Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 220-239)



  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 about that.
  (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 contraband?
  (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 two brands.

  227. To be absolutely clear, that was Regals and Superkings?
  (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 mind—and obviously we would discuss it with ministers if we felt it was appropriate—potential 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 companies—Imperial or BAT or Gallaher—are 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 trader.

  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.[8]

  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 it not?
  (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, Portsmouth perhaps.

  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 port?
  (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.

Mr Williams

  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.

8   Ev 58-60 Back

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