Examination of Witnesses(Questions 220-239)
MONDAY 29 APRIL 2002
220. Which are those areas?
(Mr Broadbent) They essentially relate to matters
such as their willingness to be open with us in terms of information
flows, timeliness, and their own export policy and their internal
procedures for regulating their export policy.
221. Thank you very much. I hope when we are
in closed session you may be able to be a bit more forthcoming
(Mr Broadbent) There is not much more to say.
222. You have been pretty forthcoming and I
appreciate your record of being forthcoming. When you are looking
at the way of working out the amount of tobacco smuggling, this
is paragraph 5.28 on the measurement of tobacco smuggling it says:
"Customs calculate the level of tobacco fraud by measuring
the difference between the supply of legitimate tobacco products
in the UK and the estimated level of consumption. Customs use
a variety of data including tobacco manufacturers' tax returns,
the General Household Survey and the Omnibus Survey for tobacco
consumption, data from the Tobacco Manufacturers Association"
and so on. What you are basically doing, if I understand this
right, is you are saying this is the amount of legal tobacco that
they are putting into the UK market.
(Mr Broadbent) The first step is to work out how many
cigarettes were smoked in the UK. The Household Survey data is
quite a difficult thing to find out.
223. So you estimate the amount of cigarettes
smoked, you take away from that the amount of legal supply, and
you do an adjustment figure for the amount that is legally brought
in from abroad, and the balancing figure is your estimate of the
(Mr Broadbent) Correct.
224. Am I right in thinking that you also have
a fairly accurate fix on the market share of each of the major
brands and hence each of the major tobacco companies?
(Mr Broadbent) Yes we do.
225. And you also have a clear understanding,
which I think you quantified at 17%, of the counterfeited tobacco
that is coming into the country?
(Mr Broadbent) Counterfeiting is more difficult. I
gave a range of 11 to 17 but we have an estimate.
226. Would you agree with me that it would therefore
be possible on the same basis that you estimate the amount of
contraband, the amount of smuggled tobacco, to do a similar calculation
for the amount of manufacturers' product from this country that
is being exported and reimported? In effect, what you do is you
take your original figure, the number of cigarettes smoked, you
then take away from that the legal and the counterfeit and the
legally imported, and then you have a balancing figure which is
that which is exported and illegally reimported into the market?
(Mr Broadbent) We do try and do that calculation.
That was what underpinned my comment earlier when I said that
our estimate is approximately half the market is comprised of
227. To be absolutely clear, that was Regals
(Mr Broadbent) Regals and Superkings are the two smuggled
market leaders although, interestingly, they have a very small
licit market share.
228. What this Committee wants to do is help
you to do your job as best you can and to establish whether there
are different policy initiatives that might help you do that.
Would it help you if you were to work with manufacturers who were
able to put in place a logistic certification trail and that you
were able to charge those companies, on the basis of the calculation
that we have just outlined, for their market share of the illegal
market in this country?
(Mr Broadbent) I think that we do keep in mindand
obviously we would discuss it with ministers if we felt it was
appropriatepotential means to regulate the export market
if we felt that they were not conducting it properly in any way.
We do keep in mind several things. One is that the UK is a big
legitimate exporter of tobacco and we do not want to impact adversely
the earnings that brings in.
229. I entirely agree with what you have just
said, but what we previously agreed on was that we could make
a fairly good estimate of exactly what the market share of the
illegal market in the United Kingdom was that was produced in
the United Kingdom. Why then do we not penalise those companies
for that supply?
(Mr Broadbent) Because the company may not know. If
it exports, let us say, 200 of a particular brand. 100 may be
quite licit and the other 100 may come back. The company may not
know which come back as illicit. It would be a very major obligation
to place on a company to say if it comes back we are going to
hold you liable. That is a very major obligation.
230. Indeed it would be because it would impose
an onus on them to have a certification trail so that they were
extremely careful to whom they handed their product on.
(Mr Broadbent) It can be on sold two or three times
abroad. It is very difficult for them to be clear to whom they
are selling. I think an obligation that says any product which
comes back you should be held liable for, whilst as I said we
should keep everything open, is a very onerous obligation on a
company. We do have to keep in mind the issue that these are currently
on-shore manufacturing businesses and, as with any form of regulation,
you need to make sure you do not regulate in such a way that they
conclude they should manufacture elsewhere.
231. Can I ask you about the Andorra question,
as it seems to have become known, after Mr Davidson's witty remarks
earlier. When it is clear that these companiesImperial
or BAT or Gallaherare exporting to a country where they
do not have a significant share of the local market, why do we
not regulate that in this country and say that whilst it is right
and proper and legal for you to manufacture for export, it cannot
be proper for you to be exporting to that country where there
is no legitimate market?
(Mr Broadbent) Our red and yellow card system is intended
to be a voluntary form of co-operation with the trade to achieve
that end. We get some experience in implementing it. One of the
difficulties of course is that tobacco is an internationally traded
commodity and major brands are international. It is often the
case that there are quite legitimate organisations who market
tobacco who may be based in the Middle East and who on sell to
different destinations, so I think we should not minimise the
difficulty that the legitimate manufacturer has in saying that
his business does have to be based in Dubai and he is a legitimate
232. Maybe supplying Dubai Airlines or something
like that quite legitimately?
(Mr Broadbent) Or he may well be operating in Dubai
and re-exporting to different markets in the Middle East if a
company has a base there and it is an international commodity.
There are many dealers in this commodity who are based regionally
and which re-export to 20 or 30 countries around them so the problem
is more complex. In the more flagrant cases you can say this one
is very high risk. Some of the answer lies in the nature of the
contract you have with the person you supply as much as with the
supply. You can impose certain obligations on the purchaser of
cigarettes and that may be an area we will want to explore so
we have high quality contractual relationships with customers.
Clearly a legitimate customer would have no problem with that.
There are some answers but they tend to lie more in the detailed
discussions that do not damage your business. We support UK plc
but we do want to try and kill this thing.
233. Very good. Perhaps, if you thought it would
be helpful to the Committee, you might provide us with a note
as to exactly how they might go about doing that, if those are
things you have worked closely with the manufacturers on.
(Mr Broadbent) I would be happy to try and provide
a note on some of the areas we are trying to explore to make the
trade more legitimate.
234. Can I turn with you to figure 16 on page
26. My understanding here of the number of cigarettes seized this
year against last is 2.77 billion as opposed to 1.88 billion and
the tax per cigarette, you have an increase in the seizure of
0.89 billion which at 17 pence per cigarette works out at 145
or just about £150 million. I do not know whether it is in
increased revenue or in non lost revenue, I do not know quite
how you quantify that because I take it we do not actually get
the revenue from those cigarettes.
(Mr Broadbent) That is right, although what you hope
is that you get the revenue from people buying legitimate cigarettes
elsewhere. As I said earlier, it is interesting that the revenues
do seem to have stabilised and are now rising a bit by a sum not
unadjacent to the numbers you are talking about which is encouraging.
235. Very encouraging. Given that the scanners
that you have put in cost between £1.4 and £1.9 million
each and there are 12 of these in circulation, so we are looking
at just over £20 million worth of scanners to achieve a revenue
yield of about £150 million, that seems to be pretty good.
I am not saying that, of course, all of that increase in revenue
is down simply to the scanners but if you put a large part of
that increase down to the scanners then that would be a fairly
good indication of the cost-effectiveness of the scanners, would
(Mr Broadbent) I think you probably overstate it actually.
The scanners are important but we probably spent £50 million
in that year. All of that effort has to be taken together, for
example the big seizures of tobacco in Hong Kong have not come
about because of the scanners, I think it is indicative of the
total strategy of which the scanners are an important part.
236. Okay. Can I ask you one final thing which
I think goes back to some of the things that Mr Rendel was asking
you about. Which of the ports are most resistant to changing their
working practices? You will recall that in paragraph 5.17 it says
"At freight container ports, in particular, Customs rely
on port staff and port equipment to retrieve containers for scanning
and then hold or return these as appropriate . . . Port authorities
have had to change their working methods in order to accommodate
scanners and retrieve the required number of containers each day."
Are you having more difficulties at certain ports rather than
others? Who are the least co-operative with you?
(Mr Broadbent) I think that I would say our relationship
with ports is actually generally quite constructive. We are putting
an enormous burden on the ports, they are big, fixed installations
and it is quite difficult for them sometimes to meet what we are
trying to do. I would not sit here and point the finger at any
port, and it is very important I say that. I do not want to complain
about any individual port. There are some ports where perhaps
we have faced greater problems than others, as much because of
the complexity of operations as anything else, and if I had to
name those I would probably mention Dover has been quite a challenge,
237. Are you able to work with the ports on
the legitimate logistical problems that those ports have perhaps
because of the constraint on space, the configuration of ports?
From Customs are you able to put in money to help the port rearrange
its configuration and so improve your ability to function in their
(Mr Broadbent) We certainly work with the ports to
find the cheapest and most effective solution possible because
what the port will do is actually recharge the importer and exporter.
For example, if a container is pulled through one of our scans
238. So money is not a problem?
(Mr Broadbent) There is a lag. I think the problems
for the ports is not money because they will recharge, it is more
to do with their ability to get the throughput because clearly
if we take up space, there is a little bit of a conflict between
their commercial objectives and our objectives. If we take up
space or slow their throughput they get paid per movement, so
we have to find a very sensible balance between that and I think
in most cases that balance is found. In the case of Dover, for
example, which is an important economic infrastructure for this
country, rather than just talking to the port by ourselves we
actually lead a multi-agency group which includes immigration,
health, all the people from the Government who want to do something
at the port are now in one group headed by us and we sit down
with the head of the Dover Harbour Board and say "right,
how are we going to solve the problems?" I think the Dover
Harbour Board understand the problems that have got to be solved.
You do need to find a reasonable accommodation. Can I just say
I much appreciate your opening comments about congratulations
which are due very much to the organisation and I will, if you
are happy, pass them on to the organisation because they work
very hard, they are very committed to this, they like winning
and I know they appreciate very, very much hearing that people
take notice. I will pass that on.
Mr Gardiner: I think you have achieved
a great deal in very difficult circumstances, so well done.
Chairman: Thanks for that. Just one final
scan down your arguments by Mr Alan Williams whose x-ray eyes
can pierce any material.
239. Thank you, Chairman. It is good of you
to pass the congratulations on to your staff but, of course, the
reality is that you have been starved of staff for over the last
20 years, have you not? We have had a whole series of investigations
into Customs and Excise and different types of smuggling and what
has come over is that over the years there has been cutback after
cutback after cutback and closure of activities in various ports.
It is hardly surprising that it is a mess, is it?
(Mr Broadbent) I think that Customs and Excise is
a big and complex organisation and it is always going to face
certain issues. The first point is that it is tied to the economic
structure of the country which is always changing, so it has constantly
faced this problem, the need to geographically shift its activities,
and this does lead to a perception.
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