Paul Norris: Convoluted way to pay for digital TV

New Zealand is about to get digital, free-to-air television. Although Sky has been digital since 1998, you have to pay for it. Now, free-to-air digital is due to begin early next year.

Experience around the world suggests viewers only respond to new technology if they perceive it has some value to them. They are only likely to buy the set-top-box necessary to receive digital television if there are new channels available.

Within the past few weeks, a formal collaboration between the free-to-air broadcasters, known as Freeview, has been signed. The Government is putting up $25 million over five years to help to fund the infrastructure needed to get digital free-to-air television off the ground. As part of the deal, it expects the major broadcasters Television New Zealand and CanWest (TV3) to launch two new channels each within two years.

TVNZ has been working on plans for its new channels for some time. Mindful of its competitors, it is not revealing details of what will be on these channels. But a look at the plans outlined in the infamous memo from the former chief executive Ian Fraser, leaked to the Select Committee last year, may provide some clues.

One channel is likely to be broadly factual, with news bulletins on the hour and the 6pm news rebroadcast later in the evening. Current affairs programmes, now buried at inhospitable hours, like the increasingly influential Agenda, could be rescreened in prime time.

There could also be "quality" documentaries from other countries, like that on the Exclusive Brethren made by Australia's ABC, which currently we are unlikely to see.

The second channel may be a mix of children's programming in the daytime, with lifestyle and serious drama in the evening. Some programmes would be repeats, some would be new material. Some would be imported, but most would be local.

TVNZ sees these channels as part of its public broadcasting remit to deliver the Charter. So TVNZ would like to run them as a public service, with no advertisements. Non-commercial television is common in other countries, but not in New Zealand except on Sunday mornings.

But these channels must be paid for somehow, which is why TVNZ has been in negotiations with the Government for some time, seeking public funding for them. The sums are relatively small - some $80 million over five years, which works out at $8 million a channel a year, a fragment of the cost of TV One at around $160 million a year.

There are always problems for government giving more money to TVNZ, especially given TVNZ's public image in recent years, with embarrassing revelations on presenter salaries and unseemly rows between the board and its chief executive. There are also many pressing demands on the public purse - how can money for broadcasting be given priority over hospital waiting lists?

Strangely, TVNZ's just released Annual Report may provide the answer. The report reveals it paid a special dividend of $70 million to the Government in June. This was the result of a review of the company's capital structure.

Such reviews, which rebalance shareholders' funds and debt, are understood to be normal business practice. In TVNZ's case, the review was necessary because the company had been carrying no debt since the transfer of its transmission arm THL to the Government in 2004 as part of the restructuring of TVNZ to enable it to deliver the Charter.

So TVNZ has effectively repaid the Government $70 million of shareholders' funds. Where did this money come from? A total of $21 million came from cash reserves, and $49 million was borrowed from the banks, which constituted TVNZ's rebalanced debt.

The timing of this payment is interesting. Is it not an unusually fortunate turn of events that just when TVNZ is pleading the case for some $80 million of public funds, it is able to reveal that it has made a payment of $70 million to the government? TVNZ is arguing for the reinvestment of that $70 million in the company, to launch its digital future and to enhance its digital delivery of the Charter.

Certainly the $70 million special dividend will enable the government to defend any decision to fund the new channels. It will be able to say it is a reinvestment rather than new money.

But is this the best way to fund the public broadcaster? It is a series of money-go-rounds. TVNZ makes a profit and pays a dividend to the Government; the Government pays TVNZ a certain sum for Charter funding. TVNZ pays a special dividend to the Government; the Government agrees a certain sum for new digital channels (this is speculation - the Cabinet will decide later this month).

It is worth noting that TVNZ is the only publicly owned broadcaster in the world that makes payments to the Government.

It may be suggested that it would be simpler for the Government to forget dividends and to grant TVNZ an annual sum for delivering the Charter. Forget the special dividend - let TVNZ use the money to get its new channels to air.

But this is to ignore the rule of Treasury, whose task is to ensure that businesses owned by the Crown are subject to appropriate financial discipline. If TVNZ is to make use of public money this should be done in a transparent way.

The result is that the Government is able to keep TVNZ on a tight rein. It may be independent of the Government in theory, but in practice the more TVNZ is obliged to rely on public funding, the greater the leverage the Government has over the company.

Here we return to an old theme - TVNZ is a business, and a cultural institution required to deliver social objectives and promote our national identity. Should it have to pay an annual dividend then put out the begging bowl to Government every time it seeks to make a major investment?

Rather than the recent review focused on capital structure, what should have taken place was a review of the system of funding our television public broadcaster.

* Paul Norris is Head of the Broadcasting School at the Christchurch Polytechnic Institute of Technology.