House of Commons - Public Accounts

Select Committee on Public Accounts Fourteenth Report

FOURTEENTH REPORT

The Committee of Public Accounts has agreed to the following Report:

ROYAL MINT TRADING FUND 2001-02 ACCOUNTS

INTRODUCTION AND LIST OF CONCLUSIONS AND RECOMMENDATIONS

1. The Royal Mint is an executive agency and has operated as a Trading Fund since 1 April 1975. The Treasury exercises oversight of the Royal Mint and makes payment to it under contract for the manufacture and distribution to banks of UK circulating coins. The Royal Mint also competes against its overseas counterparts and private sector commercial organisations in the worldwide markets for circulating coinage contracts, collector coins and medals.[1]

2. The Committee, on the basis of a Report by the Comptroller and Auditor General, took evidence from the Royal Mint and the Treasury on:

the deteriorating financial performance of the Royal Mint in recent years;

the control weaknesses that gave rise to thefts of banknotes from the Royal Mint in 1997 and 2001;

the allegations of improper payments by the Royal Mint; and

the applicability of 'Crown immunity' to the Royal Mint.

3. Our key conclusions are:

The profitability of the Royal Mint has continued to decline, culminating in an operating loss of £6.5 million in 2001-02, in spite of the previous Deputy Master's statement in July 2001 that the decline in the Royal Mint's financial performance had been arrested and reversed. The Royal Mint's management needs to take a firm grip on costs and productivity, in order to restore its trading operation to overall profitability.

The Royal Mint's decision to embark on a £25 million expansion programme in 1996-97 was seriously flawed. Their 'euro strategy' was naïve, failed to achieve its objectives and has resulted in the need for a restructuring exercise costing a further £12 million and involving 220 redundancies.

As a result of the lax attitude of the Royal Mint's management to basic financial controls and physical security, two thefts of banknotes occurred. The Royal Mint failed to learn lessons from the first theft, and its Accounting Officer will need to show that controls are now tight enough to prevent any further recurrence.

Allegations that the Royal Mint made improper payments are now the subject of an investigation by the Serious Fraud Office (SFO) to establish whether criminal offences may have been committed. The new Deputy Master has acted promptly and appropriately in investigating these allegations, and will need to deal vigorously with associated shortcomings in management and corporate governance. As a publiclyowned commercial enterprise, the Royal Mint has an obligation to maintain the highest ethical standards in conducting its business.

4. Other important conclusions and recommendations are:

The deteriorating financial performance of the Royal Mint in recent years

(i) The Royal Mint expected that it would win 20% of the contracts for production of euro blanks, but only secured 5% of this market, partly because of its inability quickly to meet the tighter technical tolerances specified in the euro contracts.

(ii) The Royal Mint provided evidence that no crosssubsidy exists between the Treasury's UK coinage contract with the Royal Mint and its overseas contracts for coins, blank and collector coins. There is however a lack of transparency in the reporting of the Royal Mint's financial performance in its Annual Report and Accounts. The Royal Mint and the Treasury should consider carefully what additional information on its financial performance can be included in its future Annual Reports and Accounts.

Weaknesses that gave rise to thefts of banknotes in 1997 and 2001

(iii) The control weaknesses and failings exposed by the first theft of banknotes in 1997 were not addressed by the Royal Mint, thereby creating the circumstances in which the second, larger theft could take place. No disciplinary action was taken against staff responsible for storage and security arrangements. The Royal Mint needs to overhaul its operating controls and physical security measures to prevent any further recurrence.

The applicability of 'Crown Immunity' to the Royal Mint

(iv) The Health and Safety Executive's investigation into the circumstances which led to the death of a Royal Mint employee in June 2001 found the Royal Mint to have been at fault. It is unacceptable that the Mint should hide behind Crown immunity in such circumstances. The Treasury should review the applicability of this principle to a commercial operation such as the Royal Mint.

THE DETERIORATING FINANCIAL PERFORMANCE OF THE ROYAL MINT IN RECENT YEARS

5. As a Trading Fund, the Royal Mint operates on commercial lines and is required under the Government Trading Funds Act 1975 to achieve financial breakeven, taking one year with another. Whilst an operating loss may be incurred in any one financial year, this loss should be made good in subsequent years.[2]

6. Over the past decade, the Royal Mint's trading performance has gradually declined, as shown in Figure 1, from a peak operating profit of £15.6 million in 1993-94 to its first trading loss of £493,000 in 2000-01.[3] The then Deputy Master of the Royal Mint stated in that year's Annual Report that "although the bottomline performance for the full year was disappointing, the decline in the Mint's overall financial performance during the previous two years was arrested and reversed in the second half of 2000-01".[4] However, in 2001-02 the Royal Mint recorded an operating loss (before a £12 million exceptional charge for restructuring costs) of £6.473 million.[5]

Note: The shaded bar in the 2001-02 column represents a £12 million exceptional provision for restructuring costs.

Source: C&AG's Report, Table 1

7. The Royal Mint told us that its management had engaged in a £25 million expansion programme in 1997-98, £9 million of which was used to refurbish plant and the remaining £16 million to expand capacity.[6] This was designed to enable the Royal Mint to take advantage of the introduction of new coins for the twelve nation states which participated in the launch of the euro on 1 January 2002.[7]

8. The Royal Mint did not achieve its ambitious target of securing 20% of the contracts for euro blanks, instead securing just 5%.[8] It was slower than its competitors in achieving the technical tolerance levels specified in the contracts for production of euro blanks and had not appreciated that these stricter levels meant that European coins would be more difficult to produce than UK coin products.[9]

9. The turnover of the Royal Mint fell from £111.9 million in 1997-98 to just £79.7 million in 2001-02, and its reported ratio of operating profit to sales declined from plus 11.7% to minus 23.2% over the same period,[10] as shown in Figure 2. The Royal Mint has now embarked on a £12 million restructuring programme, involving some 220 redundancies, designed to reduce its production capacity and cost base, and to improve efficiency.[11]

Source: Royal Mint 2001-02 Annual Report, page 5 (HC 1182, Session 2001-02)

10. Although the 2001-02 annual report and accounts of the Royal Mint shows sales revenues analysed between UK and overseas sales, no further details on revenues, costs of sales or profit margins are set out in the document to allow the reader to determine whether or not any element of cross subsidy exists between the two streams of business. The Deputy Master told us that such information is considered commercially sensitive by the Royal Mint and could be detrimental to its business if made public.[12]

11. At the Committee's request, the Royal Mint therefore submitted further written evidence to us on 27 January 2003 to enable us to establish whether or not the UK taxpayer was subsidising the Royal Mint's overseas coinage and collector coin contracts via the Treasury's UK Coinage Contract with the Royal Mint.[13] That note was examined by the Comptroller and Auditor General, who reported to us that he was content that it fairly reflected the Royal Mint's trading position over the periods disclosed (that is, from 1997-98 to 2001-02) in respect of its British and overseas markets.[14]

12. The Royal Mint secured a positive contribution to its fixed operating costs from its overseas circulating coin and blank sales in each of the years 1997-98 to 2001-02. Overseas sales of euro coins and blanks had also shown a positive contribution in each of those five years.[15] We were assured that the Royal Mint had not used income from UK coin issues to cross subsidise prices for overseas euro orders, although the technical and quality difficulties experienced by the Royal Mint in meeting those orders had reduced the overall level of contribution achieved.[16] Crucially, the Royal Mint's operating profit and financial performance would have been significantly worse if it had not secured these levels of overseas work, since the additional contribution generated had offset fixed costs that could not be avoided in the short to medium term.[17]

WEAKNESSES THAT GAVE RISE TO THEFTS OF BANKNOTES IN 1997 AND 2001

13. The Royal Mint operates a highsecurity plant guarded by Ministry of Defence Police, with controls such as random searches and metal detectors to ensure that coins are not taken into or out the premises without authorisation. However, £25,680 in brand new £20 banknotes was stolen from a safe at the Royal Mint at some point between April and December 2001.[18] The Royal Mint also informed us that a similar theft of £5,000 in banknotes had occurred five years previously.[19]

14. Although an investigation of the 2001 theft by the MoD Police has not led to an arrest, the Royal Mint and the MoD Police identified a range of control weaknesses within the Royal Mint that had contributed to the loss, as shown in Figure 3.[20]

Figure 3: Factors contributing tot he 2001 banknote theft

1.	Neither of the two keys to the safe containing the banknotes was held securely.
2.	The safe was poorly located within the gold store, being located away from the supervisor.
3.	Although within a secure area, the safe was generally opened at the start of the day and left open and unattended until the end of the day.
4.	As well as Royal Mint employees, certain contractors working on the site had access to the area where the safe was located.
5.	No periodic stock checks of the contents of the safe were made between February and December 2001.
6.	The decision to order and store the total expected production run at the outset, rather than drawing down smaller consignments from the Bank of England as required during production exposed the Royal Mint to higher risk and greater potential loss.
7.	Whilst the Royal Mint is highly vigilant in addressing the risk of coin theft from the Llantrisant site, its control procedures (such as metal detectors) were not designed to combat the risk of thefts of other items such as banknotes.

Source: C&AG's Report, para 37

15. The Royal Mint admitted that its control procedures had been inadequate as its focus had been on the risks of coin theft, rather than banknotes.[21] It also conceded that those procedures were themselves not adhered to for much of 2001, during a major refurbishment of the packaging area where the safe containing the banknotes was located.[22]

16. Responsibility for the physical security of the banknotes held in the safe rested with the relevant departmental manager.[23] The Deputy Master explained to us that he had decided not to take disciplinary action in respect of the 2001 theft, because of the inadequacies of the operating procedures and also in view of that manager's unblemished health and absenteeism record during his 26 years of employment by the Royal Mint.[24]

17. The Royal Mint's internal auditors had not alerted management to the security risks associated with the control weaknesses because their audit work did not address these issues and focussed instead on the manufacturing control systems.[25] Their last review of security controls had been undertaken in July 2001 but, with management's agreement, such audits were limited to reviewing whether the principal control procedures operated by the Royal Mint had operated satisfactorily and were limited to discussion and review of supporting documentation.[26]

18. In the light of these thefts, the Royal Mint has since conducted a review of its physical security procedures and introduced revised arrangements, including the installation of video cameras in the area around the safe.[27]

1 C&AG's Report, Royal Mint Trading Fund Accounts 2001-02 (HC 1181, Session 2001-02), para 1 Back

2 C&AG's Report, para 2 Back

3 ibid, para 5 Back

4 ibid, para 6 Back

5 ibid, para 7 Back

6 Q 91 Back

7 Q 10; C&AG's Report, paras 11, 15-16 Back

8 C&AG's Report, paras 18-19 Back

9 Qq 154, 170-175 Back

10 C&AG's Report, p5 Back

11 ibid, paras 23-25 Back

12 Q 156 Back