Select Committee on Public Accounts Minutes of Evidence

Examination of Witnesses(Questions 500-519)



  500. I am just asking you where the triple whammy is. Your profits have stayed virtually constant over five years, three of which were before the time of the organised criminal activity, so there has been no notable change in your profitability as a result. In the meantime, what has happened, which you have not alluded to, is that in the last year, 2001, you actually were making as much profit from your overseas trade as you were making from your UK trade. So the idea that you have not somehow been benefiting in terms of your total profitability as a result of illicit activities of people overseas does not bear examination, does it?
  (Mr Davis) I think it does.

  501. Your profit has gone up massively, it has just gone up indirectly.
  (Mr Davis) I think I said in response to an earlier and similar question, the fact is a significant amount of our growth in operating profit from our international operations is through acquisitions. These are companies we have bought, we have made seven international acquisitions since 1997, so understandably our international profit would rise.

  502. But the triple whammy which you feared, fortunately, has not fed through into your profit figures.
  (Mr Davis) One could argue that it has in that it would have been higher if that had not been the experience, and we would have been more successful in certain other of our export markets.

  503. Did the market change so dramatically after 1997 in the UK that you would have expected to make enormously more profits when they have been constant for the previous three years?
  (Mr Davis) No, I think—

  504. No, of course, it does not. And the same applies to the turnover.
  (Mr Davis) All I pointed out earlier was that in terms of 1997, that was when we saw really the start of cigarette smuggling into the UK.

  505. And when you would have suffered from the whammy and it did not happen. The profits remained as they were before.
  (Mr Davis) Again, if I could please put it into the context of when I made the point, the whammy is the fact that the taxation in the UK or—

  506. No, that is not what you were talking about. You were talking about reduced profits. That is what you said, a triple whammy.
  (Mr Davis) The taxation in the UK has induced smuggling. If that reduces sales of our bona fides duty-paid UK product, then that obviously hits us because we make obviously a good margin in the UK.

  507. That was the second part.
  (Mr Davis) The double part of the whammy is that we are also investing in infrastructure and advertising and promotions in many markets in the world, but in these particularly sensitive markets we have invested in them and it has been a wasted investment because the product has been hoovered up by smugglers and brought back to the UK, and that is not in our interests because we are not creating an international business that we want to.

  508. But you did not suffer the down-turn in turnover either. The turnover was £3.5 billion approximately in 1997, it was virtually the same in 1998, it was the same in 1999 when the smuggling started, it was the same turnover, in fact slightly higher, in year 2000, and was significantly higher, it went up to £4 billion, in the year 2001. So the triple whammy you talked about just failed to wham, did it not?
  (Mr Davis) You have to bear in mind that a significant part of the turnover is actually duty and, by definition, the turnover would grow if the duty levy grows.

  Mr Williams: I will finish there, I have run out of time.

Mr Howarth

  509. Could I declare an interest, I am probably the only member of the Committee who is still a smoker. When we were talking earlier about the high cost of a packet of cigarettes in the UK as compared to other European countries, I think it was Mr Dibble who said there were higher costs to retailers in the UK compared to many of these other countries. Are you able to give us any information about the wholesale cost to retailers in this country compared to other countries as in the original Appendix II of the paper you supplied?
  (Mr Dibble) I have not got the details but clearly there are higher costs to wholesalers as well, there are higher insurance costs, wages in the UK tend to be much higher than other parts of Europe, that is another cost, rent, property prices are far higher than in Southern European states. So it is not just retailers, I should have said the whole of the distribution chain has to bear higher costs.

  510. Nevertheless could you perhaps supply us with the higher retail costs in the same way as you have provided the wholesale prices?
  (Mr Dibble) That is more macro-economics, I would say, than particularly to our industry.

  511. Is it? It is still information you have. Presumably you know what you charge for selling X amount of cigarettes to a wholesaler?
  (Mr Dibble) Sorry, of course we can provide you with a price to wholesalers in the UK as compared to the price to wholesalers elsewhere in Europe.

  512. That is all I wanted.
  (Mr Dibble) Sorry, I misunderstood your question.

  513. I think that would be helpful if we could have that information. Another interesting point, and again I think it was Mr Dibble but I may be wrong, apparently in a submission to Treasury Ministers you argued, as I understood it, you gave it some title which I have forgotten but you were basically arguing for some tax harmonisation between the UK and the Republic of Ireland.
  (Mr Dibble) This was a discussion concerning how Customs can be helped in eliminating smuggling. In fact there are only two knobs to twiddle to eliminate smuggling. One is you increase detection, which Customs are doing very successfully we are pleased to say. The other is the price knob. If the price incentive is so high, even if you take out half of the goods being smuggled, smugglers can still make a profit. Therefore, our model looked at what UK prices would have to be relative to various detection rates to take the economic incentive out of smuggling, and the model included where total UK consumption would go, both legal and illegal, and what proportion of the market would be smuggled.

  514. I notice in this submission you argue for our costs going down to those of the Republic of Ireland. What would be the effect of them bringing their level up to ours?
  (Mr Dibble) I think the effect would be they would have the very similar disorderly market which we are suffering.

  515. The only way to do it is for us to come down to their level, it could not possibly be the other way?
  (Mr Dibble) We have just gone through on a European basis a tobacco tax harmonisation with the Commission which lasted two years. The outcome is very clear, that Member States throughout the EU were not prepared to increase their taxation on cigarettes above the target of 64 euros per thousand cigarettes, that is 84p. As Gareth said earlier, in the UK from a high tax base anyway we put on 84p in the 3Ö years from November 1996 to March 2000.

  516. When you decided on the interesting marketing strategy of penetrating that huge world market of Afghanistan, were you aware of the fact that something like 90% of the heroin supply to this country and a fairly substantial proportion of the cannabis supply to this country comes from Afghanistan?
  (Mr Dibble) No.

  517. You totally missed this phenomenon, the fact there are established drug trafficking routes and considerable infrastructure in Afghanistan to smuggle illegal substances right across the world to markets in this country and elsewhere? It was something which totally passed you by?
  (Mr Davis) I have to say it was not a consideration from our point of view.

  518. So where did you assume all these cigarettes you were exporting to Afghanistan were going to go?
  (Mr Davidson) To Afghanistan.

  519. Can you just remind me at its height how many cigarettes you were exporting to Afghanistan?
  (Mr Davidson) Some 300 million.
  (Mr Dibble) Customs have provided the figure in their document, 325 million.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2003
Prepared 10 January 2003