Scarlets - material uncertainty

Update To begin with an apology for the length of this post, but the Scarlets story is important and has already had a material impact on the county's finances. All the indications are that it is likely to be hitting the headlines again in the next 12 months.

Thanks go to various people who have helped piece this information together. There is already enough material on this sage to write a book, and it is impossible to even begin to do justice to it in a blog post, now matter how long.

As the result of some of the feedback received, some of the information below has been corrected or updated, and headings have been inserted to make it easier to read.

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Readers of the Western Mail will have spotted a piece a few days ago (here) reporting on the Scarlets' latest sets of accounts, published at the end of April. The club's chief executive, Mark Davies, remains optimistic, and he goes on to make a passionate argument for the importance of the club to both the town and the wider region.

You would not expect anything less from the club's chief executive, and what he says is certainly in tune with the feelings of most people in this part of the world who want Scarlets to survive and prosper. Scarlets is a great club, and it has produced some great talent.

The Parc y Scarlets development and the club's dependency on financial support from the county council are quite another matter, especially at a time when the council is squeezing us all for more money, while cutting services and making staff redundant.

The person who bears a great deal of responsibility for taking both the county council and the club up this particular creek is the council's chief executive, Mark James, and he may well have lost the paddle.

Contrast Mr Davies's eloquent case for the club with the bad tempered rantings of Mr James in the same article. As usual, he blames everything on a small minority, and even goes so far as accusing critics of "wishing the club and the council harm".

So what have they done that has annoyed him so much this time? Quite simply, they have drawn attention to comments made by the club's auditors, Grant Thornton, in the latest accounts, and those comments should be ringing alarm bells in County Hall, where you would hope that the council and the taxpayer would be the chief executive's first priority.

Logically if Mr James has a bone to pick with anyone, it should surely be with the auditors for qualifying the accounts in the first place.

Consultants Report

Before we delve into the accounts and pick up on a few things overlooked by the Western Mail, we now know that the county council and the club have jointly commissioned what was no doubt an extremely expensive consultants report to highlight the contribution the club is making to the region. In other words, we are paying top dollar for a PR exercise to justify our forced journey up the creek. As the old saying goes, a consultant is someone who is paid to tell you what you have already decided for yourself. More on this below.

Corporate structure and name changes

The club runs its finances through two different companies, and both changed their names in September 2011.

The first company is effectively little more than a shell used to channel receipts from the WRU. Formerly
Llanelli RFC Limited, it changed its name to Llanelli Scarlets Regional Limited.

Llanelli Scarlets Regional Limited is a wholly owned subsidiary of Scarlets Regional Limited, known until September 2011 as Llanelli Rugby Football Club Limited.

Confusing, isn't it? Apparently the names were changed to bring the club in line with WRU policy.

Council's investment in the site

All of this would only be of interest to financial anoraks if it were not for the fact that Carmarthenshire County Council has pumped millions of pounds in grants, loans and assets into the venture over the last few years, and the club's future is, to put it mildly, uncertain.

Getting to the bottom of how much the Council has put into the venture is extremely difficult. Estimates range from £40m, to the chief executive's latest statement (in the Western Mail) article which puts the figure at £20.2m.

One of the disputed numbers here is the value of the land leased to the club for 150 years. As we shall see, the chief executive argues in the Western Mail that it is nothing, whereas he told councillors at a public meeting on 14 November 2007 that it was estimated to be worth £14 million.

At the same meeting the councillors reviewed a report commissioned by the council from Deloittes which flagged up no fewer than 17 risks, and concluded that this was a high risk proposal. Naturally, this advice was ignored.

The neighbouring 26 acre site which is now the Pemberton shopping centre was sold for £1 million per acre after a great deal of money had been spent on preparing the land by filling in mine shafts, etc.

We can be sure that the chief executive's number is too low as he claims, for example, that the land on which the stadium was built "had no value". Back in 2006 the council said that "based on current planning approval" the land had been independently valued at £210,000. "Current planning approval" almost certainly meant the value with planning consent for leisure use, which is much less than land with consent for retail or residential use, but even that seems extraordinarily low given that land and property prices were booming at the time. It is also worth noting that the land which is now Parc y Scarlets was originally zoned for housing in the council's UDP.

Another item quoted in the Western Mail story was the Section 106 monies, which are worthy of a chapter on their own. These total £5.6m and would normally be released by developers of the Stradey Park site in phases as the development progressed. Of course, to date none of the houses involved has actually been built, but the council decided to advance the money from its reserves to Parc y Scarlets anyway and has thereby lost around £0.5m in interest.

No wonder the chief executive is so angry about hold-ups to the Stradey Park development.

In addition to the loans, the Section 106 monies, the council's share in the development costs, the scheme has received significant grants from funds administered by the council, and a slew of hidden subsidies in the form of interest relief on debts and use by the council for all manner of conferences and corporate events.

Accounts for 2010-11

But it's time for a look at the accounts themselves.

The best way to think about the two Scarlets companies is "Good Bank" and "Bad Bank".

The Good Bank is Llanelli Scarlets Regional Limited (or Llanelli RFC Limited as it then was), and its accounts for the year to 31 July 2011 are remarkably simple. They show that after deducting operating costs, interest on loans etc. on a turnover of £4.5m, there was a surplus of £0.

£4.1m of the £4.5m reported turnover came in the form of receipts from the WRU. All of this was transferred to the parent company, Scarlets Regional Limited, which is where the real action lies.

The latest set of published accounts is for the year to 30 June 2011, and this is an altogether different beast. At first sight, things seem to have improved on the previous year, with losses falling from £2.9m to £1.8m, and the directors are moderately upbeat in their assessments for the future.

The club's auditors are less cheery.

Firstly, they point out that the club had an excess of liabilities over assets of £1.95m. They add, "these conditions along with other matters....indicate the existence of a material uncertainty which may cast significant doubt about the company's ability to continue as a going concern".

A similar qualification was made in the previous year's accounts when liabilities exceeded assets by £5.5m. That was solved by turning £5.4m of debt into equity to keep the ship afloat and wipe the slate clean. To end up a year later almost £2m in the red explains why the auditors are worried.

If that is not bad enough, the auditors then go on to qualify the accounts for a second time, pointing out that the carry value of the stadium itself was shown at £10.5m in the club's books, and they warn that if the club's upbeat assessments about its future are not realised, the value of the stadium would need to be written down.

Written down, or written off, because in the event of the club going out of business, the value of the stadium is probably closer to Mark James's valuation for the land on which it stands: nothing. What would you do with a 14,870 capacity stadium? Hand it over to the local bowls club or the ladies' hockey team?

The stadium cost over £23m to build, with the council stumping up £10.2m, according to the council's chief executive. In other words, if the club goes bust, it's not just the club's share in the stadium which will have gone up in smoke, but the council's investment as well.

But as Mr James points out in his Western Mail rant, "we still own the freehold, so if the club ever stops playing rugby we can develop it then, so we have lost not one penny of the value of the land."

And as he told us earlier, the value of the land was nothing. Get your heads around that one if you can.

At first sight, the rest of the accounts appear to paint a picture of overall improvement, but what you have to remember is that we are comparing apples with pears. The most recent financial year ran for 12 months, whereas the previous one ran over 17 months.

When the numbers are adjusted, what emerges is a slight improvement in revenues (the most recent year was helped by a £1m rise in WRU receipts). Adjusted for inflation, however, revenues were flat.

Administration expenses show a slight decline, when adjusted for the difference in accounting periods, and the directors put this down to continued focus on reducing costs (a salary cap was put in place on the players, for example), increased utilisation of the stadium and a modest rise in ticket sales.

However, staff costs rose from about £5.5m to £5.8m on a like-for-like basis. The average number of staff rose from 122 to 125.

Despite the conversion of the directors' loans into equity, debt falling due after more than 12 months rose quite sharply from £8.2m to £9.3m. This includes a loan of £2.4m from the county council which has since been re-scheduled, and should now be shown as £2.6m. In addition to converting loans to equity, several directors have also agreed to waive interest payments on their loans for 12 months until June 2012.

Other points which stand out include a note stating that the club will pay the council £500,000 over 5 years from 2013 towards the cost of up-keep for the stadium. A big question mark hangs over whether this will be paid, and it points also to another hidden subsidy (presumably the council has been picking up the full whack for up-keep so far).

Not shown in the accounts, but included in the club's forecasts is revenue from the sale of "a significant asset" in the coming year. We are not told what that asset is or what it is expected to realise. A note in the latest accounts refers us to the previous year's statement, which says exactly the same thing.

What the accounts make clear is the extent to which the club is dependent on the continuing good will of four of its directors, who have put millions into it. Whether they will be willing or able to stump up another couple of million this year if there has not been a dramatic change in the club's fortunes is another matter. Several chickens are due to come home to roost this year, including interest on the directors' loans and a renewal of the club's facilities with its bankers.

Apart from the sale of the unnamed asset, the club is also pinning a lot of hopes on its "Ambassador Programme", a scheme designed to widen its investor base. In the first 7 months of operation to the end of March 2012, the scheme had raised just £275,000.

However you look at it, the club is really struggling financially, and there are more storm clouds than rays of sunshine hanging over it.

Collapse of the club would be disastrous not just for rugby in the region, but also for the taxpayers of Carmarthenshire, and yet there is nothing to suggest that the club has a long-term sustainable future which could justify the investment of yet more public money. But this is where the consultants report comes in which is apparently so positive about the contribution of the club to the regional economy.

If, as seems likely, another bailout is needed, the consultants report will be used as PR to persuade councillors and others of the wisdom of stumping up more money. It will also be a useful face-saving exercise for the backers of the scheme.

What is needed, however, is not a glossy consultants report, but a thorough investigation by the Wales Audit Office. How much public money has been put into the project, and what are the risks? Were councillors and others given a clear and accurate picture by proponents of the scheme? What were the relationships between the many companies and individuals who have played a role in it? Were all of the required procedures and statutory requirements met fully? Was the council right to put so much into such a high risk project?

And that's just for starters.