Examination of Witnesses(Questions 420-439)
MR GARETH
DAVIS, MR
BRUCE DAVIDSON
AND MR
JOHN DIBBLE
WEDNESDAY 19 JUNE 2002
420. We will come on to that. You say in 4.3
"Imperial Tobacco seeks to trade only with bona fide distributors,
many of whom act as distributors for other reputable companies
in the UK, Europe and elsewhere in the world." So, Latvia,
Kaliningrad, Afghanistan, Moldova and Andorra all fit into your
statements in 4.1 and 4.3, do they?
(Mr Davis) They are a small number of a huge number
of markets that we deal with. They are a small number but, again,
they are recognised markets.
421. So you honestly believe that the two billion
cigarettes that you exported to Latvia, Kaliningrad, Afghanistan,
Moldova and Andorra were going to be smoked by the people of those
countries? You honestly believed that?
(Mr Davis) Yes.
422. You did. If that was the case how many
cigarettes would they have to smoke each? My understanding is
that just the number of cigarettes that went to Andorra alone
would have meant that every single person in Andorra—every
single person—would have had to smoke 135 cigarettes a day
to consume the number of cigarettes going into Andorra. You honestly
believe that all the cigarettes that were going into those countries
were for the legitimate market?
(Mr Davis) Can we just concentrate on the Andorra
one and I will come back to your general point. I think Andorra
is one of the success stories in tackling smuggling.
(Mr Dibble) Andorra is a classic success story. Andorra
is like a supermarket country, very, very low prices, people go
there from France, from Spain, tourists, therefore they buy cigarettes.
Clearly far more cigarettes are sold than the very, very small
population of Andorra.
Mr Steinberg: I accept everything you
say but what about Latvia, Kaliningrad, Afghanistan and Moldova?
Chairman
423. There are not many tourists in Afghanistan.
(Mr Dibble) The volumes may seem very high to you,
I understand that, but we are a big high volume industry. Those
volumes represent a single digit market share, a very modest market
share.
424. So how many cigarettes would they each
have to smoke in Latvia to consume the cigarettes?
(Mr Dibble) Latvia is a distribution hub.
425. You are saying you are supplying purely
to legitimate people in Latvia and purely legitimate people in
Kaliningrad? I do not even know where Kaliningrad is to be quite
honest with you.
(Mr Dibble) Kaliningrad is in Russia.
426. You are saying you had legitimate distributors
in those countries?
(Mr Davidson) Yes. The distributors in these countries
often handle a range of other products other cigarettes.
427. You knew exactly what was happening. You
knew that you were supplying to those countries and they were
going to end up back here. Of course you knew. If you have changed
your policy, that is great. You will give us confirmation this
afternoon that your export sales in future will only be sold to
the legitimate markets and legitimate distributors, you will give
us that guarantee this afternoon?
(Mr Davidson) I would have to respond to your statement
that we knew, or I knew, that we sold them there in the knowledge
that they were going to come back because that was clearly not
the case.
428. People will make their own opinions about
that, obviously they will, bearing in mind the figures that have
been given. Will you give us that guarantee this afternoon?
(Mr Davis) I think on the basis of what we have been
doing, when we have found that these products have come back—we
believe these are bona fide distributors, it is lower down
the distribution chain it happens—but when it has come back
and a pattern has emerged, it is demonstrable now that we have
ceased supply and we will continue to do that.
Chairman
429. There were a number of points made by Mr
Steinberg in an interesting line of questioning. We should get
this on the record. What Mr Steinberg said, a direct quote from
the transcript, was Mr Sadler seemed to express fears that Imperial
brands had been ousted by foreign brands in some of the markets
and what he actually said was "We do not want only foreign
brands being poured into the UK. Whatever is going on it is important
that our brands are not excluded from it". You disassociate
yourself from that statement, do you?
(Mr Davis) I think he was taken out of context. He
was very much talking in an intra EU context.
Mr Gardiner
430. Rubbish.
(Mr Davis) No, it is not rubbish, sir. It was very
much in an intra EU context and I think he has been taken out
of context. If you put a word in the wrong place and it comes
across on the television, that sometimes happens, it happens to
all of us sometimes. It is certainly not the policy of the company.
Chairman
431. You were asked by Mr Steinberg would your
profits be hit if smuggling of Imperial brand cigarettes was cut
and you said—
(Mr Davis) We would expect our profits to increase.
432. To increase. Your operating profits have
increased since 1997 from £400 million to £600 million,
how do you explain that?
(Mr Davis) Very much it has been a pretty aggressive
period of growth. We have made seven acquisitions, the first one
was in February 1997, substantial businesses. The latest acquisition
is the most substantial. They have been very profitable cash generative
companies that we have acquired.
Chairman: Thank you. Mr Ian Davidson.
Mr Davidson
433. Could I just start by saying that any company
that employs somebody called Davidson who graduated from the University
of Edinburgh and has an interest in rugby cannot be all bad. The
rest of it is not as good as that.
(Mr Davis) We do not hold that bit against you.
434. Do you understand why we have some anxieties
about your company when Customs and Excise are telling us publicly
that you are the least co-operative and when you look at the question
of red and yellow cards, you have had 15 red and four yellow whereas
BAT have had none and Gallaher have had one yellow, one red and
Gallaher have signed Memorandums of Understanding and Customs
tell us they are unable to get to that stage with you? Do you
appreciate why we have some anxiety?
(Mr Davis) Indeed. If I look at the meeting you had
on the 29th and the information that was provided to you on the
29th it is understandable why you should be concerned. It has
been straightened up in the revised submissions. I think what
was coming to you was that Imperial was not supplying information
to Customs and Imperial was not responding to the red and yellow
card type warnings. I am pleased to say in the revised submissions
that has been straightened out. If that was the information Mr
Broadbent had when he was at this Committee answering questions
then I can understand your concern. I would say they were erroneous
answers.
435. You have no reason to believe, have you,
that information supplied in confidence to Customs would be leaked
either to your competitors or to anyone else that would cause
you difficulties?
(Mr Davis) We just take Customs on trust.
436. I just wanted to clarify that there is
no reason why you should not be completely open with Customs.
I think you have already said, and perhaps I quote you slightly
wrongly, "tell us what you want us to do and we will do it".
That is your position as I understand it. Customs have given us,
at my request particularly, a shopping list of things that we
want from yourselves. Rather than read them all out, and I am
sure Customs have got means of transmitting those to you, would
you think it was reasonable if we sought Customs' agreement to
come back to us in six months, in 12 months, to report on progress
on all these matters?
(Mr Davis) I would have no problem with that—
437. Do you think they will be happier about
yourselves then than they seem to be at the moment?
(Mr Davis) I would very much hope so.
438. So would I but that was not quite what
I asked you. Do you expect that they will give you a better report
then?
(Mr Davis) I think there are two factors. One is that
there are areas of greater co-operation that they have outlined
and I have already said to the Director of Law Enforcement that
those are not problems for us, we are quite happy to deal with
those and accommodate those. I think in the interim, in that six
month period, it will also give us the chance to put the record
straight with Customs. As I have said, what we have seen on the
one Memorandum of Understanding that has been signed so far we
found quite perplexing. I am pleased to see that it happened but
perplexing in the sense that everything that was enumerated in
it we consider we do. We were very surprised and disappointed
that Customs considered we did not.
439. I am happy with that six months or 12 months.
Could I come back to some of the points my colleague raised. I
was very surprised when I read that a third of all Superkings
and Regals that you made in the eight month period October 2000
to May 2001, a third of all of them, went to Latvia, Kaliningrad,
Afghanistan, Moldova and Andorra. It does not seem to me reasonable
that a third of your product for a worldwide company would go
to those areas. My colleague has already made the point that if
they were consumed by locals how many they would have to smoke
each day. The point has been made about onward transmission of
these. Do you have access to records that would explain to us
at our leisure where they all went? I understand your point about
Andorra, tourists passing through, but some of the other places,
Kaliningrad, Moldova and Afghanistan, were not known as tourist
resorts at that time for reasons that would seem fairly obvious.
If they could not be absorbed locally and they were not being
sold to tourists, where exactly did they go? Rather than you give
me a long explanation I want to clarify whether or not we have
mechanisms for tracking where those were onwardly transmitted
and, if so, can you let us have that in a note?
(Mr Davis) We can let you have in a note about the
markets, the share of those markets that the volume would have
achieved if it had stuck in those markets and we can let you have
a note about our coding situation. That is all information that
is supplied to Customs on a routine basis. But I have to—[3]
3 `Commercial in Confidence' note not printed. Back
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