Examination of Witnesses (Questions 1
- 19)
TUESDAY 13 FEBRUARY 2001
MR ROGER
HOLMES, MR
ALAN PEARCE
AND MR
GRAHAM DAVIES
Chairman
1. Good afternoon, gentlemen. Thank you very
much for showing us around the Royal Mint. It has been very interesting.
I shall plunge straight into our first question. Why do you believe
that the Royal Mint needs to remain a nationalised undertaking?
(Mr Holmes) Good afternoon. We are delighted
that the Sub-Committee has found time to see the Mint and to take
evidence in South Wales. It is difficult to answer your question
because the Mint has an operational executive role within government.
We do not decide the policy as to our ownership. During the various
reviews in relation to whether the Mint should be privatised,
the Mint has not taken a particular position. For a long time
we have operated within the public sector. We have not experienced
major constraints from having been in the public sector, but we
have not argued the point either way as to whether we should be
privatised or not.
2. Do you see any advantages to being in the
public sector?
(Mr Holmes) Clearly, there are arguments both ways.
The main point to be made is that we acknowledge that there would
be differences between being in the private sector as opposed
to the public sector. Whether those differences are pluses or
minuses is not a matter for us to judge. I emphasise that we see
ourselves as an organisation with commercial objectives, the objectives
set for us by the Treasury. The prime objective is to make a return
on capital. I believe that all the employees in the Royal Mint
understand that and understand that their jobs depend on success
in the commercial market, whether it is selling circulating coins
and blanks overseas or selling collector coins into the commercial
market place to the individual consumer.
3. Are there any activities that you undertake
that are not what one may define as commercial?
(Mr Holmes) We do not believe so. Obviously, the original
reason for the Royal Mint's existence was to provide circulating
coinage for the United Kingdom. In that context we have a statutory
position as the national mint. The arrangement by which we currently
provide that coinage is a contract between ourselves and the Treasury.
At the moment it is a five-year contract and by and large it is
written as though it were a commercial contract.
4. On the subject of contracts, what proportion
of your work do you contract out to others?
(Mr Holmes) That varies over time. The UK coinage
is not contracted out. We are able to supply the whole of the
UK requirement. In relation to our overseas work, outside Europe
we operate in what we call a consortium with De La Rue plc and
the Birmingham Mint. Within that consortium we work together to
capture overseas coinage business outside Europe and then the
manufacturing work is split between the Royal Mint and the Birmingham
Mint. We act as the prime contractor. Birmingham Mint is subcontracted
a certain share of the work from us.
5. Presumably there is other contracted-out
work, other than your foreign work?
(Mr Holmes) In that case I was talking essentially
about coins. We subcontract out certain overseas coins. We obviously
buy in many things. Although we have a large blank production
facility, we occasionally buy in blanks. We also buy in other
requirements. We buy in huge quantities of metal and many of the
other requirements such as the normal requirements of manufacturing.
6. You have said that you are almost exclusively
a commercial operation. Later on we shall discuss how successful
you are commercially. If you were a privatised undertaking, would
you be subject to rather different disciplines and incentives
than you are in the public sector?
(Mr Holmes) I guess that we would expect some changes
if we were in the private sector. I imagine that that would depend
upon what type of owner or what type of shareholder we had. The
Treasury tries to act as though it were a shareholder in a private
sector sense in the way in which it monitors our activities. Therefore,
the change may not be as obvious as it may have been, say, 20
or 30 years ago. It could be that our management and pay structures
would change in the private sector, as has happened in other privatisations,
but that is not for us to speculate on. As far as the incentives
on employees of the Royal Mint to achieve and to maintain competitiveness
are concerned, that is already there. We all know that our jobs
depend on success in the commercial marketplace. I do not believe
that that would change whoever owned the Mint.
7. Presumably the bottom line, the profitability,
would change?
(Mr Holmes) In a sense that is already there. We are
set a target on return on capital by the Treasury and, no doubt,
if we were in the private sector we would be expected to earn
certain levels of profitability. Like private sector organisations,
we do not always meet our levels of profitability, although in
the past we have had a long track record of having done so. That
again is there. If we do not meet our profitability that could
affect outside perceptions of the Mint. If we are not competitive
our jobs could be affected. In my view the difference is not very
marked.
Chairman: Perhaps we can turn to look at how
successful you have been on the commercial front.
Mr Fallon
8. A moment ago, Mr Holmes, I believe you said
that all your employees understood the importance of making a
return on the capital employed. Three years ago that return was
22 per cent, then it was 9 per cent and in the last reported year,
when the target was 14 per cent, the return was 0.5 per cent.
What has gone wrong?
(Mr Holmes) Perhaps I can take the history back a
little further. The Mint has had a long track record of good returns
on capital. More recently, there has been a combination of two
major factors. First, the overseas market for the circulation
of coins and blanks has become steadily more difficult. We have
had more competition in the market. There are more mints and indeed
private sector blank suppliers with spare capacity. Recently many
people have put in additional capacity. In terms of the marketplace,
we are also suffering from less favourable exchange rates than
we had a few years ago. The traditional demand from some of our
past coin customers appears, at the moment, to be static or declining.
The demand for circulation coins and blanks is very volatile as
has been seen in the UK, as we may talk about later, so it is
difficult to predict how that will go. Clearly the difficult marketplace
has been a factor. As we have explained in our memorandum to the
Sub-Committee, we have also had a programme of change that we
initiated some years ago, but which has been at its peak over
the past two or two-and-a-half years. In that space of time we
have carried out a major capital expenditure programme, amounting
to about £25 million within a two to two-and-a-half year
timeframe. That was designed partly to renew and to refurbish
equipment that has been with us for most of the time since the
Mint moved to South Wales 25 years ago, and to upgrade our capacity
for new business requirements, particularly the blanks market
that we knew would open up with the first wave euro countries.
So we have had a major investment programme to put in right across
the factory and allied to that we have introduced many changes
to the working practices and working patterns. We have brought
in a major amount of multi-skilling. We had some multi-skilling
before, but we totally modernised the Mint's working practices
and we have brought them right up to date over the past two to
three years. That was allied with team working. Instead of everyone
doing a particular job, we have people working in teams so that
we have more flexibility in what they concentrate on. That has
involved a lot of training for the multi-skilling team work to
give us that flexibility. The training programme has been a major
investment for the future. The other aspect of team working that
I want to stress is that we have introduced a total productive
manufacturing programme, to use teams not only to carry out the
day to day work, but to involve everyone, at all levels, to gain
improvements. That is starting to come through now. To go back
to the change programme, associated with the new investment we
have changed the shift patterns. The working hours regulations
have assisted us towards a conclusion that we should have more
shifts, more crews to cover the continuous process areas of the
Mint. Previously, we had four crews in the continuous processes,
many of which you will have seen in our blanks production area.
We had four crews to cover the 168 hours of the working week and
now we have five crews because of the need to cut down on overtime.
In addition, we took advantage of that to have lower manning levels
per shift, so the number of extra employees was reduced. Installing
that new equipment and to get it running properly has inevitably
caused some disruption. Much of the equipment that we have is
very complex and to make it all work efficiently has been a big
challenge. Secondly, we have a lot of people doing different jobs
from those that they did before which has involved a lot of training.
Allied to that perhaps I can emphasise, in relation to the blanks
business, that we have gone into supplying blanks to other mints
to a greater degree, as opposed to finished coins, and that has
brought new challenges in terms of meeting customer requirements.
We have had to learn our way through that. It has been a very
disruptive period and one during which any organisation would
have to suffer disruption. We are coming out of that now. In the
last three months of last year the production was nearly 50 per
cent higher than at the beginning of the year. That was accompanied
by a high improvement in productivity. We recognise that we have
a lot further to go in terms of achieving further efficiency improvements,
but the marketplace—a difficulty that we have to confront—is
still there.
9. You have referred to all the difficulties
and you have referred to the programme of change, but the latest
result is very much worse than it was three years ago. You were
set a target of 14 per cent and your outcome was 0.5 per cent.
That is failure in anybody's book, is it not?
(Mr Holmes) I believe it would have been a failure,
in another sense, not to have tackled the change in the way that
we did. Any organisation has to go through changes to modernise
itself. It could have been argued that the Mint could have changed
earlier. It did not go through some of the crises that many private
sector manufacturers went through during the recession because
it was quite successful during that period, but there comes a
time when an organisation has to embark on changes. We felt that
the Mint had to be in a different shape to cope with the 21st
century. Yes, the disruption has lasted longer than we would have
liked, but I am convinced that it was the only way forward to
make the Mint stronger for the 21st century.
10. What is the target return on capital employed
for the current financial year?
(Mr Holmes) It is 7 per cent.
11. In your annual report you say that it is
not yet confirmed.
(Mr Holmes) Yes. It has now been confirmed as 7 per
cent.
12. Why was it confirmed so late in the financial
year?
(Mr Holmes) I think that was a matter of discussion
between ourselves and the Treasury. The Treasury set the target.
The Treasury wanted to consult the Shareholder Panel that had
been newly appointed in March last year. Frankly, it did not affect
the way in which we operated. We tried to maximise our return
whatever.
13. Perhaps you can tell the Sub-Committee about
the way in which you operate. You have had 10 months of the financial
year. What is your rate of return likely to be at the end of the
year?
(Mr Holmes) I cannot give you a profit forecast for
the year at this point. However, I can say that we have had a
difficult year on the circulating coins and blanks side of the
business and a good year on the collector coins side. I do not
believe that we shall achieve the 7 per cent target this year
but how far short of it we shall be I cannot say.
14. Moving away from accounting and turning
to the operating profit, why do you not show the operating profit
for the particular divisions?
(Mr Holmes) Frankly, that is a matter of commercial
confidentiality. We operate in a competitive market world-wide.
Our competitors do not publish such figures because, like us,
they believe that that would be useful ammunition for the competition.
15. You have three big divisions. Roughly, what
does the collector coins division make?
(Mr Holmes) I believe this information is commercially
confidential. The collector coins side of the business is profitable
and it has always been that way.
16. Does it make millions of pounds?
(Mr Holmes) Yes.
17. It makes millions?
(Mr Holmes) Yes.
18. I ask you that because last year your operating
profit for the whole business was £345,000, so without the
collector coins division, you would be bust.
(Mr Holmes) "Bust" is a different concept
in terms of having the cash resources. I want to emphasise that
the investment programme was self-funded; we did not seek money
from anyone else. We do not exactly have a debt burden. I willingly
concede that in the past year the circulating coins and blanks
business made a loss.
19. Five years ago you were making £9 million
profit and then £7 million, then £13 million and in
the past two years £5 million and £345,000.
(Mr Holmes) Yes.
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