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.[66] 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.[67] 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 brought forward".[68] The Warnock Report of September 1992 found that "insufficient progress has been made in ... improving financial management".[69] 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.[70] It recommended that consideration be given to the establishment of a Management Board.[71] 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".[72] 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.[73] A Management Board was not established.[74]

  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".[75] 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."[76]

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.[77]

  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:

"The timetable 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.[78] 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".[79] Lord Gowrie repeated his criticisms in evidence.[80] 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.[81] 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."[82] Sir Angus Stirling also considered the charge of a shambles to be "silly and hollow".[83] 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 now".[84] 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.[85] 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.[86] 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 benefit.[87] 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.[88]

  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.[89] 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 would be".[90] 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 audit committee".[91] Lord Chadlington sought to clarify the precise financial position.[92] 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".[93]

  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".[94] 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".[95] 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.[96]

  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.[97] 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".[98] 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".[99] 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".[100] 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.[101] 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".[102] 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 period.[103]

  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.[104] 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.[105] 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.[106] 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.[107] 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.[108] 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.[109] 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".[110] Yet again, the Board had to convince itself and the Arts Council that the company was a going concern, or face insolvency.[111] Additional public funds were not sought by the Royal Opera House nor, as the Arts Council made clear, were they likely to be available.[112] 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.[113] 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.