WEDNESDAY 23 OCTOBER 2002
Mr Ian Davidson
In the absence of the Chairman, Mr Alan Williams was called to the Chair
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 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)
(Mr Sheehan) Absolutely.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(Mr Sheehan) I cannot relate the 200 people to the capital investment, sir, because they are two separate issues.
(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 -----
(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.
(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.
(Mr Sheehan) It was left open during the day hours. It was obviously locked out of working hours.
(Mr Sheehan) The procedures were very clear, that the safe should not be left open.
(Mr Sheehan) The person in charge -----
(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.
(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.
(Mr Sheehan) This is all in the same area. I cannot defend the situation because the procedures were not being applied.
(Mr Sheehan) This was in a totally different part of the plant.
(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.
(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.
(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.
(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.
(Mr Sheehan) I think the focus was on coin and that was a mistake and we accept that.
Mr Williams: Rather belatedly.
(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.
(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.
(Mr Sheehan) The anticipation was that other countries would move to particularly copper plated material and to some extent nickel plated material.
(Mr Sheehan) It has happened to some extent but the market dynamics and the over-capacity have more than offset the benefits of that.
(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.
(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.
(Mr Sheehan) We had identified particular countries that were moving that way but not a specific contract.
(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.
(Mr Sheehan) The £25,000 disappeared. We had actually used £15,000 as part of the plan.
(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.
(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.
(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.
(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.
(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.
(Mr Sheehan) You are absolutely right.
(Mr Sheehan) I cannot comment on that. I can confirm that in a separate note if I may.
(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.
(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.
(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.
(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.
(Mr Sheehan) We immediately instituted the new procedures. We reviewed them when I was aware of it and we introduced those new procedures.
(Mr Sheehan) The internal audit section did not flag this up, to be quite honest.
(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.
(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 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.
(Mr Sheehan) Certainly.
(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.
(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.
(Mr Sheehan) I think it was open by default because of the nature of the work that was ongoing in that particular area.
(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.
(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.
(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.
(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 Sheehan) That is correct.
(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.
(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.
(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.
(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.
(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.
(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.
(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.
(Mr Sheehan) Or for euro blanks, ie, the unstruck coins.
(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.)
(Mr Sheehan) Or did not have the capacity to produce their full complement.
(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.
(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.
(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 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.
(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.
(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.
(Mr Sheehan) We do not believe so.
(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 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.
(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.
(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.
(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.
(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.
(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.
(Mr Sheehan) That has not been a proposition that has been made to me.
(Mr Sheehan) In my view.
(Mr Sheehan) That is certainly a possibility but I genuinely cannot tell you that one way or the other.
(Mr Sheehan) The external police investigation is still ongoing, yes.
(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.
(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.
(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.
(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.
(Mr Sheehan) I am hoping to improve productivity considerably. I am hoping to attract more market share by being more competitive.
(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.
(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.
(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.
(Mr Sheehan) We did not achieve the market share that we anticipated.
(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.
(Mr Sheehan) To reduce our cost base, but with an expectation ----
(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.
(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.
(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.
(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.
(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.
(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.
(Mr Sheehan) It was correct at the time but I am not a great believer in holding high stocks.
(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.
(Mr Sheehan) The issue of crown immunity is not an issue for me at all.
(Mr Sheehan) If that is a policy decision by the government, I have no problem with that policy decision.
(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.
(Mr Sheehan) We have considered that and plans are designed to minimise that possibility.
(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.
(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.
(Mr Sheehan) I thought I had answered the question in the context of my objective, which is to reduce stock levels.
(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.
(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.)
(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.
(Mr Sheehan) We have a very limited euro market, as you know.
(Mr Sheehan) We competed actively for that market. It was a competitive tender arrangement and we did not achieve the profitability that we anticipated.
(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.
(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.
(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.
(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.
(Mr Sheehan) Our plans are very clear: to recover our profitability and get back on course.
(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.
(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.
(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.
(Mr Sheehan) I have no idea.
(Mr Sheehan) I do not know what their unit costs are.
(Mr Sheehan) We are not party to their unit costs.
(Mr Sheehan) You asked me about unit costs.
(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.
(Mr Sheehan) I cannot comment upon their unit costs, as I have indicated, because I do not know their unit costs.
(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.
(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.
(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.
(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.
(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.
(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 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 Sheehan) I can perhaps modify the words slightly, if I may, in that they were certainly ambitious in terms of their investment plans.
(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.
(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.
(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.
(Mr Sheehan) Yes, in the last year.
(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.
(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.
(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.
(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.
(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.
(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 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.)
(Mr Sheehan) Blanks and, to some extent, coins to meet the requirements of a particular country.
(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.
(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.
(Mr Sheehan) We do not disclose details of profit and loss in any particular market, certainly not in an open forum.
(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.
(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.
(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.
(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.
(Mr Sheehan) I concur.
(Mr Sheehan) 594 million coins.
(Mr Sheehan) I find it difficult to answer that question, to be quite honest.
(Mr Sheehan) They are part of the profit share scheme.
(Mr Sheehan) Absolutely none.
(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.
(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.
(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.
(Mr Sheehan) Yes, very much so.
(Mr Sheehan) Everybody had problems to a greater or lesser extent.
(Mr Sheehan) Yes, that is quite true.
(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.
(Mr Sheehan) Everybody had issues in terms of achieving tolerance levels. We were slower than others and that is not acceptable.
(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.
(Mr Sheehan) I would not have been happy at the time, I have to say.
(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.
(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.
(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.