Select Committee on Treasury Minutes of Evidence

Examination of Witnesses (Questions 40 - 59)



  40. I asked whether the contract that you agreed last year would improve your financial position and you said that it would depend on volume. Now you say that the volume is about the same. What does that do to the financial performance?
  (Mr Holmes) There should be a modest improvement in our financial position arising from the contract, yes.

  41. Another matter that needs to be agreed is the dividend that you pay to the Treasury. Is that negotiated or imposed?
  (Mr Holmes) It is negotiated, but the Treasury take account, quite fairly, of our circumstances when asking for its dividend. In the past the general rule has been that we have been expected to dividend 100 per cent of our profits, unless there is some particular reason for not doing so. During the height of our capital expenditure programme, the Treasury agreed that we could withhold some or all of our profits to help finance that programme. That was a sensible arrangement between us. I guess that that would occur with any shareholder in any ownership.

  42. I find it odd that in the early 1990s the dividend seemed to be virtually 100 per cent of your profit, and yet there was a capital investment programme even then—£3 million, £3 million, £2.5 million, £2.5 million—and still all your profits were going in dividend. Was that not shortsighted, bearing in mind what you tell us now about the effect of the big capital investment on your bottom line?
  (Mr Holmes) At that point the Treasury was not in a position to turn down the Mint's proposals for capital investment. The Mint had not yet worked out the proposals. Essentially, in the early 1990s those capital expenditure figures were financed out of the depreciation charge; we were more or less investing in line with the depreciation and maintaining our asset value.

  43. Were you and your predecessors bad managers then, if you were working, for something like eight years, on a capital investment programme for the future?
  (Mr Holmes) We were working it up. There are two important points on that. One is that the programme needed a lot of preparation. It was a massive programme, as you have seen. Secondly, the programme almost had to be done as one package. There was no point in putting a lot of money into one bit of the factory if it unbalanced the factory, because it would put too much capacity in one area and not enough further down the line to handle the extra product that was coming from the area invested in. More specifically, for example, we invested in one bit of the factory to handle bigger coils which would be more efficient—that is two-and-a-half tonne coils rather than one tonne coils—so you have to invest in every piece of equipment that handles those coils at once to give you the benefit. For that and various other reasons, the investment programme had to be carried out as a package over a relatively short period of time and we were not really ready until 1997 to start implementing it.

  44. When you said earlier that you had been able to generate the capital investment internally, did that mean that in the early 1990s within your figure for depreciation in your accounts was the masking of your capital investment out of your own funds? Is that what you have just told me?
  (Mr Holmes) Yes, effectively. I believe that the depreciation charge was round about £2 million to £3 million; that was the amount that was more or less equal to our capital expenditure. We made some savings on working capital as well at various times. We were able to plough back into capital expenditure.

  45. In more recent years when there has been a little more substantial capital investment—£9.6 million in 1997/98 and £12.6 million in 1998/99—how have you financed that?
  (Mr Holmes) Essentially out of profits, plus the depreciation. That helps towards that as well, to the extent that we did not dividend the Treasury. If you look at 1997/98 and 1998/99, for example, you will see that we made profits of about £20 million in those two years and we "dividended" £7 million. So we were ploughing back the balance into capital expenditure.

  46. There has been a bulge in capital expenditure that has wiped out the dividend to the Government?
  (Mr Holmes) That is right. The funds were self-generated. We were not borrowing heavily and putting our finances at risk for that programme.

  47. Yes, until this year, the target for profits on assets applied in the business stayed at 14 per cent. That seems rather odd. Why was the target not changed?
  (Mr Holmes) The Treasury sets the target rather than the Mint itself. Obviously, it is natural that Ministers do not want to see targets reduced if at all possible.

  48. The figures are pretty compelling; you are going to invest some capital that will take away the dividend and there will not be the profit. Either you or the Treasury were rather naive to set a target that you could not possibly meet.
  (Mr Holmes) From our point of view we wanted to continue to be profitable through this period. We found it a struggle, for the reasons that I gave. We accepted the targets and said that we would do our best to achieve them. Perhaps we underestimated the amount of time during which we would have this disruption and I think we underestimated the difficulty of the marketplace. The targets were based on a combination of our own expectations plus the feeling that it is not a good idea to reduce target levels unless you have clear evidence of a fall in performance.

  49. I have been asking you about your negotiating position with the Government. In the past two years, in your negotiations for the target for your profits as a proportion of your capital, did you make any representations that it should be less than 14 per cent?
  (Mr Holmes) Yes, because, as I said earlier, the target for the year that we are in now was set at 7 per cent. Some time after the start of the year it was set at a lower level. We have a good dialogue with Treasury officials and as you will have seen at the Treasury end, the Treasury has appointed a Shareholder Panel to advise it on being a good shareholder and that panel has had an impact on advising the Treasury officials and, through them, the Minister on what is a sensible target in the circumstances.

  50. As Mr Fallon pointed out, the point about the Shareholder Panel is that it is quite new. At the beginning of that financial year, when the target was changed to 7 per cent, you started the year off with no target. It was 14 per cent the previous year and the 7 per cent target had not then been set.
  (Mr Holmes) That really would not affect us operationally in the sense that our objective is to do as well as we can with our business. That did not cause us any real difficulty, but clearly we expected a target to be set and we operated on the assumption that we would have one.

  51. What target did you represent should be set?
  (Mr Holmes) There was no disagreement between us and the Treasury about 7 per cent.

  52. Are you going to make 7 per cent?
  (Mr Holmes) As I said earlier in answer to Mr Fallon, I do not believe that we shall make 7 per cent because of the impact of the factors that I mentioned continuing during the early part of the financial year. At the moment I cannot forecast exactly how far short of that we shall be.

  53. The Government have added some new targets for customer service. There are four at the moment. Was that with your agreement or was that imposed on you?
  (Mr Holmes) Those were done with our agreement. Clearly, in recent years there has been an emphasis, throughout all government agencies, on customer service and setting ourselves clear performance targets. These targets were generated as part of that general move. They are targets where we come up to the Treasury with suggestions as to what would be appropriate targets and they look at them and set them.

  54. What use do you think they are to your business?
  (Mr Holmes) They are a good discipline. Although sometimes it is nice to run a business entirely behind closed doors—in the private sector one would not see such targets published—we do not have a problem with that and it raises the profile of customer service among the employees in a helpful way. If you take, for example, the collector coins deliveries to individual customers, we set ourselves targets of 95 per cent within 25 days and to reduce that time is one of the key objectives in that business. Twenty-five or 28 days was quite acceptable as a delivery standard in the past, but customers are becoming more and more demanding and they are getting used to ordering products over the internet and getting them within a day or two. We are setting ourselves the task of pushing our delivery targets in that general direction. We are gearing up our systems, putting more product on the shelf to ensure that we have them ready for when promotions go out. That target is one of the key elements in showing us how we are doing.

  55. If targets are a good discipline, why, according to your memorandum, does the target for "UK collector coin: Accepted orders from UK banks and Post Office to be delivered within twenty-five days from receipt of order or published issue date", show the worst performance of the three years?
  (Mr Holmes) There is a misprint there. Something has gone wrong with the layout because the description of what the target is seems to have been transmuted from the first target. We are talking about the second target on the table. Essentially, that is about the length of time between the order and receipt by individual UK consumers, members of our coin club. That performance fell in 1999/2000 versus the year before, partly because we tightened the target from 28 days to 25 days and partly because we had a high level of demand in that year and did not put enough product on the shelf in relation to the orders that came in. We also had some packaging problems. We have seen a substantial improvement in that performance in the current financial year and we want to carry on from there to get the 25 days down substantially. Yes, we did not achieve that target but it is an important focus for us.

  56. In what way was it a good discipline then?
  (Mr Holmes) That relates to awareness of it and an awareness of where we are falling down and what we should do about it. My colleagues in the collector coins business look at the performance every month and where there are particular root causes of problems they will set up teams or take initiatives to fix them. We have been learning quite a lot about how much product we should have on the shelf when we start promoting and balancing that against the danger of having too much product on the shelf and finishing up with surplus. Coins have dates on them and they tend to age in the sense that customers are less interested in them once the year in which they were first issued has passed.

  57. Are you likely to be nearer the 95 per cent target this year?
  (Mr Holmes) Yes, nearer the 95 per cent in 25 days.

  58. Why are there no targets for overseas customers?
  (Mr Holmes) The problem there is that every customer wants a different delivery time and arrangement. It also depends on what we have to do for the customer. For the UK collectors in our Coin Clubs we are talking about coins where we already have the design, the product is agreed and we are producing it. For an overseas customer we design to order, we make the tools to order and, therefore, when we deliver depends on when the designs are approved, for example. So it can be a very movable feast. It is not easy to monitor how we do that exactly in a purely quantitative sense compared with the targets that we have in the UK. Obviously, we look carefully at our deliveries to overseas customers and in relation to any complaints that we receive we try to fix the problems that arise.

  59. Would your service to overseas customers benefit from a target or not?
  (Mr Holmes) As I said, the difficulty is setting one that would mean something. Possibly that would benefit from a target, but I believe that it would be difficult to find one that was sufficiently precise to be worth monitoring in a quantitative sense.

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