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It is likely that the reduced funding for S4C will in turn affect S4C’s suppliers. As about 75% of S4C’s grant in aid is spent on commissioning work from Welsh independent production companies, this sector is likely to be particularly affected. Assuming that funding for the Welsh independent production companies remains a similar proportion of S4C’s revised budget, the sector’s income is estimated to reduce by around £80m over the spending review period. However, this reduction is uncertain and will depend on S4C’s ability to make savings or raise funds elsewhere following their funding cut.

As the majority of revenue in the Welsh Independent Production sector is from S4C, there may in turn be some effect on jobs in the sector. However, this is again uncertain and will depend in part on the sector’s ability to find funding from other sources. There is tentative evidence that the sector has been gradually becoming less reliant on S4C. According to the S4C Economic Report 2010, turnover in the Welsh Independent Production sector grew by 8% from 2007 to 2009, twice the 4% rate of increase in funding from S4C over the same period.

As shown in table 2, from 2013/14 until 2014/15, the majority of S4C’s funding will be from the Licence fee. The funding level will be £76.3m in 2013/14 and £76m in 2014/15 amounting to £152.3m (approximately £145m in constant prices) over the spending review period. In addition, in line with the Broadcasting Act 1990, the BBC is expected to continue to provide at least 10 hours per week of Welsh language programmes free of charge to S4C. The BBC estimates the cost of this is around £20m every year. The provision of BBC programmes to S4C in line with the Broadcasting Act 1990 is unaffected by this change.

In addition there may be some transitional costs as the BBC adapt to closer working with S4C. Once again, the scale of these costs is uncertain at this stage and will depend upon decisions made by S4C and the BBC. The transitional costs purely from the change in funding arrangement alone are not expected to be substantial.

Any broader impacts on jobs and output in the Welsh or UK economy are highly uncertain and will depend on wider economic factors, but this measure is not expected to have a substantial negative impact on either the Welsh or the UK economy.

Benefits under preferred option

As shown in tables 2 and 3, the Exchequer gains in two ways from option 1: a reduction in S4C’s total budget, and a transfer of funding responsibility to the BBC. Under the proposed option, S4C funding will cost the Exchequer £186.7m over the spending review period. This is a reduction of approximately £260m (£250m in constant prices) compared to the existing funding arrangement.

The proposed option may result in efficiency gains within S4C, as they seek to maintain high quality broadcasting standards with reduced funding. Improved efficiency would mean that the positive spillovers and plurality gains from S4C’s service could still be achieved, but at less cost to the Exchequer. The indirect impact of a reduction in funding for the Welsh Independent Production sector may also increase competition for commissions, stimulating further efficiency gains.

Whilst S4C will remain an independent service retaining its brand identity and editorial independence, it is expected that the partnership with the BBC would result in economics of scale, for example potentially arising from shared operations and facilities. Closer working will give S4C greater access to the BBC’s considerable experience and expertise in the Welsh Television sector and in broadcasting more generally.

Summary of monetised costs and benefits

The costs and benefits under option 1 are summarised in table 4 (in constant prices). As around 75% of S4C’s budget currently goes to Welsh independent producers, much of the cost to S4C is likely to be passed on to this sector. On this basis, the cost to the Welsh Independent Production sector is estimated to be roughly £80m (£70m in present value terms) over the Spending Review period.