Everybody knows that there's a whole lot of money swilling around the Edinburgh Fringe festival. Behind the laughter and applause you can hear the ker-ching of a thousand tills. This is an arts festival, sure, but it's also a trade fair and a tourist attraction.

Everyone knows that. So where's all the money going? Who's making any? Well, no one is quite sure - but suspicion and insinuation are rife.

"Performers assume that we're making the profit," says Christopher Richardson, who runs the Fringe's uber-venue, the Pleasance. "And we assume that the people of Edinburgh are making the profit. And the people of Edinburgh assume the performers are making the profit." According to Karen Coren, who runs rival venue the Gilded Balloon, "Christopher Richardson makes money." According to everyone, stand-up superstar Ross Noble must make money. "That's right," says Noble, "I do. But I'm not going to tell you how much, otherwise I'll never be able to come back to Edinburgh again." It's a murky issue, further muddied by the fact that, in the arts, profit is a source of embarrassment rather than pride.

Let's start with the figures. In 2001, the Fringe box office, which sells a quarter of all tickets on the Fringe, cleared stg£1.9 million in ticket sales. The international festival makes £2.2 million in ticket sales, and is given the same again in public subsidy - which the Fringe doesn't receive. Christopher Richardson at the Pleasance claims that his venue, which sells more tickets than the entire international festival, recoups some £1.5 million on sales (with sponsorship and a cut of the bar takings on top of that). But none of these bodies is in the business of profit- making. Even the Pleasance is a charitable organisation whose profits must be ploughed back into the operation.

"You can't make a loss," says Richardson, "but you can't distribute the profits." After tortuous calculation, he estimates that the Pleasance may end the festival £250,000 up, of which £200,000 is used to fund the theatre's loss-leading London operation.

So why is his profit so small? "Because it is extremely expensive to be here," says Richardson. "I have 151 staff, and I pay for accommodation for all of them. And of course one has to pay them. Then there's the cost of renting the venues [from the university], and fitting up the venues, because almost every single one is a temporary theatre space." There's also a pressure to keep tickets cheap - to preserve the so-called "spirit of the Fringe". This year, a row has flared between promoters, who want to raise ticket prices, and the Pleasance, which insists on low prices.

The same harsh economic environment prevails at the Assembly Rooms and the Gilded Balloon, both of which seem to stumble from one financial crisis to the next. "The last time I made a profit was in 1980-something," says Karen Coren. All three super-venues rely on one or two smash hits to subsidise the flops. But the venues' relationship with star acts is two-way.

Coren claims to have helped launch many illustrious careers. "But we don't get any payback from that. Which we should, really." So you're asking for an annual stipend from Johnny Vegas? "Absolutely. And Eddie Izzard. And Sean Hughes." But Izzard and Hughes both put in the Edinburgh hours before the money started rolling in. Performers at the Edinburgh Fringe themselves struggle to make a profit. At the international festival, companies are paid a fee to appear; on the Fringe they pay.

"There are two approaches," says Paul Gudgin, the director of the Fringe. "One, this is a place where we develop our work, we develop our business, so we're prepared to sustain a loss or break even because of that. The other is that, if you do it carefully and aren't trying to be the next big noise, you can actually find an audience and make a bit of money in Edinburgh." In comedy, almost everyone wants to be the next big noise. "In the comedy community, Edinburgh is regarded as a showcase at which to show off your wares to a TV commissioning editor," says James Herring, formerly of Avalon Promotions, the daddy of comedy management companies, now of Taylor Herring PR. And so promoters encourage comedians not to see Edinburgh as a money-making enterprise.

"With the increased professionalism and competition at the Fringe, you do need to spend money," says Avalon's Richard Allen-Turner. Alongside unavoidable expenses like venue rental and the cost of appearing in the Fringe brochure, Allen-Turner counsels big spending on marketing, press and publicity. According to Simon Munnery, an ex-Perrier nominee who is no longer on the company's books, "Avalon tends to mount such an expensive operation that you can't make a profit". Allen-Turner plays the calculated risk card. "Somebody might come and not make money, but by being seen by the right person, they could set in motion a deal that makes the amount of money they lost seem negligible."

But not every comedian accepts this "lose now, win later" formula. "There are people who promote young acts," says Noble, "who tell them: 'You have to spend loads of money on publicity in order to affect your career.' But I don't necessarily think that's the case." Many comedians privately insist that promoters profit from Edinburgh at the performers' expense. It may depend on the particular financial arrangement they strike with their clients. Some promoters take a split of net profit; others demand a cut of gross, which can leave performers in heavy debt to their promoters, or management. "It is scandalous," says Coren.

One comedian (who prefers to remain nameless) agrees. "Performers have to pay £11,000 to £12,000 to perform in Edinburgh, and there's £20,000 or £ 30,000 coming in. Yet at the end of it, these people are finding themselves with an £ 8,000 to £9,000 deficit. So they gig all year to cover that loss. Whereas, if promoters don't make their money back, they will take it off the comics. It is costing them nothing to come here."

Noble believes performers can make money, as long as they watch their backs. "If the person who promotes your show is staying in a five-star hotel, and is charging the room service bills to the show account, then you're obviously not going to be making too much money. It is those hidden costs - if you keep an eye on all of that, then you can make money." It is clear that the army of theatrical agents, promoters and managers in Edinburgh tend, at least, to cover their own backs. But do they actually make money? The answer seems to be: a little.

So if both venues and performers (megastars excepted) struggle to balance the books, and even promoters make scarcely enough to keep them in Cuban cigars, where's the money going? Step forward the City of Edinburgh, which city council leader Donald Anderson estimates is making £150 million yearly from the festivals. "It really has helped to boost our economy," says Anderson. "We are now the fastest-growing city economy in the UK."

There is one point on which all parties agree: Edinburgh itself is raking it in. "It is difficult to find an area where the town is not gaining from the festival," says Christopher Richardson. Hotels are full; so are restaurants, bars and taxis. Private landlords charge extortionate rents.It is an issue that concerns Gudgin, whose Fringe festival generates so much wealth for the city but, unlike the international festival, receives no major subsidy in return.But the attitude of the city's businesses perplexes Gudgin.

"I would like to ask local businesses, what would happen if this festival stopped? How would it affect you?' To which the reply would be: 'It would be enormously damaging and might make me shut down.'

But what should not be forgotten, as Simon Munnery says, is that "It's not about money. It's a festival, a gathering of people and ideas. And there are some shows going on as well, apparently."

Brian Logan -Guardian Service