Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 420-439)



  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?


  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.


  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.


  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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