Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses (Questions 180 - 199)



  180. Why were there no contingency plans for such a high risk venture, no visitor history to base judgements on for instance, clear financial difficulties from the very beginning? Why no contingency plans?

  (Mr Young) The company bore the risk.

  181. Mr O'Boyle, why no contingency plans?

  (Mr O'Boyle) We believed that by discounting the visitor numbers by over 50 per cent, we had driven the floor to a level which was very conservative. Over 50 per cent discount is by far more than is the norm in the private sector.


  182. I am a little concerned about this whole deal structure. The report has some parts in it which Mr Young has differed from. C&AG, would you just like to tell the Committee why the National Audit Office came to the view which it expresses in paragraphs 1.68, 1.71 and the others which relate to the deal?

  (Sir John Bourn) There was no difference between myself and Mr Young on the facts of the matter. The difference was on opinion and recommendation. The difference between our view and the view of the Department is set out in paragraph 1.68 on the side of the Department and 1.69 on the side of ourselves. Essentially we did not believe that the museum would actually close, that there would be this hiatus in which it would come to a stop and turn into a barren wilderness. We believed in fact that it would be possible for it to continue and that that was what would happen and that would be the basis on which plans could be made. In that we relied on professional advice as well as the Department did.

  (Mr Colman) The key point I wish to add is that the Department's fear of closure really arose from the fact that there was a two-year moratorium under the original deal before the Armouries were entitled to step in in the event of failure by RAI. In the Department's view there was a two-year period of uncertainty during which the museum might very well close. In our view, however, there was another factor which should have been borne in mind, which was that failure by RAI would arguably be a fundamental breach of the contract, in which case the two-year moratorium did not apply. That seemed to us to give a negotiating lever which could have been used in negotiation with an insolvency practitioner, the receiver or whoever had been appointed to get a better deal than what on paper might appear to be the consequence of RAI's failure. It is a question of judgement about what could have been achieved in negotiation.

Mr Williams

  183. When you say the Armouries could have taken it over, does that mean that in effect it could have terminated the PFI contract? That would have meant, would it not, that it would then count against PSBR? How important a consideration was that in the Department's mind in these early days of PFI when the attempt was being made to establish PFI as circuiting around PSBR? Would it have been regarded as a damaging blow to the process?

  (Mr Young) Where I was nodding and I thought you were going was that an objective of ours was to make sure that the £21 million of debt which the company had with the Bank of Scotland did not transfer to the public sector. That was a key aim of our re-negotiation, which I think we have achieved successfully. In 1999 our key aim was to get the best value for money, not rescue the reputation of this PFI deal, because what has actually happened is that the PFI guidance we all now follow is so different from the makeup of this PFI deal that there was no need for this PFI deal to survive to allow PFI as currently guidanced to carry on.

  184. No, but it would have put a spoke in the wheel at that stage, as PFI was conceived, would it not?

  (Mr Young) It was in 1999 that we were having this discussion, if that is what you mean?

  185. Yes.

  (Mr Young) This was started in 1993. In 1999 we were doing the re-negotiation. It was not a key component of any of our argument to rescue it for that presentational reason.

  186. You cut the marketing budget. By how much did you cut the marketing budget? You said that led to a loss of visitors. By how much did that reduce visitor receipts?

  (Mr O'Boyle) I was going to try to clarify the cut in marketing. That was a clear strategy which we applied and is in line with the launch of a product and creating brand awareness and having to use expensive media.

  187. I can understand the logic and I understood your previous answer. The point was that the correlation was stated that the marketing budget went down and concurrently the visitor rate went down, which suggested that one was seen as having a causal relationship with the other. By how much was the marketing budget reduced?

  (Mr O'Boyle) I do not have the exact figures to hand, but we had something like £1 million committed as pre-launch which was spent on TV. We cut the marketing budget because it went to direct marketing, focused marketing. It was not about media expenditure because we knew who our customers were, we knew the profile of the customers and there is not a direct correlation between amount spent on media and what is used then on a more cost-effective, focused and targeted way.

  188. Could you tell me the movement in the two figures? That is all I am asking you for. I am not asking you to give me a detailed analysis, I am just looking at the statistical analysis.

  (Mr O'Boyle) I would think it was certainly under a half.

  189. Under a half of what?

  (Mr O'Boyle) The marketing expenditure was cut from £1 million by at least one half and then probably cut below that again.

  190. By how much did visitors' receipts go down?

  (Mr O'Boyle) Each visitor was worth in excess of £4 and visitor numbers are as stated, so it is a straight multiple.

  191. I am sorry, having had to dive out to sort out a problem, I am afraid you are going to have to do my homework for me on this.

  (Mr O'Boyle) We started at 344,000 for a full year and went down to 191,000.

  192. A difference of 150,000.

  (Mr O'Boyle) Yes.

  193. Ignore the relationship. Four times that is £600,000.

  (Mr O'Boyle) Yes, and then we get the secondary expenditure on catering and retail which is worth another couple of pounds at least.

  194. If it is another couple of pounds that puts it up 50 per cent, that makes it up to £900,000, nearly one million. You cut your marketing by £500,000 and the receipts went down by £1 million. If there is a correlation, you have made a bit of a mistake, have you not?

  (Mr O'Boyle) This is a question we asked and both the investors and the bank asked independently to ensure that there were the right resources, the right strategy and the right message. The consultants said to them that basically the strategy was correct, they wanted us to widen the appeal of the Armouries, they wanted us to reach more of a family market and they wanted us to use our exhibitions as a lead to try to drive the marketplace. We did have some success with the overall exhibitions programme.

  195. You are still not answering the basic question. If you lost twice as much as you gained, where is the common sense of that? You say your bank said this and your consultant said that. Did you do any thinking for yourselves?

  (Mr O'Boyle) We did and we have a very sophisticated advanced marketing strategy which told us exactly the post codes, the profiles and who was coming. We knew that the audience was very A, B, C1. We needed to widen it. We knew they had cars because the public transport and infrastructure was limited. We were basically looking at trying to get to a wider audience, cost effectively. We could not carry on using TV advertising, prime time. It was just burning money.

  196. If you cost effectively widened your market, why did your attendance go down? It seems to me you lost market not gained market.

  (Mr O'Boyle) The penetration rates went up in the more distant areas and as we all know, if you have been once, the local market, which underpinned the launch, said they would come back when there was something new on. So by bringing in the exhibitions we were using that as a way to try to refresh the product, as well as new interpretations and curatorial offerings. That is part of the strategy now, where events are a major factor in the revitalisation of our museum and indeed most national museums use exhibitions as a refresher.

  197. What proportion of the attendance is local market now?

  (Mr O'Boyle) I am sorry I cannot answer that one at this moment.

  198. You have done all this market analysis and you know the market you are targeting but you do not know whether you are targeting a local market or wider market.

  (Mr O'Boyle) As part of the transfer of the 1999 deal, the responsibility for the discharge of the statutory duties and the marketing of the museum passed over, together with £29 million of fixed assets and nearly £1 million of operational assets, for a peppercorn to the Armouries. I do not have marketing responsibility for the museum now.

  199. You did have for six years, maybe more, during that time. Do you not know how much of the attendance was local and how much was from outside the area?

  (Mr O'Boyle) Yes, we do.

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