Examination of Witnesses(Questions 280-287)
MR RICHARD
BROADBENT AND
MR MIKE
WELLS
MONDAY 29 APRIL 2002
280. Thank you very much. I asked you before
about this cost benefit analysis of the tax. I do not think I
put my question very well so can I try again. The total tax that
should be paid on tobacco is £13 billion, you are currently
losing £3.5 billion of this, so your tax take is only £9.5
billion. There is obviously a balance between high tax and high
smuggling and lower tax and lower smuggling. Could you secure
more revenue than £9.5 billion by lowering tax rates? Have
you done any cost benefit analysis of this?
(Mr Broadbent) It is a convention obviously that our
advice to ministers is confidential but when we advise ministers
on duty rates we give them advice on elasticities, on both real
and nominal prices and the average price of tobacco, because clearly
you cannot have a fiscal policy which does not take account of
these factors. I do not want to go into the advice we give. It
is important to remember that tobacco duty has a health policy
objective as well as a revenue objective and there is a lot of
evidence which suggests that reducing the average price of cigarettes,
which undoubtedly would be one of the impacts of reducing the
tax, would lead to an increase in smoking, so it is perhaps more
complicated than just would you get more revenue.
281. This question of Imperial, as the meeting
has gone on you have become more and more outspoken on the issue,
which we welcome, and you have been an excellent witness, if I
may say so, but is there anything more that you can say in private
session that you have not told us in public?
(Mr Broadbent) No, I think that we have had an open
discussion about Imperial. My reticence, just to be clear, is
that it is important to me and to our organisation that we can
have a constructive relationship with all manufacturers, including
Imperial. At the end of the day we are not going to win by having
a fight but equally you come to a point where you have to be clear
we are not making sufficient progress, and we have recently made
that clear to Imperial and I have explained to the Committee we
have made that clear to Imperial.
282. Can you tell us anything more about the
non-cooperation you are experiencing from manufacturers?
(Mr Broadbent) If I give you some examples. For example,
we know that Imperial account for 50% of the smuggled market.
I talked before about our need when we seize smuggled goods to
go to the manufacturer to track and trace the mechanisms so we
can trace the route very quickly. Imperial by some measure are
the slowest of the manufacturers in responding to our requests.
I think Imperial are the only company to whom we have issued red
and yellow cards who in one or two cases are still continuing
to trade with those customers. I think that there have been occasions
when Imperial have said to us that we should not speak to certain
members of their staff who might be involved in sales, which means
we cannot always have the discussions we want to have. These are
the sorts of examples that I would give.
283. I think we have had some discussion but
it would be useful to get more information on estimates you have
of what market share British companies secure and specify in what
countries so that you can point to the excessive exports. I think
we want to try and get fully to grips with this.
(Mr Broadbent) I am happy to provide a general note.
The issue is that the destination of exports is very rarely the
final destination. We can try and provide what information we
have. As I said, the cigarette trade is within that activity and
it often goes through ports quite legally.
Chairman: Thank you very much. Mr Barry
Gardiner wants to come in on this.
Mr Gardiner: Chair, I want to point out
to the Committee that we do have the power to call Imperial to
the Committee. I think we should consider whether we do that because
it may be extremely helpful to our investigation.
Chairman
284. We might deal with that in a moment. There
is a further question that Mr Rendel wanted me to ask. He points
out that 10% of the licit market is 5.6 billion and 50% of the
illicit market is 8.5 billion. Could we ask you finally whether
it would be helpful to publicise that if you smoke Regals or Superkings
the odds are that you are smoking a smuggled cigarette?
(Mr Broadbent) We have published the brand breakdown
in the PBR last November. My anxiety is that those who smoke Regals
and Superkings may know already. We do publicise the brand breakdowns
in the PBR.
Mr Williams
285. One quick guide figure. Is the expenditure
on advertising for the brands that make up half the smuggled cigarettes
in relation to the domestic market higher than than you would
expect their market share to justify? In other words, is it intended
to create a demand for their smuggled goods?
(Mr Broadbent) That is a good question. I am afraid
I do not know the answer. I can have a look. I suspect we do not
know what the actual spend is for those particular products but
I will look into that and see.
286. Would that not be an obvious guide figure
for you if it occurred to me off the top of my head that if they
are spending twice as much as they should on advertising it might
be an indication that they are not advertising for domestic sales?
(Mr Broadbent) It is a quesiton of getting at the
data, and the data will be held commercially, but I will take
it away.
Mr Bacon
287. Since we are continuing to do this in open
session, I was looking at this web site which was also published
in a British newspaper at the beginning of January 2000, and at
the eight million pages of BAT documents that were lodged in Guildford
Surrey as part of the settlement of the 1998 US court case. It
is very clear from an analysis of 11,000 pages of documents that
has been done that company officials of BAT take into account
what they call the DNP or GT, the "duty not paid" or
"general trade" market, which are apparently according
to Les Thompson, a former RJR senior sales manager who pleaded
guilty in 1999 to money-laundering charges stemming from a US-Canadian
smuggling operation and now spending 70 months in prison, a general
euphemism used by senior folks when talking around the topic of
smuggling. It is very clear that BAT systematically takes into
account the GT or the DNP market in its marketing operations.
There is an example here of a fierce trademark dispute with Philip
Morris over which of those two companies had the right to use
the Belmont brand name in Columbia. A 22 February 1994 memo outlined
contingency options should BAT lose that case. One of those was
to "launch new brands in duty paid and maintain Belmont in
the general trade channel." That is according to Mr Thompson,
the smuggling chap. However, a noted drawback of keeping Belmont
in the GT channel was that the company "cannot support Belmont
in the GT via advertising . . ." It goes on to another example,
this was a Mr Dunt, a BAT official, and mentions a memo of 23-24
February 1994 summarising a visit of that date to Columbia which
indicated that BAT wanted to control the timing and products it
entered into the duty not paid market. Regarding the BAT Kent
Super Lights brand the memo noted that "the duty not paid
product should be launched two weeks after the duty paid product
has been launched."
Chairman: I think we got the point. Any
comment?
Mr Bacon: In other words, they are systematically
taking into account both these streams. Presumably that is wrong,
is it not?
(Mr Broadbent) There is quite a large inquiry going
on in relation to BAT in Latin America to which those documents
relate to a period in the past. We are not engaged in that inquiry
because that is on a different continent. We can only focus our
attention on what we perceive BAT to be doing in the UK and whilst
I think probably Gallaher's are outstanding in terms of the co-operation
they give, BAT have not proved to be problematic and I certainly
would not want to sit here and suggest we have a problem with
BAT today. I am not trying to say that everything in the garden
is perfect but I am not trying to suggest we have anything on
the scale you are discussing here.
Chairman: Thank you very much, this has
been a very interesting session. It is indeed true that we have
the right, should we so wish to, to summon Imperial or anybody
else. I would ask colleagues to remain behind after the public
session to discuss amongst ourselves whether that would be useful.
May I say, Mr Broadbent, that whilst you have been accused by
some colleagues of being complacent, this is a very difficult
issue and I have to say you have been a quite excellent witness
and you have sought to be very communicative with us to explain
the difficult situation that your staff encounter and for that
we are grateful. Thank you.
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