Column Number: 003
Ninth Standing Committee on Delegated Legislation
Wednesday 13 March 2002
[Mr. John Cummings in the Chair]
Draft Royal Mint Trading Fund
(Extension and Variation)
The Economic Secretary to the Treasury (Ruth Kelly): I beg to move,
That the Committee has considered the draft Royal Mint Trading Fund (Extension and Variation) Order 2002.
I am delighted to be here today under your expert chairmanship, Mr. Cummings.
The Royal Mint's operations, which are currently financed by the Royal Mint Trading Fund Order 1975, are the manufacture and supply of coins, medals, seals and similar articles, and operations incidental or conducive to such manufacture or supply. The order extends the Royal Mint Trading Fund Order 1975 to the manufacture and supply of gifts and collectable items other than coins, and any operation incidental or conducive to such manufacture or supply.
The Mint has been operating its non-coin, gifts and collectables business for the past year. Those operations were funded by the vote in 2001–02, and were approved by Parliament as part of the main estimate for the Treasury last year. It has always been the Government's intention to put new business on an even footing with the rest of the Mint's business, but the Government Trading Funds Act 1973 requires that operations financed by the trading fund must already have been carried out by a Government Department.
The Treasury specialists in that area advised me that the new activities would need to have been carried out for more than six months on the vote. That period has passed, and it is appropriate for new activities to be included in the Mint's trading fund. The non-coin gifts and collectables business should be carried out on a basis consistent with the bulk of the Mint's activities. There would be little sense in the Mint's collector-coin business, which shares much of the same customer base, being operated independently from the non-coin gifts and collectables business for financial reporting reasons.
The non-coin gifts and collectables business will need to account for its activities separately this year. Including the new activities in the trading fund will ease the current reporting burden on the Mint's management, and allow them to focus on growing the business. More importantly, however, those activities are, in their own right, more appropriate to a trading fund than to the vote.
Trading funds were introduced by the Government Trading Funds Act 1973 as a means of financing the trading operations of a Government Department that had previously been carried out on the vote. The new arrangements permitted the establishment of a self-accounting unit, which had greater freedom to manage
Column Number: 004
its financial and other activities while remaining under the control and management of a Minister. As a trading fund, the business will be free from the procedures of vote accounting. That will give the trading fund greater flexibility to match receipts to expenditure than is possible on the vote, and it will be able to build up cash deposits rather than needing to surrender them to the Consolidated Fund. The trading fund is free to change between current and capital expenditure as is appropriate for the business, providing that that is consistent with the framework set by the Minister.
A trading fund has greater flexibility to plan ahead, as it is required to meet financial objectives over a number of years. It can borrow long and short term in order to meet financing needs. That may have a knock-on effect on working capital as the trading fund is financed by borrowing, which costs money, rather than by vote finance. Staff may become more cost conscious as a result, and focus on managing their working capital better. A trading fund has freedom within the corporate planning framework to purchase and dispose of assets and charge or credit expenses or proceeds to the trading fund, and it has greater pricing flexibility for services provided to competitive markets.
The non-coin gifts and collectables business easily meets the statutory tests that determine whether a trading fund structure is more appropriate. First, the revenue of the fund will consist principally of receipts in respect of goods or services provided in the course of the business. Revenue of the new business will be sufficient, taking one year with another, to meet outgoings properly chargeable to the revenue account.
The second test is whether the financing of operations will be in the interests of improved efficiency and effectiveness in the management of those operations. I am confident that that will be the case for the non-coin gifts and collectables business, for the reasons that I have already given. The Mint will include the new business in the annual accounts on the same basis as the current business, and those accounts will continue to be audited by the National Audit Office.
The second aspect of the order is to increase the limit on total indebtedness at the Royal Mint to £50 million. The Mint's current limit, which has been in place since 1975, is no longer appropriate for a business of its size. Had that limit been increased in line with inflation, it would currently be more than £100 million. That limit was set at £20 million when the business's net assets were £15 million. The net assets are now five times that.
Had the original limit increased in line with net assets, the Mint's limit would be more in line with the limit on other trading funds. The new Defence Aviation Repair Agency trading fund, set up last March, had a limit of £300 million on net assets of £100 million. Many other trading funds also have limits on indebtedness that surpass the level of net assets. The danger of keeping the limit low is that it may no longer be sufficient to cope with normal business volatility. That is certainly the case in the Mint at present. We expect it to need more than the
Column Number: 005
£20 million limit in 2002–03 in order to cope with volatility and the need for any restructuring.
We do not currently have plans to utilise the full £50 million limit, but it is a prudent limit to set. It gives the Mint additional freedom to cope with increasing competition in the marketplace, but does not signal the slackening of financial discipline at the Mint. I commend the proposal to the Committee.
Mr. Howard Flight (Arundel and South Downs): I, too, welcome you to the Chair this afternoon, Mr. Cummings. This is one of the first statutory instruments that I understood exactly on first reading it, which was most welcome. I want to ask some questions so that any citizen who reads our deliberations will have a full picture of what is going on. In principle, the proposal appears to be practical and sensible.
The Minister has partly answered my first question, which is what is the Royal Mint trading fund legally? It appears to function like a public sector company, but it is not legally separate in any way—it is a division within the public sector, although the various matters to which the Minister referred give it a degree of independence. Can the Minister put on record what its activities cover at present? She referred to its growth and the need to extend its credit limit, but what do its activities represent in terms of revenues and profits, and what happens to those profits?
On the transfer of the new areas, my questions are in essence the same. What revenues and profits does this body of commercial activities typically generate? The order refers to the transfer of assets and liabilities. What assets and liabilities are we talking about?
The commercial activities of the Mint are popped into this vehicle, which will run on a private sector basis. Will that model be considered for other areas? In overall terms, what will happen to the flow of profits?
Ruth Kelly: This is the first time that I have been congratulated on the drafting of a statutory instrument, so I thank the hon. Gentleman for his compliments. It is a great pleasure to respond.
The Mint has been involved in the non-coin gifts and collectables business for only one year, so many of the hon. Gentleman's questions relate to current performance. During the past year, the costs of setting up trading, such as marketing and promotion, have been substantial, so a profit has not been shown. We hope to develop that side of the business so that the Royal Mint is better able to plan ahead, make its own decisions about current and capital expenditure, promote its products and gain market share. The proposal puts it on a commercial footing, as suggested by the Treasury Select Committee when it considered the matter.
Legally, the trading fund is the means by which the Mint is funded. Parliament has voted capital, and the Mint must return a dividend to the Treasury. As I have outlined, there will be much more flexibility in the future as to how the money is managed. We expect the fund to gain market share in the next few years and the business to operate on a more commercial footing.
Column Number: 006
The Mint's status was last reviewed in 1998–99. At that time, many people argued that it should not be put on a more commercial footing but should be put into the private sector. However, we decided that the Mint's large change programme would make such a decision difficult, that there were large and unproven investments in the Mint that investors would find difficult to factor in, that the Treasury had a unique and special relationship with the Mint and that there were many uncertainties facing the Mint's business. The next review will take place in 2003–04, when we will consider those issues again, as we do regularly every four or five years.
The measure extends the Mint's commercial freedoms. Setting up a trading fund is a logical consequence of the nature of the Mint's business. There was an extensive debate about the Mint's trading performance when the issue was dealt with by the Treasury Select Committee. The figures were in the public domain. The Mint has had some difficulties recently. However, enabling it to operate more commercially in the non-coin collectables area should enable it to return to profit soon.