Report by the Comptroller and Auditor General NATIONAL AUDIT 6kICE

The Royal

Ordered by the House of Commons to be printed 1 February 1990 London: HMSO fZ4.20 net 195 This report has been prepared under Section 6 of the National Audit Act, 1983 for presentation to the House of Commons in accordance with Section 9 of the Act.

John Bourn Comptroller and Auditor General National Audit Office 29 January 1990

TheComptroller and Auditor General is thehead of theNational Audit Office employing some 900 staff. He, and the NAO, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies use their resources. Contents

Pages Summary and conclusions 1

Part 1: Background to the and their business 6 Part 2: Management Systems and Functions 6 Part 3: Commercial arrangements with associated bodies 12 Part 4: Indicators of Performance 17

Appendices 1. Senior Management and Departmental Structure 19 2. Investment appraisal at the Royal Mint 20 THE ROYAL MINT

Summary and conclusions

1. The Royal Mint are a Government Department under the Chancellor of the Exchequer, who is ex officio . In 1968 the Mint were relocated from Tower Hill, London to Llantrisant in Mid-Glamorgan where they now employ about 950 staff. Since 1 April 1975 the Mint have operated as a Trading Fund under the Government Trading Funds Act 1973, which requires them to operate on commercial lines. The Mint are to be made an Executive Agency on 1 April 1990.

2. The Mint’s primary function is the production and distribution of standard . They also produce standard coins for export, collector coins, bullion coins and a wide range of medals. Their total turnover in 1987-88 was E94.3 million.

3. This report records the results of an examination by the National Audit Office (NAO) oE the adequacy of the Mint’s management systems and functions; the effectiveness of the Mint’s commercial arrangements with the Treasury and other bodies; and of the evidence available on how well the Mint were managed and carried out their business.

4. The main findings and conclusion of the NAO examination were:

On Management 5. The NAO found that: Systems and (a) The Mint’s corporate planning operates well and review by the Functions Treasury is penetrating. However, not all the important issues facing the Mint, such as the future demand for their products, were adequately addressed in the planning document (paragraphs 2.2-2.4 and 2.8). (b) The demand for United Kingdom coinage was volatile and for new coins, in particular, was often substantially wide of forecasts (paragraph 2.5). The forecasts of demand affect the price paid by the Treasury for United Kingdom coinage (paragraph 8(b) below]. (c) The Mint have wide-ranging and reliable computerised information systems. Their production planning and control arrangements are comprehensive but rely heavily on manual effort (paragraphs 2.9-2.11). (d) The Mint are seeking to update their quality assurance procedures. However, they had not yet adopted the full disciplines of British Standard 5750 (paragraph 2.12). (e) The Mint’s investment appraisal systems are based on sound and prudent principles. But there were examples of apparent failure to consider relevant factors or options; and post-review was inadequate. The appraisal system was subject to Treasury examination (paragraphs 2.13-2.15). (f) The Mint’s marketing and sales departments are energetic and

1 THE ROYAL MINT

imaginative. This activity cost some E3.5 million in 1987-88 (paragraph 2.17 and 2.29(a)). (g) A significant proportion of the Mint’s costs are regarded as fixed. This has a consequential effect on the cost to the Treasury of standard United Kingdom coins, since the taxpayer meets the fixed costs so identified. The Mint’s fixed/variable cost ratios have been agreed by their internal auditors (paragraph 2.26(b) and 3.7). (h) The Mint have a professional internal audit provided by Coopers and Lybrand who, with the Mint’s approval, also carry out worthwhile value for money studies. Otherwise, there is no permanent management services unit (paragraphs 2.21-2.23).

6. The NAO concluded that the Royal Mint have sound, well- established management systems, and are making increasing use of advanced information technology. In this connection the greater use of computerised systems may increase efficiency. In the NAO’s view, however, the Mint’s systems were not always applied rigorously, especially those for investment appraisal: and the formal corporate plan could be more comprehensive. Since overestimating demand for United Kingdom coins increases their cost to the Treasury, the methodology for forecasting demand for United Kingdom coins should be reviewed. However, the Treasury doubt that this would lead to improved forecasts.

On Commercial 7. The Treasury remunerate the Mint for the production and Arrangements with distribution of United Kingdom standard coins under a contract which Associated Bodies they negotiate annually with the Mint. Outside this contract the Mint used to produce bullion coins for the Exchange Equalisation Account; and have unwritten agreements with the two main private mints in the United Kingdom for the sharing of orders of standard coins and proof/collector coins from overseas customers. They have also formed a consultancy company-Royal Mint Services Ltd - jointly with Thomas De la Rue and Company Ltd.

8. The NAO’s findings on the Mint’s dealings with these bodies were: (a) The unit cost, excluding metal costs, paid by the Treasury for the productionof United Kingdomcoins fell steadilyin real terms in the five years ended 31 March 1989, and are expected to fall further in 1989-90 (paragraph 3.4). This reduction has been achieved despite the Mint having to satisfy significant fluctuations in demand, both above and below forecasts (paragraph 2.5). (b) The United Kingdom coinage contract provides for the Mint to be reimbursed a proportion of their fixed costs which usually exceed the United Kingdom’s share of Mint output. Over the last six years the consequential “premium” payments have averaged E2 million annually. The Treasury regarded their “premium” contributions to the Mint’s fixed costs as commensurate with their having first call on the Mint’s resources, and their requiring the Mint to maintain adequate capacity to ensure that demand forecast for the medium term can be met efficiently and economically (paragraphs 3.5-3.6). Nevertheless, they had decided to review with the Mint the premium payment arrangements (paragraph 3.11). 2 (c) The fair operation of the arrangements on fixed costs depended on accurate forecasts of United Kingdom demand as well as the classification of costs as between fixed and variable, referred to in paragraph 6 (paragraph 3.7). (d) In lieu of paying for reserve capacity, the NAO suggested that the Treasury and the Mint should consider whether the demand might be met more economically by subcontracting more work to the other United Kingdom mints, by stockpiling coins, or in other ways. However, neither the Royal Mint nor the Treasury thought the private mints had sufficient capacity to make a significant contribution to any major increases in demand (paragraph 3.12). (e) Unlike other United Kingdom coins, the cost to the Treasury of the one penny and two pence coins exceeds their face values. Copper-plated coins could be produced at a lower cost, but the NAO recognised that the size and content of coins are policy matters for Ministers (paragraph 3.13). (f) The Mint pay a relatively high dividend on their Public Dividend Capital. However, they benefit from rounding the dividend down, but the scope for this has been reduced (paragraph 3.14). (g) The Exchange Equalisation Account has met the capital servicing costs of the Precious Metal Unit, installed in 1986; and the Mint have melted down some of their 23 million gold Sovereigns in stock, paid for by the Account, to use as raw material for the new coin. However, the Unit has so far been engaged only on commercial work and the contractual arrangements with the Treasury were terminated in 1987-88. The Treasury pointed out that the decision to impose Value Added Tax on gold coins and the fall in the gold price in the early 1980s had both affected the demand for sovereigns to an extent which could not have been foreseen at the time the new Unit was commissioned (paragraphs 3.15-3.18 and Appendix 2, Section (a)). (h) The Office of Fair Trading have confirmed that the Mint’s agreement with the two United Kingdom private mints to share orders of certain coins did not contravene Restrictive Trade Practices legislation (paragraph 3.19). (i) The financial results of the company jointly owned by the Mint and Thomas De La Rue and Company Ltd have been disappointing. The partners had recently reviewed its future and had decided to continue with it for three years with revised financial objectives [paragraphs 3.20-3.21).

9. The NAO recognised that the Treasury had sought to achieve value for money from their arrangements with the Mint, as evidenced by the steady fall in unit costs of coinage. However, the NAO were not convinced that the Mint needed to maintain their reserve capacity when facilities might be available elsewhere or the existing capacity used more intensively. The Treasury pointed out that the steady fall in unit costs justified financing the capacity forecast to be needed in the medium term.

3 10. It seemed to the NAO that the arrangements with the Exchange Equalisation Account were unduly favourable to the Mint in that the taxpayer has financed most of the cost of the Precious Metal Unit. The NAO are therefore pleased to note that the arrangements have been terminated and trust that a more equitable contract will be agreed.

On Performance 11. The NAO considered a number of factors which would measure how efficiently the Royal Mint were managed and carried out their business. These included: performance indicators and performance against the Treasury target, profitability, productivity, comparison with other mints, extent of exports, and customer satisfaction. The NAO’s findings on these aspects were: (a) For commercial reasons, the Mint include no performance indicators in their annual report other than those based on published figures; mainly their operating profit. This lack of published performance indicators compares unfavourably with other public trading bodies and has been questioned by the Treasury and Civil Service Committee, which considered that the Mint should give more information on performance (paragraphs 4.2-4.4 and 4.7). (b) The Mint’s current cost return on capital employed during the five-year period to April 1966 averaged over 11 per cent. The target set by the Treasury for the three years to 31 March 1999 is 10 per cent. Changes in accounting arrangements meant that this target presented less of a challenge, but the Treasury have ensured that the Mint supply extra information so that they can take account of the change (paragraphs 4.2-4.6). (c) Profit on United Kingdom coinage has generally been high, dropping to a low point only in 1965-66 when the Mint’s United Kingdom coinage issues were at a high level. Two of the Mint’s product sectors have not yielded profits. The Mint have regularly made profits on sales sub-contracted to the other United Kingdom mints (paragraph 4.6). (d) The Mint did not consider the production of a meaningful, business wide measure of their overall productivity to be practical (paragraph4,10), (e) The NAO were unable to make reliable comparisons of the Royal Mint’s productivity or costs with those of the other United Kingdom mints. The indications were that the costs of the other mints were probably lower for comparable work, but the Treasury and the Mint did not consider that there was sufficient evidence to support this conclusion (paragraphs 4.10-4.11). (f) The Mint enjoy a comparatively large share of world markets for their products and have received four Queen’s Awards for Export Achievement (paragraph 4.12). (g) The major banks approached by the NAO were generally content with the service they received from the Mint, and there was general satisfaction on the part of the Mint’s other customers. However, the banks considered that the move towards lighter and smaller coins should be taken further and that the value range of coins could be reduced. The NAO recognised that other views and factors have to be considered (paragraphs 4.13415).

12. The NAO acknowledged that the Mint had developed a range of performance indicators for each of their product sectors, both in terms of profitability and productivity, for internal use. The evidence available suggested that the Mint produce high quality output, make a valuable contribution ,to exports and serve their customers well. Part 1: Background to The Royal Mint and their Business

1.1 The Royal Mint are a Government Department The Mint also produce standard coins for export; under the Chancellor of the Exchequer who is ex collector coins; bullion (precious metal) coins; a officio Master of the Mint. This arrangement dates wide range of United Kingdom military and civil from the Coinage Act 1870, which empowers the medals: and a wide variety of commemorative Treasury to appoint the Deputy Master and other medals. officers of the Mint and to give directions regarding general management. In 1968 the Mint were 1.4 In 1987-88 the Royal Mint had an annual relocated from Tower Hill, London to Llantrisant in capacity to manufacture 10,000 tonnes of bronze Mid-Glamorgan where they now employ about 950 coin blanks ready for stamping in coin presses, or staff, but they retain a small office in London. The their equivalent in other metals; to coin the Mint’s organisational structure is shown at equivalent of 1,680 million coins the size of a five Appendix 1. The Mint are to be made an Executive pence coin; to process 1.2 million ounces of Agency on 1 April 1990. precious metals; and to manufacture IOO,OOO medals. 1.2 Since 1 April 1975, the Mint have operated as a Trading Fund under the Government Trading Funds Act 1973. This Act requires the Mint to 1.5 The Mint’s total sales over the five years to 31 operate on commercial lines and limits their range March 1988 amounted to f344 million, including of activities to the manufacture of coins, medals, f224 million (65 per cent] in respect of overseas seals and similar articles, and any operation sales. Standard coin sales accounted for 53 per cent incidental or conducive to such manufacture. of total sales, of which over half were in respect of standard coins to overseas countries, and collector 1.3 The Mint’s primary function is the production coin sales accounted for the bulk of the remainder and distribution of United Kingdom standard coins. (Figure 1).

Figure 1 Royal Mint Sales Turnover by Product Sector 1983-88 (Emillion) lu! UK Standard Coin

El Overseas Standard Coin

Collector Coin, Bullion Coin 0 and Metal By-Products

q Medals

v lb6 Source: Royal Mint Operating Statistics

6 Relationship with Other Bodies of standard United Kingdom coins on the basis of a negotiated annual contract (paragraphs 1.6 As well as their special relations with the 3.2-3.13). Treasury, the Mint have contractual relationships with private sector sales agents, suppliers and Scope of the NAO Examination purchasers, the two main private mints based in the United Kingdom (paragraph 3.19), and Thomas De 1.9 Against this background, the NAO set out to La Rue and Company Ltd @aragraphs 3.20-3.21). consider whether the Mint’s activities were carried out economically, efficiently, and effectively. They HM Treasury’s Role examined the adequacy of the Mint’s management systems and functions (Part 2); the effectiveness of 1.7 The Chancellor of the Exchequer is the Master their commercial arrangements with the Treasury of the Mint, though he delegates day-to-day control and other bodies (Part 3); and the evidence to another Treasury Minister. available on how well the Mint were managed and carried out their business (Part 4). 1.8 As well as appointing a Deputy Master who acts as executive head of the Mint and Accounting 1.10 The NAO examination largely focused on a Officer, the Treasury set the Mint’s overall financial review of Royal Mint papers and computer systems target, currently an average annual return on and relevant Treasury papers, and interviews with capital employed of not less than 10 per cent over those organisations’ staff. But they also sent the three years to 31 March 1990, calculated on an questionnaires to six major clearing banks and two inflation adjusted basis. They discuss the bankers’ associations, and to the two main private conclusions of the Mint’s corporate planning process mints in the United Kingdom. And they engaged a with the Mint, and approve major capital projects consultant in the areas of corporate planning and (paragraphs 2.3, 2.13-2.15). In addition, the Treasury production control, where they considered pay the Mint for the production and distribution specialised expertise was required.

7 THE ROYAL MINT

Part 2: Management Systems and Functions

2.1 The NAO reviewed the Royal Mint’s main in the rules for competition between European management systems and functions, including mints. In general, the plan concentrated on corporate planning, coin forecasting, information formulating targets rather than setting out possible systems, production planning and control, quality responses to the threats and opportunities that may assurance, investment appraisal, marketing and develop. Thus, although the Mint reviewed sales, and management services. carefully the prospects of their individual product ranges (paragaph 1.31, they could miss opportunities Corporate Planning for sales in some of their product market sectors or set objectives which were not achievable. The NAO 2.2 The Mint’s corporate planning system produces acknowledged, however, that the record of the a detailed plan for the forthcoming year and Royal Mint in responding to market opportunities forecasts for the succeeding three years. It includes was good and indicated a flexibility which was not business aims and objectives; key objectives for reflected in the planning document. market sectors and a market sector analysis; plans for other important activities such as research and Coin Demand Forecasting development; capital investment and a review of the previous year’s results. The NAO found that (a) Standard Coins plans were prepared to a detailed timetable and 2.5 The NAO found that demand for United used well-researched and accurate historical data. Kingdom standard coinage was volatile and often There were also adequate arrangements for varied substantially from forecasts (Figure 2). supervising each plan’s preparation, consulting staff, Though forecasts of demand one year ahead seemed and for review by the Mint’s Management and soundly based, forecasts of demand up to five years Executive Boards. ahead (which affect the Treasury’s contribution to fixed costs-see paragraph 3.6) were less accurate. 2.3 The Treasury are not involved in compiling In particular, demand for the fl coin was lower the Corporate Plan until the final draft stage when than anticipated in the years immediately following they discuss it in some detail with the Royal Mint its introduction; and the assumed dates for the Management. They do not seek independent introduction of smaller five and ten pence coins evidence when verifying the main assumptions were, in retrospect, optimistic. Both of these factors behind it. Treasury Ministers, including the led to over-estimates of demand in some years. On Chancellor, take considerable interest in the Mint’s the other hand, the high level of demand for United activities and endorse the Corporate Plan. The Kingdom coinage in 1988-89 had been consistently Treasury also use the corporate planning process to under-estimated in the longer term forecasts. The monitor the Mint’s performance, and they hold NAO considered that the factors which influenced regular meetings with the Mint and discusstheir demand might have been more thoroughly analysed quarterly trading returns. The NAO found that the and that batter analysis and review of past Treasury’s oversight of the Mint’s activities was variances from predicted demand might help to generally both systematic and penetrative. provide improved methodology for forecasting.

2.4 The Mint’s Corporate Plan addressed many 2.6 The Treasury told the NAO that there had issues that could impact on the performance of been a number of studies of coin demand their various product sectors; and sought to take forecasting, both in the United Kingdom and them into account in arriving at a realistic abroad, aimed at improving the accuracy of assumption of most likely performance. However, forecasts. Those methods based on relationships the NAO identified a number of issues which, in between demand and other economic variables had their view, were not adequately addressed in the proved less accurate than the Mint/Treasury planning document. These included: the possible assessment following discussion with the impact of technological innovations on capital commercial banks. Forecasts based more investment proposals; and the possible extensively on past demand had fared a little better consequences for the Mint of the single European but, not surprisingly, were poor in the face of the market, such as changes in European coinages and introduction of new coins. In general, the Figure 2

Royal Mint UK Coin Contract: Forecast Demand and Actual Issue

80181 81182 82183 83184 84185 W&36 wa7 87188 88/89

----- Forecast ‘Maximum’ Demand ----- Forecast ‘In Year’ Demand - Actual Issue - - - -. Production

Source: UK Coin Contracts (for demand) Royal Mint Product Group Performance Indicators conclusions of those studies were that demand for and that the Britannia was launched before an coins is not susceptible to very accurate forecasting, adequate retail distribution network had been particularly when new coins are introduced; many established. of the changes in demand are unpredictable and, even after the event, impossible to explain. [cl General

(bl Other Products 2.8 The NAO suggested that the Mint’s Corporate Plan should include sensitivity analyses by product 2.7 The NAO noted that the Mint had significantly and market sector, so as to develop appropriate overestimated the demand for the new gold strategies to meet changes in demand which might Britannia coin which replaced the Sovereign. At the be encountered. The Mint told the NAO that time of its launch, in 1987, the Mint expected the sensitivity analyses had been considered during the Britannia coin to become their flagship product, planning process but were excluded from the Plan making a major contribution to their sales and in recent years at Ministers’ request. However, they profits. In the event, notwithstanding heavy were subsequently reinstated in the 1989-93 Plan. advertising expenditure, the demand for the new The Treasury pointed out that it was for the Mint coin was disappointing and the Mint reduced the and themselves to decide whether to include such 1988-89 sales forecast for it by 44 per cent. material in the Plan or consider it separately. However, at the time of the NAO’s enquiries, it seemed doubtful that even the lower sales forecast Information Systems would be achieved; losses subsequently occurred in 1988-89. The Mint have since acknowledged that 2.9 The NAO found that the Mint had their forecasts turned out to be unduly optimistic comprehensive and reliable computerised

9 information systems which were used for a wide management level in the Mint, and projects with an range of management and accounting work. estimated cost in excess of f150,OOO also need the Treasury’s approval. The Mint aim to apply the Production Planning and Control Treasury’s formal guidance on investment appraisals. Indeed, they usually proceed with 2.10 The Royal Mint’s production, planning and projects only if the expected financial returns meet control systems incorporate the elements normally criteria more demanding than those recommended found in such systems: pre-production planning by the Treasury which, at the time of the NAO’s (long-term scheduling); production planning enquiries, required a five per cent return in real (detailed scheduling): loading; production terms. progressing [activity to ensure work proceeds as planned): and production monitoring (recording and 2.14 The Mint’s investment appraisal system was checking actual production outputs at every stage of therefore based on sound and prudent principles. production). The systems are extensively However, the NAO noted that the justification for computerised but they also rely heavily on manual most projects depended on the assessed sales effort. The Mint have recognised that there is scope potential for the products concerned. This for greater use of computer applications, assessment relied heavily on the judgement of the particularly at the pre-planning and planning stages Mint’s staff because there was little available and have a development programme for that external evidence on which to base a decision. In purpose. the event, most of the forecasts proved realistic; but the experience with the Britannia shows that 2.11 The NAO found that the systems worked well forecasts can be wrong (paragraph 2.7). The NAO in practice but that they relied heavily on the good considered that, given the volatility of the Mint’s working relationships of the staff to ensure they sales, appraisals should pay more regard to operated well. The NAO considered that a sensitivity analysis of sales potential. programme for computer modelling of the pre- planning and planning stages would increase 2.15 The NAO found that in one case the efficiency, as it would assist in identifying future Treasury’s review of an investment appraisal had potential bottlenecks and idle capacity, and help to been limited; that post-reviews of investment establish the most cost effective way of dealing with appraisals were carried out by the Mint on an ad such problems. hoc basis, and that none had been seen by the Treasury for at least three years. During the NAO’s Quality Assurance enquiries the Mint introduced a revised procedure for post-reviews consistent with the relevant 2.12 The NAO found that, while the Mint had Treasury guidance. Further details of the cases sound quality assurance procedures, they were examined by the NAO are provided in Appendix 2. geared more to defect detection rather than to defect prevention. This approach tended to be Marketing and Sales costly in terms of the level of reject rates in some products. The Mint told the NAO that their level of 2.16 The Mint’s Sales Department is responsible reject rates was consistent with or better than the for the marketing and sale of all coins and “blanks” general rates in industry. Nevertheless, they had to overseas countries. Their Marketing Department recognised that their quality assurance procedures is responsible for all other sales, except for those needed to be updated and were taking positive medals sold directly by the Medals Department. steps towards this. The NAO also noted that the Mint had not yet adopted the full disciplines of 2.17 The Mint maintain comprehensive customer British Standard 5750. This specifies the functions databases, holding a variety of useful information and facilities which should be covered by a which inform their sales price calculations as well management system to ensure that products and as helping to target marketing promotion towards services are produced consistently to the required the most responsive group of customers. Sales and specification. marketing targets are set and monitored regularly. The NAO found that the Sales and Marketing Investment Apraisal Departments worked energetically and imaginatively, constantly looking for new sales 2.13 Tne Mint’s overall capital expenditure plans opportunities. are approved in principle by the Treasury as part of the former’s corporate planning process. Individual 2.18 For each sales enquiry, a specific cost capital projects are approved at the appropriate estimate is prepared. This is based on technical

10 throughput details, such as the order size, alloy, the Mint should commission an independent weight, design characteristics and previous expert review of their variable cost/fixed cost experience of similar orders. From this, costs ratios. The Mint told the NAO that the ratios appropriate to each production process and other were subject to review and that their internal overheads are calculated, using a system which auditors, Coopers and Lybrand, had confirmed takes account of all costs. the basis of the assessment. The Mint’s view was that there was little scope to make 2.19 The cost of each prospective order is broken significant reductions in the variable or fixed down into fixed and variable costs, on the basis of costs for either United Kingdom or overseas fixed/variable ratios determined and kept under coins. review by the Mint. This information is then passed to the Sales Department who use it and relevant Management Services m&rket information to inform their sales quotations. Generally, all sales quotations are expected to 2.21 The Mint have no permanent management recover variable costs and make a contribution to services unit other than internal audit. Until 1980 fixed costs. Some make a profit on total costs. this function was carried out by the Ministry of Defence Internal Audit unit. Since then it has been contracted out to a private sector accountancy firm, 2.20 The NAO had the following reservations Coopers and Lybrand, who carry out a full about the marketing and sales functions: commercial audit of the Mint’s Accounts, in (a] Costs addition to their other duties. The NAO place The total marketing and promotion costs in substantial reliance on this work in their audit of 198748 amounted to E3.5 million, excluding the Mint’s Accounts. the substantial sum spent launching and promoting the Britannia coins (paragraph 2.7). 2.22 Coopers and Lybrand also suggest and underta~ke value for money studies following (b) Sales Pricing discussion and agreement with the Mint’s The NAO noted that the variable cost/fixed management. Areas examined have included the cost ratios established by the Mint usually Mint’s internal control, security, maintenance, and resulted in a significant proportion of the the Finance Department, including computer Mint’s costs being treated as fixed. The NAO developments. In the NAO’s view these studies accepted that, as a Government Department, were thorough and comprehensive. They have been the Mint have less flexibility than a well-received by the Mint’s management. commercial concern to adjust fixed costs, such as that part of its labour force which has 2.23 The Mint also employ consultants. For permanent status. But, as the ratios have a example, in 1987 they commissioned the University substantial effect on the price of coinage and of Nottingham to undertake research on future on profits from other sales, they suggested that options for United Kingdom coinage.

11 THE ROYAL MINT

Part 3: Commercial Arrangements with Associated Bodies

3.1 The NAO examined the arrangements between Kingdom coins may be manufactured or issued the Mint and the Treasury for the production and without Treasury authority. The Treasury have distribution of coins under the United Kingdom given the Royal Mint sole right of issue. The Mint coinage contract (paragraph 1.8); and the separate manufacture United Kingdom standard coinage in arrangements between the Mint and the Treasury quantities determined in conjunction with the for the production of gold bullion coins; the Treasury and distribute it to the banks who pay the relationships between the Mint and the two main face value of the coins. The Mint also reimburse the private mints in the United Kingdom: and their banks with the face value of coins withdrawn from involvement with Royal Mint Services Ltd, a circulation when, exceptionally, such coins are company jointly owned by the Mint and Thomas De returned. The Mint pass these receipts and La Rue and Company Ltd. payments directly to the Consolidated Fund, and they do not appear in the Royal Mint Trading Fund The United Kingdom Coinage contract Accounts. The estimated number of United Kingdom coins in circulation (valued at El,741 3.2 Under the Coinage Act 1971, as amended by million at 31 March 1988) and the issues planned in the Government Trading Funds Act 1973, no United 1988-89 are illustrated in Figure 3.

Figure 3 Royal Mint 1988-89 Planned coin issues and estimated coinage in circulation as at 31 March 1988 CT 2 8 %,!2 1000 ~~~ g% 22 0 5

12 Figure 4

Royal Mint Cost of UK Standard Coins to HM Treasury

80-

60

I I I I I 82183 83184 84185 85186 86187 87188

Financial Year

- COST OF COINS (At outturn prices) ----- RETAIL PRICE INDEX

- - - -. PRODUCER PRICE INDEX (CLASS 31) ----- Unit Cost of Coins, excluding metal, adjusted for output mix, at constant prices Indexed - 1983/84=100 Source: Royal Mint Operational Performance Figures 3.3 The Treasury remunerate the Mint for the variable costs, which relate directly to the volume production and distribution of United Kingdom of coins issued, and a share of the Mint’s fixed standard coins under the United Kingdom coinage costs. As the Mint’s primary function is to produce contract which is negotiated annually between and distribute United Kingdom standard coins them and the Mint. These transactions appear both (paragraph 1.3), the Treasury have first call on the in the Royal Mint Trading Fund Accounts and the Mint’s capacity: occasionally such calls may arise at United Kingdom Coinage Appropriation Account, short notice to meet unexpected demands by the currently Class XIX Vote 12. public. The Treasury also expect the Mint to maintain adequate capacity to ensure that the 3.4 The cost of coinage to the Treasury is strongly demand forecast for the medium term can be met influenced by the quantities produced and metal efficiently and economically. price variations. In the event the unit cost of production, excluding metal costs and adjusted for 3.6 In order to help finance these requirements the output mix, fell steadily in real terms in the five Treasury contribute to the Mint’s fixed costs. They years ended 31 March 1968 (Figure 4). In the same pay the fixed costs of all the Mint’s standard period, costs have generally under-run the capacity for blank production, even though some is movement in the Retail Price Index and relevant used for other customers (paragraph 3.10). The Producer Price Index group. Unit costs in 1988-89 payment for coining fixed costs is based on the were some 15 per cent lower in real terms than United Kingdom share of coining capacity costs in 1983-64, and a further reduction was represented by the average demand forecast over expected in 1989-90. the following five years, plus 20 per cent, to allow for uncertainties in the forecasts. The NAO noted 3.5 Treasury’s payments to the Mint consist of that, because these demand forecasts have not been

13 THE ROYAL MINT met, the Treasury’s contribution to fixed costs have 3.11 The NAO considered that the arrangements exceeded those attributable to the United between the Treasury and the Mint for fixed costs Kingdom’s share of output by an average of G! (paragraph 3.5) could obscure the latter’s overall million a year (or 12.5 per cent of total payments performance. This was because lower overall profits under the contract) over the last six years. These would result from high United Kingdom coinage additional “premium” payments are higher when production, even if efficiently met, because there United Kingdom demand is relatively low, and would be less opportunity to take on overseas work smaller when United Kingdom demand is high. using capacity for which the Treasury had paid the fixed costs. The Treasury accepted the principle of 3.7 The NAO also noted that the fair operation of these observations. However they pointed out that this arrangement depended on accurate coin the Mint’s target was set on a medium term (three demand forecasts and a proper classification of costs year) basis in order that fluctuations in demand, between fixed and variable. The Treasury scrutinise and any distortion resulting from different levels of the forecasts carefully, but do not have the capacity Treasury “premium” payments, would even to verify the cost ratios directly, relying instead on themselves out. The Treasury recognised that, with the fact that the Mint’s internal auditors (paragraph a prospective move to Executive Agency status z.zob) regard them as acceptable. (paragraph 1.11, it would be important to demonstrate that the Mint’s performance was not 3.8 The NAO pointed out that the delayed distorted by the United Kingdom coinage introduction of the new 10 pence and 5 pence coins arrangements. They had therefore decided to @aragraph ZS), which were originally forecast to be review with the Mint during 1989-90 that part of issued in 196647 but will not now be issued before the United Kingdom coinage contract concerned 1990-91, had played a major part in inflating the with premium payments. five year average demand. As a result, the Treasury paid the Mint scune Sl million before it was due. 3.12 The NAO were not convinced that it was necessary to maintain reserve capacity at the Mint, 3.9 The Treasury accepted that, in retrospect, the largely at the Treasury’s expense, to meet forecast dates were more tentative than had been unexpected increases in the demand for United envisaged at the time. But they considered that this Kingdom coins. They thought that Treasury and the was a case where considerable capacity was going Mint should consider whether it would be more to be required fairly shortly. It was therefore cost effective to increase production of coins by the appropriate that they should make a contribution to use of more overtime in some areas, by suspending ensure the capacity was available when it was less essential work, or by sub-contracting some needed. If they had not paid in advance to secure it, standard coin production to other mints. The two the Mint might have shed capacity, making the main private mints in the United Kingdom informed eventual production costs for the new coins much the NAO that they could undertake such work. The higher. Royal Mint and the Treasury doubted that the available capacity of the private mints would be 3.10 The NAO were also concerned that, to the sufficient to make a significant contribution to extent the Treasury met a higher share of the meeting major changes in demand for coins. The Mint’s costs than their share of the Mint’s output, NAO also thought that the Treasury should explore the Mint had an opportunity to undertake other with the Mint whether it would be more cost- work at prices lower than would otherwise have effective to hold a reserve stock of coins to meet been appropriate. Treasury recognised that this any unexpected demands. And, as indicated in opportunity existed. However they considered, if paragraphs 2.5 and 2.6, the NAO considered that they did not meet a higher proportion of the Mint’s there may be scope for improving the methodology fixed costs when United Kingdom demand was low, for forecasting the demand for coins in the United the Mint might reduce their capacity and would Kingdom, despite the acknowledged difficulties then only be able to meet an increase in United (paragraph 3.5). Kingdom demand in an inefficient and costly way. These additional costs would fall on the Treasury; 3.13 The NAO noted that, unlike other United and there would be a risk that demand would not Kingdom coins where the Treasury make a be met in a reasonable time. The T&asury thought substantial gain, the cost to the Treasury of the Mint’s ability to meet a record demand for producing the one penny and two pence bronze United Kingdom coins in 1988-89, after producing coins exceeded their face values. They also noted only 55 per cent of this level as recently as 1986-67, that copper-plated coins, for which the Mint have was an example of the merits of the present the necessary technical capability, would lead to a arrangements. saving of 65 per cent on metal costs. The Treasury

14 pointed out that Treasury Ministers decide what for this Unit (Appendix 2, Section (a)], the NAO new coins should be introduced in the context of were concerned about the losses caused by coinage policy, but they were not responsible for excessive Sovereign production. coin production policy, since this was a matter for the Mint. 3.17 The NAO considered that the agreement was unduly favourable to the Mint in that the Treasury Payments to the Treasury agreed that the Exchange Equalisation Account would meet the capital servicing costs of the new 3.14 The Mint make annual payments to the Unit of about f310,OOO a year, although it could also Consolidated Fund as dividend on their Public be used for the Mint’s commercial work. In the Dividend Capital and in respect of royalties from event it has been used only for such work, thus their promotional and United Kingdom proof coin resulting in additional reimbursement of the Mint’s sales, in recognition of the risk that some might costs. enter into circulation. For 1987-88, these payments amounted to about s5.5 million and f3 million 3.18 The Treasury considered that the agreement respectively. By convention, the dividend, which is was justified as the Mint needed to be given some based on the Mint’s current cost profit, is rounded assurance of continuity of sovereign production and down to the nearest so.5 million. In the two year a return on their investment. It was designed so period 1966-88, this had enabled the Mint to retain that the Unit’s recurring capital costs were not E567,OOOwhich would otherwise have been borne entirely by the Exchange Equalisation transferred to the Consolidated Fund. The Treasury Account, since the Mint would retain control of the pointed out that the Mint paid a proportionately building and could use it for other purposes. The higher dividend on their Public Dividend Capital agreement provided for the Exchange Equalisation than other similar bodies. In 1988-89 the Mint paid Account to place annual orders for coins; the price 79 per cent, compared with payments of between 0 would be agreed annually between the Mint and and 13 per cent by other bodies. Nevertheless, they the Treasury and was expected normally to reflect a accepted that the dividend could be rounded down progressive increase in the Mint’s efficiency over to the nearest El,000 rather than the nearest EO.5 the previous year. With no orders having been million, but they regarded the benefit to the Mint of placed for the Exchange Equalisation Account, the the present arrangement as very small. Treasury gave notice in June 1986 of their intention to cancel the arrangements, which were terminated The Royal Mint’s arrangements with the at the end of the Unit’s second year. The NAO Exchange Equalisation Account noted that all the Unit’s capital servicing costs of f310,OOO a year (paragraph 3.17) had been borne by 3.15 The Exchange Equalisation Account is the Account. operated by the Bank of on behalf of the Treasury. One of its main uses is to check undue The Royal Mint’s agreement with the fluctuations in the exchange value of sterling. The private mints in the United Kingdom Treasury may cause any funds in the Account to be 3.19 Since the mid-1960s the Royal Mint have had invested in securities or gold. Until the introduction an unwritten agreement with the two main private of the Britannia gold coin in 1987 (paragraph 2.7), mints in the United Kingdom-the the Mint had a long standing contractual Mint Group and Imperial Metal Industries-that relationship with the Treasury for the production of they should not compete with each other for orders bullion sovereign coins for the Account. In 1986, to of standard coins from customers outside the improve security, a new Precious Metal Unit European Community and, in the case of the costing El.56 million was installed at the Mint in Birmingham Mint Group, for orders of support of this work (Appendix 2, Section [a) proof/collector coins. Under the agreement, the refers). Mint negotiate the contracts and then subcontract to each of the two private mints one sixth of the 3.16 The NAO noted that the Mint had already orders. The Office of Fair Trading have confirmed been paid processing costs from the Exchange that the agreement is not one to which the Equalisation Account over a number of years for Restrictive Trade Practices Act 1976 applies in the 23 million bullion sovereigns still in stock when respect of registration. the Precious Metal Unit was approved. The extent of these payments could not be easily determined. Royal Mint Services Ltd Some of these coins are now being melted down by the Mint to produce the new Britannia coins for 3.20 Royal Mint Services Ltd was formed in April commercial sale. Apart from questioning the need 1980 and is owned equally by the Mint and Thomas

15 De La Rue and Company Ltd, who also act as the loss of f76,400 in 1988-89 on a turnover of Mint’s sales agent in certain countries. Royal Mint f130,600, though small profits had been made in Services Ltd’s objectives are to assist governments earlier years. In addition, at 31 March 1989, the to set up or modify their own Mints and to offer Company’s liabilities exceeded their total assets. them related training and consultancy advice. They The NAO could find no evidence of the benefits aim to do this without harming the Mint’s own that the Company might have brought to the Mint interests: indeed, one of their aims is to attract and were concerned over its financial position. more business for the Mint. During the course of the NAO’s study, the two partners reviewed the Company’s future and 3.21 Royal Mint Services Ltd’s financial results subsequently decided to let it continue for a further have been disappointing; they incurred a loss of three years, with revised financial objectives 1&12,000in 1987-88 on a turnover of E693,000, and a designed to secure minimum profit levels.

16 Part 4: Indicators of Performance

4.1 The NAO considered a number of factors other, fixed coining costs are no longer related to which would serve as a measure of how efficiently long term future demand for the new 5 pence and the Mint were managed and carried out their 10 pence coins. In March 1988 the Mint estimated business. These included: performance indicators that these changes would result in additional profits and performance against the Treasury target, of E3.1 million over the two years ending 31 March profitability, productivity, comparison with other 1990, but the NAO noted that the Treasury had not mints, extent of exports, and customer satisfaction. increased the Mint’s financial target accordingly.

Performance Indicators/Treasury Target 4.8 The Treasury told the NAO that they did not consider it either sensible or practicable to change 4.2 Although the Mint have performance the target continually to take account of every indicators for internal use, for commercial reasons, change affecting the Mint’s performance. But in their Annual Report includes only those based on view of the impact of the royalties agreement, the published figures, for example, their overall Mint had been providing them with not only their operating profit. The Treasury have set the Mint actual return but with one adjusted to take account only one published performance target-an average of the changes in the payment of royalties. annual real return on capital employed of not less than 10 per cent over the three years to 31 March 4.7 The NAO noted that internal financial 1990 @aragraph 1.8). indicators on a product sector basis and some non- financial indicators, such as coins produced per 4.3 The Mint’s annual accounts show that their machine/operator, already existed. They regarded operating profits in the five years to April 1988 these as more useful indicators of performance than averaged 17.8 per cent on capital employed. For the limited published ones. The Mint considered it most years the Mint’s profits on average capital indisputable that publication of such details would employed exceeded the average returns of large be helpful to their competitors. The NAO pointed manufacturing companies in the United Kingdom out, however, that the Mint’s lack of published by about three percentage points on an historical performance indicators compared unfavourably cost basis. In current cost terms, the Mint’s return with other public trading bodies such as Her on capital employed during the five-year period Majesty’s Stationery Office, whose published averaged over 11 per cent, compared with the indicators include cost movements (in real terms); present financial target set by the Treasury of not response times for sales orders; and product reject less than 10 per cent (paragraph 1.8). rates. The NAO did not consider that the Mint faced the extent of competition that the Stationery 4.4 The Treasury agreed that, even for Trading Office do in respect of their products and services, Funds whose performance should be measured although they did accept that the nature of the primarily in terms of profit, there was a case for competition was more specific. And they noted that, seeking additional indicators of performance, in their Seventh Report of 1987-88, the Treasury particularly in the context of a move to Agency and Civil Service Committee had stated that they status (paragraph 1.1). The NAO noted that the believed that Parliament would wish to be provided Mint’s latest Corporate Plan, which is unpublished, with more information on the Royal Mint’s included some indicators of this kind. performance along the lines of that provided for other parts of the Civil Service in the existing Public Expenditure White Paper. 4.8 The NAO also noted that the current Treasury target presents less of a challenge as a result of changes in the arrangements under which the Mint Profitability of Product Sectors pay royalties on proof coinage, although these changes have been offset, to some extent, by new 4.8 The NAO noted that there were significant arrangements for the reimbursement of fixed costs. profitability variations between the Mint’s product On the one hand, from 1988-89 the royalties are no sectors (paragraph 1.3). Over the five year period longer passed directly to the Consolidated Fund but ended 31 March 1988, the highest profits were made are credited to the Mint’s Trading Fund. On the from United Kingdom coinage, though these

17 dropped to a low point in 1985-86 when issues overseas coin production (paragaph 4.8). The were at a high level, reflecting the points made in Treasury and the Mint both pointed out that the paragraphs 3.6 and 3.7. The income from sales of NAO’s allowance for an assumed profit element in overseas standard coinage was lower during this the private mints’ prices was not sufficiently five year period: and two of the product sectors accurate to deduce anything about the private have failed to make any profit. Throughout the mints’ costs. period a proportion of the overseas coin business was sub-contracted to the private United Kingdom Exports mints and this made a contribution to the Mint’s profits. 4.12 The Mint exported their products to 65 countries in 1987-88. The Mint’s exact share of Productivity world markets for their products is uncertain, but they believe it to be quite large in cases where 4.9 Until 1988, the Royal Mint’s Corporate Plans buyers invite open competition. In recognition of included details of the output per employee in the this, the Mint received the Queen’s Award for standard coin area. At the time the Mint considered Export Achievement in 1966,1973, 1977 and 1987. this to be the best available productivity measure for their operations as a whole. This measure was Customer Satisfaction discontinued on the grounds that it was relatively crude and too limited in its scope. 4.13 The NAO contacted six of the largest clearing banks in the United Kingdom and the Committee of 4.10 The Mint told the NAO that, although London and Scottish Bankers and the Northern productivity indicators were used for their Ireland Bankers’ Association to obtain their views individual activities, it was not possible to calculate on the supply of United Kingdom coinage and a meaningful one on a business wide basis. But, in related matters. any event, they would be unable to compare their productivity with other mints, as there was a lack 4.14 The banks generally thought the United of similar information elsewhere. Kingdom coinage structure was satisfactory. But they welcomed the move towards lighter and Cost comparisons with other Mints smaller five and ten pence coins (paragraph ZS), and most wanted to see this taken further. Some 4.11 There was insufficient information available thought that the value range of coins could be to compare with any accuracy the Royal Mint’s sensibly reduced, perhaps by withdrawing the two costs with overseas mints. As regards the two main pence coin. The NAO acknowledged that the views private United Kingdom mints, the NAO noted that of other interested parties and other considerations they provided tendered prices for 25 per cent of all need to be taken into account in decisions the Mint’s overseas coinage orders in 1987-88. On concerning coinage policy. Accepting the the basis of this sample and, after allowing for an acknowledged difficulty of forecasting accurately assumed profit element of 15 per cent (the “semi- the demand for coinage, the banks were generally current” cost accounting target rate recommended very satisfied with the speed and accuracy of the by the Government Review Board in 1987 for risk Mint’s service, both in relation to coin issues and work) in their prices, the private mints’ costs withdrawal of surpluses. None had experienced any appeared to be substantially lower than those of the significant coin shortages. Royal Mint for making proof/uncirculated coins; and slightly lower for standard coins. This point 4.15 The NAO found that there had been was reinforced by the Mint making profits on orders relatively few complaints from the Mint’s other customers and all of these appeared to have been subcontracted to the private mints while they made ^.. . losses (based on full costs] on their own standard followed up thoroughly.

18 Appendix 1 Royal Mint Senior Management and Departmental Structure (effective from February 1989)

! Ez:;:ting) + $(I;;n,

Finance *Deputy Chief Executive Principal Finance Officer Information Technology Director (Finance & Corporate Services) Procurement

Corporate Planning/Secretariat

Director Regional Sales Deputy Master (Overseas Sales) Managers (4) [Chief Executive] 2 External Directors

Scientific

Engineering/Health & Safety Director Production (Operations)

Engraving

Royal Mint Services

- Establishments Officer

Personnel/IR/Security Training

- Public Relations * Chairman, Royal Mint Services Ltd

19 THE ROYAL MINT

Appendix 2 Investment Appraisal at the Royal Mint

The NAO examined investment appraisala supporting five major projects at the Mint with the following results: (a) In 1963 the Treasury approved a new El.56 million unit to produce sovereign coins, following external advice that the old unit was insufficiently secure. At the time the project was under consideration, the Exchange Equalisation Account had a stockpile of 23 million sovereigns, representing around 10 years’ sales. Since then sales of these coins have almost ceased. The NAO thought that the possibility of low demand should have been considered in the appraisal; which might also have explored other options, for example, limiting further the stock levels of precious metals, and hence their security needs.

The Treasury considered the case for building a new unit on security grounds overwhelming. At the time they approved the project they concluded, after careful consideration, that the Unit’s prospects were more than sufficient to cover the investment; and that the large stockpile of sovereigns was necessary to cover demand whilst production was suspended for three years while the new Unit was being built. In the event, the demand for gold coins, and particularly sovereigns, declined more quickly than the Treasury or the market had anticipated. According to the Treasury, this was due to the imposition of Value Added Tax on gold coins and the fall in the gold price in the early 1980s. (b] In 1962 the Mint went ahead with a copper plating plant, despite unanswered doubts as to whether sales of plated coins might have displaced the Mint’s main sales of unplated coins. The plant was considered by the Mint to be of strategic importance and financially viable; and recent orders have supported that view. The NAO were concerned that the Treasury had not been given sufficient information to undertake an effective evaluation of the project. The Treasury informed them that further information had been imparted during unrecorded meetings between the Mint and themselves. (c) In April 1987 the Treasury approved a plating plant costing El.2 million. The project was justified on the savings expected to result from reducing more expansive purchases from overseas suppliers. The NAO noted that Treasury review of this appraisal was limited. (d) In 1988, the Mint erected a coin store costing f0.45 million because they considered that it was considerably cheaper than the continued rental of external storage facilities. The NAO noted that supporting investment appraisal ignored the associated additional costs of building maintenance, rates and some minor costs, such as loading and inspection, which had been included in the external storage contract. The Mint did not consider that the inclusion of these costs would have affected the viability of the case, as the potential savings were so large.

20