Productivity Growth and the
Funding of Public Service
Broadcasting in the UK
David Paton
Nottingham University Business School
Leighton Vaughan Williams
Nottingham Trent University
May 2008
Introduction
• The role of PSB and how it should be funded has long
been a source of controversy amongst policy makers in
many countries.
• Typically, the public service broadcaster has an
incentive to argue that improvements in, for example,
programming quality should come from increases in
public subsidy whereas public finance officials would
prefer to see improvements funded from efficiency
savings.
Introduction (cont.)
• The negotiating process is complicated by the
difficulty in identifying a level of efficiency
savings which it is reasonable to expect the
public service broadcaster to achieve.
Why Public Service Broadcasting?
• Classic Market Failure argument
Market Failure
• 1. Non-exclusivity (although the technology exists to
exclude and is used by some commercial broadcasters).
• 2. Non-rivalry (i.e. consumption of the good by one
person does not reduce its availability to others).
• The ‘Free Rider’ problem, in which those who do not
pay are as able to consume the product as those who do
pay.
Market Failure (cont.)
• ‘Merit good’ principle, i.e. a good whose value to an
individual (in terms of information and education, for
example) exceeds the value placed on it by the
individual, in part because people are not fully
informed.
• In a more general sense, PSB may provide more
positive externalities (e.g. improvements in social
responsibility) than would a free market which might
pander to the lowest common denominator.
Rationale (cont.)
• The rationale for PSB may become even more
important as spectrum width and digital
technology reduces barriers to entry, although
advantages of scale cold mean that a high level
of market concentration is maintained.
Citizen-Based Grounds for PSB
• All this is part of what has been termed (Cave,
2004) a “citizen-based” ground for public
service broadcasting.
• Notably, the public interest objective of
increasing overall levels of programme quality,
creating a “… bias towards quality” (Noam,
1987).
Department for Culture, Media and
Sport directive
• PSB should “… provide a strong and distinctive
schedule of benchmark quality programmes on
all its services (DCMS, 2000).
Why study BBC?
• 1. The UK is unusual in funding its main public
service broadcaster, the BBC, by means of a
licence fee levied on anyone (with defined
exceptions) who owns a TV set.
• 2. The BBC is the largest and most dominant
public service broadcaster in the world.
Background
• 1. Founded in 1922 as the ‘British Broadcasting
Company’ by a group of wireless
manufacturers.
• 2. Royal Charter granted in 1927.
• 3. TV broadcasting commenced in 1936.
• 4. Charter most recently renewed in 2006.
Funding
Licence fee paid for by every household with TV, with
defined exemptions, e.g. for those over 75.
BBC income, 2006-07 = £3.24 bn (BBC Executive
Report, 2007).
£3.1 bn (2005-06); £2.94 bn (2004-05).
The UK both devotes a larger share of GNP to PSB, and
attracts a larger audience share, than any other
developed economy.
Level of funding
• Determined every 5 years by a ‘licence fee
settlement’ resulting from negotiations between
central Govt and the BBC. In these negotiations
the Govt has increasingly been concerned with
trying to assess the level of efficiency savings
which the BBC might reasonably be expected to
achieve over the lifetime of the ‘settlement’.
Measurement Problems
• Given that the BBC’s programming output is free at
the point of use, it is difficult to identify levels of
output in a form suitable for assessing productivity
levels or growth in the BBC.
• A natural alternative is to estimate productivity growth
in the commercial broadcasting sector and to use these
as a benchmark to judge reasonable efficiency gains
which the Govt might expect the BBC to make.
• Even so, there remains a problem in defining
measurable units of output and adjusting for quality
changes.
Motivation: Summary
•
•
•
•
Funding settlement for public service broadcasting (PSB) in
the UK subject to political tensions.
Broadcasters want more public funds whilst Treasury want
efficiency gains
Treasury face difficulties in identifying what efficiency
gains are reasonable.
We are interested in estimating productivity growth rates
amongst commercial broadcasters to use as a benchmark
for reasonable PSB efficiency savings.
Previous work
• 1. Very few estimates of productivity growth in
broadcasting and, to our knowledge, none at all based
in the UK.
• 2. Exceptions include Triplett and Bosworth (2003)
who calculate labour productivity in a range of US
service industries. They use data from the Bureau of
Economic Affairs (BEA) to calculate an annual growth
rate of labour productivity in radio and TV
broadcasting of 1.2% p.a. between 1995 and 2000.
Using Bureau of Labor Statistics (BLS) data, they
report a similar growth rate , of 1% p.a.
Previous work (cont.)
• Another exception is Sichel (2001) who report
labour productivity grwoth estimates using both
total output and value added for th broadcasting
sectorfor three periods:
• Total output: 1977-90 (0.6%); 1990-95 (1.1%);
1995-99 (0.7%).
• Value added: 1977-90 (-0.8%); 1990-95 (6.3%);
1995-99 (-4.5%).
Summary of previous work
• With the exception of Asai (2005), who looks at
broadcasting productivity in Japan, we have no
estimates of broadcasting productivity for any
period beyond the year 2000 or of TFP and no
estimates at all for broadcasting in any country
except the US. This is particularly important in
the context of this study given the institutional
differences between broadcasting in the US and
UK.
Methodology
1. Labour productivity growth estimates:
compare broadcasting with broader sectors:
“Other services” and “Recreational, Cultural
& Sporting Activities”
2. TFP estimates using Stochastic Frontier
Analysis (SFA) method, decomposed into
technical change and efficiency change.
3. TFP also estimated using Levinsohn-Petrin
technique (see Levinsohn and Petrin, 2003, for
details).
Data
Annual Respondents Database (ARD) – a plant-level file based on
the Annual Business Inquiry, a survey conducted by the OFS.
•
•
•
•
•
Firms selected for inclusion in the ABI from the IDBR at
the ONS.
Sampling is based on size by employment on the Register.
Sampling undertaken at “reporting unit”…
… reporting unit selected by enterprise.
Broadcasting data available from 1997 to 2003 for around
130 firms each year.
Measurement of Variables
Output measures:
Gross Output (GO)
Gross Value Added (GVA) (see paper for
construction)
Inputs measures:
Employment
Capital stock
Materials (for GO only)
Deflate by CPI for Recreation & Leisure
(published by the ONS)
Table 1: Descriptive Stats for Broadcasting: 1997-2003
TV
Year
1997
1998
1999
2000
2001
2002
2003
Selected
N
Emp
89
69
69
90
94
73
82
438.4
486.1
548.2
407.6
522.3
505.8
599.6
SOURCE: ONS
Nonselected
N
Em
p
578 21.2
1108 8.4
1624 6.6
1991 10.1
2299 4.6
2735 8.8
2992 4.1
Radio
Selected
Non-selected
N
Emp
N
Emp
69
45
56
43
54
47
50
44.0
76.1
61.8
99.9
77.4
114.9
90.2
1521
1440
1409
1413
1366
1355
1338
5.3
4.7
4.9
4.7
5.5
4.7
5.2
Results
1. Labour productivity growth estimates
2. SFA TFP growth estimates & decomposition
3. Comparison using alternative estimators (e.g.
Levinsohn-Petrin)
4. TFP estimates by employment group
5. Alternative price deflators (not reported here)
1. Labour Productivity Growth estimates
Other Services
GO
Recreation
GVA
GO
Broadcasting
GVA
GO
GVA
1999
2.6
7.9
-1.4
6.5
-10.6
1.4
2000
2.4
0.2
1.6
3.5
8.6
16.3
2001
2.4
3.2
5.2
4.3
12.8
10.7
1999-2001
2.5
3.8
1.8
4.8
3.6
9.5
2002
4.2
0.5
5.7
0.5
2.5
-2.1
2003
11.4
2.6
14.0
1.4
5.0
-8.2
2004
14.6
8.6
13.7
5.4
10.5
18.0
2002-2004
10.1
3.9
11.1
2.4
6.0
2.6
1999-2004
6.3
3.9
6.5
3.6
4.8
6.0
Notes:
(i) Figures are mean annual % growth for the specified periods
Summary of Results
1. Mean annual labour productivity growth over 1997-2004
estimated to be 4.8% using GO and 6.0% using GVA.
2. SFA TFP growth estimates & decomposition
GO
1998
1999
2000
2001
2002
2003
Technical Change
-
8.95
8.95
8.95
8.95
8.95
Efficiency Catch up
-
-7.35
20.40
-7.31
-4.25
7.96
Total Productivity
Growth
-
1.59
29.34
1.64
4.69
16.90
Technical Change
5.47
5.47
5.47
5.47
5.47
5.47
Efficiency Catch up
-3.92
-0.53
13.92
-4.49
-9.01
3.05
Total Productivity
Growth
1.55
4.95
19.39
0.98
-2.54
8.53
GVA
Notes:
(i) Figures are annual % growth for the specified periods
Summary of Results (cont.)
1. Mean annual labour productivity growth over 1997-2004
estimated to be 4.8% using GO and 6.0% using GVA.
2. Mean TFP growth rate using SFA is 11.9% (GO) and
5.4% (GVA). Growth explained mainly by technical
change but also by efficiency improvements
3. Comparison using alternative estimators
GO
1998-2000
2001-2003
1998-2003
SFA Estimates
13.63
10.71
11.88
OLS Estimates
12.19
6.77
8.94
Levinsohn-Petrin Estimates 24.86
7.41
14.39
GVA
SFA Estimates
8.06
2.74
5.40
OLS Estimates
4.84
2.12
7.57
Levinsohn-Petrin Estimates 8.92
7.17
7.87
Notes:
(i) Figures are mean annual % growth for the specified periods
(ii) Levinsohn-Petrin (LP) estimates allow for endogeneity of inputs.
(iii) GO estimates and the L-P GO and GVA estimates are based on 1999-2000, 2001-2003 and
1999-2003 respectively.
Summary of Results (cont.)
1. Mean annual labour productivity growth over 1997-2004
estimated to be 4.8% using GO and 6.0% using GVA.
2. Mean TFP growth rate using SFA is 11.9% (GO) and
5.4% (GVA). Growth explained mainly by technical
change but also by efficiency improvements
3. Levinsohn-Petrin estimates broadly comparable
(although implausible for TV alone).
4. TFP estimates by employment group
GO
1998-2000
2001-2003
1998-2003
250+ employees
6.87
9.13
8.23
50-249 employees
13.21
17.80
15.51
20-49 employees
-8.24
19.91
8.65
10-19 employees
37.39
-1.38
14.68
<10 employees
3.08
14.10
9.69
250+ employees
1.62
5.09
3.36
50-249 employees
2.95
9.74
6.34
20-49 employees
10.42
0.52
5.47
10-19 employees
9.81
-11.12
-0.65
<10 employees
8.16
6.71
7.44
GVA
Notes:
(i) Figures are mean annual % growth.
(ii) GO estimates are based on 1999-2000, 2001-2003 and 1999-2003 respectively.
Summary of Results (cont.)
1. Mean annual labour productivity growth over 1997-2004
estimated to be 4.8% using GO and 6.0% using GVA.
2. Mean TFP growth rate using SFA is 11.9% (GO) and
5.4% (GVA). Growth explained mainly by technical
change but also by efficiency improvements
3. Levinsohn-Petrin estimates broadly comparable
(although implausible for TV alone).
4. TFP estimates reasonably stable across firm sizes
Policy Implications
• Broadcasting sector in UK has experienced
positive productivity growth over recent years
• Technical change and (less so) efficiency
catch-up contributed to productivity growth.
• Likely to be potential for significant efficiency
savings from the BBC
• Lower licence fee increases !!
• But caution needed due to relatively small
sample size & rapid changes to structure of
industry.