Examination of Witnesses (Questions 20-39)|
1 NOVEMBER 2006
Q20 Mr Gauke: You mention in the
annual report that there was a wide-ranging business review undertaken.
What were the findings of this review and what has been done as
Mr Barrass: We have given it an
umbrella heading of the business improvement programme and there
are really three legs to it. One is a brand strategy review, which
you can think of as an extension of our marketing strategy, what
we want the Mint to look like, take an appraisal of what our customers
think of us and how we can build on that and reinforce it. The
second leg is how we manage ourselves internally, how we set accountabilities
and responsibilities and internal reporting. We have made a lot
of progress in the last six or eight months in pushing responsibilities
and authorities down through the middle management to the junior
management, so the guys actually take personal ownership and pretty
much across the board they are quite excited about that and have
really grasped the nettle with both hands. The third one, which
is chronologically the most recent leg that we have put in place,
is what we have termed the better working programme, which we
announced on August 1, where we are looking at every process,
every facet of the business really from top to bottomand
I mean from top to bottom; right up to board leveland examining
why we carry out business that way rather than some other way,
whether we need to carry out that facet of business at all. We
think that is a 40-50 week programme. We are around about week
12 or 13 now, and last week I made an announcement, which I hope
you have copies of, which said that we expect as a result of that
programme to reduce our permanent headcount by somewhere between
60 and 99 people. That is our permanent headcount. You are probably
aware that we carry quite a high level of casual workers as well.
To date as part of that programme we have not renewed, ie we have
released 46 casual employees so far, with very little pain, simply
by changing some of the working practices that we have. So those
productivity actions are absolutely coming through now as we speak.
Q21 Mr Gauke: Can I turn to the subject
of hedging for various risks involved in your business. Clearly,
metal price is very important, as indeed is foreign exchange.
The Mint's performance hedging against metal price risk is not
declared in the same way as in respect of foreign currency risk
as I understand it. Are there any particular reasons why that
is the case?
Mr Barrass: No. I am quite happy
to share with you the process we have there. When we get an overseas
order, we will have a finite window with deliveries in, so we
know how much metal we need for that period. We will then hedge
that on the LME market and, because that typically is based in
dollars, we will also hedge currency at the same time, so we have
effectively eliminated the risk on that. With regard to the UK
currency on behalf of the Treasury we will hedge, again, both
metal and currency for a quarter in advance so that we are at
least insulated from metal price increases during that quarter,
and we do that on behalf of the Treasury.
Q22 Mr Gauke: Do you do any benchmarking
as far as your hedging performance is concerned with competitors
or other metal consumers, and if so, how does your performance
Mr Barrass: No, we do not. What
we try to do is take the speculation out of the process, so that
if we have an overseas customer, for instance, comes along and
says, "I am looking at this sort of quantity of product in
this window," the way that the industry prices its product
is to pass the price of metal through to the customer and to negotiate
the value-added on top. Clearly, at that early stage in negotiations,
you cannot lock in either the metal price or the currency price
but as soon as you get to the point where you are putting ink
to paper, that is the time where you eliminate all of the risk
as far as you can with the hedging. The price that you quote the
customer is the price that you know you are going to be buying
the metal at in sterling and therefore we can concentrate on what
we really do, which is manufacturing coins. One of the things
that we will not do is take risks on the market. We are not in
the currency speculation game. We only take the currency and metal
hedging for known orders that we have plus the UK forward quarterly
Q23 Mr Newmark: In 2002-03 the Mint
reduced its work force by 20% yet we heard on 25 October that
the Financial Secretary wrote to this Committee notifying us that
there is a further reduction due in headcount. I am curious as
to why three years on you are still restructuring.
Mr Barrass: We have to hold our
hands up here and say the first restructuring, although it did
have an immediate impact, if you look at the financial results
for that year, you can see why that action was taken: even without
the £12 million that was provided in that year, we would
have lost £6.5 million notwithstanding. There was an immediate
headcount reduction, there was an immediate benefit to the P&L
on that but over time, as we have failed to put some of our initiatives
in place properly, some of that headcount has become backfilled
by casual heads, which we are now in the process of removing,
and now we have identified further opportunities to dig deeper
into the full time work force.
Q24 Mr Newmark: I thought part of
the process of change was to shift from full time to having a
more flexible work force, but you are saying even with that flexibility
there, you have had to get rid of some . . .
Mr Barrass: No. In fact, what
we are holding our hands up there on is that we were unable to
secure that flexible work time agreement with our work force,
which was very disappointing for us and a great surprise for the
unions involved, because the management and unions at that time
were standing pretty much shoulder to shoulder in saying "This
is a great deal", and somehowand it is fairly inexplicablethe
work force decided they did not want that deal. So we were not
able to put that in place.
Q25 Mr Newmark: How close are you
to achieving a stable structure then?
Mr Barrass: This 40-50 week programme
that we instigated on 1 August, I think we will have most of the
headcount reductions in place by probably January, February, March
next year and that will be the stable structure which we will
be taking the business forward.
Q26 Mr Newmark: So you are confident
that from 2007 you will be in a fairly stable structure?
Mr Barrass: Yes, I am.
Q27 Mr Newmark: In 2004 the Chancellor
announced that the Government intended to transform the Royal
Mint from a trading fund into a government-owned company. The
Mint's 2004-05 annual report stated that incorporation was expected
to be completed by the end of 2005 but your latest annual report
states that the vesting process is now on hold "pending the
appointment of a permanent chief executive and the completion
of the strategic review". Why has it been necessary to put
the vesting process on hold?
Mr Barrass: The vesting process
will take the Royal Mint from a trading fund status to a wholly
owned government limited company status and, as any of us who
are directors of limited companies or PLCs will know, to exist
they have to be going concerns, they have to be financially viable
and to have a financially viable future. Clearly, coming off the
back of two years' losses and quite a lot of cash consumption,
it would have been crazy to vest at that time until we have got
the business on a sustainable, profitable basis, and so that is
the first thing we need to put in place. I guess that is pretty
much my job, and that is what the business improvement programme
is there to do, and we are confident that will happen. We then
have a very strong point of view that the team that should lead
the vesting should be the same executive team who are actually
going to live with vesting post the event, so I think it would
be wrong for me and two of my executive directors, as interims,
to take us through that vesting process and then effectively let
someone else inherit the position that we had developed for them.
So the process as we see it now is to get the business on a firm,
stable, sustainable financial footing, so it is generating cash
and is a genuine going concern and, in parallel with that, to
recruit a new chief executive, and that individual should be the
one that leads through what remains of the vesting process.
Q28 Mr Newmark: What benefits would
flow from the Mint operating as a government-owned company rather
than a trading fund?
Mr Barrass: You come back to the
unique nature of it. As chief executive, I really have to wear
two hats down in south Wales. On the one hand, I have to recognise
that I am the head of a government department and everything that
goes with that, all the scrutiny, all the decision-making, the
whole governance that goes along with a government department.
I willingly wear that hat. On the other hand, I wear a hat that
says that I am in an aggressive commercial environment, I am a
manufacturer of things for third parties, I have a sales organisation,
a marketing organisation, and I need to be able to make very quick,
very dynamic decisions, and sometimes you can get a conflict between
the two. What vesting would give us as a limited company is, without
adding in the way of risk, because we would have a different governance
structure there, where we would have a fully accountable board
as a limited company does have, but that should make the whole
decision-making process very different.
Q29 Mr Newmark: When you say different,
does that mean you are going to become more competitive?
Mr Barrass: I think so. It will
allow us to react much more quickly to market forces, it will
allow us to take much quicker commercial decisions, it will also
enable usand we do not have any of these in embryonic form
todayto get into a commercial relationship with third parties,
with commercial ventures, which is a little bit tricky for us
at the moment because I then have to put my government department
hat back on and say "Well, actually, I cannot get into a
joint venture with ABC Ltd because it is inappropriate for a government
department to do that." It would not necessarily be inappropriate
for a limited company, albeit wholly owned by the government,
to get involved in that sort of process.
Q30 Mr Newmark: Assuming you have
talked to some of your customers about this change, I am curious
as to what the reaction is, particularly of your overseas government
customers, to a potentially private sector Royal Mint?
Mr Barrass: The overseas customers,
especially on the circulating side, that I have seen, because
they are the ones that I think you would have the biggest concern
about, their concerns were totally allayed by the fact that we
would be 100% government-owned, and really, this is the way we
have explained it to them, that it is simply a governance issue;
it does not change anything in terms of the protection of the
heritage, connection with royalty, connection with government
and our status in the UK. Clearly, there is a different legal
status but that is all.
Q31 Mr Mudie: Can I touch on the
Western Mail article in October, which suggested that you
were asking the Treasury for £10 million in severance pay?
A Royal Mint spokesman said this document "was an early draft
and bears little resemblance to our current better working programme."
In what way? Have you asked the Treasury for £10 million?
Mr Barrass: No, we have not.
Q32 Mr Mudie: Are you going to ask
for any money?
Mr Barrass: We will certainly
be asking for money. If I can cope with the article first, the
article was taken from an internal draft document within the Mint
where we were scoping where the ceiling might be, and at that
stage we had no indication as to what the headcount movement might
be at all and so we went back to the 2002 numbers and said if
the 2002 numbers were any sort of guideline, and our gut feel
as managers was that that was very much the most it could ever
be, that really was a ceiling we would never get to, then something
like £10 million might be the right sort of number as a scope
number. Since then, as we have worked through the details, we
have got to a more refined number. As I say, we think it is between
60 and 99, not as tight as I would like it but, because of the
way we are driving towards that number, it has to be fairly vague
at this time. We have had some discussions with the Treasury as
to how much money that is likely to cost and we have a funding
ceiling that would allow us to make those redundancies as they
are identified over the remaining 30-40 weeks of the programme.
The programme is a 40-50 week programme and we are approximately
12 weeks into the programme.
Q33 Mr Mudie: Fifty weeks, so that's
just over the year's programme.
Mr Barrass: No, the whole programme
will be 40-50 weeks. That is a year's programme. That is right.
Q34 Mr Mudie: Those figures are not
much out with Peter Allred's figures. The unions worked out that
there would be 200 job losses over the period, including 100 during
this financial year. You are well on your way to that are you
not? When you mention 60-99, is that a target you are aiming for
in terms of permanent employees?
Mr Barrass: That is our total
expectation on this programme. The 200 is not our number, the
200 was never our number, and I think I should clear up that 200
was never the union's number either. The way that we have approached
this from August 1 is to work hand in glove with the unions. We
have three unions that represent our employees at the Mint. On
the very day I announced the programme we set up a consultation
group which includes regional representatives of the unions. We
have been working with them all the way through and they never
had a number of 200 in mind either. This is pure speculation by
the media, I am afraid.
Q35 Mr Mudie: It is jut a calculation
based on the amount of money you asked for.
Mr Barrass: We did not ask for
the £10 million.
Q36 Mr Mudie: It was scoped, was
Mr Barrass: It is a number you
can see is very slightly scaled down from the previous . . .
Q37 Mr Mudie: Sixty to 90 permanent
people, and you mentioned a figure of 46 casual. Did I hear you
correctly that 46 have gone so far?
Mr Barrass: Yes.
Q38 Mr Mudie: What is your target
for reductions in the casual force? You have got 170 on the production
side, have you not?
Mr Barrass: Not at the moment.
We are down to something like 110-112.
Q39 Mr Mudie: You have taken 46 off,
have you not?
Mr Barrass: Not only that but
the way we will continue to use casuals at the end of this programme
is to use the casual work force to hit our volume peaks. We always
need some level of casuals at the Mint.