Select Committee on Public Accounts Fourth Report



Value for money of the revised deal

47. The Committee asked the Department and the Royal Armouries whether their original strategic objectives for the museum had still been met. The Royal Armouries admitted that they had not met their strategic business objective of becoming more self-sufficient. The Department also confirmed that it had not met its strategic objective of reducing the grant-in-aid it made to the Royal Armouries. However, they had created a world class museum which increased access for the public to much more of the Armouries' collection. Previously the Royal Armouries could only show ten per cent of the collection in the Tower of London. The Department had also had an explicit objective of maximising the contribution of the private sector and had succeeded in getting one third of the cost of construction financed by the private sector. Finally the Historic Royal Palaces Agency, which runs the Tower of London, had saved the taxpayer £20 million by its lucrative use of the space vacated by the Royal Armouries. On the whole therefore the Department felt that they had got a good deal which kept the museum open at a reasonable price with a reasonable sharing of risk between the private and public sector.[53]

48. We questioned the Department's view that the revised deal represented good value for the taxpayer's money. The public sector had effectively bailed out RAI and their shareholders by allowing RAI to retain the profitable corporate entertainment and car parking business, as well as catering, whilst taking over responsibility for the loss-making parts of the museum's operations, which would now be funded by additional grant-in-aid.[54] We asked whether the Department, when negotiating the revised deal, had calculated the value of the income streams implicit in the business activities which they had allowed to remain with RAI. The Department said that they had not.[55] Subsequently the National Audit Office calculated the value of this business to be over £10 million.[56]

49. The Department argued that RAI had not escaped lightly. RAI had run up debts of £21 million in constructing the new museum and then running it in its disappointing first years. Responsibility for paying off these debts had remained with RAI and had not transferred to the public sector. The Department felt that RAI's investors would not be comfortable with their investment. RAI told us that they had failed to achieve its strategic business objective of increasing shareholder value.[57]

50. When questioned about whether there was any possibility that its shareholders would get their money back, RAI explained that their first responsibility was to pay off their debt of £21 million. They had yet to start doing so, however, and currently estimated that repayment would take thirty years. There was a theoretical possibility that, after the debt was repaid in thirty years, the shareholders could get a return on their investment. However that was dependent on the performance on the Clarence Dock development in terms of delivering increased returns so that RAI could begin paying off the debt. RAI's calculations assumed a substantial beneficial impact from the critical mass of passing trade that the Clarence Dock would deliver to the museum and therefore to RAI's car park and catering income. RAI considered that there could potentially be another 50,000 to 100,000 visitors due to Clarence Dock.[58] RAI subsequently advised that the date of 2031 for the payment of its debt had been based on an assumption that the benefits from Clarence Dock would be receivable from late 2001. However they now estimated that the incremental revenues from the Dock would commence in late 2004. Consequently it was now estimated that their debt would not be paid off until 2039.[59]

51. The Committee asked whether RAI had seen a significant deterioration in their income due to the lower numbers of people visiting. RAI confirmed that they had. However those visiting were spending more, so the per capita income had increased. Also, RAI's primary income line was the corporate hospitality and that had seen strong growth.[60] The Committee was also advised that the Royal Armouries would share in the benefit that would accrue to RAI from the Royal Armouries' move to free entry to the museum in 2001 (paragraph 27). Under the terms of the revised deal RAI had to pay twenty per cent of their turnover to the Royal Armouries once their debt had been paid off. A higher level of income for RAI from the increase in visitor numbers would mean that RAI would be able to pay their debt off sooner and the sooner the debt was paid off, the sooner the Royal Armouries would get the twenty per cent of turnover.[61]

52. When the Committee sought to establish the effect of the change in pricing policy for admissions on the future level of visitor numbers and of RAI's income, the Royal Armouries pointed out that there were limits on the capacity of the museum to handle increased visitor numbers. The designed capacity of 1.3 million was based on the assumption that people would spend about two and a half hours in the museum. In fact the average visit time was around four hours. Therefore the maximum capacity of the museum was probably 600,000 to 650,000 visitors a year. RAI also shared this view on the museum's real capacity.[62]

53. The Committee noted that 650,000 visitors was still three times the current attendance level, which would make a considerable difference to RAI's profits and to the debt pay off period, and RAI admitted that there was a potential increase to their profits due to the higher visitor numbers arising from a free entry policy. However experience had already shown that, when the number of visitors had increased, expenditure per visitor had decreased. For example, the restaurants and cafeteria only had a limited number of seats. While the car parks currently were probably one third full on normal holidays, on bank holidays they were almost full to capacity and there had even been overflows. If there were large numbers of visitors, they would spend less time in these facilities and so spend less money there.[63]

54. RAI subsequently told us that they had calculated that, if, as a result of free admissions, the number of visitors rose to 350,000 a year, their debts would have been paid off by 2030. If visitor numbers increased to 400,000 a year, they would have paid off their debts by 2025. However, even after RAI had paid off their debts, RAI considered it unlikely that their shareholders would immediately start to see a return on their investment as this would be dependent on the size of RAI's reserves at that time. As at December 1999 RAI had had a large negative balance on their reserves and it had not been possible since then to model how this balance would change in the future.[64]

55. The Committee asked the Department whether they had estimated the difference that the Government's free museum strategy would make to visitor numbers and to RAI's debt pay-off time. The Department told us that they had not prepared such an estimate. However they doubted that the visitor numbers would increase by as much as some of the figures mentioned in the Committee's previous questioning. The new strategic plan for the Royal Armouries had posited an increase of 40 per cent of visitors, to 250,000 by 2003-04, on the basis of free entry for children and pensioners and one pound for adults. In the Department's view RAI's estimate of a period of thirty years for the repayment of the outstanding debt would remain optimistic.[65]


56. Under the terms of the revised deal, the public sector has failed to achieve all the objectives it set itself at the very start for the new museum. It has nevertheless effectively bailed out RAI, as the public sector was unwilling in the end to let the risk lie with the private sector. While RAI have retained responsibility for the debts of £21 million they ran up when building and operating the museum, they have also kept the profitable elements of the museum's business, such as corporate hospitality and car parking, worth in total over £10 million. In contrast, the Royal Armouries have taken over the loss making aspects of the museum and will be dependent on funding from the Department and the income from the lower-than-expected visitor numbers.

57. The possibility that RAI's shareholders will still receive some return on their investment, despite the original deal's failure, may be greatly increased by the introduction of free access to the museum later in 2001. Free access should result in greater numbers of visitors to the museum, and consequently higher income for RAI's car parking and catering operations. Under the terms of the revised deal, the public sector will share in these benefits, once RAI have paid off their outstanding debt, as the Royal Armouries will then be entitled to receive twenty per cent of RAI's turnover at the museum. Departments should ensure that they have the right to share in the benefits of any future windfall gain resulting from any re-negotiated deal.

53  Qs 16, 79, 115, 117-118, 176 Back

54  C&AG's report, paras 1.85, 1.90-1.91, 1.93 Back

55  Q212 Back

56  Evidence, Appendix 4, p33 Back

57  Qs 79, 116, 176, 178-179 Back

58  Qs 101, 105-108, 135, 147-149, and Evidence, Appendix 2, p21 Back

59  Evidence, Appendix 2, p21 Back

60  Q130 Back

61  Qs 102, 133, 136 Back

62  Qs 137, 141 Back

63  Qs 135, 139, 142, 144, 147-149 Back

64  Evidence, Appendix 2, p21 and Appendix 4, pp 33-34 Back

65  Q211 Back

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