2.5 One of the objectives set for the original deal was to achieve maximum risk transfer to the private sector. This was in line with practice on PFI deals at the time. The 1993 deal transferred all operating and demand risk to RAI by making RAI responsible for the costs of operating and maintaining the museum, which were funded solely through museum revenues and any future share in development gain (paragraphs 1.27 to 1.28). However current guidance on the allocation of risk in PFI deals is that risk should be allocated to whomever from the private or public sector is able to manage it at least cost. The public sector body should therefore seek the optimum, not the maximum, transfer of risk.
2.6 The guidance now available does, however, support the transfer of demand risk to the private sector where services are not being provided directly to the public sector. It states that, where the public sector is not the only user of the services provided (as in the Armouries' case), consideration must be given to the possibility of transferring demand risk.6 In these cases, for example, roads and other transport links, the public sector cannot directly control usage levels. On this project demand risk was high as the museum was a new attraction with no proven "footfall" (paragraph 1.28).
2.7 Current guidance recognises that, where risk is transferred to the private sector, including demand risk, the private sector party should have clear ownership, responsibility and control of the risk. However, on the Armouries project, the private sector did not have clear ownership, responsibility and control of demand risk because of the division of operational responsibilities for the museum. Under the original agreement there were a number of aspects of the operation of the museum that were shared between the Armouries and RAI. For example, promotion and marketing of the museum, an activity which would have a significant effect on demand, was a shared responsibility under the original agreement (Figure 6). There also needed to be close cooperation between the Armouries and RAI on the generation of income (Figure 10). The Armouries points out that responsibility in these areas was shared as the deal was more of a partnership between itself and RAI than a conventional PFI project.
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6 Treasury Taskforce "Partnerships for Prosperity" (November 1997) paragraph 3.27