Examination of Witnesses (Questions 180
WEDNESDAY 31 JANUARY 2001
180. Why were there no contingency plans for
such a high risk venture, no visitor history to base judgements
on for instance, clear financial difficulties from the very beginning?
Why no contingency plans?
(Mr Young) The company bore the risk.
181. Mr O'Boyle, why no contingency plans?
(Mr O'Boyle) We believed that by discounting
the visitor numbers by over 50 per cent, we had driven the floor
to a level which was very conservative. Over 50 per cent discount
is by far more than is the norm in the private sector.
182. I am a little concerned about this whole
deal structure. The report has some parts in it which Mr Young
has differed from. C&AG, would you just like to tell the Committee
why the National Audit Office came to the view which it expresses
in paragraphs 1.68, 1.71 and the others which relate to the deal?
(Sir John Bourn) There was no difference
between myself and Mr Young on the facts of the matter. The difference
was on opinion and recommendation. The difference between our
view and the view of the Department is set out in paragraph 1.68
on the side of the Department and 1.69 on the side of ourselves.
Essentially we did not believe that the museum would actually
close, that there would be this hiatus in which it would come
to a stop and turn into a barren wilderness. We believed in fact
that it would be possible for it to continue and that that was
what would happen and that would be the basis on which plans could
be made. In that we relied on professional advice as well as the
(Mr Colman) The key point I wish to add
is that the Department's fear of closure really arose from the
fact that there was a two-year moratorium under the original deal
before the Armouries were entitled to step in in the event of
failure by RAI. In the Department's view there was a two-year
period of uncertainty during which the museum might very well
close. In our view, however, there was another factor which should
have been borne in mind, which was that failure by RAI would arguably
be a fundamental breach of the contract, in which case the two-year
moratorium did not apply. That seemed to us to give a negotiating
lever which could have been used in negotiation with an insolvency
practitioner, the receiver or whoever had been appointed to get
a better deal than what on paper might appear to be the consequence
of RAI's failure. It is a question of judgement about what could
have been achieved in negotiation.
183. When you say the Armouries could have taken
it over, does that mean that in effect it could have terminated
the PFI contract? That would have meant, would it not, that it
would then count against PSBR? How important a consideration was
that in the Department's mind in these early days of PFI when
the attempt was being made to establish PFI as circuiting around
PSBR? Would it have been regarded as a damaging blow to the process?
(Mr Young) Where I was nodding and I
thought you were going was that an objective of ours was to make
sure that the £21 million of debt which the company had with
the Bank of Scotland did not transfer to the public sector. That
was a key aim of our re-negotiation, which I think we have achieved
successfully. In 1999 our key aim was to get the best value for
money, not rescue the reputation of this PFI deal, because what
has actually happened is that the PFI guidance we all now follow
is so different from the makeup of this PFI deal that there was
no need for this PFI deal to survive to allow PFI as currently
guidanced to carry on.
184. No, but it would have put a spoke in the
wheel at that stage, as PFI was conceived, would it not?
(Mr Young) It was in 1999 that we were
having this discussion, if that is what you mean?
(Mr Young) This was started in 1993.
In 1999 we were doing the re-negotiation. It was not a key component
of any of our argument to rescue it for that presentational reason.
186. You cut the marketing budget. By how much
did you cut the marketing budget? You said that led to a loss
of visitors. By how much did that reduce visitor receipts?
(Mr O'Boyle) I was going to try to clarify
the cut in marketing. That was a clear strategy which we applied
and is in line with the launch of a product and creating brand
awareness and having to use expensive media.
187. I can understand the logic and I understood
your previous answer. The point was that the correlation was stated
that the marketing budget went down and concurrently the visitor
rate went down, which suggested that one was seen as having a
causal relationship with the other. By how much was the marketing
(Mr O'Boyle) I do not have the exact
figures to hand, but we had something like £1 million committed
as pre-launch which was spent on TV. We cut the marketing budget
because it went to direct marketing, focused marketing. It was
not about media expenditure because we knew who our customers
were, we knew the profile of the customers and there is not a
direct correlation between amount spent on media and what is used
then on a more cost-effective, focused and targeted way.
188. Could you tell me the movement in the two
figures? That is all I am asking you for. I am not asking you
to give me a detailed analysis, I am just looking at the statistical
(Mr O'Boyle) I would think it was certainly
under a half.
189. Under a half of what?
(Mr O'Boyle) The marketing expenditure
was cut from £1 million by at least one half and then probably
cut below that again.
190. By how much did visitors' receipts go down?
(Mr O'Boyle) Each visitor was worth in
excess of £4 and visitor numbers are as stated, so it is
a straight multiple.
191. I am sorry, having had to dive out to sort
out a problem, I am afraid you are going to have to do my homework
for me on this.
(Mr O'Boyle) We started at 344,000 for
a full year and went down to 191,000.
192. A difference of 150,000.
(Mr O'Boyle) Yes.
193. Ignore the relationship. Four times that
(Mr O'Boyle) Yes, and then we get the
secondary expenditure on catering and retail which is worth another
couple of pounds at least.
194. If it is another couple of pounds that
puts it up 50 per cent, that makes it up to £900,000, nearly
one million. You cut your marketing by £500,000 and the receipts
went down by £1 million. If there is a correlation, you have
made a bit of a mistake, have you not?
(Mr O'Boyle) This is a question we asked
and both the investors and the bank asked independently to ensure
that there were the right resources, the right strategy and the
right message. The consultants said to them that basically the
strategy was correct, they wanted us to widen the appeal of the
Armouries, they wanted us to reach more of a family market and
they wanted us to use our exhibitions as a lead to try to drive
the marketplace. We did have some success with the overall exhibitions
195. You are still not answering the basic question.
If you lost twice as much as you gained, where is the common sense
of that? You say your bank said this and your consultant said
that. Did you do any thinking for yourselves?
(Mr O'Boyle) We did and we have a very
sophisticated advanced marketing strategy which told us exactly
the post codes, the profiles and who was coming. We knew that
the audience was very A, B, C1. We needed to widen it. We knew
they had cars because the public transport and infrastructure
was limited. We were basically looking at trying to get to a wider
audience, cost effectively. We could not carry on using TV advertising,
prime time. It was just burning money.
196. If you cost effectively widened your market,
why did your attendance go down? It seems to me you lost market
not gained market.
(Mr O'Boyle) The penetration rates went
up in the more distant areas and as we all know, if you have been
once, the local market, which underpinned the launch, said they
would come back when there was something new on. So by bringing
in the exhibitions we were using that as a way to try to refresh
the product, as well as new interpretations and curatorial offerings.
That is part of the strategy now, where events are a major factor
in the revitalisation of our museum and indeed most national museums
use exhibitions as a refresher.
197. What proportion of the attendance is local
(Mr O'Boyle) I am sorry I cannot answer
that one at this moment.
198. You have done all this market analysis
and you know the market you are targeting but you do not know
whether you are targeting a local market or wider market.
(Mr O'Boyle) As part of the transfer
of the 1999 deal, the responsibility for the discharge of the
statutory duties and the marketing of the museum passed over,
together with £29 million of fixed assets and nearly £1
million of operational assets, for a peppercorn to the Armouries.
I do not have marketing responsibility for the museum now.
199. You did have for six years, maybe more,
during that time. Do you not know how much of the attendance was
local and how much was from outside the area?
(Mr O'Boyle) Yes, we do.