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.