Examination of Witnesses (Questions 60-79)
MR DAVID
BARRASS
1 NOVEMBER 2006
Q60 John McFall: I have been associated
with a number of remuneration committees and sometimes the targets
are so easy that there is never any doubt that the person gets
their full bonus. I would like to know what that previous remuneration
committee did to give the 30% bonus to the previous chief executive
to see what the criteria are, and the criteria that will be established
by the new remuneration committee. Could you share that with the
Committee in confidence?
Mr Barrass: If I can just make
clear in case I misunderstood: there were no payments made on
the last scheme.
Q61 John McFall: I understand that,
but previously there were payments made.
Mr Barrass: Certainly the year
in question with the annual report was based around financial
targets which would have exceeded the plan for the year. The thing
that would give you comfort would be whether that plan was a robust
and challenging plan. If it was an easy plan, clearly the targets
might well be easy. What we would intend going forward is, my
discomfort and my discomfort next week with the remuneration committee
is that because we are only in week 12 or 13 of the better working
programme, I am still not clear in my mind as to whether this
is for instance going to be 60 heads or 99 heads. That makes a
huge difference in terms of bottom line and I do not want to give
an easy target for the guys, but I also do not want to give a
target that two weeks later the guys get switched off and say
that's never going to happen. It then becomes a meaningless target.
Q62 John McFall: Whatever you can
share with us in private would be very helpful.[2]
Mr Barrass: I will be happy when
we do put the bonus scheme in place to forward it in confidence
to the Committee.
Q63 Mr Mudie: Can I just ask you
a last question in terms of pensions? You mentioned specifically
pensions, increases in pensions, one of the difficulties you have
had. It is above £1 million. What has happened in pensions
that you have been hit with this amount?
Mr Barrass: Here you have got
me on very thin ice because, not being a civil servant, I am not
totally familiar with all the different pension schemes that we
run, but these are actually nothing peculiar to the Mint at all.
Q64 Mr Mudie: That is why I asked
you, because I am not sure I have seen any new civil service .
. . It is nothing to do with the retirement of the chief executive
or anything?
Mr Barrass: Nothing whatsoever.
Q65 Mr Mudie: I have not seen anything
across the public sector field that there has been an enormous
increase in pension costs, yet on 700 or 800 you have a £1
million increase.
Mr Barrass: Certainly—and,
as I say, you have caught me on the hoof. I am not ducking the
question; I simply do not know the answer. Some time in the last
two years there has been a change which we have taken as a penalty
which, as far as I am aware, is nothing peculiar to the Mint at
all.
Q66 Mr Mudie: Do you think you could
let us have a note?[3]
Mr Barrass: I would be happy to
do that.
Mr Mudie: Thank you.
Q67 Peter Viggers: The return on
assets in the collector coin division is much better than the
return on assets in the circulating coin division. Why is this?
Mr Barrass: The two markets are
very different. On the circulating side we have a much heavier
capital investment and therefore much less flexibility in terms
of adapting to market volumes, and what we have in the marketplace
at the moment is a very aggressive situation on the circulating
coins side, where we have—I am not sure what the right expression
would be—an unruly market. We have some competitors who
are doing things and we do not actually understand how they can
do them. We are having to compete with them to get volume in to
actually absorb some of our fixed costs and overheads and therefore
the return that we get on the circulating side is a lot less than
we would like it to be. On the collector side, I think our share
of the worldwide market is probably something like 1%. Everyone
is a small fish on the collector side. We are dealing with products
where we are established as probably one of the most prestigious
if not the most prestigious mint in the world. Our product is
seen as a very high-quality product and we can command a premium
on that product, therefore we can get a much better rate of return
on our capital on the collector side.
Q68 Peter Viggers: Have you published
the breakdown between the UK market and overseas markets in circulating
coins?
Mr Barrass: We publish limited
information. As I say, we have what we consider to be crazy competitors
out there at the moment and we are very reluctant to let too much
information get into the public arena so these guys know how exactly
it is that we are performing.
Q69 Peter Viggers: Is the Treasury
a benign customer?
Mr Barrass: I would say the Treasury
is quite a long way from being a benign customer. One of the things
that both the Committee and the general public can take a lot
of hope from is that we have a very robust negotiating stance
between ourselves and the debt reserves management part of the
Treasury, which is effectively our customer, and at the moment
in fact we are still trying to fine-tune the service level agreement
for this financial year. That gives you an indication of how healthy
the process is, that we have actually two government departments
that are determined to dig their heels in and fight their corners.
Q70 Peter Viggers: The price you
get is decreasing, is it not?
Mr Barrass: In real terms it has
been decreasing because it has been driven by a formula and the
formula is inflation less a percentage. I am quite comfortable
with that, in that it rightly gives the Mint every incentive to
drive for productivity actions and give the taxpayer the best
deal that it can.
Q71 Peter Viggers: As you go into
the poker game of setting the price, what is your ultimate sanction?
Is there a risk that you might lose the contract with the government?
Mr Barrass: Certainly in the short
term we will not lose it because we are a government department
and the coin of the realm is manufactured within the Crown. We
are part of the Crown, if I can put it that way. If we did not
come to an agreement sooner or later we would go higher and higher
up the Treasury, and I guess in the end the Minister would have
to arbitrate on where fairness lay.
Q72 Peter Viggers: When does the
current contract expire?
Mr Barrass: Because we have not
been able to agree on a contract or a service level agreement
for this year, what we have done is roll last year's SLA forward,
and that has been rolled forward until 31 March 2007. We will
get to an agreement one way or another.
Q73 Peter Viggers: Are your foreign
competitors driven by commercial reasons or do some countries
feel a sense of pride in having their own Mint and they are prepared
to subsidise it?
Mr Barrass: I think with most
countries, even those that are not our competitors, some which
are our customers who take our blanks and they do their own striking
within the country, I think there is a huge sense of pride within
all of those countries that they actually have control over their
own coinage. I think there is also something we have, and it is
part of what being the Royal Mint is about, that some of our customers
who take our coins overseas also have huge pride that they are
minted by the Royal Mint in the UK, and I have had that directly
from customers during my time there.
Q74 Peter Viggers: Do you suspect
dumping by some competitors and, if so, might there be a case
for a reference to the WTO?
Mr Barrass: It is very difficult
to asses because clearly they work in their own closed environment,
but certainly when we go into a tender situation and we get some
indication as to what the successful tender price was, and we
will sit back and think "Wow, that's a price that we couldn't
make money at." We have a significant amount of fixed capital
invested in the industry and, because most of the circulating
coin business is tender-driven, when a particular tender comes
into play you will get a company which maybe has huge shortfall
in its volumes and is desperate to get those volumes just to absorb
some of its overheads and then maybe goes in at what we would
see as a very non-commercial price simply to get some level of
volume to keep the plant running.
Q75 Peter Viggers: So is one part
of your circulating coin business subsidising the other?
Mr Barrass: No, we are in good
shape in the Royal Mint in that, albeit that the Treasury is a
very exacting customer, I think we are heading towards a very
fair agreement with them and we can defend a position that says
they are not subsidising the overseas coins. The overseas coinage
is not subsidising them as such, but clearly, any overseas contract
helps absorb overhead and fixed costs.
Q76 Peter Viggers: Have you gained
any new customers or lost customers recently? Is there much turnover?
Mr Barrass: On the circulating
side, we have made one or two significant gains in terms of our
customers, which has helped us have the first six months' performance
that Mr Mudie was questioning me on earlier but I would not want
to mislead the Committee that these are brand new customers. The
nature of the tender business is that we have customers that will
come to us, we will manufacture several hundred million coins
for them in a fairly defined window, then we do not hear from
them for a period of time and then they come back to the market
for another tranche of coinage, and you do not necessarily get
the second tranche. We have been successful in winning some fairly
significant tenders in the last six months.
Q77 Peter Viggers: Can you tell us
how your profit breaks down as between UK circulating coin and
overseas circulating coin?
Mr Barrass: I would not want to
share that publicly, other than on UK and overseas circulating
coin, they are both profitable at a contribution level.
Q78 Peter Viggers: Given the importance
of your overseas sales to your viability, why do none of the targets
set by Ministers relate to overseas sales?
Mr Barrass: I think because they
are self-regulating. Because the nature of the tendering business,
if you ever let a customer down in terms of quality or delivery
times or any other aspect of the contract, you simply will not
get the contract next time round. So on the overseas customer
base, it is pretty self-regulating.
Q79 Peter Viggers: In your chief
executive report you refer to a brand strategy review, the results
of which you expect to provide "especially useful direction
for the future strategy of collector coin." Can you share
some of the thinking with us?
Mr Barrass: It would be fair to
say not that we had lost our way but we had gone into areas on
our collector side of the business which maybe are not appropriate
to the Mint and, as part of the brand strategy review, we really
have a very clear strategy in place now that says what we want
the Mint to look like in the future. So we are looking for the
things—and I would hope this is not going to come as a surprise
to Committee members—for those qualities of heritage, integrity,
quality, prestige, craftsmanship, the sort of things that you
would automatically associate with the Mint, and that is really
where our product portfolio should lie. You can see from our recent
product offerings that some of them have been perhaps outside
of that and we are now going to be focusing absolutely on those
aspects I have just mentioned. That will lend huge strength to
the Mint going forward.
Chairman: We have come to the end our
time. It was three years ago we last looked at the Royal Mint,
which is the normal cycle for our scrutiny of these Treasury departments.
What has been clear from today's session is that over the last
three years, perhaps before you were in charge, it has been a
pretty abysmal performance, with commitments made three years
ago not being met, targets being missed and with the changes that
we were promised to working practices simply not having been fulfilled.
To your credit, you have admitted to all that and not shrunk away
from it. However, we do now expect to be kept informed of progress
on your plan by yourselves and by the Financial Secretary and
I do need to put you on notice that it will be well before three
years, probably within one year, that we ask you or your successor
to come before us again to report back on how the Royal Mint is
getting on. Thank you very much.
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