Select Committee on Treasury Minutes of Evidence


Memorandum from the Royal Mint

HISTORY

  1.  The Royal Mint has a continuous history extending over 1,100 years, from the striking of silver pennies for King Alfred in London in 886. The earliest recorded Trial of the Pyx, where samples of the national coinage continue to be presented annually for examination by a jury, took place in the thirteenth century. For hundreds of years the Mint developed within the walls of the Tower of London, until a new building was opened on Tower Hill in 1812. A new Mint was opened at Llantrisant, South Wales, in 1968 in order to provide additional capacity for decimalisation in 1971, and minting ceased at Tower Hill in 1975.

  2.  The Royal Mint's original purpose, and still its prime reason for existence, is the provision of circulating coinage of the realm. The United Kingdom circulating coinage now accounts for about 30 per cent on average of the Mint's total turnover. Export of circulating coins was first developed as a substantial business in the 1920s (though several branch mints had been established within the British Empire during the nineteenth century), and the export of circulating coins to overseas monetary authorities and of ready-for-striking blanks to other mints accounts on average for 40-45 per cent of the Mint's turnover. Over the last 25 years the Mint has also developed a substantial collector coin business (which includes its longer-standing production of medals), selling both in the UK and overseas and accounting on average for 25-30 per cent of turnover in recent years.

STATUTORY FRAMEWORK

  3.  The Coinage Act 1971 provides the statutory framework of the Mint. The Chancellor of the Exchequer is, ex officio, Master of the Mint, and the Treasury appoints a Deputy Master who may exercise and perform all the powers, duties and authorities of the Master. The Act does not specify that the Mint should be the supplier of the United Kingdom coinage, or that it should be a government department, but these assumptions underlie several of its provisions. The Act details the arrangements for the annual Trial of the Pyx and the specifications for gold coins and silver maundy coins, whilst providing that specifications for other UK coins be set by Royal Proclamation.

  4.  The Government Trading Funds Act 1973 enabled the Mint to become a trading fund, and this was implemented by the Royal Mint Trading Fund Order 1975 which defined the operations to be financed by the trading fund as:

    "The manufacture and supply of coins, medals, seals and similar articles, and any operation incidental or conducive to such manufacture or supply".

  5.  The Mint became an Executive Agency in April 1990. Its roles and responsibilities are currently defined in the Framework Document published by HM Treasury in March 1997. In summary, the key provisions are:

    —  the Mint's aim is to run its operations along commercial lines and maximise their efficiency, effectiveness and profitability;

    —  the Chancellor of the Exchequer sets financial and other targets for the Mint. The financial target is normally set in terms of operating profit as a percentage of average net assets;

    —  the Deputy Master, as Chief Executive, is accountable to the Chancellor for the Mint's performance in accordance with its Corporate Plan and is the Mint's Accounting Officer;

    —  the Mint has an Executive Board and also a Management Board which includes non-executive directors appointed by the Chancellor;

    —  the Treasury has two distinct roles as owner of the Mint and as customer for United Kingdom circulating coins;

    —  the Mint is free to manage its business in line with the Corporate Plan which it submits annually to the Treasury for approval, and subject to the specified financial delegations (eg all capital expenditure projects of £1 million or more require Treasury approval); and

    —  the Deputy Master has delegated authority on all major personnel matters including pay and conditions, but employees of the Royal Mint are civil servants and members of the Principal Civil Service Pension Scheme.

FINANCIAL PERFORMANCE

  6.  Table 1 shows the Mint's sales, exports, operating profits, dividends to the Treasury, capital expenditure and return on assets over the 10 years since it became an Executive Agency and including the latest published Report and Accounts for the year to 31 March 2000.

  In summary, over this 10-year period the Mint has made total profits of £106.8 million and paid dividends totalling £86.5 million to the Treasury. It has received no funding from the Treasury other than short-term loans, which currently amount to £5 million and has thus financed its capital expenditure programme essentially from internally-generated funds. However, the trend of profitability shows two significant downwards steps. The main reason for the drop in profit from 1995-96 was the new UK circulating coinage contract—see paragraph 11 below. The background to the profit downturn over the last two years is explained in the immediately following paragraphs 7-9.

CHANGE PROGRAMME

  7.  Profitability has, however, been adversely affected since 1998 by an increasingly competitive marketplace and by the far-reaching programme of change on which the Mint has embarked. Profit margins in the circulating coin markets overseas have fallen on average, with increasing numbers of mints having capacity available and overall demand being at best static, following the completion of recoinages such as Hong Kong from which the Royal Mint benefited in the mid-1990s. Some competing mints are not expected by their national authorities to use commercial criteria in export pricing. The Royal Mint's change programme has been prompted not only by the general need to maintain and improve competitiveness into the 21st century but also by a number of specific factors:

    (a)  there has been growth in demand for ready-for-striking blanks from other mints—accentuated by the requirement of first-wave euro countries—and this business has different technical and quality requirements compared with coinage work, entailing (inter alia) additional and upgraded equipment;

    (b)  much of the Mint's plant and equipment for blank production was installed in the early 1970s and after 25 years was due for refurbishment or replacement, taking advantage where appropriate of new technology and more efficient production methods;

    (c)  increasingly health, safety and environmental regulations are requiring additional capital expenditure and operating procedures, especially for the plating and blank processing areas of the factory where hazardous chemicals must be used; and

    (d)  new investment has had to be justified financially, and this has entailed measures to achieve higher productivity and continuous improvement which in turn have required major changes to working practices and shift patterns, together with a two-year training programme which is now virtually complete.

  8.  The principal elements of the change programme have been:

    —  investment of approximately £25 million in the two-year period summer 1997 to summer 1999, mainly in renewing and expanding blank production facilities;

    —  introduction of multi-skilling and teamworking coupled with a Total Productive Manufacturing initiative to involve factory employees at all levels in continuous improvement;

    —  change from four-crew to five-crew shift patterns in continuous process areas, anticipating the EU Working Hours Directive and reducing the Mint's dependence on overtime. This has been linked, wherever possible, with reducing manning levels per shift;

    —  heavy commitment to training, averaging over 13 days per Mint employee in the last two financial years. The Mint was one of the first Government departments to obtain accreditation as an Investor in People, in 1996, and this status was retained after the required three-yearly external appraisal in 1999;

    —  new pay and grading structure for industrial employees which has simplified grading, removed the previous bonus scheme based on production volumes and extended the Mint-wide profit share from non-industrial staff to all employees; and

    —  a process of culture change, moving from hierarchical management style to delegation of responsibility to teams and individuals, supported by training and better communications.

  9.  The overall impact of the factors listed in paragraphs 7 and 8 has been a significant disruption in circulating coin and blank production, which has compounded the impact of a more competitive international marketplace on profitability. In the three months October-December 2000, however, circulating coin and blank production achieved planned levels and thus started to deliver the anticipated improvements in productivity. The collector coin business has not been so significantly affected either by the investment and change programme or by any adverse developments in its marketplace and has maintained a satisfactory level of financial performance.

UK CIRCULATING COIN SUPPLY

  10.  Volumes and prices of UK circulating coin issues have a significant influence on the Mint's financial performance and production. Table 2 shows the volatility in UK demand, but an overall trend of increasing demand for the lower coin denominations. The exceptional level of demand for 5p coins in 1990-91, 10p coins in 1992-93 and 50p coins in 1997-98 arises from the recoining of those denominations at those particular times, following public consultations on the case for reducing the size and weight of the coinage. The Mint supplies UK commercial banks directly with coins and is expected to meet orders from the banks within 11 working days. Mint management liaises closely with APACS on forecasting of demand, but it has not yet been possible to identify an economic model or any other method which can reliably forecast changes in demand patterns.

  11.  The Treasury pays the Mint for coins issued at prices fixed under a five-year contract, and the Mint collects the face value of coins from the receiving banks on behalf of the Treasury. A new five-year contract for UK circulating coins was agreed by the Treasury with effect from April 2000. The preceding contract beginning in April 1995 had involved an up-front price reduction of approximately £3 million (affecting the Mint's profits from 1995-96 onwards) together with an annual price reduction to encourage improved efficiency. The new contract has maintained an efficiency factor within a revised pricing structure.

FIRST-WAVE EURO IMPACT

  12.  The Committee expressed interest in the impact on the Royal Mint on the launch of euro coins in the first-wave euro participants in January 2002. The number of euro coins required by these countries at launch date is approximately 50 billion and, except in the case of Greece, they were able to begin production more than three years before the launch date. In general, the mints of these countries have been able to create sufficient in-house coin striking capacity to meet their targets. However, their blank production capacity is either very limited or non-existent, with the result that there has been a large (though temporary) increase in the demand on blank suppliers including the Royal Mint. Blank suppliers have also increased their capacity, so that the market has remained very competitive.

  13.  The Royal Mint has supplied euro blanks at various times to nine of the 12 first-wave euro countries and has substantial contracts for 2001 from several of them. Access to these markets, which had previously been dominated by national blank suppliers, has been opened up by the euro, and, although demand is expected to drop back to around five billion per annum when the euro is fully in circulation, the Royal Mint is aiming at a continuing flow of blanks business from these countries.

  14.  The Royal Mint is fully involved in euro preparation work in the UK within the framework of the Outline National Changeover Plan. The Mint is not incurring significant expenditure on this activity at present, as the main task is to monitor first-wave experience of the planning and implementation of the cash changeover.

PERSONNEL ISSUES

  15.  The trend in numbers of Royal Mint employees is shown in Table 3. The stability of employee numbers in the 1990s followed a substantial headcount reduction in the 1980s, primarily driven by the availability of faster coining presses, which now strike circulating coins at up to 750 per minute. The more recent increase in the number of employees reflects partly the change from four-crew to five-crew working in the continuous process areas (see paragraph 8 above) and to a lesser extent the increase in capacity and production arising from the investment programme.

  16.  Three trade unions have negotiating rights at the Royal Mint—the AEEU for industrial employees (thus accounting for some 70 per cent of the workforce) and the IPMS and PCS for non-industrial employees.

  17.  As an executive agency, the Mint obtained authority to establish its own pay and grading structures (as distinct from centrally-negotiated Civil Service arrangements) in 1994 for non-industrial employees and in 1995 for industrial employees. Revised structures more appropriate for the Mint's particular circumstances were negotiated, agreed and implemented in 1994-95 and 1998-99 respectively. The structure for industrial employees is summarised in paragraph 8 above. For non-industrial employees, the Mint moved from a multiple to a single job grading structure in 1994-95, with a pay system whereby increases are primarily based on individuals' performance. All employees are eligible for a profit share scheme under which annual bonuses are paid by reference to the profit achieved by the Mint in comparison with the target in its Corporate Plan. No profit share bonus is payable unless profit exceeds 80 per cent of Plan, and the maximum of 8 per cent of salary is paid only if profit reaches 160 per cent of Plan.

  18.  In 1999 a Steering Group with membership from management and all three trade unions was established to explore and if possible achieve progress towards harmonisation of job structures, terms and conditions between industrial and non-industrial employees. In mid-2000 a unified job structure based on a common evaluation system was finalised and communicated to all employees. The next step is to discuss performance appraisal systems and pay structures, with a view to an agreement on harmonisation if possible in time for the next annual pay review date of 1 July 2001. At present there is a two-year pay agreement with the AEEU due to expire on that date, whereas there has been no agreement yet between Mint management and the IPMS and PCS on the year 2000 pay review for non-industrial employees—although individual performance pay increases were implemented as usual in July 2000.

  19.  The Mint's commitment to training and development, as an Investor in People, was outlined in paragraph 8. Considerable emphasis is also placed on communications with all employees, who are covered by a monthly cascaded team briefing system and by the monthly staff newsletter "Mint Condition". The team briefing system is intended to encourage and transmit feedback from employees, and opportunity is also afforded to receive and comment on broader based briefings from senior management about the business in the spring when the annual Corporate Plan has been finalised. All employees receive a copy of the Mint's Annual Report and Accounts. Nevertheless there is further scope to improve communications, and management and trade unions have agreed to set up a joint working party to identify improvements.

INFORMATION TECHNOLOGY ISSUES

  20.  The Royal Mint's policy is to use the benefits of information technology to improve the effectiveness and efficiency of its operations and in particular to support internationally competitive standards of manufacturing and customer service.

  21.  The most far-reaching IT project currently in progress is the introduction of integrated Enterprise Resource Planning (ERP) in the factory, with the objective of improving not only planning and scheduling but also many other aspects of operating efficiency such as stock control and management information. An ERP system is being implemented in the Collector Coin and Tools areas at present, and preparations are being made for its future extension to Circulating coin and blank production. Upgrades are also planned, in line with business needs, to other key Mint systems such as finance, human resources and collector coin marketing.

  22.  In line with the Modernising Government Initiative, the Mint already has plans to extend its use of e-commerce. The Mint's web site (www.royalmint.com) offers collector coin customers the opportunity to order coins and medals electronically, and the use of this channel has grown rapidly since it became available in 1999. The web site was upgraded in 2000 and will be further enhanced in 2001. It is of particular value in reaching customers and enquirers both in the UK and overseas who are not on the mailing lists of the Mint or of its collector coin distributors.

  23.  Many of the Mint's procurement processes are already automated, with the result that (for example) 87 per cent of routine purchases are made and 90 per cent of routine tenders issued electronically. Further improvements are planned in conjunction with suppliers.

  24.  The Mint has full internal e-mail facilities integrated with electronic notice-board, library and calendar functions. External e-mail and Internet access have been made available to key users.

  25.  The Mint has provided a link between its own web site and the UK Online Citizen Portal from which the general public can access Government information and services.

  26.  The central IT department of the Mint has 19 staff, and considerable expertise has also built up amongst the many IT users within the Mint. IT-related risks are minimised by the use of established software packages wherever possible by appropriate training and development programmes for employees and by the normal back-up and disaster recovery procedures.

AIMS, OBJECTIVES AND TARGETS

  27.  The principal aim of the Mint and the framework for target-setting is described in paragraph 5. Since the Mint acquired executive agency status in 1990, the Chancellor of the Exchequer has set a financial target relating to operating profit as a percentage of average net assets. Until the end of 1998-99 this target was set for a series of three-year periods, to allow for normal year-to-year market fluctuations eg in the volumes of UK circulating coinage issues. For 1999-2000 and 2000-01 the financial target has been set for a single year at a time, pending a review of target-setting by the Treasury, on the advice of the Shareholder Panel (see paragraph 32 below), in the light of the Mint's strategy development. The financial targets set since 1990 and the returns achieved by the Mint against these targets are as shown in Table 4. The Mint consistently achieved its three-year financial targets throughout the nine years to 1998-99.

  28.  Since 1997-98 four additional customer service targets have been set and published by the Chancellor of the Exchequer, varying in detail from year to year. Table 5 shows the customer service targets set for 2000-01, together with the Mint's achievement against target for the preceding three years.

  29.  Targets have generally been based on forecast performance in Royal Mint Corporate Plans, which are assessed by Treasury officials who advise the Chancellor. The Mint's Corporate Plan, which is not published for reasons of commercial confidentiality, also provides the Treasury with other key performance indicators which can be used for monitoring purposes.

  30.  The Mint provides a formal report on financial performance to the Treasury every three months and informally provides key financial information to Treasury officials on a monthly basis. Performance against published targets appears in the Mint's Annual Report and Accounts and is thus subject to review as part of the Mint's normal audit process—internal audit by PricewaterhouseCoopers, whose papers are reviewed for the purposes of the external audit by the National Audit Office.

ACTION FOLLOWING 1998-99 TREASURY REVIEW

  31.  In July 1998 a wide-ranging review was initiated by Treasury Ministers with the aim of identifying the actions needed to enable the Royal Mint to develop closer partnership with the private sector. The outcome of the review was announced by the then Economic Secretary to the Treasury, Patricia Hewitt MP, on 12 July 1999. A new framework was to be established in order to put the Mint on a modern commercial footing, to enable it to make best possible use of its opportunities and to make the Treasury a better shareholder. The following specific measures were announced:

    (a)  a new Treasury Shareholder Panel of private sector analysts and managers, to inject greater private sector expertise into the Treasury's oversight of the Royal Mint as shareholder;

    (b)  better definition of the role of Royal Mint non-executive directors, combined with bringing the number of executives and non-executives into more even balance in line with best-practice corporate governance;

    (c)  alignment of Royal Mint financial reporting more closely with that of private sector companies; and

    (d)  extension of the Royal Mint's commercial freedom to expand into non-coinage business where commercially viable and to participate in a wider range of ventures with the private sector.

  32.  Follow-up action during the ensuing 18 months has included:

    (a)  the Shareholder Panel, comprising three private sector members together with the chief executive of another executive agency and senior Treasury officials, was established in March 2000. The panel has met on several occasions to visit the Mint, review the Mint's strategy and advise the Treasury on its shareholder role. It has also met with the Mint's non-executive directors. At the same time the Treasury has segregated its role as 100 per cent owner of the Mint—which is now discharged at official level by the Public Enterprise Partnerships team—from United Kingdom coinage policy and customer activities which continue to be undertaken by the Debt and Reserves Management team;

    (b)  two additional non-executive directors have been appointed to the Royal Mint Management Board, and one of them, David Stark, has been appointed chairman of the non-executive directors in which role he will co-ordinate the views of the non-executive directors as necessary and chair the Board's Remuneration Committee. The responsibility of the non-executive directors has been defined as contributing to the enhancement of the Royal Mint's business over time;

    (c)  the Royal Mint's published Accounts are closely comparable to those of private sector companies, and now include a statement on the system of internal financial control in line with corporate governance best practice. Where the Accounts are framed differently from those in the private sector due to Treasury requirements—essentially in the recording of fixed assets at current cost rather than historic cost—the equivalent figures without revaluation are shown in a note to the Accounts;

    (d)  the Royal Mint proposes that the first and most significant use of its extended commercial freedom is to expand its successful collector coin business into selected high-quality non-coin products within the overall market for gifts and collectibles where it already participates. Further use of existing Royal Mint assets or know-how in non-coin products is not ruled out, but the present focus is on a successful expansion into non-coin gifts and collectibles. The Treasury obtained Parliamentary approval, within the Winter Supplementary in 2000, for a Vote under which the Mint could trade in products beyond the current remit contained in the Royal Mint Trading Fund Order 1975. The Mint is trialling certain products such as jewellery, particularly in mailings to its existing customers, with the benefit of the Vote facility, and is developing more detailed product, marketing and distribution plans for implementation later in 2001. The Treasury's intention is to amend the Trading Fund Order in due course to provide a more permanent basis for including this activity in the Royal Mint Trading Fund Accounts. Initially the supplementary Vote has been necessary because statutorily Trading Funds can only be extended to embrace operations previously established by the organisation concerned.

  33.  The Royal Mint has not yet entered into any new forms of private sector partnership since the July 1999 announcement, but the opportunity to do so in the context either of its new gifts and collectibles business or of its existing activities is being kept under close review. The Mint already has a number of successful commercial partnerships with private sector companies.

CONCLUSION

  34.  This memorandum covers the specific issues in which the Sub-Committee has expressed interest and contains further information to provide a more complete and updated picture of the Mint's business. Copies of the Royal Mint's Report and Accounts for 1999-2000 are also available to the Sub-Committee. If further information is required prior to the giving of oral evidence, the Mint will be happy to provide it.

January 2001

Table 1

FINANCIAL SUMMARY

£000
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
Sales value
108,626
82,962
104,039
110,169
106,477
90,842
91,566
111,887
91,357
95,573
UK sales
49,752
22,540
49,688
37,824
36,225
35,026
37,805
48,842
33,714
43,444
Exports
58,874
60,422
54,351
72,345
70,252
55,816
53,761
63,045
57,643
52,129
Export total sales
54%
73%
52%
66%
66%
61%
59%
56%
63%
55%
Operating profit
13,454
10,306
11,313
15,607
13,965
9,297
7,602
13,036
5,821
345
Profit for the year
14,677
10,636
11,836
16,535
15,005
9,949
7,679
13,567
6,289
668
Dividend
14,000
10,000
11,000
16,500
15,000
9,500
3,000
7,000
500
Capital expenditure
3,646
3,266
2,559
2,526
4,171
4,789
5,845
9,620
12,677
6,119
Average net assets employed
48,246
48,973
48,895
48,726
49,372
50,899
53,968
58,448
63,800
68,703
Return on average capital employed (financial objective ratio)
27.90%
21.00%
23.10%
32.00%
28.30%
18.30%
14.10%
22.30%
9.10%
0.50%


Table 2

UK COIN DEMAND (MILLION PIECES)

Denominations
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
£2
  
  
  
  
  
  
  
82
52
£1
71
35
33
76
62
46
88
73
1
9
50p
7
417
94
44
20p
72
29
54
76
119
92
108
84
49
106
10p
975
307
103
48
74
64
3
78
5p
1,523
493
223
154
222
207
263
273
162
321
2p
146
69
176
202
346
304
381
306
296
460
1p
469
96
386
550
611
641
741
593
665
916
  
2,281
722
1,847
1,365
1,470
1,338
1,655
1,810
1,352
1,986


Table 3

NUMBERS EMPLOYED (FULL TIME EQUIVALENTS)

  
1990-91
1991-92
1992-93
1993-94
1994-95
1995-96
1996-97
1997-98
1998-99
1999-2000
Average numbers for year
1,040
1,040
1,011
986
997
1,045
1,031
1,014
994
1,084
Numbers at 31 March
1,046
1,023
1,006
1,022
1,015
1,051
1,042
974
1,030
1,126


Table 4

ROYAL MINT—PERFORMANCE AGAINST FINANCIAL TARGET (RETURN ON AVERAGE CAPITAL EMPLOYED PER CENT)

¡

  
Target
Actual
1990-91
12.5
12.5
24.0
1991-92
12.5
12.5
24.0
1992-93
12.5
12.5
24.0
1993-94
14.0
14.0
26.2
1994-95
14.0
14.0
26.2
1995-96
14.0
14.0
26.2
1996-97
14.0
14.0
15.2
1997-98
14.0
14.0
15.2
1998-99
14.0
14.0
15.2
1999-2000
14.6
  
0.5
2000-01
7.0
  
N/A


Table 5

KEY MINISTERIAL CUSTOMER SERVICE TARGETS

  
  

1999-2000

1998-99

1997-98
Proposed
2000-01
Target 1
UK circulating coin
Accepted orders from UK banks and Post Office to be delivered within 11 working days
Target

Outturn
96.0% within 11 days
99.6%
95.0% within 12 days
99.8%
95.0% within 12 days
98.0%
97% within 11 days
Target 2
UK collector coin
Orders from individual UK consumers to be delivered within 25 days from receipt of order or published issue date
Target

Outturn
95.0% within 25 days
68.0%
95.0% within 28 days
94.0%
95.0% within 28 days
73.0%
95% within 25 days
Target 3
Medals
Orders delivered by agreed delivery date
Target
Outturn
97.0%
97.2%
95.0%
99.2%
95.0%
96.0%
97%
Target 4
Quality
Collector products accepted by individual UK customers
Target
Outturn
99.7%
99.65%
99.65%
99.70%
99.65%
99.65%
99.7%




 
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Prepared 27 March 2001