APPENDIX 4
Supplementary memorandum submitted by
the National Audit Office (PAC 00-01/178)
NOTE 1: VALUE
OF RAI'S
CATERING, CAR
PARKING AND
CORPORATE HOSPITALITY
ACTIVITIES
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.
NOTE 2: NATIONAL
AUDIT OFFICE
COMMENTS ON
(PAC 2000-2001/171) NOTE 3
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.
NOTE 3: NATIONAL
AUDIT OFFICE
COMMENTS ON
PAC 2000-2001/171 NOTE 4
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
| 
