Executive Summary

1  In December 1993 the Royal Armouries ("the Armouries"), then based principally in the Tower of London, signed a contract with a private sector company, Royal Armouries (International) plc ("RAI"), for a new museum in Leeds to display more of its collection. Under the contract RAI were to build and operate the new museum. In return it would retain all the income the museum generated from visits by the public. The contract structure for the deal is shown in Figure 1. However the new museum never made enough money to meet its operating costs and the servicing of RAI's debts. Consequently in July 1999, after previous warnings from RAI's bankers, the Bank of Scotland, that it would not be able to make additional funding available to RAI after that month if RAI's financial problems persisted, the Armouries revised its agreement with RAI. Under the revised agreement the Armouries took over responsibility for the running of the museum, while RAI retained responsibility for the provision of some services, such as catering, to visitors to the museum. RAI is to use its income from these activities to pay off its debt with the Bank. A chronology of events is at Appendix 1.

2  The deal with RAI in 1993 was one of the very first PFI deals signed. At the time there was no guidance available to the Armouries and its sponsoring department1 (the Department) on how to structure such deals nor was there much experience within government and in the private sector. We therefore considered whether current guidance on good practice on PFI deals would have strengthened the Armouries' and the Department's position in coping with RAI's financial problems and the threat which these posed to the museum's continued operation. We also examined whether, despite the existence now of comprehensive guidance on the PFI, there were any lessons which could be learned from this particular deal for future contracts. The methodology we adopted is set out in Appendix 2.

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1  The Armouries' sponsoring department was the Department of Environment until 1992 when the newly created Department of National Heritage took over responsibility. In 1997 this department was renamed the Department of Culture, Media and Sport.