Yes, it's Birt: yes, it works

The Director-General of the BBC is making waves - again. First he calls for an increase in the licence fee. Then we learn that he plans to hive off BBC Resources. It has been a busy time again for the man already reviled for introducing Producer Choice and trying to ruin the BBC World Service.

His enemies like to paint John Birt as a man bent on destroying the BBC. In fact the changes he is making represent the best hope of preserving the tradition of public service broadcasting in an increasingly difficult environment.

The immediate challenge faced by the BBC is the need to invest in new digital technology. The problem here is that the BBC operates on an annual budget which is not geared to cope with one-off large investments caused by technical change. For the BBC's competitors this is not a problem. Investing in television technology is an economically viable business proposition, on which banks are willing to lend. However because the BBC is in the public sector it is severely restricted in its borrowing ability.

This leaves the BBC with an awkward choice. It can use licence fee money to invest in the latest equipment to the probable detriment of programmes; or it can preserve programme excellence by taking a Luddite approach to technical change. That is unthinkable for an organisation which has always taken as much pride in its engineering as in its programming excellence.

The plan to spin off the technical side of the BBC's activities into separate business units offers a way out of this dilemma. If the BBC goes into partnership with companies in the private sector it can borrow, under the government's Private Finance Initiative, what it needs to stay at the technological frontier. So BBC programme makers get access to the latest digital technology, but the licence payer doesn't have to provide the capital cost of putting it in place.

Another consequence of the spin-off will be to sharpen the incentives to greater efficiency in programme production. The programme makers would compare the costs of BBC Resources with those on offer in the private sector. And any investment by BBC Resources in new facilities would have to be justified by the prospective returns.

There are obvious analogies between this proposal and what has been happening in the Health Service.The buzzword is the purchaser/provider split. The government is committed to buying health services and making them available free to the user, but that does not mean it has to build the hospitals or employ all the caterers, etc, who work in them.

The same is true of the BBC. It is committed to using licence payers' money to make and buy programmes which are then transmitted free on air. Hiving off BBC Resources will not change this central fact. It may mean that some part of the programme-making process will be carried out in the private sector rather than by a BBC employee. But the licence fee will still be used to purchase the material for which the BBC is famous - comprehensive and impartial news and current affairs, expensive costume dramas, programmes which cater for minorities, etc.

Worries that spinning off BBC Resources will turn the BBC gradually into a privatised American-style broadcaster are completely misplaced. On the contrary, the spin-off could achieve the best of both worlds: public purchase to guarantee standards, private provision to maximise efficiency and minimise waste of the licence fee.

Although the digital revolution is an important spur to the latest changes at the BBC, the underlying problems faced by the corporation are older and deeper. They concern the ever rising cost of buying the programmes with mass appeal, which the BBC needs to get good overall ratings, and which in turn are needed to make the licence fee politically acceptable.

This problem is well recognised inside the industry, but barely understood outside. The obvious example is sport, a mainstay of BBC programming. In the old days of the cosy duopoly with ITV, sport could be relied on to deliver large audiences for relatively low outlays. People were used to watching sport on BBC and historically the television rights to big sporting events were sold cheaply. BBC and ITV negotiators could argue that they were benefiting the sport by giving it free publicity. The sports bodies had not woken up the enormous value of their product.

That all changed with the advent of Sky TV. Rupert Murdoch was very quick to realise the huge power of exclusive sports coverage and has bid aggressively for the rights to major events, notably football. The rapid growth of Sky is bringing its total revenues close to those of BBC television. With no public service obligations and much smaller overheads it now regularly outbids the BBC for the right to sporting events.

As a result the BBC finds itself in another difficult dilemma. If it tries to hang on to its traditional sporting strongholds, it could end up spending so much money on buying the rights that it risks diluting the quality of the rest of its output. But if it lets the sport go, its audience share could drop sharply, making it difficult to sustain, let alone increase, the licence fee.

The BBC is now competing, when it bids for the crowd-pleasers, against other broadcasters who can extract, in hard cash, the full commercial value of those programmes. At present the main threat comes from Sky, to whom football in particular is enormously valuable as a way of selling additional subscriptions. But in the not-too-distant future, the spread of specialist channels and pay-per-view will enable other commercial broadcasters to sell popular programmes for their full value. They will thus be able to outbid the BBC for the talent which goes into making those programmes.

The BBC's unique ability to transmit relatively cheap popular programmes to keep up its ratings and help subsidise the more expensive minority programmes is thus under serious threat, now and for the foreseeable future. It is that, rather than the radical changes implemented under the Birt regime, which threatens the survival of the BBC as we know it.

The truth is that the Birt proposals represent the Corporation's best hope of survival in a rapidly changing television industry. The BBC's decline can be arrested only by a combination of aggressive control of costs (which is unpopular with those who make television programmes) and increases in the real value of the licence fee (which is unpopular with those who watch them). That is what Mr Birt's recent pronouncements have been about. They will not make him popular, but history will show that he is right.

The writer is a director of the consultancy London Economics.