Select Committee on Public Accounts Appendices to the Minutes of Evidence


Supplementary memorandum submitted by the National Audit Office (PAC 00-01/178)


  At its hearing on 31st January 2001 the Committee asked the Department for Culture, Media, and Sport whether, when negotiating the revised deal in 1999, it had calculated the net present value of the income streams implicit in the catering, car parking and corporate hospitality activities which it had allowed to remain with Royal Armouries (International) ("RAI"). When the Department replied that it had not, the Committee asked the National Audit Office to calculate this figure.

  In conjunction with the Department, we estimate the value of these activities to be over £10 million. This represents the value of the income from these activities less the direct costs involved (ie staff costs and the costs of goods sold).

  The figures for income and direct costs are based on the Department's and Royal Armouries' own estimates of these which they used when preparing in July 1999 their appraisals of the costs of the various options open to them for resolving the financial crisis at the museum. We have discounted the income and cost figures over fifty-seven years—the length of RAI's concession for the car parking business—using a discount rate of six per cent. Our calculations reflect the fact that, after forty years, RAI's catering and corporate hospitality concessions will cease and RAI will be required to pay the Royal Armouries twenty per cent of its car parking income. They also reflect the fact that the Royal Armouries will receive twenty per cent of RAI's turnover from catering and corporate hospitality once RAI has paid off its debt with the Bank of Scotland. We have assumed, in line with RAI's evidence at the hearing, that this debt will have been paid off after thirty years.

  In our calculations we have made the conservative assumption that RAI's income or expenditure will only increase in line with general inflation and that therefore there will be no real growth in these.


  In PAC 00-01/171 Note 3 RAI includes within its definition of its outstanding debt not only its bank loans with the Bank of Scotland but also the preference shares held in itself. These shares are owned by the Bank of Scotland. In July 1999, in order to keep RAI solvent, the Bank agreed to restructure RAI's finances and convert its existing loans into a new loan of over £13 million repayable over 25 years and preference shares of over £7 million. These shares are triggered for redemption 5 years after the final repayment of the loan.

  Consequently, RAI's ordinary shareholders will not see any return on their investment until both the Bank's loans and its preference shares have been paid off. However RAI told us that, even after these debts have been repaid, it was unlikely that its ordinary shareholders would immediately start to see a return on their investment as company law prohibits distributions to such shareholders when a company has negative reserves. At December 1999 RAI had a negative balance on its profit and loss reserve of £12.2 million. Whether the balances on this reserve would be restored sufficiently to allow the payment of dividends to the ordinary shareholders immediately the debt was fully repaid would depend on the extent of RAI's annual profits (after depreciation, corporation tax and interest) in the years prior to this. RAI considered this unlikely. However, although RAI have provided a number of scenarios showing key sensitivities on the length of time to repay the private sector debt, it has not been able to model the changes in the level of distributable reserves as there are too many unknown variables such as future changes to depreciation, tax rates & legislation which can not be reasonably forecast.


  In PAC 00-01/171 Note 4 the Department for Culture, Media, and Sport summarised the contents of the consultant reports on visitor numbers presented to the Royal Armouries and RAI between 1991 and 2000. We have examined the consultant reports themselves and can confirm that this summary fairly reflects the contents of these reports. However, in order to aid the Committee's understanding of the issues involved, we draw the following matters to its attention:

    —  In its reports of February 1991 and August 1992 MORI did state that surveys were a crude vehicle for assessing likely visitor numbers. The figures it supplied were only indications as people's stated interest in an attraction and their intention to visit did not necessarily translate into actual attendance. Therefore the proportions of respondents in surveys who said that they were very likely to do or attend something had to be substantially reduced to arrive at a more realistic forecast. The discount that MORI had then applied to the proportions had been based on its previous experience.

    —  The projected visitor numbers in MORI's August 1992 excluded school visits and foreign tourists. In compiling its report in October 1992 Grant Leisure had based its figures on MORI's work, to which it had then added estimates for school visits and foreign tourists. Schroders had then based the March 1993 Memorandum on the work by both MORI and Grant Leisure.

    —  In its report of September 1993 Gardner Merchant had assumed visitor numbers of 650,000 in 1996, rising to approximately 1 million from 1999 onwards.

National Audit Office

June 2001

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