Mr Peter Grant, together with Mr James Strong AO and Professor Malcolm Gillies, was a member of the panel appointed to conduct the Orchestras Review 2005. He was engaged by the Australia Council to provide specialist advice to the evaluation of the Orchestras Review 2005 funding package. Mr Grant has provided the following overview at the Australia Council’s request. The views expressed below are those of Mr Grant, and do not form part of the LECG evaluation report.
In May 2004 the then Australian Government announced the establishment of a review designed to promote the long-term vibrancy and financial sustainability of Australia’s professional orchestras. Chaired by Mr James Strong AO, the Orchestras Review 2005 was commissioned pursuant to the earlier Major Performing Arts Inquiry (December 1999), and conducted in accordance with the general principles established by that inquiry.
The review highlighted the fact that the professional orchestra sector in Australia, like many of its counterparts overseas, was under significant financial pressure. Demographic changes, high fixed costs, shifting marketplace conditions, changes in audience tastes, increases in production costs and the limited scope for productivity improvements had all combined to create a highly challenging financial environment for the orchestras. Some orchestras had recognised these realities and risen to the challenges that they posed; others, however, had ignored or resisted the need for change and were suffering financially as a result.
Despite the high level of financial support provided by governments, several orchestras had recorded significant operating deficits in the years immediately preceding the review, and the solvency of at least two of the orchestras was in serious question. The outlook also was extremely challenging: the review concluded that urgent changes would need to be made, and long-term strategies developed, to improve the financial viability of the orchestras and help secure their long-term sustainability – without however jeopardising the high standards of artistic quality on which their reputations had been based. Robust governance, a high quality of leadership and effective management of risk would all be vital if these objectives were to be achieved.
Against this background, the Orchestras Review 2005 made a series of twenty recommendations for government consideration, intended to improve the long-term sustainability of Australia’s orchestral sector. Key measures covered by these recommendations included some significant changes to ownership and governance structures, designed to establish the orchestras as fully independent companies with clear responsibility for their own futures; some changes to government funding arrangements; a series of workplace changes and reforms, designed to improve operational flexibility, performance and health and safety in the orchestral workplace; and changes to the size and structure of some of the orchestras, with a view to improving their long-term financial sustainability. The latter recommendations in particular were premised on the assumption stipulated in the review’s terms of reference that government funding support for the orchestras would remain at the levels previously in force.
The Australian Government responded to the Review report inMay 2005,accepting most but not all of its recommendations. In particular, it supported the proposed reforms to ownership and governance arrangements, involving the orchestras’ divestment from the ABC and their establishment as fully independent companies limited by guarantee. It also endorsed the range of workplace changes recommended by the review. It did not support, however, the recommended changes in the size and structure of three of the orchestras, or the proposal that orchestra members should retain their membership of Australian Government superannuation schemes once the orchestras were divested from the ABC.
The Australian Government response committed $25.4 million in additional funding over four years to support the implementation of its agreed reforms, subject to additional contributions from State governments and the orchestras’ acceptance of the recommended workplace changes. Of this total:
- $9.9 million was allocated to help maintain the size of the four smaller orchestras;
- $4.1 million was intended to help the orchestras establish themselves as fully independent companies (including, in some cases, to extinguish their debts);
- $3.1 million was designed to improve artistic standards in the orchestras (in particular by supporting ‘Loss of proficiency’ retirements);
- $4.7 million was provided as compensation for the effects of the ‘efficiency dividend’ on the orchestras’ funding base; and
- about $3.6 million was provided for a range of other purposes, including occupational health and safety measures and alternative arrangements for the delivery of services previously provided by Symphony Australia.
This additional funding, the Government response stated, would “secure the long-term sustainability of the orchestral sector and improve the artistic and financial outlook for the sector”.
The Cultural Ministers Council meeting of August 2005 discussed the outcomes of the Orchestras Review and approved arrangements for the implementation of its key recommendations. Ministers also agreed that an evaluation should be conducted three years subsequently – that is, in mid-2008 – to establish the financial impacts and outcomes of the review and to determine whether any orchestra had suffered a net disadvantage as a result of the implementation of the government-agreed recommendations.
The evaluation study
The evaluation study was designed to provide an independent assessment of the effectiveness of the Australian Government’s funding package in assisting the six state symphony orchestras to implement the changes, reforms and new directions signalled in the government response to the recommendations of the Orchestras Review 2005.
Following a competitive tender process, the evaluation study was conducted over July -August 2008 by the consulting firm LECG. The study involved a preparatory phase, involving an assembly and analysis of background information and financial data; a series of consultations with each of the orchestras, arts ministries and funding agencies, as well as with the Symphony Orchestra Musicians Association (SOMA) and the ABC; an analysis of the submissions and other material lodged by the orchestras; a series of follow-up discussions with the orchestras; some financial modelling and projections; and the drafting of the evaluation report. This work was all completed within the two-month timeframe allocated for the study.
The evaluation was conducted professionally and competently. Preparations were thorough: the consultants were well-informed and the issues had been well researched. The consultation visits too were well conducted, and the report was drafted promptly and efficiently. The consultants circulated several drafts of their report for comment, checking back with the orchestras and other parties where key facts or other important matters were in doubt. The authors were responsive to comments received and suggestions made, while preserving a suitable degree of professional independence.
Findings of the evaluation
Key findings of the evaluation are summarised in the Executive Summary and Conclusion of the report that follows. The following extracts are a selection only of those findings.
Overall, and notwithstanding some significant adjustment costs, the orchestras made a remarkably smooth transition to their new status as fully independent companies. Likewise, despite a variety of views on the intrinsic merits of the new arrangements, all the orchestras embraced the broad spirit of the reforms and the opportunities that they provided. The transition process was assisted by the favourable economic environment and strong business conditions of the past few years, which helped the orchestras to increase their ticket sales, attract additional corporate support and sponsorship, and experiment with new marketing approaches and commercial ventures.
The effects of the 2005 funding package varied considerably across the orchestras. The injection of additional funding relieved the immediate financial pressures on the smaller orchestras and provided valuable opportunities for them to improve the quality of their musical offerings, strengthen their balance sheets and seek new sources of revenue. For the larger orchestras there were fewer benefits and some additional costs: both the SSO and the MSO highlighted cost increases they had incurred as a direct result of the 2005 reforms, and argued that the changes had exposed them to additional risk. The SSO has estimated its additional costs at about $500,000 per annum, due principally to higher outlays on superannuation; the corresponding estimate for the MSO is between $380,000 and $560,000 per annum, due to higher costs in both superannuation and workers compensation. It should be noted that neither of these estimates has been adjusted to reflect the favourable effects of the efficiency dividend offset, which benefited all the orchestras; moreover, that both the SSO and the MSO had been the prime beneficiaries of earlier major injections of government funding.
The orchestras have taken different approaches to meeting the requirements of their funding agreements with governments, tailoring their implementation strategies to suit their particular culture and business needs; despite these differences, however, all seem likely to be able to acquit their obligations under those agreements. Likewise, the orchestras are developing distinctive business models that go some way to realising the Orchestra Review’s vision that they would develop their own unique identities. Since divestment at the end of 2006, each of the orchestras has innovated in different ways and made a distinctive contribution to the musical life of its community.
The financial position of the orchestras has generally improved since 2005, with net assets for the sector as a whole rising from $9.2 million at the end of that year to $22.6 million at end 2007. However, the underlying economics and long-term outlook for the orchestras have not significantly changed: they remain fragile as businesses, have a very low asset base, and are highly dependent on government funding to sustain their ongoing operations. Consistent with this, a central finding of the evaluation is that:
While the full impact of the Orchestras Review 2005 funding package and associated reforms will only emerge over many years, it would be difficult at this time to conclude that they have successfully secured the long-term sustainability of the orchestral sector. …Over the longer term, the orchestras are likely to need continuing external support, or access to significant income generating assets, if they are to continue to operate in their current form. (Executive Summary, page 2)
Observations and reflections
As the evaluation report makes clear, the six professional symphony orchestras which are the subject of this evaluation are now significant business enterprises, with annual turnover of more than $100 million each year. Far more than that, of course, they represent a significant national asset, making a major contribution to the musical and broader cultural life of Australia. Their concert performances inspire, excite and motivate large numbers of Australians, attracting a paying audience of some 578,000 people in 2007. The orchestras also play a major role in music education: their schools concerts last year drew some 69,000 students Australia-wide, and many orchestral musicians are heavily involved in music teaching in schools, universities and in private practice. The orchestras are the largest single employer of musicians in the country; create significant opportunities for Australian composers and other musicians; have strong links to the community and youth orchestra sector; and provide essential support to other art forms.
Notwithstanding these many important qualities and attributes, the report makes it clear that the orchestras will continue to face some major pressures and challenges into the future. Quality in artistic standards and musical performance continues to be a high priority for all the orchestras, and rightly so: if the highest levels of quality are not achieved and sustained, reputations will suffer, audiences will dwindle and business strategies will inevitably fail. At the same time, however, there remains a significant tension between the aspirations of the orchestras in this respect and the constraints imposed by financial realities – including the affordability of the orchestras in terms of public funding.
Governments already provide about half of total funding for the professional orchestras Australia-wide, and the orchestras receive some 48 per cent of total government funding (both Commonwealth and State) allocated to the MPAB companies Australia-wide. This generous share of total funding for the major performing arts underlines the need for the highest standards of financial and managerial accountability going forward. Consistent with the principles stemming from the 2005 review, the orchestras need to take prime responsibility for their financial and artistic futures, and to develop business strategies which are both realistic and responsible. High standards of governance and effective management of risk will be critical.
As the evaluation report highlights, the orchestras currently have different approaches to managing risk, and different levels of preparedness for the challenges they are likely to face in the future. In some cases, even where risks have been accurately identified, no serious discussions have been held at Board level nor effective strategies developed to manage those risks. The mindset still prevails in some of the orchestras that, should financial conditions deteriorate, governments will come to their rescue in the future as they have in the past. This attitude does not make for effective risk management, and should no longer be acceptable as a basis for public funding.
Among the many challenges facing the orchestras in the period ahead, three warrant particular mention here.
Changes in economic conditions: The evaluation highlights the sensitivity of the orchestras’ trading conditions and financial performance to the general state of economic conditions. Discretionary expenditure on orchestral concerts will vary according to prevailing levels of disposable income and consumer confidence; likewise, levels of corporate sponsorship and private contributions will vary according to the state of the economic cycle. The more that the orchestras diversify their revenue sources and reduce their reliance on government funding, the greater will be their exposure (in both directions) to prevailing economic conditions. The recent slowdown in the Australian economy is likely to pose some significant challenges for the orchestras over the next few years.
Salary pressures: Salary costs represent a very high proportion – well over half – of the total costs of the orchestras,and even relatively small increases in salary costs can have significant effects on bottom-line performance. The report notes that the orchestras have generally managed to contain salary growth in the early years since divestment, but warns that pressures are building and may be difficult to contain. Moreover, major improvements in labour productivity are difficult to secure in the orchestral setting, by the very nature of an orchestra’s output.
Assets and accommodation: All the orchestras are constrained by their very low asset base. By contrast with many of the major orchestras overseas, Australian orchestras typically do not have access to significant income-earning assets in the form of endowments, property or other reserves to support their concert operations. This affects their ability to absorb the effects of adverse trading conditions, and reduces their scope to take the risks necessary to grow their markets.
The report draws attention to the accommodation arrangements of the orchestras as an important example of this problem. The six orchestras are tenants in other people’s buildings; they lack security of tenure, are adversely exposed to price increases in rented accommodation, and are highly vulnerable to the decisions taken by others. While the details vary from case to case, many of the orchestras will face significant accommodation issues and challenges in coming years.
While concentrating mainly on the various challenges facing the orchestras in the future, the report poses some challenges for government policy as well. With public resources limited, and many priorities competing for government attention and support, important questions of balance arise: in particular, the terms on which government funding support should be provided, and the actions which the orchestras themselves should reasonably be expected to take to help secure their future. Significant issues for governments flowing from the evaluation study include questions such as the following:
- What is the appropriate level of government financial support for the orchestras? How should the balance between different revenue sources be struck, and how should it vary over time? When an orchestra faces serious financial difficulties, in what circumstances should governments intervene with special funding assistance? Where should the line be drawn?
- What weight should be given in funding decisions to the sharp differences in market size, trading conditions and local environment now facing the six professional orchestras? To what extent should historical funding relativities continue to apply? What should be the structure of funding incentives? How, for example, to ensure that an orchestra which has acted responsibly and managed its affairs well is rewarded, or at least not penalised, in government funding decisions?
- What is the appropriate form of government financial support? Should governments be more involved, for example, in helping to build the asset base of the orchestras for the future – perhaps through an investment fund of the type established in other areas of government policy in recent years? Are current funding arrangements optimal, and if not, how can they be improved?
- What conditions should be attached to the provision of government funding support for the orchestras? Are current accountability arrangements appropriate and adequate, and if not, how should they be improved?
No doubt these and other issues will be an important focus of attention in the next review of funding arrangements for the major performing arts, including the orchestras, to be undertaken in 2009.