THE RENEGOTIATION OF THE PFI-TYPE DEAL
FOR THE ROYAL ARMOURIES MUSEUM IN LEEDS
RE-NEGOTIATING AN AGREED DEAL
43. The Department had set themselves the objective,
when faced with RAI's insolvency in July 1999, of delivering a
solution which kept the museum open while minimising the requirement
for additional grant. The Department had considered that, should
RAI go into receivership because of their financial difficulties,
the museum would have closed and been lost. They had therefore
sought to avoid RAI's receivership.
They disagreed with the National Audit Office's judgement that
the museum's closure had only been a possibility. RAI and their
bankers had both told the Department that RAI's receivership would
mean the closure of the museum. Its closure would have entailed
uncertainty and cost. There would have been a severe risk of loss
of staff and deterioration of the product and an unknown cost
to re-open the museum. The Department's legal advice had been
clear that, if RAI had gone into receivership, the bank would
have been most likely to have kept the museum closed for two years.
The alternative would have been for the bank to keep the museum
open and carry on losing £3 million a year. Neither the liquidator
nor the bank would have been keen to do this.
44. The Comptroller and Auditor General was asked
about the Department's disagreement with the National Audit Office
in this area. He told us that there was no difference with the
Department on the facts of the matter but only on an opinion and
recommendation. In the Department's view there was a two-year
period of uncertainty during which the museum might have closed.
In the National Audit Office's view, however, failure by RAI would
arguably be a fundamental breach of the contract. In this case
the two-year moratorium would not have applied, giving the Department
and Royal Armouries a lever which could have been used to get
a better deal. It was therefore a question of judgement about
what could have been achieved in negotiation.
The Department told us that it had not taken any advice from insolvency
recovery specialists but possibly should have done so.
45. The Department's objective was to avoid the museum's
closure. Based on legal advice and statements from RAI and their
bankers, the Department considered that, if RAI had become insolvent,
there would have been a two-year moratorium on the Royal Armouries'
ability to get back the museum and the museum would have closed.
There is room for doubt, however, as to whether that view took
full account of the Royal Armouries' rights in the event of fundamental
breach of the contract by RAI, where no such moratorium would
have applied. Faced with similar situations, departments should
be clear both about their legal rights and the strength of their
commercial position, and be prepared to use those rights and powers
aggressively in negotiations.
46. In negotiating the deal to save the museum the
Royal Armouries and Department commissioned only legal advice.
They did not seek appropriate commercial advice from an insolvency
practitioner, although they were faced with a threatened insolvency.
Departments should ensure that their negotiation team includes
people with previous experience of commercial negotiations and
that they are supported by appropriate commercial advice.
48 C&AG's report, paras 1.68, 1.71, 1.76-1.77, 1.81 Back
report, para 15 Back
51 Q182 Back