Examination of Witnesses (Questions 100-119)
MR RICHARD BROADBENT AND MR MIKE WELLS
MONDAY 25 FEBRUARY 2002
100. There has been a recent series of advertisements about social security fraud, which I have been very aware of; as no doubt a lot of people I just happened to see them in the newspapers. I have never seen anything at all asking for information about diesel fraud. Do you involve yourselves in that sort of a programme at all?
(Mr Broadbent) It is one of the elements of a strategic response which was mentioned in the PBR. We mentioned four or five areas we are looking at, one of them was clearly the registration scheme for distributors which is probably the single most important step we could take. Publicity was one of those four or five headings. The reason for that, and I agree with what you are saying, was that in the case of tobacco, where we invested quite a lot of money in publicity, it was proved to be highly effective. Recognition rates, particularly amongst hauliers, are 85 to 90 per cent about the penalties we can impose, the seizure of their vehicles, the risks they are taking. Publicity is a very important part of any strategy. As we develop a strategy for oils, depending on resourcing and so forth, publicity will certainly be a part of it.
101. When you have done it for tobacco, have you reckoned that it has been cost effective in terms of bringing in more duty than you spent on the efforts?
(Mr Broadbent) It is always hard to know, is it not, with advertising which half is wasted and which half is value for money. The overall judgement we have made is that it has been good value. The recognition rates are certainly very, very high and our professional advisers tell us that is usually a sign of impact.
102. Once again you have a little bouquet for the Chancellor. You can offer him a little extra money if he gives you a bit more money to put into publicity.
(Mr Broadbent) Unfortunately one cannot take strategy and strip the individual bits out and say this bit is worth this much and this bit that much. The key is to have a set of integrated actions and then you can have an impact. Perhaps that is what is meant by moving from a tactical to a strategic approach. It is knitting together publicity with a registration scheme, the new intelligence-driven activity we were talking about and an outcome based target. Then you can begin to see the impact you are having.
103. Paragraph 7 of the main findings of the NAO report, page 2, says your estimates in 2000 for the revenue loss from frauds on petrol and diesel could be between £450 million and £980 million in the UK. Those figures are broken down in Figure 2. That is a huge variation in estimates, between £450 million and £980 million. Do you have any more accurate figure for what the loss might be?
(Mr Broadbent) We can be pretty confident that both the £450 million and the £980 million are not the true level of fraud. To get to a figure as high as £980 million, all activity in Northern Ireland and all petrol in the UK would have to be fraud. We know that most petrol in the UK is actually cross-border shopping and we know that a very large proportion in Northern Ireland activity is cross-border shopping. Equally the £450 million assumes that all the activity in Northern Ireland is cross-border shopping and we know there is fraud because we stand at the border and see it. It is a range and my judgement would be that we know that the £450 million is misuse of diesel fraud in the UK, so that is a fairly hard figure, subject to some points I can discuss if you wish. We know that most petrol in the UK is probably cross-border shopping, which is another £130 million. We know that in Northern Ireland we cannot make estimates of cross-border shopping because we do not have the traffic data and border surveys, but it is economically worthwhile for everyone in Northern Ireland to shop across the border so one might make a judgement and say half of that market was legal. If that were the case, then you would say that the total amount of fraud would be of the order of £600 million.
104. So your best guess would be about £600 million.
(Mr Broadbent) You asked me to narrow it down and I would say that the £450 million is the diesel; I think there are small amounts of petrol fraud in the UK and if you took a bit of a guestimate and said that half the Northern Ireland market was fraudulent, you would get to my £600 million.
105. In Figure 2 in this report a lot depends on your estimates for what is legitimate and what is illegal, but it is only in the mainland UK on diesel that you have made any attempt to distinguish between the two. I would have thought there was a pretty essential distinction in that you can measure the number of people leaving a supermarket with food, but those who have shoplifted and those who have paid for it are two quite different kinds of people. Why do you not then attempt to have more accurate estimates of what is legitimate cross-border shopping and what is illegal?
(Mr Broadbent) In Northern Ireland, we do not, because there is no traffic data. A lot of the estimates in Great Britain depend on traffic data. There is quite good data of traffic coming into GB and that is a very important component when these estimates are built up. There is no traffic data for Northern Ireland because it is a land border and people cross it freely, so we have no data. We supplement our data in GB with survey data and again we do not do surveys in Northern Ireland because it is not a great place to stand and count vehicles in a way which gives you a fair sample. We just do not have data for Northern Ireland. Although we can therefore estimate in a top-down way, for example 100 per cent of hauliers and 30 per cent of motorists have an incentive to shop across the border quite legally, I cannot do any more than say I personally would make a judgement that it might be half or a bit more, but that is not an estimate I could publish. I have no statistical basis for that; it is a top down estimate. I am afraid it is very difficult to see us getting much further forward in Northern Ireland except operationally I can probably give you year by year a sense of how that balance is going. In GB we do break down the diesel market. The car market is slightly more complicated to break down because it is not clear what the nature of the fraud would be. It would probably be a smuggling fraud with petrol because you cannot use red diesel. Really it is a question of estimating the amount of smuggling, which we think is quite low.
106. What percentage of the red diesel market is the £450 million which you guess is lost through the misuse of red diesel? It says in this report that that is four per cent of the diesel market?
(Mr Wells) I cannot tell you the figure off the top of my head. I can tell you what the relative proportions of red diesel and diesel in the UK are but we may be able to work the figures out for you.
107. What are those figures for the use of red diesel?
(Mr Wells) The total production of gas oil in the UK in 2000-01 was just under 6.8 billion litres as against 18.4 billion litres of ultra low sulphur diesel, the main diesel. That is the broad total production of each. It would give you some indication as to the proportion. If I could do maths I could work back.
108. It is obviously quite a significant proportion of the red diesel market. I am ignorant about the use of red diesel except by farmers. How many people? What sort of people would qualify for red diesel?
(Mr Broadbent) It is off-road vehicles, for example, road construction, all construction vehicles, farming. Essentially any vehicle which does not use the road as its primary use is entitled to use red diesel.
109. There cannot be that many vehicles which do not use the road.
(Mr Broadbent) Quite a large number of vehicles. We have a figure which I could give you, but I do not have it in my head, for the categories of vehicles which are exempt. There are large numbers of vehicles: all farming vehicles, all construction vehicles, all civil engineering vehicles. It is quite significant and they are used quite heavily. They are used many hours of the day and they have quite low mileage per gallon.
110. It seems to me to lose £450 million on a scheme which is not a massive scheme but applies to a few, seems an extraordinarily large sum of money to lose just on the red diesel scheme.
(Mr Wells) You were asking about the four per cent. That of course relates to all forms of misuse and that includes kerosene as well which is another 3 billion litres on top of the red diesel and kerosene is widely available for use as a heating fuel and is widely available for that purpose. We are talking here about both the misuse of kerosene and the misuse of red diesel.
111. The point I am making is that whilst it may be true, with the exception of Northern Ireland, that there is not widespread abuse, there is not widespread smuggling of petrol and diesel, it does seem to me that there is an extraordinary abuse of the red diesel scheme. In answer to some of the Chairman's questions you said you were looking at alternatives, obviously this is a scheme which has run since the Second World War. Does it not strike you as a scheme which is both open to abuse and is being abused?
(Mr Broadbent) Yes, I would agree on both counts. Historically it has actually been a highly complicit regime. There is no doubt that pattern has changed. You can now see an upward trend. There are some reasons to believe that particularly the year 2000 had a bit of a blip in it for certain reasons.
112. That was because of the fuel dispute.
(Mr Broadbent) Yes. There is no doubt that there is an underlying upward trend and a regime which was for many years complicit and very efficient has become less complicit and we need to act to stop that. I agree with you that the level of fraud is higher than it should be and increasing and that partly reflects the fact that it is not actually very difficult to misuse red diesel. The fraud is a relatively easy one to carry out. You just take the diesel and put it in your tank.
113. The financial gain in terms of the price per litre is very, very considerable, is it not?
(Mr Broadbent) Yes. Whether that gain is reflected in cash in the pocket, which is for the commercial fraudster, or in reduced output prices, is less clear. There is a lot of evidence which suggests that the relatively smaller misuser actually reduces output prices.
114. I have never bought any red diesel, that I am aware of. It is true to say that if I turned up at a local petrol station in my rural part of the country, in Cheshire, and said I had a tractor in my back garden and I wanted some red diesel in these various tanks, that would be fine.
(Mr Broadbent) It is quite legal. The garage proprietor has to make you aware that it is not for road use and has to write on your invoice that it is not for road use, but you can go and acquire red diesel from certain outlets. More red diesel comes from distributors than comes from garages nowadays.
115. Although I can see that introducing a cumbersome licensing system would have its drawbacks, are there not fairly simple things you could do which might act as a deterrent, for example asking people to write down their name at the petrol station if they bought red diesel?
(Mr Broadbent) There are some things we might look at doing at that retail point, but I believe in terms of value and volume that the biggest risks come at the distribution point. A lot of this red diesel is delivered direct to hauliers, direct to users. The amount which is actually comprised these days of farmers going down to their local garage and filling up with red diesel is quite small and as you have observed I am sure they are all very honest. The scale of misuse comes primarily in the distribution to large-scale hauliers, construction vehicles and so forth and that is where the new controls, if we introduce them, would need to bite.
116. Where is the £450 million fraud taking place? Is it just the guy with the diesel car going to the petrol station, or is it really quite major fraud happening at the big points of distribution.
(Mr Broadbent) It used to be the first sort and that is what we have seen from the pattern of our activities, the pattern of sanctions, the pattern of prosecutions. What is happening now is that it is changing to the latter sort. We are starting to see people move into this market, set themselves up, misuse red diesel on a large scale or increasingly launder red diesel. So they sell it as diesel which is just a bit cheaper, but they have laundered out the dyes; that is becoming an increasingly important part of the activity. This year to date we have disrupted 19 laundering plants in the mainland; two years ago there were none at all. That is a measure of the switch of activity.
117. In that sort of system, where there is increasingly large-scale fraud taking place, do you think a regime where your main weapon is a £250 fixed penalty fine and you confiscate the diesel you seize is not really effective? It might have deterred the opportunistic car driver, but it is not really going to deal with these big fraudsters.
(Mr Broadbent) No, it is not effective at all and that is why we are switching a lot of the activity into targeted investigation, into disruption and out of that we are starting to see prosecutions flow. If I pointed to the two most important things which have happened on the mainland in the last couple of years, one of them is a big change in the size of assessments being levelled. Assessments are very important in this case, because if you seize the diesel on one load, so what? What we are trying to do increasingly is go in and say "Right. Here's a load. We're now going to look at your books and we are going to see what we can do". We can sometimes levy assessments of £250,000. The total value of these assessments we have raised has gone up from about £3 million two years ago to nearly £8 million this year; £7.8 million so far this year. Go for their pockets.
118. That is still a pretty low percentage of £450 million.
(Mr Broadbent) It is an example of moving away from the fixed penalty. Instead of giving them a £250 fine, we try to give then a £250,000 assessment. It is a big step and we have the powers to do that. We are the ones who need to get ourselves in order so we do more of that and less of the fixed penalty.
119. The red dye might have been pretty effective in 1946 but do you think it is still an effective means of marking the diesel, particularly as according to this report it is quite easy to disguise it by mixing it with other kinds of diesel or other kinds of oil or indeed remove it from the oil altogether?
(Mr Broadbent) It is not that easy. First of all, there is a dye and a chemical marker. It is not sensible to go into the details of removing it but suffice to say that if you are going to do it on a large scale you are going to have a rather large smelly plant when this is supposed to be a covert activity. This is going to be churning out several thousand litres of waste, it is going to be quite smelly and if you are producing any quantity of diesel as a result you are going to have tankers leaving and arriving every day. There are some logistical constraints on the ability to do this very easily. The dye is very visible, it is quite difficult to get rid of it, though you can get rid of it, but even if you do we can still test the fuel and know it is laundered because the chemical marker is still there. It is quite effective. Having said that, there are one or two quite interesting developments which we are in discussion with some universities about. I do think it is incumbent on us to try to think ahead. There are some possibilities where we can introduce some markers which, for example, the process of trying to remove it would degrade the hydrocarbon itself. If we could get to that sort of marker, it would be a really good technical solution to our problem and we would not need to have so many expensive people out trying to find the ordinary marker.