IV. FINANCIAL MANAGEMENT
AND THE CLOSURE PLANS
18. Although they have recently
become more acute than ever, the financial difficulties of the
Royal Opera House are not new. In 1983 Mr Clive Priestley was
asked to examine the House at a time when its deficit was projected
to reach £3 million. The Priestley Report proposed strengthened
financial management organisation systems with "clear lines
of authority, responsibility and delegation for incurring costs
and achieving results". It concluded that "greater
priority must be given to financial objectives in the trade-off
with artistic desires". It recommended that the then three
performing companies be structured as separate cost centres, each
under a Chief Executive, with a fourth cost centre for the theatre
and central administration overheads.
When Sir Angus Stirling became Chairman of the Royal Opera House
in 1991 he inherited a £2.5 million accumulated deficit.
By the beginning of 1992, in part due to an orchestra strike,
the deficit had risen to £3.5 million.
The House's auditors issued a qualified audit opinion for 1991-92,
remarking that "whether the going concern is an appropriate
basis for the preparation of these accounts ultimately depends
on the success of the management of the company in reversing the
apparently continuing deficit, and in eliminating the deficit
The Warnock Report of September 1992 found that "insufficient
progress has been made in ... improving financial management".
It concluded that the critical financial situation was the result
of the tendency "to decide what is right artistically first,
and to count the cost later". It urged programme planning
in future to reflect known or probable resources.
It recommended that consideration be given to the establishment
of a Management Board.
The Price Waterhouse study, commissioned for the Board by Sir
Angus Stirling, identified the same weakness of a poor sense of
economy and recommended that repertoire planning should take place
"within a financial envelope".
Sir Angus Stirling pointed out that these critical reports were
followed by a series of reforms leading to a trading surplus in
successive years, although he acknowledged that financial management
weakened in 1995-96.
A Management Board was not established.
19. In criticising the re-development
proposals in 1992, the Warnock Report noted that "there are
no indications as to how the closure period of 30 months will
be financed, what activities the Royal Opera House might pursue
during this period, and where these activities might take place".
The House's eight page justification of the redevelopment in
response to the Warnock Report in April 1993 contained the following
remarks on the closure period:
"The Theatre will
close in 1997 to complete the main works, re-opening on 31 December
1999. The activities of the Royal Opera and the Royal Ballet
during closure are under discussion. It is likely that both Companies
will perform Seasons in other London theatres and extend their
touring overseas and in the United Kingdom."
In 1993 and 1994 Sir Jeremy Isaacs
undertook extensive negotiations about the Theatre Royal, Drury
Lane, as a venue for both companies during the closure period;
it was acknowledged as "the most suitable venue", but
talks with the theatre owner and those with commercial agreements
with the owner were fruitless.
20. Sir Angus Stirling stated
that the Board "from the outset of its closure considerations"
prepared four costed options: a total cessation of operations;
a temporary theatre close to Tower Bridge; a lease of the Lyceum
Theatre; the "nomadic" option. Rejection of the first
option was swiftly agreed with the Arts Council. The Board's
preferred option was the temporary theatre, which would facilitate
a full programme for both companies within the cost provision
for closure of £20 million. According to Sir Angus Stirling,
the Board was fully apprised of the risks relating to this option.
Accepting the Lyceum would have involved, in Sir Jeremy Isaacs'
words, "a second-best solution", with smaller audiences,
a requirement for capital expenditure and programme costs of £7
million above those for the temporary theatre. Sir Jeremy's account
of the failure of the Tower Bridge option was as follows:
was tight. Southwark granted planning permission. The Secretary
of State called the scheme in. By the time his inspector had
reported, expeditiously, in favour, the opportunity had passed."
In oral evidence, Sir Jeremy
said: "If there had been any kind of co-ordinated activity,
any kind of strategic thought within Government as to the needs
of a great international institution at that point, it might have
been possible for the Department of National Heritage and the
Department of the Environment to co-operate in granting permission"
for the Southwark Theatre.
The Lyceum was no longer available and another option, the Dominion,
was deemed unacceptable. The "nomadic" option, which
according to Sir Angus Stirling was not "merely an afterthought",
became the only realistic option.
21. In April 1997 Lord Gowrie
publicly criticised the evolution of the House's closure plans,
stating that the Royal Opera House Board was "given frequent
warnings of the need for fall-back positions from their visionary,
but highly uncertain, preferred option of Tower Bridge ... The
closure plans were, quite frankly, a shambles".
Lord Gowrie repeated his criticisms in evidence.
Ms Allen also believed that the House had pursued for too long
an "extraordinarily inspirational but ultimately ... unrealistic
ambition" to build a theatre in Southwark, leaving only "a
very tight period of time" to pursue other options.
In July, Sir Jeremy Isaacs disputed the validity of Lord Gowrie's
criticisms, arguing that the final closure plans were "admirable"
and that those who attended performances during the closure period
"will not know what the talk of a shambles means".
He said that he was "perfectly content to be judged in terms
of the work that we do during the closure period to the audiences
we find during the closure period", which would be more attractive
than would have been possible "if we had just chosen the
easier, simpler, safer option of going 300 yards ... to the Lyceum.
That was my choice and I stand by the results of it."
Sir Angus Stirling also considered the charge of a shambles to
be "silly and hollow".
Mr Keith Cooper, then the Director of Corporate Affairs, told
the Committee in July: "a nomadic existence, which is our
fall-back, has lots of advantages, as we are beginning to prove
The claims of all of these have already been demonstrated to
be unwarranted. No-one viewing the state of the companies in
their current nomadic existence can agree with the claim by Sir
Jeremy Isaacs that the closure plans were "admirable"
or that Mr Cooper was right that the nomadic existence had "lots
of advantages" which were being proved.
22. One consequence of the
failure to secure a single home for the closure period was that
the House was required to undertake a programme of redundancies.
One hundred and ten positions had already been made redundant
in 1996 under cost cutting and contracting-out exercises, funded
separately from redevelopment costs; a reduction of 50 posts was
achieved by natural wastage; 60 people were made redundant.
There were a further 30 redundancies in 1997 not related directly
to the closure. As a result of the redevelopment, 222 posts were
made redundant, although again the number of people made redundant
was slightly lower. Redundancy terms involved payments of twice
the statutory minimum; the average redundancy payment throughout
1996 and 1997 was £10,139.
The Arts Council agreed with the Royal Opera House that redundancy
costs arising from the closure for redevelopment could be claimed
from the lottery grant; the case of the House was not unique in
this procedure and the rules were not changed for the House's
At the time of the lottery application in January 1995, redundancy
costs were estimated at £2.4 million, even though it was
not then known what form the work of the companies during the
closure period would take. A total of £2.5 million was claimed
from the lottery for this purpose and was paid between August
and October 1997.
23. In September 1996 Lord
Chadlington succeeded Sir Angus Stirling as Chairman of the Royal
Opera House; he had left the Arts Council in March 1996 and had
attended his first meeting of the Board as a Director in July
of that year.
At his second meeting as a Director he was in the chair. He
was not impressed by his inheritance, describing the financial
position as "more than a poisoned chalice". He "did
not know how bad and financially ineffective the closure plans
He found the management structure of the House to be "totally
out of keeping with the circumstances which we are in".
Lord Chadlington added: "We do not have a clear division
between the responsibilities of the Board of Directors and the
executive management". The Board did not have a remuneration
committee and had only "the beginnings of ... a finance and
Lord Chadlington sought to clarify the precise financial position.
Shortly before his arrival, the Finance Director had departed;
his successor did not take up post until 1 July 1997, ten months
after Lord Chadlington became Chairman. During the period when
there was no qualified Finance Director, the financial information
was not clear and accurate enough to serve as a basis for financial
decisions: "the figures were like catching a falling sword
and they changed every month in the most alarming way".
24. Ms Genista McIntosh
took up her post as Chief Executive at the beginning of January
1997. According to Lord Chadlington, "she had largely inherited
a set of budgets which showed that the House was going to be extremely
difficult to manage during closure".
She also found that the organisation had "grave problems,
managerially and in other respects, within which it was ... quite
difficult to operate effectively"; she believed that the
management structure was "diffuse and fragmented".
By the end of financial year 1996-97 the House had an accumulated
deficit of £4.7 million, which had largely arisen in 1995-96
and 1996-97. Having regard to the results for the first part
of 1997-98 and the uncertainties faced during the closure period,
the auditors advised the Board that the company needed additional
funding of £2 million for it to be viewed as a going concern.
Faced with the prospect of insolvency in late July, the House
was only saved by a £2 million subvention, the donors making
it clear that they would only bale the House out once.
25. Ms Allen took up her
position as Chief Executive at the beginning of September 1997,
by which time the Covent Garden home had closed for redevelopment.
She told the Committee that the situation was even worse than
her predecessor had suggested: "Genista McIntosh used the
words `diffuse' and `fragmented' to describe the management structures.
I think she was slightly understating it." There were "very
few management processes at all"; responsibility for many
decisions was delegated to the two artistic companies, to people
who had no accountability for the financial consequences of those
decisions. The Chief Executive had responsibility without power.
Lord Chadlington said that the financial information available
to the management did not reflect the wider consequences of financial
decisions and was "inadequate in the extreme".
Sir Jeremy Isaacs and Sir Angus Stirling disputed this picture
of financial management. According to the latter, a finance committee
"examined, month by month, the actual and projected income
against budget, and against reports by the management".
We requested from the Royal Opera House a month by month balance
sheet to demonstrate the path of the deficit. In reply, Ms Allen
stated that "it is not possible to let you have the financial
information you have asked for, since the Royal Opera House has
not in the past produced it. It has been a source of concern
to me and to Richard Hall [the Finance Director from 1 July 1997],
since our arrival, that we have neither monthly balance sheets
nor monthly profit and loss accounts".
We regard the lack of financial information available to the
Board and the management of the Royal Opera House as deplorable.
In the light of the fact that the House has received £98
million of taxpayers' money in the last five years, we are astonished
that the Arts Council seems to have expressed no concern at this
state of affairs. There is no evidence to suggest that the Arts
Council even ascertained that this state of affairs existed.
26. The financial situation
of the Royal Opera House had become acute even before the closure
period had begun. Its financial survival thereafter appeared
to depend upon a realistic relationship between expenditure and
income in the closure period. The original lottery application
had included an annual breakdown of expenditure and income for
each year during the closure period and the lottery grant included
provision of £20 million to bridge the gap between them.
In 1996 the Arts Council became concerned about the financial
plans for the closure period and Ms Allen asked an additional
monitor, Mr Richard Pulford, to examine them. Mr Pulford found
that the financial forecasts "have attracted no sense of
general ownership within the House as a whole. It is as if they
have merely been left on a shelf while planning has proceeded
willy nilly without material reference to them ... The root cause
must be a serious failure of central leadership".
When she succeeded Sir Jeremy Isaacs in January 1997, Ms Genista
McIntosh sought expenditure reductions of around £3 million
to identify a break-even point for the first year of the closure
27. The closure plans finalised
in early 1997 envisaged a full programme for both companies, with
the Royal Ballet appearing at Labatt's Apollo, Hammersmith, the
Royal Festival Hall, the Barbican Theatre and the London Coliseum,
and the Royal Opera at the Barbican, the Royal Albert Hall, the
Shaftesbury Theatre and the Royal Festival Hall, before both companies
had residencies at the refurbished Sadler's Wells in the year
before re-opening. The average ticket price was to be reduced
by 25 per cent compared with Covent Garden.
The House was optimistic of attracting new audiences as well
as retaining much of its traditional one. Box office income for
the period September 1997 to March 1998 was forecast in the spring
of 1997 to be £9.5 million.
As our inquiry progressed, these estimates began to go seriously
awry. By mid-October estimated income in this period had been
reduced to £8.2 million; by the end of October it had fallen
to "just over" £8 million.
Disappointing ticket sales had led to discounting, sometimes
almost frenzied, which had in turn led to poor overall receipts.
The Royal Ballet's Labatt's season was estimated as having a
shortfall of £725,000, with a £140,000 shortfall on
the Royal Opera at the Barbican and an anticipated shortfall of
£600,000 on other repertory up to March 1998.
Ms Allen agreed that the House might have underestimated the
importance of the "Covent Garden factor" in the audiences
which it usually attracted. Mr Cooper acknowledged that the marketing
had been insufficient for new and unfamiliar venues.
This is another example of lack of planning for the move.
28. This shortfall in anticipated
receipts provoked by late October a financial situation worse
even than that of July.
The Royal Opera House was required to present balanced budgets
for the closure period by 12 November, but was not even certain
of the extent of its own debt, although the budget plans had been
reviewed and Lord Chadlington said encouragingly on 4 November,
"I no longer feel that we are going to have some huge disaster
falling out of the tree as far as the numbers are concerned, which
was happening every day".
Yet again, the Board had to convince itself and the Arts Council
that the company was a going concern, or face insolvency.
Additional public funds were not sought by the Royal Opera House
nor, as the Arts Council made clear, were they likely to be available.
The day after our final meeting, it was announced that the House
had again been saved from insolvency. On 25 November Lord Chadlington
wrote to inform us that the Board had approved a plan which would
inject up to £12 million into the Royal Opera House over
the closure period, subject to certain conditions; he reported
that the Arts Council considered the plan to be "robust".
On the other hand, we were concerned to learn from his letter
that donors to the rescue package had "made it clear that
they are funding the Royal Opera House itself" and were seeking
"reassurance and certainty over which companies will play"
at Covent Garden.
Such conditions to donations appear to preclude some of the options
which Sir Richard Eyre has been asked to consider and which it
cannot be ruled out may be included in his report. These conditions
could therefore throw into uncertainty a reliance on such donations
if Sir Richard Eyre's report is not to the liking of the donors.
66 Priestley Report, Chapter 1, para 2(6); Walker-Arnott Report, Appendix J, para 1.2; Warnock Report, Appendix VIII, para 8. Back
67 Evidence, pp 130, 153-154. Back
68 Annual Report of the Royal Opera House, 1991-92, p 26. Back
69 Warnock Report, para 6.4, Appendix VIII, para 10. Back
70 ibid, summary, para 6(a)(i), para 16.16. Back
71 ibid, para 12.6. Back
72 Evidence, p 130; Price Waterhouse Report, paras 15, 37. Back
73 Evidence, p 130. Back
74 Putting Our House in Order, Attachment 4, p 15. Back
75 Warnock Report, para 7.20. Back
76 Putting Our House in Order, p 24. Back
77 Evidence provided commercially in confidence by the Royal Opera House and not reported to the House; see also Q 59 and Evidence, pp 19, 155. Back
78 Evidence, pp 19, 152, 154-157; QQ 59, 74. Back
79 The Sunday Times, 20 April 1997; see also Evidence, p 2. Back
80 QQ 19, 305. Back
81 QQ 172, 206. Back
82 QQ 59, 74, 77. Back
83 Evidence, p 130. Back
84 Q 120. Back
85 Evidence, pp 30, 116, 119. Back
86 Evidence, pp 119, 116. Back
87 Q 16. Back
88 Evidence, p 120. Back
89 Q 336. Back
90 QQ 337, 336. Back
91 QQ 101-102. Sir Angus Stirling states that a finance committee "was reconstituted by me to include the audit and played a key role in monitoring the implementation of the Price Waterhouse conclusions on a continuous basis", Evidence, p 154. Back
92 Q 206. Back
93 QQ 329, 78. Lord Chadlington stated that the acting finance director was "a very, very competent person" (Q 82), a view endorsed by Sir Jeremy Isaacs (Evidence, p 152). Back
94 Q 82. Back
95 QQ 33, 34. Back
96 Evidence, p 110; QQ 78, 216. Back
97 Q 187. Back
98 Q 370. Back
99 Evidence, pp 130, 152, 154. Back
100 Evidence, p 58. Back
101 Evidence, p 18; details provided by the Royal Opera House in confidence. Back
102 QQ 206, 372; Warnock Report, Appendix J. Back
103 See Annex 1. Back
104 Evidence, pp 29-30. There were additional plans for tours in the United Kingdom and abroad. Back
105 Q 120; Evidence, p 118. Back
106 Evidence, pp 111, 118. Back
107 Evidence, p 118. Back
108 Q 191. Back
109 Q 171. Back
110 QQ 330, 364-374. Back
111 QQ 329-332. Back
112 QQ 329, 325. Back
113 Letter from the Chairman of the Royal Opera House provided in confidence and not reported to the House. Back