Press Release - The Department for Culture, Media and Sport:
The Re-negotiation of the PFI-type Deal for the Royal Armouries
Museum in Leeds
18 January 2001
Sir John Bourn, head of the National Audit Office, reported to
Parliament today that the Royal Armouries* in July 1999
successfully negotiated a revised deal with Royal Armouries
(International) plc** ("RAI") which ensured that the Royal
Armouries Museum in Leeds remained open. The revised deal has also
made it possible for the future redevelopment of the surrounding
Clarence Dock area, from which the Royal Armouries itself, as well
as the local economy and community, will receive a number of
benefits.
In December 1993 the Royal Armouries, then based principally in
the Tower of London, signed an agreement with RAI for a new museum
in Leeds to display more of its collection. Under the agreement RAI
were to build and then operate the new museum for 60 years. In
return it would retain all the income the museum generated from
visits by the public. RAI met over £14 million of the £43 million
cost of constructing the new museum, with the Government
contributing £20 million via the Royal Armouries, and Leeds City
Council and Leeds Development Corporation £8.5 million.
Although the new museum was delivered on time in March 1996 and
to budget, once opened it never made enough money to meet its
operating costs and the servicing of RAI’s debts, and by early 1999
RAI’s cumulative losses were estimated at £10 million. These losses
mainly arose as visitor numbers were much lower than previously
forecast. In response to its financial problems, RAI undertook two
refinancings in 1997 and 1998. As part of the second refinancing in
1998 the RAI’s bankers, the Bank of Scotland, said that it would
not be able to make additional funding available to RAI after July
1999 if the financial problems persisted.
Withdrawal of the Bank's support after July 1999 would have
resulted in RAI becoming insolvent. The Royal Armouries and the
Department for Culture, Media and Sport therefore considered a
number of options for dealing with the financial crisis.
Consequently, in July 1999 the Royal Armouries revised its
agreement with RAI. Under this revised agreement the Royal
Armouries took over responsibility for the running of the museum,
while RAI retained responsibility for the provision of catering,
car parking and corporate hospitality services to visitors to the
museum. The Department supported this revised deal because it
considered that this was the only arrangement which was certain to
keep the museum open, since it was the only one which had the
support of the Bank of Scotland as RAI’s principal lenders. It also
preferred this arrangement as RAI would retain responsibility for
the repayment of its loans with the Bank of Scotland of almost £21
million.*** Consequently, in July 1999 the Department told the
Royal Armouries that the revised deal was the only option for which
the Department was willing to make extra funding available. As a
result of the revised deal, the Royal Armouries receives from the
Department extra grant-in-aid of £1 million a year but has also had
to make efficiency savings of almost £2 million a year.
The end result is that the government, and not the contractor,
will pay to keep this museum open. The deal with RAI in 1993 was
one of the very first PFI-type deals signed and took place when
there was no guidance available to the Royal Armouries and the
Department on how to structure such a deal nor was there much
experience within government and in the private sector. Since 1993
the PFI has developed greatly. Many more such contracts have been
signed and there is a large body of guidance now available to
public bodies who want to enter into such deals.
In his report Sir John draws attention to the main lessons which
may be of benefit to other public sector bodies contemplating
entering into similar PFI-type deals or facing the prospective
insolvency of their private sector partner:
- the need to gauge market interest in winning the contract for a
project, and to reconsider the project as currently structured if
there is little such interest;
- ensuring that all contract documentation is agreed before the
contract is actually signed and avoiding agreements to agree at a
later date;
- the need to comply with current good practice and guidance when
procuring PFI-type contracts; and
- when faced with the possible insolvency of the private sector
partner, obtaining an absolutely clear view as to what the legal
position is under the contract and considering all options
available.
Notes for Editors
*The Royal Armouries is financed primarily by grant-in-aid from
its sponsoring department, the Department for Culture, Media and
Sport. Under the National Heritage Act 1983, it statutory duties
are:
- to care for, preserve and add to the objects in its collection
of arms, armour and associated objects;
- to secure that the objects are exhibited to the public;
- to secure that the objects are available for inspection or
research;
- to maintain records of the collection; and
- to generally promote the public’s enjoyment and understanding
of arms and armour.
**Established in 1993, Royal Armouries (International) plc is a
private sector company which was specifically set up to build and
then operate the new Royal Armouries Museum in Leeds.
***The £21 million represents the value of the outstanding loans
which RAI originally took out to fund its costs in setting up the
new museum and then its operating losses once the museum
opened.
Press notices and reports are available from the date of
publication on the NAO website at http://www.nao.org.uk/ Hard
copies can be obtained from The Stationery Office on 0845 702
3474.
The Comptroller and Auditor General, Sir John Bourn, is the head
of the National Audit Office employing some 750 staff. He and the
NAO are totally independent of Government. He certifies the
accounts of all Government departments and a wide range of other
public sector bodies; and he has statutory authority to report to
Parliament on the economy, efficiency and effectiveness with which
departments and other bodies have used their resources.
Press Notice 5/01
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