzanna Taverne said:

"The industry and the public must have confidence that deals between the BBC’s commercial services and its licence fee-funded services are on a fair footing, and this independent report gives important assurance in that respect.  Clearly there were also a few cases that could have been handled better, and we welcome the clear plans the BBC has set out in response to today’s findings."

Based on its findings, EY also made some recommendations to ensure that robust transfer pricing arrangements are in place if the Trust approves the BBC’s plans to turn its in-house production arm BBC Studios into a commercial subsidiary.  These proposals are currently being formally assessed by the Trust, with a final decision likely at the end of 2016.  EY noted that:

• Robust transfer pricing arrangements should in particular focus on transparency and communication with industry stakeholders;
• The BBC should be required to demonstrate its reasoning behind individual transfer pricing decisions, such as why a specific value has been used in setting payments;
• Benchmarking analysis should be updated regularly, and a formal review process and should be built into long-term contracts.

Suzanna Taverne added:

"As part of our assessment of the BBC Studios proposals we are looking carefully at the transfer pricing arrangements, and today’s report provides helpful independent input into that process as we come to a decision on whether the plans would deliver what’s best for audiences without disadvantaging the rest of the market."

The full report from EY, together with the Trust’s response and the BBC’s implementation plan can be found below:

Notes to Editors

1. The Trust announced its intention to conduct a review of transfer pricing in February 2015, when the new commercial framework for the BBC was published, bringing the Trust’s oversight of the BBC’s commercial services into line with the way that the licence fee-funded services were overseen. During the public consultation as part of drafting the new commercial framework, concerns had been raised by some industry stakeholders about the BBC’s transfer pricing arrangements with its commercial subsidiaries. 
2. The Trust launched its regulatory assessment of the BBC’s proposal to turn its in-house production arm, BBC Studios, into a commercial venture, on 16 September.
3. BBC Studioworks, formerly known as BBC Studios & Post Production, is a commercial subsidiary of the BBC which provides studio and post-production facilities to broadcasters and independent production companies.  This is separate to the BBC’s in-house production arm BBC Studios, which the BBC has proposed turning into a commercial subsidiary.  The BBC Trust is currently conducting a regulatory assessment of this proposal.  EY’s report was completed before the BBC submitted their BBC Studios plans to the Trust for consideration.