THE RENEGOTIATION OF THE PFI-TYPE DEAL
FOR THE ROYAL ARMOURIES MUSEUM IN LEEDS
FORECASTING VISITOR NUMBERS
19. As with the Millennium Dome, the museum's financial
problems were caused primarily by visitor numbers being much lower
than previously estimated. By 1999, visitor levels were around
a third of what the museum needed to break even and only a sixth
of the numbers expected.
When asked whether there might be other attractions which had
received lottery funding and were in the similar position of being
at risk because of low visitor numbers, the Department said that
there were lottery-funded projects, such as the new art gallery
in Walsall, the Lowry at Salford, and the Tate Modern in London,
where visitor numbers had outstripped what the Department and
Lottery distributing bodies had predicted, as well as some which
had fallen short. The Department were therefore getting together
with the Lottery distributors, other visitor attractions and the
English Tourist Council to see whether there were best practice
lessons to be learned, and to help the Lottery distributors in
particular in assessing the visitor projections which came forward
with bids for funding.
20. The Royal Armouries said that there was a range
of explanations for visitor numbers being so low. Between 1990
and 1992 both the Department and the Royal Armouries had employed
four sets of consultantsPeat Marwick, Grant Leisure, PA
Consulting and MORIto look at the number of visitors who
were likely to come to this attraction, and they had offered projections
of visitor numbers varying from 900,000 to 1.3 million a year.
RAI's own consultants, MEW, had subsequently forecast less than
600,000 to over 1 million visitors a year, depending on the entrance
21. The Royal Armouries admitted that at the time
they had also made comparisons with museums and attractions outside
London, such as the Jorvik Viking Centre and the National Railway
Museum in York and the National Museum of Photography and Film
in Bradford. The Jorvik Centre had been very popular for a considerable
time, getting 865,000 visitors in 1990 but had then gradually
become less popular and was currently getting between 400,000
to 500,000 visitors a year.
Warwick Castle had been getting 625,000 visitors a year, and was
now getting over 800,000, although it was a well-established attraction
and not a new venture.
22. The Royal Armouries were asked whether the low
numbers of visitors might have been due to the level of the charges
for admission to the museum and what information they had sought
from consultants on the probable level of visitor numbers at differing
pricing levels. The Royal Armouries agreed that ticket price was
one of a number of potential contributing factors to the low visitor
numbers. Peat Marwick had been concerned that the museum was likely
to be price sensitive. MORI's research had suggested that the
projected visitor level would be extremely price sensitive with
a sharp drop-off in visitors once entrance fees for adults exceeded
£5. They had predicted that the new museum would receive
about 1 million visitors a year at a £5 adult admission price
but that visitor numbers would be worse and fall to around 250,000
if the price was set at £6.95. In contrast, RAI's consultants,
MEW, had assumed less price sensitivity, although visitor numbers
decreased as the entrance fee increased.
23. We asked therefore whether the Royal Armouries
had in effect ignored MORI's advice, which had effectively predicted
what had happened, given that the initial admission price had
been set at £6.95.
The Royal Armouries said that it was the private sector's responsibility
for taking account of that research when putting together its
The Royal Armouries told us that they had been concerned about
the ticket price and had made these feelings known to RAI. However
RAI had placed reliance on the MEW research which did not bear
out the Royal Armouries' view, as well as on advice from other
consultants which was not the same as MORI's.
24. RAI told the Committee that it had set the admission
price at £6.95 following the advice of six consultants which
they had commissioned, three before the museum's opening and three
after. The Department had commissioned Gardner Merchant before
the deal's signature to carry out its own validation of RAI's
business plan and visitor numbers. Gardner Merchant had forecast
650,000 visitors for 1996, rising to 1 million a year from 1999
onwards, and had been prepared to invest £1 million in RAI
on this basis. Prior to opening RAI had also commissioning Barrington
Johnson Lorenz, a well respected northern based leisure marketing
organisation, who had forecast 800,000 visitors. Finally they
had commissioned MEW in January 1995 to conduct a 1500-person
survey nationally, specifically to establish the visitor numbers
and pricing. MEW had forecast that an admissions price of £6.95
in 1996, when the museum actually opened, would deliver 850,000
RAI also told us that they had had discussions with Tussauds about
their joining the project as the operators of the museum for RAI.
In these discussions Tussauds had been talking of visitor numbers
of up to 600,000.
25. The Royal Armouries also agreed that free tickets
were extremely important as part of promoting the museum. Their
policy was to give free tickets when it was advantageous to do
so and the level of free tickets had changed every year in line
with the changes in the museum's marketing policies.
RAI had attempted many ticket prices between 1996 and 1999 in
an attempt to reverse the decline in visitor numbers. Thus, although
the adult price had been £7.95 in July 1999, RAI had also
introduced a number of season tickets which had been cheaper,
and a winter off peak price of £4.95 in 1998. The price for
the car park had remained the same as at the museum's opening
and RAI's food prices had only moved broadly in line with inflation.
26. When asked why the headline price had not come
down, despite the low numbers of visitors, but had gone up from
the initial price of £6.95 to £7.95,
RAI explained that two of the three reports which had been commissioned
after the museum's opening had been independent of RAI and had
been commissioned by RAI's investors and their bank. Both the
reports had demonstrated that the pricing levels had been appropriate.
Exit surveys of people who had visited the museum had shown that
three quarters of visitors believed the museum was excellent value
for money. Ninety five per cent of visitors had said that they
had had a wonderful day out; the museum had also won a number
of awards since its opening.
In all, the market research that RAI had undertaken subsequent
to the museum's opening the price issue had not figured prominently.
27. One of the first things the Royal Armouries had
done on taking over the museum had been to reduce the admission
price for adults in December 1999 from £7.95 to £4.90.
The new museum was on course to meet the projection of 180,000
visitors for 2000-01 which the Royal Armouries had made in August
1999. The Royal Armouries was very hopeful that the reducing prices
and changed marketing, under which attempts were being made to
target audiences so as to increase the level of return visits,
meant that the corner had now been turned. Royal Armouries believed
that a lower admission price, although it reduced the amount of
ticket revenue, was in the long-term interests of the museum.
Royal Armouries had also accepted the Government's offer of increased
funding and would be introducing free entry for children and senior
citizens from April 2001 and then "Quids In" for adults
from September 2001. On the basis of this new pricing policy the
Royal Armouries' new strategic plan now anticipated an increase
of forty per cent in the number of visitors to 250,000 by 2003-04.
The Royal Armouries' eventual hope was for visitor levels somewhere
between 300,000 and 400,000. However the Royal Armouries needed
to be realistic as it was about to enter a period of three to
four difficult years, since the area round the museum would be
a building site as the dock redevelopment began. It was planning,
therefore, for 200,000 visitors in 2001-02, 250,000 visitors in
2002-03 and 260,000 by 2003-04. Larger numbers of visitors were
not being predicted until the external factors necessary for such
numbers, such as the redevelopment of the Dock and the new light
rail system, had occurred.
28. The Royal Armouries agreed that the marketing
of the museum had been important. The need for the museum to be
marketed well had been an issue raised by most of the consultants.
We therefore asked why expenditure on marketing had been reduced
and what impact this had had. The Royal Armouries said that in
1999 KPMG had compared spending on marketing in the Royal Armouries
with like attractions and found that the Royal Armouries was one
of the highest spenders. Because of their financial difficulties
RAI had not had the cash to sustain that level of marketing. For
a new attraction, the marketing budget would normally start at
a high level and then reduce, so the reduction in expenditure
on marketing had not necessarily been a contributing factor to
the low visitor numbers, although the Royal Armouries and RAI
would have liked to have spent more if possible.
29. RAI confirmed that they had cut marketing expenditure
by over half, from over £1 million to under £500,000,
and that, at the same time, the fall in visitor numbers had reduced
RAI's income from ticket receipts, catering and retail sales by
almost £1 million.
The cut in the marketing budget had been in line with usual practice
when launching a product and creating brand awareness. RAI had
committed approximately £1 million at pre-launch to be spent
on television. They had then reduced the marketing budget because
a switch had been made to the use of more focussed, direct marketing
on those who were likely to visit the museum. Direct marketing
was a more cost-effective way of doing this than expensive media
30. RAI confirmed that two reports commissioned by
their investors and bank after the museum's opening had supported
this marketing strategy. The consultants had wanted RAI to widen
the appeal of the museum and reach more of a family market. This
RAI had attempted to do with its programme of exhibitions. Seventy-four
per cent of people attending the museum lived within one hour's
travel time from Leeds, but once the local people had visited
the museum, they would only pay a return visit when there was
something new. Bringing in the exhibitions had been a way of attempting
to refresh the product.
31. RAI's information had also shown that there had
been little scope for immediate growth in the local market. The
museum's penetration rate in their primary market had been 5.28
per cent, compared with the London national museums who had been
achieving 5.5 per cent in their primary market. As for the museum's
other markets, the tourist market, which made up 14 per cent of
the museum's attendance, had a penetration rate of 0.97 per cent,
while the rate for the secondary market, defined as within one
to two hours of Leeds and constituting 12 per cent of its attendance,
had been 0.43 per cent. This compared to the regional UK museum's
secondary market penetration of one per cent on average and to
London national museum's 5.3 per cent penetration. RAI's strategy
therefore had been to target the one-hour-plus market, as this
was a major catchment area and offered the potential for immediate
growth, and to seek an increase in the penetration rate in this
market to the regional average of one per cent.
Other reasons for low visitor numbers
32. The Committee asked whether the choice of Leeds
for the museum's location had contributed to the museum's failure.
RAI agreed that Leeds was off the beaten track for tourists and
the tourist component was a major factor in visitor numbers and
the propensity to visit for museums.
The Department told us that the Government had taken the decision
to move the Royal Armouries out of London on the basis that there
were many other national museums and galleries in London and that
moving out would improve the public's access to the national collections
in other parts of the country.
33. The Royal Armouries explained that there were
a number of other factors contributing to low visitor numbers.
There were more visitor attractions and therefore more competition,
and the increases in visitor numbers which had been expected during
the 1990's had not occurred. Visitor numbers at the Armouries
Museum might also have been affected by people's views on firearms
after the Dunblane tragedy, which had occurred just before the
museum opened. The Clarence Dock development, which had been expected
to attract people to the area surrounding the museum, had not
yet occurred. Finally, it had originally been intended that there
would be better access to the museum by means of a light rail
transport system bringing people directly from a large car park
by the M1. This has not yet occurred.
34. The new museum involved significant commercial
risk, as it was a new attraction in a redevelopment area with
no proven track record of visits by the public.
We asked why there had been no contingency plans for this project
when it was such a high risk venture and in financial difficulties
from the outset. The Royal Armouries told us that it was because
RAI had borne the risk.
We questioned, however, whether risk had been transferred fully
to RAI as this had been an important public project where the
public sector had not wanted the museum's closure and therefore
had had to step in and take it back. The Treasury acknowledged
that, if the complete failure of a project was not an option which
the public sector could tolerate, then the risk of failure became
a risk that had to remain with the public sector.
35. As with the Millennium Dome, the deal for the
new museum had foundered because of lower than expected visitor
numbers. According to the Department there were also a number
of other attractions which had received public funding and were
also at risk because of low visitor numbers. We therefore welcome
the Department's attempts to identify, along with a number of
other bodies, good practice when reviewing visitor projections
for proposed projects.
36. The actual number of visitors to the new museum
was much less than any of the consultants commissioned by the
Department, Royal Armouries and RAI had forecast. However those
forecasts were based on a certain pricing assumption and the consultants
warned that the actual number of visitors would vary, depending
on the admission price charged. In particular, MORI appeared to
have forecast accurately what actually happened with its predictions
of the level of visitors at the admission price eventually chosen.
37. Departments should therefore ensure that they
have a clear understanding of what it is exactly that their consultants
are telling them when providing forecasts of future visitor numbers,
in particular with regard to the sensitivity of those forecasts
to different pricing levels. Departments should assess the reasonableness
of these projections by comparing them with the performance of
comparable existing attractions.
38. Departments should also ensure that the capital
structure of a proposed deal is consistent with the riskiness
of the project. If the project involves a high degree of commercial
risk, the project needs to be financed with a high level of risk
capital relative to bank debt. If it is necessary to proceed with
a project in the absence of adequate levels of risk capital, the
sponsoring department should plan for the contingency that extra
funding will be required.
39. The warnings on pricing appear to have been ignored
by RAI. RAI had placed reliance on their own consultancy advice
and had charged a high entrance fee of £6.95. Visitor numbers
had then collapsed. In response RAI had taken a number of measures
to boost attendances, including price discounts and a programme
of major exhibitions. It is surprising that RAI increased the
full adult entrance price from £6.95 to £7.95. One of
the first things that the Royal Armouries had done, on taking
the museum over in 1999, was to reduce this entrance fee to £4.90.
40. The reduction in the entrance fee appears to
be working, as recent visitor numbers have been up on the similar
period twelve months ago. It is likely that this improving trend
will continue as the Royal Armouries are planning, in line with
government policy, to introduce free admission to the museum in
2001. Despite these actions, the Royal Armouries have prudently
based their future strategy on cautious estimates of future visitor
numbers in line with the museum's past experience in Leeds.
41. There were a number of other factors, in addition
to the pricing policy, which contributed to visitor numbers being
less than forecast. The included an increase in the number of
other, competing, visitor attractions and delays in the development
of the Clarence Dock area surrounding the museum. Expenditure
on marketing had also been reduced over time in line with the
planned strategy for the museum.
42. This was a high risk project as it involved the
establishment of a new museum, in a redevelopment area, with no
proven track record of visits by the public. The Royal Armouries
nevertheless had no contingency plans in place, as they considered
that the risk of the project's failure lay with RAI in the private
sector. However, on this deal the business risks ultimately lay
with the public sector as the Department and the Royal Armouries
had been unwilling to countenance the closure of the museum and
had therefore stepped in to rescue the project. In considering
future PFI projects, therefore, departments should consider where
the business risks ultimately lie and draw up their own contingency
17 C&AG's report, paras 6, 1.36, 1.40, and Figure
1-3, 150-153, 157-158 Back
6-7, 11, 35, 153-154, and Evidence, Appendix 2, p21 Back
8-11, 29-30, 36, 80-81, 155, and Evidence, Appendix 2, p21 Back
32, 156, 216 Back
51-52, 120, and Evidence, Appendix 2, p21; Appendix 4, pp 33-34 Back
55, 64 Back
46, 85-86, 125, 127-128 Back
9, 36, 85-87, 125 Back
54, 85, and Evidence, Appendix 2, p21 Back
84, 96 Back
33 Q11 Back
50, 122, 124, 126, 129, 132 Back
129, 131-132, 153, 211, 214-215 Back
36 Q38 Back
47-49, 93 Back
188-194, and Evidence, Appendix 2, p21 Back
186-187, 195 Back
54, 194, 196, 206, and Evidence, Appendix 2, p21 Back
164, 168-171 Back
164-167, 172 Back
34, 169, 215 Back
report, paras 5 and 1.28 Back
46 Q180 Back
17, 19 Back