Members present:
              Sir Michael Spicer, in the Chair
              Mr Nigel Beard
              Mr Jim Cousins
              Mr Michael Fallon
              Mr David Kidney
              Judy Mallaber
              Mr James Plaskitt
                       EXAMINATION OF WITNESSES
                 MISS MELANIE JOHNSON, a Member of the House, Economic Secretary, DR PAUL
           MILLS, Head of Debt and Reserves Management Team, MR PETER
           SCHOFIELD, Head of Public Enterprise Partnership Team, and MR
           MICHAEL SWAN, Head of Tax Administration/Chancellor's Departments
           Team, examined.
        114.     Good morning.
        (Miss Johnson)   Good morning.   Could I explain, first, that the reason
  why Peter Schofield and Paul Mills are both here is that they represent the
  two sides of the Treasury's engagement with the Mint.   We have split our
  engagement with the Mint and Paul Mills represents the client of the Mint, as
  it were, and Peter Schofield represents the shareholder interest that the
  Treasury has in the Mint.
        115.     Beginning with a general question, as you know we held
  evidence in Cardiff with the Royal Mint so a number of questions have arisen
  out of that session.   Given the fact that the Royal Mint is essentially a
  commercial operation and has trading fund status, and given that it would seem
  to be doing its commercial work with decreasing success, if I can put it in
  those terms, why should it remain a state-run operation?    Why not privatise
        (Miss Johnson)   It has become an increasingly commercial organisation
  and it is certainly our aspiration for it to be a very commercial
  organisation, but the fact is that I think a few years ago it was not running
  on a very  commercial basis and we have been making moves to put it on a more
  commercial footing.   There were a variety of reasons for not privatising it
  but one of the key reasons was that it was not on a significant commercial
  footing at the time.   I think a number of reasons went into that.   The
  Mint's status was reviewed last in 1998/9:  and the decision was that we
  should concentrate more on making the Mint more commercial and more effective
  in the public sector; that privatisation would have been difficult because the
  Mint had a large change programme and a large degree of investment that was
  about to start or had started, of which you will be aware, and it was hard,
  therefore, for investors to factor the result of that investment into any
  possible privatisation.  Of course, also, the Treasury does have a customer
  relationship with the Mint as well and that needs to be taken into
  consideration too.   There have been similar reviews I understand in 1990 and
  1993/4 which reached the same conclusion:  that it was not appropriate to
        116.     That is very interesting answer because it suggests that some
  of the barriers to privatisation, namely its commercial status and the  big
  investment programme and the effect of that, have now been removed.   Would
  it be true to say that the door is more open to privatisation now?
        (Miss Johnson)  No.   That would be to speculate.  The next quinquennial
  review of the Mint will be in 2003/4 and at that time, as with all these
  quinquennial reviews, we will fundamentally go through all the options that
  could conceivably face the organisation.   Those routinely include the option
  of privatisation and it will be looked at in just the same way that it has
  been looked at before.   It is true that the Mint will be -- and hopefully
  already is -- on a more commercial footing than it has been but it is also
  true that we see it at the moment continuing in the public sector but on a
  more commercial footing.
        117.     You did mention that the lack of commercialisation or the
  embryonic commercialisation was a major factor in determining that it will
  remain in the state sector.   Will you concede that that is now less of a
        (Miss Johnson)  I agree they are becoming more commercial; there is still
  some way to go but we have made progress on that.  That is one of a number of
  factors which led us in the 1998/9 review to come  to the conclusion that we
  came to.   At the moment our considered view is that the Mint has a continuing
  role in the public sector but on a more commercial footing than in the past. 
   As I said, it will be looked at again -- as it routinely is on the
  quinquennial review basis.
        Chairman:   Perhaps we should look at how successfully it has been
  operating in the public sector and come back to that question.
                               Mr Fallon
        118.     Minister, you set the key performance targets for the Mint. 
   Why was the key target for the rate of return on capital employed not set
  until well into the current operating year?
        (Miss Johnson)   The Mint has gone through a period of substantial change
  and, if you visited it, you will have seen the results of a lot of that change
  in Llantrisant.   The Mint had a period of substantial investment going on and
  it therefore seemed sensible to make sure that we were aware of what issues
  were arising out of that before the targets were actually set.   Ideally
  targets ought to be set at this time of year and that is certainly what we are
  planning in this present year.
        119.     In effect, for the current year you lowered the target for
  the previous year when it was  14 per cent and the Mint only made 5 per cent. 
   You have lowered it now to 7 per cent.   Do you expect them to meet that?
        (Miss Johnson)   We do, yes, of course. There is no sense in setting a
  target unless we expect the organisation to might it.
        120.     But Mr Holmes told us that he would not?
        (Miss Johnson)   Well, you asked me what I expected and I am telling you
  what I expect. When I set a target I expect someone to achieve it.
        121.     But we are ten months into the financial year, so you expect
  him to make 7 per cent?
        (Miss Johnson)   He may not make it but you asked me what I expected and
  I gave you an answer about what I expect when I set a target.
        122.     Fair enough.   The other targets are customer service targets
  and so on.   You do not, it has been pointed out to us, have targets for sales
  to central bank or trade customers.   Why is that?
        (Miss Johnson)   The targets that you have are the public targets, as it
  were.   There are confidential targets as well but we have concentrated on
  areas which we thought were appropriate both to share publicly - and which
  obviously are shared publicly annually - and which  were also fundamental to
  the Mint's performance and could be shared.   Obviously some matters are
  commercially sensitive, could not be the subject of public performance targets
  and could remain part of the confidential element of targeting.
        123.     But in assessing the Mint's performance, we found it quite
  difficult to see how well the Mint was doing when it does not, for example,
  publish information about the overall profitability of its collector coins
  division.   We were told that there are obviously bits of that are
  commercially sensitive but there is no overall figure for the contribution
  that the collector coins division is making.   We were told it ran into
  millions but no figures were given.   Is that satisfactory?
        (Miss Johnson)   Yes because, ultimately, it is an organisation that is
  working in a commercial setting:  it has competitors so information is
  commercially sensitive.   I obviously am aware of what the figures are:  it
  is not that they are not shared with ministers -- ministers are aware of those
  figures and I am aware of them throughout the course of the year -- but it is
  not thought to be appropriate because it could be damaging, commercially, for
  the Mint. 
        124.     But there are other figures not there. There is nothing on
  the total of royalties you get from the Royal Mint:  no figures on marketing
  expenditure:  you may see some of this information but it is difficult for the
  outside world to see whether or not something that enjoys a monopoly status
  is performing well or not?
        (Miss Johnson)  It only enjoys a monopoly status with regard to the
  government being its customer but not at all with regard to the work which it
  does in winning contracts with -- mostly obviously -- overseas governments of
  one kind or another to produce coinage for other countries.
        125.     But overall this is an organisation that has a turnover of
  95 million and made last year a profit of 345,000.   Without the profits
  contributed by the collector coins division, this organisation presumably
  would go bust?
        (Miss Johnson)   The effect of the investment in the Mint, and Roger
  Holmes spoke about this when he was giving evidence to the Committee, was
  probably underestimated in terms of the difficulty of doing it and what it
  meant for retraining staff and for changes in practices.   It was a very
  substantial programme and it has had  a substantial effect on the Mint
  initially of a kind that will affect their performance downwards.   More
  recently, though, we have managed to produce a very substantial upturn in the
  number of blanks, for example, and coins that are being produced and the
  investment is beginning to bear fruit, but you are looking at a period where
  the input of investment into that organisation which had very little
  investment of a capital kind and very little change over a long period was
  very substantial and was perhaps a bit underestimated in terms of its
  consequences and the difficulty of settling it in by the Mint and Mint
        126.     We saw the extent of the change programme that has been going
  on over the last two or three years, yet the overseas programmes were the
  lowest for twelve years?
        (Miss Johnson)   That reflects the fact that the commercial environment
  in which the Mint is operating is now much harsher and more realistic than has
  been in the past.   The Mint recognises that there is a change in climate and
  that they need to respond appropriately to that.   In the past, there were a
  significant number of contracts that were not done on price but, between the
  Mint and  others, on the basis of previous contact and, indeed, contracts and
  quite a lot of their business came in this form.   It is much less the case
  now that that happens:  much more is being done on price  -- that is
  commercially right -- and the Mint will, and is, responding appropriately to
  that challenge.
        127.     It is difficult, however, for the outsider to assess whether
  this whole monopoly organisation turning over 95 million, would not be better
  served by simply selling coins to third parties who take on the commercial
  risk.   Might that not be a better route if they do not have the commercial
  information that you would expect to see in a company report?
        (Miss Johnson)   That is why we have quinquennial reviews.  Obviously the
  reporting for those reviews does enable people to know that a thorough
  analysis has been done every five years of the basis of this organisation,
  whether operating within the public sector or whether it is privatised, and
  whether the nature of this structure and organisation of the performance
  within the public sector has been thoroughly examined.   On all previous
  occasions, from 1990 onwards, the conclusion has been drawn that it should
  remain in  the public sector.   That is not to say that a different conclusion
  could not be arrived at, but the fact is that at the moment we certainly see
  that as being the status quo.
                               Mr Kidney
        128.     Three and two years ago there was a massive capital
  investment in the works at Llantrisant which the management did through the
  change programme.   Was it not obvious that that change programme and its
  investment meant there would be massively-reduced profits in the works?
        (Miss Johnson)   In the sense in which you have just employed a lot of
  capital which was not previously employed then there is an obvious truth to
  what you are saying.   In terms of the difficulties, as I was mentioning
  earlier on, of introducing that technology, introducing the manpower or staff
  changes that were necessary and the training that was necessary, there was
  some underestimate done of the complexity of that and how easy it would be to
  bed it all in.
        129.     Presumably the Treasury approved the change programme?
        (Miss Johnson)   Yes.   The change programme was initiated in 1997 and
  the investment has taken place over the last few years.   There was  an
  initial investment from the summer of 1997 to the summer of 1999, and there
  is a further projected increase.
        130.     We have heard from Mr Fallon that the return on capital
  employed just two years ago was still set by the Treasury at 14 per cent so
  in terms of attributing blame for failing to meet returns we can firmly pin
  the blame on the Treasury, can we, for an unrealistic return being set?
        (Miss Johnson)   No, and the returns are set over a rolling three-year
  programme anyway.   It is because the Mint's business fluctuates quite a lot,
  and the cash flow does as well, depending on which contracts are being done
  when and when payment is being made for them.   It has always been the view
  that we needed to have a rolling three-year figure and it is the rolling
  three-year figure that is the most significant one.
        131.     In the years before that change programme, the Royal Mint as
  manufacturer had a position that would be the envy of most British
  manufacturers -- it had no external debt, it had an excellent return on
  capital and profits -- and every year the Treasury was pinching all of the
  profit; 100 per cent went into the dividend back to the  Treasury and as a
  result there was no investment in capital in modernising that plant all
  through the 1990s except what they could mask from the Treasury in
  depreciation charges.   Is that terribly bad management by the Royal Mint, or
  is that the Treasury tying their hands behind their back so they could not do
  what any decent management would have done?
        (Miss Johnson)  It is perhaps not the most modernised way of dealing with
  the issue which you are raising and I think there is scope for us to look at
  a change to that which provides greater incentivisation.  I think the
  arrangement historically has not provided as much incentivisation as it could.
        132.     There is also the freedom of management to manage and make
  that decision to invest.   As you have pointed out, on one side you have the
  owner of the Mint and on the other you have its main customer advising you. 
   Who is going to win?
        (Miss Johnson)   We - and I in particular - have to balance those two
  sides. Clearly on the one hand we need coins supplied; we need them supplied
  cost effectively; and we need to make sure that on the other hand the
  government is  getting a reasonable return as a shareholder, as it were, in
  the Mint and we need to make sure that it stacks up as a sensible proposition
  from the taxpayer's point of view.   So we need to wear both hats, and it is
  a balance to be struck.   I do not think an ideal balance has been struck in
  terms of the investment issue and it is possible that we may need to move to
  a better balance on that.
        133.     Specifically, last year was the year to re-negotiate the
  five-year contract for UK circulating coins which the Royal Mint provides all
  of and the Treasury negotiates the contract.   Which of these two advisers did
  win last year?  Did you get the lowest price possible for the customer or did
  you get a decent price to make a profit for the manufacturer?
        (Miss Johnson)   We did discuss these matters with the Mint and I think
  I need to point out to you, in response to the earlier points you were making,
  that a lot of the targets and the returns and so forth are based as well on
  the Mint's own corporate plan and on discussions with the Mint.   There have
  been discussions:  this is not a decision made in the Treasury in isolation
  in some way from the Mint:  these decisions are made in  discussion with the
  Mint and they need to bear in mind both sides of the issue, as I have already
        134.     This is quite important, though. Mr Fallon made the point
  that in recent years it is the collectors coins that have been making the
  profits and have been cross-subsidising, in effect, certainly last year the
  rest of the activities. Did last year's contract with UK circulating firms
  correct that so that that contract will enable the Mint to make a profit on
  it, or are they still going to be dependent on a cross-subsidy from other
        (Miss Johnson)   I think the coin contract has a net cost to the
  Exchequer but let me ask Dr Mills to comment.
        (Dr Mills)    As far as I understand, the contract was set up to price
  coins so that the Mint was going to be able to make a satisfactory return on
  capital that is higher than what it is currently doing.   Obviously we make
  those payments and then, if there are production difficulties in other parts
  of the Mint, that reduces the overall return on capital.  The contract we
  negotiated last time, however, did involve a reasonable return on its  capital
  built into the assumptions.   We are not saying that cheap coinage is the
  be-all and end-all; we are saying it is reasonable for the Mint to make a real
  return on its contract with the Treasury for coinage and then, if it makes
  other returns elsewhere in its business or problems arise meaning its overall
  cost of capital falls, that is in a sense the Mint's responsibility.   The
  move to more commerciality means that I have got to think about setting a
  long-term contract that I might do with another supplier for five years; there
  will be a reasonable profit expectation built into that and, if there are
  other problems with the Mint with other costs or whatever, then essentially
  that is for the shareholders and the Deputy Master of the Mint to sort out. 
   I, as a customer, expect to pay a reasonable return to the Mint for its
  capital employed and I do not think that I ought to bail out other bits of the
  Mint if there are problems.
        135.     Did anybody from the shareholder panel or the management at
  the Royal Mint give you a hard time over the negotiating of this contract?
        (Miss Johnson)   Not so far as I am aware.
        (Dr Mills)    Unfortunately I did not  negotiate this; it was before my
  time.   As far as I am aware, no.
        (Miss Johnson)   We have had very constructive discussions with the
  shareholder panel; they are an asset to the Mint and very useful from the
  Treasury's point of view in having a real input there into the strategy and
  planning.  They are playing a very valuable role.
        136.     I do not know that it is very reassuring to know that they
  gave you a hard time; for me that is very worrying because I would have
  expected them to give you a hard time.   I do not like the Chairman asking you
  questions about the privatisation of the Mint, but I feel very uncomfortable
  about the same organisation being the owner and the main customer.   I think
  there is a difficulty there in getting decent management and history over the
  last few years shows what happens if that management is poor.
        (Miss Johnson)   I do not think it is entirely fair to say it is poor
  management.   There are a number of ways in which we have addressed what we
  think has been less than satisfactory.   I did talk about the wider,
  commercial freedom and the importance of addressing those issues but there are 
  also other issues, one of which is the shareholder panel and the value of
  having the private sector and the manufacturing-based experience of the
  members of the shareholder panel and the non-executive directors as well, who
  have a lot to offer in the Mint, and we have strengthened the non-executive
  director side.   The Mint is now working in a more commercial environment than
  it was before and it is having to change to reflect that commercial
  environment.   It has not had a significant capital investment of the kind
  that has just gone into it for a long time; that capital investment makes a
  substantial difference and it has lacked that until recently.   They have also
  done a lot internally on team-working and on getting things right first time
  in terms of manufacturing process and other matters which they may have told
  you about.  I think there are many reasons why the performance has not been
  as exciting as it could have been in the last year or so but they are not, I
  do not think, to do with the dual role that the Treasury holds through me.  
  I have to hold both bits of this role but the two officials who are here
  belong to different parts of the Treasury, so that the customer and
  shareholder role is quite  considerably split and they are able to discharge
  their different roles without having to look two ways at the same time.
        (Mr Schofield)   Responding as well to Mr Kidney's point about the way
  in which the contract was put together, the fact that the role has been split
  and that my team now has a shareholder role has enabled a greater degree of
  transparency to come into the debate, and that debate is articulated and
  explained to ministers and that has been helpful.   As the Minister says, the
  introduction of the shareholder panel gives us greater access to expertise and
  has been very useful in terms of enabling us to ask the right questions and
  to get to the heart of the issue from the shareholder point of view.
        137.     You mentioned a corporate plan.   Is that before you now for
        (Miss Johnson)   It is in the process of being before me, as it were.  
  It is not far off being before me but it is not before me at this moment, no. 
   We have had substantial input to this year's corporate plan both from the
  shareholder panel and from outside consultants in terms of strategy, so a lot
  more work has gone into making  sure that we have a longer term view built in
  behind this year's corporate plan.
        138.     Historically it is not published for reasons of commercial
  confidentiality, but is there not a way in which the corporate plan can be
  seen by the rest of the world without the commercial confidentiality bits
  being made public?
        (Miss Johnson)   There may be.   We would have to think about how that
  could be done in a way that would be useful and would not be a problem for the
                               Mr Fallon
        139.     Coming back to the rate of return, the 1999/2000 rate of
  return you said was 14.6.   That was not part of the three years; that was the
  first of the single-year targets, was it not?
        (Miss Johnson)  We have a rolling three-year target.
        (Mr Schofield)   The 1999/2000 target was a single-year target following
  on from two periods of three-year rolling targets set at 14 per cent.
        140.     That is the point I am making.   You broke away from the
  three-years; you set a single-year target of 14.6, but the result was 0.5 so
  somebody got it wrong.
        (Miss Johnson)   Yes, but it was informed  at the time by the Mint's own
  corporate plan.   It was not the case that it was set by the Treasury in
  isolation from the Mint.   As I explained, a lot of the difficulties of the
  major investment programme and the changes that were necessary which are now
  bedding down satisfactorily have caused the situation that we have got here.
        141.     The Mint told us they were now - and I think you presented an
  order to Parliament to allow them to do this - moving into the area of doing
  gifts and collectibles and trinkets of all kinds.   If we do not have this
  kind of information in the annual report about marketing and overheads and so
  on, it is very difficult to assess whether it is really right for a state
  organisation to be competing against the private sector by producing trinkets
  like this.   Should the Royal Mint really be doing this?
        (Miss Johnson)   The shareholder panel certainly believes that it is a
  good development. It has been enthusiastic about it and would like to see it
  extended which is interesting because they obviously all have extensive
  private sector backgrounds and are recently appointed.   I think to call it
  trinkets is unfortunate.   They are and have  always had a collectible coin
  division, as it were, or in recent times did, which is obviously not producing
  coinage as such but producing purely for collectors:  they produce a number
  of coins both for the UK and for overseas contracts which are never going to
  be part of the standard coinage but are only for collectors, and they have
  been extending this business because it has been a good business and a
  profitable one.   It is appropriate for them to be undertaking this in a more
  commercial setting, which is the one we believe they need to be operating in,
  and we feel it is one of the right ways for them to develop for the future. 
   As I said, that view is strongly shared by the shareholder panel too.
        142.     But do you see the danger in them engaging in that activity? 
   Essentially these commercial trinkets, gifts, should be produced by other
  houses, by other businesses, and there must be a point at which a state
  organisation should not be allowed, in a cross-subsidised way that is not
  properly reported in its accounts, to get into that kind of market place?
        (Miss Johnson)   What they are producing is associated with their role
  as a Mint still.  Clearly it does not make sense for them to produce items
  that have no connection whatsoever with their own collector coin customer base
  and does not resonate with the Royal Mint.   It is within that framework that
  the business is being developed.
        143.     In answering various questions which you have kindly answered
  for us today, you have identified, it seems to me, at least four roles for the
  Treasury: the shareholder, the customer, the controller of investment, as Mr
  Kidney pointed out, and also it has just been introduced as the protector of
  competition, with respect to the Mint.   You have said that these various
  functions can somehow be kept behind Chinese walls, if Chinese walls are
  allowed in the Treasury, and you are confident that that is the case.
        (Miss Johnson)   I have identified two prime roles: you may wish to make
  further distinctions but I am not sure I particularly recognise them.   Some
  of the matters you are talking about are very much shareholder extensions of
  the shareholder role, and there is a basic distinction between the Treasury's
  role as a shareholder and its role as a customer.   That is recognised
  organisationally between the fact that if  I am dealing with one side of the
  Mint I will normally have one set of officials, Paul and his colleagues,
  coming to see me and advising me and if I am dealing with the other aspects
  of the Mint it will be Peter Schofield and his colleagues who will come to
  advise me.   They are completely separate, therefore, and I think the
  arrangement is working well, and there are not the number of focuses which you
  have tried to suggest there might be.
        144.     Surely the competition element has to be in the mind of the
  Treasury ministers.   If the Royal Mint really did decide to go berserk on its
  trinkets and produce chocolates, the Treasury would presumably have a view
  about that?
        (Miss Johnson) They cannot cross-subsidise because we do take the profit
  and so it cannot.
        145.     So you are saying it can do anything so long as it is
  cross-subsidising who does?  Is that what you are saying?
        (Mr Schofield) In terms of the movement into different types of market
  there are two things I would say.  The first thing is that these are
  competitive markets that it is moving into.  From the point of view of
  shareholder I think the key issue for us is the degree of commercial risk that
  it would be taking on in doing so.  In terms of looking at proposals that they
  have put forward, we take a robust and rigorous look at the proposals they put
  forward as part of the corporate plan.  With the expertise of the shareholder
  panel we will assess if this is the sort of business that the Mint should be
  moving into.  We look at that as a shareholder, we also look at it as a
  funder, as a banker in that sense.
        146.     I can see you looking at both those roles and I can see there
  is a distinction made between them, although I have a question to ask about
  the credibility of that distinction.  The question still remains that neither
  the shareholder or funder is the proper person to answer as to how far it can
  stray into competitive markets in a way that most people would assume is
  unfair competition.  That must be a concern of the Treasury.  That is at least
  one other dimension that the Treasury is concerned with. 
        (Mr Swan)   I would ask why you would say it is unfair competition in one
  sense because we have now moved to a situation where if the Mint does borrow
  from government it is going to be charged a commercial rate as if it were in
  the private sector.  It is not allowed to retain huge amounts of profits that
  it is not investing and so it cannot use retained profits from other contracts
  to then cross-subsidise other business.
        147.     I am aware that time is running out and I do not think a
  long-scale philosophical discussion about whether the state is borrowing
  fairly or unfairly against private companies is quite in order, but it is
  certainly an open question.  The final question I have got does specifically
  relate to this distinction between the shareholder and the customer.  Although
  you have provided us with examples of two representatives within the Treasury
  it ultimately comes to the Minister.  How credible really is it in people's
  minds that there is this distinction between customer and shareholder?  At the
  end of the day the buck stops with you, Minister, and you are one person.
        (Miss Johnson) Yes, and a balancing act has always had to be done on this
  front by Ministers over years.  Nothing is different from what it has always
  been with respect to the Mint in this regard.  There is nothing new about the
  situation at a ministerial level from what it has been, I will not say for
  time immemorial but for some time before, because clearly what has always
  happened is that there is a tension between the taxpayer getting a very good
  deal and the Mint as a supplier of coin to the Government, and that tension
  is always going to continue to exist.  But that is a tension on which I do
  have good independent advice from both sides in arriving at the judgment about
  what the balance at the end of the day is to be held on.
        148.     It is precisely when that tension becomes too extreme that
  governments around the world have found it easier to split off the two
        (Miss Johnson) A large number of governments have their own mints but I
  have not done a survey globally of it.
        Chairman:   Thank you very much indeed.