Select Committee on Treasury Third Special Report


APPENDIX

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 8).

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 11).

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 basis.

(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 themselves internally.

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 Corporate Plan.

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 management board.

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 other business.

(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 contract.

(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.


HM Treasury
August 2001


 
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