WEDNESDAY 23 OCTOBER 2002

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Members present:

Mr Ian Davidson
Angela Eagle
Mr George Howarth
Mr Brian Jenkins
Mr Nigel Jones
Mr David Rendel
Mr Gerry Steinberg
Jon Trickett
Mr AlanWilliams

In the absence of the Chairman, Mr Alan Williams was called to the Chair

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SIR JOHN BOURN KCB, Comptroller and Auditor General, further examined.

MR BRIAN GLICKSMAN, Treasury Officer of Accounts, further examined.

ROYAL MINT ANNUAL REPORT 2001-02, including REPORT BY THE COMPTROLLER AND AUDITOR GENERAL:

ROYAL MINT TRADING FUND: 2001-02 ACCOUNTS

Examination of Witnesses

MR GERALD SHEEHAN, Deputy Master and Comptroller (Chief Executive), Royal Mint, examined.

Mr Williams

  1. We are here today to consider the NAO report on the Royal Mint Trading Fund 2001/2002 and their accounts. We welcome you, Mr Gerald Sheehan, as our witness. It is your first visit here. I am sure you wish it had been the third, but it has to happen some time. Can I explain to everyone that the Committee process will be slightly varied today because there are allegations of improper payments that have been made in pursuit of contracts. This has led to a formal investigation which is still going on by the Serious Fraud Office. What we will be doing is dealing with other aspects of the report and then at the end of that section we will go into closed session when I am afraid all our visitors will have to leave. Mr Sheehan, I know that you have inherited the situation you find yourself in but what we are confronted with is a loss of £6 million, an expansion of capacity by 50 per cent at the very time when the world market for coins and discs was shrinking, the theft of £25,000 that was not discovered for over a year and now we have learned yesterday about the theft of another £5,000 five years ago. There have been the allegations that I have referred to of improper conduct and in very recent times we have had the tragic loss of life of one of your workforce. There are obviously very many questions we will wish to ask you. Before I start on details can I ask you two points that may hopefully be an oversight? Your report and your accounts are required to be distributed to MPs but we did not get them and we received them very late. Also, they are required to be printed by the Stationery Office and that was not fulfilled. Can you explain how that arose?
  2. (Mr Sheehan) Because of the nature of the report and the issues within it and some of the issues you have already mentioned, we delayed the input of our results this year in line with and agreed with the National Audit Office. In the context of the Stationery Office producing our report, I was not aware of that. I am aware that we are very keen to reduce our costs so we may well have done it that way. If that was an oversight I can only apologise. ( Note by witness: A further explanatory note will be issued)

  3. But it was an oversight, no deliberate intent?
  4. (Mr Sheehan) Absolutely.

  5. Okay, that is fine. I am sure you will make sure it does not happen again. Before we go on to the financial matters, there is the sad matter of the death of one of your employees. I was very disturbed to find, as I am sure the Committee was when it read the background briefings from the C&AG, that the Health and Safety Executive found that the Mint had been responsible for the death of one of its staff in an industrial accident, but the presiding officer at the hearing said that but for Crown immunity there was a realistic prospect of conviction in the courts. That is very serious indeed. Can you give us one good reason why the Mint should have this Crown protection that it has?
  6. (Mr Sheehan) Can I say first that this tragedy - and it was very much a tragedy - was felt very much by all the workforce in the Mint and is still felt and our sympathy still goes out very much to the family. In the case of the Crown immunity, my understanding is that this is a policy issue. I find it quite difficult to comment on this particular point. The important point and the key issue for me is that we have to have health and safety standards within the Mint which are absolutely paramount and at the top of the agenda. The work that we have been doing over the last six to nine months has focused very clearly upon improving safety standards throughout the Mint. We have structured to a large extent the health and safety team and made them far more focused. We are focusing very clearly on risk assessment and safe working procedures, and our accident performance is improving.

  7. Do you think they might have been more focused already had they been aware that they were not protected by Crown immunity?
  8. (Mr Sheehan) Absolutely not. This is a key priority for us in the Mint and whether we are fined or not is nota factor which we must take into account in looking at our accident record and performance.

  9. Obviously you cannot comment on policy. Can you give me any operational reason why Crown immunity should be extended to you? You are just a production plant. Why should you have Crown immunity?
  10. (Mr Sheehan) It is a policy issue. I cannot think of any other reason at this stage. I am not used to this particular situation, coming from a private sector environment, but apart from the policy issue, which I really cannot comment upon, I would not be able to comment any further.

  11. Since the presiding officer felt that there was a realistic prospect of conviction, can we take it for granted therefore that there has been disciplinary action internally as a result of this incident, since culpability lies within your organisation?
  12. (Mr Sheehan) We have looked at the whole aspect of this. As you are aware, I was not there at the time. It was felt that there was no requirement in this instance for that action to be taken. There were a number of issues surrounding the event and what we had to do was review the whole of the safety procedures in this area. We did have generic procedures that covered the handling of equipment of this nature, using overhead cranes. The failing that we had was that we did not have a risk assessment specifically for this type of kit, and obviously since the event we have corrected that.

  13. So the Health and Safety Executive found you responsible, the presiding officer at a hearing felt there was a reasonable prospect of a conviction, but apparently the circumstances that led to those conclusions do not even merit a disciplinary act on your part as management?
  14. (Mr Sheehan) The other point I would make is that the Health and Safety Executive also made it very clear that there was no individual culpability and it is possible to prosecute individuals in the Mint as it is in other parts of business but that was not the action that the Health and Safety Executive deemed necessary.

  15. It is a sensitive issue to raise so soon after the event, but does the Crown immunity in any way prejudice the compensation to which the victim's family would be entitled?
  16. (Mr Sheehan) Absolutely not. We have done everything we can to help the family within the guidelines that we have used. We have done everything we possibly can.

  17. Your loss of six million: why did you increase your capacity by 50 per cent at the very time when there was already surplus capacity in the world market in production terms and the world market, if anything, was declining? Why a 50 per cent increase?
  18. (Mr Sheehan) I have to go back five years to paint the picture then of the market. The situation was very clear then. With the introduction of the euro to the Euro 12 there were some very great opportunities in terms of the market place. The anticipation was something in excess of 50 billion coins over a three-year period, which is something like a 30 per cent increase. It was clear that the Mint management saw an opportunity to take a significant market share of this particular market, particularly in the case of plated material where there was a lot of expertise within the Mint and a lot of the focus of the investment at the time was directed at the introduction of more copper plating plants to take advantage of this market opportunity.

  19. Where did you read a market increase of 50 per cent when everyone else says that there was over-capacity?
  20. (Mr Sheehan) It was very clear that for a three-year period from that period on there would be a spike in the market associated with the introduction of euro coins and of the £25 million about £16 million was directed at the capital investment to attract a share of that market. The other £9 million was aimed at improving the overall Mint plant and equipment which was becoming a bit tired. In going for the investment to attract the market share we did not achieve anything like we anticipated we would achieve.

  21. There was a major planning error in fact and a costly planning error and 200 people are losing their jobs now, I understand.
  22. (Mr Sheehan) I cannot relate the 200 people to the capital investment, sir, because they are two separate issues.

  23. Just to the market conditions?
  24. (Mr Sheehan) The market conditions now are very different from what they were anticipated to be five years ago. The situation we have now is that we have passed the euro peak. A lot of people like us invested in new plant and equipment. We have something like 30 per cent over-capacity -----

  25. The euro peak, with respect, would not account for a 50 per cent increase, and it would be a once-and-for-all increase to get the initial stock of coins in circulation. You do not plan long term investment on a short term production possibility in one market, do you?
  26. (Mr Sheehan) That was the three to four year period of opportunity with the euro. At the time there was a clear move in other parts of the world, in other countries, to move their product, their coin, from a homogeneous, non-ferrous product to plated material, so there was a clear move in that direction and people could see the opportunities, particularly in copper-plated material.

  27. Can I move on to the theft of the £25,000? First of all, you are an ultra-secure plant, you even have army protection, and yet we find that the safe was left open all day during working hours and that in the safe there were passwords or something or other. What passwords were in there?
  28. (Mr Sheehan) There are two safes. The one you are alluding to has passwords. It is nothing to do with this particular theft. The second safe which has passwords does not contain anything in bank notes. The bank note safe, the one you are alluding to, was left open and that was obviously an incorrect procedure, very much so.

  29. For a year?
  30. (Mr Sheehan) It was left open during the day hours. It was obviously locked out of working hours.

  31. Yes, but for how many years? Was that standard practice?
  32. (Mr Sheehan) The procedures were very clear, that the safe should not be left open.

  33. But who left it open?
  34. (Mr Sheehan) The person in charge -----

  35. Who was in charge? Office, not name. What was the office of the person in charge?
  36. (Mr Sheehan) It was the departmental manager at the time. The circumstances that we had were that it was likely that this theft occurred between the April and October period in our view.

  37. And it took you over a year to find it.
  38. (Mr Sheehan) It took us until December, you are quite right, to find it. At the time there was a significant investment taking place in the packaging area. People were under pressure, there were lots of contractors being used at that time and there were clear failings in applying our procedures. There is no doubt about that.

  39. But what does what is going on in the packaging area have to do with closing a safe?
  40. (Mr Sheehan) This is all in the same area. I cannot defend the situation because the procedures were not being applied.

  41. Is it not even worse if it is all in the same area that you have contractors and their workers and so on all circulating there, and you just left the safe open? Was the safe with the passwords open as well?
  42. (Mr Sheehan) This was in a totally different part of the plant.

  43. That is not the point.
  44. (Mr Sheehan) I cannot comment on whether that safe was open at any time. I can comment that in the light of the Grant Thornton internal review we have now corrected that other problem.

  45. My understanding from the National Audit Office is that passwords were at risk. Perhaps you will consider that again. That was a relatively recent occurrence and then yesterday I get a phone call from the clerk to say that we have been notified that you have found that another £5,000 had walked about five years earlier. I assume that five years earlier the safe was still left open and that you did not have all this extra activity in the packaging area, so how did that happen and how is it that no-one knew about it?
  46. (Mr Sheehan) This came to light on Friday evening when I was carrying out further investigations on the whole issue of procedural control in the Mint in the light of the issues that we had. It is a very different issue. This was of bank notes that were being delivered from the Bank of England to our London office and then on to Llantrisant. It is a different matter, still a procedural control issue, without question, and unacceptable.

  47. How did it take five years to discover? You have internal audits and so on. How did you not know about it?
  48. (Mr Sheehan) I think it is necessary for me to explain the focus of the Mint in terms of procedural control and security control. Our focus has been very clearly upon the avoidance of theft of coin. We produce coin and that has been our clear focus. To put that in perspective and to demonstrate that it is fairly effective, since 1989 there have been four attempted thefts of coin. We have dismissed three of those people and the fourth person resigned prior to any disciplinary procedure.

  49. But, with respect, there is a limited amount of value you can carry out in coin unless you are carrying it in a transporter or something. You can fill your pockets with coins and it is still petty cash. Fill your pockets with bank notes and it is a fair amount of money. Where is your sense of proportion?
  50. (Mr Sheehan) Absolutely. What we have had to do very clearly is to review the whole procedural issues within The Mint in terms of security and we have taken the appropriate action to make sure that we can minimise the possibility of this happening again.

  51. You have only been there 30 years. Not you, the Mint has only been there 30 years. So you are getting around to looking at these things, are you?
  52. (Mr Sheehan) I think the focus was on coin and that was a mistake and we accept that.

    Mr Williams: Rather belatedly.

    Mr Rendel

  53. Perhaps I can start off on the whole of the investment that you made which the Chairman was referring to just now. I think he is quite right to mention that it does seem rather strange that a one-off demand, the peak in demand, led to this huge investment. You did mention one or two other things. Was a business plan produced concerning this investment and, if so, how quickly did it show that the investment would be paid off?
  54. (Mr Sheehan) This plan was produced in terms of the most likely scenario. We are talking about a pay-back, I believe, within four years for the three plants.

  55. So it was going to be paid back after the end of the euro peak?
  56. (Mr Sheehan) The demand for coin in the euro was likely to be in the three to four year period, three full years and one partial year, so the logic was to pay back on that basis.

  57. But you were still expecting some of the pay-back to take place after that? You are expecting to take on quite a lot more business in order to pay back that sum, let alone make a profit on it afterwards?
  58. (Mr Sheehan) The anticipation was that other countries would move to particularly copper plated material and to some extent nickel plated material.

  59. Why has that not happened?
  60. (Mr Sheehan) It has happened to some extent but the market dynamics and the over-capacity have more than offset the benefits of that.

  61. Was that over-capacity taken into account when you drew up that business plan?
  62. (Mr Sheehan) I do not believe that we were aware in 1997 of the quite expansive plans that private sector blank producers in particular and some mints had in anticipation of the euro demand, so I do not think it was taken into account.

  63. What efforts at the time were made, apart from the plating issue, to identify other sources of revenue, other business that you might be going to be able to take on if you made this investment?
  64. (Mr Sheehan) Again, the plan was clearly looking at the overseas market outside Europe, understanding that some countries were looking for re-coinage business, and that is a significant opportunity, and that they were looking to convert from homogeneous material to plating material. That is not guaranteed but there was certainly a clear move in that direction.

  65. Have you identified particular contracts that you were going to win, or you thought in general you were likely to be able to win?
  66. (Mr Sheehan) We had identified particular countries that were moving that way but not a specific contract.

  67. Can I turn to the theft and perhaps come back if I have time to some more general questions afterwards? Can you explain why the £20 notes were taken into storage 14 months before they were needed? That seems to be in a sense a cash flow problem, does it not? You are increasing your working capital quite a lot by just having those notes in storage without needing them for 14 months.
  68. (Mr Sheehan) This is very clearly one of the lessons that we have learned from the new procedure. The actual total was £40,000 and we had used just under £15,000 of the total, so there was £25,000 left and I agree that that was one of the lessons we have learned.

  69. It was not left; it disappeared.
  70. (Mr Sheehan) The £25,000 disappeared. We had actually used £15,000 as part of the plan.

  71. Would you have used more if there had been more left? When you started production there was only £15,000 left in the safe anyway.
  72. (Mr Sheehan) The plan was to use them all over an extended period. The issue we have had, and we have learned from, is that we should not hold anything like that amount of money and just have it delivered on a more regular basis.

  73. There are two points here. It is not only when you took in the money but also how much did you eventually use? You expected to use £40,000 worth of these notes in these presentation packs. As it happened there was only £15,000 left when you started production. Did you get in another £25,000 to replace the £25,000 that was lost and did you sell £40,000 worth of packs?
  74. (Mr Sheehan) I cannot confirm the total amount that we sold but we anticipated using the £40,000 and I am not sure, although I can confirm this later, that we took more in.

  75. Anyway, you found £15,000 was left of the £40,000. I understand that your policy now is only to bring in the money as you need it in line with production, but that still does not explain the fact that it is not only a question of bringing it in as you produced it but of how long in advance you got it in to begin with. It is not only that you got the whole lot in. The first bit you got in 14 months in advance. Why on earth did you get any of it in at that stage?
  76. (Mr Sheehan) Again, I admit very openly that this was a mistake on our part. Since we have reviewed this we have very clearly changed the procedures. We have done a number of things. We have re-positioned the safe to make it far more clear and open in that sense. We have put in video cameras. We now have a three-key system. One of those keys is held by the MoD police and cannot be opened without them being there, and we have limited the amount of money that comes in.

  77. I think in October 2000 you took the money into the safe. Were you expecting at that stage to start production of these packs at about that time or did you, even in October 2000, know that you were not actually going to start production of these presentation packs until December 2001, which is when you did start production?
  78. (Mr Sheehan) The money was brought in in October. As I indicated, we used £15,000 of that. My belief is that that was associated with the run-up to the Christmas period and the time for packing, etc.

  79. Hang on a minute. As I understand it, you did not start production of any of these packs until December 2001. Is that wrong?
  80. (Mr Sheehan) No. My belief, and again I confirm that I was not there, is that we used £15,000 worth from October 2000 onwards, but the problem occurred between April and October 2001.

  81. I thought there was £15,000 left in the safe in December 2001. Paragraph 32 says: "... on 13 December 2001 a stock check of the contents of this safe prior to the commencement of the production run for the presentation packs revealed that 1,284 notes were missing and only £14,320 ... remained", so it looks as if prior to production, starting in December 2001, -----
  82. (Mr Sheehan) You are absolutely right.

  83. I go back to the first question. Did you know in October 2000 that you were not going to start production until December 2001?
  84. (Mr Sheehan) I cannot comment on that. I can confirm that in a separate note if I may.

  85. But certainly if that was known it seems to me a quite extraordinary position that you should have taken in the money 14 months in advance of needing it, and it does lead one to wonder whether somebody actually wanted that money in place a long time in advance because somebody had their eyes on it.
  86. (Mr Sheehan) I can confirm that the use of bank notes has been in place since about 1990, so there has been a rotation of bank notes through the period and they are used as part of these packs on a regular basis.

  87. You had some stock control regulations in place, some procedures, but they apparently did not include a stock take over quite a long period of time. When you knew that there were going to be contractors in the area why were these stock controls not at that point made a great deal more stringent, which one would have expected?
  88. (Mr Sheehan) That is exactly what should have happened. The circumstances were that the individuals concerned were under a fair bit of pressure to complete the work in the area because the packaging refurbishment area was a necessity for storing extra stock, and the focus went off the stock procedural controls and that was obviously a mistake.

  89. Has anything happened to the man or woman who took that decision? There were lax controls at the very time when the danger was at its highest.
  90. (Mr Sheehan) I looked at this situation. The procedures were not good enough, without question, and have since been reinforced. The individual concerned had been an employee in the Mint for 26 years. He had an unblemished record in terms of health/absenteeism and, weighing up the pressures and the issues that we had and the fact that the procedures were not good enough, I felt it inappropriate to discipline him. In fact, the situation occurred not long after this event that the individual has been away from work with ill health, with a stress-related problem and depression, and has now taken early retirement.

  91. Can you tell me please why it took as long as four months, from December 2001 when the problem was discovered until April 2002, for the MoD police report to be produced? That seems a long time for what was clearly a serious problem which needed urgent action.
  92. (Mr Sheehan) The MoD report was a protracted investigation which involved the outside police as well because we wanted to keep it low key in the hope that we could find the notes and find the theft and the person who had taken them, so there was a very protracted investigation which involved the external police as well.

  93. What steps were taken during the investigation to prevent anything of a similar sort happening again?
  94. (Mr Sheehan) We immediately instituted the new procedures. We reviewed them when I was aware of it and we introduced those new procedures.

  95. You have an internal audit section, I understand, or at least you employ internal auditors on a contract basis. Was any action taken against any of them for having failed to notice the fact that there was this horrendously obvious open situation with money lying in an open safe?
  96. (Mr Sheehan) The internal audit section did not flag this up, to be quite honest.

  97. The question is, why did they not?
  98. (Mr Sheehan) The issue was that I do not believe that the audit was focused on these particular issues. It was focused on the Mint as a manufacturing entity looking specifically at the control from a manufacturing perspective - the control of stock, the hedging policy, etc. That is again a lesson that we have very clearly learned, that some of the internal audit must be focused on some of these issues.

  99. When was the last internal audit done of the security situation in what I believe is called the Collector Coin Division's gold store?
  100. (Mr Sheehan) We have an internal audit on security, I believe, every three years. I cannot say exactly the year it was done. It is every three years.

    Mr Rendel: It would be interesting, Chairman, to know when that was last done before all the problems came to light, because if these are people employed on contract and they had done anything like a relatively recent security audit of that area at a time when the safe was being kept open during the day, and there is some evidence I think that the safe had been kept open during the day for some time before this matter came to light, then clearly it seems to me that they failed rather badly in their duties. I would have thought this might be worth considering when you are renewing the contract.

    Mr Williams

  101. Before we go on, do you have any colleagues with you from the Mint and are they able to provide the answer?
  102. (Mr Sheehan) I have two colleagues with me. I am not sure that they are particularly expert in this field, and I suspect that they would not know the answer.

  103. In that case you will let us have an urgent note on it.
  104. (Mr Sheehan) Certainly.

    Mr Rendel

  105. I have to say, Chairman, as somebody who has been an internal auditor of a large multinational in the past, I am surprised that internal audit have failed to pick this up in good time. It seems to me that they have let you down really rather badly.
  106. (Mr Sheehan) I can only comment that my belief is that this incident occurred between April and October. I have no evidence to suggest that the safe being left open was something that happened well before that as well.

  107. So the safe was only left open during the time when these contractors were in?
  108. (Mr Sheehan) I cannot comment on that because there was no evidence to confirm one way or the other, but certainly it was left open in that period, yes.

  109. Again, it seems quite extraordinary that somebody should have made things easier for potential theft at the very moment when the danger of potential theft became the greatest.
  110. (Mr Sheehan) I think it was open by default because of the nature of the work that was ongoing in that particular area.

  111. Can we turn back to the more general points? On page 38 in paragraph 10 there is a note that there was a change of contract by the Treasury which led to a reduction in turnover. How much of the reduction in your profit has been because of a change of terms in what the Treasury was paying you?
  112. (Mr Sheehan) If I compare it since the 1994/1995 period to date, then the actual impact upon the profitability of the Mint from that period to now is something like £2.8 million.

  113. Given that we are probably not the nearest mint to a lot of the overseas markets, what is the proportion of transport costs as a proportion of your sales revenue? Presumably if you are transporting heavy coins all over the world it must cost quite a bit.
  114. (Mr Sheehan) I cannot give you the exact number but, bearing in mind the high value of these products, it is a relatively small percentage.

  115. A high value of the products but not necessarily a high profit margin on the products, which is the important point. It is transport costs against the profit margin which is important.
  116. (Mr Sheehan) I think we have to consider the whole situation in terms of the Mint and its position in the international market because we have a capital intensive industry with high fixed costs and the Mint must attract overseas volumes to achieve a good return.

  117. Precisely, and in Wales presumably you do have a difficulty with competing with some of the international producers because your transport costs are inevitably going to be higher if you are producing euros for Germany than, say, a mint in Germany or France.
  118. (Mr Sheehan) In the case of euros, yes, but this is very much an international market and the key competitors that we have are, for example, in Canada, in Germany, in Chile, in South Africa. They have the same issues that we have in trying to deliver to a wide range of countries. The transport factor is not a major issue and we do not have a major disadvantage in that respect if you consider that we are delivering typically, last year, 200 currencies to 55 countries.

    Mr Rendel: I am surprised, but thank you.

    Mr Davidson

  119. When you were speaking earlier on, Mr Sheehan, about the facts of the notes you mentioned, if I picked you up correctly there had been four attempted thefts of coins which had resulted in three dismissals and one person had resigned before disciplinary action was taken. Did I hear that correctly?
  120. (Mr Sheehan) That is correct.

  121. Can I ask whether or not any prosecutions were considered and what the amounts involved were?
  122. (Mr Sheehan) This was in fact trying to take out a very small number of coins through the security and the MoD police, of which we have 30, picked them up. It was not the value of the coins per se; it was the fact that they were taking them out.

  123. Would you know if people were being successful in stealing coins on a regular basis?
  124. (Mr Sheehan) Our stock control procedures suggest that we do not have a major problem. I can tell you that we have picked up one or two other issues. We have one issue at the moment with an alleged theft and it is going through the disciplinary procedures. There was one other issue that we flagged up as well as these four people in January 1998 where there was an issue of £250 which was never completely solved, whether it was a theft issue or a procedural control issue.

  125. Had the people that you caught got away with it, would it have been picked up or would somebody just run the machine a bit longer and print off some more?
  126. (Mr Sheehan) We have 30 MoD police on site. We have a very focused search system. We actually did about18,900 searches last year of individuals and about 9,000 searches of cars, so it has been fairly focused. We also have locker searches. We did about 900 of those. That, combined with the MoD presence there and the fact that we do not have a stock control problem in coin, gives me the comfort that we do not have a particular problem in this area.

  127. When you say you do not have a stock control problem in coin that is capable of being interpreted in a number of different ways. Would you notice if somebody had managed to get away with, say, several handfuls of coin? It would become immediately apparent that you were coins short?
  128. (Mr Sheehan) If it were several handfuls it may not become immediately apparent, but when we did our stock reconciliation checks, which take place on a weekly, monthly, quarterly, annual basis, we would have picked it up.

  129. Can I turn to the question of coining the euro? You got five per cent of the euro market. Do I take it then that if Britain joined the euro 95 per cent of our euro coins would be imported?
  130. (Mr Sheehan) The situation we have there is that in terms of the euro production in the 1997/1998 period and from there on we were on a very big learning curve in terms of the quality of the product and the tolerances that were required. We did not get it right in those years very clearly and as a consequence we did not achieve the market share that we had anticipated. The situation now is very different in that we do have the quality assurance standards to meet the requirements of the euro and we are producing euros now and have done consistently over the last few years very successfully. If the UK moved in that direction we have very clear plans in place, dependent on the volume requirement and on the timescale, to meet the Treasury requirements if they gave us those orders.

  131. You make the not unreasonable point that you were on a learning curve with producing the euro, but presumably this was not unique to yourselves since nobody else had been producing them before. Everybody else was on the same learning curve as you were and you aimed for 20 per cent and you got five per cent. If it comes to the situation that Britain joins the euro what percentage would you be aiming for and how can we believe that you would achieve that percentage?
  132. (Mr Sheehan) If the policy decision was to ensure that the Mint supplied all the coins, dependent on the volume and the timescale (and they are still under discussion) we would be in a position to produce them all.

  133. I understand that but surely this would have to go out to EU open competition. There would be no guarantee that you would get them all, would there, because that would be contrary to EU procurement legislation?
  134. (Mr Sheehan) The situation, certainly with the euro, from the government mint perspective in continental Europe was that they had the orders from their particular government. If that is a policy decision then we would obviously adhere to that.

  135. Just so that I am clear about that, every company in Europe that had a mint did its own and you were bidding for the euros for those that did not have their own mint?
  136. (Mr Sheehan) Or for euro blanks, ie, the unstruck coins.

  137. I am still a bit unclear. Why should you get 100 per cent of the British order, yet you were able to bid for a share of the euro blank orders from other countries?
  138. (Mr Sheehan) Because there are certain countries that do not have mints, as you have already indicated, and there was a requirement, because of the very high volume of coin needed over a relatively short timescale and the fact that other mints did not have the capacity to produce blanks. ( Note by witness: Only one of the Euro currency countries does not have its own mint. Ref answer to Q 152.)

  139. So you only got a share of the orders in those countries which did not have their own capacity to produce blanks?
  140. (Mr Sheehan) Or did not have the capacity to produce their full complement.

  141. So you feel confident that, irrespective of cost, if a political decision is taken that we in Britain should produce all our own coins, then you will get that order and you will be able to produce them?
  142. (Mr Sheehan) If the Treasury wish me to make 100 per cent of the coin then I have plans in place to achieve that, dependent upon volume and timescale.

  143. At the moment am I right in thinking that there is a euro mountain of coins produced surplus to requirements within the EU?
  144. (Mr Sheehan) There is a general view that there was a cautious approach to the volume that was required in various euro countries and that generally there is somewhere between 25 and 30 per cent excess production. That is true for certain countries but not necessarily for others. In the light of that the Euro Coin and Notes Working Group was looking at, if this did happen, what the requirement would be for the UK.

  145. So there is in fact, according to the section on page 9, a euro mountain at the moment with some countries having more than 12 months' stock of coins in their vaults. You must regard yourself as unfortunate that you are not covered by the common agricultural policy; otherwise you would be getting paid to produce even more euro coins that nobody wants to use them, but I will leave that for the moment. Can I come back to the question of the death of the member of staff? I am a bit perplexed at the point where you say that no disciplinary action was taken. Surely if the Health and Safety Executive felt that a prosecution had a very good chance of succeeding there must have been some blame associated to yourselves as an organisation and presumably within that there must have been some blame associated to particular members of either management or staff.
  146. (Mr Sheehan) The situation we had was that there were safe working procedures in place of a generic nature which applied to this particular piece of kit. This was a specialist piece of kit that in truth required a specialist procedure in terms of safe working and handling and we did not have that. In hindsight we should have that but we did have safe working procedures in place and we were actively pursuing a wide range of risk assessments and safe working procedures throughout this particular area and other areas of the Mint.

    Mr Williams

  147. You said you did not have it in place. Someone must have been responsible for putting it in place. Whose responsibility was that?
  148. (Mr Sheehan) The question was, was there a requirement for a specialist safe working procedure in this area and that was the debate. In hindsight, and it is easy in hindsight, it was very clear that we needed that specialist safe working procedure.

  149. Was it an individual decision or a collective decision?
  150. (Mr Sheehan) In terms of risk assessment and safe working procedures it was looked at in the context of the Mint as a whole and we prioritised certain areas. There are certain areas of the plant which are extremely safety critical in terms of the area of annealing, plating and pickling, for example, and our efforts were very much focused in that area.

  151. Did the manufacturer provide any safety guidance and was that guidance observed?
  152. (Mr Sheehan) The manufacturer provided the safety guidance. In one instance there was a failing on our part in that we did not adhere to that particular guidance.

  153. Was that contributory to the accident?
  154. (Mr Sheehan) We do not believe so.

  155. Did the Health and Safety Executive think it might be?
  156. (Mr Sheehan) No. They mentioned the fact that this was an issue but I think the problem was specifically that there was no specialist procedure in place.

    Mr Williams: I would like to have a very full note on the background to this. I am not at all happy about this and I think it is outrageous that Crown immunity protects you from proper investigation.

    Mr Jones

  157. I have just been scanning through the annual report and you have some wonderful coins there, including the sixpence and the half new penny but there is no sign of the euro. Why did you exclude the euro from your accounts?
  158. (Mr Sheehan) Not for any particular reason. We took advice from our design experts and after fairly healthy discussion on this subject we concluded this. There was no particular reason.

  159. Can I refer you to table 1 on page 37 of the report where there is a pretty dramatic drop-off in the annual operating results, particularly from 1992/1993 to 2001/2002, with a bit of a blip in 1997/1998 which is explained by a rise in collectors' sales. I know you were not there but could you give us a history as to why it was that action was not taken earlier to arrest this pretty steep decline?
  160. (Mr Sheehan) If I try and put myself in the position of the management team perhaps two or three years ago, the situation they had was that it was clear that the euro peak would eventually come and would pass and there would be some possible capacity issues. There was a question mark over the other markets and the opportunities in other markets, particularly in terms of the copper plated and nickel plated material, and whether that would to some extent offset the euro peak. There was also the question mark about the euro in the UK. The dilemma that they had was to assess the cost/benefit analysis of investing a significant amount of money in redundancies, early retirements, etc, against a backcloth of potentially losing money, and whether that would give a good return for that investment. It was a dilemma and I can understand the dilemma to some extent. What we did, and this started before my time but I accelerated the process, was to look at the whole aspect of our competitive position. We benchmarked ourselves against a number of key good players throughout the world and by February of this year we concluded that we did have a major issue in terms of our competitive position in terms of cost for the various products that we made. On that basis, and on the basis that the market conditions were even more difficult than the previous management team had anticipated two or three years ago, it was clear to me that decisive action had to be taken. By the end of February I had concluded that. I wrote my report in the context of the corporate plan, submitted that to the Economic Secretary and very quickly, at the end of March, she confirmed that I could move ahead with this restructuring. This is paramount and vital for the Mint in my view, not just in terms of taking 220 jobs out of the organisation but a fundamental change in working practices and flexibility with a target of being in the top quartile in terms of performance, which is absolutely vital for us in my view.

  161. Are you now kitted up to meet the challenges of the future? There are another ten or so countries who may be joining the European Union and I guess a lot of those will want to join the euro eventually. Are you exploring market opportunities there and have you got the right equipment to see you through the next few years?
  162. (Mr Sheehan) We have the right equipment, without question. What we have to achieve now is clear accountability within the Mint to deliver, particularly in terms of customer service, and that is a key focus for us.

  163. You mentioned in the report, paragraph 18, that you aimed for 20 per cent of the euro coins and ended up with five per cent, a lot of euro blanks. Why was that 20 per cent target set? How was it assessed that it would be possible for a country which is not actually joining the currency to end up with a fifth of the business? Would that not be a bit unrealistic?
  164. (Mr Sheehan) The situation that we had was that we were the main exporter of coin in the world. The emphasis very much in the lower denominations was on copper plated material and the investment was very much focused in that particular area. We were anticipating that we would get a very significant share of that particular market in the light of our track record and in light of the kit that we had invested in.

  165. Are you allowing the team who made those estimates to continue to estimate the amount of new business that you might get from other aspiring countries?
  166. (Mr Sheehan) My philosophy in the context of markets and financial achievements is one of caution and I have applied that caution within the Mint. I can tell you that we have had difficulties over the last few years, which is very clear, but I can tell you that in the first six months of this year we are more than achieving our target position.

  167. Was the 20 per cent incautious?
  168. (Mr Sheehan) It is so simple in hindsight to say it was ambitious. Based on the facts at the time and the information that the people had it was a challenging target.

  169. Do you think that there was any political decision among the other countries who were joining the euro to exclude the Royal Mint from part of the work that you were aiming for?
  170. (Mr Sheehan) That has not been a proposition that has been made to me.

  171. So it was just done on quality, price and ability to deliver?
  172. (Mr Sheehan) In my view.

  173. Can I move you on to the theft? Paragraph 32 says that 1,284 notes were missing. It seems a curious number of notes to disappear. Do you think that these were being stolen in dribs and drabs over a period of time rather than just one lifting of a chunk of money?
  174. (Mr Sheehan) That is certainly a possibility but I genuinely cannot tell you that one way or the other.

  175. Is the police investigation ongoing?
  176. (Mr Sheehan) The external police investigation is still ongoing, yes.

  177. Are you able to say anything about the previous theft of £5,000? Is an investigation still going on into that?
  178. (Mr Sheehan) No. That has been concluded. The view of the MoD police at the time that the most likely event was that there was a theft and that has not been pursued after that event.

  179. Do you know of any further thefts?
  180. (Mr Sheehan) I can tell you that there are other issues. I have alluded to some of them already. We talked about the coin. There is one other particular issue related to bank notes which occurred at about the same time where there was an MoD police investigation. This was linked to bank notes and coin. The conclusion of the MoD police at the time was that they could not conclude whether this was a theft or whether there was a lack of procedural control. The issue for me, and this is something I identified fairly early on in the Mint, is that we have to address the issues of procedural control and stock control. That is a key focus for us.

    Angela Eagle

  181. In 1997/1998 the then management team got £25 million to restructure the business, did they not, and they spent it on increasing capacity at a time when that was perhaps something to do with the euros, from 18,000 tonnes to 27,000 tonnes. That is a big increase. Why so large?
  182. (Mr Sheehan) This is a very capital intensive industry and if you are going to invest it costs a lot of money. Of the£25 million £9 million was associated clearly with plant refurbishment as opposed to capacity expansion and £16 million was associated with expansion and that was clearly identified as a market opportunity, particularly with the euro, but also with the changes in the market place. This is a cyclical industry. The demand does move year on year and can vary considerably.

  183. Let me just stop you there. Twenty five million was spent in 1997/1998 to significantly increase the capacity. You have now come back and asked for£12 million to reduce it.
  184. (Mr Sheehan) We are not currently reducing capacity. The decision to reduce capacity from a 20-shift operation to a 15-shift operation was made during 2001 and that was completed by the end of the calendar year 2001.

  185. You are reducing capacity by getting rid of between 200 and 220 people, are you not?
  186. (Mr Sheehan) I am hoping to improve productivity considerably. I am hoping to attract more market share by being more competitive.

  187. Let me take you through this, Mr Sheehan. The Government gave you £25 million to restructure, not you personally but the Mint, in 1997/1998. Capacity was vastly increased but he cost base was vastly increased, and now we are having to give you £12 million so that you can reduce capacity.
  188. (Mr Sheehan) The situation we have at the moment in terms of the market and in terms of our competitive position is very clear. We have to restructure. We have to reduce our cost base. We have to address the fundamentals within the business and the market now compared to three or four years ago is very different. We have to face up to this.

  189. Why was this not anticipated when the 25 million was given to you in 1997/8?
  190. (Mr Sheehan) Because I believe the market fundamentals then were different. There was the opportunity with the euro. There were clear opportunity in terms of the coinage orders during that period and there was a move to plating products. Not all of that has come to fruition but we are well set for the future.

  191. The euro opportunity was totally wasted. Winning five per cent when you had hoped to win 20 of the largest recoinage that has happened for many a long year is not really a very good performance, is it?
  192. (Mr Sheehan) It is not a good performance and everybody in the Mint who was involved accepts it is not a good performance. We have learned our lessons. We have learned very clearly that we have to achieve the quality standards in much shorter timescales. It is a very big lesson and we have learned it.

  193. You completely missed the boat on the euro, did you not, with all that extra investment?
  194. (Mr Sheehan) We did not achieve the market share that we anticipated.

  195. I would say you completely missed the boat. There was a big wasted opportunity there, was there not? In other words, that restructuring of money was effectively wasted.
  196. (Mr Sheehan) In the context of kit, we have some of the best kit in the world. We do have some real opportunities for the future. We are going through this restructuring. We are very much on course in that restructuring. In fact, we are further ahead than we anticipated at this stage in the year. I believe we are well set for the future. The key focus now is upon improved flexibility in working practices and meeting customer service standards.

  197. All these figures are in the report. With this extra 25 million -- and perhaps there was a misreading of the world situation -- you ended up with a five per cent increase in turnover and a 15 per cent increase in the cost base. Part of what you are now doing with the 12 million that you have asked the Treasury for is to reduce your cost base, is it not?
  198. (Mr Sheehan) To reduce our cost base, but with an expectation ----

  199. You used the 25 million to put it up.
  200. (Mr Sheehan) To reduce our cost base in terms of manning levels, in terms of fixed costs in other areas, but with a clear focus on achieving extra volume and extra market share by having that much better cost base.

  201. In paragraph 22, productivity per employee, with your £25 million of money to invest in 1997, fell by 16 per cent. How can you invest and have productivity fall like that?
  202. (Mr Sheehan) In the early years, we saw a very significant increase in productivity of 27 per cent on a tonnes per man year basis. The market then changed considerably, as I have tried to describe, and the decision was made not to take the action in terms of the employment levels. Post the competitive bench marking exercise, it was very clear to me that we had to take those decisions.

  203. How would you look at it, as somebody who was perhaps in private banking wondering whether to invest an amount of money to help a company invest, if their previous record was to squander £25 million of restructuring money in the way the Mint has, when they came back to ask for another 12 million?
  204. (Mr Sheehan) I think I would look at the overall picture in terms of profitability over the period. I think I would try to understand the market dynamics which had caused this particular problem and I would be questioning the management team very thoroughly on what their strategy is to get out of the problem.

  205. What has happened to the management team that made this series of disastrous investment decisions in the mid-1990s? Are they all still working at the Mint?
  206. (Mr Sheehan) I have restructured the executive team to clarify accountability, which I believe is a problem. One position has been removed so we have reduced the numbers by one. That has given me the opportunity to focus the key executives in terms of accountability so there is no ambiguity in their job. This is a key priority for me, to make people clearly accountable for performance in the Mint.

  207. That is admirable but it does not actually answer my question, with all due respect. The group of individuals who made these disastrous investment decisions and completely failed to deliver the euro business as they themselves presumably had anticipated they would: are they all still in your management team?
  208. (Mr Sheehan) The director of circulating coin production has been in his position for two and a half years. That was after the event. The person prior to that, I believe, retired. The sales director has been in position since 1996. The key job which was director of circulating coin production -- the person has been changed two and a half years ago.

  209. You are happy that the people who made these decisions have been properly called to account for them and they are now not in a position where they can make a series of similar disastrous decisions with public money?
  210. (Mr Sheehan) I am very happy that they understand the circumstances surrounding the decision making and the problems that we had. I am very happy and clear that they are now focused and accountable for delivering to ensure that we achieve what we need to achieve. I can tell you again that we are, in the first six months of this year, very much on line.

  211. I note from the report that, because of the over-capacity created by this huge investment you made in 1997/8, you have been able to stockpile circulating UK coins. You now have 240 million pieces extra. That is 34 per cent more than you used to store. Is that correct?
  212. (Mr Sheehan) It was correct at the time but I am not a great believer in holding high stocks.

  213. Is that wise, given your experience with bank notes?
  214. (Mr Sheehan) I think I tried to demonstrate that our controls in the coin area are very effective. I accept the problems with bank notes. I am not a great believer of holding high stocks in this particular area. In fact, the stocks have come down progressively and, as of yesterday, they are now running at 594 million which is significantly lower than the end of the year number.

  215. I would like a simple answer to this final question on Crown immunity: would you personally be happy if Crown immunity was lifted from the Royal Mint tomorrow?
  216. (Mr Sheehan) The issue of crown immunity is not an issue for me at all.

  217. I am asking your opinion. Would you personally be happy if Crown immunity were lifted from the establishment that you are now in control of tomorrow?
  218. (Mr Sheehan) If that is a policy decision by the government, I have no problem with that policy decision.

    Jon Trickett

  219. Given the fact that there is a possibility we might go into the euro, is it possible that we are getting our stock levels to a level where some of the coinage that you have minted will never be used?
  220. (Mr Sheehan) The plan that we have clearly suggests a requirement for current UK coin over a period of time during the production of the euro if that happens, so there is no chance of that at all.

  221. Is there a possibility that you continue to mint sterling and continue to have historically high stock levels and at some point or another we will get into a position where some of the cash which you are holding would not be used, should we go into the euro? Is that something which you have considered?
  222. (Mr Sheehan) We have considered that and plans are designed to minimise that possibility.

  223. Is it not the case that you are running production levels at a higher level than strictly necessary, given the fact that stock levels have risen, and in a way your bottom line is artificially improved by the fact that you put money into stock rather than reducing production to keep stock at normal levels?
  224. (Mr Sheehan) The stock levels for the end of this financial year will be lower than they were at the end of the last financial year.

  225. I am using the phrase "historic levels" and the reason why is that, like you, I have worked in the private sector and I know that many businesses will look very carefully at work in progress and stock levels in order to ensure that the bottom line figure, the profit or loss level, is not quite as bad as it might otherwise be. The fact of the matter is your operation -- perhaps not you individually -- has continued to produce sterling at a higher level than is actually strictly necessary according to historic levels, I think, in order to show less of a loss than would otherwise have been the case. That would be normal business practice, would it not, in the private sector, to do that kind of thing?
  226. (Mr Sheehan) You come from the private sector, like me, and you know that it can be unhealthy to hold too high stocks. The areas of stocks that we have are in raw materials -- that is metal and scrap particularly -- and in coin. We are addressing both those issues and by the end of this year the raw material stocks will be significantly lower than the start of the year, as will the UK coin stocks.

  227. I am going to assume that you did not answer my question because you chose not to answer it. My assertion that businesses in a position which are in trouble, as you are or have been until the last few months, deliberately look at stock and work in progress levels to assist them with disguising the true state of the business. I assume that you did not answer that question because that is in fact true.
  228. (Mr Sheehan) I thought I had answered the question in the context of my objective, which is to reduce stock levels.

  229. That is not what I am asking you. I will move on. I think people round the table can see that you are not addressing the question which I am putting to you. I want to move away from stock and ask about the state monopoly which you have. You are a monopoly supplier at the moment, partly because the Treasury makes you a monopoly supplier and partly because you dismissed your contractors. We have had a note from Birmingham making various, fairly interesting statements. Before I ask you about that, I want to understand the euro. Paragraph 16 refers to the European procurement roles. Are you really proposing that the government and this committee might endorse the proposition that you should continue to have a monopoly, given the way that you have performed as a business in the last year or two?
  230. (Mr Sheehan) This is very much again a policy decision. Mints through Europe have a similar relationship with their government and have that under consideration but if the Treasury require me to produce the coin of the realm and have a monopoly in that that is their decision. It is very much a policy decision.

  231. European procurement rules would allow you to operate a monopoly if the Treasury determined?
  232.  

     

     

    (Mr Sheehan) In terms of European procurement rules, there is a questionable debate about whether they apply to coinage. ( Note by witness: The manufacture and coinage is a state function of the Crown, and the Royal Mint is the particular emanation of the Crown responsible for performing that function. Although an agreement exists between the Mint and the Treasury (as the Department with overall responsibility for the economy and financial affairs) as to the arrangements for coinage production, the manufacture and issue remains a Crown activity, which is effectively performed by the Crown itself.)

  233. It is a questionable situation in law. When you were asked a question earlier about the issue of sterling, transferring into the euro, you said you were capable of producing all the coinage. I do not know how many coins are in circulation at any one time in the UK but if we move from sterling to the euro clearly that is going to be a huge great peak of activity. You said yes, you could produce all the coins but then you added a conditional clause and I wrote it down. You said, "Depending on the amount of coinage and the time within which we are required to produce the euro." Are you really proposing that you should have the monopoly supply in relation to the introduction of the euro into the UK, should that happen?
  234. (Mr Sheehan) Again, this is very much a policy decision. I have plans in place, dependent upon the volume requirements and the timescale which would meet the Treasury requirements. Again, it is subject to policy.

  235. I want to move on slightly. Given the fact that you have lost money in producing coins, both sterling and the euro, is it not the case that the British taxpayer has subsidised the euro which has been in circulation in the rest of Europe? What you are doing by announcing a loss means the taxpayer is subsidising the euro which is in circulation elsewhere in Europe.
  236. (Mr Sheehan) We have a very limited euro market, as you know.

  237. Five per cent of all coins, and you made a loss on that, did you not?
  238. (Mr Sheehan) We competed actively for that market. It was a competitive tender arrangement and we did not achieve the profitability that we anticipated.

  239. You lost money. The fact of the matter is that that bill is now being picked up by the taxpayer. While some of us are sceptical about going into the euro or not, at least we will have a choice. What the Mint has done effectively is ensure that the British taxpayer subsidises European use of the euro which we ourselves have not yet agreed to go into. Is that not the case?
  240. (Mr Sheehan) The situation with the Mint is that, as you know, we are an agency. If we have problems in terms of profitability, we have a facility for borrowing money that we pay back at a commercial rate. That is not an ongoing situation and hence the action that I have announced that has to take place to correct the situation.

  241. I am going to try to take you on to productivity because I think there is some deliberate mis-wording in the report. I want to ask you about that in a second or two. On the question of the euro, which I believe we are subsidising, frankly, because of the incompetence of your management, probably before you arrived, I want to see whether you have any further reflections in relation to the point I am making and whether you can actually identify whether the losses which were incurred fell more heavily upon the euro than they did on sterling. In other words, the unit costs of production relative to the sale price which you were selling the service at, what the differential was, and whether the losses were more incurred by euro production or more by sterling production.
  242. (Mr Sheehan) I have to try and split the two markets. In the case of the coin contract, we have what I consider to be a challenging contract.

  243. Is that for the euro or for sterling?
  244. (Mr Sheehan) This is for sterling. It should become more and more challenging over the period. In fact, if you analyse it without adjusting for volume, the cost per unit this year compared to 1993/94 is about 70 per cent, so it is that much lower. In the case of the euro, this was very much a competitive market where other suppliers, blank producers like us, coin producers like us, competed. It was a very healthy, competitive market. Unfortunately, we only achieved five per cent.

  245. The question I am asking is, in terms of the bottom line figure of £6 million or £7 million, whatever you actually lost, was that loss incurred by the euro or was it mostly incurred by failing to meet the prices which you had sold to the Treasury -- if you like, the sterling?
  246. (Mr Sheehan) In the context of the overall sales turnover in overseas coin, the euro was a very small percentage. The issues were of an international nature in terms of competition, not just the euro situation.

  247. You are not going to answer my question. I think I have asked you three times. Are you able to find the amount of money that was lost in producing the euro?
  248. (Mr Sheehan) Our plans are very clear: to recover our profitability and get back on course.

  249. We are talking about accounts which you have produced late, by the way, which show a loss and I think we are entitled to ask you where was that loss incurred in terms of your productive activities. One of the things you do is produce euros which you bid against other producers elsewhere. You won five per cent. I want to know how much you lost on that contract.
  250. (Mr Sheehan) The losses were incurred primarily in the overseas markets and I would not differentiate in this forum between the euro market and other international markets.

  251. The British taxpayer, broadly speaking, has been subsidising coin production in the euro and in other coins as well as a result of the losses which were incurred?
  252. (Mr Sheehan) The current market situation is very clear. There is over-capacity. It is a flat market and people have to compete in that flat market. The dynamics are such that there is less volume available to compete for and the margins, the selling prices, are very tight. The situation we have now is that we have to compete in these markets. If we did not compete and we did not achieve the volumes from international markets, the Mint would be publishing worse profitability than it is now.

  253. Is it right that the British taxpayer should subsidise you for lost leaders in foreign currency, taking work from the private sector who would not receive any subsidy from anywhere? Is that morally correct and is it vires? Are you within your legal powers to do that?
  254. (Mr Sheehan) The British taxpayer is not subsidising us. I would reiterate if we did not compete in the international market and achieve volumes then we would be in a worse situation. The actions that we are taking are clearly designed to correct the profitability problem.

  255. The Birmingham Mint say that their unit costs or the price at which they would sell to the Treasury, presumably, is less than you are selling at. Is that the case?
  256. (Mr Sheehan) I have no idea.

  257. Why not?
  258. (Mr Sheehan) I do not know what their unit costs are.

  259. Until quite recently, they were your subcontractors, were they not?
  260. (Mr Sheehan) We are not party to their unit costs.

  261. I said the sale price to you.
  262. (Mr Sheehan) You asked me about unit costs.

  263. No. I corrected myself. What I said was the price at which they are selling to you. Is that higher or lower than your costs of production?
  264. (Mr Sheehan) This is a totally different market in different products. We are talking about an arrangement that we had with the Birmingham Mint in overseas markets, not for UK coin, and they are very different products.

  265. Let me just repeat the question. The Birmingham Mint have sent a note to all Members of this Committee asserting that they can provide coin cheaper than you are, but they have been excluded because you have used your monopoly supplier position. Is that statement correct?
  266. (Mr Sheehan) I cannot comment upon their unit costs, as I have indicated, because I do not know their unit costs.

  267. I am not asking you about unit costs now, am I?
  268. (Mr Sheehan) We have a challenging contract with the Treasury which has continued to decrease on a year on year basis. Ignoring volume, it is about 70 per cent of what it was in 1993/94.

  269. Our exchanges are quite unsatisfactory because you have addressed very few of the points I have made. Although I am becoming impatient with this exchange, I want to try one further line of questioning. In paragraph 12, we learn that a significant amount of money, £25 million, has been spent on re-equipping the capital plant in the Mint. It says in the last sentence there that the productivity of the Mint's employees had risen by 27 per cent. Do you stand by that statement?
  270. (Mr Sheehan) In terms of the measure of productivity that we had, which is the amount of production divided by the number of employees, yes, I do.

  271. Why did staff costs go up by 28 per cent and turnover only by five per cent? It strikes me that if employees' productivity is higher by 27 per cent, there would certainly be an increase in turnover beyond the 28 per cent increase in staff costs, since the sales figure is directly related to the productivity of the employee costs. How can I make sense of this table three?
  272. (Mr Sheehan) The situation we have is that there was a 27 per cent increase in productivity over a period where we increased our shift patterns from 15 to 20 shifts and increased volumes. The increased volume more than offset the increased numbers. Then, the situation changed and by the end of last year we had to reduce our shift patterns because of the nature of the market. Unfortunately, we did not reduce the numbers accordingly.

  273. Table three is the period of time which paragraph 12 is referring to, broadly speaking. Turnover increased by five per cent but staff costs increased by 28 per cent. It is impossible to reconcile the statement that that table three is not out. How is it possible to reconcile the statement that productivity increased by 27 per cent; yet turnover only increased by five per cent and staff costs have increased by 28 per cent?
  274. (Mr Sheehan) Can I refer you to the dates which I think are particularly important? The 27 per cent increase referred to in paragraph 12 is the increase from 18,000 tonnes in 1996/97 to 1999/00 and that is where the increase in productivity occurred that is not directly related to staff costs. Table three refers to the period 1996/97 to 2000/01.

  275. That is simply not true. The sentence says that the productivity increased by 27 per cent from 1996 to 2001. That is the last clause in the final sentence of paragraph 12.
  276. (Mr Sheehan) The volume went up by some 50 per cent from 18,000 to 27,000 tonnes so the 50 per cent increase offset the increased staff levels.

  277. The volume of production increased by 27 per cent but the sale value increased by five per cent so you were producing 27 per cent more coinage but only getting five per cent more income.
  278. (Mr Sheehan) That was the nature of the market we had in that period. Hence the need to take the action we have taken.

    Mr Williams

  279. You work in the steel industry which is highly competitive and yet you do not seem to know the profitability of individual markets or individual contracts.
  280. (Mr Sheehan) I do not think it is appropriate that we discuss specific contracts. The euro contracts were many and varied over the period and I do not think it is appropriate to select those or differentiate between those and other international contracts throughout the world.

    Mr Williams: In that case, you can put in a confidential note to us. We want to know clearly whether there is cross-subsidy between the British market and the overseas market. I will expect the National Audit Office to look over those figures with you to make sure that they are properly presented. I want them within the next two weeks.

    Mr Howarth

  281. You have been very gamely defending things that happened before you had any responsibility at the Mint but would it not be fair to say, if you are really going to be honest about it, that the period probably since the middle of the 1990s could be characterised in management terms as being sluggish, short sighted and complacent?
  282. (Mr Sheehan) I can perhaps modify the words slightly, if I may, in that they were certainly ambitious in terms of their investment plans.

  283. The use of the word "ambitious" in conjunction with the three adjectives I have just used is not modifying it; it is completely disagreeing with it.
  284. (Mr Sheehan) Ambitious in the sense that they clearly identify the market opportunities and can see that in future years those market opportunities could well increase outside Europe and were prepared to invest heavily to achieve good returns. The events of circumstance and the fact that we did not achieve the levels of market share that we anticipated and the fact that the international market has deteriorated far more significantly over the period than they anticipated, those two factors together, have to a large extent caused the problems.

  285. Let us examine the question of sluggishness a little more. You just had a very interesting exchange on the question of productivity and, to be honest, at the end of that exchange I am more confused than I was at the beginning. How would you define productivity?
  286. (Mr Sheehan) Productivity classically is defined in some form as tonnes per man year or tonnes per man hour or some version like that, typically.

  287. Using that typical measure, how would you illustrate the levels of productivity at the Mint over, say, a period since 1995?
  288. (Mr Sheehan) I can illustrate it by saying that levels of productivity went up from 1996/97 to 2000/01 by 27 per cent against a backcloth of significantly high volume sold and some increase in manning levels and then deteriorated because the market itself, the volume sold in the subsequent year, reduced significantly. The numbers did not reduce in line with those reductions in volume. In my personal view, that type of measure is not necessarily the correct measure for the Mint because you have to look at this business as a manufacturing business in terms of cost, not purely in terms of productivity.

  289. In the period you refer to you had basically more people producing less.
  290. (Mr Sheehan) Yes, in the last year.

  291. Clearly, there is a record in the quite recent past of a decline in actual productivity. You talk about the way you intend to remedy that. Let us move on to the question of being short sighted. It seems to me that what has happened over a period of time is that you invested on the assumption that you were going to get a share of the euro market that failed to materialise. You used the word "ambitious" to describe that but surely there must be some prudential part of decision making and investments like that? Surely it must have been foreseeable that there was no absolute guarantee that you were going to get that share of the market and yet the levels of investment are quite significant. Again, would you not agree that, rather than ambitious, perhaps the best way to describe it is short sighted?
  292. (Mr Sheehan) No. Bearing in mind the circumstances at the time and the market opportunities that prevailed, I still believe that the decision to invest was absolutely the right decision. The problem was that, because of the circumstances that I described, we did not get the market here that we anticipated.

  293. How can it be right if that was the outcome?
  294. (Mr Sheehan) Because there were other factors that were not taken into account at the time in terms of the difficulty in producing the tolerances of these coins and the significant investment that other producers, particularly private sector producers, had put in which caused the significant extra capacity which had to be utilised.

  295. You are from the private sector and you know that in those sorts of circumstances you have not only to look at what the potential market is; you have to look at what the competition in the market is, your capacity as a business not only to produce but to produce to the required standard. All of those factors must come into it and yet it seems to me none of those factors was properly taken account of and yet you still believe it was an ambitious thing to do. It seems to me to have been short sighted and perhaps negligent in management terms.
  296. (Mr Sheehan) The Mint at the time very clearly had an excellent track record in the international market in terms of its sales. It had a very good reputation in the international market. The investment was designed to link with that, very clearly, in terms of what it could achieve.

  297. I am beginning to wonder whether we are talking a different language here. However, I will move on. On the other issue of complacency, if you look at the health and safety problem, particularly the tragic death, and the question of the losses or thefts, it seems to me they both illustrate a sense of complacency. This is the way we have always done things; it seems to work; there is not a problem here and something terrible or very unfortunate happens in the case of the thefts involved. Clearly, there were failures in both cases in procedures which you have hopefully put right. Again, we are talking about during that period of time. Does that not indicate there was a high level of complacency? What was revealing was that you said a few moments ago that the Mint had a very good track record. It has been very successful over a long period of time. Is there a sense in which, because of that, people were resting on their laurels and things started to go wrong?
  298. (Mr Sheehan) I do not accept that in terms of our accident performance. If we go back to 1993/94 compared to last year, our loss and accident rate was only 75 per cent of that on a comparable basis, which is a significant improvement. Generally, the accident performance within the Mint is in line with that of the manufacturing industry. We do have a strong focus. I would like to focus on what we are doing to correct the situation generally. That is important to me because we have learned some lessons and it is important that we understand the lessons and learn from them. Some of the things that we are doing and have done are particularly addressing your concerns, because we have set up a very strong risk management committee. We have given them very clear terms of reference which are very effective, in my view. We have addressed the health and safety issues in terms of accountability. We now have restructured the health and safety team. We have a senior manager specifically responsible for that area, a manager who is totally committed to this particular area. We have reviewed the internal accounting systems which address some of the stock issues, of which you are very aware, and I am comfortable that we are well in line there with. Of the 70 recommendations in the Grant Thornton report, we have now completed 47 and we are well on line to meeting the requirements for the end of this year. We have addressed some of the other issues in the Grant Thornton report in terms of the audit committee, which is obviously very important as well. The key issue is that we have a focused senior management team and they are clearly accountable. I can measure them clearly on their performance over the next period. If I have any problems, I will address those problems.

  299. To return to the question of productivity and the performance of the workforce, you talk about having introduced more flexibility. Presumably that involves things like multi-skilling and so on. What I find quite staggering in that regard is that there is quite a big manufacturing sector in my own constituency and many, many years ago I worked in the manufacturing sector. Ten years ago or 15 years ago even in some parts of the industries in my area, they were bringing these sorts of things in anyway. Do you not think you have been very slow to bring in these modern ways of managing manufacturing plants?
  300. (Mr Sheehan) The principles of team working and flexibility started in the Mint about four years ago. We have made good progress over that period. I am looking to go further in terms of integration of craft teams into the workforce, in terms of more innovative working arrangements, annual hours, for example, and these are particularly important because these are designed to address the cyclicality of the business in which we work, both in circulating coin and collector coin. The key focus in this business has to be customer service. We have to have the flexibility of the workforce to achieve that. It is not just the numbers that we are taking out; it is the complete addressing of the working practices and some other difficult decisions as well. We have imposed a pay freeze this year. We are taking away some of the other benefits which are inappropriate for the manufacturing industry. This has been difficult for us over the last six to nine months, but we are making good progress.

  301. We are going to have to beg to differ about what all these mean because it has been a sluggish, short sighted and complacent business. However, it does seem that no heads have rolled. Mistakes have been made; wrong investment decisions have been made. Also, procedures have been inadequate and yet, when you are asked as to whether anybody has left, one person may have taken early retirement no doubt with a fairly generous package to go with it. Do you not think it would have been a bitter had you been a bit more ruthless with some of the people that you inherited?
  302. (Mr Sheehan) Perhaps I have not been as clear as I should have been in terms of the changes that we have made. We are taking 220 people out of the system. We are in advance of our plans there. This clearly addresses the issues from top to bottom without question. If I take the area of concern of stock control, the bank note and packaging area, we now have five new managers over the last six to nine months in key management positions, three line managers, one in planning and despatch and another manager in the area of warehousing. This is fairly radical action in this area. It is a much younger management team. It is a far more focused and accountable management team and I expect them to deliver.

    Mr Jenkins

  303. You know that the rigours of the market place are not applicable in some sectors. All we have is this committee or committees like ours to ensure that rigours are imposed upon some of the public sector. We have to ask questions as to whether we are getting value for money int hat sector. Towards the end, you are starting, I feel, to recognise the greater need to hold your hands up and say, "Yes, we were wrong. We took our eye off the ball. We were lousy." We have situations where the report says, in the finance department, the safe containing such items as blank cheques and bank receipts and the system password was left open during working hours. This is a sloppiness that would not be tolerated in most privately run companies. Companies that do not get their act together go out of business. We have to ask ourselves why should you remain in business. From some of the answers you have given, my reply would be you have no right to remain in business because I do not think you were briefed to come before this committee as well as you should have been. It was fairly obvious before you came to this committee that money that went missing from the safe would be enquired about. When Mr Rendel asked you about the £40,000, when it was missing, and did you send for more, you said, "I do not know." Why was the money there for so long before it was needed? "I do not know." When was the last security audit conducted? "I do not know." I suggest you should have known. Next time, maybe you will take the time to prepare yourself and get that team behind you, who are supposed to be briefing you, in place. When your neck is on the line, you should ensure that somebody else takes the stick as well. I am sure you will after this point. I have worked in industry and I understand what productivity is about. Productivity is a term we use to assess the ratio between output and the inputs used to generate that output. You can have a reduced output but as long as the input falls faster your productivity is going up, as you well appreciate. Most countries in Europe have their own means to turn out the euro. What is the percentage of countries in the euro zone that do not have their own mint?
  304. (Mr Sheehan) the only one I am aware of is Luxembourg. Holland provides them with their coins. The issue we have is not necessarily that they do not have a mint but they do not have the capacity to produce the full output. Hence, there was the reliance upon other producers. A lot of mints do not have blank production facilities, so they buy in blanks to produce the coin. ( Note by witness: Ref answer to Q 69.)

  305. Is it the blanks that you supply?
  306. (Mr Sheehan) Blanks and, to some extent, coins to meet the requirements of a particular country.

  307. We were totally unaware of what requirement was laid down for a coin because the Mint has been making coins for a while around the world and they know what tolerances are required. Why were you taken so unaware with the actual tolerances?
  308. (Mr Sheehan) The tolerance requirements were quite strict for most countries. There was some variation from country to country but mostly the tolerances were very strict and more difficult than we anticipated to produce. That was a major problem.

  309. That is amazing. Most countries will have their own mint constantly?
  310. (Mr Sheehan) It depends on the demand that is required. The situation we have now is that some countries invested heavily in new coining presses to meet the demands and now those coining presses are redundant. This is a factor within the market place itself.

  311. We have a breakdown between our own production and export production. Jon Trickett pressed you on the percentage of your profit or loss that comes from the export side. I understand you do not make a loss on the Treasury side, the Treasury contract. Is that true?
  312. (Mr Sheehan) We do not disclose details of profit and loss in any particular market, certainly not in an open forum.

  313. I do not mind you making a loss if we got the right price and the Treasury would make that profit and that is passed on back to the taxpayers. In this scenario, profit and loss is merely a figure that we use to evaluate against other suppliers, is it not?
  314. (Mr Sheehan) As you said, you have been in the private sector. I am sure you are very clear that on occasions, particularly in difficult markets, the strategy that you employ is to achieve a contribution to fixed costs, not necessarily a profit. That can be a short to medium term goal and that is a better solution for a particular business than not making the product in totality, because the profitability is better overall by doing that. That is not a long term solution. We have to solve the problem in terms of the cost structure.

  315. I am well aware of marginal cost price and how to implement it. When I quickly made a decision to cut those products, I had to search round for a product that would pay its full price. We did survive on marginal cost pricing. Can you tell me why the Treasury should deal with you if they can get the product from another supplier, cheaper?
  316. (Mr Sheehan) The Treasury have given us a challenging contract which has reduced progressively over the years. I believe we supply them with a very good service and a very good quality of product. It is very much a policy decision and that policy decision is applicable throughout Europe. I believe they get a good deal.

  317. The Treasury actually does give you a subsidy to some degree because it pays via the contract to supply coins. If the price is higher than what they could achieve in the open market, that is a subsidy to your production and that production could be used to undercut other suppliers in the export field. You did indicate that the price in the world market is so competitive that we have to use that subsidy. We have to do marginal cost pricing and we have to pare it to the bone. If I can buy those coins in the world market cheaper than you can supply at home, why do I not buy them on the world market and save money?
  318. (Mr Sheehan) I believe we supply the Treasury with an excellent service in terms of quality and product. It is a challenging contract and it has continued to decrease generally, year on year.

  319. Have you any intention of introducing some sort of performance related pay?
  320. (Mr Sheehan) I am a believer in incentivising the workforce. In one particular area where we had to address that recently, that is starting to show some success. I have had discussions with the non-executive chairmen on this subject and I believe it would be appropriate. There is a profit sharing scheme at the moment but obviously when you are not making money you do not pay out on a profit share scheme.

  321. That is the incentive to start making money so you get the bonus.
  322. (Mr Sheehan) I concur.

  323. You had £594 million in coin stock.
  324. (Mr Sheehan) 594 million coins.

  325. It is that value that we keep referring to, high value product. You make tokens like any other token producer. I suggest that maybe you should put a whole through the middle of some of those tokens. You might have adequate coin to pay some of the management for their performance over the last few years. Would I be wrong?
  326. (Mr Sheehan) I find it difficult to answer that question, to be quite honest.

    Mr Williams

  327. Does the management have performance pay?
  328. (Mr Sheehan) They are part of the profit share scheme.

  329. Have they had any benefits recently?
  330. (Mr Sheehan) Absolutely none.

  331. Incentivising, a wage freeze and the removal of benefits sound a rather original way of incentivising. Were these negotiated with the workforce?
  332. (Mr Sheehan) In the context of all the changes that took place, there was a list of changes in terms of working practices that we needed to achieve in terms of manning reductions, in terms of the pay pause, in terms of the removal of some of these benefits. We had a consultation period of 90 days from the end of March to the end of June before we enacted, so there was full consultation on the subject. I hope that the majority of the workforce feel it was a necessity, not a choice, in that sense.

  333. Does 90 days' consultation mean 90 days of just letting them talk or did you adopt any of the changes they suggested?
  334. (Mr Sheehan) I think during that period I gave about 24 presentations. I think there were about 36 in total. There was a very animated discussion after almost all of those presentations and we certainly took on board some of their points.

  335. Do you expect any further redundancies in the foreseeable future Are you anticipating any?
  336. (Mr Sheehan) If we achieve what we can achieve -- I do believe we have a good workforce -- and achieve the productivity levels and the service levels, then at this stage I believe we have done enough. What I cannot guarantee, and I do not think anyone can guarantee in this type of market, is the state of the market and the trends in the market. E have to be able to react quickly to positives and negatives in the market place. Hence the need for a highly flexible workforce.

  337. Following on some of the questions Angela asked, your investment as very substantial. Were you buying, if that is an appropriate term in this industry, state of the art equipment?
  338. (Mr Sheehan) Yes, very much so.

  339. In that case, why is it that other countries did not have problems achieving the targets required by the euro and you did?
  340. (Mr Sheehan) Everybody had problems to a greater or lesser extent.

  341. But you seem to have had more because you lost more of the market.
  342. (Mr Sheehan) Yes, that is quite true.

  343. Did your predecessors choose the wrong machinery and equipment?
  344. (Mr Sheehan) This is fairly standard, state of the art machinery, so there was no fundamental difference between this and other players. Other players made different decisions.

  345. In that case, why could they get the tolerances with the same equipment or similar equipment that you could not?
  346. (Mr Sheehan) Everybody had issues in terms of achieving tolerance levels. We were slower than others and that is not acceptable.

  347. What made you slower?
  348. (Mr Sheehan) It is difficult for me to say because I was not there but I believe it was associated with us understanding very clearly the UK coin market and our ability to produce there and perhaps not understanding that the European coins were far more strict in their tolerance levels and more difficult to produce than the UK coin products.

  349. For people who are specialists in this field, that seems to be a rather substantial oversight, does it not?
  350. (Mr Sheehan) I would not have been happy at the time, I have to say.

  351. You do seem to be rather addicted to the relationship with your present auditors. There does not seem to be much evidence of your seeking alternatives. We have found in the past that such relationships can be over-cosy. Do you think that your way of appointing your internal auditor is adequate?
  352. (Mr Sheehan) We accept the points that Grant Thornton have made very clearly. Of the 47 actions that we have already taken, one is to agree through the Audit Committee to put the internal audit out to tender next year. The internal auditor, in my view, having looked at it from a purely manufacturing perspective, has done an excellent job. The mistakes that we have made together have been that we have not addressed necessarily some of the public sector issues that we should have addressed.

  353. Going back to the issue of Crown immunity, how far is this just a status quo situation that no one has ever sought to change because it has always been there? Has there been any assessment of a necessity for Crown immunity? If you cannot answer on the spur of the moment, let us have a document.
  354. (Mr Glicksman) I would be happy to do that. In general, the question of Crown immunity has been under review in the past and there have been steps to remove Crown immunity in a number of areas. I do not know in detail about this particular area of the health and safety legislation but I would be happy to put in a note for you.

  355. When you put in a note, will you also put in two notes, with a note to whoever is responsible that we have expressed our concern at the situation we find at the Mint and its workforce as a result of Crown immunity. We would hope to see it reviewed urgently.

(Mr Glicksman) Yes, I will do that.

Mr Williams: We look forward to your note. That is the end of the open session. I now have to ask everyone other than the committee and witnesses to leave.