GOVERNMENT RESPONSE TO THE TREASURY COMMITTEE'S
EIGHTH REPORT, SESSION 2000-01: THE ROYAL MINT
(a) We recommend that the Government consider
expanding the range of financial information published by the
Royal Mint in its annual report to Parliament, so that more detailed
information on the Mint's performance is provided in future (paragraph
The Government is looking at ways in which further
information of a non-confidential nature could be included in
the annual report. For instance, further information on the breakdown
of sales between circulating coin and collector coin, the Mint's
production performance, and on customer service performance will
be included (starting in the 2001/02 Annual Report). The publication
of detailed financial information segmenting costs and profits
for the different parts of the business would undoubtedly be helpful
to the Royal Mint's competitors and hence would not be in the
best interests of the Mint or the UK public as the Royal Mint's
shareholder. Only a small minority of mints and blank suppliers
around the world publish information of this kind, and they tend
to be those with whom the Royal Mint is not in strong competition.
(b) The Treasury's 1995 contract with the
Royal Mint for UK circulating coins had a direct effect on the
Mint's profitability, it would seem by design. Although the 2000
contract is acknowledged to be an improvement, from the Mint's
perspective, supplying UK circulating coins remains an unprofitable
activity. The arrangements for the supply of such coins also affect
the Mint's performance, with the Mint facing all of the risks
associated with variable demand. We would welcome steps which
would lead to the Mint sharing such risks with other parties (paragraph
The Mint's profitability on the UK coinage contract
depends not only on the contract price structure but also on the
Mint's production efficiency and on the extent to which the Mint's
fixed overhead costs are shared between UK and export production.
Under normal operating conditions the five-year contract for the
supply of circulating coin agreed with the Mint in 2000 is designed
to allow a reasonable rate of return based on the Mint management's
business plan. It was unprofitable in its first year due to unanticipated
production difficulties experienced by the Mint, as a result of
the heavy programme of change, rather than to the terms of the
coinage contract being too tough.
UK coins are issued to meet the level of demand from
the public. The level of demand varies and as the contract obliges
the Mint to meet demand the Mint is exposed to some risk. The
Government does not believe that the volatility of UK coin demand,
which has recently been significantly below average, has been
a cause of the Mint's recent financial performance.
Although the range of annual UK demand over the last
ten years has been between 722 million and 2,072 million coins
per year, the variation between actual and forecast demand over
this period has been 15 percent. Further action is underway to
improve the management of the risks the Mint faces. It is encouraging
to report that the banks have agreed in principle to commit themselves
to firm orders equivalent to 60-70 percent of their total coin
forecast for the year. The Government hopes that all parties will
continue to work together to ensure that the efficiency of coin
supply arrangements continues to improve.
(c) The Royal Mint's programme of change could
have been better managed in order to minimise its impact on the
organisation's financial performance (paragraph 13).
The impact of the change programme on the Mint's
financial performance was indeed greater than the Mint's management
expected. In retrospect, given the ambitious nature of the Mint's
change programme, a greater degree of disruption should have been
anticipated and taken account of in operational plans. However,
the Mint's circulating coin and blank production improved during
the second half of 2000/01, reflecting measures taken to overcome
the disruption arising from the change programme. The Mint is
now seeking to restore its efficiency to levels which enable it
to be truly competitive in a tough international market.
(d) We recommend that the Treasury re-assess
its policy of taking 100 per cent of the Royal Mint's annual profit
as a dividend payment, so that the Mint can better manage its
own investment strategy in future (paragraph 14).
The Treasury does not have a policy to take 100 per
cent of the Royal Mint's annual profit as dividend payment as
is clear from decisions between 1996/1997 and 1999/2000 to allow
the Mint to retain a substantial part of its profits for new capital
expenditure: the dividend payment to the Treasury was around 40
per cent of profit in 1996/97, 52 per cent of profit in 1997/98,
zero in 1998/99 and around 74 per cent of profit in 1999/2000.
It is also worth noting that over recent years the Mint has, unlike
other manufacturing businesses, had little or no gearing on its
balance sheet and has therefore not needed to make significant
payments on debt. The Treasury's dividend policy has therefore
not been as restrictive as the Committee implies.
The Government intends to review the Mint's dividend
payments and capital structure in light of the Mint's Corporate
Plan for 2001/02-2003/04. In doing so, it will ensure that the
Mint has the level of reserves required to operate a business
of this nature.
(e) We recommend that the Mint publish a regular
forward-looking business plan, based on its unpublished corporate
plans (paragraph 17).
The Mint's forward-looking business plans, as described
in the Mint's corporate plan, are commercially sensitive. Hence
the Corporate Plan is a commercially confidential, unpublished
document. However, in response to the Committee's request, the
Mint would be prepared to include in its Annual Report more information
on the non-confidential aspects of its Corporate Plan along the
lines which it normally provides to its employees on an annual
(f) The Royal Mint's financial performance
target does not appear to play an important role in assisting
the management of the organisation, or its oversight by the Treasury,
and nor does it provide outsiders with useful information about
the Mint's performance. We invite the Treasury's Shareholder Panel,
in its review of the Mint's targets, to come forward with a more
meaningful range of published financial targets (paragraph 19).
The Mint's financial target (to achieve a given rate
of return on capital employed) was set on an annual basis for
the past two years, as opposed to the more normal practice of
setting it for a several year period. This was owing to the operational
problems the Mint was experiencing. Whilst the targets set were
based on the Mint's Corporate Plan in each year, they were challenging
in view of the difficulties the Mint was seeking to overcome.
During this period the primary focus of the Mint's management
was to achieve the production performance targets they had set
Following the positive steps the Mint has made to
improve its performance, the Government, with the assistance of
the Royal Mint Shareholder Panel, has been reviewing the business
performance targets the Mint is set.
The Government intends to set the Mint an overall
medium term rate of return target. Set as an average to be achieved
over a period of several years, this target will represent a 'top-down'
view of the minimum the Mint can be expected to achieve, based
on the performance of comparable businesses in the private sector.
The Government will also set detailed annual 'bottom-up'
targets for the different parts of the business, based on the
key performance indicators identified in the Mint's Corporate
Plan each year. For 2001/02, these targets will include a target
for unit cost reduction on circulating coin and a target for profit
level and net profit margin on collector coin. These targets are
seen as the primary focus for measuring the Mint's performance.
The Government will also continue to set targets
each year for the Mint's customer service performance. These are
important not just for ensuring the Mint provides a satisfactory
service to the UK public, but also as a further measure of the
success of the Royal Mint business overall.
The Government is keen to make publicly available
whatever information it can on the Mint's performance. The targets
for the business's overall rate of return and for the Mint's customer
service can readily be published. However, for reasons of commercial
confidentiality the Mint's management believes it would not be
in the public interest to publish detailed business targets, and
the Mint's performance against these, derived from the Mint's
The Government intends to ensure that in future annual
financial targets are set as early as possible in the financial
year to which they apply.
(g) We recommend that the Royal Mint begin
work on developing customer service targets relating to those
areas of business not covered by current targets (paragraph 20).
The Government believes a strong focus on meeting
customer requirements is essential to the Mint's future success.
It is for this reason that the Government is setting the Mint
more demanding targets for meeting collector coin orders. However,
although the Committee is correct in pointing out that there is
no customer service target relating to overseas sales at present,
such a target would be difficult to set because of the varying
terms and conditions applied to overseas contracts, depending
on the wishes of the customer. The current customer service targets
were originally developed in line with Government policy to increase
service standards and transparency in the provision of services
to the UK public. Targets on the Mint's overseas business would
not be relevant to this and would provide useful information to
the Mint's competitors.
(h) We recommend that the Royal Mint's annual
report include a statement about the activities of the non-executive
directors (paragraph 24).
The work of the Royal Mint's non-executive directors
is an important part of the Royal Mint's corporate governance
framework. The Government has increased the number of non-executive
directors on the Royal Mint management board and, as the Committee's
report notes, improved the definition of their role in line with
best commercial practice. The role of Chairman of the Non-Executive
Directors has also been created. This role includes the functions
of chairing the Remuneration Committee and the Audit Committee,
and in the absence of the Deputy Master, chairing the Royal Mint
In response to the Committee's recommendation, future
Royal Mint Annual Reports will include more specific information
about the activities and responsibilities of non-executive directors,
for example relating to the Audit and Remuneration Committees.
(i) We are deeply sceptical about the Mint's
plans to produce, or buy-in and market, gifts and collectibles
only tangentially related to the Mint's core business. We are
not convinced that a state-owned enterprise should be competing
against the private sector in this way. The main justification
for the Mint's new venture appears to be a need to earn higher
profits in order to offset losses made on the UK circulating coins
contract and to compensate for declining traditional overseas
markets. We do not think that a state-owned Mint should be expanding
its product range beyond coins and medals in order to deal with
these problems (paragraph 26).
The Government does not share the Committee's scepticism
over the development of this new area of business for the Mint,
or agree with the Committee's view of the justification and rationale
for it. The Committee's comments here appear somewhat contradictory
given its wish to see the Mint become a "very commercial
organisation" (recommendation (k)).
The Government is keen to ensure that the Mint maximises
its value as a business. It is for this reason that the Mint has
been allowed to develop its collector coin and overseas circulating
coin businesses, both of which compete with the private sector.
The Government believes that the development of a quality non-coin
gifts and collectibles business, similarly competing with the
private sector, is a natural business development which should
create significant value for the Mint (and the UK public) and
enhance the Royal Mint brand. Allowing the business to develop
in this way is essential if it is to become a very commercial
organisation, and to attract high quality, commercially focused
management. Both the Mint's non-executive directors and the Royal
Mint shareholder panel strongly support this new venture as an
excellent opportunity to develop the business.
Performance of circulating coin has been disappointing
during the Mint's recent change programme. However, the Government
expects this business to return to profit. The Mint's collector
coin sales (including non-coin gifts and collectibles) will therefore
reinforce and not compensate for the performance of the Mint's
(j) We are not convinced that the Treasury's
attempt to divide its own shareholder and customer interests can
be made to work (paragraph 28).
The Government believes the division of the distinct
responsibilities of shareholder and customer within the Treasury
as a department is an important step forward in improving the
way decisions are made about the Mint.
Dividing the Treasury's responsibilities in this
way enables the more explicit identification of the Treasury's
different policy objectives. It also enables the objectives to
be identified and pursued by those areas of the Treasury where
the relevant expertise lies. For instance, the shareholder role
now rests with the Treasury team that deals with the Government's
shareholder responsibilities in relation to other state enterprises.
This should increase the degree of expertise brought to the shareholder
role and improve the management of state owned enterprises as
a whole. Finally, the division of responsibilities enables Ministers
to gain a more comprehensive view of the different objectives,
makes any trade-offs involved more apparent, and then enables
Ministers to make the decisions that balance these objectives
where they compete, as for instance they might on the UK coinage
(k) We agree with the Minister's aspiration
for the Mint to become "a very commercial organisation".
We welcome the Minister's assurance that the 2003-04 review of
the Mint's status would "fundamentally go through all the
options that could conceivably face the organisation". We
note that, in reply to questioning, she confirmed that this would
"routinely include the option of privatisation". There
is no question that the State should retain control over the design
and specification of its coinage and other issues of this sort.
Decisions about the status of the Royal Mint's manufacturing and
marketing capabilities, and its overseas work, should be made
on the basis of which arrangements maximise value to the UK economy.
We do not believe that the Royal Mint should be immune from fundamental
innovation, especially given its recent poor financial performance
(paragraphs 29 and 30).
The Government will keep all options open regarding
the future status of the Royal Mint. The next quinquennial review,
in 2003/04, will consider the options as well as any further reforms
that need to be made to the Mint and its governance. In any decision
it takes, the Government will look to ensure that value for money
is achieved for the UK public and that the cost efficient supply
of UK coinage requirements is protected.
In the meantime, the Government is committed to being
an effective shareholder of the Royal Mint, ensuring the business
is run as successfully and commercially as possible. In particular:
- the Government has created the shareholder panel
to enable the Treasury to act as a more commercially minded shareholder
and will continue to look to its advice;
- the structure of the Mint's management board
has been changed (as well as the definition of roles on it) to
be more in line with best commercial practice. The Treasury will
monitor the board's performance in particular through greater
contact with the non-executive directors;
- as the Committee discussed, the Mint is being
given wider commercial freedoms to enter into non-coin gifts and
collectibles markets. The Government will take a close interest
in this to ensure that the Mint is held accountable for its performance.