The agreement allowed the transfer of much risk, with the construction and operation of the museum under private sector control

1.25  The agreement concluded in December1993 transferred considerable risk to the private sector. The allocation of key risks under the 1993 agreement is shown in Figure 8.

1.26  The deal transferred construction cost risk to the private sector partner. The Armouries had already designed the museum, obtained planning permission, committed £5 million of expenditure, and commissioned tenders for the construction of the museum before its joint venture partners were appointed. Under the agreement RAI was responsible for constructing and fitting out the museum within the agreed budget of approximately £43 million and building the museum to the agreed timetable. Thus the risk of cost and time overruns during the construction and fitting out phase was transferred to RAI. The agreement also allowed for the Armouries to receive a share of any saving on the construction cost in proportion to its contribution of £20 million. A fixed price construction contract was awarded following competition to Alfred McAlpine Construction Ltd, who was jointly selected by the Armouries and RAI. Construction started in January 1994 and the museum opened on time, and within budget, in March 1996.

1.27  The deal also transferred the commercial risks of operating the museum to the private sector partner. The original agreement provided that RAI should operate the museum with no funding from the Armouries, apart from the provision of certain professional and support staff by the Armouries and the joint undertaking and funding by the Armouries and RAI of the promotion and marketing of the new museum. RAI was solely responsible for funding the operating costs of the museum, including core museum functions such as interpretation, education, security, together with the costs of maintaining the museum building and displays (Figure 6). The only sources of income available to RAI to meet these operating costs were visitor income, car parking charges, retail and catering income, sponsorship and corporate hospitality - and RAI's potential future share in development gain. RAI could not rely on income from other projects to help support this venture.

1.28  As the museum was a new attraction in a redevelopment area, there was no proven "footfall", and therefore there was considerable risk associated with the income projections. Grant-in-aid to the Armouries from 1996 onwards did not include any separate element for the continued funding of the Leeds museum. The agreement therefore passed all the commercial risk to RAI, in line with the objective established by the Armouries of transferring maximum risk to the contractor. RAI told us that it had recognised this risk. Its business plan had therefore relied on heavily discounting the projections of visitor numbers (paragraphs 1.11 and 1.12). It had also engaged Gardner Merchant, an experienced facilities management company, to manage the early launch phase.

1.29  The project agreement provided for the Armouries and RAI to reach agreement before the new museum was to open on many detailed operational matters where the Armouries' and RAI's interests and responsibilities overlapped, through the drawing up of an operating specification. This specification was to cover matters such as the number of Armouries' staff required to fulfil its statutory functions, the standards of repair and maintenance for the museum and its fixtures and fittings, and the arrangements for jointly undertaking and funding the promotion and marketing of the museum. Agreement on this specification was never, however, reached. This was partly because the Armouries and RAI agreed in 1994 that, in order to obtain practical experience in operating the new museum before determining the specification and to make way for the accelerated design and construction of the building, they would defer the agreement of this specification until after the museum's opening. However the main reason for the lack of agreement was the financial difficulty in which RAI found itself once the museum was open and its resulting concern not to do anything which might increase its costs in the face of reduced income. Consequently, despite the encouragement of the National Audit Office in 1997 and the Department in 1998 and the Armouries' own efforts, it proved impossible for the Armouries to agree an operating specification with RAI.