The licence-fee battle the BBC was never going to win

As final details of the BBC licence-fee settlement were thrashed out in government last week, the reputation of the corporation's director-general, Mark Thompson, plumbed depths not seen since John Birt had the job.

BBC sources expect the settlement to be confirmed on Thursday and they are profoundly pessimistic. It is assumed that the link between the licence fee and the retail prices index will be broken by an annual rise of 3 per cent for two years from this April and 2 per cent for the following three years. This is less than the BBC claims it needs to fulfil aims including moving key departments to Salford and converting British homes to digital television.

Labour backbenchers will tomorrow meet the Chief Secretary to the Treasury, Stephen Timms, to make a last bid for compromise. Their paucity of ambition illustrates the extent of the BBC's problem. "It has all come down to the borrowing limit," says the delegation's leader, the Labour MP John Grogan. "At present the BBC's limit is £200m - about 8 per cent of the licence fee. But when that figure was set in 1992 it represented 16 per cent, so it could be increased."

BBC sources say Tessa Jowell, the Secretary of State for Culture, Media and Sport, has championed this solution. The Chancellor has opposed it, saying it would increase the public sector borrowing requirement. Now corporation executives believe a compromise could allow them to borrow more, provided the money is strictly allocated to public-service objectives.

"Salford will cost us between £350m and £400m upfront," says a spokesman. "We cannot fund it out of redundancies and savings. Increasing our borrowing limit could help us get over the hump at the beginning."

But borrowing is a poor second best to income, so what went wrong? Why did Thompson's high-profile campaign for a real-terms licence fee increase deliver such meagre results?

John Whittingdale MP, Conservative chairman of the Select Committee on Culture, Media and Sport, says the bid was politically naive. "When the Chancellor is looking to make savings across the board and the BBC's main competitors are looking at declining revenues and audiences, a substantial increase was wholly unrealistic."

Politicians on both sides of the House say Thompson's tactics made a bad case worse, particularly a speech last October in which he held a gun to the Chancellor's head by "making it abundantly clear" that the digital switchover would be derailed unless he got what he wanted.

So could a less confrontational approach have won a more generous settlement? Staff threatened by budget cuts, redundancies and relocation believe it could. "Greg Dyke made it plain that he would not fight a public battle over the licence fee," says a senior journalist. "He thought we could only lose by advertising the scale of our requirements. He was right."

Three years after the Hutton inquiry forced Dyke to resign, his reputation as a deal-maker is soaring. A landmark ruling last week by the freedom of information tribunal forced the BBC to publish confidential minutes of the governors' meeting at which he was forced out. Some governors clearly believed he should stay. We now know that he asked to be reinstated. Would it have made a difference if his request had been granted?

Grogan remains sceptical: "The problem has always been the Chancellor. No negotiating tactic would have shifted him."

The minutes of the meeting at which Dyke was sacked reveal that governors feared the Hutton controversy had jeopardised the corporation's future. The majority concluded that Dyke's departure would improve prospects. That view will be severely tested as the BBC battles to fulfil ambitious plans with severely constrained resources.