Productivity Growth and the Funding of Public Service Broadcasting in the UK

1
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

2
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.

3
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.

4
Why Public Service Broadcasting?

• Classic Market Failure argument

5
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.

6
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.

7
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.

8
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).

9
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).

10
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.

11
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.

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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.

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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.

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Measurement Problems

• Given that the BBCs 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.

15
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.

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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.

17
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).

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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.

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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).

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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.

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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)
Measurement of Variables
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(No Transcript)
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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)

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1. Labour Productivity Growth estimates
Notes (i) Figures are mean annual growth for
the specified periods
25
Summary of Results

• 1. Mean annual labour productivity growth over
  1997-2004 estimated to be 4.8 using GO and 6.0
  using GVA.

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2. SFA TFP growth estimates decomposition
Notes (i) Figures are annual growth for the
specified periods
27
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

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3. Comparison using alternative estimators
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.
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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).

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4. TFP estimates by employment group
Notes (i) Figures are mean annual growth. (ii)
GO estimates are based on 1999-2000, 2001-2003
and 1999-2003 respectively.
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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

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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.