WEDNESDAY 31 OCTOBER 2001

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Members present:

Mrs Irene Adams, in the Chair
Mr Alistair Carmichael
Mr Peter Duncan
Mr Mark Lazarowicz
Mr John Lyons
Ann McKechin
John Robertson
Mr Mohammad Sarwar
Mr Michael Weir

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Examination of Witnesses

THE RT HON PAUL BOATENG, MP, Financial Secretary to the Treasury, MR RICHARD SUMMERSGILL, Head of Excise (Social Regimes), HM Customs and Excise; THE RT HON BARONESS SYMONS OF VERNHAM DEAN, Minister of State for Trade and Investment, Department of Trade and Industry, MR ANDREW WHITE, Director of Mergers, Office of Fair Trading, MR TONY METCALFE, Assistant Director, Competition Policy Directorate, Department of Trade and Industry; and MS RHONA BRANKIN, MSP, Deputy Minister for Environment and Rural Development, Scottish Executive, MR MICHAEL KELLET, Head, Water Framework Directive Team, and MR ROBERT CROWHURST, Head of Unit, Trade Policy Directorate, Department of Trade and Industry, examined.

Chairman

674. Good morning. Thank you all very much for your attendance this morning before the Committee. We have taken up an inquiry started by our predecessor Committee into the drinks industry in Scotland, covering the whisky industry and the water industry in particular. Perhaps at this point I can ask any Member of the Committee to declare any interest he or she may have in this regard. I am chair of the Scottish All-Party Scotch Whisky Group and I declare that interest now. I thank the Ministers for attending this morning. I give a particularly warm welcome to Rhona Brankin. This is quite an historic occasion as this is the first time that a Minister from the Scottish Parliament is attending an inquiry with colleagues from Westminster. We thank you for attending this morning. Perhaps I can ask the Ministers to start with a brief statement outlining the responsibilities appertaining to the inquiry, and then we can go on to the structured questions. If you do not want to make a brief statement that is fine, but if you have something that you would like to say, we are happy for you to do that first..

(Mr Boateng ) I am the Financial Secretary to the Treasury and I have responsibility within the Treasury for Customs and Excise. I also have a responsibility for productivity, competition and enterprise. In both of those respects we particularly welcome the decision of your Committee to revisit this topic. The Scottish whisky industry is a major exporter. It makes an important contribution to our balance of payments. Excise duty and VAT on alcohol contribute some £11 billion to the Exchequer each year which obviously makes an important contribution to schools, hospitals and a whole range of vital spending programmes. Therefore, we are highly cognisant of the importance of the industry and of our responsibility to Customs and Excise to protect both the Exchequer and legitimate business when they are under attack as they are from criminals involved in smuggling and fraud. So for all those reasons, this is a particularly welcome inquiry.

(Baroness Symons of Vernham Dean) I am the Minister for International Trade and Investment. I have brought colleagues with me who deal with the competition side of our relationship with the industry. As you will know, the sponsoring department is DEFRA, but the DTI and indeed British Trade International (BTI) also have a very good relationship with the spirits sector, especially on the trade side. We share a clear common purpose in promoting competition and developing markets worldwide. Sometimes that is through bilateral approaches, sometimes through Ministers and sometimes with our posts on the ground, or, of course, through the Commission. At other times, when appropriate, we do so under the auspices of the World Trade Organisation. We think that we have had a successful history in relation to this. As Paul Boateng has said, it is very important to us in terms of employment and in terms of our export performance overall. The Scottish Whisky Association has just announced that exports to Asia, for example, were up by one-third in the first half of the year - by volume - and by up by 20 per cent in terms of value. The industry has regular access to the DTI Ministers and, of course, to senior officials as well as extensive day-to-day contact with officials on individual cases. We believe that that dialogue is very important. We also believe that the industry thinks it is important too. They have made that very clear in the representations that they made to my colleague, Patricia Hewitt, the Secretary of State at the DTI in relation to the DTI reviews that are currently under way. On the competition side, the enterprise Bill planned for this parliamentary session will make a significant change to competition law. If the Committee would like to explore that further, my colleagues on the competition side, Mr White and Mr Metcalfe, will be happy to deal with those questions. On the trade side, we are coming up to the launch of the new trade round, which we hope will be in about 10 days to two weeks' time in Qatar. We believe that the industry would benefit significantly from the launch of the round. Clearly, the negotiations will be particularly significant in relation to the agriculture negotiations about which there has been a certain amount of public comment. Those negotiations are already under way as a result of what happened in the Uruguay round, when a round was last launched. Perhaps there are some other ways in which the trade round is very significant to the industry, such as further reductions in tariffs. The elimination of non-tariff barriers is also an important point. The enhanced protection for intellectual property rights, of which I am sure the Committee is aware, is a big issue for the industry and finally there are services, like agriculture, on which negotiations began a little while ago. We also believe that the industry should benefit significantly from the general boost that the launch of a new trade round will give to worldwide trade. I should make reference to the importance that the Government attach to the launch of the round, not only because of the liberalisation of trade in general, but particularly after the appalling events of 11^th September. We believe that international trade needs this significant boost that we hope the launch of a new trade round will lend to all of our exports effort, which of course includes the Scottish whisky industry.

(Ms Brankin) Thank you for your welcome. I am delighted to be here. I am the Deputy Minister for Environment and Rural Development in the Scottish Executive. I thank you for your invitation to me to give evidence to your inquiry. As you are aware, primarily I am here to talk about the requirements of the Water Framework Directive. This opportunity has presented itself and it allows me to reiterate the Executive's support for the drinks industry in Scotland and the recognition of its value and importance to the Scottish economy. I should point out that the responsibility for the drinks industry within the Scottish Executive lies with Douglas Alexander and Alistair Morrison, who has responsibility for the Scottish whisky industry. The industry's prosperity is dependent on the continued availability and abundance of excellent quality water. That is also crucial to its image across the world and the industry has committed itself to protecting the natural environment from which it draws its raw material. We have pledged to support the Scottish manufacturers' policies where devolved matters have an effect on competitiveness and we shall take steps to ensure that in meeting the requirements of the legislation that the regulatory burden on the businesses is kept to a minimum. The EC Water Framework Directive came into force on 24 September last year. It sets out a new approach to protecting and improving water across the EU. The directive gives us a framework to work on, but we shall have to fill in the details. The first step in the implementation will be the transposition of the directive's provisions into Scottish law. That will be done through the Water Environment and Water Services Bill that we plan to introduce to the Scottish Parliament next year. We know that it is important to engage all the interested parties, including the drinks industry, as early as possible in implementing the directive. That is why we are striving to involve them at every stage. We believe that, by working pro-actively, we shall be able to implement the directive in a way that is best suited to the Scottish circumstances, so that we can balance the needs of those who depend upon water for prosperity. It is for that reason that in June we published a consultation paper outlining the proposals. We have had responses to that and a conference was held in September with representatives of the industry attending. The week after that event I had an opportunity to meet with representatives of the whisky industry, which produced an opportunity to discuss their concerns. Also my officials have met with the industry and will continue to do so. I shall finish there, but I am happy to answer any more detailed questions on the environmental impact.

675. I should say that today's evidence will go onto the Internet as soon as possible after this session. Rhona Brankin, I shall ask you some questions first. If, after giving your part of the evidence, you would like to leave because you have to return to the Scottish Parliament, please feel free to do so. You have given us some indication of the view of the Scottish Executive on the Water Framework Directive. What does the Executive think of the effectiveness of the licensing system for abstraction currently operating in England and Wales? Do you consider that the system there produces tangible environmental benefits?

(Ms Brankin) Obviously, there is a system of abstraction control for England and Wales and our officials work closely with officials in England and Wales. We have been looking at the matter closely in terms of drawing up our own plans to develop abstraction controls in Scotland. We are at an early stage in that, and we have to be able to work in tandem with colleagues in England and Wales. One of the reasons for that is because we share river basin areas and we have to draw up river basin management plans for rivers such as the Solway and the Tweed. So we shall be working closely together, building on the experience of England and Wales and looking at areas of common interest.

676. Mr Kellet, would you like to add anything?

(Mr Kellet) We have good relations. I suppose we learn lessons from the system south of the border, as appropriate. We deal with the situation in consultation with the industry as well as with other bodies.

677. Does the Scottish Executive believe that it is necessary for Scotland to introduce a system of abstraction controls? Has the consultation process undertaken by the Scottish Executive shown any clear consensus yet on the need for abstraction control?

(Ms Brankin) There is no doubt that the Water Framework Directive requires us to introduce controls over water abstraction in Scotland. It requires us to deal with all human impacts on the water environment. Although we have what many would say is an over-abundance of water in Scotland, we believe that we cannot afford to be complacent. Over-abstraction of water can cause damage. There is no doubt that it causes some environmental problems in some parts of Scotland at certain times of the year. We cannot afford to be complacent, so we need to build up an overall picture of the impact.

Mr Carmichael

678. When drawing up your abstraction control policy and your guidelines, it must be borne in mind that the Scottish whisky industry, particularly in the more remote parts, will have a different need from other businesses and other commercial organisations in the business of abstraction in other parts of the country. What assurances can you give us that what will come out at the end of the day will not be a "one size fits all" policy, but that there will be sufficient flexibility incorporated within it to recognise the different needs in the different areas?

(Ms Brankin) Yes. I recognise the importance of the Scottish whisky industry, certainly in many areas which have an environment with specific needs. We are aware of the need to ensure that although we implement the directive on a Scottish-wide basis, it will be implemented in a way that meets the local needs of that environment. Indeed, where there is no need for abstraction controls that is fine. Essentially, we need to be able to build up a picture and to take it from there and then look at the controls that will be necessary.

Mr Lazarowicz

679. Do I take it from what you have said that there will be situations where abstraction controls will not be required?

(Ms Brankin) It is difficult to give an absolute answer to that. It may affect only certain industries. They will be required to be licensed, depending on the amount of water that they use. We shall have to look specifically at each individual case in order to determine what sort of controls will be necessary, but it is very much a case of looking at each individual case, looking at potential impacts and making a decision in full consultation with the industry.

Mr Weir

680. Has any thought been given to the cost to the industry of abstraction controls? Many businesses, including whisky have suffered a great deal of cost in implementing the Waste Water Directive. Has any thought been given to the cost of implementing this directive?

(Ms Brankin) Currently there is an initiative between SEPA and the Scottish whisky industry that is looking at potential impacts. I have had discussions with the Scottish whisky industry and they are also very focussed on the need for their industry to represent what is best in terms of clean use of the environment. Certainly, they accept that it is in their interest as well. There is a continuing dialogue with the industry and recognition on the part of the industry and ourselves that there has to be a degree of meeting of minds in this. It is important for the industry to rely on a clean environment. We are aware of that and we are having discussions, through SEPA, with the industry.

Mr Lazarowicz

681. Regardless of the form in which abstraction regimes are introduced, do you consider that there is any merit in the introduction of registered water users?

(Ms Brankin) We need to be able to build up a comprehensive picture of the use of water in Scotland. It would be useful to have a register. Only when we have a full picture of water use, will we be able to make plans for the management of that resource.

Chairman

682. The Committee understands that there are local problems with abstraction? Does that justify a blanket approach?

(Ms Brankin) Although we are required to implement the directive in Scotland, we shall be taking very much a case-by-case approach. We have said that - this forms the basis of our approach - we shall look at water abstraction on a case-by-case basis and that will take local needs into consideration.

Mr Lyons

683. On the question of the water users' register, to what extent is registration available now, through the local authorities or SEPA or anything else?

(Ms Brankin) At the moment there is no comprehensive system. That is why we would find this useful.

Mr Carmichael

684. At the risk of being presumptuous, and before I move the discussion on, perhaps I can express the hope that this is not the first and last exchange between Ministers here and in the Scottish Parliament. In the past there has been some reluctance for some people here to make the journey north. I hope that the example that you have set, and the precedent you have made, will not be lost on some of your colleagues in Westminster. Broadening the discussion, how do you see the relationship running between the whisky industry and the Scottish Environmental Protection Agency, as it currently exists?

(Ms Brankin) I think the relationship is very positive just now, and I am encouraged by the positive dialogue between SEPA and the Scottish whisky industry. A joint discussion is taking place and we are looking at that. I am encouraged and I think that the situation at this stage is positive. We want to seek to reduce some of the fear of the unknown and the worry that there may be some sort of blanket imposition of abstraction controls. As I have explained, that will not happen.

685. I am encouraged by what you are saying. I think there was a lot of unnecessary conflict, particularly in relation to the Waste Water Directive. One particular example that springs to mind was the regulations that were imposed on Islay in relation to waste water disposal in relation to the production of pot ales. That waste was taken from Lagavulin at the south end of the island to the north end of the island for disposal. Most of the time there was a good strong tide running and it would be back at the south end of the island before the lorries were. Can we have some assurance that there will be a more sensitive approach taken by SEPA in relation to whatever comes from the water treatment regulations and that we have learned from the mistakes of the past?

(Ms Brankin) Yes, absolutely.

Chairman: The predecessor Committee visited Islay. I and other members of this Committee were Members of that Committee. There was disquiet that it had cost the industry £650,000 to implement measures that none of us could see the point of. We would hope that there was later dialogue between the industry and SEPA.

Mr Sarwar

686. I would like to highlight that point. We took evidence from representatives of the industry that there was unease and unnecessary burden placed on the industry. That did not help them to compete in the industry and they were very uncomfortable about it. We do not know what the relationship was, but we felt that SEPA had treated the industry in Scotland unfavourably.

(Ms Brankin) I take that point. I believe that the relationship is a lot better. Certainly I am working hard to ensure that we work together in partnership.

Mr Weir

687. Does the Scottish Executive have any plans to transpose into Scottish law the full provisions of EC Directive 96/70, which would require stricter control on what might be labelled as spring water? I think the Minister will be aware of the several companies in Scotland, particularly in rural areas, for whom this is an important matter. Stricter regulations may be of benefit in dealing with the competition. There is already a stricter regime in Europe.

(Ms Brankin) As you may know, we are preparing the regulations in the form of the Draft Spring Water and Bottled Drinking Water (Amendment) (Scotland) Regulations 2001. Earlier this year, in March, we issued a consultation document and the Executive is currently looking at the results of that consultation. The intention is to publish the document and to go out to another round of consultation on that. In Scotland, the responsibility for implementing the directive in respect of bottled water rests with the Food Standards Agency. These regulations were put out earlier this year, and there will be a further short consultation on these regulations.

Chairman: I think that SEPA have come back to us on this point. Hopefully, the relationship with the industry is now improving. Are there any further questions for the Minister on water abstraction or the industry in general? Thank you very much. We have finished our structured questions to you. If there is anything that you feel you would like to add, or any other point you want to raise during the proceedings, please feel free to do so. We turn now to the Treasury.

John Robertson

688. What is the reason for the relatively high rates of excise duty on alcohol imposed by the UK Government compared to other countries within the EU? I point particularly to Germany in relation to beer. We have something like ten-and-a-half times the excise duty, and when we look at Spain in relation to spirits, our duty is five times higher.

(Mr Boateng) Before responding to the question perhaps I can introduce my colleague who is Head of Excise (Social Regimes) at HM Customs and Excise, who is assisting me this morning. I shall respond to the question by saying that traditionally in the United Kingdom, we have had relatively higher rates of taxation on alcohol in comparison with our European partners. I think we are something like fourth in the list, after Sweden, Finland and Denmark. That has been the tradition in the United Kingdom over many years. It is worth point out that each sovereign state develops its fiscal regimes in accordance with its traditions. Understandably you give the example of Germany, but that country also taxes coffee, whereas we do not. Each country, over the years, develops its own approach to taxation. We have some of the lowest rates of personal taxation across the EU; one of the lowest overall burdens of taxation across the EU, but traditionally there has been a differential between ourselves and our EU partners on the taxation of alcohol.

689. I accept that except for the fact that we seem to tax whisky which is our own product a lot higher than other countries. How does that weigh up with what you said about beer in Germany?

(Mr Boateng) In relation to the discussions that we have had within the EU on this issue, we have urged the increase in the minimum rates for wine and beer and we have urged the reduction of the minimum rates in relation to whisky precisely in order to encourage and to support our export industry. However, the traditional pattern of our own taxation as between whisky and beer and wine remains. Perhaps I can give you an example of the consequences if we were to reduce our rates to those that exist in France. It would be the equivalent of 2p in the pound on income tax. That would be the consequence if we were to adopt the French model. That would have real implications for us all on both sides of the border.

Mr Carmichael

690. You are talking about the rate of duty on spirits in the UK as compared with France?

(Mr Boateng) No, across the board.

Chairman

691. Would we sell more whisky if that were the case?

(Mr Boateng) I think the jury is out on that one in terms of the arguments around elasticity.

Mr Duncan

692. You may be aware that Douglas Alexander, the Trade Minister, is currently in India, having discussions with the commerce minister in India. He made some very interesting observations in that India has some punitive taxes on whisky. I commend him for tackling the problem. One of his comments was that he will be pressing the case for lowering the tax on whisky. What are your observations on the juxtaposition between the external approach of the Trade Minister and whether that view is related to inside the Treasury?

(Mr Boateng) Without commenting specifically on the Minister's remarks in relation to India, the concern is specifically about a tax that is discriminatory and designed to inhibit trade. That is not something that any Minister, on either side of the border, would ever be prepared to countenance. It is worth pointing out that over the past four Budgets there has been a freeze on spirits duty. That has narrowed the differential. Without those freezes, a bottle of spirits would be 64p more expensive than it is today. If you take a 20-year period, whisky is cheaper today as against wine and beer than it was 20 years ago. So the trend is one that the industry and whisky drinkers, of whom I confess to be one - although I may have trouble with the spelling of Laphroaig - welcome.

693. I am sure that the Chairman will welcome your declaration of interest in this subject! Does the Treasury accept that given that we have had four years of no increase, that that is a reflection of the view that whisky is over-taxed in the UK?

(Mr Boateng) It is a reflection of the Chancellor's budget decisions over four successive years. The Chancellor has to make decisions in relation to levels and to rates of taxation and duty in the light of all the circumstances at each budget. That is what the Chancellor does and that is what he will continue to do.

Ann McKechin

694. Given that the Treasury has frozen the rates on spirits over the past four years, will that be a continuing trend?

(Mr Boateng) I would refer Ms McKechin to the remark that I have just made in relation to the Chancellor's judgment over four successive years. He will make a judgment around budget time.

Chairman: I believe all Members of the Committee wanted to ask that question.

Mr Weir

695. On the Qatar round and the liberalisation of trade, does the Minister see a move towards the harmonisation of duties, particularly within Europe?

(Mr Boateng) If I can limit myself to the harmonisation of duties within Europe - my colleague Baroness Symons may make a wider remark around globalisation - our policy has been and remains to oppose consistently harmonisation. We do that for the very good reason that we believe it is important to maintain the Chancellor's flexibility in this area to determine what best suits the interests of the economy at any given time. That is why, for instance, we have not favoured unitary taxation over the years, because it does not permit, in our view, sufficiently individual responses to changing circumstances. That is not to say that we have not urged on our European partners the changes that we believe will be beneficial to our national interest and to the benefit of the drinks industry in relation to minimum rates, where we believe it is proper to have a European-wide policy and where we take a very robust view, informed by the representations of the industry and indeed representations from members whose knowledge and understanding of that industry arises from their constituency connections.

Chairman

696. Minister, you said that the system is mainly traditional. Has it become a bit hidebound and perhaps it is time to revisit our traditions and to work on them?

(Mr Boateng) You may say that I would say this, but the view that we take is that it is always important to ensure that the Chancellor maintains the freedom of action and has the flexibility that is necessary in terms of rates and levels of taxation across the piece to make the necessary determination as to where the national interest lies. Our approach traditionally has been as I have described. That is the nature of these islands' history. I am bound to say that it has served us well over the years in terms of revenue source. Let us be clear about that. It is part of a pattern of taxation that we believe is in the interests of all our peoples.

Mr Sarwar

697. Minister, as you are aware, excise rates are considerably higher in the UK than in most other European countries. No one expects the reduction of those rates and harmonisation overnight, but I believe that we need a long-term strategy in which, if we have a reduction in excise duty, we can recover the revenue lost through increases in sales and eliminating smuggling. What are the revenue implications for the UK economy of the wide margin between excise duty in the UK and those in most other European countries? Is any review of the situation proposed?

(Mr Boateng) Obviously, we have an interest and a determination to tackle smuggling. In relation to smuggling it is interesting that there is questionable evidence as to whether or not the differential rates actually impact on levels of smuggling as much as is currently thought. Much of the alcohol which is the subject of illegal trading has never been the subject of duty anyway, so it is not a question of simple cross-border or cross-Channel smuggling, which of itself is an issue and which we devote a not inconsiderable amount of resources to combatting and with some success. It is not just a question of people buying over there, where rates are lower, and reselling here. It is an illegal activity that undermines legitimate business and an activity that is centred on alcohol that has never paid any tax anywhere. So we do not believe that a response to smuggling ought to be to reduce our own levels of taxation. We believe it ought to be, and it has been, a re-doubling of our efforts in order to combat smuggling. The figures speak for themselves. That is why we have put out an extra 170 customs officers to tackle cross-Channel smuggling and why we have placed the emphasis that we have on combatting spirits fraud. We believe that that is the proper approach rather than reducing our rates. Nevertheless, I repeat that we recognise the concerns around competition that the industry quite understandably has in terms of the way that it is taxed in our neighbours' and partners' jurisdictions.

John Robertson

698. Later we shall ask about the cross-border smuggling, but from what you have said to my colleague, the answer to the question is that you are not going to do anything. I am somewhat surprised, particularly as we are trying to be part of the European Community and trying to bring everybody on board with us. Is our attitude as a Government to taxation that it is right and that everybody should come up to our levels? Should we not meet them somewhere in the middle?

(Mr Boateng) Our attitude as a Government vis-a-vis our European Union partners in relation to the drinks industry is to protect our interests and the interests of the industry. We believe that that is best served by consistently arguing the case for minimum rates that reduce the disparity and the disadvantage that our spirits industry particularly suffers abroad in terms of the differential between beer, wine and spirits. That is why we argued against the zero rate for wine and why we were concerned that the EU's most recent reviews in this area have come to nothing in terms of minimum rates. We are looking forward to the outcome of the 2000 review, because we believe that that will assist us in our objective which is to tackle this issue through minimum rates.

Mr Weir

699. Earlier the Minister said that he did not think that the differential rates of duty were at the root of the smuggling problem. I was slightly surprised by that, given the amount that it is alleged is smuggled into the UK from Europe. I would have thought that it would have originated from some sort of commercial venture where duty was paid on the production. Does that not affect the lower duty at that stage?

(Mr Boateng) I do not believe that I put it as baldly as that. I suggest that the case is that it is possible to exaggerate the impact of the differentials between ourselves and France on this issue because of the way in which spirit fraud, as such, is grounded in spirit that has not paid duty anywhere. Undoubtedly, in terms of cross-Channel smuggling it features. If you can load up a white van in Calais and get away with bringing in large quantities of spirits, tobacco or other goods where there is a tax differential and then flog it on the other side, that is a factor that determines whether or not you are prepared to take the risk. The message that we would send to those who seek to evade duty in that way, bringing in goods that clearly are not for personal use and exceeding the EU guidelines, is that we are on your case and we are strengthening our customs capacity to respond. I understand that you will be asking more questions about smuggling later, but I do not want anyone, for one moment, to under-estimate the extent to which the links with organised crime of smuggling represent a threat to us all. People who are prepared to smuggle alcohol and tobacco, in my experience, not least as a criminal justice Minister, will also be prepared to smuggle drugs and will be prepared to use not inconsiderable violence in order to further their criminal ends. We do not intend to allow them to get away with it.

700. I appreciate what the Minister says, but I am still curious about spirits that pay no duty anywhere. Surely such large consignments cannot have failed to pay any duty whatsoever.

(Mr Boateng) I shall defer, if I may, to Mr Summersgill, who has immense operational experience of this issue.

(Mr Summersgill) In respect of spirits, the vast majority that are brought into the United Kingdom are what we call "inward diversion fraud". Perhaps I can give the Committee the background. When the European manufacturers produce spirits they are allowed to sell them in "duty suspension" and they will move around the European union in "duty suspension". Most of the smuggled spirits coming into the country, come in, effectively, with false documentation, suggesting that it is a legitimate load of goods moving in "duty suspension", so it will have borne no duty in any of the member states. The vast majority of the problem that we have with spirits smuggling is that the spirits have borne no duty at all. They have been obtained on the pretext that they are going to legitimate sources in the UK. The position is slightly different with beer and wine. Much more of that is the subject of cross-Channel smuggling, so that will have been obtained in supermarkets in Calais or elsewhere in France or the near-Continent. It will have borne near-Continental levels of duty and then it will be smuggled in, largely through what we call the "white van trade".

701. I accept that and I thank you for that explanation, but I have one small point. If you are talking about Scotch whisky coming back in, being smuggled in, how can that be "duty suspended" if it originated in the UK, went to France, say, and is coming back in again? Surely, it would be obvious that it would not have paid duty, in those circumstances.

(Mr Summersgill) It would have been exported in "duty suspension" to, say, a warehouse in France. It may have been obtained falsely from that warehouse in France, or it may have passed through several hands in France in "duty suspension". Then it would be re-imported into the UK with documents that say it is going wherever in the UK. Obviously, if we find shipments of Scotch whisky coming into the UK we are a little more suspicious, but it is not a crime to import Scotch whisky into the UK. It is a perfectly legitimate practice.

Chairman

702. Do you have any idea what proportion of smuggling comes across the Channel and what proportion is smuggled without duty being paid at all?

(Mr Summersgill) The vast majority of spirits are smuggled into this country without any duty being paid at all. That is costing about £500 million according to the latest figures published by the NAO. When beer and wine come across the Channel again some duty will have been borne and that is costing us about £300 million.

Mr Sarwar

703. I know that we shall come to the smuggling issue later, but you will know that there are many people who go to Europe and bring back large quantities of cigarettes and alcohol, including spirits, because of the difference in price. It has been said that we can recover that revenue from other places. Is the Government considering any policy to narrow the gap on excise duties, or do you just think that that gap will exist for ever and that is that?

(Mr Boateng) The policy of the British Government is to ensure that the Chancellor of the Exchequer retains the flexibility in relation to levels or rates of taxation and duty to enable him to create in these islands the most favourable conditions for enterprise, for competition, for productivity and for the levels of public spending and investment that are required to meet the needs of our fellow citizens. That is our policy. If you examine the revenue benefit, over the years, towards our approach to duty, whether excise duty or VAT, you will see the substantial benefits that that policy has brought. Eleven billion pounds plus is a very great deal of money. It behoves those who suggest that that money be foregone to suggest what programmes should be cut in order to reflect that, or how the Chancellor ought to raise the gap that would open up in the nation's finances as a result. The Chancellor has to have the discretion to make his judgment. He makes that judgment, of course, on the basis of representations that are made to him very often around this time. That is fair enough. However, we are not prepared to countenance the fettering of the Chancellor's discretion in this area.

Mr Lyons

704. Going back to the "duty suspended" spirits, what are we saying to the manufacturers in terms of their responsibilities to look after the situation?

(Mr Summersgill) The system for moving alcohol around the EU is a harmonised system. It is a common system that applies to all member states. When a Scotch whisky distiller exports some whisky, say, to France, either he or somebody else is required to put up a guarantee for the duty involved, effectively. If the consignment is lost or stolen, then a liability to the duty arises. That is a very strong incentive to the person who dispatches the goods to ensure that they use proper hauliers, that they ensure that the customer whom they are supplying is a legitimate person and they are also required to check whether it is going into "duty suspension" and that it is going to a properly authorised warehouse.

(Mr Boateng) I am bound to say that the overwhelming majority of people engaged in the industry in all its aspects behave responsibly and diligently. It is important to get that on the record. From time to time there will be cases where there is less than appropriate diligence exercised. When that comes to light, that will be a matter both for adv ice, where appropriate, and prosecution, where appropriate. In the main, the overwhelming majority of people engaged in the industry behave responsibly, not least because they recognise that, at the end of the day, smuggling undermines legitimate business. It is a crime; it is not in anyone's interests and the overwhelming majority of people engaging in industry at every level are honest, law abiding people who recognise their civic responsibility in this area.

Mr Sarwar: The SWA drew attention to the complexities involved with moving bonded products. It described the system as "creaking". Basically, a drinks exporter has, within two months, to receive from a destination authorised warehouse elsewhere in the EU an administrative accompanying document or AAD authenticating receipt. The non-appearance of the AAD renders the exporter liable for duty which could amount to £100,000 per container of whisky. The difficulty faced by whisky producers in identifying authorised warehouses in a system which is still paper bound and only in the process of being computerised has caused the SWA to argue that a defence of due diligence should be admissible when irregularities arise. What is the government's view of a plea of due diligence in circumstances when consignments of spirits have been diverted or lost but where exporters have demonstrably acted properly and in good faith?

Chairman

705. That is £100,000 per container.

(Mr Boateng) Yes, £100,000 for a container of spirits and £20,000 in relation to beer at United Kingdom rates. My response to what is an important question is that European law provides exclusions to liability for losses but these do not include circumstances where a trader claims to have exercised "due diligence". For us to institute a domestic policy where due diligence was perceived in this way and was accepted as a defence for duty would be contrary to the Holding and Movements Directive. Obviously, that is therefore a factor that would preclude us going down that path but what Customs have done is to enable from 28 September of this year warehouse keepers to limit their liability when they cannot control the ultimate delivery of the load. In these cases, they can now ask the transporter or the owner of the goods to provide the guarantee. Therefore, the person who provides the guarantee also assumes responsibility for the duty on the load. That element of flexibility has been introduced but obviously where the warehouse keeper is also the owner of the goods the options for requiring someone else to assume liability through providing the guarantee are more limited. In that case, the possibility of a duty charge does actually address the point that was raised earlier on about making sure that people stay on the straight and narrow because it is an incentive to the warehouse keepers to be vigilant about fulfilling their responsibilities because there is a penalty to be paid if not. Mr Morrison in his oral evidence recognised that.

Ann McKechin

706. As you are aware the taxation on spirits is considerably higher than that on wine and beer. Can you tell us what the government's justification is for having such a current system of tax difference where spirits are more severely taxed? Would you accept that the system does discriminate against spirits and the spirits industry as opposed to the beer industry, for example?

(Mr Boateng) Undoubtedly, for the historic reasons that I have outlined, there is an additional burden of taxation on spirits as opposed to wine and beer. That is the case and that is the pattern of taxation that has emerged over the years. The upside - and I think the freeze indicates this. You asked a leading question about the freeze which I declined to get drawn into - is that the system we have, which is one that rejects the concept of unitary taxation, does allow the Chancellor to respond to individual concerns within the industry about changing circumstances within the different sections of the alcoholic drinks industry. That flexibility is there and maintained and, as I have indicated and as I hope the history of the Chancellor's approach to this subject over the last four years has indicated, he does clearly take very seriously, in arriving at his judgment as to what the best interests of the economy are, representations that are made to him.

Mr Carmichael

707. Can you understand the frustration that exists in the Scottish whisky industry in particular when we hear you talk about historic reasons which, to my mind, is just another way of saying, "That is the way because that is the way it always has been and we are not inclined to change it". There is a clear contradiction in a government policy that says, "We will promote our own indigenous industries and punish the Scottish whisky industry more severely as compared perhaps with the French wine industry". Having said that, however, there has been a great deal of what you have said this morning that has gladdened my heart. I am delighted to hear that the Treasury recognises the immense contribution that the drinks industry and the Scottish whisky industry in particular makes to the wider Treasury pot. In that context, can you understand that the Scottish whisky industry in particular is one which is very sensitive to trends in the wider economy? What you tend to find is that, when the economy goes into a downturn - we do not have that any more because we do not have boom and bust - the Scottish whisky industry is one of the first to pull in its horns. That can have a very severe impact on some of the most vulnerable areas in what are referred to as peripheral parts of this country or these islands, as you call them. A lot of them are islands, funnily enough. The general plea I am making is that everything is fine at the moment when the economy is running fairly well but, come the downturn, which will inevitably come at some stage, can we have some assurance that the particular needs of the Scottish whisky industry and the communities which depend on it will not just be ignored in amongst the wider picture? (Mr Boateng) My reference to these islands is to the British Isles but I do recognise that, as you say, this is an industry that is rooted in the rural economy as much as it is in the urban one. What you describe as the peripheral areas - many of them happen to be islands - are very much affected by the state of the industry. I can assure you that the Chancellor takes very, very seriously indeed - these are matters for him obviously, the level and rate of taxation and duty - the representations that are made to him by the industry and those with the concerns and best interests of the industry close to their heart. Of course those parts of the British Isles which are most affected by the state of the industry are very important and integral to the rest of the country as a whole. They are not regarded as peripheral to his considerations, both in terms of the employment they generate but also in terms of the environmental impact of their operations and their contribution to our overseas areas which Baroness Symons is much more qualified than I to talk about. In response to your earlier challenge, this particular Minister is only too happy to respond to any invitation to go north, as you put it. Indeed, it would be odd if it were not the case, given that this particular Minister's grandfather gloried in the name of Robert Wallis Burns McCombie. You can tell from that that, although his father was a Scot, he was born in London. I would be only too happy to come and see for myself and to respond to any invitation that you or others might extend.
708. It is not for me to invite people to the Scottish Parliament. I am sure others can do that.

(Mr Boateng) I was not just thinking of the Parliament.

Chairman

709. The key question is the discrimination of spirits. Is there a discrimination in spirits? I am looking for a yes or no answer here.

(Mr Boateng) Self evidently, a greater burden is borne by spirits than by wine and beer.

710. How does the government view the operation of the EU minimum rates system and does the government agree with the assessment made by its predecessors in 1995 that the EU minimum rates system discriminates against spirits and is a barrier to free trade in Europe? What changes, if any, would you like to see introduced?

(Mr Boateng) I would like to see the review delivered as quickly as possible and I am concerned - I have to share this as the Committee has asked me specifically - that the 1996 and 1998 reviews did not materialise at all. That is a matter of concern. Of course, we accept that Member States are free to set duty rates at levels which are appropriate to their own particular circumstances, subject only to the unanimously agreed minimum rates, but we do actually want to be in a position to see some changes in terms of the way in which and the level at which those rates are set, particularly in relation to wine but also in relation to beer. We want to see the minimum rates for spirits reduced. That is our objective. We have responded to the questionnaire that was issued by the consultancy firm, Customs Associates, to help inform the process. That set out our national objectives as much as I have shared them with you and, amongst other things, the revenue losses resulting from the current disparities between Member States' rates. It goes back to the earlier point about cross-border shopping and smuggling. The trade associations, again through their European bodies, also had some input into this and we hope for an early publication of the outcome of the review, whilst understanding that that questionnaire and the Customs Associates report was but one factor in the Commission's final report, but we will be making strongly to the Commission the points that I have made to you, whilst recognising that fiscal sovereignty is important. It is very, very important, as I know this Committee will appreciate, to our own national interests, but it does have to be underpinned by sensible and realistic minimum rates and, we believe, the abolition of the zero rate for wine.

Mr Lazarowicz

711. I am glad that you made reference to the absence of the reviews over the last three occasions effectively. I am sure you would agree that the situation has not changed since 1992, let alone 1996. Can you tell the Committee what representations the government has been making in the past to try and get the review carried out, because it is now a serious issue for the industry and we are concerned about that. I wonder if you could tell us what the government has been doing about it.

(Mr Boateng) At official level, certainly, representations have been made and I would be happy to provide a memorandum to the Committee that outlines the nature of those representations, but perhaps more significantly one of the messages I get, amongst others, from this Committee is that you would like, I suspect, ministers to be involved in making those representations. I will write to the relevant Commissioner.

Mr Lazarowicz: I would be happy for you to take steps to do that.

Mr Lyons

712. Can I come to the question of the Roques Report and get your response? To what extent will the implementation of recommendations contained in the Roques Report properly equip the government to deal with the question of smuggling and fraud involving alcoholic drinks?

(Mr Boateng) We obviously take the Roques Report very seriously as a responsible government would do. 37 of the 65 recommendations relate to management, culture and governance of the department. Richard Broadbent is this afternoon giving evidence to the Public Accounts Committee on this very point. The majority of the work on those management, culture and governance issues has been completed or it very soon will be in terms of the restructuring of the board. That has addressed a number of the concerns outlined in the Roques Report. The remaining 28 of the recommendations relate to the need to strengthen the EU-wide system for holding and moving goods in duty suspension. The key outstanding issue here is recommendation 27 on fiscal marking and I would be interested to know your own views on this because, as you know, there are differing views within the industry. Roques came to one view, rather in support of fiscal marking. There are concerns within the industry, understandable concerns from the industry's perspective, about significant compliance cost implications there. Before we were to come to any conclusion - and we have not come to a conclusion about that recommendation - we would want to be in a position to take very careful cognizance of the views of the industry to go forward with a process of consultation that has already begun informally in terms of soundings, but we would want to strengthen and take forward consultation on that particular issue.

John Robertson

713. To come back to combating smuggling and fraud and cross-Channel shopping, what future action is planned to stop it?

(Mr Boateng) This year, we have 150 detection staff deployed in Scotland itself. These are multi-functional, frontier and inland anti-smuggling officers who target excise smuggling of tobacco, alcohol and oils as well as prohibited and restricted goods, drugs, fire arms and child pornography. They are based in strategic locations across Scotland and deployed flexibly according to risk and the intelligence we receive. This represents an increase in 34 staff over last year and it has been achieved through the redeployment from lower priority work of other non-law enforcement resources. In addition to these detection staff, we have a national strike force. Teams are deployed alongside local staff. They blitz in Scotland and have done so on five occasions over the last 12 months. Let me give you an example of the sort of thing that they are up against. Ice cream vans used as a source of supply of contraband. It did come as a bit of a shock to me. I have clearly led a more sheltered life in north west London. The reality was very ugly on the ground, as many of you will know. Indeed, in the course of one particular raid one of our officials - this is what Customs officers are up against - sustained very unpleasant injuries. These are front line staff who do a very good job in very difficult circumstances on occasion. It is my belief that we owe them a debt of gratitude. We are taking it very seriously and much of it is, as you will appreciate, intelligence led. Very often in the public mind there is not necessarily a sufficient appreciation of the extent to which intelligence plays a part in this area. We have 68 intelligence workers deployed in Scotland alone and they are part of a network that goes right the way across these islands.

714. Why have we been so slow in reacting to this? It is not this government but the previous government that has been so slow.

(Mr Boateng) The facts speak for themselves in the sense that we reversed a decline in numbers of Customs officers that did occur under the last government. You would want to ask them why they came to the decisions they did come to but we have come to the decisions that we have based on our judgment as to where our priorities ought to lie and this is where they do lie.

Mr Weir

715. From your knowledge of the structure and those involved in this illegal trade, do you think the Proceeds of Crime Bill should incorporate more powers to attack this particular trade?

(Mr Boateng) We in the Treasury are obviously very supportive of the Proceeds of Crime Bill. I was fortunate enough to have served in the Home Office at the time of its genesis and I know the significance that successive Home Secretaries and Police and Criminal Justice Ministers have attached to this piece of legislation. It will make a real difference. I am able to share with you -- although I would urge the Committee, were you so minded, to visit some of our front line operations and you will see for yourself- the genuinely multi-agency approach to the tracing of the money streams. There is a great deal to be gained in terms of detection and law enforcement from following the money. We and our law enforcement agencies, Customs and Excise, and also with other partners across government, the Department of Works and the Department of Pensions and Social Security, work together in order to trace the money streams. It works. We have made some real gains as a result of it but again it is very often intelligence led and it is very skilled work that utilises a range of skills and professional expertise.

Mr Sarwar

716. I appreciate that the government has recruited more officers to deal with this problem. It is my experience that smuggling has reduced considerably since this government has taken over but there is one issue that warehouse owners always raise with me and that is that there are people involved in this illegal trade, who set up their own company. They issue the proper receipts to the shopkeepers, to the warehouses, and the people who buy these goods buy them in good faith. Then Customs go and seize those products. Is there anything that can be done to have something on the label somewhere, "This is just for export" or even a different coloured bottle? That could make a tremendous difference because then people will know that they are selling illegal goods in the shop or in their warehouse if there is some form of distinction for the product where we can assess it is for the export market.

(Mr Boateng) These are issues that your Committee will wish to wrestle with and to consider no doubt in the course of your deliberations. It is undoubtedly true, in relation to tobacco, that fiscal marking has helped enormously. I have met people in precisely the situation that you have described who have welcomed fiscal marking in tobacco because it gave them that sense of confidence and assurance that they were not unknowingly trading in illicit goods. It helped us target those - this is a London example - in the Caledonian Road who were openly selling cigarettes. Now of course that, as a result of fiscal marking and increased presence on the ground targeting this, has reduced and reduced considerably. There are however wider issues about cost compliance that you will want to consider and that we would have to consider before introducing fiscal marking in the spirits world, for instance. Similarly, labelling for export only - and Baroness Symons is perhaps in a better position than I am to comment upon this - does have implications for our EU Article 29 obligations in terms of quantitative restrictions on exports. It is not a simple issue but you are absolutely right. It is important always to seek, and our law enforcement officers do seek, the support of the legitimate trade in their actions against smuggling.

Chairman

717. Baroness, do you want to comment on that?

(Baroness Symons of Vernham Dean) I do not think I am in a position to comment on that right at the moment.

Ann McKechin

718. As the Minister will be aware, the Climate Change Levy does not include natural mineral water because it does not have the correct substance to it. Also, there has to be a direct association between the production to qualify for the rebate which means, in the case of the whisky industry, it inevitably involves maturing of the product but it does not qualify. Does the government accept that the current operation of the Climate Change Levy does disadvantage these industries and is a review of the Climate Change Levy likely in the near future which will further consider representations regarding these apparent anomalies?

(Mr Boateng) Administratively, we keep all taxes under constant review and, where there are anomalies, we are obviously prepared to receive representations in relation to them in order that the Chancellor can make a judgment. What one would say about the impact of the Integrated Pollution Prevention Control Directive on flavoured mineral waters as against pure mineral waters is that the Directive and the levy and the relationship between the two, the use of the directive in order to determine who gets a levy rebate, is targeted specifically on the issue of energy intensive processes. While the extraction and bottling of pure water does not fall within the IPPC, it is because it is not deemed to be and on the face of it is not an energy intensive process. The discounts were specifically designed to meet the needs of energy intensive processes. This is a very technical issue and Richard Summersgill should not hesitate to intervene if I begin to stray off course, not least because it was a little before my time. When the government was consulted on the construction of the Climate Change Levy, it did invite alternative suggestions for eligibility criteria.

(Mr Summersgill) At the end of the day, the IPPC does provide legal certainty, administrative simplicity and, all importantly, compatibility with EU state aid requirements. It was not possible to find any alternative to that. It does create some anomalies and that one is perhaps of the most concern.

Chairman

719. Would whisky maturation be considered in the same way? It is not energy intensive.

(Mr Summersgill) I think so. Whisky maturation usually happens away from most distilleries so it does not fall within the IPPC. Some of you will probably have greater experience of this than me but maturation warehouses, as I understand it, are neither heated nor chilled, so I would not expect them to be intensive users of energy.

Mr Lazarowicz

720. Baroness, you will recall we had a discussion earlier about the discrimination faced by whisky producers in India and India is not the only example of discrimination against whisky and other producers. The Scottish Whisky Association have identified 130 countries where there are some barriers of some sort. I was pleased to hear your reference to the issues that the government will be pursuing in the next WTO negotiation but I wonder if you could give us an indication of the specific action the government is taking to overcome the difficulties faced by whisky in particular when trading in international markets.

(Baroness Symons of Vernham Dean) There are a number of ways in which the government is able to help when these incidents are brought to our attention. Reference has already been made to the fact that one of my colleagues, Douglas Alexander, will be making a direct approach in India today. In incoming visits - i.e., officials or ministers from countries where we believe some sort of discrimination is being practised -- the discrimination may be very varied according to different countries. Indeed, some countries may practise more than one type of discrimination. Equally, when ministers or officials from this country go overseas, we can make representations. Our posts are regularly in touch. As I hope I made clear in my opening remarks, we believe that there is a strong relationship between our people in posts and I made a point of speaking about BTI, British Trade International, who are able to make representations. We can also make demarches which we do with our colleagues in the European Union. India in particular has been the subject of such a demarche and that might be one form of approach. Lastly, we can also take action through the WTO where the country practising any alleged discrimination is a member of the WTO if we do not believe that they are performing their obligations. There are a number of paths that we can follow in trying to help the industry where it believes it is a victim of discrimination.

Chairman

721. I think we have a new witness. Could you identify him, please?

(Baroness Symons of Vernham Dean) I have two colleagues with me who deal with competition issues which are outside my ministerial remit because I understood you might have one or two questions on this: Mr White and Mr Metcalfe. I have also asked Mr Crowhurst to join us. He is an expert in trade policy and if you have any detailed questions on trade policy with which I am not as yet conversant he will be able to help us out.

Mr Lazarowicz

722. Have there been any instances to date in which the government has made use of the WTO GATT mechanisms for raising examples of discriminatory practices and are there any intentions to use those in the future?

(Baroness Symons of Vernham Dean) We have started to try to use the proceedings in a number of instances. We try to do this through our EU membership so that we do so with the full weight of the European Union around us. I am sure we can give you a full list. I believe we have a list in annex B, which was sent to the Committee, which goes through in some detail a number where we have been pursuing these issues. We have some successful outcomes using the WTO procedures. You will find those in relation to Japan, Korea and Chile. If you would like further information on any of those, we have tried to err on the side of brevity in giving you these rather quick, thumb nail sketches of what is happening country by country, and if there are specific instances in which you are particularly interested I can give you a fuller account. I suggest it might be more suitable to do that in writing if there are particular countries that are causing concern. I know that India obviously will be one and indeed India is one of the countries where I would say that we are not just dealing with issues around particularly heavy tariffs but also in relation to such things as very heavy interest on warehousing for imports which of course also adds very considerably to the cost of whisky, for example.

723. I am sure that information would assist the Committee but there is one country which has also been identified by the Scottish Whisky Association as presenting a particular problem and that is Turkey and the relationship between Turkey and the European Union. I understand the Trade and Industry Committee was told by the government in the last investigation that the government had taken up the question with the Commission and I wondered what response the Commission had given to those invitations from the government.

(Baroness Symons of Vernham Dean) The problem with Turkey is again a fairly complex one. We believe a lot of this is about protecting their own particular spirit which I believe is called tekkel. The main concerns there are not only questions of imports; it is also about import permits, about certificates and about labelling. We have been lobbying very heavily on this. We have done so through our own embassy in Ankara and also through the EU. We are making progress slowly over this. This is one of the issues obviously that we will want to resolve with Turkey given their status as a would be applicant country for EU membership, but I am afraid at the moment we are making progress rather slowly. We are going to continue to liaise with our colleagues in the Scottish Whisky Association but our main problem is going back to the monopoly industry which tekkel is in terms of being a Turkish monopoly distributor. It is the Turkish government's desire to protect that industry which we believe lies at the heart of our problems here, but we will continue to liaise with the industry and to do all we can to pursue our concerns, not only bilaterally but through the Commission in the way that we are.

Chairman

724. I want to look for a moment at Interbrew. I understand this area may be outside your responsibility but Mr White and Mr Metcalfe might be able to help us. Would the suggestion that Scotland might be identified as a separate beer market be a reasonable interpretation of one of the proposed options concerning the Interbred acquisition which were considered by the DTI?

(Mr White) We have not identified Scotland as a separate market. We have left the question open. When the Director General advised the Secretary of State on whether or not this should be moved into a second phase investigation by the Competition Commission, he said it was not necessary to reach a conclusion on this before it went to the Competition Commission. The Competition Commission also left the question open after its report. It looked to the market as if it were a Scottish market or a series of regional markets and as a GB market.

725. When the Interbrew acquisition was originally being reviewed, what consideration was given to the public interest, including the prospect for employment and regional economic development that was implied?

(Mr White) It was not possible to look at the public interest in this case because the Interbrew /Bass merger originally fell under the aegis of the European Community Merger Regulation and we asked for it back, as we can under Article 9 of the Regulation, and the Commission agreed. When you have a case back, you cannot look at anything but the competition issues.

726. Can I go back to a previous question concerning the successful appeal by Interbrew against the original decision by the then Secretary of State for Trade and Industry concerning that company's acquisition of Bass Brewers? Belhaven Brewery Company suggested that one of the options proposed seemed to suggest that Scotland could be identified as a separate beer market which "could effectively set a precedent for the future regulation of other industries in Scotland." (Mr White) I am not conscious that Belhaven have suggested that we have defined the market separately. That is not the case. We avoided the issue of making reference to the Competition Commission. The Competition Commission avoided the issue of making its report and we have not since then had to redefine the markets again.

Mr Weir

727. Can I take it that the option is still open and has not been closed off? No one has grasped the thistle, so to speak, of deciding the issue rather than just rejecting it?

(Mr White) It has not been necessary to reach a conclusion in order to take the action we have taken and it is a very difficult issue which is why we have avoided it. If it is not necessary to reach a conclusion, you do not do so.

728. Is it perhaps not in the interests, particularly of the beer industry in Scotland, that such a decision be reached because it can protect this situation arising again in a subsequent takeover?

(Mr White) Whether you need to reach a conclusion is going to depend on what is happening. I am only talking at the moment about the consideration of the Interbrew/Bass merger and the fact that we made reference to the Competition Commission who made an adverse report. If it was necessary to reach a conclusion, we would do so.

729. Is it not an argument to pre-empt that situation if it is considered to be appropriate and helpful to redesignate Scotland at this stage to avoid using this pass the parcel situation in the future?

(Mr White) You have to re-examine the situation every time you examine a new merger situation and decide then, at that time, whether or not there are distinct markets. These things are fluid and can change.

730. Do I take it that even if it was designated as a separate market now, that may not be the case in the future, depending on the type of acquisition or takeover that was proposed?

(Mr White) It would depend on a number of factors. In reaching a conclusion on the geographic definition of a market, you take a number of different factors into account. You will take the players in the market into account; you will take prices in those markets into account. All those factors can change over time. To reach a conclusion one day that the Scottish beer market is distinct from the English beer market does not necessarily follow.

731. Are you saying that each time there is such a merger the whole issue has to be re-examined? You cannot designate a market and leave it designated?

(Mr White) Yes.

Mr Carmichael

732. You have identified already that there are economic development issues at stake here. That is something which has now devolved to the Scottish Parliament. What interaction is there between your Department in London and the relevant department in Edinburgh which I think would probably be Enterprise and Lifelong Learning when an issue like this comes up as it did in relation to Interbrew?

(Mr White) We invite comments from any other relevant government department in any merger situation. They will be taken into account. We also have within the Office of Fair Trading a mergers panel which is a committee that meets if we think there are serious issues arising on a merger. Other government departments which have an interest in that merger will be invited to the meeting. They have quite an extensive involvement if they wish.

733. Do you recall what you got from the Scottish Executive?

(Mr White) I cannot offhand recall.

Chairman

734. Can you give us a note?

(Mr White) Yes, but of course it was not a purely Scottish merger. It was a merger in England and Wales as well.

Chairman: We have now concluded our structured programme for you, you will be glad to know. If there is anything any of you would like to add in the light of what has gone on, please feel free to do so now. If you are happy, thank you very much for your attendance this morning. I can assure you your evidence will be of great value to us when we come to make our report which we hope will be fairly soon.