Examination of Witnesses (Questions 40
TUESDAY 13 FEBRUARY 2001
40. I asked whether the contract that you agreed
last year would improve your financial position and you said that
it would depend on volume. Now you say that the volume is about
the same. What does that do to the financial performance?
(Mr Holmes) There should be a modest improvement in
our financial position arising from the contract, yes.
41. Another matter that needs to be agreed is
the dividend that you pay to the Treasury. Is that negotiated
(Mr Holmes) It is negotiated, but the Treasury take
account, quite fairly, of our circumstances when asking for its
dividend. In the past the general rule has been that we have been
expected to dividend 100 per cent of our profits, unless there
is some particular reason for not doing so. During the height
of our capital expenditure programme, the Treasury agreed that
we could withhold some or all of our profits to help finance that
programme. That was a sensible arrangement between us. I guess
that that would occur with any shareholder in any ownership.
42. I find it odd that in the early 1990s the
dividend seemed to be virtually 100 per cent of your profit, and
yet there was a capital investment programme even then£3
million, £3 million, £2.5 million, £2.5 millionand
still all your profits were going in dividend. Was that not shortsighted,
bearing in mind what you tell us now about the effect of the big
capital investment on your bottom line?
(Mr Holmes) At that point the Treasury was not in
a position to turn down the Mint's proposals for capital investment.
The Mint had not yet worked out the proposals. Essentially, in
the early 1990s those capital expenditure figures were financed
out of the depreciation charge; we were more or less investing
in line with the depreciation and maintaining our asset value.
43. Were you and your predecessors bad managers
then, if you were working, for something like eight years, on
a capital investment programme for the future?
(Mr Holmes) We were working it up. There are two important
points on that. One is that the programme needed a lot of preparation.
It was a massive programme, as you have seen. Secondly, the programme
almost had to be done as one package. There was no point in putting
a lot of money into one bit of the factory if it unbalanced the
factory, because it would put too much capacity in one area and
not enough further down the line to handle the extra product that
was coming from the area invested in. More specifically, for example,
we invested in one bit of the factory to handle bigger coils which
would be more efficientthat is two-and-a-half tonne coils
rather than one tonne coilsso you have to invest in every
piece of equipment that handles those coils at once to give you
the benefit. For that and various other reasons, the investment
programme had to be carried out as a package over a relatively
short period of time and we were not really ready until 1997 to
start implementing it.
44. When you said earlier that you had been
able to generate the capital investment internally, did that mean
that in the early 1990s within your figure for depreciation in
your accounts was the masking of your capital investment out of
your own funds? Is that what you have just told me?
(Mr Holmes) Yes, effectively. I believe that the depreciation
charge was round about £2 million to £3 million; that
was the amount that was more or less equal to our capital expenditure.
We made some savings on working capital as well at various times.
We were able to plough back into capital expenditure.
45. In more recent years when there has been
a little more substantial capital investment£9.6 million
in 1997/98 and £12.6 million in 1998/99how have you
(Mr Holmes) Essentially out of profits, plus the depreciation.
That helps towards that as well, to the extent that we did not
dividend the Treasury. If you look at 1997/98 and 1998/99, for
example, you will see that we made profits of about £20 million
in those two years and we "dividended" £7 million.
So we were ploughing back the balance into capital expenditure.
46. There has been a bulge in capital expenditure
that has wiped out the dividend to the Government?
(Mr Holmes) That is right. The funds were self-generated.
We were not borrowing heavily and putting our finances at risk
for that programme.
47. Yes, until this year, the target for profits
on assets applied in the business stayed at 14 per cent. That
seems rather odd. Why was the target not changed?
(Mr Holmes) The Treasury sets the target rather than
the Mint itself. Obviously, it is natural that Ministers do not
want to see targets reduced if at all possible.
48. The figures are pretty compelling; you are
going to invest some capital that will take away the dividend
and there will not be the profit. Either you or the Treasury were
rather naive to set a target that you could not possibly meet.
(Mr Holmes) From our point of view we wanted to continue
to be profitable through this period. We found it a struggle,
for the reasons that I gave. We accepted the targets and said
that we would do our best to achieve them. Perhaps we underestimated
the amount of time during which we would have this disruption
and I think we underestimated the difficulty of the marketplace.
The targets were based on a combination of our own expectations
plus the feeling that it is not a good idea to reduce target levels
unless you have clear evidence of a fall in performance.
49. I have been asking you about your negotiating
position with the Government. In the past two years, in your negotiations
for the target for your profits as a proportion of your capital,
did you make any representations that it should be less than 14
(Mr Holmes) Yes, because, as I said earlier, the target
for the year that we are in now was set at 7 per cent. Some time
after the start of the year it was set at a lower level. We have
a good dialogue with Treasury officials and as you will have seen
at the Treasury end, the Treasury has appointed a Shareholder
Panel to advise it on being a good shareholder and that panel
has had an impact on advising the Treasury officials and, through
them, the Minister on what is a sensible target in the circumstances.
50. As Mr Fallon pointed out, the point about
the Shareholder Panel is that it is quite new. At the beginning
of that financial year, when the target was changed to 7 per cent,
you started the year off with no target. It was 14 per cent the
previous year and the 7 per cent target had not then been set.
(Mr Holmes) That really would not affect us operationally
in the sense that our objective is to do as well as we can with
our business. That did not cause us any real difficulty, but clearly
we expected a target to be set and we operated on the assumption
that we would have one.
51. What target did you represent should be
(Mr Holmes) There was no disagreement between us and
the Treasury about 7 per cent.
52. Are you going to make 7 per cent?
(Mr Holmes) As I said earlier in answer to Mr Fallon,
I do not believe that we shall make 7 per cent because of the
impact of the factors that I mentioned continuing during the early
part of the financial year. At the moment I cannot forecast exactly
how far short of that we shall be.
53. The Government have added some new targets
for customer service. There are four at the moment. Was that with
your agreement or was that imposed on you?
(Mr Holmes) Those were done with our agreement. Clearly,
in recent years there has been an emphasis, throughout all government
agencies, on customer service and setting ourselves clear performance
targets. These targets were generated as part of that general
move. They are targets where we come up to the Treasury with suggestions
as to what would be appropriate targets and they look at them
and set them.
54. What use do you think they are to your business?
(Mr Holmes) They are a good discipline. Although sometimes
it is nice to run a business entirely behind closed doorsin
the private sector one would not see such targets publishedwe
do not have a problem with that and it raises the profile of customer
service among the employees in a helpful way. If you take, for
example, the collector coins deliveries to individual customers,
we set ourselves targets of 95 per cent within 25 days and to
reduce that time is one of the key objectives in that business.
Twenty-five or 28 days was quite acceptable as a delivery standard
in the past, but customers are becoming more and more demanding
and they are getting used to ordering products over the internet
and getting them within a day or two. We are setting ourselves
the task of pushing our delivery targets in that general direction.
We are gearing up our systems, putting more product on the shelf
to ensure that we have them ready for when promotions go out.
That target is one of the key elements in showing us how we are
55. If targets are a good discipline, why, according
to your memorandum, does the target for "UK collector coin:
Accepted orders from UK banks and Post Office to be delivered
within twenty-five days from receipt of order or published issue
date", show the worst performance of the three years?
(Mr Holmes) There is a misprint there. Something has
gone wrong with the layout because the description of what the
target is seems to have been transmuted from the first target.
We are talking about the second target on the table. Essentially,
that is about the length of time between the order and receipt
by individual UK consumers, members of our coin club. That performance
fell in 1999/2000 versus the year before, partly because we tightened
the target from 28 days to 25 days and partly because we had a
high level of demand in that year and did not put enough product
on the shelf in relation to the orders that came in. We also had
some packaging problems. We have seen a substantial improvement
in that performance in the current financial year and we want
to carry on from there to get the 25 days down substantially.
Yes, we did not achieve that target but it is an important focus
56. In what way was it a good discipline then?
(Mr Holmes) That relates to awareness of it and an
awareness of where we are falling down and what we should do about
it. My colleagues in the collector coins business look at the
performance every month and where there are particular root causes
of problems they will set up teams or take initiatives to fix
them. We have been learning quite a lot about how much product
we should have on the shelf when we start promoting and balancing
that against the danger of having too much product on the shelf
and finishing up with surplus. Coins have dates on them and they
tend to age in the sense that customers are less interested in
them once the year in which they were first issued has passed.
57. Are you likely to be nearer the 95 per cent
target this year?
(Mr Holmes) Yes, nearer the 95 per cent in 25 days.
58. Why are there no targets for overseas customers?
(Mr Holmes) The problem there is that every customer
wants a different delivery time and arrangement. It also depends
on what we have to do for the customer. For the UK collectors
in our Coin Clubs we are talking about coins where we already
have the design, the product is agreed and we are producing it.
For an overseas customer we design to order, we make the tools
to order and, therefore, when we deliver depends on when the designs
are approved, for example. So it can be a very movable feast.
It is not easy to monitor how we do that exactly in a purely quantitative
sense compared with the targets that we have in the UK. Obviously,
we look carefully at our deliveries to overseas customers and
in relation to any complaints that we receive we try to fix the
problems that arise.
59. Would your service to overseas customers
benefit from a target or not?
(Mr Holmes) As I said, the difficulty is setting one
that would mean something. Possibly that would benefit from a
target, but I believe that it would be difficult to find one that
was sufficiently precise to be worth monitoring in a quantitative