Damning report questions survival of Welsh rugby regions
A long-awaited report into Welsh rugby's regions says some of the four may not survive their financial plight and criticises "poor management".
Accountants PriceWaterhouseCoopers assessed the regions' finances up to April 2012 and highlighted options for the future. They raise, but dismiss, a return to a club-based system and central contracts for leading players.
To balance the books, the report recommends more collaboration between the Welsh Rugby Union and regions, "enforced" by a new management board.
Five Welsh regions were initially formed in 2003, reduced to four a year later with the demise of Celtic Warriors, leaving Newport Gwent Dragons, Cardiff Blues, the Ospreys and Scarlets competing in European competitions, what is now the Pro12 tournament and the LV= Cup.
The aim of the change from a club-based structure was to improve the standard of professional play and put the game on a sounder financial footing.
Since then the players who helped Wales win Six Nations Grand Slams in 2005, 2008 and 2012 have overwhelmingly come from the four regions.
The PriceWaterhouseCoopers report was commissioned jointly by the WRU and regions and the BBC has obtained a copy.
The report states: "The historical financial performance shows the four regional businesses are not sustainable on a standalone basis in their current form without continued additional funding from benefactors or alternative funding sources."
Despite rising income from the WRU, the report says the regions' annual funding gap rose from £2m in 2008 to £5.2m in 2011 despite a £5m increase in revenue during that period.
A funding gap reduction to £3.8m for the financial year ending in April 2012 is forecast - in the past those gaps have been met by the regions' benefactors.
But the report warns the regions cannot continue to rely on benefactors, saying: "We understand from regional representatives that the impact of the global financial crisis, together with benefactors becoming disillusioned with a relationship of conflict has removed most or all of this support for the regional businesses."
"Poor management" is also blamed for the regions' plight, and the report adds they "could and should have been run in a more professional and commercial manner and poor decision making has contributed to the size of the funding gap.
"Also, the regional management teams have at times been ineffective due to the overriding influence of the benefactors," the report adds.
Projections show that in the financial year ending in 2013, the gap will disappear, with a projected surplus of £0.5m. The main reason is a reduction in costs, thanks to the introduction of a £3.5m salary cap. However, PriceWaterhouseCoopers believe those projections are highly ambitious.
The overall quality of the financial information provided by the regions was poor according to the report, which comments: "Not all regions were able to provide us with an up-to-date business plan."
However, the report says the four organisations have begun to address management and performance issues through cost-cutting and a "strong emphasis on improving commercial and marketing activities".
In addition, the report says the regions have now accepted they cannot compete financially with certain English and French clubs and have focused on developing younger players.
The lure of potential European success in the Heineken Cup is also highlighted as a reason behind the regions' financial issues, along with the signing of overseas players on higher wages than their home-grown counterparts.
None has yet won the Heineken Cup, but Cardiff Blues won the European second-tier Amlin Challenge Cup in 2010.
Of five Pro12 title wins by Welsh regions since 2003, the Ospreys claimed four and the Scarlets one.
The report says if the WRU took on more risk by assuming greater responsibility for the regions "it logically should have a greater degree of control.
"However, this could lead to a requirement to treat the regions as subsidiary companies, which we we understand would not be acceptable to the WRU."
A return to Welsh rugby's pre-regional club structure is among seven options the report considers.
This would "potentially reinvigorate attendance levels". But the idea is dismissed because of a "potential loss of income" and the "dilution of playing strength" and would also be "reverting to a structure that was previously unsuccessful".
The report adds: "It is unlikely the current model will be sustainable in the short-term," and cites continuing to cut player costs will "impact competitiveness of the regions and, potentially, the national squad".
An option of the WRU centrally contracting players and reducing the £6m they give to the regions for Test players "does not address the structural funding gap" they are operating under.
Changing the season's structure so that competitions run in succession would improve marketing opportunities and increase international players' availability. But that would need the agreement of the WRU's counterparts throughout Europe and the International Rugby Board as well as current sponsors and broadcasters.
Reducing the number of regions would concentrate playing and coaching resources and reduce costs. However, it would also lead to a "likely reduction in income" amid renegotiated broadcasting and competition agreements as well as limiting the opportunities for players.
If the WRU were to take over the regions, there would be potential cost savings as well as "clearer lines of responsibility and decision making". But the report's authors fear doing so could mean less money for grassroots and Premiership rugby and "the WRU would potentially breach its banking covenants".
The seventh - and seemingly favoured option in the report - is for the WRU and regions to "adopt a closer collaborative approach" with the formation of a management board to enforce it. The report says this "requires a positive change in the WRU-regions relationship."
The report says the advantage of such a move would maintain regional identity and benefactor involvement and "can be implemented quickly", but adds the solutions being considered should be "evolutionary, not revolutionary, so as not to jeopardise current income streams."
The BBC understands the regions will meet to discuss the report in the next few days.