Report by the Comptroller and Auditor General

NATIONAL AUDIT 6kICE

The Royal Mint

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

The Comptroller and Auditor General is the head of the National 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

Summary and conclusions Pages

1

Part 1: Background to the Royal Mint 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

2. Investment appraisal at the Royal Mint

19

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 Master of the Mint. 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 United Kingdom standard coins. 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 Systems and Functions

5. The NAO found that:

(a) The Mint’s corporate planning operates well and review by the 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 sovereign 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 production of United Kingdom coins fell steadily in 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 coin 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 Britannia 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

On Performance

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.

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 (paragraph 4,10), (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 their Business

1.1 The Royal Mint are a Government Department under the Chancellor of the Exchequer who is ex officio Master of the Mint. This arrangement dates from the Coinage Act 1870, which empowers the Treasury to appoint the Deputy Master and other officers of the Mint and to give directions regarding general management. In 1968 the Mint were relocated from Tower Hill, London to Llantrisant in Mid-Glamorgan where they now employ about 950 staff, but they retain a small office in London. The Mint’s organisational structure is shown at Appendix 1. The Mint are to be made an Executive Agency on 1 April 1990.

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 operate on commercial lines and limits their range of activities to the manufacture of coins, medals, seals and similar articles, and any operation incidental or conducive to such manufacture.

1.3 The Mint’s primary function is the production and distribution of United Kingdom standard coins.

The Royal Mint and

The Mint also produce standard coins for export; collector coins; bullion (precious metal) coins; a wide range of United Kingdom military and civil medals: and a wide variety of commemorative medals.

1.4 In 1987-88 the Royal Mint had an annual capacity to manufacture 10,000 tonnes of bronze coin blanks ready for stamping in coin presses, or their equivalent in other metals; to coin the equivalent of 1,680 million coins the size of a five pence coin; to process 1.2 million ounces of precious metals; and to manufacture IOO,OOO medals.

1.5 The Mint’s total sales over the five years to 31 March 1988 amounted to f344 million, including f224 million (65 per cent] in respect of overseas sales. Standard coin sales accounted for 53 per cent of total sales, of which over half were in respect of standard coins to overseas countries, and collector coin sales accounted for the bulk of the remainder (Figure 1).

Figure 1

Royal Mint Sales Turnover by Product Sector 1983-88 (Emillion)

v

lu! UK Standard Coin

El Overseas Standard Coin

0 Collector Coin, Bullion Coin and Metal By-Products

q Medals

Source: Royal Mint Operating Statistics lb6

6

Relationship with Other Bodies

1.6 As well as their special relations with the Treasury, the Mint have contractual relationships with private sector sales agents, suppliers and purchasers, the two main private mints based in the United Kingdom (paragraph 3.19), and Thomas De La Rue and Company Ltd @aragraphs 3.20-3.21).

HM Treasury’s Role

1.7 The Chancellor of the Exchequer is the Master of the Mint, though he delegates day-to-day control to another Treasury Minister.

1.8 As well as appointing a Deputy Master who acts as executive head of the Mint and Accounting Officer, the Treasury set the Mint’s overall financial target, currently an average annual return on capital employed of not less than 10 per cent over the three years to 31 March 1990, calculated on an inflation adjusted basis. They discuss the conclusions of the Mint’s corporate planning process with the Mint, and approve major capital projects (paragraphs 2.3, 2.13-2.15). In addition, the Treasury pay the Mint for the production and distribution

of standard United Kingdom coins on the basis of a negotiated annual contract (paragraphs 3.2-3.13).

Scope of the NAO Examination

1.9 Against this background, the NAO set out to consider whether the Mint’s activities were carried out economically, efficiently, and effectively. They examined the adequacy of the Mint’s management systems and functions (Part 2); the effectiveness of their commercial arrangements with the Treasury and other bodies (Part 3); and the evidence available on how well the Mint were managed and carried out their business (Part 4).

1.10 The NAO examination largely focused on a review of Royal Mint papers and computer systems and relevant Treasury papers, and interviews with those organisations’ staff. But they also sent questionnaires to six major clearing banks and two bankers’ associations, and to the two main private mints in the United Kingdom. And they engaged a consultant in the areas of corporate planning and production control, where they considered specialised expertise was required.

7

THE ROYAL MINT

Part 2: Management Systems and Functions

2.1 The NAO reviewed the Royal Mint’s main management systems and functions, including corporate planning, coin forecasting, information systems, production planning and control, quality assurance, investment appraisal, marketing and sales, and management services.

Corporate Planning

2.2 The Mint’s corporate planning system produces a detailed plan for the forthcoming year and forecasts for the succeeding three years. It includes business aims and objectives; key objectives for market sectors and a market sector analysis; plans for other important activities such as research and development; capital investment and a review of the previous year’s results. The NAO found that plans were prepared to a detailed timetable and used well-researched and accurate historical data. There were also adequate arrangements for supervising each plan’s preparation, consulting staff, and for review by the Mint’s Management and Executive Boards.

2.3 The Treasury are not involved in compiling the Corporate Plan until the final draft stage when they discuss it in some detail with the Royal Mint Management. They do not seek independent evidence when verifying the main assumptions behind it. Treasury Ministers, including the Chancellor, take considerable interest in the Mint’s activities and endorse the Corporate Plan. The Treasury also use the corporate planning process to monitor the Mint’s performance, and they hold regular meetings with the Mint and discuss their quarterly trading returns. The NAO found that the Treasury’s oversight of the Mint’s activities was generally both systematic and penetrative.

2.4 The Mint’s Corporate Plan addressed many issues that could impact on the performance of their various product sectors; and sought to take them into account in arriving at a realistic assumption of most likely performance. However, the NAO identified a number of issues which, in their view, were not adequately addressed in the planning document. These included: the possible impact of technological innovations on capital investment proposals; and the possible consequences for the Mint of the single European market, such as changes in European coinages and

in the rules for competition between European mints. In general, the plan concentrated on formulating targets rather than setting out possible responses to the threats and opportunities that may develop. Thus, although the Mint reviewed carefully the prospects of their individual product ranges (paragaph 1.31, they could miss opportunities for sales in some of their product market sectors or set objectives which were not achievable. The NAO acknowledged, however, that the record of the Royal Mint in responding to market opportunities was good and indicated a flexibility which was not reflected in the planning document.

Coin Demand Forecasting

(a) Standard Coins

2.5 The NAO found that demand for United Kingdom standard coinage was volatile and often varied substantially from forecasts (Figure 2). Though forecasts of demand one year ahead seemed soundly based, forecasts of demand up to five years ahead (which affect the Treasury’s contribution to fixed costs-see paragraph 3.6) were less accurate. In particular, demand for the fl coin was lower than anticipated in the years immediately following its introduction; and the assumed dates for the introduction of smaller five and ten pence coins were, in retrospect, optimistic. Both of these factors led to over-estimates of demand in some years. On the other hand, the high level of demand for United Kingdom coinage in 1988-89 had been consistently under-estimated in the longer term forecasts. The NAO considered that the factors which influenced demand might have been more thoroughly analysed and that batter analysis and review of past variances from predicted demand might help to provide improved methodology for forecasting.

2.6 The Treasury told the NAO that there had been a number of studies of coin demand forecasting, both in the United Kingdom and abroad, aimed at improving the accuracy of forecasts. Those methods based on relationships between demand and other economic variables had proved less accurate than the Mint/Treasury assessment following discussion with the commercial banks. Forecasts based more extensively on past demand had fared a little better but, not surprisingly, were poor in the face of the 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 coins is not susceptible to very accurate forecasting, particularly when new coins are introduced; many of the changes in demand are unpredictable and, even after the event, impossible to explain.

(bl Other Products

2.7 The NAO noted that the Mint had significantly overestimated the demand for the new gold Britannia coin which replaced the Sovereign. At the time of its launch, in 1987, the Mint expected the Britannia coin to become their flagship product, making a major contribution to their sales and profits. In the event, notwithstanding heavy advertising expenditure, the demand for the new coin was disappointing and the Mint reduced the 1988-89 sales forecast for it by 44 per cent. However, at the time of the NAO’s enquiries, it seemed doubtful that even the lower sales forecast would be achieved; losses subsequently occurred in 1988-89. The Mint have since acknowledged that their forecasts turned out to be unduly optimistic

and that the Britannia was launched before an adequate retail distribution network had been established.

[cl General

2.8 The NAO suggested that the Mint’s Corporate Plan should include sensitivity analyses by product and market sector, so as to develop appropriate strategies to meet changes in demand which might be encountered. The Mint told the NAO that sensitivity analyses had been considered during the planning process but were excluded from the Plan in recent years at Ministers’ request. However, they were subsequently reinstated in the 1989-93 Plan. The Treasury pointed out that it was for the Mint and themselves to decide whether to include such material in the Plan or consider it separately.

Information Systems

2.9 The NAO found that the Mint had comprehensive and reliable computerised

9

information systems which were used for a wide range of management and accounting work.

Production Planning and Control

2.10 The Royal Mint’s production, planning and control systems incorporate the elements normally found in such systems: pre-production planning (long-term scheduling); production planning (detailed scheduling): loading; production progressing [activity to ensure work proceeds as planned): and production monitoring (recording and checking actual production outputs at every stage of production). The systems are extensively computerised but they also rely heavily on manual effort. The Mint have recognised that there is scope for greater use of computer applications, particularly at the pre-planning and planning stages and have a development programme for that purpose.

2.11 The NAO found that the systems worked well in practice but that they relied heavily on the good working relationships of the staff to ensure they operated well. The NAO considered that a programme for computer modelling of the pre- planning and planning stages would increase efficiency, as it would assist in identifying future potential bottlenecks and idle capacity, and help to establish the most cost effective way of dealing with such problems.

Quality Assurance

2.12 The NAO found that, while the Mint had sound quality assurance procedures, they were geared more to defect detection rather than to defect prevention. This approach tended to be costly in terms of the level of reject rates in some products. The Mint told the NAO that their level of reject rates was consistent with or better than the general rates in industry. Nevertheless, they had recognised that their quality assurance procedures needed to be updated and were taking positive steps towards this. The NAO also noted that the Mint had not yet adopted the full disciplines of British Standard 5750. This specifies the functions and facilities which should be covered by a management system to ensure that products and services are produced consistently to the required specification.

Investment Apraisal

2.13 Tne Mint’s overall capital expenditure plans are approved in principle by the Treasury as part of the former’s corporate planning process. Individual capital projects are approved at the appropriate

management level in the Mint, and projects with an estimated cost in excess of f150,OOO also need the Treasury’s approval. The Mint aim to apply the Treasury’s formal guidance on investment appraisals. Indeed, they usually proceed with projects only if the expected financial returns meet criteria more demanding than those recommended by the Treasury which, at the time of the NAO’s enquiries, required a five per cent return in real terms.

2.14 The Mint’s investment appraisal system was therefore based on sound and prudent principles. However, the NAO noted that the justification for most projects depended on the assessed sales potential for the products concerned. This assessment relied heavily on the judgement of the Mint’s staff because there was little available external evidence on which to base a decision. In the event, most of the forecasts proved realistic; but the experience with the Britannia shows that forecasts can be wrong (paragraph 2.7). The NAO considered that, given the volatility of the Mint’s sales, appraisals should pay more regard to sensitivity analysis of sales potential.

2.15 The NAO found that in one case the Treasury’s review of an investment appraisal had been limited; that post-reviews of investment appraisals were carried out by the Mint on an ad hoc basis, and that none had been seen by the Treasury for at least three years. During the NAO’s enquiries the Mint introduced a revised procedure for post-reviews consistent with the relevant Treasury guidance. Further details of the cases examined by the NAO are provided in Appendix 2.

Marketing and Sales

2.16 The Mint’s Sales Department is responsible for the marketing and sale of all coins and “blanks” to overseas countries. Their Marketing Department is responsible for all other sales, except for those medals sold directly by the Medals Department.

2.17 The Mint maintain comprehensive customer databases, holding a variety of useful information which inform their sales price calculations as well as helping to target marketing promotion towards the most responsive group of customers. Sales and marketing targets are set and monitored regularly. The NAO found that the Sales and Marketing Departments worked energetically and imaginatively, constantly looking for new sales opportunities.

2.18 For each sales enquiry, a specific cost estimate is prepared. This is based on technical

10

throughput details, such as the order size, alloy, weight, design characteristics and previous experience of similar orders. From this, costs appropriate to each production process and other overheads are calculated, using a system which takes account of all costs.

2.19 The cost of each prospective order is broken down into fixed and variable costs, on the basis of fixed/variable ratios determined and kept under review by the Mint. This information is then passed to the Sales Department who use it and relevant m&rket information to inform their sales quotations. Generally, all sales quotations are expected to recover variable costs and make a contribution to fixed costs. Some make a profit on total costs.

2.20 The NAO had the following reservations about the marketing and sales functions:

(a] Costs The total marketing and promotion costs in 198748 amounted to E3.5 million, excluding the substantial sum spent launching and promoting the Britannia coins (paragraph 2.7).

(b) Sales Pricing The NAO noted that the variable cost/fixed cost ratios established by the Mint usually resulted in a significant proportion of the Mint’s costs being treated as fixed. The NAO accepted that, as a Government Department, the Mint have less flexibility than a commercial concern to adjust fixed costs, such as that part of its labour force which has permanent status. But, as the ratios have a substantial effect on the price of coinage and on profits from other sales, they suggested that

the Mint should commission an independent expert review of their variable cost/fixed cost ratios. The Mint told the NAO that the ratios were subject to review and that their internal auditors, Coopers and Lybrand, had confirmed the basis of the assessment. The Mint’s view was that there was little scope to make significant reductions in the variable or fixed costs for either United Kingdom or overseas coins.

Management Services

2.21 The Mint have no permanent management services unit other than internal audit. Until 1980 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, Coopers and Lybrand, who carry out a full commercial audit of the Mint’s Accounts, in addition to their other duties. The NAO place substantial reliance on this work in their audit of the Mint’s Accounts.

2.22 Coopers and Lybrand also suggest and underta~ke value for money studies following discussion and agreement with the Mint’s management. Areas examined have included the Mint’s internal control, security, maintenance, and the Finance Department, including computer developments. In the NAO’s view these studies were thorough and comprehensive. They have been well-received by the Mint’s management.

2.23 The Mint also employ consultants. For example, in 1987 they commissioned the University of Nottingham to undertake research on future options for United Kingdom coinage.

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THE ROYAL MINT

Part 3: Commercial Arrangements with Associated Bodies

3.1 The NAO examined the arrangements between the Mint and the Treasury for the production and distribution of coins under the United Kingdom coinage contract (paragraph 1.8); and the separate arrangements between the Mint and the Treasury for the production of gold bullion coins; the relationships between the Mint and the two main private mints in the United Kingdom: and their involvement with Royal Mint Services Ltd, a company jointly owned by the Mint and Thomas De La Rue and Company Ltd.

The United Kingdom Coinage contract

3.2 Under the Coinage Act 1971, as amended by the Government Trading Funds Act 1973, no United

Figure 3

Royal Mint

Kingdom coins may be manufactured or issued without Treasury authority. The Treasury have given the Royal Mint sole right of issue. The Mint manufacture United Kingdom standard coinage in quantities determined in conjunction with the Treasury and distribute it to the banks who pay the face value of the coins. The Mint also reimburse the banks with the face value of coins withdrawn from circulation when, exceptionally, such coins are returned. The Mint pass these receipts and payments directly to the Consolidated Fund, and they do not appear in the Royal Mint Trading Fund Accounts. The estimated number of United Kingdom coins in circulation (valued at El,741 million at 31 March 1988) and the issues planned in 1988-89 are illustrated in Figure 3.

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 production and distribution of United Kingdom standard coins under the United Kingdom coinage contract which is negotiated annually between them and the Mint. These transactions appear both in the Royal Mint Trading Fund Accounts and the United Kingdom Coinage Appropriation Account, currently Class XIX Vote 12.

3.4 The cost of coinage to the Treasury is strongly influenced by the quantities produced and metal price variations. In the event the unit cost of production, excluding metal costs and adjusted for output mix, fell steadily in real terms in the five years ended 31 March 1968 (Figure 4). In the same period, costs have generally under-run the movement in the Retail Price Index and relevant Producer Price Index group. Unit costs in 1988-89 were some 15 per cent lower in real terms than costs in 1983-64, and a further reduction was expected in 1989-90.

3.5 Treasury’s payments to the Mint consist of

variable costs, which relate directly to the volume of coins issued, and a share of the Mint’s fixed costs. As the Mint’s primary function is to produce and distribute United Kingdom standard coins (paragraph 1.3), the Treasury have first call on the Mint’s capacity: occasionally such calls may arise at short notice to meet unexpected demands by the public. The Treasury also expect the Mint to maintain adequate capacity to ensure that the demand forecast for the medium term can be met efficiently and economically.

3.6 In order to help finance these requirements the Treasury contribute to the Mint’s fixed costs. They pay the fixed costs of all the Mint’s standard capacity for blank production, even though some is used for other customers (paragraph 3.10). The payment for coining fixed costs is based on the United Kingdom share of coining capacity represented by the average demand forecast over the following five years, plus 20 per cent, to allow for uncertainties in the forecasts. The NAO noted that, because these demand forecasts have not been

13

THE ROYAL MINT

met, the Treasury’s contribution to fixed costs have exceeded those attributable to the United Kingdom’s share of output by an average of G! million a year (or 12.5 per cent of total payments under the contract) over the last six years. These additional “premium” payments are higher when United Kingdom demand is relatively low, and smaller when United Kingdom demand is high.

3.7 The NAO also noted that the fair operation of this arrangement depended on accurate coin demand forecasts and a proper classification of costs between fixed and variable. The Treasury scrutinise the forecasts carefully, but do not have the capacity to verify the cost ratios directly, relying instead on the fact that the Mint’s internal auditors (paragraph z.zob) regard them as acceptable.

3.8 The NAO pointed out that the delayed introduction of the new 10 pence and 5 pence coins @aragraph ZS), which were originally forecast to be issued in 196647 but will not now be issued before 1990-91, had played a major part in inflating the five year average demand. As a result, the Treasury paid the Mint scune Sl million before it was due.

3.9 The Treasury accepted that, in retrospect, the forecast dates were more tentative than had been envisaged at the time. But they considered that this was a case where considerable capacity was going to be required fairly shortly. It was therefore appropriate that they should make a contribution to ensure the capacity was available when it was needed. If they had not paid in advance to secure it, the Mint might have shed capacity, making the eventual production costs for the new coins much higher.

3.10 The NAO were also concerned that, to the extent the Treasury met a higher share of the Mint’s costs than their share of the Mint’s output, the Mint had an opportunity to undertake other work at prices lower than would otherwise have been appropriate. Treasury recognised that this opportunity existed. However they considered, if they did not meet a higher proportion of the Mint’s fixed costs when United Kingdom demand was low, the Mint might reduce their capacity and would then only be able to meet an increase in United Kingdom demand in an inefficient and costly way. These additional costs would fall on the Treasury; and there would be a risk that demand would not be met in a reasonable time. The T&asury thought the Mint’s ability to meet a record demand for United Kingdom coins in 1988-89, after producing only 55 per cent of this level as recently as 1986-67, was an example of the merits of the present arrangements.

3.11 The NAO considered that the arrangements between the Treasury and the Mint for fixed costs (paragraph 3.5) could obscure the latter’s overall performance. This was because lower overall profits would result from high United Kingdom coinage production, even if efficiently met, because there would be less opportunity to take on overseas work using capacity for which the Treasury had paid the fixed costs. The Treasury accepted the principle of these observations. However they pointed out that the Mint’s target was set on a medium term (three year) basis in order that fluctuations in demand, and any distortion resulting from different levels of Treasury “premium” payments, would even themselves out. The Treasury recognised that, with a prospective move to Executive Agency status (paragraph 1.11, it would be important to demonstrate that the Mint’s performance was not distorted by the United Kingdom coinage arrangements. They had therefore decided to review with the Mint during 1989-90 that part of the United Kingdom coinage contract concerned with premium payments.

3.12 The NAO were not convinced that it was necessary to maintain reserve capacity at the Mint, largely at the Treasury’s expense, to meet unexpected increases in the demand for United Kingdom coins. They thought that Treasury and the Mint should consider whether it would be more cost effective to increase production of coins by the use of more overtime in some areas, by suspending less essential work, or by sub-contracting some standard coin production to other mints. The two main private mints in the United Kingdom informed the NAO that they could undertake such work. The Royal Mint and the Treasury doubted that the available capacity of the private mints would be sufficient to make a significant contribution to meeting major changes in demand for coins. The NAO also thought that the Treasury should explore with the Mint whether it would be more cost- effective to hold a reserve stock of coins to meet any unexpected demands. And, as indicated in paragraphs 2.5 and 2.6, the NAO considered that there may be scope for improving the methodology for forecasting the demand for coins in the United Kingdom, despite the acknowledged difficulties (paragraph 3.5).

3.13 The NAO noted that, unlike other United Kingdom coins where the Treasury make a substantial gain, the cost to the Treasury of producing the one penny and two pence bronze coins exceeded their face values. They also noted that copper-plated coins, for which the Mint have the necessary technical capability, would lead to a saving of 65 per cent on metal costs. The Treasury

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pointed out that Treasury Ministers decide what new coins should be introduced in the context of coinage policy, but they were not responsible for coin production policy, since this was a matter for the Mint.

Payments to the Treasury

3.14 The Mint make annual payments to the Consolidated Fund as dividend on their Public Dividend Capital and in respect of royalties from their promotional and United Kingdom proof coin sales, in recognition of the risk that some might enter into circulation. For 1987-88, these payments amounted to about s5.5 million and f3 million respectively. By convention, the dividend, which is based on the Mint’s current cost profit, is rounded down to the nearest so.5 million. In the two year period 1966-88, this had enabled the Mint to retain E567,OOO which would otherwise have been transferred to the Consolidated Fund. The Treasury pointed out that the Mint paid a proportionately higher dividend on their Public Dividend Capital than other similar bodies. In 1988-89 the Mint paid 79 per cent, compared with payments of between 0 and 13 per cent by other bodies. Nevertheless, they accepted that the dividend could be rounded down to the nearest El,000 rather than the nearest EO.5 million, but they regarded the benefit to the Mint of the present arrangement as very small.

The Royal Mint’s arrangements with the Exchange Equalisation Account

3.15 The Exchange Equalisation Account is operated by the Bank of England on behalf of the Treasury. One of its main uses is to check undue fluctuations in the exchange value of sterling. The Treasury may cause any funds in the Account to be invested in securities or gold. Until the introduction of the Britannia gold coin in 1987 (paragraph 2.7), the Mint had a long standing contractual relationship with the Treasury for the production of bullion sovereign coins for the Account. In 1986, to improve security, a new Precious Metal Unit costing El.56 million was installed at the Mint in support of this work (Appendix 2, Section [a) refers).

3.16 The NAO noted that the Mint had already been paid processing costs from the Exchange Equalisation Account over a number of years for the 23 million bullion sovereigns still in stock when the Precious Metal Unit was approved. The extent of these payments could not be easily determined. Some of these coins are now being melted down by the Mint to produce the new Britannia coins for commercial sale. Apart from questioning the need

for this Unit (Appendix 2, Section (a)], the NAO were concerned about the losses caused by excessive Sovereign production.

3.17 The NAO considered that the agreement was unduly favourable to the Mint in that the Treasury agreed that the Exchange Equalisation Account would meet the capital servicing costs of the new Unit of about f310,OOO a year, although it could also be used for the Mint’s commercial work. In the event it has been used only for such work, thus resulting in additional reimbursement of the Mint’s costs.

3.18 The Treasury considered that the agreement was justified as the Mint needed to be given some assurance of continuity of sovereign production and a return on their investment. It was designed so that the Unit’s recurring capital costs were not borne entirely by the Exchange Equalisation Account, since the Mint would retain control of the building and could use it for other purposes. The agreement provided for the Exchange Equalisation Account to place annual orders for coins; the price would be agreed annually between the Mint and the Treasury and was expected normally to reflect a progressive increase in the Mint’s efficiency over the previous year. With no orders having been placed for the Exchange Equalisation Account, the Treasury gave notice in June 1986 of their intention to cancel the arrangements, which were terminated at the end of the Unit’s second year. The NAO noted that all the Unit’s capital servicing costs of f310,OOO a year (paragraph 3.17) had been borne by the Account.

The Royal Mint’s agreement with the private mints in the United Kingdom

3.19 Since the mid-1960s the Royal Mint have had an unwritten agreement with the two main private mints in the United Kingdom-the Birmingham Mint Group and Imperial Metal Industries-that they should not compete with each other for orders of standard coins from customers outside the European Community and, in the case of the Birmingham Mint Group, for orders of proof/collector coins. Under the agreement, the Mint negotiate the contracts and then subcontract to each of the two private mints one sixth of the orders. The Office of Fair Trading have confirmed that the agreement is not one to which the Restrictive Trade Practices Act 1976 applies in respect of registration.

Royal Mint Services Ltd

3.20 Royal Mint Services Ltd was formed in April 1980 and is owned equally by the Mint and Thomas

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De La Rue and Company Ltd, who also act as the Mint’s sales agent in certain countries. Royal Mint Services Ltd’s objectives are to assist governments to set up or modify their own Mints and to offer them related training and consultancy advice. They aim to do this without harming the Mint’s own interests: indeed, one of their aims is to attract more business for the Mint.

3.21 Royal Mint Services Ltd’s financial results have been disappointing; they incurred a loss of 1&12,000 in 1987-88 on a turnover of E693,000, and a

loss of f76,400 in 1988-89 on a turnover of f130,600, though small profits had been made in earlier years. In addition, at 31 March 1989, the Company’s liabilities exceeded their total assets. The NAO could find no evidence of the benefits that the Company might have brought to the Mint and were concerned over its financial position. During the course of the NAO’s study, the two partners reviewed the Company’s future and subsequently decided to let it continue for a further three years, with revised financial objectives designed to secure minimum profit levels.

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Part 4: Indicators of Performance

4.1 The NAO considered a number of factors which would serve as a measure of how efficiently the 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.

Performance Indicators/Treasury Target

4.2 Although the Mint have performance indicators for internal use, for commercial reasons, their Annual Report includes only those based on published figures, for example, their overall operating profit. The Treasury have set the Mint only one published performance target-an average annual real return on capital employed of not less than 10 per cent over the three years to 31 March 1990 @aragraph 1.8).

4.3 The Mint’s annual accounts show that their operating profits in the five years to April 1988 averaged 17.8 per cent on capital employed. For most years the Mint’s profits on average capital employed exceeded the average returns of large manufacturing companies in the United Kingdom by about three percentage points on an historical cost basis. In current cost terms, the Mint’s return on capital employed during the five-year period averaged over 11 per cent, compared with the present financial target set by the Treasury of not less than 10 per cent (paragraph 1.8).

4.4 The Treasury agreed that, even for Trading Funds whose performance should be measured primarily in terms of profit, there was a case for seeking additional indicators of performance, particularly in the context of a move to Agency status (paragraph 1.1). The NAO noted that the Mint’s latest Corporate Plan, which is unpublished, included some indicators of this kind.

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 pay royalties on proof coinage, although these changes have been offset, to some extent, by new arrangements for the reimbursement of fixed costs. On the one hand, from 1988-89 the royalties are no longer passed directly to the Consolidated Fund but are credited to the Mint’s Trading Fund. On the

other, fixed coining costs are no longer related to long term future demand for the new 5 pence and 10 pence coins. In March 1988 the Mint estimated that these changes would result in additional profits of E3.1 million over the two years ending 31 March 1990, but the NAO noted that the Treasury had not increased the Mint’s financial target accordingly.

4.8 The Treasury told the NAO that they did not consider it either sensible or practicable to change the target continually to take account of every change affecting the Mint’s performance. But in view of the impact of the royalties agreement, the Mint had been providing them with not only their actual return but with one adjusted to take account of the changes in the payment of royalties.

4.7 The NAO noted that internal financial indicators on a product sector basis and some non- financial indicators, such as coins produced per machine/operator, already existed. They regarded these as more useful indicators of performance than the limited published ones. The Mint considered it indisputable that publication of such details would be helpful to their competitors. The NAO pointed out, however, that the Mint’s lack of published performance indicators compared unfavourably with other public trading bodies such as Her Majesty’s Stationery Office, whose published indicators include cost movements (in real terms); response times for sales orders; and product reject rates. The NAO did not consider that the Mint faced the extent of competition that the Stationery Office do in respect of their products and services, although they did accept that the nature of the competition was more specific. And they noted that, in their Seventh Report of 1987-88, the Treasury and Civil Service Committee had stated that they believed that Parliament would wish to be provided with more information on the Royal Mint’s performance along the lines of that provided for other parts of the Civil Service in the existing Public Expenditure White Paper.

Profitability of Product Sectors

4.8 The NAO noted that there were significant profitability variations between the Mint’s product sectors (paragraph 1.3). Over the five year period ended 31 March 1988, the highest profits were made from United Kingdom coinage, though these

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dropped to a low point in 1985-86 when issues were at a high level, reflecting the points made in paragraphs 3.6 and 3.7. The income from sales of overseas standard coinage was lower during this five year period: and two of the product sectors have failed to make any profit. Throughout the period a proportion of the overseas coin business was sub-contracted to the private United Kingdom mints and this made a contribution to the Mint’s profits.

Productivity

4.9 Until 1988, the Royal Mint’s Corporate Plans included details of the output per employee in the standard coin area. At the time the Mint considered this to be the best available productivity measure for their operations as a whole. This measure was discontinued on the grounds that it was relatively crude and too limited in its scope.

4.10 The Mint told the NAO that, although productivity indicators were used for their individual activities, it was not possible to calculate a meaningful one on a business wide basis. But, in any event, they would be unable to compare their productivity with other mints, as there was a lack of similar information elsewhere.

Cost comparisons with other Mints

4.11 There was insufficient information available to compare with any accuracy the Royal Mint’s costs with overseas mints. As regards the two main private United Kingdom mints, the NAO noted that they provided tendered prices for 25 per cent of all the Mint’s overseas coinage orders in 1987-88. On the basis of this sample and, after allowing for an assumed profit element of 15 per cent (the “semi- current” cost accounting target rate recommended by the Government Review Board in 1987 for risk work) in their prices, the private mints’ costs appeared to be substantially lower than those of the Royal Mint for making proof/uncirculated coins; and slightly lower for standard coins. This point was reinforced by the Mint making profits on orders subcontracted to the private mints while they made

overseas coin production (paragaph 4.8). The Treasury and the Mint both pointed out that the NAO’s allowance for an assumed profit element in the private mints’ prices was not sufficiently accurate to deduce anything about the private mints’ costs.

Exports

4.12 The Mint exported their products to 65 countries in 1987-88. The Mint’s exact share of world markets for their products is uncertain, but they believe it to be quite large in cases where buyers invite open competition. In recognition of this, the Mint received the Queen’s Award for Export Achievement in 1966,1973, 1977 and 1987.

Customer Satisfaction

4.13 The NAO contacted six of the largest clearing banks in the United Kingdom and the Committee of London and Scottish Bankers and the Northern Ireland Bankers’ Association to obtain their views on the supply of United Kingdom coinage and related matters.

4.14 The banks generally thought the United Kingdom coinage structure was satisfactory. But they welcomed the move towards lighter and smaller five and ten pence coins (paragraph ZS), and most wanted to see this taken further. Some thought that the value range of coins could be sensibly reduced, perhaps by withdrawing the two pence coin. The NAO acknowledged that the views of other interested parties and other considerations need to be taken into account in decisions concerning coinage policy. Accepting the acknowledged difficulty of forecasting accurately the demand for coinage, the banks were generally very satisfied with the speed and accuracy of the Mint’s service, both in relation to coin issues and withdrawal of surpluses. None had experienced any significant coin shortages.

4.15 The NAO found that there had been relatively few complaints from the Mint’s other customers and all of these appeared to have been ^.. .

losses (based on full costs] on their own standard followed up thoroughly.

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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

Deputy Master [Chief Executive]

Director Regional Sales (Overseas Sales) Managers (4)

2 External Directors

Scientific

Director (Operations)

Engineering/Health & Safety

Production

Engraving

Royal Mint Services

- Establishments Officer

Personnel/IR/Security Training

* Chairman, Royal Mint Services Ltd - Public Relations

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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 nickel 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.

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