The Royal Armouries moved from the Tower of London to a new museum in Leeds in 1996. The £43m PPP/PFI deal with Royal Armouries International (RAI – led by 3i Group plc,) included £20m from the museum and £8.5m from Leeds City Council and Leeds Development Corporation. The Armouries financial advisers, Schroders, forecast 1.3m visitors per annum based on PA Consulting and MORI projections which would have given investors a 25% rate of return over 25 years. However, visitor numbers peaked at 344,000 in 1997 and plummeted to 191,000 within two years. This led to two refinancings of the project which ceased to be a PPP/PFI project in 1999 following the renegotiation of the contract. Cumulative losses soared to £10m in 1999 and the Bank of Scotland refused further lending thus forcing a renegotiation of the contract. The Armouries took over the running of the museum whilst RAI retained responsibility for some services. The core problem was the wildly optimistic visitor forecasts and a delay to the redevelopment of the adjacent docks which was expected to boost visitor numbers (National Audit Office, 2001).
“Under the contract revision, the main risk allocated to the private sector (the ‘demand risk’ of adequate customer numbers) was transferred back to the public sector whilst shareholders, who should have lost their investment when the contract failed through lack of cash, were substantially protected. These changes were achieved by shifting responsibility for the new museum to the Royal Armouries whilst RAI was allowed to retain profit-making activities such as catering, car parks, and corporate hospitality, giving shareholders a chance of profit even though the venture had failed and under the original agreement they should have lost their money” (UNISON, 2004, Public Risk for Private Gain: The public audit implications of risk transfer and private finance, July, London).