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IN 2019, Scottish Rugby stood on the edge of a financial precipice, yet Mark Dodson tried at that year’s AGM to claim that the business was debt free, which, as he was subsequently forced to acknowledge, clearly was not the case.
Enjoying the benefits of John F Kennedy’s celebrated aphorism about a rising tide lifting all the boats, turnover had risen 74% from £35.1m to £61.1m since his appointment in 2011, but operating costs had ballooned 84.1% from £32.9m to £60.5m and the operating surplus had sunk to an unsustainable 0.9% of turnover.
Net current liabilities of £10.4m and debentures of £44m stood against a £41.5m valuation of Murrayfield. Price Waterhouse only signed off on the 2020 accounts once the Scottish Governments £20m Covid bail-out was confirmed in December 2020, and Joe Fitzpatrick, the Minister for Public Health, Sport & Well Being at that time, when challenged about the disproportionality of this payment compared to other sports such as football, said: “Rugby’s need was more desperate – they needed this cash just to keep the lights on”.
The Covid bail-out and the Six Nations deal with CVC should have significantly changed the financial dynamics of Scottish Rugby – but they have not. Record Revenues of £67.9m produced a record deficit of £10.5m in the year to 31st May 2023 and no amount of fancy accounting can change that. The present financial model is unsustainable and the attempt to camouflage reality and whitewash its consequences in the 2023 Annual Report is both an insult to the member clubs and a serious threat to the revised governance structure.
Revenue
The Strategic Report references 2019 as the pre-covid year with the same match profile of four Autumn Tests and three home Six Nation games, and claims that ‘Ticket Income’ has increased 50% from £15.8m to £23.7m ‘due to better pricing profile and better performance on the field driving up volume as well as yield’ but in the 2019 Annual Report, Dominic Mackay (the Chief Operating Officer at that time) told us that all four Autumn Tests and the three Six Nations games were sell-outs – so the 50% increment in ticket income is solely down to the higher price of the tickets.
The winner of the Six Nations is reportedly paid £5m with a sliding scale down to £1.0m for sixth – so finishing third in 2023 should increase the Six Nations ‘take’ (which presumably falls into Broadcasting Revenues) by around £883k, yet 2023 ‘Broadcast Revenues’ are down on 2022.
‘Commercial Income’ is down 7.1% on 2022.
Whilst revenue from ‘Professional Rugby’ has stuck at £10.5m, selling 28% of the URC to CVC was always going to reduce the income stream of the two professional teams in percentage terms, but it would now appear that the anticipated intrinsic growth has not been strong enough to compensate, which will be bad news in the medium to long term, given that the current net cost of the professional game is £15.2m, despite Edinburgh’s 6% attendance growth and its reported doubling of commercial income since 2018/19.
‘Development Income & Grants’ were down 30.6% from £3.2m to £2.2m.
‘Hospitality & Other Income’ was boosted by the Beyoncé, Harry Styles and Bruce Springsteen concerts in May. A note tells us that revenues include £1.1m of recharges for stewarding, etc – presumably with a view to manipulating these charges out from the 15% calculation for investment towards the club rugby budget.
‘Ticket Income’ has grown 50% to £23.7m since 2019, and now accounts for 35% of the overall turnover of £67.9m. The other five categories of income have flat-lined, with the use of Murrayfield as a concert venue covering the fall in development income and grants.
According to Scottish Rugby’s own figures, crowd numbers were the same in 2019 as in 2023 so the sole source of growth has lain in ticket prices. Scottish Rugby complains of a ‘hyper-inflation environment” but inflation was single digit throughout the accounting period; indeed, the only evidence of ‘hyper-inflation’ within the report lies in their own 50% hike in ticket prices. How long will supporters accept these prices and how much scope is there for further growth?
Operating Costs
Through the pandemic, ‘Operating Costs’ rose by 3.1%, from £59.2m in 2019 to £61.1m in 2022, but then jumped by 23.5% from £61.1m to £75.4m in the year to 31 May 23.
The spend on ‘International Rugby’ rose by 21.5% from £11.2m to £13.7m in 2023.
Scotland played four Autumn Tests and five Six Nations games in season 2022-23 plus three Test matches on their South America tour. The WRU 2023 Annual Report shows international match fees of £3.5m for their 12 games in the year to 30th June 23 (which equates to £12,500 per game) so it is not unreasonable to assume that the Scottish players are paid at a similar level, though there is zero transparency on this in Scottish Rugby’s financial statements.
According to the Strategic Report, the £833k Six Nations bonus was shared with the players.
The South America tour must have cost close to £1.0m.
The Strategic Report claims that £2.5m was ‘invested’ into the Women’s National Team, but the reported 28 new player deal was not signed until November 2022, and only 15 were in place by the year end, which, at most, could only have cost £350k in hard cash.
All of which leaves some £8m for ancillary costs such as coaching, medical, travel and accommodation.
‘International Rugby’ and ‘Professional Rugby’ have only been shown separately in Scottish Rugby’s financials since 2021, but in these three years the charge for Professional Rugby has jumped 45.2% from £17.7m in 2021 to £25.7m in 2023 with the number of male professional players going up 12.6% from 111 in 2021 to 125 in 2023, with the consequent gross cost per player going up from £159k in 2021 to £206k in 2023, an increase of 29.6%.
The Annual Report tells us that “some £2.5m of strategic funds were invested” in the professional teams during the year after a “benchmarking exercise had shown that this type of investment was necessary to secure performance in the pro teams”. Laying aside for the moment the semantics of whether or not player wages can ever be considered an investment rather than an operating cost, one would have to ask for details of the benchmarking exercise and suggest that perhaps similar exercises led to the demise of Wasps, Worcester Warriors, London Irish and Jersey Reds who all, of course, lived out-with the comfort blanket of their national body.
It is interesting to consider the £25.7m spent on professional rugby in 2023 through the prism of the Guinness Premiership’s £5m salary cap, which, with allowances for marquee players and international credits allows an average authorised spend per club on player wages of around £6m.
Assume that, contrary to the tacit assumption that Edinburgh and Glasgow are confined to tight budgets, both clubs work to this £6m figure for playing wages – then consider the breakdown of Coach & Player wages on Page 54 of the Annual Report which, working to the median figure for each band gives a total charge of £16.5m – then deduct £3.5m for the national side which leaves £13m for the two pro teams split £12m for the players and £1m for the back-up staff – which prompts a big question as to where exactly the other £12.7m (£25.7m minus £13m) goes.
The Strategic Review suggests that “de-centralisation of the strength and conditioning, medical and other performance rugby costs from Performance Rugby” was a significant factor in the increase in the 2023 Professional Rugby costs but there is no compensating reduction the Performance Rugby costs which, indeed, have risen from £4.1m in 2022 to £4.7m in 2023.
Spending on ‘Domestic and Club Support’ for the year to 31st May 2023 came in at £4.3m each, £8.544m in total, or 12.6% of Revenue, as against the 15% which will apply from next year under the new governance structure. There is, however, no detail as to the proportionate split between money ‘invested’ within Murrayfield’s crowded corridors and cash actually dispensed to the pit-face.
The Strategic Review pointedly implies that under the new rules, with the 15% calculation being based on the previous four years turnover, the ‘investment’ in the grassroots would only have been £8.531m. Petty stuff but symptomatic of a mind-set which infers that the £200k allegedly invested in SCRUMS and any administrative costs incurred in support of the grassroots should be included in the calculation, ignoring that Lorne Crerar’s submission to the member clubs in May 2022 specifically excluded the Rugby Development Department’s overhead costs from the calculation.
This same mind-set has shown a pronounced aversion to any suggestion that revenue expenditure set against the ‘Strategic’ CVC monies should be brought into the calculation, and is distinctly apathetic to the view that the ongoing FoI request, once it eventually returns the requested data, might very well confirm that funds from the £15m Covid Recovery Grant should rightfully be redirected to the clubs.
‘Commercial’ costs are up £2m (44.7%) year on year from £4.5m to £6.5. According to the Strategic Report “our contribution to Six Nations running costs and the revenue share to private equity” are included, but no further detail is forthcoming.
‘Facilities’ costs have soared 53.9% from £6.6m to £10.2m due to increased usage, the removal of post Covid rate relief, energy wholesale prices and most significantly an ageing stadium where chronic under investment is now beginning to take a serious toll (something which must be addressed – and funded!).
‘Administration & Governance’ costs have held comparatively steady – yet still gone up 6.5% from £5.7m to £6.1m.
Payroll
The root cause of Scottish Rugby’s financial difficulties is not hyper-inflation, but a bloated and overpaid payroll.
As Gordon McKie, Dodson’s predecessor as Chief Executive, pointed out, in an interview with the Sunday Times in April 2020, Scottish Rugby’s headcount had grown to 450 from 280 and the annual payroll had nearly doubled since he left in 2011 – and according to 2023 Financial Statements the average monthly headcount has grown still further to 479.
Total employment costs were £39.2m or 57.8% of the £67.9m turnover, which effectively means that for every £1 that came in the door, 58 pence went out on wages.
The average wage was £70,960 and the average cost per employee was £81,891.
These figures are given perspective by the grid in the Governance section of the Annual Report (Page 54) splitting employees into their salary bands and inadvertently revealing that the head count had gone up to 509 by the year end.
It is difficult to understand, how, with 59 more people on the payroll on 31st May 2023 than there had been on 1st June 2022, £695k can have been spent during the year on “redundancy and restructuring”.
It is also difficult to understand how in an organisation where the average wage is £70,960, the directors can justify a 3.5% salary increase ‘across the business’ plus a ‘one-off’ 3.5% ‘cost of living award’.
Directors fees and salaries for the year to 31May 2020 amounted to £1405k.
Mark Dodson was paid £676k (2022: £578k).
John Jeffrey was paid £59k, £22k of which was reimbursable by World Rugby
The non-execs were paid £68k (£16k each to Bob Richmond, Hazel Swankie and Lesley Thomson)
The balance (£624k) was split between the three other executive directors (Shona Bell, Hilary Spence & Jim Mallinder) with two of them being paid £200k+ and the other is in the £100/£200k band.
The Annual Report tells us in the section dealing with Dodson’s remuneration [page 53] that: “The difference between the figures quoted for 2021/22 and 2022/23 is due to an accrual for accounting reasons to provide towards a contractual payment which is due when the director’s service contract ends. Payment of an equivalent amount which was due to that director from the Long Term Incentive Plan that was in place in 2018/19 and which was terminated during the Covid-19 pandemic, was deferred voluntarily by that director at that time.”
This is hard to follow given that when Dodson announced on 13th April 2020, at the height of the pandemic, that he was waiving his bonus entitlements for 2019-20, there was no mention of this being a temporary measure, and the 2020 statutory accounts indicate clearly that the Long Term Incentive Plan had been terminated at 2018-19. It is understood that the terms of the £5m loan received from the Scottish Government in early 2021 prohibited bonuses.
Dodson’s current contract, which is until June 2025 (four months short of his 65th birthday), was unveiled in June 2022; nearly 18 months before his previous contract ran out and just a few months before the new governance structure was voted in by an overwhelming majority of member clubs. It is highly unusual for the CEO of rugby governing bodies to have fixed-term contracts, let alone be contractually entitled to a termination bonus.
The difference between a bonus and a termination payment is not explained.
‘Strategic Investments’
Lorne Crerar, in his introduction to the Annual Report, tells us that: “The accounting treatment for investment transactions carried out in previous years is complex and has contributed to the significant swing from profit to loss”. Following the cash removes any complexity, but Mr Crerar will need to explain how the accounting treatment has contributed to the significant swing from profit to loss.
In cash terms, £18.2m has been received from CVC for PRO14/URC and £19.7 for the Six Nations. A further £14.4m is due for the Six Nations over the next couple of years and there may be a further cash tranche due for URC in 2024-25. The only hard cash expenditure has been the £5.4m repayment of the Hive Stadium loan – so the net cash surplus is £32.5m, which should have been ring-fenced for the redevelopment of the main Murrayfield Stadium, instead of which it is being frittered away on revenue items.
Women’s Rugby (£2.5m) is, admittedly, a step change which might possibly, along with the legal costs of the new governance structure (£377k), be justified as strategic, but pro team wages (£7.8m), the Old Glory write-off (£881k) and redundancy payments (£659k) are not by any definition, strategic investments, and should not be treated as such.
Dodson admits in the Annual Report that: “Although tolerable in the short-term this investment position is unsustainable in the long-term and requires the Group to examine the market over a more extended period gauging what the sport needs over a ten-year horizon to stay relevant and competitive.”
He sees the crash coming but is happy to carry on driving with his eyes shut because in 2026 when the final two tranches of the CVC money is gone and Murrayfield is crumbling to bits, it won’t be his problem anymore.
Scotland’s clubs cannot afford to sit in the back seat of the car any longer. They need action from the new governance structure and they need it now. They need it to insist on payroll cuts and they need it to insist on CVC money being ring-fenced for the redevelopment of Murrayfield.
John McGuigan interview part one: “The world around us is changing so we as an organisation will change with it”
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