CHAIR —I welcome officers from the Special Broadcasting Service. Do you wish to make an opening statement, Mr Brown?

Mr Brown —Thank you for the opportunity but no, thank you.

CHAIR —We will go to questions.

Senator MINCHIN —I guess you are understandably devastated by the outcome of the budget. There are many who think that the chap sitting to your right might have done well for the ABC but has been a disaster for the SBS. I understand you sought $70 million extra per annum, but you have only got $20 million for the whole triennium in extra funding. I would like to know your reaction to what has occurred, what this will mean for SBS in terms of your plans, and I would like to know whether the funding that you have received—similar to the ABC—goes to your base. I note that in the third year it is $11 million extra. Does that then become the base funding for the next triennium or is this just a one-off?

Mr Brown —Perhaps I will start with the last point first, while it is in my mind. My understanding is that it does go to the base.

Senator MINCHIN —Is that correct, Minister?

Senator Conroy —That is my understanding also.

Mr Brown —With regard to the overall reaction of the SBS, actually we are grateful that we have received any sort of increased funding. As you would be aware, this is the first increase of any real type since three trienniums ago, I think, probably nine years ago, SBS received an annual increase of about $2.5 million a year to cover the increased costs of overseas acquisitions. Since then there has been no increase in funding save for one year when we received $3 million, a one-off payment for sports rights, but in the following triennium it was removed from the budget. In the context of that track record, to receive any sort of increase is most welcome. Notwithstanding the ABC’s success—that is really a matter between the ABC and the government, not really SBS—we obviously are cognisant of the global financial crisis and I think our view is that, although we are not party to the actual decision making, in other circumstances SBS might have done better. We are aware of the global financial crisis because it is affecting us as well in terms of our commercial performance.

In that context, yes, we did ask for something in the region of $70 million a year. That was a kind of averaged out figure for a range of new services. From memory, it was sort of back loaded as well. One of them was related to local content, and in that regard the government has increased our funding there. That is very welcome because that part of our budget is under very considerable pressure because of our commercial downturn.

Our intentions are to look closely at our prioritisation to make sure that we provide our core service to the maximum capability we have. With regard to additional services we will make every endeavour to deliver those in part. They obviously cannot be delivered in the full range as we outlined them. For example, we will launch SBS2 on Monday as per schedule. It will not carry the full range of content that we had envisaged in our original funding submission, but it will carry part of that and it will fulfil a range of other responsibilities, and in the end we believe we will be able to put a viable multichannel to air.

With regard to digital radio, we will launch our digital radio service in July. I think it is late June that some of it goes to air. It will be a simulcast of our analog service with a time shifting of those services to enable audiences to access them on different occasions. With regard to online, these were the three large components. The principal element of online was for us to secure, for the first time really, funding for online that allowed us to provide a more robust service and one that is more comprehensive. In there was a very specific request to develop language hubs. On the delivery of language services, multilingual services for SBS are currently constrained by the fact that analog radio has to vertically stack a sequential range of programs and you can only access them sequentially. Online obviously gives us the capacity to break out of that sequential straightjacket and move into a random access world. We will pilot those language hubs and we will renew our engagement with the government on the basis of those pilots to demonstrate what is capable in a digital world of reaching out and offering multicultural Australia a greater range of services, greater depth for language communities, and allowing some new language communities to come on board as well.

Senator MINCHIN —I suppose the point that commentators are making is that if both the ABC and SBS had been treated in a sense equitably that would be one thing, but to the commentariat it appears that the ABC has had much more favourable treatment than SBS. I am sure you are grateful for whatever small mercy the government has granted you, but a much greater mercy was granted to your compatriot and cousin, the ABC. Have you had an explanation from the government as to why that differential treatment was meted out to you? I think that is the reasonable thing that observers are noting: for some reason SBS appears not to be in favour with this particular government and it is giving the ABC much more favourable treatment. Do you see it that way? Have you had an explanation of why your treatment is so much worse than the ABC’s?

Mr Brown —I have not sought an explanation.

Senator MINCHIN —Really?

Mr Brown —Really. As I said earlier, what decisions the government makes in relation to other funding areas are really a matter between the ABC and the government. I am aware of the commentary. Frankly, it is very confusing and mixed, and I have seen suggestions that range from the minister not liking me to the decision to put ads in programs, but none of those really makes a great deal of sense. The rather more pragmatic explanation—and in my view it would probably be the correct one—is that the government is well disposed to SBS and would have wished to more completely fund it than it felt it was able to in the end, and the reason there was any constraint in that area was the global financial crisis, which I note has affected many other decisions.

Senator MINCHIN —You are not worried that the fact that you are able to gain external revenue—which is something I support—unlike the ABC, is really starting to count against you? That is the notion that is being perpetrated—that either the government or the bureaucrats or both are saying: ‘Well, SBS has access to the commercial market for revenue. We do not need to give them any money, unlike the ABC.’ Are you worried that you are in that dilemma, that catch-22?

Mr Brown —It was a question posed, was it not, some years ago when we first started stepping up our commercial activities? But is it a catch-22 situation? I do not have any reason to believe that and that has never been suggested from any area of parliament under the previous government and this government, so I have no reason to believe that is the case. I understand the speculation; it is the sort of speculation the staff would put up as well and say, ‘Is it hurting us?’ Of course, if that were the case, if there were any suggestion that we were being punished for our commercial activity, that would be kind of odd because we are being pushed more and more to be reliant on our commercial activities and they form an increasing proportion of our total funding. We do not really have a great deal of choice in this regard.

The act granted us a licence to raise revenue and the act also requires us to operate SBS in the most efficient manner possible. I have never felt that our commercial licence was some sort of discretionary licence. I always felt—and I feel today—that it was a licence that we should extract full value from for the benefit of our audiences. I guess I will never persuade people who object as a matter of principle to programs being interrupted that there is a principle behind what we are doing, but that is the case. I am looking at a range of programs that currently go to air that would not go to air without that commercial support.

Senator BIRMINGHAM —I want to come back to advertising shortly, but is it possible that you are actually getting a budget cut in net terms out of this budget? As Senator Minchin has been discussing, the government is giving $4 million in 2009-10, and $5 million and $11 million in the years beyond that, but of course it is taking with the efficiencies to the distribution and transmission expenses. In your submission to the 2020 Summit you said that in terms of savings the obvious place to start is in transmission and distribution services. Each year SBS spends almost $80 million out of a total appropriation of $188 million on transmission and distribution. It does not take much of a saving out of that $80 million for what is going back into government coffers to actually outweigh the additional funding you are getting.

Mr Brown —Obviously I am a bit constrained in what I can say with regard to efficiencies identified in transmission and distribution, for commercial reasons, but it is pretty clear, obviously, that about $4 million of savings come straight out of the analog shutdown. That is a cost neutral situation for us. Those are funds we do not need to spend, so we do not need to be given them.

Senator BIRMINGHAM —Just to clarify this, the ABC told us that was a special purpose grant provided, anyway, so I am assuming that was the same—

Mr Brown —Ours has a slightly different mechanism but it has the same effect. We receive funding directly for that purpose. When that purpose no longer exists then we do not need the funding. With regard to the other area of shared transmission and distribution, yes, it was our idea. We took it to 2020 in the spirit of the 2020 Summit that we should come up with ideas for the general benefit of public broadcasting, and so we did. We came up with an idea that we think would benefit both broadcasters. Our wish is that when we fully explore that there might be some way for savings to be recommitted back to the two organisations, but these are very early days and we are yet to have any sort of serious discussions with the department about how this can best be achieved. We have had some preliminary discussions with the ABC, as Mr Scott reported. They actually predate the budget decisions, so these are the things that we have been talking about: how could this possibly work for the benefit of public broadcasting? I do not believe there can be any suggestions that there will be a net loss situation for SBS as an outcome of this budget.

Senator BIRMINGHAM —In your submission at the end of the 2020 Summit you did say, of course, that any savings generated could be redirected to content creation. Although we do not know what these amounts are—for you and the ABC it is still obviously a work in progress as to how you are going about achieving them—the government quite clearly has targets that presumably Finance is going to hold you to account to meet over the triennial funding period in terms of savings that have to go back. It is tricky without knowing those, but of course they are mixed in together with the ABC’s funding and so on. Is the minister going to give some type of assurance that in net terms SBS is not actually worse off?

Senator Conroy —Before I come directly to your question, I will respond to a couple of comments—I will not say assertions—made by Senator Minchin that he sought Mr Brown’s view on. Could I make it absolutely clear that I have a high regard for Mr Brown and that funding of the SBS had nothing to do with any of those conspiracies that Senator Minchin was describing. The funding for the ABC, which seems to be some benchmark for Senator Minchin’s questions, was based entirely around an election commitment, which we met. The global economic recession meant a number of hard choices, and worthy projects have had to wait. But the ABC funding increase was about an existing election commitment, which we honoured. So I reject utterly a number of those propositions, which I had not heard previously, but I did feel it necessary to respond, particularly to the one that suggested I have anything other than the highest regard for Mr Brown.

Senator MINCHIN —I accept that.

Senator Conroy —And no-one should read any truth into any suggestion otherwise. In terms of the net outcome, the SBS has the largest increase, as I think Mr Brown said, in three trienniums. Mr Brown, to his credit, took forward a proposal to the 2020 Summit, which we are now working our way through. I cannot foresee a situation where SBS would be worse off, but it is a work in progress. I am sure Mr Brown would be aware it is up to an interdepartmental committee, and I think Mr Scott was asked similar questions. It is an early work in progress. The savings are only in transmission and distribution. There is still a net gain for content. The new funding is the content of programming. Other than the special sports grants given by the previous incumbent, I think it is accurate to reiterate the point Mr Brown makes, which is that this is an increase well beyond anything previously given in three trienniums. It is a permanent increase. They are not one-offs. There will be some serious negotiations to see what savings can be made.

Senator BIRMINGHAM —If Mr Brown’s $80 million in transmission and distribution costs are a correct estimate, which I am quite sure they are, it only takes a 10 per cent to 15 per cent saving off that annually for even the highest figure, the $11 million in the third year of the triennial funding, to be outstripped by—

Senator Conroy —But this is money that is given for a specific purpose. If the purpose is not there then there is no need for the money. This is a direct fault of an appalling piece of public policy conducted by the former government when it decided to privatise the broadcast towers and then contracts were entered into. SBS did a far better job in protecting taxpayers than previous management did a long time ago at the ABC. SBS deserves congratulations for having done that. The savings for SBS are much less in terms of transmission, I think it would be fair to say, than the ABC, which might be able to contribute far more given the outrageous terms of the contract.

Senator BIRMINGHAM —I would equally have thought that SBS, having in good faith gone along to the 2020 Summit and said, ‘Here is a plan; here is an idea; here is how we can save some dollars, and we would hope to be able to put that back into content generation,’ deserve to be guaranteed that they are not going to be left in net terms worse off at the end of that process.

Senator Conroy —This is the only increase in content funding for the SBS since 1994. Let us not cry crocodile tears. Your previous government sat there for three triennium fundings—11½ years—and did not give them a cent for content funding. There were a couple of one-offs for individual sporting events, as has been described. Do not come here and try to pretend that if they were to get a reduction in transmission costs they somehow would have a worse situation. This is the only increase since 1994.

Senator BIRMINGHAM —Will you give a guarantee that at least by the time we get to 2011-12, when the next triennial funding agreement is being negotiated, for the 2012-13 budget, that the base level of funding will not be lower than it is currently today; that you will not have stripped more out of the transmission side?

Senator Conroy —I appreciate the comment Mr Brown made about it being possible that savings in transmission may go back, but what Mr Brown indicated publicly at the 2020—and we are now going through the process—is around transmission costs. We have made a permanent increase in SBS’s funding, something the previous government in 11½ years—

Senator BIRMINGHAM —Yes, it did. You have said—

Senator Conroy —I appreciate your—

Senator BIRMINGHAM —I am just trying to be clear that you are not Indian giving in this situation—

Senator Conroy —You are able to skip over that; I appreciate that.

Senator BIRMINGHAM —that you are not giving with one hand and taking away with the other.

Senator Conroy —You cannot be held responsible for the atrocities of the former government—

Senator BIRMINGHAM —Atrocities!

Senator Conroy —but the facts speak for themselves. If you think you can play the game of saying that transmission funding and content funding are the same thing, that was a game played by the previous government, and I thought you were actually trying to move on from that. We have given an increase in content funding.

Senator BIRMINGHAM —I am not trying to play any sorts of games here; I am just trying to get a clear position that we are not going to wake up in three years time and find that in fact the base funding for SBS is less than it was when we went into this process and that for all of Mr Brown’s good work in finding savings he has not even been able to keep the status quo in terms of investment in SBS.

Senator Conroy —You keep trying to imply that transmission funding is equivalent to content funding, so let us be clear about this: it is not. If a saving is able to be made on transmission, that is to the benefit of Australian taxpayers, and the government will consider what to do with that in the forthcoming budget. But, if you want to try to start drawing a line that suggests adding the two together somehow magically makes the increase in content funding that we have given disappear, no-one is going to take you seriously, and I am certainly not.

Senator BIRMINGHAM —You will not assure us today that in three years time the government will not be investing less in SBS than it is today?

Senator Conroy —I appreciate that you have inherited a staffer who is locked in the mindset of the previous government. Let me be clear. The pretences of the previous government about increases in funding were entirely around contractual increases in the transmission deals. They were not for content. They were not for the actual core business of the public broadcasters. I appreciate you might want to try to add them together again to play this game, but let me assure you that we have given a permanent increase in content. If we are able to make savings on transmission, not the core business—a policy failure from the previous government following a very grubby privatisation deal that has made taxpayers significantly worse off; and you can keep trying to play this game—as I said to you at the beginning of this conversation, I cannot envisage that the savings will be more than the increases. But let me be clear about this: if there are savings from transmission, that will be a discussion between the ABC, SBS and the government. Do not try to pretend that it is the same thing.

Senator BIRMINGHAM —We believe the budget is based on there being savings in transmission.

Senator Conroy —Mr Brown, in good faith, has indicated there are possible savings. Do not try to pretend that is a reduction in the SBS’s core funding. It is not.

Senator BIRMINGHAM —Presumably it is only if they deliver above whatever the budget forecast and projections are you can have those discussions.

Senator Conroy —You can make all the presumptions you like. The discussions have barely commenced. Do not try to pretend a reduction in transmission expenditure by SBS can be netted off against a content funding increase in this budget.

Senator BIRMINGHAM —Either there are figures that go against keeping the deficit from not being even bigger or there are not those figures in Finance. If there are those figures, the expectation is that the ABC and SBS will find a way to reach those savings.

Senator Conroy —Let us be clear: is it your contention that transmission funding and content funding are the same?

Senator BIRMINGHAM —I just want to make sure that we do not wake up in three years time and find that SBS is being funded less by this government than it was when it was first elected.

Senator Conroy —I repeat: is your contention, seriously, that transmission funding and content funding are the same thing?

Senator BIRMINGHAM —I well and truly understand the difference. As I said, Mr Brown went along to the 2020 Summit in good faith and it would be nice to think that even if the government took some savings from the transmission—and that is reasonable—perhaps SBS might at least get a guarantee that their funding will not be less in three years time.

Senator Conroy —It would have been nice to for the previous government to have given them a permanent increase, but it did not happen.

Senator BIRMINGHAM —Quite clearly there is no guarantee in anything that you are saying. We can only hope that SBS’s funding will at least be maintained at current levels.

Senator Conroy —I repeat what I said earlier: I cannot envisage that. The work of the committee process that is being engaged in now will commence shortly. In fact, it has already begun in the very preliminary stages.

Senator BIRMINGHAM —I have one last question on this issue. Should whatever the projections are for these transmission savings be exceeded—

Senator Conroy —That is a hypothetical.

Senator BIRMINGHAM —What is a hypothetical?

Senator Conroy —You said ‘if’ something happens. That is a hypothetical.

Senator MINCHIN —Let him finish the question.

Senator BIRMINGHAM —Indeed.

Senator Conroy —And he is conceding it is a hypothetical, to be fair to Senator Minchin.

Senator BIRMINGHAM —The difficulty we have in this situation is that we do not know what the projections are. We will never actually know whether they have been exceeded. It is not like I can look at next year’s budget papers and say, ‘Yes, they have been exceeded.’ I put the hypothetical to you that if they are exceeded will you at least be attempting to sit down and deliver to Mr Brown his share of those additional savings beyond what Finance is budgeting?

Senator Conroy —I am not going to speculate on the possible success or otherwise of the process that SBS, ABC and the government are going to engage in.

Senator BIRMINGHAM —I shall allow Senator Minchin to continue his questioning.

Senator MINCHIN —Thank you. Mr Brown, in relation to your own revenues. You are reported as having warned SBS staff of a major downturn in revenue, with a shortfall of up to $9 million this financial year, an even worse downturn the year after and savings that will have to be entered into. Is that the position for this financial year, that your revenues will be that much less than forecast?

Mr Brown —Yes—between $8 and $9 million.

Senator MINCHIN —What will that mean for you?

Mr Brown —This year has almost closed off. We have managed our way through that.

Senator MINCHIN —Will you still come through with a surplus this financial year?

Mr Brown —Yes, we will. The difficulty that every media company is having is that the market is so short. Whereas you might have a clearer view to forecast revenue in ordinary times, in times like this the market gets really short, advertisers hold back and make their decisions just a few weeks before buying. Our expectation next year is that we will probably be in the region of $9 million or $10 million off the budget we struck for our five-year plan. So, against planning purposes, it is a lesser revenue but still a year-on-year growth.

Senator MINCHIN —In terms of the forward years, page 165 of the PBS under ‘Own source income’—and I presume this is SBS—lists sale of goods and rendering of services for 2008-09 of $68 million, looping to $93.8 million in 2009-10. I assume this is the SBS we are talking about?

Mr Brown —Yes.

Senator MINCHIN —That is not quite consistent with your concerns expressed apparently in your email and that you just expressed about what might happen to your revenues, or are we talking at cross-purposes?

Mr Brown —No.

Senator MINCHIN —That is a very substantial increase that you are forecasting.

Mr Brown —Yes. I did say that it was a year-on-year increase. But it is an increase particularly driven by two events that we own—the Ashes and the FIFA World Cup—which both happened to occur in one financial year. There is a matching cost of securing those rights and providing the production costs.

Senator MINCHIN —They both occur in 2009-10?

Mr Brown —Yes. The Ashes are in July of this year and the FIFA World Cup is predominantly in June 2010 with a little bit in July.

Senator MINCHIN —I accept that, because you go from $68 million up to $93.8 million, but in the next three years after that you are forecasting $89 million, $97 million and $107 million. It is not as though next year is a one-off. All of your forecasts are based on sustaining that level of revenue considerably above this financial year.

Mr Brown —Our increases have been significant since we introduced interprogram breaks.

Senator MINCHIN —That has made a real difference, has it?

Mr Brown —We are on a growth path. There is no doubt about that.

Senator MINCHIN —Can you charge a lot more for in-program rather between-program advertising?

Mr Brown —The prognosis from an independent report for between-programs was that our revenues would be down to about $25 million a year. That is without regard to the global financial crisis. The prognosis for between-program breaks was very poor. If they are in-programs—and remembering our interruptions are fewer and of shorter duration than for commercial networks—our advertisements are in a clutter-free environment, and that has a value. We have been endeavouring to move from a position where we were being forced to offer massive discounts in order to secure any sort of advertising revenue between programs to a position where our advertising yield is proportionate to the ratings that we have. That journey of getting there involved year-on-year growth. The numbers I have shared with you and staff are numbers that show that we will not be reaching the numbers that we originally forecast both for this year and for next year.

Senator MINCHIN —I must say I am pleased that the government in this glossy document has said it has not proposed to require the SBS to change its current approach to advertising, although I note, Minister, you do say ‘at this time’. Does that mean it is something you are going to keep under review?

Senator Conroy —No. We thought we were fairly straightforward. We are certainly not in a position in this current financial circumstance to compensate the SBS for the withdrawal of in-program ads.

Senator MINCHIN —Does that mean that at some stage in the future you may contemplate that, although the budget will not be back in surplus for yours and my political lifetime?

Senator Conroy —I cannot speak for you, but according to the rumours that I hear out of South Australia that could be correct in your case.

Senator MINCHIN —Do not believe everything you hear out of South Australia. Mr Brown, the surplus you forecast for this next financial year is a very thin $1.1 million on revenues of $308 million. It is a remarkably thin margin. Have you ever actually run at a loss?

Mr Brown —Not in memory, no. As you are aware, we require the approval of the Minister for Finance and Deregulation to run at a loss.

Senator MINCHIN —Yes, I am aware of that. I could not recall your running at a loss.

Mr Brown —We have never sought approval for that.

Senator MINCHIN —Is that as thin a margin as you have ever forecast?

Mr Brown —No, I do not believe so. We normally operate on a margin of below $1 million. The intention for that is that there is no point in building up surpluses unless it is the case you see this year where the surplus is stronger, which gives us cash reserves. Otherwise it makes more sense for us to deliver value to audiences rather than to squirrel away surpluses, so we try to run a modest surplus each year.

We have previously discussed the need for a loan. The circumstances for SBS have changed somewhat in the last two or three years because the final spending of the digital transmission money and the digital transition funds inside SBS mean we are now exposed to a cash situation where we need to make sure we protect our cash position as opposed to our P&L accrual position.

Senator MINCHIN —You still have an outstanding loan. I see your interest costs are still $1.2 million. Is that in relation to the loan from the government?

Mr Brown —We have not drawn down the loan that has been approved, so we are not incurring any interest yet. We do have a mortgage on our premises at Artarmon.

Senator MINCHIN —That is probably what that interest bill is.

Mr Brown —Yes.

Senator MINCHIN —Are you paying that down?

Mr Brown —Yes.

Senator MINCHIN —It is not an interest-only situation?

Mr Brown —No. That is a table mortgage.

Senator MINCHIN —What is the debt on that?

Mr Brown —There is about $13 million owing on it.

Senator MINCHIN —When do you anticipate that mortgage will be repaid?

Senator Conroy —It will probably be beyond your political lifetime.

Mr Brown —We believe four to five years.

Senator Conroy —Easily beyond your lifetime.

Senator MINCHIN —If I get re-elected next time—

Senator Conroy —I hear there is a lot of competition in South Australia at the moment.

Senator MINCHIN —Our chances are looking increasingly good of being back in government in a couple of years. Are you anticipating having to reduce staff, services and so on in the next financial year given the tightness of your situation?

Mr Brown —We are still going through our final budgetary process. As I have made clear to staff, which subsequently was published, our primary focus is to protect services and jobs, particularly as the impact is being driven by what we all hope is a short-term phenomenon. In that case, to cut anything that needs to return does not make any sense. We want to lock in the core activity. It is a time, though, when we have to look prudently at the amount of money we spend on discretionary areas, and it is also an appropriate time for everybody to look closely at efficiencies that do not have an impact on core services but can protect them.

Senator LUDLAM —I am interested in pursuing some of the same issues in terms of the increased advertising, particularly in the middle of programs. I know that was not the original intention, but it seems to have become part of the practice. Is lack of funding pushing SBS to thin out program content and insert this sort of material? Going to the questions that Senator Minchin was pursuing before, and having read how it was expressed here, will any of the additional money that you have in the budget be used to draw down the amount of advertising that you are putting into programming or is it all going into other areas?

Mr Brown —The additional money that we are receiving is broadly for the provision of local content, and that is what it will be spent on. The impact of the commercial downturn does mean that some content that is funded by commercial dollars cannot take place.

Senator LUDLAM —How hard have those revenues been hit?

Mr Brown —As I said, between $8 million to $9 million this year, but we have navigated our way through that. Next year it will be a similar amount or it might be slightly more, but we are adjusting our budgets to compensate for that.

Senator LUDLAM —Are there proposals on the books? Are you going to be forced to increase the amount of advertising that you run?

Mr Brown —No. We are not allowed to and we have not sought any request for the act to be changed. The act specifies that the minutes are fixed at five minutes per hour. That is on radio and television.

Senator LUDLAM —You are pressing up against that ceiling, but you do not see the need to increase that?

Mr Brown —On television the five minutes per hour has been filled. You may recall when breaks were between programs they could be as long as eight minutes.

Senator LUDLAM —They would be longer, yes.

Mr Brown —Now with breaks in programs they might be as short as one or two minutes.

Senator LUDLAM —I know a lot of the programming that you broadcast was not designed to be cut up. What is your process for deciding and assessing where ad breaks will run? Why is the minister laughing?

Senator Conroy —We had a very lengthy discussion a number of years back when it was first introduced about whether or not Inspector Rex, for example, went to his dog bowl to eat his food and that was an appropriate time for an ad.

Senator LUDLAM —For a dog food ad?

Senator Conroy —Yes.

Senator LUDLAM —What is your process for assessing that sort of thing when you are looking at programming that was not designed to be chopped up?

Mr Brown —I probably would not accept the definition of ‘chopped up’. Under the act we are allowed to make use of natural breaks. There is industry recognition of what a natural break is. Clearly, it is not a real natural break. They are not created by nature. Nothing that is manmade has something natural in it.

Senator Conroy —Inspector Rex wandering into the bushes was not a natural break.

Mr Brown —’Natural’ is used by the industry and is accepted globally to refer to points in productions where there is a time lapse, a change of scene, a change of story in the case of news and current affairs programs, or change of skits in the case of a comedy show.

Senator LUDLAM —Wasn’t initially a natural break when something finished and not some kind of arbitrary change of tone or change of scene within a program?

Mr Brown —That is certainly not the industry definition and clearly could not be the case. It could not be a natural break if it finished because it would not be breaking anything. The term ‘natural break’ suggests that there are points in productions. To go to your point, yes, there are some broadcasters—not many but a few—who commission content or make content that has no breaks in it in their domestic market. For instance, you might look at the BBC as the most obvious example.

Senator LUDLAM —That is what I was thinking of.

Mr Brown —The BBC runs content on its overseas channels. In this market if you watch BBC HD or UK TV, which is owned by the BBC, or BBC Knowledge—all of these channels are available in Australia on subscription television—they have breaks in them, and BBC is exercising the same judgement as we do—that there are natural breaks. If there are not any natural breaks then we will not put any breaks in, but most productions carry points in them the industry would describe as a natural break.

Senator LUDLAM —For cinema release movies, for example, or a BBC production, would you be able to estimate for us what sort of proportion of programming SBS is being forced to break for these considerations and that was not designed for that to be done?

Mr Brown —I am not being pedantic, but I will pick you up on your terminology there. We are not being forced to break. I must be clear that we will only use natural breaks where they emerge. Although we have a standard approach to the number of breaks, that can be varied for any production in any circumstances. You asked how many programs. The BBC would be one provider, but we would not carry a great deal of BBC material. Most of that is on the ABC, obviously. Films are not made for television, anyway. They are made for theatrical release. Most broadcasters who obtain films for television release will find natural breaks in them—some rather better than others. In our case, we limit the number of breaks in any movie to two. It is not difficult to find two moments in a movie where there is a time lapse, a change of sequence or a change of plot.

Senator LUDLAM —Is that a human process or a computer process to search for spots in the script?

Mr Brown —That is very firmly a human process. The criteria for natural breaks are documented and laid out. Staff are required to use those criteria in order to identify natural breaks.

Senator LUDLAM —Are you able to tell us, if these figures exist, how much additional net income the SBS receives following the implementation of the decision to interrupt programs? Is it possible to break out the proportion of revenues that you are getting from in-program advertising as opposed to what is happening at the top of the hour?

Mr Brown —It becomes increasingly difficult because, as the years go by since that decision, there are other things that have influenced it. Obviously, there is the increase in audience size and the fact that we are probably a more capable selling agency.

Senator Conroy —I think I did ask similar questions to this a couple of years ago. You might be able to get a measurement between what was the then advertising dollar as opposed to what was projected. It is probably updated. I was given a projected figure back then. You probably have two figures, so you can have a look at that for a comparison closer to the actual real-time issues.

Mr Brown —If you look at the last year, we did not have breaks in programs. Then if you skip a year, because there was a year when for some programs it was transitional, and you look at the year following, my recollection is that about $12 million or $13 million increased revenue was obtained over that two-year period year-on-year comparison. As I previously said to Senator Minchin, our revenue has been increasing since then.

Senator LUDLAM —That has also come at the cost that some of the top of the hour ad breaks became shorter, so it is being spread more evenly around the hour as well.

Mr Brown —We now place only one 30-second spot on the top of the hour. We have got rid of those not in program breaks. They were very disruptive. They created little value in terms of revenue. They broke audience flow. People who watched one program simply would not stay through eight minutes of interruption for the next program. That meant that the promos that we placed in there that told audiences about future SBS programs were not being watched by anybody either. Some significant damage was being caused by that structure.

Senator LUDLAM —Are you concerned or are you surprised by the degree to which these opinions were raised in the process of public submissions late last year, the degree of disquiet amongst the audience about the amount of advertising?

Mr Brown —No, I am not really. Why would anybody want any interruption of programs in a perfect world? Even Channel 9 would prefer it if they could find another way to raise money. We do not adhere to this because we believe it is a good practice for audience enjoyment. We do it because it is the means by which we fund the programs that audiences enjoy.

Senator LUDLAM —It is because you have to. That is why I was using the language like ‘you are forced to’ before, because I figure it is not something that you prefer to do.

Mr Brown —What we sought to do three or four years ago was to lift the scale of Australian storytelling. I think we have been very successful in that. I heard Mr Scott say that back in 2006 or 2007 the ABC had a very low level of drama, and SBS exceeded it comfortably, which was quite remarkable. If you watch SBS—as I hope you do this year—you will see The Circuit returning, East West 101 and Who Do You Think You Are? These are all programs both of scale and quality that SBS could not afford to make in the past.

Senator LUDLAM —In your funding submissions to the minister did you propose funding that would be sufficient to allow you to cease or wind back the amount of advertising that you play?

Mr Brown —No. I believe I answered this at the last Senate estimates. I made the point that our focus was on expanding services and not finding revenue to offset the commercial revenue.

Senator LUDLAM —I guess that conversation was a bit hypothetical; now we have a budget. Also in February the minister supplied estimates that between $29.3 million to $39.7 million would be required to maintain operations for 2008 if the network were to stop interruption of programs through advertising. Those were estimates at the time. Can we verify that they are accurate now, with the benefit of hindsight and the budget?

Mr Brown —I think they are broadly accurate. I am aware that you have lodged a question on notice in this regard, and we are currently preparing those figures. From my early understanding, they are broadly accurate.

CHAIR —Senator Ludlam, we are scheduled to go to dinner now. Do you have many more questions?

Senator LUDLAM —I am happy to come back after dinner. That is fine.

CHAIR —We will break for dinner.

Proceedings suspended from 5.59 pm to 7.05 pm

CHAIR —We will resume.

Senator BIRMINGHAM —Are you now satisfied that SBS’s operations under section 45 of the act are in accordance with the act?

Senator Conroy —Very confident.

Senator BIRMINGHAM —That is reassuring because, as you know, we have been through this discussion on advertising many times before and your views on intraprogram advertising from your days as shadow minister are well known. Until now you have beaten me off with the argument that it would be considered and you would review the advice under the triennial funding consideration. So you have reviewed the advice and you are confident and happy to see SBS continue with its current operations?

Senator Conroy —I think it has been mentioned by Senator Minchin that in this document we deal with the issue of funding and at this stage we are not in a position, due to the global financial recession, to commit any further funds, as much as there are many worthy projects that SBS would like to undertake.

Senator BIRMINGHAM —For all the heat and bluster before the election about intraprogram advertising, have you waved the white flag on that one?

Senator Conroy —We state in this document that we are not in a position at this time, as discussed with Senator Minchin earlier this evening, to give any further funds to the SBS despite the fact they have many, many worthy projects that they would like to pursue.

Senator LUDLAM —In relation to the tail end of the line of questioning around advertising and what proportion of the income from the sale of airtime that SBS actually receives, are you taking a big commission from advertising agencies?

Mr Brown —That is, television airtime?

Senator LUDLAM —Yes.

Mr Brown —I think I am on the record as saying it is approximately 80 per cent.

Senator LUDLAM —It is 80-20.

Mr Brown —It is the industry standard that, of all advertising booked on any commercial or SBS network, that agency gets 10 per cent. Because we outsource our collection and our selling of advertising, there is an amount similar to that we pay. I am not sure if we discussed it here but it has certainly been made public that that function will become an in-house function from 1 July, so future revenue will be 90 per cent, but as I speak to you today it is 80 per cent. In four weeks time it will be 90 per cent retained.

Senator LUDLAM —So the current state of play is that 20 per cent is going to commission and you will be winding that back to 10 per cent, or is there a production component in that?

Mr Brown —No, there are two commissions in play. The first one is the commission of 10 per cent that is withheld by the agency that is buying advertising off you, so on behalf of a client. That is how that agency derives their income. They spend $1 million with a network; $900,000 of it goes to the network; $100,000 stays with the agency. In the case of SBS, since advertising started in 1991 we have been outsourcing our sales functions so that is not being performed by us; it is being performed by another entity for our benefit. That incurs a commission structure as well. I cannot tell you exactly what it is, but I think I have always made it clear that it is about 20 per cent in total. It is that second element that disappears on 1 July and then we will only be paying the same commission as every other network, and that is 10 per cent.

Senator LUDLAM —Has it been about 70-30 split to date?

Mr Brown —No, it has been 80-20 and it is going to 90-10.

Senator LUDLAM —I am with you. You will take that back. What is the decision behind internalising those functions? Why has that decision been made?

Mr Brown —The outsource model has worked well for us and the company, Stenmark, has performed well, but at a certain point we formed a view that it would be more efficient to in-source it and it would also allow us to more strategically align that function if it were under our direct control.

Senator LUDLAM —I put this to you, Minister—I think a couple of senators around the table this evening have raised this—it was a pretty strong policy that the government took to the last election about eliminating, if possible, advertising during programming. You have been forced through budget circumstances to fall back on that for the time being? Is it still government policy, once the financial situation improves, to reverse that and have SBS—

Senator Conroy —Could you refer me to where I stated that it was government policy?

Senator LUDLAM —So it was not government policy?

Senator Conroy —I am just asking you if you could refer me to any document source or Hansard where I have actually stated (a) we would reverse it or (b) it was a policy going to the last election.

Senator LUDLAM —That is very interesting. They are not statements that you made in the run-up to the election that you were not happy to see advertising during programming specifically—

Senator Conroy —No.

Senator LUDLAM —Not winding back advertising altogether but during the programming itself, which is what we have been discussing tonight.

Senator Conroy —I said: can you show me a statement where I said that we would get rid of it or that it was an opposition policy going into the last election? All you have done is quote my general view, which is that I am unhappy about it. We have said consistently over the last 12 months that we would look at it during the triennial funding round. The global financial crisis has descended on Australia and we have been dragged into it, so we are not in a position at this stage to be able to compensate SBS if we were to insist on them moving away from the current model.

Senator LUDLAM —You might require a slightly better citation than this. SaveOurSBS.org, the website, which I am sure you are familiar with, is running a quote by you when you were opposition spokesperson for communications:

I will find the date of that for you.

Senator Conroy —No, I am not disagreeing that I said that—

Senator LUDLAM —Okay. That was—

Senator Conroy —I am disagreeing with your interpretation of what that meant.

Senator LUDLAM —Can you bring us up to date on what that actually meant?

Senator Conroy —It meant exactly what it said. It just did not mean what you are saying it said.

Senator LUDLAM —I am pretty happy with the context of the quote, that you opposed when you were in opposition—

Senator Conroy —I am pretty happy with it too; I made it.

Senator LUDLAM —But it was not government policy at the time; it was just an opinion?

Senator Conroy —It was an opinion. It was never stated—you will not find any election document or any public statement that says we would reverse it.

Senator LUDLAM —But it does not say—

Senator Conroy —There is a reason that you do not have a quote there saying we would reverse it, and the reason is that we never said it.

Senator LUDLAM —Sorry to belabour the point, but you also have not said, ‘I, Mr Conroy, oppose’; you have said, ‘Labor has opposed and continues to oppose’. But at the time you did not say, ‘But we will do nothing about it once we are in government’; you just opposed it on principle at the time?

Senator Conroy —Yes. I am not happy with it and the economic circumstances absolutely mean that we are not able to compensate SBS for the funds that they currently derive from the new format.

Senator LUDLAM —That is all right. That is all I was trying to get to. Would you restate that today: you continue to oppose that? It is obviously not a decision; it has been forced by budget necessity. Mr Brown has said this evening that it is not something that he enjoys having to do, but that is just what it came to.

Senator Conroy —I would concur with Mr Brown. We are not in a position where we can compensate SBS if we were to insist or were we to move a change, and therefore for the foreseeable future the situation stands.

Senator LUDLAM —I appreciate that. Can we go to the issue of the size of the loan that SBS took in the recent past? You said, I think in response to an earlier question this evening, that you have not actually drawn down those funds yet. Is there a reason for that? Is it contingency funding or is it earmarked?

Mr Brown —No. I think it is just a procedural matter. It is due to be drawn down in June.

Senator LUDLAM —Was that to replace a shortfall in core funding? Can you step us through where that loan falls in your thinking in the overall budget context?

Mr Brown —I did go through this at the last Senate estimates. The reason for it is that SBS as an organisation lives pretty much hand to mouth. We talked earlier about the scale of surplus and how we try to manage it to as small a surplus as possible. But there are events that require us to prepay, particularly sports rights. So if we secure, as we have, the 2010 FIFA World Cup and the 2014 FIFA World Cup, the payments for those events—which are quite substantial—have to be made in years preceding the year in which the matching revenue comes in, so we have to cash flow this and some other areas as well.

In the past we have not really been exposed to this difficulty because we had a fund for digital transition. That was to equip the SBS premises with digital equipment. This has been progressively expended over recent years and the very last dollars go out this calendar year. As those funds have dwindled, our cash position has deteriorated. So we are back to a situation of having no working capital. By that I mean additional funds obscured the fact that we have no working capital because we were using that for working capital. We took the view that if we received a loan that was to be paid off over five years we would use those five years to try to build up a level of working capital.

Senator LUDLAM —I apologise if you went through this at an earlier session, but can you tell us how much you believe you will eventually pay back in interest repayments to the Commonwealth? Is it a loan that accrues interest? Effectively it is one arm of government lending a sum to another.

Mr Brown —Between $2 million to $3 million—perhaps $2.5 million—I would have thought, over a five year period.

Senator WORTLEY —Is it right that SBS has the rights to the upcoming Ashes test series between England and Australia?

Mr Brown —Yes, we do.

Senator WORTLEY —Are these rights shared with another broadcaster?

Mr Brown —Fox Sports owns the pay rights and SBS owns the free-to-air rights.

Senator WORTLEY —What coverage will SBS give to the Ashes?

Mr Brown —We will be providing full live coverage, every ball. We had the same set of rights in 2005. We were a little restricted in our coverage then, just to a small degree, because it clashed with the Tour de France. This time, because we now have SBS2 up on air—or we will have SBS2 up on air—we will be able to broadcast both events in full, the Tour de France on SBS2 and the Ashes on SBS1. We will also show some of the Tour de France on SBS1 on the days when the Ashes are not being played.

Senator WORTLEY —Can you tell me about SBS’s new social media engagement media team?

Mr Brown —Yes. ‘Team’ might be a strong word. I think that might be one person who already works on another function with somebody else assisting them. We are investigating how SBS can make best use of reaching audiences through a social network on the internet, through Facebook and Twitter and similar such social sites. The reason for that is SBS is in a way punished for having only a six per cent share. It has an outstanding program that it wants to promote to broader audiences. It, unlike any other network, cannot do that solely on its own channel. It cannot reach out to other audiences who are not already watching SBS. The Ashes coincidentally gives us an opportunity to reach a broader audience, but we are constantly trying to find ways in which to inform all Australians about the offering that exists on SBS. So this is an area that we are exploring.

Senator BIRMINGHAM —How goes the second series of Top Gear Australia?

Mr Brown —How goes it?

Senator BIRMINGHAM —Yes.

Mr Brown —Good, I think, really. The ratings are up on average over the previous series. You will have seen we have made a few changes. I think it is a program that is evolving and will continue to evolve. It reflects the success of Top Gear UK. It took them many years to turn that into the international success it has become.

Senator BIRMINGHAM —How does Top Gear Australia fit within the remit and the objectives of SBS?

Mr Brown —I have often given this response: the obligations of SBS under the charter are to provide services that inform, educate and entertain all Australians and reflect Australia’s multicultural society. It is not an obligation that is placed on every single program and the charter therefore is to make sure that the totality of the services is across the broad range. In delivering a multicultural range there is obviously going to be some programming which may exist on other networks. The point of difference with SBS is the range of programs that do not and will never exist on other networks. In addition, SBS adopts what is called a tent-pole strategy, where we identify a handful of key properties that attract a broader audience than our mainstream schedule would otherwise do. Top Gear is one of those. The Ashes is one of those. From time to time there will be other programs that come along that we will secure for that purpose. It comes back to the point I was making to Senator Wortley: that the ability of SBS to reach out to a broader range of audience is heavily constrained. We are constantly facing the challenge of how we tell all Australians about the good stuff that is on SBS. Top Gear presents an opportunity of lifting the size of audience but the promos placed within Top Gear also tell a potential audience about future offerings.

Senator BIRMINGHAM —How much does Top Gear cost SBS?

Mr Brown —Obviously that is a commercial in confidence—

Senator BIRMINGHAM —Let us approach it a different way. In terms of your locally produced content, roughly what proportion of expenditure on locally produced content does Top Gear account for?

Mr Brown —I cannot really tell you that but what I can tell you is that it is not the most expensive program that SBS is involved in. It is not as expensive as drama. It is not the most expensive factual program. I know that there are occasionally numbers thrown around about SBS as to Top Gear. I think Senator Ludlam has asked a similar question on notice about a report a couple of years ago that it was costing $11 million. It costs a mere fraction of that.

Senator BIRMINGHAM —You are convinced in terms of the limited dollars that SBS has for locally produced content that Top Gear is a value-for-money proposition?

Mr Brown —Yes, I am. Really you could raise that question about all of our top-end content. It is a challenge for any organisation that is not substantially resourced about how it allocates those dollars. You can equally challenge us on our commitment to drama. That is more expensive and more challenging, but I think it is important to maintain the mix, a mix of entertainment that has a broader appeal, drama that is distinctive, and high-end quality drama that nobody else is going to make here. They all represent balancing challenges for us, and I think we are currently managing that well.

Senator BIRMINGHAM —The challenge is that, in most of the drama instances that you would highlight and that may be more expensive to produce, it is easy to see how they fit within the SBS charter. Even though some of them have good and broad appeal as well, they reflect some of those multicultural values that people simply see sitting within the SBS charter. It is harder to see how Top Gear fits that same remit and approach.

Mr Brown —I understand the comment. If you watch Top Gear there is a multicultural dimension through guests and people like that, but I am not going to put it up as being a symbol of our commitment to diversity and distinctiveness, which you might well find in some of our drama content.

I really go back to the tent-pole strategy. There are some funds that we set aside for a particular purpose, and that is to keep SBS’s profile high. That is not a strategy I invented. It is one I believe in. You could equally say that when SBS, six or seven years ago, bought The History of Britain, the story about Anglo heritage, and ran it on a Sunday night, it was the highest rating show at that time. I think that was entirely appropriate, but it hardly could be said to fit a multicultural agenda or even the SBS charter. Strangely, of course, nobody really criticised that because it was seen as being a very worthy content.

Top Gear attracts some criticism because it is just all-out entertainment. I do not think there is anything wrong with that. I think SBS’s charter is quite explicit that we are to supply entertainment programs as well.

Senator BIRMINGHAM —Are there any commitments to Top Gear beyond the second series at present?

Mr Brown —Of the Australian version as opposed to the UK version?

Senator BIRMINGHAM —Yes.

Mr Brown —I will take that on notice. I am not entirely sure.

Senator BIRMINGHAM —Thank you. Just briefly following up a couple of other things, I would like to go to a response to question on notice 124 from SBS which related to complaints about bias. In that response, related to complaints around the coverage of the conflict in Gaza, you indicated:

At present, three of the complaints have been dismissed and two are still being finalised.

Have those two been finalised now?

Mr Brown —Yes, they have. My belief is that they have also been dismissed.

Senator BIRMINGHAM —Were there any other complaints received, other than those outlined in this response?

Mr Brown —Not to my knowledge.

Senator BIRMINGHAM —We had some discussion at these estimates last year or some time ago about SBS Radio and the spot audits and spot checks that were occurring. Are they still taking place?

Mr Brown —Yes, they are. I should say that we have supplemented it. We might have talked about this before. We have introduced a position inside SBS Radio called the Head of Quality and Standards of which that spot monitoring is one function, but we have also been looking at a number of other ways in which we can be confident that all of our output is living up to the codes.

Senator BIRMINGHAM —In the responses thus far from those spot checks have any problems been identified?

Mr Brown —Not of a type that relates to a breach of code or editorial failing. They are also there for professional standards as well. After each of those spot monitorings occurs there is discussion with the executive producer, program manager and the team where feedback gets passed on to them about the appropriateness of the balance of content of the structure of the show and things like that. That would be a normal output. I am not aware of any response that would indicate that the program would have breached the codes or would have had some significant editorial failing.

Senator BIRMINGHAM —Are they funded for in next year’s budget?

Mr Brown —They are.

Senator BIRMINGHAM —Thank you.

CHAIR —There are no further questions for SBS. Thank you very much for appearing before us this evening.

Senator Conroy —Just while we are switching over, I am just wondering if we can get an indication from the committee as to which departmental officials we feel we might need tonight, just so we can let those that we do not need go.

CHAIR —We have dealt with that already. Our secretariat has provided advice to the departments.

Senator Conroy —Where do you think we will get up to?

CHAIR —We probably may need 1.2, and 1.3 will probably not be required this evening. Of course, 1.1 will be tomorrow.

[7.30 pm]