Examination of Witnesses (Questions 120
THURSDAY 1 MARCH 2001
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 publiclyand which obviously are shared publicly
annuallyand 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 which 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
ministersministers are aware of those figures and I am
aware of them throughout the course of the yearbut 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
withmost obviouslyoverseas 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 be 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 its management.
126. We saw the extent of the change programme
that has been going on over the last two or three years, yet overseas
sales 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 it 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
pricethat is commercially rightand 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. How would
we know whether that might that not be a better route if we 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.
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
(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 manufacturersit had no external debt,
it had an excellent return on capital and profitsand 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) Weand I in particularhave
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 outlined.
134. This is quite important, though. Mr Fallon
made the point that in recent years it is the collector 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
(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 return on 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 did not give 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 consideration?
(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 Mint.
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.
1 Note from Witness: The Treasury's coinage seignorage
can be calculated from the coinage vote on the Treasury's spending
and the coinage receipts in the Consolidated Fund accounts. Back