Examination of Witnesses(Questions 288-299)|
WEDNESDAY 19 JUNE 2002
288. Welcome to the Committee of Public Accounts.
I would like to welcome to the Committee Mr Davis, who is the
Chief Executive of Imperial Tobacco Group plc, one of the United
Kingdom's largest tobacco manufacturers. Would you like to introduce
your team, Mr Davis. Welcome to our Committee. We are grateful
you have found time to come and see us.
(Mr Davis) Thank you very much for inviting
me and my colleagues to this meeting of the Committee of Public
Accounts. I think it is fair to say we were somewhat surprised
289. I should say that the way we normally operate
is that if you introduce your colleagues then I will go straight
into questions. I will tell you how the system operates if you
introduce your two colleagues.
(Mr Davis) I was going to be very brief but, yes,
okay. Immediately next to me is Bruce Davidson, who is Managing
Director of our International Division. Bruce joined the company
in early 1998. Next to Bruce is John Dibble. John is our General
Manager for Economic Affairs and has been with the company about
33 years. For well over 20 years of that time he has been the
main point of liaison or contact with Her Majesty's Customs.
290. Thank you very much for introducing your
team. We have also got Mr Wells, who is over there, who is the
Director of Law Enforcement Policy with Customs and Excise. Although
he is sitting in the back row he is here to assist the Committee
and the Committee can ask him questions as well as asking questions
of the National Audit Office. In common with many other Members
of Parliament I have received hospitality from tobacco companies,
including presumably Imperial. It was non-remunerated but I would
like to declare that. Other Members may wish to declare or not
any hospitality they have received. The Committee would like to
discuss today the subject of tobacco smugglingcigarettes
in particular. We understand that an estimated 17 billion cigarettes
are smuggled into the United Kingdom each year, representing an
annual loss to the Exchequer of £2.8 billion in Duty and
VAT. The extent of smuggling is therefore of major concern to
the Committee. In April 2002 the Committee took evidence from
Richard Broadbent, the Chairman of HM Customs and Excise. He told
us of the difficulties his Department apparently face in securing
the full co-operation of Imperial Tobacco in combatting cigarette
smuggling. You have very kindly submitted a paper and statement
to the Committee. We are very grateful for that. We have all seen
it and read it, so I will take that statement as read. May I say
that all the Members will have a chance to ask some questions.
The way we operate is that they all get about ten minutes. Obviously
you have not been to a committee like this. It is going to last
the best part of two hours so you will have plenty of time to
get your argument out. You can relax, you do not need to read
out long answers and prepared statements. You know the subject
back to front anyway. What they like is brisk answers to brisk
questions. That is how we operate. We do not need to have any
prepared statements read out. Customs, to introduce this subject,
have told us that the share of your company of the legitimate
market in the United Kingdom is around 40% compared to a 55% share
of the smuggled market, and for two brands in particular the smuggled
share is much higher. This is what Mr Wells and Mr Broadbent have
told us. How do you explain that situation?
(Mr Davis) In the first instance, I have to correct
the numbers for the sake of accuracy. The actual share of our
own owned brands is just over 43% of the UK market. In addition
to that, we distribute Philip Morris' brands in the UK market
so that, in effect, takes our share to just over 50% of the United
Kingdom market. I think also it is fair to say the Customs' estimate
of 55% includes brands such as Marlboro which we do not handle
on an overseas basis and also includes Embassy Number One which
we do not own outside of the EU; it is owned by British American
Tobacco. If those brands are taken away or that 55% is adjusted,
then it comes to 50% which is broadly in proportion to our UK
291. That is 50% of the smuggled market?
(Mr Davis) The Customs' estimate is 55%, I am saying
the correctly adjusted figure based on Custom's estimate is 50%.
292. 50% still very large. How do you explain
(Mr Davis) The main point I would make is that many
of our brands and two of the brands in question, Regal and Superkings,
are very large brands in the UK and they enjoy considerable consumer
franchise. In the case of Regal in particular there is extreme
regionality. It is a hugely popular brand in Scotland, the North
of England and South Wales which I think the Chairman of Customs
in your meeting of 29 April labelled the smuggling "hot spots"
in the UK. It is not surprising that those brands should be very
sought after in those sort of smuggling hot spots.
293. We are told that you are exporting billions
of cigarettes to small, sometimes very poor countries where the
population is either few in number or unable to afford English
cigarettes. These seem to be unlikely places to be consuming such
quantities of cigarettes and odd places for legitimate distributors
to be locatedMoldova, Kaliningrad, these sort of places.
What is your explanation for that?
(Mr Davis) They are existing cigarette markets and
some of them are very sizeable cigarette markets where international
brands are readily available. Certainly part of the strategy of
Imperial, particularly since we demerged from the Hanson conglomerate
in 1996, has been to grow our international business. That is
not a rocket science strategy. Our domestic market has been squeezed
very much by the punitive levels of taxation, the highest levels
of taxation in the world, so part of our strategy has been to
grow internationally. These are markets that exist, they are sizable,
they are markets where international brands are available and
they are markets obviously we have tried to break into.
294. Do you know where your smuggled products
come fromwhich countries and which distributorsand,
if so, what are you doing to stop the supply of them?
(Mr Davis) We very much know that. This is information
that we share with Customs on a regular basis. We have total divulgence
of that information to them on a regular basis. Certainly they
receive a disk every month. They know where all the sales are,
they have all the invoice information. Could you repeat the question
because I have lost my thread.
295. We now know that you know where these smuggled
cigarettes are coming from because the packets are coded.
(Mr Davis) Indeed.
296. If we know where these cigarettes are coming
from and they are apparently coming from these poor countries
that could not possibly consume all these cigarettes, why do you
not stop it? Why are you still distributing to these countries?
(Mr Davis) Again, I have to correct you. Having read
the minutes of the Committee of Public Accounts of 29 April, going
back to what I wanted to say at the start, we were very surprised,
disappointed and concerned to see some of the comments there about
the lack of co-operation with Customs, particularly reference
to the fact that information was not provided beyond May 2001,
which is quite incorrect, and also that we continue to trade with
customers who had been red carded. This is clearly not the case.
Since 1999 we have discontinued business or ceased supply to over
30 distributors. That is having an effect, one has to say. In
the first part of the calendar year seizures of our brands compared
with the same period last year are down 40%. We are doing very
little trade, if any at all, in many of these areas today. I would
have to argue that we have taken very strenuous and drastic measures
to stop this.
297. I think that is quite a key point. My colleagues
will have to investigate that further. We have been briefed, of
course, as you know, that you have been less co-operative than
other tobacco manufacturers and it is for that reason that Customs
have not felt able to enter into a Memorandum of Understanding.
There is one point I can give to you and maybe you can answer
this question. According to Customs, 15 red and four yellow cards
have been issued in respect of your customers. You say you have
received 13 and four yellow. Let us not argue about that. The
fact is that the total number of cards issued in respect of the
other two UK manufacturers is only two. We have a picture of you
from Customs and Excise of you receiving many more red and yellow
cards and of you being less co-operative than other tobacco manufacturers.
For example, speed and completeness of response to the tracking
and tracing requests of seized goods has been significantly slower
than other manufacturers. You will have an opportunity to develop
your case this afternoon, but you deny that, do you?
(Mr Davis) In terms of red cards I did not say that
we had been issued with 30 red cards; I think we have been issued
with 13 red cards. We have discontinued business with 30 customers
and most of those were before red cards were ever issued by Customs.
We have been extremely responsive to (a) eight of those red cards
and (b) before they were even thought of, or before it was a mechanism
that was used by Customs. The observation that was made by Customs
to me and really the first I knew of it in any great detail was
when I was invited to a meeting with the Director of Law Enforcement
on 16 April who said at that meeting that we were compliant but
not as co-operative as we might be. At that meeting I expressed
surprise and disappointment because I believe our track record
of co-operation with Her Majesty's Customs over many years stands
up to the closest scrutiny. We were very frustrated.
298. Other Members can investigate that further.
Reading your own Executive Summary you say, page 2, bullet 5,
and I think these words are very carefully chosen by you: "Imperial
has never deliberately supplied overseas' markets with the intention
that smugglers will obtain its cigarettes and divert them to the
UK illegally." To sum up the first part of this hearing,
what this Committee wants is a stronger degree of assurance from
youbecause you also say that you strongly disapprove of
the smuggled market, you had to say that, and it damages your
business. What your statement leaves us wondering, if I can speak
for my Committee for a moment, is whether your company whilst
doing nothing illegal is, in effect, turning a blind eye. What
is your response to that?
(Mr Davis) Chairman, I will answer that in as short
and crisp a way as I can. The discontinuation or cessation of
trade with 30 major distributors around the world is a very drastic
and serious reaction to that problem. It is evidence of the significant
co-operation we have with Customs and the seriousness with which
we view smuggling. It does us no good whatsoever. It undermines
our position in this market. It is double whammy and probably
a triple whammy for us. I would prefer us to be judged by our
Chairman: Thank you, Mr Davis. Mr Frank
299. I have two questions. We have to declare
our interests. As smoking cigarettes is closely allied to developing
lung cancer, I am going to ask our three witnesses whether they
(Mr Davis) I do.
(Mr Davidson) I do not.
(Mr Dibble) I do not.