House of COMMONS



treasury committee

(Treasury Sub-Committee)



Administration and Expenditure of the Chancellor's Departments, 2008 - 09



Wednesday 21 October 2009




Evidence heard in Public Questions 1 - 152



This is an corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.



Any public use of, or reference to, the contents should make clear that neither witnesses nor Members have had the opportunity to correct the record. The transcript is not yet an approved formal record of these proceedings.



Members who receive this for the purpose of correcting questions addressed by them to witnesses are asked to send corrections to the Committee Assistant.



Prospective witnesses may receive this in preparation for any written or oral evidence they may in due course give to the Committee.



Transcribed by the Official Shorthand Writers to the Houses of Parliament:

W B Gurney & Sons LLP, Hope House, 45 Great Peter Street, London, SW1P 3LT

Telephone Number: 020 7233 1935

Oral Evidence

Taken before the Treasury Committee

(Treasury Sub Committee)

on Wednesday 21 October 2009

Members present

Mr Michael Fallon, in the Chair

Nick Ainger

Mr Graham Brady

Mr Colin Breed

Jim Cousins

Ms Sally Keeble

Mr Andrew Love

John McFall

John Thurso

Mr Mark Todd

Mr Andrew Tyrie

Sir Peter Viggers


Witnesses: Mr Robert Stheeman, Chief Executive, Ms Jo Whelan, Deputy Chief Executive, and Mr Jim Juffs, Chief Operating Officer, Debt Management Office, gave evidence.

Q1 Chairman: Robert Stheeman, I welcome you back to the Sub-Committee. Could you introduce yourself formally and your team, please?

Mr Stheeman: Certainly. I am Robert Stheeman, Chief Executive of the Debt Management Office, to my left is Jo Whelan, the Deputy Chief Executive and the Joint Head of Policy and Markets, and to my right is Jim Juffs, the Chief Operating Officer.

Q2 Chairman: Thank you very much. How have your priorities changed over the last year?

Mr Stheeman: Fundamentally, they have not changed that much. The overall task that we have been set has become that much larger, but the actual nature of the priority remains very much the same. It has always been for us to focus as much as possible on delivering the remit as smoothly and successfully as possible and that has not changed despite that it is much larger in size.

Q3 Chairman: So it is simply the quantum of the task that has changed?

Mr Stheeman: Absolutely.

Q4 Chairman: Given how closely you are now working with the Treasury, does it make sense to retain the office as an autonomous agency?

Mr Stheeman: In my opinion, my personal opinion, of course - and I would say this, wouldn't I? - yes, it does because we are a very focused, professional, small outfit which has to interact directly on a daily basis with the market in particular. We need to also provide market intelligence where necessary to the Treasury. I think all those are things which if you are actually within one bigger, larger department you could potentially lose that focus. It also helps us, I think, attract key staff, motivate people because they know what they are there for. I think one of the key issues for is us is simply being able to say, "This is our focus. We are not distracted by other things," and I think the separate agency status helps, even though we are under no illusions that we are somehow independent, we are a legal part of the Treasury.

Q5 Chairman: But you are also working for the Bank of England. You have provided nearly a billion pounds to purchase assets under that facility, have you not?

Mr Stheeman: We do not work for the Bank of England directly, if you like, we work for the Treasury in providing the financing for indeed the non-QE part of the asset purchase facility. That is absolutely right, but I think it is quite important to note that what we are doing is ultimately providing exactly the same function that we have always provided, which is to meet the cash needs of the Exchequer.

Q6 Chairman: For the first time that Standard & Poor's has downgraded its sphere of the UK economy to negative from stable. Do you have regular meetings with the credit rating agencies?

Mr Stheeman: In the DMO we do not have very many meetings. We have on occasion had meetings but the main part of those meetings is conducted usually within the Treasury with a focus on the fiscal side in particular, rather than just the debt management side. We have on occasion, as I say, had a visit, I can recall, earlier this year from one of the rating agencies ourselves and we are obviously happy to provide them with whatever information they want, but their focus is usually about the fiscal position rather than purely about debt management.

Q7 Chairman: But there would be an effect, would there not, on your work if the credit rating dropped further?

Mr Stheeman: Absolutely, and clearly we watch very carefully what the rating agencies opine. At the same time, that effect is likely to manifest itself, if at all, in the price. It is not necessarily going to manifest itself in, if you like, the longer term issues for us, in the way we access the market or the strategy that we are trying to pursue, or the advice that we would give the Treasury.

Q8 Chairman: So you do not have contingency plans to meet a sudden drop in the rating?

Mr Stheeman: Not directly because first of all that almost presupposes that something like that could or would, or will happen. We do not know. The rating agencies ultimately provide an opinion. It is their opinion. Does it have an effect on the market? It may do, and I would imagine that any downgrade, any formal downgrade - and we have only so far had the outlook changed - could move the market, but in my experience our sense is that actually rating agencies are what we would call lagging rather than leading indicators. By the time they have opined, the market itself has probably to a large extent already moved and discounted that information in the market.

Q9 Sir Peter Viggers: You explained the preference for longer dated gilts in your annual reports in 2007/2008, pointing out the advantages in terms of cost, yet the number of short dated gilts that you have issued recently, the proportion, has increased considerably. Could you comment on that?

Mr Stheeman: Certainly. We very much remain very keen to issue as much long-dated paper as we possibly can, in particular because we regard it as generally cost-effective - we know the pension fund demand is out there - but as the financing requirement has risen as dramatically as it has it has forced us to go to that part of the curve which is the deepest and provides the most liquidity and enables us, if you like, to raise large amounts of cash in a relatively short period of time. To give you an example of that, a little over a year ago the average size of our short-dated auctions, anything up to seven years, was usually in the region of three, sometimes three and a half billion. This year they are five billion, so we have been able to increase the average size of those auctions significantly. The average size of long-dated auctions remained unchanged more or less at around two, two and a quarter, two and a half billion.

Q10 Sir Peter Viggers: Is the appetite for short-dated gilts linked with overseas development?

Mr Stheeman: Certainly overseas investors, if and when they are active in the market, it tends to be primarily in the shorter end of the market, occasionally also the medium sector up to ten years, but they are generally focused very much on shorter maturities, that is absolutely correct.

Q11 Sir Peter Viggers: How do you anticipate that you will replace the short dated gilts when they mature?

Mr Stheeman: That depends very much on how the financing requirement evolves over the next few years and the size and the nature of that requirement over the next few years. We still, I think, will certainly continue with our aim to try and focus as much as possible on spreading the issuance out across all maturities, but it could be that if the financing requirement were to decline I think it is reasonable to assume, as long as there is no major shift in the shape of the yield or something that would suggest it will be an extremely expensive strategy, that we will try as much as possible to spread that issuance around and that could lead to a decline in short dated issuance again.

Q12 Sir Peter Viggers: Do you have any national security concerns arising from an increased reliance on overseas buyers?

Mr Stheeman: Not really. You are talking ultimately about investors in debt. It is not the same thing as investing in equity. Overseas investors do not have voting rights. I think that the portion of overseas investors that we have in our portfolio, which is about a third, is not unduly high. If you look at the fact that we have got about a third overseas, a third with the pension fund industry, I think that gives us a sort of what I would call balance and probably a diversification in our investor base which is actually quite positive.

Q13 Sir Peter Viggers: If there were uncovered auctions, what is plan B?

Mr Stheeman: Well, we would probably follow exactly the same procedure that we followed earlier this year when we did have an uncovered auction, which means that we make up the shortfall in our cash and management operations. The simple fact is that we will take directly on our own books, on the Debt Management Account, the full amount of the gilts that has been issued from the National Loans Fund and we will fund that ourselves. Then we have a procedure whereby there is a short period where we do not try and sell those gilts back into the market so that the market can, if it wants, adjust and then we sell that subsequently into the market. We would follow that procedure again because we believe the market places a lot of value and emphasis on the predictability of that system and not being surprised by any actions that we would then take perhaps to make up that shortfall.

Q14 Mr Breed: In your statement in the report and accounts you indicate that the DMO has received a remit in 2009/10 which will again require a record level of gilt sales of 220 billion. Is that a realistic amount of debt to sell in 2009/10?

Mr Stheeman: I think so. We are more than halfway through the year. We have done, I think, just a little bit over 135 billion so far, but to me the best indication of that is probably due not to what we have done just since 1 April but on an annual rolling basis actually since this time last year, which was the moment we had to step up issuance so much at the time of the bank recapitalisation actually we have issued, I think, over 200 billion already in the last twelve months.

Q15 Mr Breed: In that case, is the market not becoming saturated with UK gilts?

Mr Stheeman: I do not see a sign of that. That does not mean that we are complacent or that we in any way underestimate the scale of the challenge. I think we have been fortunate as well over the last six months in that probably market conditions have been more benign than we and some commentators would have actually expected. But we do not see signs of saturation. The auction programme has gone relatively well. Auctions have tended, since the uncovered auction, to be relatively well covered. The market has held up relatively well, but I would also stress against a very benign backdrop and, of course, we have to be fully aware and cognisant of the fact that the Bank itself has been buying gilts in the secondary market.

Q16 Ms Keeble: What effect is QE having on the current view of the sales? You referred to it briefly earlier.

Mr Stheeman: It's clearly having an effect. It is incredibly hard to try and quantify what that effect is. I think that what it has certainly done is helped create the benign conditions I was referring to. The best example of that is that we have to acknowledge that since the beginning of this financial year net gilt issuance - net in terms of what we have provided to the market in terms of supply - that has been, as I say, 135 billion, but at the same time the Bank has taken out 160 billion from the market, so effectively we have had a decline in available gilts in the market by approximately 30 billion. So that is actually almost a net decline in gilt supply, so there clearly has been an effect. My opinion is that the effect is shown in the yield levels that we currently see across all maturities because the Bank is now buying across all maturities. Exactly where yields would be were the Bank not to buy, I don't know.

Q17 Ms Keeble: Do you want to make a comment on the current yield levels?

Mr Stheeman: I would say two things there, and it is quite important for me to stress that we genuinely in all the debt management policy advice we give to the Treasury, the decisions we take, we do not, if you like, attempt to finesse the level of yields or try and take advantage of current levels. The only obvious comment I would make is that we are in some maturities across the board at intergenerational lows when it comes to yields, so the one positive factor which must exist is that we are currently raising money at relatively, in historical terms, cheap levels.

Q18 Ms Keeble: Which is a positive statement about confidence in the UK?

Mr Stheeman: It may be. I think it is ultimately very simply a question of supply and demand.

Q19 Ms Keeble: I just wanted to check up on one question to follow on from what Peter Viggers asked previously, which is that you have introduced the use of mini-tenders in syndicated programmes, increases of short dated gilts and the increase in overseas investors. Do you see any risk in that change in profile of what you are doing, or do you think it will all just proceed smoothly?

Mr Stheeman: The way I think I can best try and answer that question is to say that we fundamentally need an efficient, well-functioning and deep gilt market for us to be able to raise the money that we do. That is absolutely critical. So I think it is fair to say that everything that we try and do in terms of our strategy is around facilitating the distribution mechanism for gilts. So you mentioned mini-tenders, and the various things, syndications, that we have introduced this year, are primarily designed to smooth the distribution process for our gilt programme. As long as we have this well-functioning market, I believe that we will be able to continue to deliver the remit successfully. But having that is incredibly important.

Q20 Mr Tyrie: What discussions do you have with the Bank of England before you make gilt disposals, before you go out and sell gilts?

Mr Stheeman: Virtually none. I mean, we clearly talk to the Bank of England on an operational level, but there is no discussion between us and the Bank in terms of what we would choose as a debt management strategy, in the same way as the Bank would not seek to garner our views in terms of, for instance, the way it carries out QE.

Q21 Mr Tyrie: But they are the biggest investor of the lot. You have just given the figures. You have regular meetings, do you not, with investor groups at the moment to decide what maturities to issue, to find out where the liquidity is in the market, and yet you are not talking to the biggest buyer of the lot?

Mr Stheeman: I think if we were to talk to the Bank about, if you like, the programme or even, dare I say it, as we do with other investors, ask the Bank the question, "What would you like us to issue?" If that was to happen - and I can assure you it certainly does not happen - I think the market would rapidly lose confidence in, if you like, the conduct of both debt management policy and possibly even monetary policy.

Q22 Mr Tyrie: And they are not even sitting in on these investor group meetings?

Mr Stheeman: We have occasionally invited them in the past. Recently they have not joined these meetings but in the past more as an observer so they are aware of what the investor conditions and views are, absolutely. As I say, we talk to them on an operational level, but in terms of trying to separate debt management policy and monetary policy, both we and the Bank are very keen to try and maintain that separation.

Q23 Mr Tyrie: You have described this extremely benign environment in which the Government is taking the lion's share of what you are trying to get out into the market. Not only is that going to stop, it is going to go into reverse, is it not? The Government is going to have to shift this stuff? So the pressure in the gilt market is going to become very severe indeed at some future date. Yields are going to rise, are they not, quite a lot?

Mr Stheeman: I fully accept that and I would be the first to acknowledge that I would accept that whenever the Bank decides both to stop QE and potentially even to reverse it, we will find ourselves in a very different environment. But it goes back to my point, and I completely agree with you, I think yields will rise. I do not know by how much, but they will rise. But at the same time, in fairness, that is ultimately where the market and this efficient market mechanism that I was referring to kicks in. If the market does its job well and efficiently, then the price of the gilt that we are selling should be able to adjust itself relatively smoothly, but that is absolutely key. We are under no illusions about the challenge ahead!

Q24 John Thurso: I wanted to ask about the Public Works Loan Board. Who would be the best person to answer questions there?

Mr Stheeman: Any of us.

Q25 John Thurso: Well, let me ask the question. The amount lent by the Public Works Loan Board this last year is reported as being about 6 billion, down from 10 billion the previous year. How much of that is through early redemption interest rates causing a drop in lending?

Ms Whelan: We cannot really ascertain exactly an amount that is related to a particular cause, but it is worth noting that in that period interest rates changed quite a bit and that probably led to some local authorities revisiting their Treasury management strategies. We saw, for example, some repayments of the long dated borrowing. There were, repayments across the maturity sectors but mainly in the shorter dated and in the longer dated, and at the same time I understand there was a fall-off in the amount that local authorities had invested. So potentially there were some alterations on both the asset and liability sides of their balance sheets. When we process the loans we are not mandated to ask exactly why they are doing it.

Q26 John Thurso: The point behind this - I am sure you are aware of it - was the Communities and Local Government Committee Report, which cited the November 2007 chance in the rates, which meant that actually it was too punitive for local authorities to repay, so they hung onto the loans and then invested the surplus cash. Therefore, when they all got stuck by being in banks in other countries, there was more at risk because they had not repaid loans which they might otherwise do and they called for some pretty urgent review of that. Is that for you to push through?

Ms Whelan: It is partly for us and we have actually got a consultation letter out currently which is being put forward by the Debt Management Office and the PWLB together acting rather on behalf of the Treasury. The whole thing is governed really by a piece of statute about the National Loans Fund, which says that the National Loans Fund must not lend at a loss and in the statute it sets out a certain methodology that can be used that will accord with that statute provision. That allows us, or requires us really, to compute the notional government borrowing rate at the time we make advances. So the methodology that has been in place for a while now is consistent with that. What we are currently consulting on is whether it would be acceptable to stakeholders to slightly change the operational process for that, which we would hope might allow the costs to be slightly lower in future, but we do need to see what the results of the consultation are as to whether people will find it operationally straightforward to do it according to the way we have suggested it might be done.

Q27 Mr Brady: How worried are you that there might be uncovered auctions in the future?

Mr Stheeman: I would have to logically expect that at one point there will be an uncovered auction. I don't know when that will be. I think I probably said exactly the same thing a year ago, so I apologise, but it is in the nature of the market that from time to time you will have an uncovered auction. My concern, as I said, I think then, is always around the notion that potentially there is something structurally wrong in the remit which would suggest potentially that we are facing not just one uncovered auction but maybe several. Were that to happen, then I will be slightly more concerned, but having said all of that, I do tend occasionally just to point out the auction process, what it is, what it tells you about demand at a certain time, and it really only tells you about demand at the moment you hold the auction, at 10.30 on any given day. I always think it is worth recalling that, for instance, last year, for whatever reason, I think Germany experienced something like ten or so what has been referred to as "technically" uncovered auctions, yet no one suggested fundamentally that there was a problem there with selling Bunds or that there was anything other than a view that German Government Bonds represented the best possible asset in their market. So I am not that concerned, but I would be concerned if it was a sign that the distribution mechanism is not functioning efficiently. I always come back to that point, I know, but that is absolutely key from our perspective.

Q28 Mr Brady: When you had the uncovered auction last year you just do not feel that that was the case, that there was structural bargaining?

Mr Stheeman: I think one of the main reasons for the uncovered auction in March was the volatility that we were experiencing in the market at that time and volatility indeed is something which the market does not like because it impact especially on the risk appetite of our primary dealers, of the Germans, the gilt edge market-makers, and if their risk appetite is diminished, that indeed is something which we are not so happy about, but that is one of the reasons why we have introduced also these supplementary issuance licences this year.

Q29 Mr Brady: Are you planning future syndicated auctions, and if so can you say a word about what the cost of that is as opposed to the cost un-syndicated?

Mr Stheeman: So far we have had the planning assumption this year for this current financial year that we will be doing a total of 25 billion in syndicated auctions. We have completed three so far and the fourth is actually occurring today. We have syndicated a new 50 year conventional gilt seven billion in size, so we have done a very large part of the 25 billion programme in total. The costs have been to date, I think, just over 36 million, which have been paid in fees, including today's syndicated auction that is just over another 15 million, so it is just a bit above 50 million in total this year, so far.

Q30 Mr Brady: How does that compare with the cost of unsyndicated?

Mr Stheeman: The costs of mainly auctions? That is a very, very good question. We do not know. We have to guard against the notion that auctions are a cost-free way of issuing debt. They are not. We can easily end up paying sometimes quite large concessions through the auction programme. The big difference between auctions and syndications is that the cost that we are paying for syndications is explicit. We are actually paying them out in hard fees. I am sorely tempted to say that syndication from time to time is potentially a more cost-effective way of issuing large amounts in one go and thereby reducing the number of auctions that we have to hold and thereby reducing arguably the risk premium, whatever that is, that the primary dealers might be charging us in that process.

Q31 Mr Brady: When is it appropriate to hold a mini-tender and how many of them have there been this year?

Mr Stheeman: I think we aim to hold about one once a month. Effectively mini-tenders are nothing more than small auctions. They are mini-auctions. They tend to be in general roughly half the size of an auction. We introduced them for the first time a year ago when the remit was suddenly increased, primarily as a way also, as with syndication, of focusing on long-dated conventional and index-linked issuing because demand sometimes is not always as big as a full auction size that we are trying to get away. The demand can actually be slightly smaller but it does not mean that it is not there and it does not mean that we are not keen to tap into it. So very often a lot of the stresses in the market if a particular bond might be regarded by the market as in very short supply we are able to address that demand by the mini-tender process.

Q32 Mr Brady: Have top-up auctions been successful in 08/09 and 09/10?

Ms Whelan: I think so, very much so, and what we have tried to do there effectively is introduce a mechanism to incentivise bidders at auction by allowing them the option to take up to 10% of their allocation at the clearing price on the same day but a few hours later, at two o'clock. As you would expect, the success can generally be measured, in terms of whether they take it up, as to whether the price is either above or below where it was at the time of the auction. If it is below, obviously the take-up will be very low, but we also think that the primary measure of success is actually just to incentivise bidding. We need to have, if you like, eager bidders at the auction and the top-up facility is one way of trying to achieve that.

Q33 Mr Love: I want to come back to the question you were asked by Mr Tyrie in relation to quantitative easing. While I take on board the point you made for you to act in concert in some way alongside the Bank of England would be seen very negatively by the marketplace, but it is important that you have a well-functioning market and therefore I wonder if any consideration has been given by the Debt Management Office to whether there needs to be some arrangements made for when the quantitative process reverses?

Mr Stheeman: That is an entirely legitimate process and you are probably very much aware that the Governor of the Bank has said on numerous occasions that when it comes to any disposal of their gilt holdings that they will be actually coordinating and talking to us in that process, and you would expect that on an operational level we will certainly be doing that. I completely agree with the premise of your question. Neither we, nor the Bank, nor the Treasury, or anyone in the authorities has any interest at all in seeing, if you like, a disorderly market or anything which is going to upset the market and the Bank has made that very clear. So we will be talking to them in detail about that.

Q34 Mr Love: I was just going to say that. You indicated earlier on that you have not had any discussions at all with the Bank, as I understood the response you gave. Surely now is the time to be at least exploring what will happen when this process reverses itself?

Mr Stheeman: As I say, on an operational level we will certainly be doing that, but what I am talking about now, if you like, is the operational side and I think the Bank would not be very keen to send a signal, or for us to send a signal that we are, if you like, contemplating a change in direction as far as the Bank is concerned in terms of what they are doing. But when the time comes, I am sure that we will be talking to them in quite a bit of detail. If I could just make one point there. As an example of the cooperation which we have with the Bank, what I describe as operational cooperation, you may be aware that the Bank lends out part of its gilt portfolio that they have purchased through us into the market in order to help facilitate the repo market, and that has been something which the market has welcomed very much indeed. So I thin it just underlines how conscious the Bank is of avoiding disruption to the market.

Q35 Chairman: When you came last year we expressed some concern about the capacity of your office to handle this increased workload. I see from your Annual Report that your staff numbers have not in fact gone up. Have you got enough people?

Mr Stheeman: I think we do for the moment. We are a lean organisation and I am quite happy actually that we stay that way. Just so that you know, the Annual Report obviously goes until the end of March. At that time we had the resources and obviously I think we had approximately 90 staff members. That is probably now close to about 110, 115, to be precise about 113, so it actually has gone up and, as you will expect, always when you start adding resources there is always a lag in terms of actually getting the right people in place in time. But we have had discussions with the Treasury about the resources. We have received the resources that we have requested and we requested more resources, also financial resources, and we have received those.

Chairman: Good. All right. As you know, we are on a tight timetable today so we are going to leave it there. If we have further questions we will follow them up in writing, but I would like to thank you and your colleagues for appearing today.

Witnesses: Ms Jane Platt, Chief Executive, Director of Savings, and Mr Steve Owen, Channel Delivery and Management Director, National Savings and Investments, gave evidence.

Q36 Chairman: Jane Platt, can I welcome you back to the Sub-Committee. Could you formally introduce yourself and your colleague, please?

Ms Platt: Certainly. My name is Jane Platt. I am Chief Executive of National Savings and Investments and the Director of Savings, and this is my colleague, Steve Owen, who is Director of Channel Delivery and Management.

Q37 Chairman: We have about thirty minutes for this session, because we want to squeeze in the Royal Mint, before our vote. Your vision is to provide guaranteed savings for customers, but your mission is to raise cost-effective finance for the Government. Has that conflict got worse over the last year?

Ms Platt: Over the last year we have certainly lived through some exceptional times as we have dealt with the flight to safety post the Lehmans crisis in the autumn and over that period it has been very important to us to balance the interests of: our customers, of the Government in the form of net financing, and financial stability. So in fact over that period our key remit of raising cost-effective net financing has been reinforced, but so has the importance of us behaving straightforwardly and honestly with our customer base.

Q38 Chairman: But what criteria do you use to determine a fair rate of interest for your customers?

Ms Platt: In terms of determining our pricing, we look at a number of things. We look at our position in the competitor tables, we look at base rates and we look at the amount of net financing that we need to generate. So we calibrate these things, bearing in mind, of course, the need to make sure that we behave appropriately at a time when the banks and building societies are rebuilding their balance sheets to make sure that we have a suitable blend of rates across the various products that we market.

Q39 Chairman: You mentioned the flight to safety, but you ceased discretionary marketing during the autumn and winter. Why was that? Why did you not want to encourage additional funding?

Ms Platt: In August of last year we were on track to be raising 4 billion of net financing for the Treasury, which was the agreed amount we had set off to raise. After the Lehmans crisis it was very, very clear that we were going to be receiving a large volume of unsolicited funds coming into NS&I, and at that point we had to make a decision. Do we stay open for business and allow net financing to rise very well above the amount we had previously agreed, or should we actually stop not only marketing our products but also allowing people to invest in them? We took the decision with the Treasury that we should cease all discretionary marketing but stay open for business and I think that NS&I and its operating partner, Siemens, did a marvellous job in the face of huge unsolicited volumes in staying open for business. Our contingency plans worked, staff cancelled their holidays, they did extra shifts, they really "busted a gut" to be able to make sure that we offered a good service to customers. Because you could imagine what would have happened if NS&I had not been open for business at a time when people were so concerned about their savings. I was up in our call centres just very shortly after the flight to safety and listening to people of all ages, some of them in tears, talk about how concerned they were about the safety of their savings. And of course NS&I's call centres are staffed by people who generally have some 22 years of experience and they were able to calm people down at a time when emotions were running very high. So I think that NS&I has really proved itself as the cornerstone, a robust cornerstone, of the savings market in an extraordinary time.

Q40 Chairman: It seems odd in the middle of the period to actually discourage people from saving with you, given you are a savings body?

Ms Platt: We certainly were not discouraging them in any way. We stayed open for them.

Q41 Chairman: But you stopped the marketing?

Ms Platt: We stopped the marketing, but ---

Q42 Chairman: How is that not discouraging?

Ms Platt: It is very different to cease marketing than to be actively discouraging people moving towards us. At that point, of course, it was not clear how long the flight to safety would go on for, whether the measures that were being taken by the Government would be successful. We had no idea how long that flight to safety would last, so we just wanted to make sure we stayed open for business, that people could always get through, that our systems were robust and that through all that NS&I and Siemens coped extremely well.

Q43 Chairman: Could you explain your net finance target for the current year? It is essentially to maintain the status quo. Why is that?

Ms Platt: After such an extraordinary year last year when our net financing figure was 12.5 billion, we worked with the Treasury to look at our target for this year, which is indeed zero net financing within a tolerance of -2 billion to +2 billion, and indeed we expected some money to flow out after the flight to safety was over because as more normal circumstances begin to reassert, you would expect some of the money that came in to gently flow out. So we were expecting that to happen, which is why our net finance target is as it is for this year.

Q44 Mr Todd: Can I turn to an issue we have raised previously, which is unclaimed funds? In your accounts for 31 March you have represented that section and it is far from clear whether unclaimed funds have actually gone up or down during the period in question because it is not possible to make a comparison. Have they gone up or down?

Mr Owen: The total level of unclaimed funds using the Government definition and the industry definition is about 452 million, which relates to our account products. If you wish to compare with where we were when we last sat in front of this Sub-Committee, they have gone down a little. The total on a like for like basis would be just over a billion now. We have had a great deal of success in terms of reuniting customers with lost assets both through our free tracing service, which we have run since 2001, but more significantly through our joint approach with the BBA and the BSA in relation to the mylostaccount website, which has reunited some 212 million worth of funds with customers.

Q45 Mr Todd: So if we turn to p.99 of your accounts, how do I reconcile the figures you present there with what you have just said?

Mr Owen: The figures as I have just given them are based on the definition of 15 years without a proactive contact from the customer, which is the definition used by the industry and by Government and which is a different basis for some of these figures.

Q46 Mr Todd: Okay, we will skate over why you use one indicator when you are answering questions and when you are in your accounts you use another, but on this basis it would appear that those figures you have left in your accounts have actually gone up in the period in question and you have taken a number of other elements and placed them into some pool account of some kind somewhere else so that we cannot compare them at all?

Mr Owen: The figures have gone up in terms of p.99. We have grown, of course, quite significantly so you might expect them to go up in accordance with our overall scale and size.

Q47 Mr Todd: But you have grown in terms of new customers. It would be a sad thing if they could come up and claim in such a unique year in which, as your Chief Executive has said, people have been flying to safety. It hardly indicates that they are likely to lose their accounts within 12 months?

Mr Owen: It is quite normal for the customers to leave their funds with us on a long-term basis. Our savings certificate, for example is a five year product and after those five years if the customer takes no action it rolls over into another five years product, so we need to be quite careful in terms of the definition of unclaimed funds in relation to NS&I products.

Q48 Mr Todd: If the Government were to change its position - and, as you know, we urged it so to do last time in terms of including these in the unclaimed assets scheme. If they were to do that, would that have any operational impact on how you managed your unclaimed funds? You are already obviously attempting to link these funds to their legal owners. If it were moved to the unclaimed assets scheme, what difference would that make?

Mr Owen: We are a little different to the rest of the banking industry in that the money that flows into NS&I we do not hold it, we do not keep it, it flows into the Government coffers and presumably the Government therefore spends it, so it is already being used for the public good effectively through expenditure.

Q49 Mr Todd: I was more interested not in the philosophical argument, which I understand although I do not accept, but in the operational implications of that change.

Mr Owen: In what sense?

Q50 Mr Todd: In other words, if you moved this to the unclaimed assets scheme, would this change the way in which you manage the unclaimed funds that you have been collecting and enumerating, although, as you have just said, you pass them direct to the Treasury anyway?

Mr Owen: As you so rightly say, we do not manage them as such. We already make every effort to reunite the customers with their funds, both through mylostaccount, through using third party databases such as Experian and through some software we use to proactively find customers.

Q51 Mr Todd: So it would not make any difference to what you do?

Mr Owen: Not operationally, no.

Q52 Mr Breed: Could you tell us something about the new banking system that has not quite yet come into being, in particular what sorts of improvements it might bring to your services that you are providing?

Ms Platt: Absolutely. When I was here a little over two years ago I was talking about the modernisation of National Savings & Investments and we are running through a programme of modernising the infrastructure, data centres, our banking engine, and we are transferring our products one by one from the old banking system to the new banking system, and we are doing it on a product by product basis. What customers will see is the ability to manage their products online. Because at the moment already we have an ISA product which customers can not only buy and sell online but they can change their customer details and all those sorts of things. So it is a proper internet service in its fullest sense and what you will see as we move across onto the new banking service is still very high levels of accuracy and all those good things, but also the ability for customers to manage their holdings online to transfer to new products. So we offer a much slicker and better service for customers. For the Government what you will see is a reduction in our overall cost base, which means that over time we will be able to offer cost-effective services to areas and groups of customers that at the moment are not cost-effective for us to offer products for. So it will have the benefit of reducing our cost base but also mean that it is cost-effective, because our costs are lower, to provide our products for areas of the market that we are currently not servicing.

Q53 Mr Breed: So it will not be a banking system that can be provided to those who want just a basic bank account and find it difficult to obtain one from normal High Street banks as such, is it?

Ms Platt: No, it is a banking engine in terms of allowing us to manage and administer those funds. It is not a retail banking system because we do not offer current accounts and that is not something we have built into our specification.

Q54 Mr Breed: So if there is a sort of launch what you are basically doing is gradually building up a new method of dealing with products for customers as such? Perhaps we were wrong to expect a big launch of something brand new if it was not going to happen. There is not going to be a launch, is there? Essentially you will just over 2009/10 gradually take products onto this system, so there will not be a magnificent launch as such, will there?

Ms Platt: There will be no Big Bang and anyone who works in banking would absolutely avoid such a thing, moving everything all at once, because the risk to 27 million customers of moving from one thing onto a new thing all at once would be a huge, huge risk. So we have taken the prudent approach of moving the products across product by product and for each product there will be a re-launch, there will be an improved service that customers will see and a benefit to Government. So although there is no Big Bang there are tangible benefits.

Q55 Mr Breed: Do you see that when you have actually completed the task of moving everything over you will have to have some sort of marketing campaign to actually stimulate more and more customers and more product sales and that sort of thing, or is it something which is going to be relatively low-key?

Ms Platt: I think that will depend on the discussions we have with the Treasury on our net financing remit because if they set up a net financing remit that is positive and generating a number of billions for the Government, then we would be able to combine our new product launch with marketing to attract funds in. So our marketing is aligned to the requirement for net financing rather than to the requirement of the system.

Q56 Sir Peter Viggers: You signed a public/private partnership contract with Siemens in 1999 for ten years which was subsequently extended to 15 years and they found themselves under heavy demand during the flight to safety. The amount you have paid to Siemens has increased by about 20,000 over the last couple of years. To what extent do your increased payments to Siemens reflect additional costs to Siemens and to what extent do you think there is additional profit there?

Mr Owen: The flight to safety in terms of the payment to Siemens was round about 12 million in total. Now, that figure covers not just taking in the sales but managing those sales through the life of the contract, through to 2014. Our profit margin within those negotiations with Siemens, which was done some years ago, was 12.5%.

Q57 Sir Peter Viggers: Are you satisfied that changed circumstances mean that the amounts you are paying to them adequately reflects that they are not making excessive profits?

Mr Owen: Yes, I am satisfied. It is very difficult to calculate the precise costs because some of this sits in the future and customer behaviour will drive the actual cost of managing those customers over their total life. If they are very active customers who contact us a great deal, of course it costs more than a customer who puts their money with us and then leaves it there until repayments. But I am satisfied we did a great deal of work to ensure the amount we paid to Siemens was the correct sum.

Q58 Sir Peter Viggers: As circumstances have changed, do you continue to monitor and do you continue to be satisfied that the amount you pay them is satisfactory?

Mr Owen: We do continue to monitor on an ongoing basis. The other element that gives me confidence that the amount we paid is not excessive is that we can compare it with the average costs at the original tendering back in 1999 to see if we were paying more or less per transaction or per customer than we were when we went to the market for a competitive tender. And we are actually paying significantly less than we were back in 1999 per customer or per transaction.

Q59 Sir Peter Viggers: They are responsible for direct channel sales, of course. You had a short advertising campaign in 2009 to encourage greater use of direct channels. How much do you hope to save through promoting greater use of direct channels.

Mr Owen: Our direct channels do save us a great deal of money, primarily because when we bring a customer in direct we only pay one third party and that is Siemens. If we bring money in through the Post Office we pay two third parties, so it is significantly cheaper to bring money in directly as opposed to a High Street partner.

Q60 Sir Peter Viggers: Siemens is responsible for direct sales. Are you saying that the direct sales come direct to you and may not come through Siemens?

Mr Owen: Siemens do all of our processing for us, whether it is direct or indirect. They process everything, so we pay Siemens a different amount if the money comes in through the Internet or the telephone compared with if it comes through the post and we pay them less for the direct sales than we do if it comes in through more traditional means because their processing costs are lower.

Q61 Sir Peter Viggers: If you increase direct sales and reduce traditional sales, that must have an impact on those responsible for the traditional sales, namely the Post Office. What would the impact be then?

Mr Owen: It does reduce our payment to the Post Office, yes.

Q62 Sir Peter Viggers: How do you see the distribution of products developing in the coming years?

Ms Platt: I think our strategy is quite clear, that we want to have a robust set of Internet, telephone and postal channels and our relationship with the Post Office remains healthy. Last year the percentage of business that we did through the Post Office was about 60%. I would expect it to be about 50% this year, which is something the Post Office are well aware of and we work very closely with them.

Q63 Ms Keeble: I want to ask about your relationship with the Post Office. You said that you expect the market share that goes through the Post Office to decrease. Is that because you are going to grow the others or is it partly because of the reduction in the Post Office network?

Ms Platt: It is to do with the balance between the various different channels. So overall, for example this year we are not expecting any growth because we are trying to manage our net financing around zero within the band of -2, +2 billion and the percentage the Post Office will be doing will be about half of the sales which will come in through that channel.

Q64 Ms Keeble: Are you going to be affected by the reduction in the Post Office network and the other various channels, the sales channels? Which ones are you looking to increase and how?

Ms Platt: In terms of the Post Office and its number of branches, in fact the vast majority of sales coming to us come through the Crown branches, so we would not expect to be adversely affected in terms of our sales by any plans that we have seen from the Post Office to date.

Q65 Ms Keeble: Do you not think that you are over-reliant on the Post Office? Looking at the figures, the Post Office counter sales were very sort of static through 2003/4 to 2007/8. Last year it shot up and it practically doubled. I see that your Internet sales have grown but not exponentially. What are you going to do to really expand on your other sales channels?

Ms Platt: Last year was a very unusual year because of the flight to safety and there was definitely a discernible trend that because people were very concerned about security overall, it was important for them to have the physical transaction and a piece of paper that was stamped in the Post Office when they actually invested their savings. So I think there were very particular reasons why the Post Office counter sales were so disproportionately high potentially last year.

Q66 Ms Keeble: So you are trying to say that people would rush round to Northern Rock and took the money right there and then they rushed round to the Post Office and paid it in? I think you would have to be quite clear if the flight to safety people were choosing to go to the Post Office .

Ms Platt: Not all of the flight to safety people were choosing to go to the Post Office because in fact all of our channels increased their sales last year, but there was a disproportionate increase in the Post Office. It was not just people rushing round from Northern Rock and putting their money straight into the Post Office, it was people looking to invest over the counter and wanting some proof of that.

Q67 Ms Keeble: What are you doing about looking at the products? Could you have an agreement with the Post Office about who provides what type of product, if there are some sorts of areas which they will not go into? Finally, your baby bond product, is that the Child Trust Fund or not?

Ms Platt: I do not think so.

Q68 Ms Keeble: Okay, so the first one is just about the agreement with the Post Office about who sells what?

Ms Platt: We do not have a precise agreement with the Post Office over who sells what, but we have a very good relationship with them and over time we share our plans, they share their plans, and as you will have seen in the last few days we have mutually agreed that our Guaranteed Growth and Income Bonds will no longer be sold in the Post Office but just through our direct channels. That is the result of our strategy to increase the amount we are doing over the Internet and over the telephone. Also they are content with that because they have products which compete in the same space, so it works well for both parties. So we work very closely together in looking at that.

Q69 Ms Keeble: And the baby bond product, is that a Child Trust Fund or not?

Ms Platt: We have Children's Bonus Bonds. We do not have a child's trust fund, but we have a Children's Bonus Bond.

Q70 Ms Keeble: We went into this some time ago when I asked about whether you did a Child Trust Fund and you did not do one. Have you looked at that at all, because given your profile and the assurances people have about those sales, why don't you offer a Child Trust Fund? Why can't you develop one?

Ms Platt: The situation has not really changed since we last spoke about this matter in that we do have a review of our products line from time to time. We had one about 18 months ago and the Child Trust Fund remains a product that we cannot offer on a viable basis in light of our remit.

Q71 Ms Keeble: Why not?

Ms Platt: Because of the expense of creating and running that sort of product. It would not be cost-effective financially for the Government. But we do have an extremely good product in Children's Bonus Bonds and some 5% of our total customers are children who invest either in Children's Bonus Bonds or in Premium Bonds or Capital Bonds.

Q72 Ms Keeble: Can I just ask again on this, because if you say that you are trusted for children's products then why not the Child Trust Fund and why not look at how it can be provided as one of a range of products to make sure that you really can deliver a comprehensive suite of services for children, if you are trusted for that sector?

Ms Platt: We believe we do have a comprehensive range of products for children with the Children's Bonus Bonds, Premium Bonds and the other things that we offer. We have looked at the economics of offering a Child Trust Fund, but unfortunately they do not meet the hurdles of being able to offer such a thing cost-effectively in the context of our overall range.

Q73 Chairman: Just a couple of final questions. Your key efficiency measure, soon to be called "value add", the extent to which it is cheaper to raise money through you than through the rest of the markets was simply suspended last year and has not been reinstated. Why was that? How can you tell how well you are doing if the efficiency targets you have got no longer exist?

Ms Platt: It has been temporarily suspended, so we are all working on the basis that as soon as the comparators which make up that target and benchmark have some meaning, then we will reintroduce it. When I say when the comparators have meaning again, let me just explain. We temporarily suspended value add at the time when interest rates, the base rate, went down to half a per cent. The base rate has never been that low since the Bank of England was founded and certainly not since Premium Bonds and our other products were introduced. So we looked very carefully at the value add measure and realised that if we did not suspend it, it would drive us to make some very difficult and unfair decisions in terms of pricing for our customers. For example, with base rate at half a per cent, that would assume on our value add measure that the Gilt Office (DMO) would be able to raise financing for 11 or 12 years at less than 0.3%. That is just not true, so therefore we had to suspend the measure because it was distorted and did not give a true measure. However, we have got an efficiency measure ---

Q74 Chairman: No, let us just stick with value add. When you say it can be reintroduced, can it now be reintroduced mid-year or would you get away with no measure for the whole of this year?

Ms Platt: We have a measure for this year, which is our efficiency ratio, which looks at the cost of administering the fund against the amount.

Q75 Chairman: Yes, but I am asking you about value add. Could the value add measure be reintroduced in-year?

Ms Platt: Technically it could, but only when the comparators have some meaning. We have got, though, a value proxy measure, which does measure whether we are able to add value against the gilt market. What that has done, and we have worked with the Treasury on this, is to put in place an indicator which does indeed show that during the time that value add has been suspended so far we are raising money more cost-effectively than the Gilt Office (DMO) and I am more than happy to go into the detail of that calculation and the figures if you would like.

Q76 Chairman: I am afraid we do not have time to do that. You have got your own youandyourmoney website alongside the Financial Services Authority's own website on moneymadeclear. Why do you need your own?

Ms Platt: Along with other financial services institutions, we absolutely support the Government's financial capability initiatives. We believe with the NS&I brand we are in a really good position to get people with our 27 million customers, many of whom come to our website on a very regular basis actually looking at this information. And you may be interested that in WH Smith's very shortly we will be putting out some financial services guides. Again, this is very unusual because most people would expect us to have everything focused absolutely on product, but of the eight guides we are putting out six of them are on financial capability and helping to educate the public where we believe NS&I has an important role to play.

Chairman: I am afraid we are out of time. We are going to have to leave it there. If there are further questions we will follow up in writing. Thank you both for attending today.


Witnesses: Mr Andrew Stafford, Chief Executive, and Mr Adam Lawrence, Finance Director, Royal Mint, gave evidence.

Q77 Chairman: Can I welcome you both. Could you introduce yourselves formally, please?

Mr Stafford: Good afternoon. I am Andrew Stafford, the Chief Executive of the Royal Mint. I have at this moment to make an apology. Mike Davies is the Chairman, but unfortunately he has been unable to make the Committee hearing because the train service from Coventry was cancelled due to a fatality on the line. We have advised that Adam Lawrence, the Finance Director, was the other witness who was attending, and Adam has made it, but Mike Davies will not be attending and he will be writing to you to send his personal apologies, but it was unavoidable.

Q78 Chairman: Okay. Your profits are down and your rate of return is down. Why is that?

Mr Stafford: The answer is that our turnover grew year on year -

Q79 Chairman: No, the profit I asked you about.

Mr Stafford: Forgive me, I am just about to say that the mix of our business did change quite substantially year on year, particularly in the commemorative coin business where a lot of the turnover in the last twelve months was from bullion coin as people sought to buy more gold coins at a much lower margin than our collector coins. So our growth in turnover was not comparable with the growth in margins from our commemorative coin business. Therefore, we have seen a reduction in our profitability of the percentage of sales but our return on average capital employed, which is our key measure, clearly performed very well.

Q80 Chairman: But your average rate of return on capital employed has gone down, is that not right?

Mr Stafford: It has gone down, but it is still a very healthy return for a manufacturing organisation. As I said, the principal component of that is the change in mix of the business year on year, predominantly driven by a growth in demand for bullion coin products.

Q81 Chairman: But what is the strategy now if your turnover keeps going up and you make less and less profit? Am I right?

Mr Stafford: Our strategy is very clearly to achieve a better return on average capital employed and if you look at our trend over the last three years then clearly we have made tremendous strides in that area. In-year there was a reduction because of that very reason, but if I look at our current strategy for this year we are increasing our circulating coin business overseas and as a result we are now seeing a dramatic improvement again. You cannot turn off demand for bullion coin products from the consumer when clearly in the economic situation in the UK this year there has been a very strong interest in buying bullion coins.

Q82 Chairman: I am sure my colleagues will follow up on that. The schedule is to turn you into a Government-owned company by December. Are you on track for that?

Mr Stafford: Yes, we are on track. Everything is being done to complete the process by 31 December.

Q83 Chairman: Is this not a risk, launching a new Government-owned company just as it has become profitable again?

Mr Stafford: We believe that we have in place a strategy. We have demonstrated now for the third consecutive year that this business is a successful business making a good return for its shareholder. We have a long-term strategy in place involving both growth in our UK commemorative coin business and in our international circulating coin business. We have secured long-term contracts in major overseas markets such as Russia. We have secured a major capital investment programme for the business to increase our manufacturing capability, so we believe that the strategy and the capability are in place for long-term sustainable, profitable growth.

Q84 Chairman: If you have got a long-term strategy, does it include full privatisation? Do you expect to be a trading company for ever?

Mr Stafford: That is not a matter for management. The decision of whether or not the Royal Mint is privatised is a matter for the politicians, not for management.

Q85 Chairman: You do not have a view on it?

Mr Stafford: My view is irrelevant. My task is to make sure that I make the maximum return for the shareholder, regardless of who that shareholder is. The shareholder at the moment is the Government and the Government has tasked me with making the maximum return for the shareholder.

Q86 Chairman: I understand that, but I asked you whether you had a view?

Mr Stafford: And I can tell you that I might have a view but my view is irrelevant. That is a matter for the politicians.

Q87 Chairman: So you had a view but -

Mr Stafford: Whether or not I have a view - and I must be absolutely clear on this because my view is irrelevant. It is a matter for me as management to make the return for the shareholder. It is for the shareholder to determine whether or not they wish to privatise the business.

Q88 Nick Ainger: Mr Stafford, Gerry Grimstone's review for the Operational Efficiency Programme made the recommendation that you move to the private sector?

Mr Stafford: Yes.

Q89 Nick Ainger: Did he visit Llantrisant?

Mr Stafford: No, he has not visited Llantrisant.

Q90 Nick Ainger: Did he talk to you?

Mr Stafford: No, he did not.

Q91 Nick Ainger: Do you not find that amazing that someone is suggesting a complete change of the operation of the company and never actually visits its only plant and its management?

Mr Stafford: That is not - again, my task -

Q92 Nick Ainger: Let me turn it around. If you were going to carry out a review of an organisation, would you normally visit that company and also talk to its management?

Mr Stafford: Mr Grimstone is reviewing a number of organisations. It is not for me to comment on which of those organisations it is appropriate -

Q93 Nick Ainger: But were you surprised that your organisation, the Royal Mint, is being reviewed and he did not visit and he did not speak to you?

Mr Stafford: My task is to perform the duties that I am given to perform and I am not going to be drawn on that point because the review has been instructed by the Chancellor and we are performing what we have been asked to undertake in that review and we are complying fully with all the advisers that have been appointed to conduct that review process.

Q94 Nick Ainger: Okay, let us move forward and look at the actual report, your annual report. You say in "Our Future" where you refer to the vesting that, "There is now a strong case for the introduction of private risk capital into the business. This will allow us to pursue new commercial opportunities, expand more rapidly, taking advantage of freedom, flexibility," et cetera. What commercial areas could you move into that you cannot move into now?

Mr Stafford: Well, there are two very specific things. One is the acquisition of other organisations which would allow us to expand internationally, and secondly undertaking joint ventures with overseas partners to enable us to penetrate markets, for example Asia, where we have a presence but we would need to have a greater level of presence for a manufacturing capability. Both of those things, whether it is an acquisition or a joint venture, would clearly require a capital injection into the business. If the Treasury did not feel that that was a good use of public money to make those investments, then clearly private capital is an alternative way of pursuing both joint ventures and acquisitions.

Q95 Nick Ainger: So let us get it right, you are talking about overseas adventures, not actually investment in the Llantrisant plant?

Mr Stafford: Not necessarily. We have just, for example, already announced a major capital investment programme in the Llantrisant plant, 20 million will be spent over the next twelve months, doubling our capacity for nickel plating. So there is a huge investment within -

Q96 Nick Ainger: But that is under the existing programme. What you have just told us is that the way to expand into new commercial opportunities is actually to have work going abroad?

Mr Stafford: Not necessarily so. For example, one or two of the acquisitions that could be undertaken in the business would be for UK operations, which could be combined with the Llantrisant operation . So there are specific opportunities in the UK as well as overseas.

Nick Ainger: Thank you.

Q97 John Thurso: Following on from that, to what extent is your future success dependent on guaranteed business from the Treasury?

Mr Stafford: The UK Treasury now accounts for less than a quarter of the Royal Mint's turnover and profitability. We have had a strategy to clearly reduce our dependence because there is no potential for growth by just remaining as the incumbent suppliers to Her Majesty's Treasury for UK circulating coin. So in answer to your question, less than a quarter of our turnover and profit is now dependent upon the UK Government.

Q98 John Thurso: A quarter of the turnover?

Mr Stafford: And profit.

Q99 John Thurso: And profit. One of the comments which have been made to us by a private mint is that you have an unfair competitive advantage because of what you get from the Treasury and that if you were to enter into the private sector with that competitive advantage it would be a disadvantage to them and would not be truly competitive. What is your answer to that?

Mr Stafford: Well, the answer is that we have to compete on an international basis with other mints and we win some tenders and we lose some tenders on a cost basis and there will be no difference to whether or not we are owned by Government or owned by the private sector in that regard. With regard to private mints, private mints predominantly make commemorative coins and there is very healthy competition in the market for commemorative coins. We have a very good business in the UK, but there are other UK privately owned mints that also supply commemorative coins.

Q100 John Thurso: You had, I think, a bit of a spat with the Birmingham Mint, which has now been settled, I understand, for a relatively modest amount of money. In the annual report it says there is no basis for a claim. Why did you choose to settle out of court at all?

Mr Stafford: The case goes back a long time, it goes back to 2002 when the matter was ---when you say we've had a spat, the current management have certainly not had a spat. The Birmingham Mint ---

Q101 John Thurso: They inherited one then?

Mr Stafford: They inherited a spat. We sought to resolve this to avoid any further cost to the public purse. We were advised that to take this matter to trial would have incurred at least another three-quarters of a million pounds in legal fees, and even if we had won but not been awarded costs then we could have been incurring significant costs. So to settle the whole matter for 100,000 was a very sensible way of settling the matter and avoiding any further risk to the public purse.

Q102 John Thurso: It was a purely commercial decision?

Mr Stafford: Yes.

John Thurso: One last question, if I may.

Chairman: As briefly as you can, because we are up against the clock.

John Thurso: In that case, that is fine, I am done.

Chairman: We are up against the clock today because we have to finish at half past.

Q103 Jim Cousins: Mr Stafford, I listened very carefully to the answers you gave to the earlier questions, but as I understood it you already have some relationships with private sector banks?

Mr Stafford: Well, we have some of our banking facilities provided by private sector banks. They are not in any way equity stakes, but we obviously have some of our banking facilities with private sector banks, correct.

Q104 Jim Cousins: And your Russian contract?

Mr Stafford: That is an arm's length commercial arrangement with a private sector organisation in Russia which is the supplier to the Russian Mints. So we contract with an organisation called Tenzor, which in itself then contracts for the supply of coins to the Russian Mint.

Q105 Jim Cousins: So what you are is a trading fund? You are able to enter into these commercial arrangements and in the case of the Russian one, I guess, Russia being Russia -

Mr Stafford: Forgive me, this is us supplying them with a product. This is nothing to do with the way we finance our balance sheet, this is purely ---

Q106 Jim Cousins: But it is a long-term arrangement with them?

Mr Stafford: Yes. We have never said we cannot ---

Q107 Jim Cousins: How do you carry the risk of that arrangement?

Mr Stafford: Forgive me, we receive a payment up front for the goods before we supply it. We have a very large percentage of the goods paid for before we deliver.

Q108 Jim Cousins: You transferred an unusually large amount of money from your reserves into your profit and loss account last year?

Mr Stafford: I will ask my Finance Director maybe to answer the technical points if I may.

Q109 Jim Cousins: You transferred 8 million into your profit and loss account?

Mr Lawrence: Sorry, that is our profit for the year, so if you look from year to year at our reserves that is the movement in profit.

Q110 Jim Cousins: And that made the total in your profit and loss account ---

Mr Lawrence: No, no, that's an impact on profit as well, a shift in reserves

Q111 Jim Cousins: No, no, the total now in your profit and loss account is about 50 million?

Mr Lawrence: That is our retained profits.

Q112 Jim Cousins: Yes, so how much of that might you consider investing in these arrangements that you have referred to?

Mr Lawrence: There is a big difference between retained profits and cash. Retained profits is effectively the built up profits for years and years and years. You wouldn't necessarily reinvest that. That's the shareholders' capital, so if the shareholder wanted that back we could repatriate that back to the shareholder, which we do via dividends every year.

Q113 Jim Cousins: How much will that be valued at when you become a Government-owned company?

Mr Lawrence: Well, you typically wouldn't value a company based on the retained earnings.

Q114 Jim Cousins: No, it would be transferred into it, would it not?

Mr Lawrence: Probably not. You typically wouldn't do that in this business.

Q115 Jim Cousins: So does that mean the Government this year will get that money back?

Mr Lawrence: No, but if the Government wanted to call back their retained earnings they would be able to call that back via dividends and the shareholder would ask us to repay some dividends if they wanted to do that.

Q116 Jim Cousins: And they have not asked you to do that?

Mr Lawrence: Well, we do. Every year - for the last couple of years - we have given roughly a 4 million dividend.

Q117 Jim Cousins: 4 million, but there is 50 million in the ---

Mr Lawrence: But I don't have 50 million of cash to give you. If you want it, I could go and leverage the balance sheet, get a loan and give you some money.

Q118 Jim Cousins: Do forgive me, Mr Lawrence, Mr Stafford was very proper earlier about his powers vis a vis ministers. You must understand this Committee has no power to compel you to do anything with your money.

Mr Lawrence: No, I am not meaning you personally, the shareholder. If the shareholder wanted that cash back they could extract it. The way they would have to extract it, though, would be to actually finance up the balance sheet because we don't have enough cash to give you that 50 million.

Q119 Jim Cousins: Your target for return on capital is 10%?

Mr Lawrence: Yes.

Q120 Jim Cousins: In fact I think you achieved that in the year before last. How many redundancies have you declared?

Mr Stafford: Within the last twelve months we have had no redundancies.

Q121 Jim Cousins: And in the twelve months prior to that?

Mr Stafford: In the twelve months prior, I think I am right in saying there were 200.

Q122 Jim Cousins: 200?

Mr Stafford: Sorry, it's the year before that, so for the last two years there have been no redundancies. Forgive me, it was back in 2005/6.

Q123 Jim Cousins: And your present employment is -

Mr Stafford: 765 permanent employees and about approximately 100 temporary employees, which flexes that according to seasonality, but there are 765 permanent employees.

Q124 Jim Cousins: The number of your permanent employees is not going up. Is the number of your casual employees going up?

Mr Stafford: As I say, we have to cope with seasonal peaks but basically we have a very stable workforce and we envisage over the next 12 - 24 months that we will increase our overall workforce by approximately 100 as we grow the business in commemorative coin for the London 2012 Olympics and we have announced that we expect an increase in our workforce of approximately 100.

Q125 Jim Cousins: Mr Stafford, would you confirm to the Committee that the Treasury guidance is that companies which move from a trading fund status to a Government-owned company status are generally on a path to privatisation?

Mr Stafford: I could not comment on whether or not that is the case because -

Q126 Jim Cousins: You cannot comment on the case that that is in the Treasury guidance?

Mr Stafford: I can't comment on that because the statement around the Royal Mint is that we are moving to a Government-owned company if we go through the vesting process. There is no intended statement of policy to move to privatisation and there has never been any public record of that fact.

Q127 Jim Cousins: The Treasury's guidance, general guidance on these matters is that organisations which move from trading fund status to a Government company status are on a path to privatisation?

Mr Stafford: That is your statement. I can neither confirm nor deny that statement because it is not for me to state what the Treasury's policy is on that matter.

Q128 Jim Cousins: You have never checked back to see that that statement is in the Treasury's general guidance?

Mr Stafford: Whether or not it is in the general guidance, it is not specific to the Royal Mint.

Chairman: We will have to speed up, I am afraid, because these are important issues. Mark Todd, fast, snappy questions, and snappy answers if we can!

Q129 Mr Todd: I will try. You currently outsource a significant portion of your work to third parties in other countries, I think in the USA, Australia - there are actually some blanks in your report, am I right? Your Finance Director is nodding and you are looking blank!

Mr Stafford: No, I am not, I am trying to understand what you said. When you say "outsource", we buy in precious metal blanks for our commemorative coins, so the gold and silver blanks for our commemorative issue.

Q130 Mr Todd: Okay, got it. You presumably faced a significant price increase in the last twelve months. Have you had any quality concerns?

Mr Stafford: We have had some quality concerns because when you start moving to new suppliers sometimes you have to be very diligent and ensure they understand the specifications that we demand, which may be higher than those which they have previously been used to, and we have had to work very closely with the suppliers to improve the quality of that.

Q131 Mr Todd: Has there been a transfer of blank production to these overseas locations from the UK or has that been something you have historically tended to source from those?

Mr Stafford: Three years ago there was a decision made to cease production of gold blanks in the Royal Mint because the volumes required were so small relative to the ---

Q132 Mr Todd: I think I have heard silver as well, is that right?

Mr Stafford: Yes. So the answer is that a decision was made to cease production of them because the volumes were not sufficient to warrant retaining that production.

Q133 Mr Todd: Okay, now you have seen the outcome in terms of quality and price are you thinking that was the correct judgment to make?

Mr Stafford: We still are very sure that that was the correct decision because we have managed to negotiate better terms and improve the quality substantially over the last twelve months.

Q134 Mr Todd: Have you conducted a valuation of the business as it stands?

Mr Stafford: A valuation of the business? Well, part of the process for the vesting will be to determine what capital structure is appropriate for the new vested organisation.

Q135 Mr Todd: So does that include an exercise of valuing the business?

Mr Stafford: No.

Q136 Mr Todd: For example, for a trade sale?

Mr Stafford: No.

Q137 Sir Peter Viggers: You routinely screen for counterfeit coins and your estimate on that screening is that in October 2008 it was 2.58% of pound coins that were counterfeit?

Mr Stafford: Yes.

Q138 Sir Peter Viggers: How do you respond to the coverage by a representative of Williams, a firm which make counterfeiting equipment, that in fact the true number of counterfeit coins in circulation is about twice your estimate?

Mr Stafford: We undertake these surveys every six months and we have got data going back several years, and we are very comfortable that our analysis is correct. We take a representative sample and we have statistically proven that there is a consistency in our methodology and therefore the right level is 2.58%.

Q139 Sir Peter Viggers: In 2007, I understand that 97,000 fake coins were removed from circulation, 97,000 for the whole year, whereas in the last quarter of 2008, I understand that 270,000 fake coins were removed. Are those figures right and what do they say?

Mr Stafford: What it says is that we are becoming much more vigilant in the way that coins are removed from circulation, so one of the tasks has been for the banks to improve the method by which their machines in cash centres removed the counterfeit coins from circulation. So the challenge is not to say how many coins there are currently in circulation but to actually remove them from circulation. We have worked very closely with the Serious Organised Crime Agency (SOCA) and with the banks to make sure that our processes for identifying and removing from circulation those counterfeits is much more thorough, and I am very pleased to say that the banks are doing a very good job.

Q140 Sir Peter Viggers: The problem is, of course, that no one has ownership of identifying counterfeit coins. The people who have got counterfeit coins, if they find they have got one it becomes valueless and it is not in your interest or in anyone's interest to damage confidence in the currency system. Do you think that someone should be given responsibility for screening counterfeit coins? Who should be responsible?

Mr Stafford: The people responsible are the banks because they are the people who actually circulate the coins through the system and they have a clear responsibility in their cash centres to identify the counterfeit and the machinery is there that is capable of doing it, and we also have to ensure that the public is well-educated and our task with the Treasury is to provide the education so that people know how to identify counterfeits. It is not our task to remove them.

Q141 Mr Brady: What is your long-term assessment of the demand for circulating coin in this country and in other countries?

Mr Stafford: Our long-term view is that demand for the UK circulation is remarkably robust. If you go back over the last decade, then demand has been almost without exception consistently around 1.3 billion coins per annum. The principal drivers for that demand are (a) removal of coins from circulation because people lose them, either down the backs of their sofas or in jam jars, and also because when a new store opens, when Tesco opens a new branch, for example, there is the requirement for an injection of more coins into the system. If you look at those two principal drivers, they have been remarkably consistent. We have undertaken some quite detailed research to try and extrapolate what we see the long-term demand being and we can see nothing that is going to materially alter that demand.

Q142 Mr Brady: You do not see a threat from technology, different methods of payment?

Mr Stafford: No, because most transactions involving coins are for values less than 10 and in those situations even the Oystercard, frankly, becomes less attractive. It is really where things like a 5 and 10 note is involved that the crossover takes place.

Q143 Chairman: Can you explain to the Sub-Committee why you have changed the way in which your target one is measured?

Mr Stafford: Yes, it is to make sure we have a more realistic method of calculating the terms for shareholders. I will let the Finance Director who was responsible for recommending that change explain it.

Mr Lawrence: We use bullion to finance our precious metals and the question was asked before about supplying precious blanks from overseas. It is a very effective way of financing our bullion, which can be 20, 30, 40 million at any given time. To put it in perspective, the rates we are pay on that are less than half a per cent per annum, so it is a very effective way of financing our bullion purchases. If we did not change our method of calculation and we came to this Committee and were measured on our performance, we would actually start making some pretty poor decisions. So this actually allows the business to make the best business decision for the business.

Q144 Chairman: Is it in fact easier or harder to increase your average rate of return on the average capital implied?

Mr Lawrence: Technically, when we did the calculation for the prior year we made our target slightly harder, but it is the right decision for the business.

Q145 Chairman: Why did your Target 3 performance decline?

Mr Stafford: Target 3 -

Mr Lawrence: Is the delivery of commemorative coins.

Q146 Chairman: Commemorative coin delivery in the UK.

Mr Lawrence: The primary reason is that in the first part of the year we released the new coins, the new reverses, which was the Heraldic symbol, and we had such a fantastic demand for that that it actually put us in a backorder situation and that drove us in the first part of the year to mean that we actually couldn't achieve our targets for the whole year.

Q147 Chairman: Why have your debtor numbers nearly doubled?

Mr Lawrence: Again, a very good reason. We had a very, very, very strong quarter four and the relationship in our quarter four, we had a high level of overseas debtors so our business was largely dominated by overseas customers, who typically pay us on 30, 60 day terms, and that was the reason for our increase in debtors. It's just that we had a very good last quarter of the year.

Q148 Chairman: You made quite a well-publicised mistake with the new 20 pence coins. How was that spotted?

Mr Stafford: It was brought to our attention by a coin collector, who identified it. We immediately went through the records to identify how this could have happened and it transpired that on the first day of production of the new reverses on one machine they had replaced the reverse design, i.e. the piece with the new design on it, but they had failed to recognise that on the 20p because of the nature of the design the date had had to be moved from the reverse to the obverse where the Queen's head is. Of course, they first looked and recognised that it still had a right Queen's head on the obverse but failed to recognise that that one needed to be replaced with one with the date on it. It happened on one machine for one shift.

Q149 Chairman: But why did nobody spot it in your organisation?

Mr Stafford: Because the person responsible checked that the dye still had a right Queen's head image on it but failed to identify - so it was an operator error. It caused one machine to produce it on one shift and it was then replaced, so it resulted in from 8.00 am until .1.00 pm on one shift ---

Q150 Chairman: How many coins was that?

Mr Stafford: Approximately 200,000.

Q151 Chairman: I understand the operator error, but why did nobody check it? Why did it take a collector to spot it?

Mr Stafford: The answer is because on the initial inspection if you have got the right Queen's image - and all the other denominations did not involve moving the date from the reverse to the obverse, the 20p did, and it was an operator error which should have been spotted. Steps have now been taken to make sure that all obverse dyes involving the 20p have the Queen's image with the date on it.

Q152 Chairman: You have got the 200,00 back? Did you take them out of circulation?

Mr Stafford: No, they are out in circulation. There is nothing wrong with them in circulation, they are perfectly legal tender. It is a bit of a storm in a tea cup.

Chairman: All right, we are going to leave it there. Thank you very much for your evidence today. If we have further questions we may follow up in writing before our report. Thank you both very much.