ofcom: the effectiveness of converged regulation · 7. ofcom has announced a budget cut of 28% over...

HC 688 Published on 10 February 2011

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House of Commons

Committee of Public Accounts

Ofcom: the effectiveness of converged regulation

Twentieth Report of Session 2010-11

Report, together with formal minutes, oral and written evidence

Ordered by the House of Commons to be printed 1 February 2011

The Committee of Public Accounts

The Committee of Public Accounts is appointed by the House of Commons to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit” (Standing Order No 148).

Current membership

Rt Hon Margaret Hodge (Labour, Barking) (Chair) Mr Richard Bacon (Conservative, South Norfolk) Mr Stephen Barclay (Conservative, North East Cambridgeshire) Dr Stella Creasy (Labour/Cooperative, Walthamstow) Jackie Doyle-Price (Conservative, Thurrock) Justine Greening (Conservative, Putney) Matthew Hancock (Conservative, West Suffolk) Chris Heaton-Harris (Conservative, Daventry) Joseph Johnson (Conservative, Orpington) Rt Hon Mrs Anne McGuire (Labour, Stirling) Mr Austin Mitchell (Labour, Great Grimsby) Nick Smith (Labour, Blaenau Gwent) Ian Swales (Liberal Democrats, Redcar) James Wharton (Conservative, Stockton South) The following member was also a member of the committee during the parliament: Eric Joyce (Labour, Falkirk)

Powers

Powers of the Committee of Public Accounts are set out in House of Commons Standing Orders, principally in SO No 148. These are available on the Internet via www.parliament.uk.

Publication

The Reports and evidence of the Committee are published by The Stationery Office by Order of the House. All publications of the Committee (including press notices) are on the Internet at http://www.parliament.uk/pac. A list of Reports of the Committee in the present Session is at the back of this volume.

Committee staff

The current staff of the Committee is Philip Aylett (Clerk), Lori Verwaerde (Senior Committee Assistant), Ian Blair and Michelle Garratty (Committee Assistants) and Alex Paterson (Media Officer).

Contacts

All correspondence should be addressed to the Clerk, Committee of Public Accounts, House of Commons, 7 Millbank, London SW1P 3JA. The telephone number for general enquiries is 020 7219 5708; the Committee’s email address is [email protected].

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Contents

Report Page

Summary 3

Conclusions and recommendations 5

1 Ofcom’s management of its resources 7

2 Outcomes for citizens and consumers 10

Formal Minutes 12

Witnesses 13

List of printed written evidence 13

List of Reports from the Committee during the current Parliament 14

3

Summary

The Office of Communications (Ofcom) is the independent regulator and competition authority for the United Kingdom communications sector, which encompasses broadcasting, telecommunications and wireless communications. Ofcom was formed in 2003 from the merger of five previous regulators. Its operating expenditure in 2009-10 was £122 million, funded through broadcast licence fees and charges, and grant-in-aid from two government departments: the Department for Business, Innovation and Skills (£75.7 million in 2009-10); and the Department for Culture, Media and Sport (£0.6 million).

In most cases the communications market functions well and consumers enjoy the benefits of competition, such as choice and low prices for a range of products and services, and our report is presented in the overall context of that positive picture. However, there is scope for Ofcom to do more to tackle persistent problems such as the volume of silent calls, relatively low levels of switching between telecoms providers, and limited competition in fixed-line telephony.

Ofcom has successfully reduced its cost base, compared to its predecessors, despite having taken on a number of additional duties. A frequent justification for undertaking public sector mergers is to reduce costs through streamlining ‘back-office’ functions and property requirements. Ofcom has achieved cost reductions but, because it has classified some of the benefits of the merger as efficiency savings, it is questionable whether the scale of these is as much as would have been expected, once the merger-specific savings have been taken into account.

Ofcom manages its expenditure within an overall cap, which is agreed each year with the Treasury. In most organisations the intended work plan will determine the budget, but in Ofcom it is effectively the other way round. This has the potential to incentivise Ofcom to make decisions based on keeping within the cap – rather than maximising value. This means that value for money – optimising the available resources to achieve intended outcomes – is not always the primary focus.

Ofcom needs to do more to demonstrate its focus on value for money and to allow the taxpayers and companies that fund its activities to assess its performance. Ofcom sets out in its annual work plan the activities it plans to undertake, but it does not specify its intended outcomes, explain how its activities will achieve those outcomes, or set out how it will measure success. This makes it impossible to assess whether Ofcom is delivering value for money.

On the basis of a report from the Comptroller and Auditor General1 we took evidence from Ofcom on the management of its resources and the outcomes it delivers for citizens and consumers.

1 C&AG’s Report, Ofcom: the effectiveness of converged regulation, Session 2010-11, HC 490

5

Conclusions and recommendations

1. Value for money is the optimal use of resources to deliver the intended outcomes. Ofcom does not articulate the outcomes it expects to deliver, which means it is not possible to assess value for money. Ofcom publishes a lot of information about consumer outcomes, but acknowledges that it needs to do more to define the specific results its work is attempting to achieve. Ofcom should set out in its Annual Plan what outcomes it intends to deliver, expressed in a clearly defined and measurable way, and indicating in advance what success will look like. We welcome Ofcom’s commitment to us to undertake this work, and we look forward to seeing the results in its 2011-12 Annual Plan. Ofcom should then report regularly and publicly on its progress against these intended outcomes.

2. The expected financial benefits of merging five organisations into one were not defined at the outset, leading to confusion between expected savings and on-going efficiencies. In 2006 the National Audit Office estimated that the costs of creating Ofcom were in the region of £80 million but, because the expected financial benefits of the merger were not clearly defined at the outset, it is not possible to determine whether these costs have been recovered in full. This weakness is not uncommon in relation to public sector mergers, and this Committee commented on it in April 2010. The Government subsequently committed to “look closely at how it can ensure sufficient weight is given to value for money considerations and specific measurable benefits”: we would welcome a progress report from the Treasury.

3. Some of Ofcom’s claimed efficiency savings have been double-counted, as the same savings have been counted across a number of years. For example, Ofcom appears to intend to keep counting indefinitely the savings from the disposal of surplus properties. Ofcom should in future report its savings to Parliament and the public, on a basis which is in keeping with the principles set out by the Treasury, and as used by other public sector bodies.

4. The mechanism through which Ofcom’s overall expenditure is agreed with the Treasury does not necessarily incentivise value for money. Other public sector organisations bid for a budget to fund their work plans, creating more tangible incentives to be efficient. Ofcom operates within an annual funding cap, which then drives its work plan. This makes it much more difficult to judge whether the money allocated to Ofcom is too much or too little and whether a 28% budget cut will damage Ofcom. The Treasury and Ofcom should review the current approach to determine whether it is the most appropriate mechanism for controlling Ofcom’s overall expenditure, and report back to us by the end of 2011.

5. It is unacceptable that Ofcom held a large contingency fund in 2009-10, but could not adequately explain to us how it had been allocated. We noted with some surprise that Ofcom was able to find £14 million in 2009-10 to offset some of its pension fund deficit, and that £7 million came from unused contingencies. Ofcom has not satisfied us, despite submitting further evidence since the hearing, that it

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allocates contingency funds to specific areas of its business on the basis of risk assessment, rather than allocating excessive amounts to general contingencies. Ofcom should avoid excessive ‘general’ contingencies and, where appropriate, make specific and transparent provisions based on risk and the level of certainty that they will be required. In its response to us, we expect Ofcom to make clear the nature and value of the general and specific contingencies that it had in place at the start of 2009-10 and 2010-11.

6. Ofcom’s staff costs are relatively high. Its total wage bill is higher than those of its predecessors, allowing for inflation, although staff numbers have fallen by over 18%. As an organisation claiming to have a tight grip on costs, Ofcom should ensure that its approach to pay and related spending, such as travel and subsistence, is in line with current best practice in the public sector.

7. Ofcom has announced a budget cut of 28% over the next four years, and a reduction in staff numbers of 170. There is a high level of risk associated with such cuts. Ofcom should ensure that its cost reductions are based on a full understanding of the relative costs of alternative cuts and of the effect of these cuts on the effectiveness of Ofcom in serving consumers. We look to Ofcom to produce a robust plan for implementing the necessary changes in a way that minimises the detriment to consumer outcomes.

8. Outcomes for consumers in communications markets have been broadly positive. However, we are concerned that Ofcom needs to do more to tackle some issues, including silent calls, consumer switching, and competition in fixed-line telephony:

• The maximum fine that Ofcom may impose on organisations persistently making silent calls has recently been increased; Ofcom has also indicated to the industry that its enforcement regime will be much tougher from February 2011.

• We are concerned that it is too difficult for consumers to switch telecoms providers, Ofcom is currently undertaking a strategic review to look at the reasons for this.

• The level of competition in fixed-line telephony is relatively limited. This is understandable to a certain extent given, for example, the nature of the infrastructure, but we believe that consumers could be getting a better deal than they are.

In addition to these areas, three of the goods and services most complained about to the consumer helpline Consumer Direct are within Ofcom’s purview: mobile phone service agreements, telephone landlines and internet service providers. We would like Ofcom to write to us in June 2011 to update us on progress and developments in all six of these areas.

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1 Ofcom’s management of its resources 2. The National Audit Office defines value for money as the optimal use of resources to deliver the intended outcomes, so in order to assess value for money it needs to know what the intended outcomes are and the criteria for measuring them.2 In its Annual Plan Ofcom sets out what activities it expects will contribute to its desired high-level outcomes, but it does not describe how it will measure whether it has achieved these outcomes: it does not state what success will look like.3 Ofcom does publish a large volume of outcomes data, for example in its annual publication The Consumer Experience, but what is missing is a statement setting out at the beginning of the year where it wants to get to in terms of outcomes and a statement at the end of the year setting out whether it got there. Ofcom agreed that this is something it could do better, and we welcome its commitment to address this issue.4

3. In 2006, the National Audit Office calculated that the costs of the merger amounted to some £80 million, and we estimate that the savings represented by Ofcom’s year-on-year budget reductions are approximately £70 million.5 Some of the efficiency savings that Ofcom has claimed are, in our opinion, direct benefits of the merger, for example savings from the disposal of surplus properties. Moreover, Ofcom has double-counted some savings by counting them across a number of years. The disposal of surplus properties again serves as an example: Ofcom has counted the rent and business rates savings every year from 2004 and could not tell us when it intended to stop counting.6

4. Ofcom does not agree with our analysis of these issues, and as the expected benefits of the merger were not clearly set out in the original Regulatory Impact Assessment, it is difficult to reconcile these different opinions and disentangle merger savings from genuine efficiency savings. However, it is appropriate for us to judge Ofcom, a public body, under the criteria set by the Treasury, which specify that savings can only be counted once.7 The shortcomings of the Regulatory Impact Assessment are not unique: we commented on the situation in April 2010, following the Comptroller and Auditor General’s report on Reorganising central government.8 In its response to our comments, the Treasury said: “the Government acknowledges that more could be done to ensure there are strong business cases in place for any Machinery of Government changes. Building on the issues already considered when making a Machinery of Government change, as set out in the Machinery of Government changes: best practice handbook, the Government will look closely at how it

2 C&AG’s Report, para 13

3 Q 100; C&AG’s Report, para 2.7

4 Q 101

5 Qq 8, 10; C&AG’s Report, The creation of Ofcom: wider lessons for public sector mergers of regulatory agencies, Session 2005-06, HC 1175, July 2006, paras 1.8–1.10

6 Qq 14–31

7 Qq 13–15, 32; C&AG’s Report, The creation of Ofcom: wider lessons for public sector mergers of regulatory agencies, Session 2005-06, HC 1175, July 2006, para 1.7

8 Committee of Public Accounts, Thirty-third Report of Session 2009-10, Nine reports from the Comptroller and Auditor General published from July 2009 to March 2010, HC 520, April 2010; C&AG’s Report, Reorganising central government, Session 2009-10, HC 452, March 2010

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can ensure sufficient weight is given to value for money considerations and specific measurable benefits.”9

5. The resources that Ofcom has available to spend are subject to a financial cap, set annually by the Treasury.10 Ofcom is free to manage its resources within that overall cap, so the cap effectively drives its work plan. This differs from other public sector organisations, which more commonly agree their work plans and then bid for budgets to fund them. Ofcom has announced a 28% real-terms budget reduction over the next four years, and told us that this cut will be achieved in three ways: by stopping or substantially reducing some activities; by bearing down on overheads or supply costs; and by completely changing what it does, and how it does it, in some aspects of its business. It implied that the third of these will be the most significant.11 We are concerned that the main impetus for Ofcom’s fundamental review of how it could make efficiency savings appears to be the imposition of a significant budget cut, rather than a pre-existing and inherent focus on value for money.12

6. Ofcom inherited two defined-benefit pension schemes from its predecessors, which between them have a funding deficit of some £27 million. During 2009-10, Ofcom found £14 million – more than 10% of its annual budget – which it used to offset some of this deficit. Half of this £14 million came from unused contingency funds.13 Written evidence provided subsequently by Ofcom did not shed any light on where the £7 million unused contingencies had come from; indeed, it only discussed a total provision of £3.5 million in the 2009-10 budget.14 Whilst Ofcom places emphasis on managing risk, there is no detail about contingencies in its published accounts, and it was unable to tell us the total value of its general contingencies, compared to its specific provisions against expected costs.15

7. In 2009-10, Ofcom employed an average of 865 staff, compared to 1,062 in 2002-03 – a reduction of 18.5%. Despite this, over the same period, total staff costs have risen by 34% to £62.3 million, albeit before being adjusted for inflation.16 Figure 1 shows that average staff costs per person have increased by about 38% over and above inflation to almost £72,000 in 2009-10. Other costs – such as professional fees, temporary staff and outsourced services – have also risen.17 The amount spent on staff travel and subsistence has not increased, but, at over £1,600 per employee in 2009-10, appears to be relatively high.18 Average redundancy costs over the last four years have ranged from £66,000 per head to £154,000 per head, which could have significant implications in view of the forthcoming loss of 170 jobs.19

9 HM Treasury, Treasury Minute on the thirty third report from the Committee of Public Accounts, Session 2009-10,

Cm 7886, July 2010

10 C&AG’s Report, para 1.9

11 Q 55

12 Qq 68, 72–75

13 Qq 58, 60–62; C&AG’s Report, paras 1.20–1.21

14 Ev 41

15 Qq 67, 79–84; Ofcom Annual Report and Accounts 2009-10; C&AG’s Report, Figure 4

16 Qq 33–34, C&AG’s Report, para 1.17

17 Qq 35–38; C&AG’s Report, Figure 4

18 Qq 45–54 ; C&AG’s Report, Figure 4, para 1.17

19 Qq 110–111

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Figure 1: Average staff costs, 2002-03 to 2009-10

Note: Staff costs include salaries and benefits; National Insurance costs; pension costs; and restructuring costs.

Source: We have used ‘total staff costs’ and ‘average number of employees’ from the Notes to the Accounts, published in the Annual Reports and Accounts, of Ofcom and the legacy regulators. For the inflation calculation, we have used GDP deflators from HM Treasury

8. Ofcom told us that it had made a conscious decision to have fewer staff than its predecessors but to pay them more, in order to deliver a better-quality organisation. It said that one of the key drivers of the increased staff costs is that Ofcom, unlike the legacy regulators, has concurrent competition enforcement powers under the Competition Act 1998, and that it therefore has to pay for economists and lawyers who are able to exercise these powers.20 We are not convinced by this argument, however, as Oftel did in fact have powers under the Competition Act.21

20 Qq 34, 38

21 Competition Act 1998, Schedule 10; C&AG’s Report, The Office of Telecommunications: helping consumers benefit from competition in the telecommunications market, Session 2002-03, HC 768, July 2003, paras 2.11–2.12

£40,000

£45,000

£50,000

£55,000

£60,000

£65,000

£70,000

£75,000

£80,000

2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10

Staf

f co

st p

er m

embe

r of

sta

ff

Actual staff cost per member of staff 2002-03 staff cost per member of staff, adjusted for inflation

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2 Outcomes for citizens and consumers 9. There are many positive outcomes in the communications market: customer satisfaction levels are generally high; good-quality products and services are widely available; and prices for many goods and services are falling. However, there are a number of areas where we believe Ofcom has not done enough to satisfy the interests of citizens and consumers.22

10. Silent calls occur when calling centre equipment connects a call to a consumer but there is no calling centre operator available to take over the call. Complaints to Ofcom about these have risen since 2006, and there will also be many unreported cases. Ofcom believes that the true volume of silent calls has actually fallen over the last two years, and that it is publicity which has caused the number of complaints to rise, but it does accept that the volume of these calls is still too high. The maximum fine that it may impose in such cases has recently been increased to £2 million, which Ofcom believes will be a much more effective deterrent than the previous limit of £50,000. Along with the higher fines, Ofcom has warned offending companies that its regime will be tougher from February 2011. However, because of the publicity surrounding the increased fines, it expects that complaints may continue to rise in the early part of 2011.23

11. Switching rates in the communications market are relatively low compared to, for example, the energy and car insurance sectors.24 Some consumers find it extraordinarily difficult and slow to switch services such as broadband or mobile phone providers. They often face a lot of confusing information which makes it very difficult to compare different providers or to interpret what might be gained or lost by switching. Ofcom agrees that the switching process should be more convenient for consumers and is currently undertaking a strategic review in this area.25

12. The average price of fixed-line telephone services has fallen only marginally since 2004, in contrast to a much steeper fall in the costs of mobile services. This seems to be a reflection of fixed-line services having originally been a state monopoly, BT still having the lion’s share of the market, and it being hard to drive down costs of the physical infrastructure. Ofcom’s research shows that, amongst the countries it uses as comparators, prices for UK consumers are lower than most, and BT has a lower market share than most other incumbent providers. By contrast, there is a much more competitive mobile market and there have been significant technological advances, allowing mobile customers to get a better deal.26

13. Data from the consumer helpline Consumer Direct shows that three of the goods and services generating the most complaints in 2009 are ones for which Ofcom has some responsibility. These are mobile phone service agreements (third highest); landline

22 Qq 1, 112; C&AG’s Report, para 10

23 Qq 112, 128–129 ; C&AG’s Report, para 2.19

24 C&AG’s Report, para 2.21

25 Qq 112, 116–117

26 Qq 124–127

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telephone services (tenth); and internet service providers (eleventh). Ofcom agreed that the level of complaints is disappointing.27

27 Qq 122–123; C&AG’s Report, para 2.20, Figure 11

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Formal Minutes

Tuesday 1 February 2011

Members present:

Rt Hon Margaret Hodge, in the Chair

Mr Richard Bacon Mr Stephen Barclay Dr Stella Creasy Matthew Hancock Chris Heaton-Harris

Rt Hon Anne McGuireAustin Mitchell Nick Smith Ian Swales James Wharton

Draft Report (Ofcom: the effectiveness of converged regulation) proposed by the Chair, brought up and read.

Ordered, That the draft Report be read a second time, paragraph by paragraph.

Paragraphs 1 to 12 read and agreed to.

Conclusions and recommendations 1 to 8 read and agreed to.

Resolved, That the Report be the Twentieth Report of the Committee to the House.

Ordered, That the Chair make the Report to the House.

Ordered, That embargoed copies of the Report be made available, in accordance with the provisions of Standing Order No. 134.

Written evidence was ordered to be reported to the House for printing with the Report.

[Adjourned till Wednesday 2 February at 2.30 pm

13

Witnesses

Tuesday 14 December 2011 Page

Ed Richards, Chief Executive, Ofcom Ev 1

List of printed written evidence

1 Ofcom Ev 20: Ev 41: Ev 41

14

List of Reports from the Committee during the current Parliament

The reference number of the Government’s response to each Report is printed in brackets after the HC printing number.

Session 2010–11

First Report Support to incapacity benefits claimants through Pathways to Work

HC 404

Second Report

Delivering Mulit-Role Tanker Aircraft Capability

HC 425

Third Report

Tackling inequalities in life expectancy in areas with the worst health and deprivation

HC 470

Fourth Report

Progress with VFM savings and lessons for cost reduction programmes

HC 440

Fifth Report

Increasing Passenger Rail Capacity

HC 471

Sixth Report

Cafcass's response to increased demand for its services

HC 439

Seventh Report Funding the development of renewable energy technologies

HC 538

Eighth Report

Customer First Programme: Delivery of Student Finance

HC 424

Ninth Report

Financing PFI projects in the credit crisis and the Treasury’s response

HC 553

Tenth Report

Managing the defence budget and estate

HC 503

Eleventh Report

Community Care Grant

HC 573

Twelfth Report

Central government’s use of consultants and interims

HC 610

Thirteenth Report

Department for International Development’s bilateral support to primary education

HC 594

Fourteenth Report

PFI in Housing and Hospitals

HC 631

Fifteenth Report Educating the next generation of scientists HC 632 Sixteenth Report

Ministry of Justice Financial Management

HC 574

Seventeenth Report

The Academies Programme

HC 552

Eighteenth Report

HM Revenue and Customs’ 2009-10 Accounts

HC 502

Nineteenth Report

M25 Private Finance Contract

HC 651

Twentieth Report

Ofcom: the effectiveness of converged regulation

HC 688

Committee of Public Accounts: Evidence Ev 1

Oral evidenceTaken before the Committee of Public Accounts

on Tuesday 14 December 2010

Members present:

Rt Hon Margaret Hodge (Chair)

Mr Richard BaconStephen BarclayDr Stella Creasy

________________

Amyas Morse, Comptroller and Auditor General, and Alex Scharaschkin, Drector, gave evidence. GabrielleCohen, Assistant Auditor General, and Marius Gallaher, Alternate Treasury Officer of Accounts, were inattendance.

Examination of Witness

Witness: Mr Ed Richards, Chief Executive, Ofcom, gave evidence.

Q1 Chair: Welcome to the Committee, Ed, and thankyou for coming. Looking at this Report, on the wholeit supports the assertion that Ofcom is doing a goodjob as regulator on behalf of the taxpayer. I think whatwe want to tease out of you this morning is where wecould get an improvement in performance. So we putthat against the background that, on the whole,Ofcom’s performance has been supported and foundto be good by the NAO. I’m going to ask you the firstquestion, which I think perhaps reflects the criticismin the NAO about your performance managementapproach, in that you don’t really relate your inputs towhat you’d seek to achieve so people can’t quite tellhow the money you spend gets the outcomes andoutputs you want.I’m going to take the example of the money onspectrum, because if you read the Report, the incomefrom the management of spectrum is £200 million ayear. I know we also get the spectrum auctions, whichbring in a lot of money to the taxpayer. But yourexpenditure is £75 million, and that just looks jollyhigh. As you look through the Report, you think,“How do you justify it?” How do we know that youneed to spend £75 million—that the £75 millionbrings value for money to the taxpayer? Or is it simplythat that’s the money that’s given to you by Treasury,so you live within the cap?Ed Richards: No, we don’t just live within the cap atall. In fact, we have tried to drive those numbers downevery single year and I think I’m right to say that theyhave gone down every single year.Chair: You’re going to have to speak up a little bitbecause the acoustics in this room are pretty poor.Ed Richards: We do try and drive it down everysingle year and we try and take a multi-year horizonof that. I think you have to disaggregate what we dowith spectrum and ask whether we have the rightinformation, whether we have the right approach tothe strategic analysis of that cost information andwhether we are trying to ensure that we get best valuefor money. There are essentially four things that wedo. The first is we license spectrum to people—everyone from yacht users, amateur maritime users,through to people like Vodafone. We then manage

Austin MitchellIan SwalesJames Wharton

interference across the country, so if somebody’smobile phone system is being interfered with, or eventelevisions are interfered with, we send people out tofix those if necessary. We then have a programme ofclearing spectrum, which is then linked to aprogramme of releasing spectrum—the auctions thatyou talked about.Looking at each of those, the first two are essentiallyprogrammatic pieces of work. Over the years, wehave, I think, concentrated very hard on reducing theamount of spend in those areas, and we’ve beensuccessful in doing that. So, there are far fewer peopledoing interference management now across thecountry than there were, and they do it much moreeffectively, and we have very good information tounderstand whether they’re doing that well or badly.In terms of licensing, again, we are on a journey toautomate licensing and I think when we’ve fullyautomated it those costs will go down again, but oncemore we have very clear KPIs in those areas. Weknow what we’re trying to do: we’re trying to licensepeople as effectively as possible, and we test thatthrough our budgeting process every year.I think the clearance and the auctions are really verydifferent. They are major projects that are designed toensure that we can release spectrum for economic use,whether it be in public services or, more typicallynow, for commercial purposes. There’s been a bit ofuncertainty in relation to clearance because we’vebeen investigating what clearance needed to be done,and that is not a simple task. When we plan to use the2.6GHz and the 800MHz, which is what will be usedfor mobile broadband in the future—the iPad and allthose sorts of things—we have to clear the existingusers from the spectrum in order to be able to releaseit. That has involved a huge amount of work with BISand the Treasury to understand what those costs are,but that is work that is being carried out literally aswe speak. For example, we need to move the variousmilitary radars and change those radars, and we haveto fund a change-out programme for those, so theycan use—

Q2 Chair: Does that come out of the £75 million?

Ev 2 Committee of Public Accounts: Evidence

14 December 2010 Ofcom

Ed Richards: No, that would come out of a differentpot, which is spectrum clearance funding, but that’swhere the most uncertainty in terms of costs lies.

Q3 Chair: I can understand those are the tasks youdo, but what I find difficult to get a handle on, as Iread the Report, is where there is a justification that£75 million is what is needed to carry out those tasks.That, I think, leads into the criticism that I know youwere a bit sensitive about, which is that there isn’treally a link in the way you manage your financesbetween inputs, outputs and outcomes. It’s all goodwork, all necessary work, but when I read the ReportI was struck by the thought that £200 million incomein and £75 million expenditure out, set aside thespectrum auctions, just seems to amount to jolly highmanagement costs.Ed Richards: Okay, well, I don’t agree with thatelement of the Report and I think that you have to askyourself what would support the supposition that thatis too high.

Q4 Chair: Nobody is saying it’s too high.Ed Richards: Or why do we not understand that itcould be lower? Let’s think about what you wouldwant to do. You would firstly want to understand whatyour costs are. Do we understand what our costs arein this area? Unequivocally so. You’d then want tomake sure that you had a good analysis of those costsand that you understood what different factorsdetermined whether they went up or could go down.We absolutely do that. You’d then want to understandwhether or not the organisation was effective and,typically annually or more often, interrogated thosecosts and made sure they were as low as possible. Weabsolutely do that; we do that every year through ourbudgeting process and those costs are crawled all overin order to make sure they are as low as possible.The final thing you’d want to do is make sure thatmechanisms like competitive tendering, goodprocurement practices and so on were in place toensure, once again, that those costs were as low aspossible. We absolutely do all of those things. So Iwould say that we do all those things—we have allthat information—and they are well understood, andthat that process of interrogation to ensure that theyare as low as possible happens every year and, indeed,has a cross-check through our internal review process,both through the board and, indeed, through the auditcommittee. So, I’m unclear as to what else it is thatwe should be doing, in order to drive those costsdown, that we’re not actually doing already.

Q5 Mr Bacon: What is your definition of value formoney?Ed Richards: I think the definition of value for moneyin this context and in any context is that, for a givenobjective, you deliver that objective for the leastpossible resource. So, in other words, you spend aslittle as possible to deliver the desired objective.

Q6 Mr Bacon: You make it sound as though valuefor money is about reducing costs.Ed Richards: No, it’s not so. It’s about spending aslittle as possible to deliver the desired objective. If the

desired objective changes or is greater, then clearly itmay cost more. Clearance is a very good example ofexactly where that has happened. So, the desiredobjective is to release the spectrum, which willgenerate many billions of pounds of value for theeconomy. As a consequence of that, we are actuallygoing to have to spend about £200 million-plus, morethan we would otherwise have done, but that is wellworth spending because the value for money createdis some billions as a result of the released spectrum.So, I think value for money is a much more subtlequestion than just lower cost.

Q7 Stephen Barclay: Just building on that issue ofreducing costs, looking at the figures, my take on thesituation was that Ofcom, in terms of its totalspending, now spends around £70 million, over theperiod it’s been in formation, less than the precursorbodies would have spent. Is that your analysis?Ed Richards: Yes, we think we are about 27%cheaper than the legacy regulators from whom wetook over, on a like-for-like basis.

Q8 Stephen Barclay: Sure, that’s the analysis atparagraph 1.27. I broke it down: in 2004–05, it was£9 million; in 2005–06, £6 million; in 2006–07,£8 million; in 2007–08, £7 million; 2008–09,£17 million; 2009–10, £23 million—if one’scomparing what the precursor five bodies would havespent with what you’re spending. So, would yourecognise that £70 million figure?Ed Richards: Yes, that is one approach to calculatingefficiencies, and that is a perfectly reasonableapproach.

Q9 Stephen Barclay: We’ll get on to efficiencies andwhether they’re being double counted. What I’mlooking at is just total spend. So you’d agree totalspend wise, that the gap is £70 million during thelifetime of Ofcom?Ed Richards: That we have reduced it compared towhat it would have been?Stephen Barclay: Yes.Ed Richards: Yes.

Q10 Stephen Barclay: The merger cost £80 million,so your total spending is still £10 million short ofwhat it cost for the merger.Ed Richards: This is back exactly to the point I wasmaking: it depends how you calculate these things.We have reduced the base against which one shouldbe comparing it and that is one of the reasons that wecalculate, unlike the NAO, cumulative cost, becauseevery single year that goes by that you’re notincurring those costs, you can—

Q11 Stephen Barclay: Sure, but what I’m saying isdo you accept that since Ofcom was formed thereduction in total spending by Ofcom is less than thecost of the merger in the first place?Ed Richards: No, I don’t accept that.

Q12 Stephen Barclay: Well, the cost of the mergerwas £80 million.



Ed Richards: I don’t accept that, because you have tocompare that cost with the cumulative cost that wouldotherwise have been incurred had the merger not takenplace. That seems to me the right way to calculatethat against that particular investment, because whatyou’re doing when you make an assessment of amerger of that case is saying, “What is the one-offcost of the merger?” which is £80 million. You thenneed to compare that against the cash flow savings inthe future cumulatively and then discount it back tothe present day and then compare the two. If you dothat—and it’s illustrated by the fact that we’re 25%cheaper on a like-for-like basis—and add that up overmultiple years—you could take five years, 10 years or20 years—you are bound to have a net present valuethat is substantially positive.

Q13 Stephen Barclay: I just don’t follow yourargument. Perhaps other members of the Committeewill. What I’m driving at is this. The cost of themerger was £80 million. I am not even allowing forthe fact that, actually, the shortfall is probably morethan £10 million because the predecessororganisations would have been expected to haveefficiency savings themselves, so in that baselinefigure we’re assuming no actual efficiency savings bythose predecessor organisations. You accepted that thetotal spending since Ofcom was formed is £70 millionless than that unadjusted figure from the precursororganisations, yet the actual cost of setting you upwas £80 million.Ed Richards: No, I don’t accept that analysis, andthere are two points I’d make. The first is that yourassumption that there would have been efficiencysavings originally is right, but it’s also true that whenwe took over, the legacy regulators had alreadydiminished their spend very substantially inanticipation of the merger, and the true running costsof the organisations were, I think, very substantiallyhigher than that. So, the task was much more difficultthan it appeared according to that data because they’dessentially shut up shop in some respects and,therefore, the running costs were lower. The secondreason I don’t accept it is that you have to calculate iton a cumulative basis because each of those savingsis a step down from the previous year’s savings. Ifyou take the 25% on a like-for-like basis and you say,“Today we are 25% less expensive on a like-for-likebasis,” then you merely say, “Well, that is 25%,roughly speaking, every year since the merger,” givenour budget is now £143 million, you can immediatelysee that that number is going to be in excess of£80 million.Chair: To be fair, Ed, nobody does that acrossgovernment. I can’t remember the CSR rules, but therules are you can only count a saving once during thatCSR period. It has to be a real cash saving. We don’tlook at it that way—nowhere in government does—and I’m afraid I don’t think you should either.

Q14 Stephen Barclay: With respect, there are twoflaws in your argument. First of all, as Figure 7 setsout, there is the flaw that you’re actually doublecounting your savings and that’s why there’s the gapbetween the savings that Ofcom are putting forward

and the savings that the NAO are putting forward. Myreading of what’s happening is that when you get ridof a member of staff in, say, 2004, instead of countingthat as a saving just in 2004, you’re continuing tocount that as a saving in subsequent years. That’s thefirst issue. Secondly what you’re doing is you’redressing up the benefits of the merger—the savingswe should have expected as part of the merger—asefficiency savings. So, if we look at Figure 7, the keysavings you have made are from the disposal ofsurplus properties—with five bodies going into one,you would expect that—and the reorganisation andsub-letting of London headquarters.So, we have an organisation that spent £80 million onthe merger, on being set up; the actual reduction intotal spend is £70 million; and a fair chunk of that£70 million is being made up of the benefits of themerger, such as getting rid of properties, rather thanwhat I would call traditional efficiency savings—andwe’ll come on to some of the issues as to whereOfcom is spending money and where it’s inefficient.You’re dressing up merger benefits as efficiencysavings and then you’re double-counting them overthe years compared to the methodology set out bythe NAO.Ed Richards: Well, I just don’t agree with that. I thinkthe NAO has one approach to calculating savings; wehave a different one.

Q15 Chair: I don’t think you can.Ed Richards: One is one way and the other gives youdifferent answers. On the CSR savings, if you take athree-year horizon and you say, ‘What is the cost ofmerger?’ and all savings need to be identified withinthat three-year period, then clearly the numbers aregoing to be much, much tighter. I can’t recall theprecise costs of the merger—

Q16 Stephen Barclay: But you’re counting£19 million of efficiency savings from the disposalof properties.Ed Richards: What we’re doing is taking theoperating costs of the organisation as we inherited itand we’re comparing the operating costs of theorganisation post the merger—

Q17 Mr Bacon: Can I just clarify on this £19 millionthat Mr Barclay mentioned, where it says, “Disposalof surplus properties,” “Ofcom methodology,£19,039,000.” That estimate of efficiency savings isbased on rent that would otherwise have been paid bythose predecessor bodies that is no longer being paid.Is that right?Ed Richards: Essentially, what we did—it’s importantto understand the relationship—was to say, “What arethe tasks in front of us? How can we do them at alower cost?” And one of the ways we did it at lowercost was to reduce the headcount. Reducing theheadcount enabled us to liberate property; we wereable to dispose of that and reduce the ongoing cost.That does seem to me to be to be a reasonablesource for—



Q18 Stephen Barclay: Sorry, can I just come inthere? You just said one of the ways we reduced costwas to reduce headcount.Ed Richards: Yes.

Q19 Stephen Barclay: But your overall staff bill hasgone up even though your headcount has come down.Ed Richards: The overall staff cost has gone up overthe entire period—that’s right.

Q20 Stephen Barclay: But by more than inflation.Ed Richards: I think we inherited about 1,150 on thestaff rolls.

Q21 Mr Bacon: Can I just keep going with the rentfor a second?Ed Richards: That was reduced.Chair: Let’s have that from Mr Bacon.

Q22 Mr Bacon: Yes. Logically, we should come onto the staff if indeed one of the reasons you were ableget rid of the buildings was that you were able toreduce staff. But let’s just stick with the building fora second. So, you were saying you were able to reducethe staff and thus you were able to free up a buildingyou no longer needed from the predecessor bodies. Sothe lease came to an end and you didn’t renew it, oryou broke the lease, paid the penalty and got out, iswhat you’re saying?Ed Richards: I can’t recall the precise detail becausethis was 2004, which is quite a long time ago, butessentially, it would have been mechanisms of thatkind.

Q23 Mr Bacon: Right. Was it just one building?Ed Richards: In all cases actually, it would have beena mechanism of that kind because we movedeverybody to a new building, so it would’ve been therelease of existing leases or negotiated closure. So,that’s right.

Q24 Mr Bacon: I’m just trying to get at what this£19 million is comprised of.Ed Richards: I think that’s exactly the kind of thingit’s comprised of.Mr Bacon: Rent—rent that didn’t get paid?Ed Richards: Yes.

Q25 Mr Bacon: For how many buildings?Ed Richards: Well, there were a number all over thecountry. There were multiple buildings in London;there were buildings in a variety of towns and citiesacross England. I think there were also offices inScotland, Wales and Northern Ireland, but we haveretained offices in Scotland, Wales and NorthernIreland. Essentially, the change has been in England,particularly in London, but in other parts of Englandas well. So there were properties that the legacyregulators had leases on that were let go.

Q26 Mr Bacon: You said this happened in 2004. In2005, 2006, 2007, 2008, 2009 and 2010, there weretherefore rent and business rates savings on thoseproperties.Ed Richards: Yes.

Q27 Mr Bacon: And that’s what that £19 millionbasically comprises.Ed Richards: I believe so, yes.

Q28 Mr Bacon: How far do you think it isreasonable to carry that number forward—or do youcarry it forward infinitely? On this basis, mygoodness, if in six years you can save £19 million,then logically in 60 years you’ll be saving£190 million.Ed Richards: I don’t think—Mr Bacon: But why wouldn’t you do that? Logically,if that’s your methodology, you’d keep it going.Ed Richards: I don’t agree that you should keep itgoing for ever.

Q29 Mr Bacon: Why not?Ed Richards: Because the question—Mr Bacon: Why not? On your methodology, you’recounting it forward. What is the criterion by whichyou choose to stop?Ed Richards: Because the question that was put to mewas in relation to the £80 million investment.

Q30 Mr Bacon: No, no, no. I’m sorry, but myquestion is this: if you are rolling it forward, whichyou are, what is the criterion by which you stop?Ed Richards: Well, we calculate these things againstthe original investment. If you’re calculating thequestion of the return against the investment, it seemsto me if you were doing a cash-flow analysis of thatkind, you would take it forward a number of years—

Q31 Mr Bacon: How many?Ed Richards: Well, it’s typically 10 years.Mr Bacon: 10 years.

Q32 Chair: Okay. I’m going to stop this because Ithink, to be honest, there’s a disagreement here andall I can say to you, Ed, is you will be judged by uson the criteria set by Treasury. So, in a sense,whatever the economic argument about how long youassess it for, I think your organisation has to acceptthat as a government organisation that is then held toaccount by us, we have to stick by Treasury rules,which are that the savings have to be within the CSRperiod—go on, just remind me.Alex Scharaschkin: Each saving has to be new withinthe period, so you can claim the saving once.Chair: Once.Amyas Morse: May I add something? I just want totalk about the methodology that Ed’s been discussing.I do think that when you made the business case forthe merger, it would have been entirely reasonable tohave taken the net present value of the savings thatyou expected and discounted them back, because atthat point when you put the business case together,you would have said, “Look, by making this mergerwe expect to achieve x.” You’re making a point-in-time decision and you’re able to compare the cost ofdoing the merger with the benefits of future reducedexpenditure. This should allow you to make a gooddecision. Then subsequently, you should be able tolook at that business case and compare it with whatthe actual running costs are and say, “Is that right or



not?” That would be a reasonable thing to do. Itdoesn’t mean you go on asserting these are realsavings, but you do say, “Did you deliver the benefitsintended in the business case?” I just fear that in themiddle of the discussion, we may lose sight of that. Ithink that’s not an unreasonable thing to do as part ofassessing whether you’ve delivered the business casefor merger.Ed Richards: I entirely agree with that and that iswhy I was making the connection to the £80 millioncost because I think when you look at—Chair: But the accounting—Ed Richards: I understand that and I’m verycomfortable with that, Chairman. I do see your pointabout the CSR and how it’s calculated today, and Iaccept that completely, but when calculating againstthe £80 million, one has to see it on a value overmultiple years.

Q33 Chair: I think the discussion on spectrum andthe cost of that all comes to the heart of the issue ofhow we can better understand your costs in relationto what you’re trying to achieve and the outputsyou’re getting for what you spend. I really think thereis an issue. But let me come to staffing, which I thinka number of us want to talk you about. Have a lookat Figure 4 on page 12. Your numbers went down;they’ve gone up a bit. I assume these are in real terms.Is Figure 4 in real terms or cash terms?Alex Scharaschkin: This is in cash.Chair: It’s in cash.Alex Scharaschkin: That doesn’t include pensioncontributions; it’s not fully apportioned, but it’s cash.

Q34 Chair: It’s cash, so the point is not actually asstrong, but staff costs, professional services,temporary staff and contractors and outsourcedservices are all really quite considerably up. There’s aquestion there again as to how you would set aboutjustifying that. If I just took your staff costs, the crudetop figure there, the average cost for a member ofstaff is about £72,000, which seems jolly high for anorganisation and, again, it is very difficult for us toassess, on a value-for-money basis, that that isjustifiable.Ed Richards: There are a number of points to makeabout that, if I may. The first is that these are cashnumbers, so they don’t look very dramatic to me. Thesecond is that we made a conscious decision when wecreated the organisation, which has not changed,which is that we were going to pay fewer people morein order to be better, as a clear calculation aboutdelivering a better-quality organisation and betteroverall value for money. I am of the view that wehave done that. The reason why in this area you haveto pay people reasonably well is that you’re askingthem to go head to head against some of the mosthighly paid people in the entire economy. They aretaking on City lawyers working on behalf of massiveglobal companies that have huge resource to throw atthis, professional consultancy and professionaleconomist firms, the Big Four and so on and so forth.We end up having to make and justify decisions thatare appealed multiply in the Court of Appeal and thenbeyond that. So we have to have a quality of people

who can actually stand toe to toe with those kindsof individuals.Despite that, we benchmark our salary informationvery carefully every year and in the key areas we areway below the actual market rate. So, when I hiresomeone from one of the City law firms, which Ioccasionally do, the pitch I make to them is very clear.I say, “We cannot pay you anything like what youwould earn in the City law firm that you are currentlyin. However, we will do our best to be as competitiveas we can and you’ll get a different mix of things.You’ll be doing really interesting work that reallymatters for the people of this country.” But you shouldbe under no illusion: when we make that propositionto people, the proposition is that they are going to begetting paid substantially less than they couldotherwise earn.Of the people at the top of Ofcom, I think five or sixout of the top eight all came from the private sectorwith those kinds of backgrounds. That is the pitch wemake to people, not just there, but in other parts of theorganisation. So, this was a deliberate and consciousattempt to make sure that we had the quality of peopleto be able to do the job well. I think, as the Reportindicates, and as our own work indicates, theoutcomes that the organisation has delivered in termsof price reduction, range, competition and things ofthat nature suggests that that wasn’t too bad adecision, because the outcomes are reasonably good.

Q35 Stephen Barclay: Can I just clarify? Staff costsare now higher than if the merger had not happened.Ed Richards: I’ll have to come back to you anddouble check on that.

Q36 Stephen Barclay: Okay, well, perhaps then Ican take you through my quick look last night at thenumbers. In 2002, there were over 1,000 staff—1,062—at a cost of £46.5 million. In 2009–10, as youwould expect from a merger, staff numbers had comedown—to 865 at a cost of £62.3 million. So, if wetake the first figure—the 2002 figure of£46.5 million—and adjust it for inflation, staff coststoday would be £56.39 million, but you’re spendingover £62 million. So, even though you have far fewerstaff, your actual wage bill, if we were comparingyour organisation against the precursor organisationshad they stayed in place, is higher.Ed Richards: But you’re not comparing like for like.

Q37 Stephen Barclay: I’m comparing the total wagebill. You can argue as to whether the people you’vehired are more skilled than those in the previousorganisations—that’s a separate argument. I’m sayingyour total wage bill is higher than if the merger hadnot taken place.Ed Richards: But you really aren’t comparing like forlike—not because of the different types of people butbecause we’re doing different things. So, we aredoing-

Q38 Stephen Barclay: No, again, that’s a separatething. I’m just saying your total wage bill haschanged.



Ed Richards: No, because your total wage bill isinformed by what you are doing in total and we aredoing a substantial number of things that our previousregulators did not do. We have additional tasks forwhich we’ve had to hire additional people who costadditional money. Let me give you one very clearexample, which is probably the most costly that wehave. Four of the previous regulators—the ITC, theRadio Authority, the Broadcasting StandardsCommission and the Radio communicationsAgency—had no competition powers. We are aconcurrent regulator for all our sectors, so we are acompetition authority. We have to undertakecompetition investigations; we have to therefore haveeconomists and lawyers who are able to act in light ofthe Competition Act and the Enterprise Act. That’s avery substantial cost that we have used significantlyover the last few years, which the legacy regulatorsdid not do. We have had to hire people and pay themin order to do those kinds of tasks.

Q39 Stephen Barclay: Shall we look at numbersthen? Since you were chief executive, between 2006and 2010, staff numbers have gone up 12.5%.Ed Richards: Yes.

Q40 Stephen Barclay: And you’re now about to cutstaff numbers by 20%.Ed Richards: By 170.

Q41 Stephen Barclay: Yes. Well, I thought one infive.Ed Richards: It’s roughly that.

Q42 Stephen Barclay: That’s the figure that you’veput forward, which I would’ve thought was 20%. So,in other words, since you’ve been chief executive it’sgone up 12.5% and now you’re cutting it. We’reactually really talking about a cut of 7.5%, to justbeyond where we were in 2006.Ed Richards: No, because, for example, one of thereasons why staff numbers have gone up since Ibecame chief executive is that we again took aconscious decision on value for money grounds toinsource significant aspects of our IT services. Thereason for that was that we’d inherited an outsourcingmodel. It was highly unsatisfactory; the quality ofservice was a disaster.

Q43 Mr Bacon: Who was your outsourcingcontractor, by the way?Ed Richards: Well, in those days it was CMG. Weended it and insourced the support for people in thebuilding, which has massively improved the quality ofthe service. I used to get complaints every day of theweek from people about it—about their computers notworking and systems going down all the time. Thathas gone away, and it has gone away because weinsourced the staff to support it so they cared aboutwhat they were doing. That increased the totalheadcount in the organisation. I accept it did that, butI have no regrets about doing it, and anybody whoworks in the organisation has no regrets about it either.So, the headcount went up, yes, but that’s one of thereasons it did.

Looking forward, it is true to say that we are nowgoing to reduce by 170 roles. That is a result,obviously, of the budget constraints that everybody inthe public sector faces. We have a variety of ways inwhich we’re going to do that, but it’s important tounderstand what they are. The most important, or thefirst port of call on this, is that we are going to stopdoing some substantial things that we have done inthe past. A good example of that is media literacy anddigital participation where, under the previousGovernment we had a substantial role in that area—amulti-million pound activity—and we will not bedoing that, outwith the research that we do.

Q44 Stephen Barclay: I think we’ll probably comeon to the future and the restructuring, but just whilewe’re on the staffing, just to clarify, since yourappointment you’ve been paid over £1.5 million interms of total package. Is that correct?Ed Richards: I don’t know; I haven’t calculated it.Stephen Barclay: £392,343 in 2006–07. £417,581,which includes a £56,400 bonus, in 2007–08. Therewas a £66,692 bonus in 2006–07. In 2008–09, thefigure was £392,056, although you didn’t get a bonus.In 2009–10, it was £381,713. So in total you’vereceived £1,583,693. Is that the case?Ed Richards: I haven’t got the numbers in front ofme.

Q45 Stephen Barclay: It’s just that the reaction tothis Report—and I’ll just come on to travel in amoment—was to attack the NAO and to say that youhave a “rigorous grip on costs,” I think the phrasewas. And so I was surprised that under your tenurestaff numbers have gone up 12.5%, which we’ve justtouched on. I was also surprised that the travel costswere just over £1.4 million in 2010, which breaksdown as £1,612 per member of staff, which seemsquite high.Ed Richards: Rather like the IT point, for the staffcosts, there’s an explanation that is rather moreprosaic. We’ve had a very busy couple of years oninternational work, for a variety of reasons, but forone particular reason that stands out, which is thatwe’ve had the formation of the Body of EuropeanRegulators and the lead-up to the formation of theBody of European Regulators, which is a massivechange to the way regulation is done across the wholeof the European Union.

Q46 Stephen Barclay: And how much of that travelwas first class or business class? I read from yourguidelines: “Members are entitled to travel first classwhere available within the UK and to claim expensesaccordingly. Travel overseas may be on businessclass”. Do you have a sense of the £1.4 million? Howmuch of that was first class?Ed Richards: I don’t have a sense, but the guidelinesare very clear and, as I recall the guidelines, they arethat anything over two hours is permitted to bebusiness class to ensure that people are able to work.Anything less than two hours is not. That is as I recallwhat the guidelines are, but you might have a copy ofthe guidelines in front of you, so you might be ableto recall them in all the detail. We have checked those



guidelines against other organisations and I believethem to be reasonably standard.

Q47 Mr Bacon: Sorry, when you say “standard”, areyou talking about first class travel by train?Ed Richards: No, there’s no presumption of first classtravel, as I’ve just said, as I recall the guidelines.

Q48 Stephen Barclay: So where it says “Whereavailable in the UK” when on business, it’s sayingthat if you do business for Ofcom you go first class.Ed Richards: No, I don’t think that is right. I’m veryhappy to come back to the Committee and correct thisif I’m not right, but as I recall our guidelines, ourpolicy is that under two hours is not first class andthat you are only able to go first class if a journey isof two hours or greater in business time.

Q49 Mr Bacon: The board members’ code ofconduct states: “Travel-when on Ofcom business,members are entitled to travel first class whereavailable within the UK and to claim expensesaccordingly.”Stephen Barclay: Point 35.Mr Bacon: “Travel overseas may be on businessclass. Travel and accommodation should be arrangedthrough the secretary”. The first sentence—“When onOfcom business, members are entitled to travel firstclass where available within the UK and to claimexpenses accordingly”—doesn’t have any ridersaround it about the length of the journey.Ed Richards: I think that’s for board members only,so that’s nine people out of 873.

Q50 Mr Bacon: Right. Army generals travel secondclass now, you know that don’t you?Ed Richards: I didn’t know that.Mr Bacon: So do MPs, by the way.Ed Richards: I believe what I’m explaining to youabout the two hours is in the guidelines that work for864 people in the organisation.

Q51 Mr Bacon: Do you have any plans to changethese guidelines to save money and make everyonetravel second class?Ed Richards: Well, changing the guidelines for theboard is something I’d obviously want to discuss withmy chairman and the board itself. But for theorganisation as a whole—

Q52 Mr Bacon: Do you have any plans to do that?Ed Richards: I’m very happy to raise it as a result ofthis discussion, but I have to confess—

Q53 Mr Bacon: Let me ask you a question moreseriously, because to set an example in these straitenedtimes, Ministers are flying long haul in economy class.The Minister for Sport, I happen to know, went toSouth Africa for the World Cup and flew economyclass.Ed Richards: I’m very happy to raise it when I geta chance.

Q54 Mr Bacon: So, why should regulators be anydifferent from Army generals and Ministers?

Ed Richards: That’s a very fair point.Chair: I think Ed is saying he’s taking it back.

Q55 Ian Swales: Can I come on to the cost savingsthat you’ve announced? You spoke about getting ridof some activities. Can you say more abut how youthink you can achieve this huge cut in numbers ofpeople, and will any services that the public enjoy ordepend on disappear as a result of these cost savings?Ed Richards: We’ve been preparing for this challengefor some time because I think it was very clear that itwas going to happen. We have approached it in threedifferent ways. One is that there’s a category of thingswhere we are going to stop doing things orsubstantially reduce things. The second is the areawhere we are going to bear down on overheads orsuppliers re supply costs. The third is where we haveto just completely change what we do and how wedo it.On the first of those, I think the headlines are thingslike we’ve completed two years of pay freeze aheadof most of the rest of the public sector—so we arealready in our second year of pay freeze. And we havestopped accruals, or we’re proposing to stop theaccruals of defined benefit pensions, which hasanother very substantial saving. That is not an easything to do, as I’m sure you’re aware. People feel veryunhappy about these sorts of changes, but those arethe ones that we proposed. In terms of overheads andsuppliers, we’ve retendered the element of IT that isoutsourced and we’ve borne back down on supplierslike research providers and so on and so forth, and webelieve we can make substantial savings there.The third area is, I think, the most challenging and themost pertinent to your question, which is that the onlyway we can deliver those benefits at that level withoutundermining or diminishing the quality of what we dois by significantly changing the way we do somethings. For example, we are accelerating ourautomation of licensing; we are changing theprocedures very significantly around broadcastingcomplaints, where we went right back to the law,examined the statute and asked ourselves whether wecould simplify those procedures significantly such thatit took time, and, therefore, people cost, out of thoseprocesses. We have to consult on that externallybecause it is a policy and we’ll probably be puttingthat in the next few days. That will be a significantchange to the way we actually do something andthere’s a host of areas of that kind where the processhas been redesigned to ensure that the total cost is lessfor the same service.

Q56 Ian Swales: Okay. So, let’s just home in on whatwe as members of the public or our constituents arelikely to see. For example, you mentionedbroadcasting complaints; what is going to change?Ed Richards: If we receive complaints and we thendecide to investigate, there is a procedure with thebroadcasters to consider the complaint, takerepresentations from them, share our views with them,then there’s an appeal regime for them and so on andso forth. So, there’s a multi-stage process before adecision is finally arrived at, and what we’reproposing to do is simplify that process quite



significantly, which will involve fewer people and lesstime. As I said, we’ve gone right back to the statuteto ask ourselves what’s the minimum we can doconsistent with a fair process. I hope that the answerto that is that the public will not see any detriment,but I think that’s what the consultation will elicit. Itwouldn’t surprise me if some of the broadcasters say,“You’ve pared back right to the bone and we’reslightly concerned about this.” I wouldn’t be surprisedby that reaction at all. If that happens, we’ll have tosit down with them and say, “Well, we have a budgetconstraint here, so we can’t do it the way we used todo it. We have to find a more efficient way of doingit.” And they will say, “Yes, but we want fairness andjustice,” and then that debate will unfold. That is whatis going to happen in the first quarter of next year.

Q57 Ian Swales: And would you say your changesare going to be a big slice of the pyramid? Are yougoing to take people out at every level or is it goingto be front-line services? Or are you mainly going todo it in the management structure?Ed Richards: Every single level of the organisation islosing jobs. Every single level.

Q58 Chair: I think there are a few more questionsaround budget and then I want to come to the user/customer thing. In the Report, we see that you’vefound £14 million for your pension deficit, which ismore than 10% of your budget. On the one hand thatis good because you’ve found it there, but on the otherhand you say you run a tightly run business, so it’squite surprising to find that within that you can findmore than 10% to put to a pension deficit. Do youwant to comment on that?Ed Richards: It’s a very fair point, a very fairquestion. My only answer to it is that we were soconcerned about the pension deficit and theimplications of it for financeability and our obligationsto the pension, pensioners and future pensioners thatwe took a very conscious decision to try and savewherever we possibly could in order to fund—

Q59 Chair: So what didn’t you do?Ed Richards: There were multiple decisions inmultiple different parts of the organisation. I don’tthink there was a single, particular activity that wedidn’t do. It was more about putting pressure on everyarea and saying, “if you don’t think you need to spendthose professional services fees,” or, “If you don’tneed to fill that job right now,” or, “if there’s amaternity cover that we don’t need to cover straightaway”—it’s those sorts of calculations that allowed usto squeeze money out, knowing that we had to findsome more money to fill the pension deficit. We thinkwe have a very acute understanding of pension deficitbecause we regulate a number of companies forwhom, as you will all know, this is a huge issue,whether it’s BT or ITV, Cable & Wireless and nowobviously the Royal Mail. So, we’re very familiarwith the problems of pension deficits and howdangerous they are if they get out of control. We feltthat it was terribly important to get on top of it andmake sure we were not sitting in a situation where wemight have to come back to the Government—or to

the companies who pay for the other half of us—andsay, “I’m really sorry but we’ve got this colossalpension deficit; it’s got out of control; it’s going to getworse; and we have to tackle it in the future”. We feltit would be better to try and get to grips with thatdeficit as soon as possible and that’s how we did it.I think the other side of the coin on that is that isabsolutely what has stood us in reasonably good steadfor delivering the 28.2%, because what it tells you—and I think this was the implication behind yourquestion—is that we were pushing people very hardin order to finance that pension deficit. What that’senabled us to do is understand roughly where we cansqueeze things tighter to now meet the 28.2%, whichis obviously a lot more money.

Q60 Dr Creasy: Although you’re essentially livingwithin your means as an organisation, I think thechallenge that we’re all facing here is understandingwhether the way in which you’re planning for whatyour means are and how you’re spending that moneywithin that is appropriate. I’m very struck by thedescription you’ve just given because, actually, theReport tells us that half of that money came fromunused contingency funds. What contingencyplanning are you doing as an organisation for the kindof budgets you’re going to need—you also talkedabout the European regulators—versus the ongoingrevenue costs, and there’s obviously some concernabout whether you’re driving those down, and whatare you expecting to come up in the next couple ofyears that you will not be able to fund because you’recutting into your contingency funds to do this?Ed Richards: You’re absolutely right. One of thesources of the deficit funding was unspentcontingency and that is always—

Q61 Dr Creasy: That’s very different though fromyou having a process by which every single pound isaccounted for and is best value. That’s rainy daymoney, isn’t it?Ed Richards: It is different, though it’s only acontribution to the £14 million.

Q62 Dr Creasy: It’s 50%. That’s quite a substantialcontribution.Ed Richards: It is different, but any organisation ofour scale with the level of risk that we live withshould have a sufficient contingency. In some years,you don’t have to spend it. I think you were askingme what’s our contingency plan for the future. One ofthe things that we will be doing to meet the 28.2% isreducing the amount of contingency we hold, withoutany question. So we will be running with a higherlevel of risk in the organisation. The kind ofcontingency we are worried about—it’s worth a wordon this—ranges from the fact that, in the next 12months, we have to do a huge amount of work toprepare for and make sure the Olympics is a successin relation to the use of spectrum. So, there will bemore intense demand—there will be an unprecedentedlevel of demand and use for spectrum around theOlympics. There is no historical precedent for itbecause people are going to turn up in their hundredsof thousands with laptops, iPhones, iPads, all the rest



of it, and they will expect their spectrum and theirmobile services to work immediately. Given that youhave the security services and you have all thebroadcasters there trying to cover the finals and so onand so forth, the risks associated with that for us arevery substantial, so we need to keep some contingencyin case we need to do operational things to make sureit works. That’s one example.Another example, frankly, is just straightforwardlitigation. We could find ourselves with huge legalcosts as a result of litigation against decisions we takein relation to a whole host of things. Those are thekinds of reasons we need to hold some substantialcontingency, but as part of the way we’re going tomeet the 28.2%, that is going to come down and we’llrun at a much lower contingency than we have in thepast. .

Q63 Dr Creasy: So, could you see yourself goingover budget?Ed Richards: I would say in future there is asignificantly greater risk of that than there has been inthe past. I think if you take 28.2% out and yourambition is in a series of areas to ensure that you’redelivering the same level of service and the samequality as you have in the past, I think inevitably thatis a greater risk.

Q64 Dr Creasy: So, do you think the cap is fair?Ed Richards: I believe we can deliver what we arehere to do within that cap, but it does involve, I think,a slightly higher level of risk for the organisation froma financial perspective. If we weren’t stopping doingsome things, I think that risk would be too great, butwe are stopping doing some things and where you’restopping doing some things, then I think that makes itmore manageable. The real challenge, I think, is theseareas where we are doing the same and we’re tryingto make sure we deliver the same level of quality, butsimply for 20% less money. That is sometimes hard.

Q65 Dr Creasy: So, just going back to Figure 4 interms of how you’re cutting that cake and how you’reusing your budgets, obviously as you’re saying you’regoing to have less of a contingency, you’re notpredicting less in terms of staff costs or the temporarycosts. If anything those could go up, couldn’t they?So, how are you going to manage those risks?Ed Richards: Those will absolutely be going down.We’re going to lose 170 roles, so staff costs are goingto go down, and professional fees will go downbecause you can’t commission professional servicesproperly and effectively unless you have people whoare able to commission it. So those will absolutely begoing down.

Q66 Dr Creasy: So how then are you going tomanage those risks? You’ve just said you’re going tocut your contingency budget, but you’re facing somepotentially large challenges where you don’t have anyevidence about how they might play out. How are yougoing to manage that?Ed Richards: We’ll manage that risk in the way thatwe—

Q67 Dr Creasy: You can’t guarantee that, can you?There might well be a point where actually you wantto come back to this Committee and say, “Look, itturned out with the Olympics it was that much morecomplicated. We had to bring in people. We had todeal with these things.” That’s a fair possibility, isn’tit?Ed Richards: We will manage the risk in the way thatI would expect any organisation of our scale to do.We have a very clear and strong risk register; wediscuss the risks that the organisation faces carefullyevery single month. That’s done at the appropriatelevels in the organisation and we make sure there ismitigation in place to manage those risks, and that isacross the whole range of risks that the organisationfaces. That is the case today and will be the case afterthe budget cuts. If I thought we couldn’t manage therisk, and if I thought we were going to go over budgetbecause of the kinds of things that we might have todo, I would say that today, but I don’t believe that.We’ve done a huge amount of very careful preparationto hit these budget targets. We’ve been planning forsome months in anticipation of it, and I think we havea credible and deliverable plan that will hit thosetargets.

Q68 Dr Creasy: I think the challenge we’re facingas a Committee is, if you were able to do this before,why haven’t you done it before? If you were able tomanage risks and you have all your planning,something in it doesn’t quite make sense because wecan’t link up what you’re saying you need to spend todeliver the things you’re being asked to do with thefact that you’re then saying, “But actually when thingschange, we’ll still be able to do it within these caps.”Ed Richards: Because we are stopping doing somethings. The first point is we are simply not going todo some things that we used to do and as aconsequence there is no risk associated with it becausewe’re not going to do it. So, let me go back to medialiteracy, which is one example: we are simply notgoing to spend any money on media literacy any moreapart from a small research programme.

Q69 Dr Creasy: So one in five of your staff are onmedia literacy?Ed Richards: There’s no risk associated with thatbecause we’re not doing it any more.

Q70 Chair: That’s the money you got from DCMS.Ed Richards: No, because the content board of theorganisation felt that it was an important priority forcitizens and consumers of the country, we spentsubstantially over, of our own additional money, onmedia literacy over the period and that money is goingto go to zero. So there’s no risk associated with that,other than if somebody came to us and said, “You’reno longer meeting your duty to promote medialiteracy”. Now, my answer to that will be—

Q71 Dr Creasy: But, sorry, on that model, one infive of your staff was working on media literacy. Isthat what you’re telling us?Ed Richards: It’s an example. So, there are three wayswe’re reducing the budget. One is we are going to



spend less or stop doing things. So, spending less andstopping doing things could be, “We’re not going tospend anything on media literacy,” or it could be thepay freeze for two years, or it could be the fact thatwe stopped accruals on defined benefit pensions. Allof that saves a huge amount of money, but we’re stillgoing to have the people doing the jobs.I accept that this is going to be a change and I acceptthat we have been forced to think harder about thisbecause of budget constraints. I assume thateverybody in the entire public sector is in the sameposition, because when you’re confronted with thosesorts of constraints—and this is a good thing in someways—you have to say, “Well, if we want to deliverx, we’re going to have to do it for less money.” So,you have to go right back to square one and askyourself how you can do it.

Q72 Dr Creasy: But you can understand why we asthe Public Accounts Committee are concerned by thatapproach, can’t you? You’re saying, basically,“Because our budget has been cut, we’re looking fordifferent ways to achieve value for money, rather thanhaving as an organisation a value-for-money ledapproach to what we’re doing.”Ed Richards: No, because there are trade-offs. Thepresumption there is that we didn’t have a value formoney framework before and I utterly, utterly rejectthat. I can tell you that the process we go throughevery single year and every quarter as we do ourreforecasting absolutely has a focus on value formoney, and people in the organisation know that andthey understand it. It’s different.

Q73 Chair: The point is that we can’t see it.Ed Richards: I understand that and I’ve been tryingto explain how we do it to give you reassurance thatwe do do it. I don’t think it’s realistic to pretend thatthere isn’t a difference between an operatingenvironment in which you have a budget set and everysingle year, the organisation in question, which is us,has reduced its real-terms budget and has deliverednumbers below that budget—those are the facts of therecent history. We can’t pretend that it isn’t a differentset of questions when somebody turns up and says,“Because of the position of public finances thenumber has to now be 28% lower.” You are presentedwith a different set of circumstances. We have to goback and ask different questions.

Q74 Dr Creasy: With respect, you’re telling me thatyou’re able to manage the future risks that you mightface as an organisation within decreasing budgetsbecause you’re going to change the way you dothings. This does rather suggest to us that youcould’ve changed the ways that you were doing thingsprior to those constraints coming in, because youdon’t see any risk to some quite major challenges thatare going to come up, such as the Olympics—and I’msure the Postcomm stuff will be challenging as well.Ed Richards: I am not saying to you, “There are norisks”. If you’re saying to me, “Are there risks?” I’msaying to you, categorically, “There are”. What Ithought you were asking me was, “Do you understand

how you’re going to manage those risks?” to whichthe answer is yes.

Q75 Dr Creasy: Yes, but that does rather suggest thatthere were ways in which you think you can get moreresource out of your organisation internally within asituation where you are getting less money, to be ableto manage those risks.Ed Richards: That is always the case.

Q76 Dr Creasy: Or you’re telling us actually youthink there are going to be substantial risks in thefuture to your ability to deliver.Ed Richards: But you’re putting me, if I might sayso, in an impossible position. Let’s look at the record.The record is that we have lived consistently withinthe budget cap, which was declining, set by Treasury.We have reduced our real-terms budget every singleyear in our existence. I wonder how many other publicsector organisations exist that have done that.

Q77 Chair: Everybody’s had the 3% cut, Ed.Everybody’s had that—more or less since the timeyou started, maybe a year or two later.Ed Richards: That’s a real-terms headline budget cut,whereas generally speaking public spending has, Iunderstand, be rising over the last couple of years.

Q78 Chair: Yes but everybody’s had to find value-for-money savings.Ed Richards: Of course. But that is the position. Wecan debate whether we should have gone further,faster and so on. We can debate that and I accept thatin some areas of course you always—

Q79 Dr Creasy: That’s our role here, isn’t it? It’s tosay to you, “It’s wonderful that you live within yourmeans, but are you cutting the cake in the mosteffective way for the public sector especially giventhat you’re now telling us that even with a reducedcake you can still feed everyone? That’s a terriblemetaphor.Amyas Morse: I just want to say two things. One ofthem is, really, I don’t disagree with a lot of thepositive things that Ed is saying about Ofcom, but thepoint you’re making is pretty much the point that wewere making in our Report, which is a question ofwhat it should be costing. We’re not denying the costis going down, but is that what it should cost? Canyou demonstrate that for us, please?Anyway, what I wanted to ask was this, really justto be clear: you made some references to reducingcontingencies. I hope I’m right in thinking that mostof what you have is specific provisions againstexpected costs. Isn’t that right?Ed Richards: Generally speaking.Amyas Morse: Because I’m not expecting to hear thatyou have general contingencies lurking aroundsomewhere in the undergrowth. I’d be a bit surprisedby that.Ed Richards: There is a very modest generalcontingency in the centre, but otherwise it’s things likelitigation costs, Olympics contingency and so on andso forth. That is what is generally being squeezed as



part of the 28.2% and I think that is what you dowith that.Amyas Morse: I’m only saying it for clarity becauseif it turns out that these provisions were cast inslightly more generous terms than they are now beingcast in but they’re still perfectly adequate, then theyshould have been cast in those terms in the first place.I’m not saying that’s the case, but you wouldn’tdisagree with that, I’m sure.Ed Richards: Not at a general level, no. I personallythink, in my experience, there are sometimes thingsthat happen that you can’t know about and you can’tforesee exactly.Amyas Morse: Of course.Ed Richards: And, therefore, I think the aspiration toidentify a particular risk against every single pound ofcontingency is an ambition that is what one might calla stretching one.

Q80 Mr Bacon: How much is your contingency—your general contingency that you just referred to?Ed Richards: I’d have to come back to you on that. Ican’t remember.

Q81 Mr Bacon: You said it was modest.Ed Richards: Well, it is going to be more modest. It’sgoing to be reduced.Mr Bacon: Sorry, can you say that again?Ed Richards: I’ll have to come back to you on thedetail of the contingency.Stephen Barclay: How do you know it’s modest?

Q82 Mr Bacon: Mr Barclay took the words out ofmy mouth. If you don’t know what it is, how do youknow it’s modest?Ed Richards: I said it’s going to be more modestbecause it is declining. We’ve looked at everythingacross the organisation in terms of delivering the28.2% and one of the things that we have done isreduce the elements of contingency. That is absolutelyone of the things we’ve done, so relatively speakingthere will be a more modest contingency than therewas in the past. That’s what I’m saying.

Q83 Mr Bacon: I’m just looking at Figure 4. Iwanted to ask you about this and it may require youto send us a note, but if so, so be it. Of the£121.5 million there, listed in Figure 4—Ed Richards: Which?Chair: Figure 4, page 12.Mr Bacon: This is figure 4, page 12—your£121 million of your total. How much of that£121 million is your general contingency? You justused the phrase, “General contingency”.Ed Richards: I’d have to come back to you on thatbecause there’s a process we go through.

Q84 Mr Bacon: Where does it sit? Everything has aline out in there and it all adds up to £121 million.Where does the general contingency sit? Is it underadministrative and office costs?Ed Richards: Or other costs.

Q85 Mr Bacon: Or other costs. Well, can I just takeyou through these items? You have £62.2 million of

staff, which is £9 million higher than five yearspreviously. Underneath that, you have £10.8 millionof professional services, £8.8 million of outsourcedservices, then you have £8.2 million of administrativeand office costs, £3.3 million of temporary staff andcontractors and then £7.9 million of other costs. Thatadds up to £30 million exactly. You could cover quitea lot of ground with £30 million. What I would liketo know is, for example, what did the £10.8 millionfor professional services go on?Ed Richards: I’m very happy to send you a moredetailed note, but in essence it would be things liketechnical advice on preparation of the auctions—so,for example, propagation modelling for interferencemanagement purposes. When we hopefully do theauction in the first part of next year, we have toassume that it will be used by certain services—forexample, mobile broadband. What we then have tounderstand is the likelihood or the potential for that tointerfere with existing services—for example,television—and that needs very highly specialisedtechnical—

Q86 Mr Bacon: So it’s technical consultants.Ed Richards: That is one example. Another examplewould be legal fees in connection to the Court ofAppeal and things of that kind. Another examplewould be specialist economic or financial andaccounting support for things like assessing cost ofcapital for setting price controls for BT. For example,we hire an expert econometrician; we hire an expertfinancial economist to do both cost of capital workand econometrics, for example, on the advertisingmarket. Where we cannot find or it’s not economic forus to employ those sorts of skills internally—so it’san array of those sorts of professional services.

Q87 Mr Bacon: Okay. I will ask you at the end tosend us a detailed note, but outsourced services—£8.8 million—you mentioned that IT was beinginsourced.Ed Richards: Partially, yes.

Q88 Mr Bacon: Partially insourced. Yet outsourcedservices have gone up from £5.2 million to£8.8 million.Ed Richards: Yes.

Q89 Mr Bacon: So what does outsourced servicesconsist in, primarily?Ed Richards: That would be partly IT. We insourcedthe desktop support, so we didn’t insource servers andthings of that kind. Those are still outsourced.

Q90 Mr Bacon: And who are they with now?They’re not with CMG anymore?Ed Richards: No, we are just in the middle of atransition at the moment that is part of the 28.2%savings and the reason we can do the same for less.And we have saved, I think, £3.5 million.

Q91 Mr Bacon: Who are you going to move to?Ed Richards: We’ve moved from Capgemini toLogica and we’re in the middle of that transition atthe moment.



Q92 Mr Bacon: Let me go through it. You movedfrom CMG to Capgemini and then you moved, or aremoving now, from Capgemini to Logica.Ed Richards: Yes, but with different specifications.So, we do more. The desktop support we do. Weinsourced ourselves, we employ people ourselves andthe service is significantly better. But it doesn’t makeany sense to insource things like servers.

Q93 Mr Bacon: Right. Administrative and officecosts is £8.2 million.Ed Richards: Just on the outsourced services, thatwould include also facilities management and thingsof that nature.Chair: I hope not Christmas trees.Ed Richards: Sorry?Chair: Not Christmas trees.Mr Bacon: No, you can get a good one from B&Qand Sir Nicholas Macpherson has got an extramoonlighting job as a star turn, if one can put it thatway.Ed Richards: I’ll have to go and check our Christmastree arrangements.

Q94 Mr Bacon: Admin and office costs were£8.2 million. What was that principally on?Ed Richards: Well, I assume that’s got all the—it’snot premises. Administration and office costs, it willbe—

Q95 Mr Bacon: It’s a lot of money.Ed Richards: Yes, it is a substantial amount of money.

Q96 Mr Bacon: Admin can’t be staff because staffis already covered off. You don’t spend £8 million onyellow stickies, do you?Ed Richards: The source of my hesitation is that Idon’t want to say something’s in it that is actually inoutsourced services or something of that kind. Whatwould be most sensible is to give you a note onexactly what’s in it. You see, some of these thingsthat are under office costs I think might well be underoutsourced services.

Q97 Mr Bacon: Yes, and then you have temporarystaff and contractors as £3.3 million. That’s on top ofyour £10.8 million for professional services. Now,what is the difference? Are you just separating outinterims from management consultants? If I’m acontractor, if I’m providing technical specialistservices on spectrum advice on auctions or whatever,why am I a contractor and not a professional service,for example?Ed Richards: Where we’ve run a procurement processfor the delivery of a professional service that wouldbe in professional services. A temporary or contractormight be a six-month maternity cover for filling aspecific role.

Q98 Mr Bacon: And then you have this other costof £7.9 million, which again is very large with no realdescription. What do you think that is?Ed Richards: Let me come back to you on what’s inthat, but the elements of contingency will be, I think,in there.

Q99 Mr Bacon: Could you give us a very detailedbreakdown and include it down to the nearest£100,000?Ed Richards: Sure.

Q100 James Wharton: Mr Richards, I think, believeit or not, the Public Accounts Committee is here tohelp you, and I’m pleased that already, in their usualrobustly helpful way, Mr Bacon and Mr Barclay havebeen highlighting some areas where you may want tolook at further cost savings. We’ve had somediscussion about costs and what you want to deliver,and identifying the difference between saving cost andactually delivering value for money. I think one of thestumbling blocks that we’re already identifying is that,in trying to understand the processes that you as anorganisation are going through, there isn’t necessarilyall of the information that we would want to haveto hand.I’m looking at the Report, page 18, paragraphs 2.7and 2.8. Paragraph 2.7 says: “Although the AnnualPlan sets out what activities Ofcom expects willcontribute to its desired outcomes, it does not describehow Ofcom will measure whether it has achievedthese outcomes: it does not state what success willlook like.” And then 2.8 says: “Without a clear ideaof when success is achieved it is difficult forstakeholders … to assess the organisation’s success inmeeting its objectives.”I think one of the missing links in understandingwhether value for money is really being found in theorganisation is actually getting a clear understandingof what the outcomes you want to achieve are. Iwonder whether you are likely to be taking any stepsto produce some of this information for us.Ed Richards: I can assure you there’s no absence ofinformation, but let me address the broader points. Ithink the point being highlighted in the Report is onethat we would accept, which is: can we do better toprovide a simpler set of relationships between whatwe do and what the outcomes in the market are? Ithink the answer to the question whether we canpresent that in a clearer form is yes, and we shouldtry and do better at that.However, there are one or two cautionary notes thatneed to be applied to that, I think, and this is in asense where we’ve come at it from historically. I thinkthe first point to make is that I have never worked inan organisation that cares as much about the actualoutcomes for the consumer and for the citizen asOfcom. You don’t see it in the annual plan and thereason you don’t see it in the annual plan is becausewe publish separately something called, TheConsumer Experience, which we publish every singleyear, which we’ve done for about five or six years,the purpose of which, as it states explicitly at the front,is to identify how well consumers are doing in theUK. It includes time series data on a whole range ofdifferent calculations to help us understand whether ornot good outcomes have been delivered.In addition to that—and we are under no obligation todo this—we publish something called the internationalcommunications market review, where we take theUK outcome and we benchmark it against a range ofother countries across the globe. This is very unusual



in my experience and it’s a very considerable exercisedoing it. So, we can then say to ourselves, “Is whatwe’re doing effective, not only on a time series basefor the UK, but also when we compare the UK withother countries?” In some cases we’re doing verywell, in other cases quite well and in other cases wehave more work to do. We publish those every singleyear and they are a comprehensive review of all thekey outcomes that you would expect to see in oursector. So, we have a very close concentration on whatthe outcomes are.I know every sector is complicated and everyonealways has difficulties and I accept that we need towork harder to try and provide those simplerelationships. But there is a second note of caution.Let’s just take a simple example: broadband. What Isense people would like to have is, “What’s the onemeasure that tells us with broadband that we havedone well on broadband?” and, “What Ofcom hasdone on broadband has delivered a good broadbandoutcome.” But then I have to say to you, “Well, doyou mean price or do you mean availability? Or doyou mean speed? Or do you mean quality of service?Or do you mean current generation broadband? Doyou mean superfast broadband? Do you mean mobilebroadband? Do you mean in cities or do you mean inrural areas?” All of those are relevant and, for theconsumer, you can’t pick one of them and say, “That’sa good outcome.” It’s highly complicated, so we haveto try and find a way of connecting activities we take,but not in a way that simplifies it so much that itcreates perverse outcomes. I would be quite concernedabout that approach.

Q101 James Wharton: Okay, I think I understandthat point and there are two observations I wouldmake. One is a concern you may be able to assistwith, and the other is more a statement of fact as towhat other agencies seem to have been able to do. Inrespect of the way that you publish outcomes in TheConsumer Experience, what I would really like to seewould be something setting out at the beginning ofthe year where you want to get to in terms ofoutcomes and something at the end of the year settingout whether you got there. It seems that detaching thetwo may give a little bit more flexibility in how it’spresented. It may purely be a presentational issue butit then gives some flexibility for yourselves to presentit so that things look perhaps a little rosier than theyare. What I would like to see is a clear statement of,“This is what we want to do,” and then you can lookback and say, “Well, have you done it?” I don’t inany way dismiss the value of the information in TheConsumer Experience, but I think there’s also a placefor that in your annual report. In respect of thecomplexity of outcomes, that’s quite true, and, as youacknowledge, it’s the case in many otherorganisations, and there are a few examples in theReport of organisations—the Environment Agency,the Australian Communications and MediaAuthority’s annual report—which seem to haveovercome these challenges and these hurdles and areable to publish these outcomes in a useable anduseful way.

Of course, we are all human beings on thisCommittee. If you were to come in front of us inhowever many years’ time and you say, “Well,actually we didn’t reach that outcome, and this iswhy” and explain that it wasn’t an accurate measure,I think that would be understood, but we need a basison which to work, especially when assessing value formoney. I would strongly impress upon you, certainlyon my behalf and I suspect on behalf of othermembers of this Committee, that actually some moremeasureable outcomes in a more clearly defined way,so we can look at where you want to go and what youwant to do, assess whether you’ve got there and assessvalue for money in that context, would be helpful. Isthat something that you’re willing to look at bringingin in future?Ed Richards: I absolutely accept that we can andshould do a better job of presenting that in that kindof way. I do accept that.

Q102 Stephen Barclay: A quick point to clarify.You’re a director of Thames Water utility.Ed Richards: Right.

Q103 Stephen Barclay: Is it paid?Ed Richards: Yes.

Q104 Stephen Barclay: How much is it paid?Ed Richards: About £42,000.Stephen Barclay: £42,000.Ed Richards: Something of that kind.

Q105 Stephen Barclay: And do they meet duringthe day?Ed Richards: Pardon?Stephen Barclay: They meet in office time, I guess,do they?Ed Richards: They do.

Q106 Stephen Barclay: Okay. Can I just come onto restructuring?Ed Richards: Could I just clarify the position on it?Because you’re clearly leading somewhere and youprobably would like to know the full picture.Stephen Barclay: What I’m clarifying is yourremuneration has been £1.5 million since yourappointment. The reaction to the NAO Report was “afurious reaction” according to the Guardian and theFT.Ed Richards: No, that wasn’t—

Q107 Stephen Barclay: Well, perhaps you’re able toclarify who in the organisation gave the quote. Andso, one of the things that in this Committee we’retrying to clarify is how tight the grip on costs cited is.I think relevant to that are issues such as first classtravel, remuneration and how that applies across theboard. So I think it’s a relevant issue.Ed Richards: Let me just complete the picture foryou. I assume you’re asking me about how much I’mpaid by Thames Water as a non-executive director,presumably on the presumption that I have thatmoney. That money is paid to Ofcom.Stephen Barclay: Okay, fine. It was purely aquestion.



Ed Richards: For absolute clarity.Stephen Barclay: Mr Richards, it’s the role of theCommittee to ask questions. I’m sorry if that upsetsyou.Ed Richards: Every benefit is paid to Ofcom and willbe netted off what I’m paid.

Q108 Stephen Barclay: Could I come on torestructuring costs please? Taking you back to Figure4, you mentioned that you’re cutting 170 jobs. I wasjust trying to understand, within Figure 4, where thecost of restructuring will be captured and how muchin the budget you’ve set aside for that.Ed Richards: We’re still doing those calculationsbecause they’re within this financial year and we areaiming to do as much of the restructuring chargeswithin the existing budget by implementing thechanges now rather than at the start of next year. Soin other words, you start saving the 28.2% in thisfinancial year, thereby making in-year savings and thatthereby liberates money that can be used forredundancy charges.

Q109 Stephen Barclay: Do you have an average interms of just the ballpark, for the Committee, as to perperson, what sort of cost you expect that to be?Ed Richards: The redundancy charges?Stephen Barclay: The restructuring costs.Ed Richards: I don’t. It’s a calculable number,obviously, so I’m very happy to come back to you.

Q110 Stephen Barclay: Could I just give you a steeron past performance? In 2007, 16 staff left, at anaverage cost of £73,937; 32 staff left in 2008 at anaverage cost £66,781; four members of staff left in2009 at an average cost of £77,000; and four membersof staff in 2010 left at an average cost of £154,000.So, the four members of staff that were exited in 2010cost £617,000. When I asked you about the fact thatstaff costs have gone up, one of the reasons you gavewas the fact that, “Well, we brought in expertise; webrought in more skilled people,” which seemed oddgiven that at the same time professional skills budgetshave gone up, outsourcing budgets have gone up, andtemporary staff budgets have gone up.I would have thought if you bring in skilled membersof staff, your need for skilled advisers would havegone down, but let’s put that on one side. If we takethe 2008 figure, which is the lowest of the last four,the average is £66,000; times that by 170 jobs andthat would give a huge figure of over £11 million. So,what I’m just trying to get a sense of is: if you havebrought in more highly paid, more skilled members ofstaff, I assume getting rid of them is going to costmore and, to flow on from Stella’s questions, in termsof your budget for next year and how that links intovalue for money, what sort of ballpark figure are youworking to in terms of the cost of restructuring?Ed Richards: It won’t be the average that you impliedthere. I’d have to go back and look at whichindividuals were involved in those previous numbersand check what they were. But, as I said in the earlieranswer, the people who will go voluntarily or ascompulsory redundancy are a range across the entire

organisation, so they are both at the higher end of thepay scales and at the bottom end.

Q111 Stephen Barclay: To the nearest couple ofmillion, do you have a ballpark figure? Obviouslythere’s work going on; there’s 170 jobs going. Youmust be budgeting on something, surely?Ed Richards: Well, we are budgeting, but we are alsoin the middle of a consultation on those redundanciesand those decisions have not been made, and theconsultation is a serious one and needs to be takenseriously. So, I am rather nervous about quotingnumbers. There is a modelling assumption that I amvery happy to share with you in due course if thatwould be helpful, but I am nervous about bandyingaround numbers when we are in the middle of aconsultation process on the number and level ofredundancies.

Q112 Austin Mitchell: Good morning. I thought Iwas going to have to say “good afternoon” before mycall came through. You should have had Colette Bowecome round and say, “Your call is very important tous, Mr Mitchell, but we’ve only got one operator ontoday owing to staff cuts”.Mr Bacon: “If you’re from Grimsby, press six.”Austin Mitchell: I want to raise the issue of consumersatisfaction—we have been dealing with value formoney—which is very difficult to prove in a fieldwhere you are bound to soft-touch regulation, whichwas the rubric that we started with. Let me just takeconsumer complaints about fixed-line and mobilephones. So far as I can see there are four areas ofcomplaint, and not enough has been done to satisfythe consumer in these areas. First of all, there is theproblem of silent calls. I used to get a lot of themwhen I was a famous television personality but youcould usually detect the breathing on the other end.Now I still get a lot, and it’s your fault because youhaven’t taken action quick enough to stop these silentcalls, which are a bloody nuisance. They drag you tothe phone out of the shower and then there is nobodythere. So what are you doing about that?Secondly, there is switching, which appears to me, assomebody who has tried to switch, extraordinarilydifficult, partly because the companies drag their feetabout SIM cards and switching everything over and,more importantly, because you are left with aconfused mass of information which makes it verydifficult to interpret what you gain and what you loseby switching. You usually get something saying, “Ourcharge is the same as everybody else’s, but bear inmind that you get three free phone calls a month torelatives in Bratislava as part of our package,” and it’svery difficult to interpret. I think you haven’t beenhelpful there in simplifying the system, and the figuresat Figure 13 indicate this quite clearly. Switching ismuch easier with electricity, gas and car insurance, yetthere is only a very small proportion—10%—switching their mobiles, and less than that for theinternet. Why isn’t switching made easier if theconsumer is going to be strengthened against thesebig organisations?Thirdly, there is the issue of stolen mobiles. If Ireached over and took Ian’s mobile, I could not only



do a News of the World on the secret affairs of theLiberal party, but I could take it to any market in thenorth—and I assume the same is true in London—andhave it unblocked for a very small figure so I coulduse it. Why haven’t you developed some kind ofsimple device with the companies that will blow thethief’s head off after the first call?Stephen Barclay: Austin, can I just point out theydon’t have any secret affairs in the Liberal party—itis all out in the open.Austin Mitchell: Well, I don’t know about that. Notenough is being done about stealing. You could havedone more there, in co-operation, I would havethought, with the companies, to render stolen phonesuseless at the first call once they are reported stolen.Finally, there is the issue of roaming, wheresomething is being done, but it is being done by theEuropean authorities and not by us. Yet the companiescharge in this country. You are responsible for thecharging for roaming and you have done nothingabout it, leaving it to Europe. Why have consumersfaced such long delays in getting any action for themon these important issues?Ed Richards: I think the easiest one of the four istheft. Theft isn’t really something for us. Theft is amatter for the police and then the companies.

Q113 Austin Mitchell: It is also a matter for theoperators.Ed Richards: The operators, yes.

Q114 Austin Mitchell: And you regulate theoperators.Ed Richards: But we don’t intervene in the switchingon or off of individual phones. As I understand it,what should happen is that as soon as it’s stolen, thepolice should be contacted, then the police can contactthe operator or you can contact the operator, and theoperator is able to turn it off. We don’t really getinvolved in that.

Q115 Austin Mitchell: Shouldn’t you?Ed Richards: I don’t think so. I think it is just onetoo many cooks, to be honest. I think if something’sbeen stolen it’s a matter for the police and then it's amatter for the individual, with their operator, to dealwith the issue of closing down the service. I think usgetting involved there is just getting in the way tobe honest.

Q116 Austin Mitchell: You could encourage andpush the operators to cut off service.Ed Richards: We can certainly encourage and pushthem, and I am very happy to raise it with them. I amless enthusiastic about trying to intervene when I thinkthat the principal relationship should be with thepolice and with the individual.The other three are different. Let’s start withswitching. The chart you referred to is interesting butI do think it is slightly simplistic. There is one verygood reason why switching is higher in electricity andgas, and that is that all you are doing is switching yourretail provider. The network is exactly the same. Intelecoms you are actually changing the network eitherthrough an unbundling, a local-loop unbundler, or if

you actually change to cable, so the technologicalchallenge and both the risk to the consumer and thehassle for the consumer is inherently greater. Thecontrast, I think, is with bank accounts, where theproportion is very low, and we understand why thatis: it is not that it is actually very difficult to switch;it is to do with the risk the consumer feels becauseit’s their financial affairs. I think telecoms, inparticular, sits somewhere between those two. It’sactually technologically more difficult because itinvolves changing networks. It is quite risky. I thinkit didn’t used to be, but people are now so dependenton their broadband in particular that I think they feelthat the risk of losing the service by switchingnetwork is quite high.Would we like to see more convenient, easierswitching processes? Yes we would, which is why wepublished during the course of this year a majordocument on our approach to switching, arguing thatwe believe the system should overall move from“losing provider led” to “gaining provider led”, whichmakes it easier and more convenient for people toswitch. We spent a huge amount of time trying toensure those processes are good and more convenientand the evidence is that that has improved things.

Q117 Austin Mitchell: You also need a commonbasis of information. I can’t judge all the variousoffers from the companies—whether it’s on internetprovision or mobile phone provision—because theyare very confusing. Why not have a simple basis ofcomparison?Ed Richards: Let me take two examples. Withbroadband we have exactly the problem youdescribe—how do I know who the best provider is?Really there are three criteria. What’s the price? Is itavailable to me? And what's the speed? What wefound was that you can find the price and availabilityout very easily; it is just on everybody’s website andit is advertised. What people didn’t know was the truespeed, and that is why we did some very originalresearch—which we’ve published and which has beenthe most downloaded piece of work we have everdone—which revealed the true speeds people weregetting and compared one operator with another. Sowe have done some very substantial work in that area.We do want to improve the switching environment;there is no doubt about that. I think we are moreconcerned about it in the future because of peoplebuying bundles of services. It is something that we arespending quite a lot of time on and I would like to seethe environment improve; there is no doubt about that.It is a risky issue for consumers because of theimportance they attach to these services.Austin Mitchell: Dependence.Ed Richards: Dependence, particularly on thebroadband access nowadays. And it is occasionallytechnologically quite complicated because you arechanging from one network to another. Sometimesthat actually involves engineers visiting and re-wiringthe house so it’s sometimes not as simple as otherforms of switching. We definitely would like toimprove it and make it a better experience forconsumers. There is no doubt about that.



Q118 Austin Mitchell: What about roaming?Ed Richards: On roaming, it is absolutely true to saythat the lead came from Europe, but that is right.

Q119 Austin Mitchell: Not in my book it’s not.Ed Richards: It is right because it is a cross-borderactivity. So it is inherently—

Q120 Austin Mitchell: But the charging is here.Ed Richards: But the source of the charging is thatwhen you roam into France, for example, youroperator is charged by the French company, who theythen have to pay. It is the nature of the—Chair: I did it when I was a Minister actually. It wasa European negotiation and it was very, very difficult.Ed Richards: It is inherently cross-border andtherefore European. So we are very much in supportof the action but it has to be taken at a European level.

Q121 Austin Mitchell: I was appalled by the factthat Sky TV provided the intrusion on GordonBrown’s privacy that arose after the Mrs Duffy affair.I wanted to complain about it. I wrote to Ofcom andindicated my willingness. I got back a lot of paper,which as I read it, said that the person affected had tocomplain. Here was a general principle; I was affectedbecause I went to a bingo hall in Grimsby that samenight and people were scrawling “bigot” over theleaflets I was handing out. Fortunately I didn’t realiseat first because they couldn’t spell bigot, but itaffected me and undoubtedly affected the vote for theLabour party. I talked to Colette and she indicated thatthe complaint could come from me. Unfortunately, Iwent on holiday and forgot about it. I got back andthere was a letter saying it was out of time. I see fromparagraph 2.35, on page 31, that in respect of the lastof the three consultations, which began in June 2009,with a closing date of 15 September 2009, you werestill taking consultation responses after the end ofFebruary 2010. Now, will you take a complaint fromme about the intrusion on Gordon Brown—which wasmonstrous, frankly, and which no televisionprofessional would have condoned—belatedly?Ed Richards: I will have to take that away and havea look at it. To be honest Austin, I don’t know andthere are all sorts of precedent implications that Iwould have to think about. Let me go back and I’llwrite to you.

Q122 Chair: I wanted to say something aboutcomplaints. Looking at Figure 11, I think it is quitedepressing to see that the number of complaints toConsumer Direct on communications are as high asthe number on second-hand car dealers, car repair andservicing in garages. I think it’s a depressing table andI don’t think you can feel comfortable with it. I justwondered what your comments were on it. I wassurprised to see so many of the areas for which youhave responsibility so high up.Ed Richards: I agree it is disappointing. I think theindustry should be more disappointed than it is aboutit, to be honest. It’s pretty common across othercountries and there are a variety of explanations forit. Partly it is a highly competitive market andsometimes in those highly competitive markets you

have sales practices that generate complaints. But Iagree, it is very disappointing and we definitely wouldlike to see it lower. One example which I think ispertinent is the action we’ve recently taken againstTalkTalk, Carphone Warehouse Group, where theywere generating a huge number of complaints becausethey were billing people—charging people—forservices they had never actually received. We haveinvestigated that and found them in breach of ourrequirements and we are now considering what actionto take in light of their representations. That is onevery good example.

Q123 Chair: I don’t think you can arguecompetition. Competition ought to have the oppositeeffect, because if there is more competition you canswitch provider, despite what you’ve said aboutswitching. Competition ought to lead to a betterservice and fewer complaints.Ed Richards: In some respects you would hope thatwas the case. I think in some ways that is true. But Ithink the experience of most liberalising marketswhether it be financial services, gas, or energy, hasbeen that, as competition opens up, some parts of themarket do adopt very aggressive selling tactics and soon and so forth. I am not condoning it because I wouldlike to see it come down, that is for certain. But youdo see those kinds of practices. Mobile phones—hardware—is really retail selling. We don’t reallyhave anything to do with that of course, because it’snot a service but a piece of equipment rather like atelevision or a laptop. So only some of thesecategories are actually within our purview. Hardwareitems of that kind—your TVs, phones, laptops and soon—are not part of what we do. They would comeunder Trading Standards, for example. The relevantbits here for us are service agreements for mobile,and telephone services and internet service providers,which are the bottom two. I am not saying that toexcuse them, because as I have said, I would like tosee these numbers go down and we are taking someaction, but we only have powers in respect ofprobably half the ones that you are looking at.

Q124 Ian Swales: Can I build on the comments ofboth Austin and the Chair? Thinking about Figure 8,which shows the progression of costs in landline andmobile services, one is struck by the very healthyreductions in mobile costs, which more than halvedover this period, whereas landline costs seem to havefairly stubbornly stayed at a similar level. If you thenlook at Figure 14, which talks about market shares, towhat extent do you think the previous graph isaffected by the fact that in the mobile areas we wellknow there is pretty fierce competition between anumber of suppliers, whereas in the landline area, BTstill have the lion’s share of the business and I suspectthat some of these other entrants are in effect buyingservices from BT, although billing separately. Do youbelieve that the fixed-line market is as competitive asit should be?Ed Richards: There is a relationship of that kind andof course it’s historic in the sense that with fixed-linewe are coming from the position of a state-fundedmonopoly, with the introduction of competition over



time, whereas with mobile we started with twocompanies, made it four and then made it five. Sothere was always inherently more competition and Iwould certainly expect that to make a difference.There has also been more technological change inmobile, though. Remember with fixed you are talkingabout wires in the ground and the costs of that aredifficult to drive down, whereas there have beensignificant advances in technology in mobile in termsof signal propagation and things of that kind whichhas allowed the cost structure to come down. I thinkthat is also part of the explanation for the contrast inthe two pieces of data on Figure 8. Having said that,would we like to see more competition in the fixedmarket? Yes, we are here to promote competition andI think we are doing well at that. The incumbent inthe UK has a lower market share, I think, thananywhere else in Europe and one of the lowest in theworld. So we are in a very good position on acomparative basis. But you want to see competitionwork as effectively as possible.

Q125 Ian Swales: May I ask a supplementary to that,on the deals that BT do with other providers? Clearlyin other industries such as electricity and gas we haveseen the markets open up despite their historicalmeans of distribution. To what extent do you getinvolved in those deals, and are you happy with theway they operate?Ed Richards: We absolutely get involved in twoways. One is through price controls where we judgeBT to have market power in a form that requires pricecontrol. On some other occasions, we get involvedbecause companies bring us disputes because theycan't agree commercially, and where BT is regulatedwe sometimes need to resolve those, so we do. Theyare extremely important and we have to make quitesophisticated judgments in relation to each particularcase. That will not change in the short term.

Q126 Ian Swales: I take your point about the factthat the technology is more fixed but you couldreverse that and say that mobile operators have beeninvesting vast amounts of capital over this period,whereas with BT, some of its capital will be welldepreciated by now and obviously new technology isopen to them in terms of use of internet, satellites andall the rest of it. It just seems to me that the fixed-lineconsumers may be getting a poorer deal and it needsto get better.Ed Richards: When we look at the outcomes here andwe look at the UK against other countries, which Ithink is probably the best benchmark—I mentionedthe work that we’ve done in that area and this issomething we look at incredibly closely—what youwill find on fixed line is that the UK position againstthe comparators that we were able to draw on is thebest.

Q127 Ian Swales: In cost terms to the consumer?Ed Richards: In cost terms to the consumer, we inthis country are better than anywhere else. The reasonfor that is that these are big fixed-cost businesses thatneed to be paid for. It is true that the original networkwas sunk and depreciated many years ago but it also

true that they’ve had to invest a lot of money sincethen, for example, to enable it for broadband and alsoto ensure it is still working effectively. Obviously,there’s a new wave of investment for fibre opticbroadband. So I think it is a more complicated storyon investment, but on the actual outcomes for Britishconsumers, we are among the best in the world. Ournumbers have stopped falling and they actuallyslightly rose last year, so the difference between usand some of the other countries is not as great as itwas and we have got a very beady eye on that and weare asking why that’s the case. It just slightly tippedup a little bit. It is an issue we have a careful eye on.The basic price of fixed telephony is a crucial part ofwhat a good outcome is for the consumer. Theaggregate position, as our international market reviewshowed, is that we are in a good place, but there is alittle change in the last year in relation to which weneed to be very vigilant.

Q128 Stephen Barclay: I just wanted to come on tosilent calls, because the overall level of complaints onsilent calls seems to have gone up during your watch.I just wanted to get your thoughts, first on that and,secondly, on how you assess the ratio between thelevel of complaints and the actual number ofunreported silent calls, because I am sure you willaccept that the complaints are just the tip of theiceberg in terms of the underlying problem.Ed Richards: I think the relationship is even morecomplicated than that. The complaints have gone upthis year compared to last year. When you look at thedata on complaints over the years, unfortunately whatyou actually find is that what appears to cause themto go up is publicity. For example, the biggest increasein complaints that we ever had was when we finedBarclaycard for silent calls. The next upward trendwas I think heavily influenced by the fact that we hadsought from the Government and been given anincrease in the level of fine, and had issued newguidance through which we were going to tighten theobligations around silent calls. The number ofcomplaints we received went up again at that point,and we think that that was essentially directly linkedto the amount of publicity.We cross-check that in The Consumer Experience,which I must send you. Rather than just takingcomplaints, which are obviously voluntary individualacts—you may not have time to make them, I maynot—we research people on a statistically reliablebasis to ask them whether they have been subject toand have been caused anxiety by silent calls. Whatthat data tells you, which is much more reliable, isthat the number of people who have been subject tosilent calls has fallen over the last two years, by about25%. So the actual true experience appears to begetting better not worse, even though the complaintsdata tells you the exact opposite.The figure is still too high. As I recall, the number isabout 22%-24% of people who have actuallyexperienced it and have been caused anxiety by it.That is why we have tightened up the regime thatcomes into force on 1 February next year. It is whywe have written to all the companies that we’ve hadproblems with in this area in order to make clear to



them that the regime is now tougher and the fine isvery substantially higher. We’re now in informaldiscussions with a range of those to make sure theyunderstand that is the case and they understand that ifwe continue to get complaints after 1 February, theconsequences are much more significant. I can say toyou in all honesty that I think the deterrent effect of a£50,000 fine which we have lived with in the past isalmost zero. The fact that we now have a potentialdeterrent effect of £2 million is much more valuable.I think the numbers are going down but we would liketo see them go down further, and we have a regime inplace that we will enact from 1 February next yearwhich should do that.

Q129 Stephen Barclay: Following that logic youwould expect the numbers of complaints to continuecoming down.Ed Richards: I think if it turns out that we need totake public activity in the first/second quarter of nextyear, I would expect there to be an increased volumeof complaints to us directly, yes, because historicallythat is what has happened. I would.

Q130 Mr Bacon: I’d like to ask you about RadioCaroline. You may be aware that they are trying to geta medium-wave licence or a medium-wave piece ofthe spectrum.Ed Richards: Yes I am.Mr Bacon: Ofcom announced in December 2006 thatit wouldn’t be issuing any more commercial licencesfor medium-wave broadcasting in the UK, and fromthat date onwards—I am reading from a note fromRadio Caroline—“both the BBC and commercialradio operators have regularly announced to theirrespective listeners that they regard medium wave asinferior and have been encouraging their listeners toswitch.” Those local commercial radio stations thatuse medium wave record such tiny audiences that theyhave deemed medium wave to be uneconomical to runstand-alone and they have been grouping together toshare programme output and reduce costs and indeedhave indicated a reluctance to do anything other thanthe bare minimum with medium wave.Radio Caroline go on to say, “The best commercialminds in the country have been unable to makemedium wave pay in terms of advertising revenue,and so we are confident that our presence on mediumwave and our unique programme format would nottake away any advertising from already licensedoperators. Allowing us a place on the band which noone else wants to utilise whilst covering ourtraditional heartland of the south east would be afitting tribute to Britain’s first commercial radiostation”—which indeed of course it is. “But in orderto achieve this we would need to be treated as aspecial case. What’s more, in order to be broadcastingby Easter 2014, which would be a magnificent 50thbirthday celebration not only for Radio Caroline butfor the people of Great Britain”. What's not to likeabout all of this? “In short, if no one else wants it, canwe have a small part of it, please?”My parliamentary colleague Caroline Lucas wrote toOfcom and received a reply saying that, according tothe registered data that the International

Telecommunications Union have, one of thefrequencies—107.1kHz—that Radio Caroline hashighlighted is in use 24 hours a day, by the French;it’s registered to the French. In fact, it turns out thatRadio Caroline has checked with CSA the Frenchequivalent of Ofcom, and been told that 107.1 is nolonger used in France. Now, instead of doing“computer says no” answers, why don’t you just helpthis national institution get a toehold on a piece offrequency that is not otherwise required, by phoningup the French and saying, “You’re not using it, canwe have it please?”Ed Richards: I’m very familiar with the RadioCaroline case and I am very happy to phone up theFrench and see what the situation is. I wish it wereexactly as it sounds, but it very rarely is. This is allabout trying to find a frequency. There are not anyspare frequencies just kicking around London or thesouth-east because they have all been used up. I pushour engineers on this every year to say, “Can't we findsome more frequencies? Can't we squeeze some morein?” It is one of things we discuss and I challengethem on every single year and I always have RadioCaroline in the back of my mind when I am doing so.

Q131 Mr Bacon: I thought you were going to sayyou have it in the back of your car, except that youcan't at the moment because it is only available onthe internet.Ed Richards: Indeed.

Q132 Mr Bacon: On the other hand you probablyhave such an expensive car that you can probably getthe internet in your car so you can listen to internetradio.Ed Richards: I can absolutely assure you I don’t. Sothere is a question of UK frequencies and at themoment we don’t think there are any. There areexisting users of medium wave and in our judgmentat the moment we would have to move somebody elseoff. So there is a broader question.

Q133 Mr Bacon: They are specifically saying not.107.1 is used in the north-east by a Newcastle station;they want it in the south-east where it is not used andit is allocated anyway to the French and the Frenchare not using it.Ed Richards: That brings us to the French.

Q134 Mr Bacon: Which is why you need to phonethe French.Ed Richards: One conversation I could imagine withthe French would be, “Are you using 107 kHz?” Towhich the answer might be, “Non, non,” but that doesnot necessarily mean that when I say, “Well, can weuse it?” the answer will be yes.

Q135 Mr Bacon: But you won't know unless youask.Ed Richards: I agree and I am very happy to ask. Iwasn’t aware it wasn’t being used. But I don’t wantto leave you with the impression that if they say it isnot being used, it will also follow that therefore theBrits can have it. I am not sure it will.



Q136 Mr Bacon: Well, we’re letting them have ouraircraft carrier. A bit of détente or entente cordialewould go a long way here.Ed Richards: I will make that point to them.

Q137 Mr Bacon: Especially since it started on aship.Ed Richards: I will make that point to them.

Q138 Mr Bacon: While you are busy with theFrench, can I invite you also to co-operate with theNAO on producing a more detailed breakdown of the£121,594,000 on page 12, at Figure 4? I have askedthe NAO and they have agreed to help you do this, Iam sure you will be glad to know. What we’re lookingfor is a forensic breakdown of that £121 million, bythe headings that we already have here but going intoimmense detail. If it should turn out—as is always thecase—that something might easily have beencategorised in one but got categorised in another, thatis a separate issue. What I want to see is these existingheadings and how they were categorised, down to agreat level of detail. If you work with the NAO to dothat they can help you produce a spreadsheet that hasthe level of detail we need.

Ed Richards: Very happy to do that.

Q139 Mr Bacon: The second thing, within the stafftravel component of £1.4 million, could you producea ranking of that per employee of Ofcom, so that theemployee with the most travel costs is at the top ofthe ranking going downward until you get to nought,because presumably, quite a lot of people don’t incurany travel costs and a smaller number incur muchmore?Ed Richards: Absolutely.

Q140 Mr Bacon: The thirds thing is expenses forstaff. I don’t know which heading it would comeunder—it might be mixed between “travel andsubsistence” and “other costs” or “administrative andoffice costs”, I don’t know—but could you itemiseand rank by employee all your expenses, includingentertainment?Ed Richards: As I recall, for all the team of themanagement group, they are already published onlinemonthly, so I’m happy to produce them.Chair: Right, that’s it. Thank you very much indeedfor your time.


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Supplementary written evidence from Ofcom

APPROACH TO CONTINGENCY AND ITS IDENTIFICATIONAND USE IN 2009–10

In line with other statutory corporations and similar public bodies, we take a prudent approach in developingand setting our annual budgets, within the overall level of our funding cap, to ensure sufficient funds areavailable through the financial year to undertake the planned work across core statutory duties and the strategicpriorities as set out in our Annual Plan. Notwithstanding the detailed approach to the budget-setting process,it is simply not possible for organisations such as Ofcom to pre-empt or plan for every eventuality or additionaland unforeseen demand on its resources during any particular financial year.

While bodies should be expected to seek to reprioritise, delay and/or curtail existing planned activities inorder to accommodate emerging but unplanned priorities, it is not always possible or tenable to achieve therequired outcomes within the overall envelope of the financial budget relating to the known and plannedactivities. Organisations therefore typically take a prudent approach in setting budgets and include a specific,identified and rigorously managed contingency sum within their overall budget.

Taking this prudent approach is particularly appropriate and necessary for us since we were not afforded aworking-capital provision at vesting. The funds required to carry out our statutory duties must be levied fromstakeholders in advance based on our estimated costs of planned activity for the forthcoming financial year.The Communications Act 2003 sets out this requirement and provides clarity around the annual process ofreconciling actual costs incurred to those planned.

In 2009–10, we included a total of £3.5 million of contingency within the approved annual budget,representing 2.5% of the total funding budget and set on the basis of the experience gained through five yearsof operation and accepted practice among similar organisations. This sum is included in the fees set andcollected from our stakeholders through the annual tariff-setting process and ensures we have sufficient workingcapital to manage such emerging issues as they arise and are formally prioritised through internal governanceprocesses. In the event there is no approved call on or utilisation of this managed budget contingency duringthe financial year, the sum is returned to stakeholders and taxpayers through lower fees, tariffs and grant-in-aid in the following financial year.

Any proposed utilisation of the budget contingency is subject to rigorous review and requires the explicitapproval of the Executive Committee (ExCo) before work can be undertaken and funds committed. The reviewprocess reflects the need to consider at an organisation-wide level opportunities to delay, curtail and/orreprioritise existing activities or drive further savings to accommodate the emerging demand and mitigate anypotential call on the contingency budget.

During 2009–10, only £0.6 million of this centrally held budgetary contingency was approved for use byExCo. It was utilised for legal and professional fees in undertaking our ICT sourcing review and commencingthe full OJEU procurement process for a new ICT outsourcing partner. This project had been formally approvedby ExCo and the Board and represents a further opportunity to deliver additional savings and increased valuefor money for stakeholders through significantly reduced operating costs in future years. For the financial year2009–10, we achieved overall savings of £7.5m relative to our approved budget through an aggressive focuson costs, driving efficiencies across the organisation and reprioritising, ceasing and/or rescoping some plannedactivities. We passed back this significant saving to stakeholders and taxpayers through reduced fees and grant-in-aid for 2010–11.

January 2011

Supplementary written evidence from Ofcom

OFCOM: THE EFFECTIVENESS OF CONVERGED REGULATION

I am writing with information Ed Richards undertook to provide to the Committee of Public Accounts whenhe gave evidence on 14 December 2010 on the National Audit Office’s report “Ofcom: the effectiveness ofconverged regulation.”

This information is attached as follows:

— attachment 1—a detailed breakdown of Ofcom’s expenditure in 2009–10 as given in figure 4 ofthe AO’s report (Q138 of the uncorrected transcript of Ed Richards’ evidence refers). As requested,his is provided to the nearest £100k and against the same cost elements and has been agreed ythe NAO;


— attachment 2—a ranking by colleague of travel, subsistence and expenses in 2009–10 (Q139 andQ140 refer). We note that colleagues incurring the greatest costs are overwhelmingly engaged ininternational activity (particularly in connection with spectrum management, with its inherentcross-border implications) and that we undertake this on behalf of the UK under direction fromthe Government. Additionally, some colleagues incurred costs for collective rather than individualactivities (eg international travel and events organisation). We have not broken these down toattribute all costs to the specific individuals who incurred them as this would only be possible atdisproportionate cost, but we have identified whether costs were incurred on colleague ordepartmental credit cards; and

— attachment 3—a note about our approach to contingency and its identification and use in 2009–10(Q83 refers).

As promised, we will provide further information about the costs of restructuring to meet our SpendingReview settlement when the final details are settled following a consultation process on proposed redundancies(Q111 refers). We anticipate doing so during the course of February. I trust that is acceptable to the Committee.

January 2011


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Printed in the United Kingdom by The Stationery Office Limited02/2011 008296 19585

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ofcom: the effectiveness of converged regulation · 7. ofcom has announced a budget cut of 28% over...

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