The IRFU contributed an additional unbudgeted €250,000 to each of the four Irish provinces last season to assist with rising player salaries.
But IRFU Chief Executive Philip Browne warned that the governing body cannot indefinitely absorb ever-increasing wage inflation.
In the IRFU's 2015/16 Annual Report, Browne outlined the challenges facing Irish professional rugby now the game's economics have been skewed by rich clubs.
"All is change in the European rugby environment with the growing dominance of those clubs in France and England with deep financial pockets. The size and quality of the playing squads that these clubs can assemble from around the world has changed the balance of power in Europe to the detriment of our provinces and the IRFU who simply cannot match the playing budgets of these teams,” said Browne.
While Browne believes there is scope for the provinces to increase gate receipts, he has called on the PRO12 to develop new revenue streams to enable the Irish sides to remain competitive.
"An extension of this new European order is the difficulty that faces the PRO12 as a competition operating in Ireland, Scotland and Wales – three rugby markets which are a fraction the size of those in England and France. The revenues generated by the tournament need to increase significantly if the participating clubs are to remain competitive with the clubs in the English and French leagues. Such an increase in values will require some radical change to the tournament and how it is structured,” stated Browne
And he warned that the changing financial dynamic represents a "potentially profound" threat to the Irish provinces.
"It is becoming increasingly clear that the professional game in Ireland can no longer rely on the IRFU being the 'lender of last resort' as the IRFU no longer has the capacity to absorb the increasing cost of the professional game as Irish Rugby struggles to respond to the inflating player market in England and France.
"The risks to the Irish professional game are potentially profound and one of the key mitigation strategies is to invest in our pathway to develop better quality players more quickly through a more effective pathway – a key element of the new High Performance strategy,” said Browne.
In all, the Union's funding of the provinces' player and management costs rose by almost €6m in the 2015/16 campaign, with most of the funding going to Munster.
A statement from the Union read:
"The Irish Rugby Football Union provided an unbudgeted additional €1m in the 2015/16 season to the provinces (€250,000 each) to assist with the difficulties experienced by all in the player contracting market.
"The increase of almost €6m in player and management costs arises, in large part, from the necessity to provide against operational amounts due from the Munster Branch, in light of their current financial difficulties, together with the aforementioned additional funding for all four provinces and various other items."
World Cup participation ensured it was another bumper year for the Union's coffers, an overall surplus of just over €5m driven by increased broadcast revenues generated by participation in Rugby World Cup 2015. However, costs climbed by by almost €5m from €66.2m to €71m, ensuring the Union achieved a close to breakeven result in net cash terms.
Income generated through the national team amounted to €61.7m or 81% of the IRFU's total revenue.
Tom Grace, IRFU Honorary Treasurer, speaking at the Union's annual general meeting held at the Aviva Stadium said, "It is no secret that the increased revenues available to French and English clubs are having a serious inflationary impact on player remuneration.
"The Union's response to this is to increase the player funding going forward for the provinces but more significantly to invest greater amounts into our player development pathways from the grassroots game upwards."
"In our budget for 2015/16 an additional €3.2m was allocated to elite player development and €800,000 to the domestic game. For 2016/17 we have enhanced the domestic game investment by a further €1.2m. It is the view of the Union that these investments in our game represent the most effective way forward for the Union given the financial constraints under which we operate.”
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