1.1 The remit for the report from The Scottish Executive follows:
1.1.1 To review the adequacy of systems operated by the Scottish Arts Council to monitor its financial relationship with the national arts companies in the light of:
1.1.2 The lessons learned from the growth of the projected deficit at 31 March 2000 of the combined Scottish Opera and Scottish Ballet companies from £1.226 million to £2.5 million between May and October 1999, and the emergence of a projected cash deficit at the same date of £3.3 million.
1.1.3 Proposals by Scottish Opera and Scottish Ballet for changes in their budgetary control and reporting systems designed to prevent a recurrence.
1.1.4 Advice from independent consultants on best practice in financial monitoring of grant recipients and proposals by SAC in the light of lessons learned from the recent financial position within the Scottish Opera and Scottish Ballet companies;
1.1.5 And to recommend future arrangements.
1.1.6 In undertaking the first two parts of the study the Scottish Arts Council should work closely with Scottish Opera and Scottish Ballet, with a view to producing an agreed report and recommendations. The independent consultants should be engaged by the Scottish Arts Council, with the agreement of the Scottish Executive. The report of the review should be delivered by 8 February 2000.
Remit received by fax on 1 December 1999.
1.1 LEGAL AND ADMINISTRATIVE STRUCTURES.
1.1.1 All major arts organisations supported by SAC are accepted as charitable bodies by the Inland Revenue. This means that the legal structure which applies to all charitable organisations, the majority of which are voluntary, have to be applied to arts bodies which engage in trading and undertake considerable risks. These companies are typically companies limited by guarantee, do not have any share capital and, subject to exceptions agreed with the Inland Revenue, do not generally permit the company directors to be paid for their services. Some of the national companies are amongst the exceptions with chief executives and in some instances players also acting as board members.
1.1.2 Although companies supported by SAC are encouraged to accumulate reserves and provisions, (General Conditions of Grant), because of the lack of any initial capital sum it is extremely difficult for any arts organisation, which is effectively prohibited from generating profit by its charitable aims, to create sufficient contingency against future losses or to make further investment.
1.1.3 Capital expenditure, ongoing cash needs, general revenue expenditure and investment in new artistic work all have to be founded mainly from the SAC revenue grant. This high degree of reliance on SAC funds is a direct result of the funding structure within which the arts operate. It creates a tension which always has to be managed constructively by SAC and the companies from their respective standpoints.
2.1 Other sources of income available to arts organisations are of course the sales to the general public of tickets for the various events. The public are not generally in a position to question or monitor any of the activity which appears on stage, nor would one expect them to be.
2.2 Sponsorship from industry is a significant contributor to the finances of the major arts organisations. Although relationships with sponsors can be relatively long term, the interests of sponsors are clearly defined. Occasionally a sponsor might have a sufficiently close relationship to be invited to join the board of an arts organisation but in this circumstance the reason for such a move is likely to be the wider one of the sponsor wishing to provide more support for the arts rather than to protect the interests of the sponsoring company.
2.3 Many organisations are supported by SAC in partnership with local authorities. SAC values and welcomes the support provided from this important community source. The total finances support to the arts by local authorities exceeds that provided by SAC but a smaller sum is allocated in direct grant aid of the type offered by SAC and this has reduced significantly in recent years. SAC will discuss with appropriate authorities the proposals outlined in this paper for improvements to monitoring procedures to ensure that wherever possible there is a consistency of approach for arts organisations which are funded jointly by SAC and an authority.
3.1 The performing arts operate in a sector where the productivity gains which can realistically be expected are relatively minor in comparison with those possible in other industries. The input required to present an opera or drama production is the same as it was when the work was first composed or written. The costs associated with producing the work have risen in line with general inflation but it is not possible to increase prices at a similar rate because the efficiency gains in other sectors means that prices in general have increased at a slower rate. Any attempt to increase prices at a higher rate is likely to price the arts out of the market, hence one of the reasons for the need for subsidy. The ability to generate the same proportion of income which was originally earned is not achievable and as a result there is a tendency for the proportion of income from subsidy to increase.
3.1.1 This is illustrated in Table One.
3.1.2 The pattern of income and expenditure growth for Scottish Opera over the past five complete years is as follows:
| TABLE ONE | |||||
| 1995 | 1996 | 1997 | 1998 | 1999 | |
| £000 | £000 | £000 | £000 | £000 | |
| Income: | |||||
| Grants * | 5,521 | 5,663 | 5,910 | 6,370 | 6,650 |
| Earned income | 2,686 | 2,684 | 2,956 | 2,797 | 2,976 |
| Total | 8,207 | 8,347 | 8,866 | 9,167 | 9,626 |
| Grant as a proportion | 67.27% | 67.84% | 66.66% | 69.49% | 69.08% |
| Expenditure | 8,346 | 8,449 | 8,842 | 9,470 | 9,756 |
includes grant from sources other than SAC
The proportion of total income contributed by SAC grant in each of the companies in the financial year 1998/99 is as follows:
TABLE TWO
| Company | Total Grant from SAC
£000 |
Proportion of Income from SAC Grant |
| Scottish Opera | 6,010,890 | 62.44% |
| Scottish Ballet | 2,327,925 | 63.66% |
| Royal Scottish National Orchestra | 2,310,550 | 52.09% |
| Scottish Chamber Orchestra | 1,290,600 | 45.01% |
1.1 This agreement is made between Scottish Opera Limited and the Scottish Arts Council and takes account of the overall settlement for the financial year April 1998 to March 1999 reached between the Scottish Office, Scottish Arts Council (SAC) and the four national companies: Scottish Opera (SO), Scottish Ballet (SB), Royal Scottish National Orchestra (RSNO) and the Scottish Chamber Orchestra (SCO).
1.2 In signing the agreement Scottish Opera Limited undertakes to continue to work within the understandings laid out in the report submitted to the Minister for Health and the Arts by Neil McIntosh on 30th April 1998 and the subsequent letter to Mr McIntosh from the Minister of 8th May 1998.
1.3 Central to the offers made by the Minister in that letter is that funds will be made available to all four national companies on the basis that they will continue to collaborate with one another; will follow agreed plans for shared resources; and will make budgetary savings - all of which items will be reported on to the Minister by SAC in the course of each financial year.
1.4 Within the terms and conditions of this agreement SAC will use its best endeavours to work with the four national companies towards satisfying the requirements of the Scottish Office as outlined in the Minister's letter.
2.1 SAC grants Scottish Opera Limited a sum of £ 5,880,000 for the financial year 1998/1999. An additional grant of £ 130,600 will be made, subject to SAC receiving an additional payment of £ 187,000 from the Scottish Office as requested in the report of 30th April 1998 and discussed in the Minister's letter of 8th May.
2.2 Should the grant of £ 130,600become available, the consolidated sum of £ 6,010,600 shall be the maximum available to Scottish Opera Limited in the current financial year. This should be the figure used in all financial plans for 1998/99 stipulated by this agreement.
2.3 Should the sum of £ 130,600not become available, SAC undertakes to notify Scottish Opera Limited immediately. Scottish Opera Limited will then revise and resubmit the documents required by this agreement, based on known levels of funding, together with a clear indication of the modifications to be made in plans in order to fulfil the optimum part of this agreement but stay within the limits of a viable budget and deficit reduction as defined here. SAC shall then discuss and complete a revised agreement with Scottish Opera Limited within the shortest possible time.
2.4 Plans and financial forecasts as required under this agreement shall be based on a planning figure of no more than £ 6,010,600 grant-in-aid from SAC for the financial years 1999/2000 and 2000/2001. (For purposes of completing a four year plan, the same figure should be entered into plans for 2001/2002).
2.5 By this agreement it is understood that Scottish Opera Limited should neither expect nor plan for any increase in the fundamental level of core revenue grant (as indicated in paragraph 2.4 above) in the period from 1998/99 to 2001/02.
2.6 It is understood that SAC can and will only consider variations to the core grant figure for years after 1998/99 in relation to its available resources; and that any such consideration if it were to take place would be dependent upon Scottish Opera Limited demonstrating savings and meeting targets as set by this agreement.
2.7 Any increase in activity or expenditure outwith the figures and conditions agreed by SAC will be met by Scottish Opera Limitedfrom within its own resources by further efficiencies, additional increases in earned income or reduced costs.
3.1 The funding specified in paragraphs 2.1 to 2.6 above shall be subject to:
3.1.1 Scottish Opera Limited submitting to SAC by 30th September 1998 a revised four year plan (for the financial years 1998/99, 99/00, 00/01, 01/02) which meets the requirements contained in the schedules of this agreement. The plan should include details of the implementation of other associated plans to which the company is committed - in particular the recommendations for collaboration with The Scottish Ballet Limited, adopted from the report Partnership and Progress (of April 1998).
3.1.2 Presentation of a viable budget for 1998/99, incorporating:
a. a planning figure of grant-in-aid of £ 6,010,600 from SAC;
b. an Advancement award of £795,000 from SAC, applied as agreed in the Advancement Funding offer letter of 16th July 1998.
3.2 Scottish Opera Limited will set targets within the financial plans outlined above to:
3.2.1 achieve earned income from ticket sales in the current year of at least £1,147,000 and further increased income in the subsequent two years.
3.2.2 achieve earned income from sponsorship, merchandising and donations by in the current year of at least £ 1,349,000 and further increased income in the subsequent two years.
3.2.3 increase income from local authorities in the years 1999/00 and 2000/01 by at least £ 75,000 over the level of 1998/99.
3.2.4 achieve a reduction of the company's accumulated deficit to a figure of no more than £ 405,000 by March 2001.
3.2.5 make and demonstrate savings in annual projections for 1999/00 and 2000/01 to a joint total of at least £300,000 between Scottish Opera Limited and The Scottish Ballet Limited for each of those financial years.
3.3 The release of funds by SAC will be made in instalments throughout the year. This release shall be dependent on SAC receiving satisfactory regular reports on the progress and implementation of Scottish Opera Limited's plans.
3.4 If at any time and for any reason it becomes evident that the plans and targets within any part of this agreement cannot be realised or that Scottish Opera Limited will encounter difficulties in any financial or organisational respect not acknowledged by this agreement, Scottish Opera Limited shall advise SAC at the earliest possible opportunity.
4.1 In order to fulfil the terms of the Minister's letter of May 8th 1998 and to maintain a collective settlement thereafter, Scottish Opera Limited will undertake to provide SAC regularly with financial information and forecasts at intervals and in formats to be agreed with SAC's Director of Finance (these being in addition to the standard requirements as laid out in Schedule Two).
4.2 Items to be provided shall be:
4.2.1 Scottish Opera Limited's adopted budget for the year 1998/99, accompanied by viable outline budgets for the years 1999/2000, 2000/2001 and 2001/2002.
4.2.2 A cashflow projection for 1998/99, accompanied by outline projections for the years 1999/2000, 2000/2001 and 2001/2002.
4.2.3 These items shall be produced and agreed with SAC on signing of this agreement, shall incorporate the financial and organisational understandings contained in this agreement and reporting in these formats shall commence from 1st September 1998.
4.3 Scottish Opera Limited shall subsequently present to the relevant committees and officers of SAC regular quarterly information and forecasts, in formats agreed between Scottish Opera Limited and SAC, giving:
4.3.1 An updated forecast for the current year against initial budget, based upon the initial budget updated by actual quarterly out-turns.
4.3.2 Revised budgets for the subsequent three years, incorporating figures drawn from the revisions contained in the updated current year forecast.
4.3.3 An up-dated cashflow projection for 1998/99 based on the quarterly out-turn figures, accompanied by outline projections for the years 1999/2000, 2000/2001 and 2001/2002 also revised in line with the current year cashflow revisions.
4.4 Reports and information can be presented in Scottish Opera Limited's preferred in-house format but must also be presented in a standardised format which will be devised and agreed between all four national companies and SAC. This standardised format will serve to assist the SAC and the national companies in monitoring the collaborative developments that are taking place and provide long-term, consistent information.
5.1 Scottish Opera Limited shall collaborate with the Scottish Ballet Limited, by:
5.1.1 setting up a joint Board and appropriate management structure to manage the elements of merged services, whilst still retaining separate management companies for the artistic operations of each company;
5.1.2 merging administrative, managerial, financial, educational, marketing, sponsorship, planning and technical services;
5.1.3 restructuring staffing as appropriate to the merged operations;
5.1.4 purchasing new equipment and facilities to support the merged services;
5.1.5 reorganising the use of resources and premises to support the merged services;
5.1.6 synchronising planning processes;
5.1.7 collaborating in artistic activities whenever possible to maximise the shared or collaborative use of artistic staffs.
6.1 Scottish Opera Limited will collaborate with the RSNO, SB and SCO to develop and implement joint strategies and projects in a number of areas, as defined in the report by Neil McIntosh of 30 April 1998.. Those areas to be considered will include:
6.2 Scottish Opera Limited will agree with the other three national companies upon which of these areas they will place priority. Full details of proposed priorities and a plan for work on those priorities - outlining actions, targets, implementation, timescales and budgets - shall be presented to SAC no later than January 1st 1999.
7.1 Scottish Opera will undertake artistic activities as detailed in the subsequent schedule, including staging at least seven full productions in the current year (and planning no less than seven in each of the years 1999/2000 and 2000/01).
7.2 In 1998/99 the organisation will give a minimum number of main-scale performances in Scotland as follows:
| Production | Glasgow | Edinburgh | Aberdeen | Inverness | Total |
| Ariadne a N | 0 | 3 | 0 | 0 | 3 |
| Queen of Sp | 5 | 2 | 0 | 0 | 7 |
| Traviata | 6 | 3 | 2 | 0 | 11 |
| Dalibor | 4 | 2 | 0 | 0 | 6 |
| Magic Flute | 7 | 4 | 2 | 0 | 13 |
| Tristan & Is | 5 | 2 | 0 | 0 | 7 |
| Hansel & G | 7 | 3 | 0 | 0 | 10 |
| Rosenkav. | 3 | 2 | 0 | 0 | 5 |
| Magic Fount | 3 | 1 | 0 | 0 | 4 |
| Boheme | 2 | 0 | 0 | 0 | 2 |
7.3 Scottish Opera Limited will undertake 2 performances outwith Scotland, viz: La Traviata and Queen of Spades, in Sunderland.
7.4 The Organisation will undertake an Essential Scottish Opera Tour in February and March 1999, comprising 15 concerts in Scottish venues.
7.5 Scottish Opera Go Round will give a minimum number of piano accompanied performances, via touring, as follows:
September
15 Gaiety Theatre, Ayr
17 Dundee Rep
19 McRobert Arts Centre, Stirling
22 Haddo House Hall, Aberdeenshire
24 Elgin Town Hall
26 Orkney Arts Centre, Kirkwall
29 Thurso High SchoolOctober
1 Ullapool Village Hall
3 Kyle Hall, Kyle of Lochalsh
6 Aros Centre, Isle of Skye
8 Ballachulish Village Hall
10 Linlithgow Academy
13 Volunteer Hall, Galashiels
15 Adam Smith Theatre, Kirkcaldy
17 Lochside Theatre, Castle Douglas
20 Motherwell Concert Hall
22 Woodend Barn, Banchory
24 Victoria Hall, Helensburgh
7.6 Outreach and Education
Scottish Opera will maintain a programme of education and audience development activities through "Scottish Opera For All", presenting a wide range of music, drama and movement programmes for children and adults throughout Scotland. Opera for All will use a variety of source material ranging from main company and Scottish Opera-Go-Round repertoire to specially designed "stand alone" projects. There will be 16 projects, comprising of a total of 250 workshops.
7.7 Equal Opportunities
Scottish Opera is required to maintain an effective and progressive equal opportunities policy.
7.8 Marketing
Scottish Opera will present SAC with an update of its marketing strategies which are of particular relevance to increasing attendances from within the core audience and attracting a new audience as part of the 1998/99 Four Year Plan.
7.9 Target Outcomes
7.9.1 Scottish Opera undertakes to use all reasonable endeavours to secure the following outcomes:
7.9.2 to produce a programme of work of high quality (relevant criteria are noted in Schedule Three).
7.9.3. to gain a total attendance of not less than 78,000 for main scale performances, 7,000 for small scale performances, and not less than 26,500 participants for educational and outreach activity.
7.9.4. to maintain a high standard of managerial practice throughout the organisation (see Schedules Two and Three).
7.10 If for any reason it becomes evident that the agreed targets stated above are unlikely to be realised, the organisation should advise the Council at the earliest opportunity.
In recognition of the unique status of the four national companies and their activities in collaboration and partnership with one another, SAC will monitor and assess collaborative developments between the national companies through the National Companies Committee, in addition to the standard forms of monitoring of Scottish Opera Limited undertaken by the Music Committee and other SAC departments (as described in Schedule Three). The National Companies Committee will operate to a remit which is appended here for the information of Scottish Opera Limited (as Schedule Four).
1.1 Below is a diary of events taken from information within SAC's files. It traces the contact and communication with Scottish Opera and is provided as a brief account of meetings pertinent to the run up to Scottish Opera's financial crisis. Not all correspondence, contact or issues of discussion with SAC or others is detailed.
2.1 Below is a brief account of the most relevant meetings, letters, minutes etc. from SAC's files pertinent to the run up to Scottish Opera's financial crisis to illustrate the level of monitoring applied in 1999.
29 April 1998 SAC receives outline 3yr plan from SO
25 June SO Board – 1998/99 budget accepted with £121k deficit
Chief Executive's outline financial plan of 29 April 1998 also accepted.
3 July Formal offer of Advancement funding of £795k to SO comprising of £600k grant, £120k for IT equipment & £75k for specific external advice / consultancies
3 August Joint SO/SB board meeting accepts that SAC understands that merger costs would be part of the financial planning to form part of subsequent years financial figures.
27 August SAC confirms core grants for national companies after various issues of detail had been resolved
4 September SAC National Companies Committee meets to discuss draft 1998/99 funding agreements for national companies.
SAC paper discusses implications of companies receiving or not receiving inflation for 1999/00 and future.
24 September SO Board meeting considers 5 year artistic plan.
(1998/99 forecast = £151K deficit against budgeted £121k.)
30 September SAC and SO meet to confirm basis of all financial plans for SO. The meeting confirms that 29/4/98 plan is a starting point
16 October SAC gives detailed consideration of SO figures and history
29 October Joint SO/SB Board meeting – first joint figures emerge.
SAC discusses merger costs.
11 November SO Board update re budget 1998/99 states £136k deficit, a reduction on 24 Sept figure. Board papers indicate SO's Finance Director will leave at the end of March. Finance Committee papers report SO working on 99/00 budget to keep within agreed 3 year plan.
16 November (SO deficit known as £136k against £121k budgeted.)
24 November SAC meets with & grants all National Companies 1.2% increase for 1999/00
26 November Figures for merged working beginning to be produced.
9 December Joint Board begins to receive financial figures for proposed merged working with an external consultant after a model was designed by Scott Moncrieff. The external consultant began working as a project manager to facilitate merger and help produce financial figures in conjunction with senior SO staff.
18 December SAC National Companies Committee considers all four national companies' figures and joint company projections.
20 January 1999 (SO Board forecast £104k deficit for 1998/99, a reduction on figure originally budgeted (£121k) due to increase in Box Office.)
25 January Joint SO/SB Board considers finance model update for merged operation.
16 February SAC's Music Committee annual meeting with Scottish Opera
18 February SO Finance Committee discusses 1999/00 budget. (SAC is not present at these meetings.)
9 March Joint SO/SB Board receives new finance model for merged operation which indicated that on the basis of an inflationary increase in SAC's grant and estimated savings from the merger, the new joint company would start to break-even in 2000/01, and contribute surpluses thereafter.
10 March SO/SB and SAC officials meet to discuss latest financial model and figures. From March – May there were several meetings of the boards of SO and the joint board which considered the future viability of the joint company. SAC was repeatedly asked at these meetings to meet the, as yet, unfunded merger costs and provide an inflationary increase. SAC responded each time that no further funding was available.
16 March SAC receives revised figures from SO/SB on future projected merged costs and continues to do so over a period of time.
17 March Draft Budget for 1999/00 presented based on 3yr plan agreed with SAC (29/4/98). Considered and noted the deficit showing as £291k.
18 March National Companies Committee considers SO/SB joint budget and inflation requests. Four national companies' Chairs and CEOs meet National Companies Committee at SAC, and press for inflation increases for 2000/01 – 2001/02.
22 April SAC receives 1st cash forecast for 1999/00. This indicated a net borrowing requirement at the end of March 2000 of £849k. The forecast indicated that this was to be met by SAC's advancing its grant and no overdraft facility being used.
Actual draw down of cash departed from cash flow statement and SAC requested a correct version.
26 April SAC receives SO/SB revised figures.
Letter from SAC requesting SO to update and correct the latest cashflow
29 April SAC & SO including Board members meet and discuss artistic issues and question of inflation for revenue grant and review financial models for merger.
21 May Scottish Ballet deficit problems emerge. Shortfall in box office & sponsorship income, deficit now totalling £390K, £40k budgeted previously. Discussed by board, SAC informed.
24 May SAC Council at Inverness agrees inflation for SO & SB. It was not possible to increase the 1999/00 grant which had only gone up by 1.25%. To compensate for the lower increase in 1999/00, the 2000/01 grant would be increased by 3.5% and 2.5% in 2001/02. Budget for joint plan acknowledged by SAC's Council.
1 June Joint SO/SB Board Finance papers tabled. Papers included financial models for the merged operation. Meeting cancelled and brought forward to 4 June
2 June SAC letter offers SO/SB inflation and 2 year funding after current year. Letter also sets out a clear requirement to appoint a Finance Director and the expectation of successfully progressing the merger plans.
4 June Joint SO/SB Board – discussion focussed on issues relating to artistic direction of SO and SB and appointment of Robert North
16 June SAC facilitates SO/SB Board members meeting following the resignation of chief executive Ruth Mackenzie from the joint company of Scottish Opera and Scottish Ballet. Ruth remained Chief Executive of Scottish Opera until the end of September.
24 June Scottish Opera Board meeting: Finance papers report: "we are using draft 1998/99 year end figures to test 1990/00 draft budget and will alert board if concerns arise".
28 June SAC's Director of Finance writes to SO expressing concern and asks for a revised cash statement with a view to how SO would manage their cash situation for the remainder of the financial year on the balance of the grant available.
30 June SB Board.
SO/SB Joint Working Party with SAC present, defines its purpose which was to include appointing a new Chair, Chief Executive and interim Chief Executive.
14 July SAC Director of Finance meets SO's Chief Executive & member of senior finance staff to discuss current cash flow (as outlined in letter of 28 June). A revised cash flow statement was presented by SO. The corrected statement indicated that the advance required from SAC remained at £849k (by end of March 2000) but a bank overdraft of £497k would also be required. At no time was there any knowledge or independent verification of the ‘actual' overdraft position of SO. Macbeth at this point was included as a net cash contributor. SAC was advised that co-production income was forthcoming.
SO indicated problems in long term planning for opera, SAC indicated that SAC needed to have the detail and full implications as they became known.
10 August SAC Director of Finance meets SO's Chief Executive & senior member of Finance staff to hear update on cash flow position..
11 August SAC's Director of Finance contacts SO's Bank to discuss the requested increase and provide assurance of SAC's support.
1 September Adrian Trickey appointed as Interim Chief Executive of Scottish Opera and Scottish Ballet.
14 September Letter from Interim Chief Executive outlining his first thoughts. He draws attention to serious flaws in the financial models of the merged SB/SO operation, suggesting serious financial problems for future years.
29 September SO's Interim Chief Executive telephoned SAC to say there were serious problems & a meeting was required.
30 September SAC's Chairman discussed the situation with the Deputy Minister for Culture and Sport.
5 October Meeting arranged between Interim Chief Executive and SAC. A revised cash flow was presented by SO which indicated that the combined accounting deficit for both SO & SB (at end of March 2000) would be £2,5 million and that there would be a cash deficit of £3.275 million for SO alone which would exceed the overdraft facility. This was an increase of £1.729 million over the version presented in mid August.
8 October SAC met officials from the Scottish Executive Education Dept. to discuss the assessment provided by SO's Interim Chief Executive.
13 October SB/SO submit to SAC an analysis of current cash position and a forecast to 31 March 1999; projection of P& L to year end; and detailed estimates of costs of Scottish Ballet and Scottish Opera plans for 2000/01.
8 November Minister announces £2.1 million special grant, appointment of new chair of Scottish Ballet and Scottish Opera, and requires SAC to undertake a review within three months.