1.1 In December 1993 the Royal Armouries ("the Armouries") signed a contract with a private sector company, Royal Armouries (International) plc ("RAI") for a new museum in Leeds to house the majority of the Armouries' collection. Under the contract RAI were to build and operate the new museum and, in return, would retain all the income generated from visits by the public. The new museum was delivered on time and to budget. However it never made enough money to meet its operating costs and RAI faced the prospect of becoming insolvent in July 1999. Consequently in July 1999 the Armouries revised its agreement with RAI and took over responsibility for the running of the museum.
1.2 This Part therefore examines whether the establishment of the new museum was consistent with the Armouries' long-term business strategy, how RAI's financial problems arose, whether the terms of the original deal aided the resolution of this financial crisis, what options the Armouries and its sponsoring department2 (the Department) considered to tackle the crisis, and what the terms were of the revised deal made to save the museum.
1.3 It shows that the Armouries considered that the establishment of a new museum at Leeds was consistent with its long-term strategy and that the deal the Armouries reached with RAI in 1993 to provide this was generally in line with the specific objectives that the Armouries had set for the project. Once it opened in March 1996 the museum immediately began to make losses, principally because visitor numbers were less than expected. In 1998 RAI's lenders, the Bank of Scotland, warned that it would not be able to make additional funding available to RAI after July 1999 if its financial problems persisted.
1.4 The Armouries' ability to deal with RAI's financial problems was limited by some of the terms of the original deal. However the Armouries and the Department considered a number of options for tackling the financial crisis, including allowing RAI to go into receivership and the Armouries taking over total responsibility for the museum. In the end the Department told the Armouries that it would only make additional funding available for an option proposed by RAI under which the Armouries would take over the museum but RAI would continue to have a limited role.
1.5 The revised deal transfers risks back to the Armouries, including the risk of admissions, delivers efficiency savings in the running of the museum, and reduces the amount of additional grant-in-aid from the Department that would otherwise have been required. The Armouries' ability to generate income is restricted to a certain extent as, under the revised deal, RAI retains the income from catering, corporate entertainment and car parking.
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2 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.