Secret Treasury report may put BBC licence fee at risk

Gordon Brown has ordered a secret investigation into the funding of the BBC, which could herald an end to the licence fee system.

The Treasury has spent several months drawing up plans with the help of outside consultants. There will be an official review of the corporation's Royal Charter in 2006.

Industry sources believe it could recommend scrapping the fee or allowing broadcasters such as Channel 4 to compete for a slice of the BBC's annual £2.5bn in public funding.

Whitehall insiders said Mr Brown was concerned that the Department for Culture, Media, and Sport, which will lead the official review into the charter, is too close to the corporation. One source said: "The BBC has the highest funding [for a public service broadcaster] in the OECD, with few strings attached. There are people in the Treasury who suspect that [the Department for Culture] is captured by the broadcasters."

The Treasury believes that if it fails to seize this opportunity for reform it will be forced to wait until 2016 – the next time the licence fee is up for review.

In June Tessa Jowell, the Secretary of State for Culture, appeared to pre-empt the charter renewal process, saying that significant changes to the licence fee were "somewhere between the improbable and the impossible".

A Treasury spokesman said yesterday that while the department was involved in general work on the media, he was not aware of a specific project on the BBC.

Commercial broadcasters, such as BSkyB, and internet services say the BBC is quashing competition unfairly by spending much of its vast guaranteed funding on new channels and websites.