Select Committee on Culture, Media and Sport Minutes of Evidence


Supplementary memorandum submitted by the Millennium Commission

INTRODUCTION

  1.  This memorandum summarises:—

    —  the background to the Commission's decision to fund a national Millennium Exhibition at Greenwich ("the Millennium Experience");

    —  the procedures by which the Commission decided to award additional grant to NMEC in February and May 2000; and

    —  the Commission's locus in the Dome Legacy competition.

A NATIONAL MILLENNIUM EXHIBITION

  2.  In June 1994 the founding Chairman of the Millennium Commission (the Rt Hon Peter Brooke CH MP) announced a proposed strategy by which the Commission would discharge its remit for supporting the Millennium celebrations throughout the UK. A major element of the proposals was a national exhibition, broadly comparable with the Great Exhibition of 1851 and the Festival of Britain of 1951. Following a consultation exercise in 1995 which supported the strategy, the Commission decided to implement the proposal.

  3.  A two-step approach was adopted for procuring the Exhibition—first to invite bids for a location and then to invite bids for an operator to develop the exhibition and its content and manage its operation. The outcome in 1996 was that the Greenwich Peninsula was selected by the Commission as the site and Millennium Central Ltd was selected as the operator. A detailed chronology of this process was set out in the Commission's memorandum of evidence to the Culture, Media and Sport Select Committee inquiry into the Millennium Dome (as recorded in the Committee's Second Report, Session 1997-1998). The points to highlight are that the guidelines for the competition set out the Commission's aspiration that the Exhibition should be enlightening, entertaining and inspiring and should leave a lasting legacy; and, that the Commission's final selection of the site gave weight to the impact this would have on the wider Greenwich Peninsula in terms of large-scale, high-quality and sustainable regeneration.

  4.  Millennium Central Limited was renamed "The New Millennium Experience Company Limited" on 2 July 1997. In this memorandum, references to NMEC include references to the company under its previous name.

INDICATIVE BUSINESS PLAN AND BUDGET: JANUARY 1997

  5.  In January 1997, the Commission completed a review of the initial business plan and budget for the exhibition. This was carried out by a review team led by the Commission's then Chief Executive (Jennie Page CBE) and it concluded that an acceptable exhibition could be delivered within a balanced cash budget of £778 million, assuming 10 million paying visitors, and that enhancements could be made if additional income was identified or if contingency sums became free. The Commission agreed with the conclusions of its review team at its meeting on 13 January 1997. It offered a grant to the project of £200 million, which would be made available once the Exhibition business plan and budget were developed in greater detail and the terms and conditions of grant were negotiated. The Commission took into account in reaching its decision the then Government's proposal that the operating company should become a public sector entity.

ANNOUNCEMENT OF AWARD OF INITIAL GRANT: 18 JANUARY 1997

  6.  On 18 January 1997, the Department of National Heritage issued a statement setting out the basis on which the Millennium Exhibition would go ahead. This was reported to Parliament on 20 January 1997 by the then Secretary of State, in answer to a written Parliamentary Question by Sir Peter Lloyd MP. The Secretary of State's answer reported that:

    (a)  the Millennium Commission had at its meeting on 13 January 1997 decided to award £200 million grant to NMEC, excluding provision for contingencies and inflation. Immediate negotiations on the terms and conditions were to begin, in parallel with the preparation by NMEC of a detailed business plan and the creation of the management team;

    (b)  in addition to the Commission's grant, the Exhibition would be funded through commercial income and private sector sponsorship. The Millennium Commission had set a target of £150 million for sponsorship;

    (c)  the targets for visitor numbers and income were estimates and would remain so, even when the detailed business plan was prepared;

    (d)  the Government had decided that the Commission should have financial provision to cover variations from the estimates in the plan without prejudicing its existing programmes. The Government would therefore bring forward an Order under the National Lottery etc Act 1993 to extend the funding life of the Commission. NMEC had indicated its understanding that it would be required to make a new grant application to the Commission to cover contingencies and inflation;

    (e)  no public expenditure would be committed to the Exhibition beyond that which would be made available to English Partnerships to acquire and prepare the site; and

    (f)  the Government had discussed the Millennium Commission's plans in detail with the Opposition, who had expressed enthusiasm for the proposed Exhibition at Greenwich and indicated that, if elected to Government, it would want to review all aspects of project delivery to ensure that it was cost effective and properly implemented and came within its existing budget.

TRANSFER TO PUBLIC SECTOR OF NMEC

  7.  On 21 January 1997 Jennie Page left her post as the Commission's Chief Executive to become Chief Executive designate and Accounting Officer of NMEC. On 12 February 1997, NMEC's shares were acquired by the then Chancellor of the Duchy of Lancaster (The Rt Hon Roger Freeman MP). A full board was appointed and the company began trading on this date with the objects of building and operating the Greenwich Exhibition. The company received initial grant payments from the Millennium Commission under Section 41.3 of the National Lottery etc Act 1993 in order to staff and establish itself in this period and prepare a more detailed business plan and budget for the Commission's approval.

APPROVAL OF FULL GRANT

  8.  On 12 May 1997, NMEC submitted its updated business plan to the Commission. This was based on a total cash budget of £758 million, with a peak grant requirement of £449 million from the Commission. NMEC forecast that £175 million would come from sponsorship and £186 million from commercial revenue, receipts and disposal income. The budget assumed 12 million paying visitors, which was 2 million higher than the Commission's own January 1997 forecast. It also assumed that, whilst a peak grant requirement of £449 million would be necessary to support the company's expenditure prior to opening, the final net grant would be lower—indicatively £399 million, taking into account forecast surplus income from operating revenues and asset disposals in 2000 and 2001.

  9.  The Commission appraised the updated business plan and budget to assess its reasonableness, weigh particular risks, gauge NMEC's viability and provide an authoritative analysis against which the Commission could decide whether and on what basis it should pay grant to the company in addition to the £200 million already offered. The Commission appointed four sets of specialist consultants to help it appraise NMEC's assumptions on design, construction costs and timetables, its commercial and income projections, its business assumptions and its procurement strategies.

  10.  Following this appraisal, the Commission agreed on 9 July 1997 that the business plan and budget provided an acceptable basis on which to offer total grant of up to £449 million. This figure was inclusive of interim grant payments and was subject to three principal caveats, which were that the Government accepted that the Commission's commitment was limited to £449 million; that the Secretary of State for Culture, Media and Sport confirmed that an Order extending the period over which the Commission could receive Lottery funds would be made if necessary; and that NMEC accepted that the Commission's grant was contingent on the continued receipt by the Commission of Lottery funds.

  11.  In reaching their decision, Commissioners were aware that risks were inherent in this unique project and in particular that there was no precise science underpinning NMEC's forecast of 12 million paying visitors. On the basis of their own appraisal however, the Commission believed that this higher level of visits would be achievable, although it was recognised to be at the upper end of the range of probabilities.

  12.  The Commission's commitment to make other than the initial payments to NMEC came into effect on 21 August 1997 with the implementation of a memorandum setting out the terms and conditions of grant. This followed a resolution of the NMEC Board on 7 August accepting the terms and conditions of Commission funding. The Grant Memorandum incorporated the Financial Memorandum issued by the shareholder on 14 February 1997 and, taken together, these two documents provide a framework for financial management and control for NMEC consistent with that for all Non-Departmental Public Bodies receiving grant, as set out in Chapter 13 of Government Accounting. Key conditions included requirements that NMEC could not dispose of any asset without the Commission's prior consent and should repay to the Commission any financial surplus, be it higher or lower in practice than the £50 million figure indicatively included in the May 1997 business plan.

GRANT PAYMENTS AND MONITORING UP TO 31 DECEMBER 1999

  13.  In the period up to the Dome's opening on 31 December 1999, the Commission made grant payments to NMEC totalling £442 million (excluding the London River Event). These payments were made within the framework of monitoring of physical and financial progress against targets, as set out in the Grant Memorandum, including the appraisal and approval of NMEC's corporate plans and budgets for 1998 and 1999, to other periodic budget reviews, as well as monthly monitoring. Appraisals by the Commission were supported by the Commission's external consultants (ie Deloitte Consulting in relation to financial and operational matters and Bovis Programme Management in relation to procurement issues and the critical path).

  14.  After appraising NMEC's 1999 Corporate Plan and budget, the Commission concluded that NMEC's cashflow position would need very careful monitoring in the last half of the calendar year, and accordingly a new and more detailed monthly cashflow monitoring return was introduced. The concern was that the Commission's grant of £449 million could be depleted prior to the Dome's opening if sponsorship income and advanced ticket sales slipped. By December, the Commission decided that it was reasonable to believe that NMEC's lifetime budget, revised in November 1999, could still be achieved. Nevertheless, Commissioners thought it probable that a cashflow shortfall would occur during the first quarter of 2000. The Commissioners recognised that this would result in an application by NMEC for additional grant in that quarter. Accordingly, the Commission shared its monitoring information with the Department for Culture, Media and Sport and indicated that any decision to provide additional grant to NMEC would be subject to the Government reaffirming its commitment to ensure that sufficient funds would flow to the Commission from the National Lottery Distribution Fund in order to safeguard its other programmes. The Commission also decided in December 1999 that it would carry out a thorough appraisal of NMEC's budget and cashflow at the end of January 2000, when the company's trading performance in the initial period of operation would be known.

AWARD OF ADDITIONAL GRANT—4 FEBRUARY 2000

  15.  An application for additional cashflow grant was received by the Commission from NMEC on 2 February 2000. Prior to this, at its meeting on 28 January 2000, the Commission had decided in the light of its own monitoring, and with regard to detailed financial information provided by NMEC that day, that a requirement for additional cashflow funding would be inevitable in February. The Commission decided that in principle it would be minded to give such support; subject to need for grant being demonstrated in a formal application from NMEC and to appropriate terms and conditions. The following public statement was made by the Commission:

    "The Millennium Commission reconfirms its support for the Millennium Dome. It has always been envisaged that the project would require cashflow support in the early part of its life. While the Commission has not received a request from NMEC for further funds, we remain willing to provide further support if necessary. Cashflow difficulties are often associated with large-scale start-ups and therefore provisions to deal with them have always formed part of the arrangements between the Commission and NMEC. Any further grant to NMEC would not be at the expense of other projects which are funded by the Millennium Commission".

  16.  The Board of NMEC met on 31 January 2000 and decided to submit an application for an additional grant of up to £60 million to meet urgent cashflow needs. An application was submitted to the Commission on 1 February, together with the detailed business plan and financial information supporting the application previously shown to the Commission in draft on 28 January 2000. This forecast that the budget would still balance within a cash total of £758 million over the lifetime of the project. However it indicated that a cashflow need had arisen because lower visitor numbers were now assumed (10 million instead of 12 million), because visitors generally were not buying tickets as far in advance as had previously been assumed, and because substantial payments from sponsors were still outstanding. The business plan forecast that the additional grant of up to £60 million, payable in February, March and April, would be repaid from commercial revenues later in the year and from Dome sale proceeds in 2001 (which were newly budgeted at £30 million, up from £15 million previously).

  17.  The Commission appraised NMEC's application having regard to the initial findings of its own review of NMEC's finances and operations, to the output of newly introduced weekly monitoring reports, to the detailed information provided by NMEC and to discussions at both member and officer level. The Commission also used its own Finance team to scrutinise NMEC's outstanding invoices to confirm that the immediate cashflow requirement was as reported.

  18.  Following its appraisal, the Commission concluded that NMEC had a real and immediate cashflow requirement; that a grant award of up to £60 million would be justified, with a first payment needed on Friday 4 February 2000; that on the basis of the latest information, NMEC's revised forecast of 10 million paying visitors was at the top end of the range of probabilities, having regard to observable patterns of demand and attendance; and, that it was probable on existing trends that at least some of the additional grant would not be repaid. The Commission decided to approve NMEC's application in that light on 4 February 2000, and the first payment of £32 million was made on the same day. This was made subject to a number of detailed conditions about NMEC's management and operations and to rigorous appraisal by the Commission's staff of the liabilities, invoices and cashflow requirements underpinning each grant claim.

NMEC OPERATIONAL PERFORMANCE: FEBRUARY TO MAY 2000

  19.  During the period February to May 2000 the Commission monitored NMEC's operational and financial performance continuously through weekly trading reports, financial information in support of grant claims, scrutiny of cashflow requirements and meetings between Commissioners and NMEC Board members. During this period it became clear that the revised visitor forecast of 10 million paying visitors would not be achieved and that income forecasts prudently should be reduced. Following a comprehensive internal budget review, NMEC confirmed to the Commission on 2 May that the company would require additional grant both to fill a gap in the project's budget and provide cashflow support. The Commissioners indicated that they would require detailed demonstration of the need for any additional grant, which would be subject to rigorous appraisal.

AWARD OF ADDITIONAL GRANT—22 MAY 2000

  20.  The Board of NMEC met on 19 May 2000 and agreed to apply to the Millennium Commission for additional grant of £38.6 million, that is in addition to the £60 million awarded on 4 February 2000. The application was submitted by NMEC to the Commission on the same day. It was supported by a revised business plan which had been submitted to the Commission on 15 May. By 19 May, NMEC had drawn-down the whole of its existing grant of £509 million (including the £60 million awarded in February 2000), none of which was now scheduled for repayment. The company had also drawn-down a £1.98 million grant for the London River Event on New Year's Eve 1999.

  21.  The revised business plan indicated that the net project cost had increased from £758 million to £773 million since January 2000 and that a funding shortfall had opened up as compared to January 2000 forecasts. The shortfall, as calculated by NMEC, had arisen for three main reasons: firstly, a reduction in the forecast number of paying visitors (6 million, down from 10 million in January); secondly, a reduction in the net revenue achieved for NMEC per visitor; and thirdly, because of cost pressures. Late payments by sponsors had also exacerbated the company's short-term cashflow problems. The business plan indicated that, whilst none of the grant already paid would be returned, some £19.5 million of the £38.6 million applied for would be repaid to the Commission in June 2001 if NMEC received £30 million from the sale of the Dome, as budgeted.

  22.  The Commission's appraisal of NMEC's application included a review of the company's expenditure commitments and liabilities, a review of uncommitted areas of expenditure, and a review of the Dome's visitor forecasts and commercial income. The Commission was supported in this work by its external consultants (Capita on commitments and liabilities and Deloitte Consulting on other financial and operational matters).

  23.  The Commission's appraisal concluded that the NMEC business plan demonstrated that there was now a funding gap in the lifetime budget and that the company needed an immediate injection of funds if it was to continue trading. There appeared to be scope for NMEC to find significant cost savings to reduce the grant needed, although on a worse-case scenario a higher level of grant might be needed to keep the project viable.

  24.  Commissioners met on 22 May to consider the application for further grant. They decided to award up to £29 million of additional grant. The grant was made subject to a number of conditions, which included:

    —  £3 million of the £29 million to be ring-fenced for additional marketing activities, based on a new marketing and promotional strategy;

    —  appointment of a new Chairman of NMEC within seven days;

    —  further development of the business plan and resubmission to the Commission;

    —  measures to achieve significant cost reductions with specific targets and dates;

    —  designating an NMEC Board member to have special responsibility for overseeing cost reduction; and,

    —  strengthening the finance team with a senior officer with responsibilities for managing the cost reduction programme;

    —  allowing a monitoring officer appointed by the Millennium Commission to be located at NMEC's offices;

    —  introducing changes aiming to strengthen the company's financial systems; and

    —  submitting an abbreviated corporate plan and revised budget to the Commission by 31 July, including alternative exit strategies, taking into account the Government's decision on the winner of the Dome Legacy Competition.

  25.  The following extract is taken from a public statement made by the Millennium Commission on 22 May:

    "The Millennium Commission today considered an application for grant of £38.6 million from the New Millennium Experience Company. The Millennium Commission had serious reservations about providing further support without substantial change in the governance of the New Millennium Experience Company. However the Commission decided it would be foolish to withdraw support when the best of the year is yet to come, and that the value of the Dome as the centrepiece of the nation's Millennium celebrations should be recognised and continued. The Government has reiterated the previous Government's commitment to ensure that Lottery funds are available, if needed, to support the Dome without having an adverse impact on the Millennium Commission's wider programme of work—three quarters of which is invested in people and projects across the UK. In the light of this, the Commission has decided to make available a further grant of £29 million, subject to stringent conditions. The decision was taken after an independent review of NMEC's financial systems and business plan . . . All Commissioners expressed full confidence in the work of PY Gerbeau and are appreciative of the changes he has already made in the running of the attraction. Despite the lower than predicted number of visitors the Dome is the most popular and highly rated paid visitor attraction in the UK and there are numerous educational benefits. NMEC is also running a National Programme of activities across the UK involving hundreds of thousands of people. In addition, the largest derelict site in southern England has been regenerated and the foundations have been laid for a lasting legacy providing jobs and homes for thousands of people".

  26.  NMEC accepted the grant award and attached conditions on 23 May 2000.

ACCOUNTING OFFICER DIRECTION

  27.  In considering the NMEC application for further grant on 22 May, the Commission received information and advice from staff in the form of a Commission paper and an Accounting Officer memorandum. The information made available to the Commission emphasised the urgency of the situation and indicated that:

    —  the application demonstrated that the project had a funding gap and needed funds immediately;

    —  there was a clear case for an additional £3 million grant to support marketing so that the Dome could maximise attendance and revenue in a highly competitive market;

    —  a worst-case scenario would indicate a need for further grant;

    —  the costs of insolvency could exceed £200 million, according to NMEC's forecasts. These fell outside the Commission's grant commitments to NMEC but could fall to the Exchequer to pay; and

    —  there was probably scope for NMEC to find significant cost savings, but awarding a grant of £38.6 million would blunt the incentive to do so.

  28.  The Accounting Officer's conclusion was that any additional grant would not represent value for money from the Lottery's perspective, given that the Commission's strategic purpose of grant (including momentum towards the regeneration of the Greenwich Peninsula) had already been substantively achieved.

  29.  In presenting this information to Commissioners, the Accounting Officer, Mike O'Connor, recommended that the Commission should weigh his advice against the wider potential advantages of making additional grant—considerations which lay outwith his remit. He advised that the wider considerations which Commissioners might legitimately consider if they wished to included the economic impact of closure, the reputation of the UK and the potential impact on public sector funds. He further advised Commissioners that should they wish to make a grant he would, as is standard procedure in such situations, require a written direction and was required in those circumstances to inform the Comptroller and Auditor General and the Accounting Officer of DCMS.

  30.  After careful consideration, the Commission unanimously agreed that a grant of up to £29 million should be made to NMEC. Commissioners reached this conclusion on the basis of wider considerations which they wished to be secured, and especially in view of the likely cost to the public purse if the grant were not made available; and on 22 May, the Chairman, on behalf of the Commission, issued a direction to Mr O'Connor formally instructing him to proceed with the offer of grant and the release of funds as necessary. The grant was subject to stringent conditions, as detailed at paragraph 24 (above).

  31.  The National Audit Office submitted a paper on the circumstances of the Accounting Officer Direction to the Chairman of the Public Accounts Committee in June 2000. A full investigation is currently underway and the Public Accounts Committee will hear evidence on this matter from the Commission's Accounting Officer on 20 November 2000.

POST MAY 2000 GRANT AWARD

  32.  David Quarmby was appointed as Chairman of the NMEC Board on 22 May. The company submitted a revised business plan showing further options for cost reductions and including a new marketing strategy and budget on 5 June 2000, and following that the company was able to confirm the objective of eliminating all of the previously forecast cost overruns. The revised budget balanced income against expenditure within a cash total of £761 million, forecasting a grant repayment to the Commission of £13 million. However, whilst balancing the budget over the project's lifetime, the forecasts indicated that a cashflow gap of up to £9 million would occur in the last quarter of 2000 unless ameliorative action was taken. The Commission endorsed the revised budget on 14 June, following a meeting with the NMEC Chairman and Chief Executive, subject to further conditions requiring NMEC to prepare a contingency plan setting out options for avoiding the cashflow shortfall, built on more detailed modelling of financial scenarios for the remainder of 2000.

THE DOME LEGACY COMPETITION

  33.  The Commission has a direct interest in a successful outcome being achieved for the Dome Legacy competition because the purpose of the Commission's grant to the Experience was both to run the National Millennium Exhibition in the year 2000 and spur large-scale, high-quality and sustainable regeneration of the whole Greenwich Peninsula as a Millennial legacy. The Commission also relies on NMEC achieving a legacy receipt of at least £30 million in order to balance its budget and enable a grant repayment to be made to the Commission, with the prospect of an increased return if NMEC's share of the proceeds is higher. As already described, the terms and conditions of the Commission's grant to NMEC require that any asset disposal by NMEC requires prior approval of the Commission and the Dome Legacy transaction is subject to this provision.

  34.  The Government has indicated to the bidders in the competition and to the Commission that it will take the Commission's views into account before reaching its decision on the outcome of the legacy competition. In line with this, the Government has allowed the Commission representation on the inter-departmental Dome Legacy Steering Group and has consulted the Commission at each key stage in the bidding process. Commissioners will meet on 11 July to consider the merits of best and final offers from Dome Europe and from Legacy plc and will convey its views to Government soon after.

July 2000


 
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