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Standing Committee on Health and Ageing

CONNELL, Mr Mark, Head, Corporate and Regulatory Affairs, British American Tobacco Australia

CROW, Mr David, Managing Director, British American Tobacco Australia

Committee met at 10 : 47

CHAIR ( Mr S Georganas ): Good morning. I ask that one of my colleagues move a motion allowing the media to record and report this public hearing.

Mr LYONS: So moved.

CHAIR: It is so resolved. I now declare open this public hearing for the inquiry into tobacco plain packaging. This inquiry examines the Tobacco Plain Packaging Bill 2011 and an associated bill. On 7 July 2011, these two bills were referred by the House of Representatives Selection Committee to the Standing Committee on Health and Ageing for this inquiry. The health and ageing committee promoted the inquiry through its website and through advertisement in the national press. Interested organisations and individuals were invited to make submissions. The committee has received 63 submissions. Submissions were received from representatives of the tobacco industry, retailers, the public, preventative health advocates and government departments. In view of the committee's remit—that is, as a committee concerned with matters of health and ageing rather than a committee that deals in economics and legal issues—the health and ageing committee has undertaken to inquire and report on the health related aspects of the proposed legislation. The program has been developed with that focus in mind, so I request witnesses appearing today to be mindful of this.

Before proceeding, I would like to comment further on the program for today's public hearing. The committee notes that only two of the three large tobacco companies operating in Australia made submissions to the inquiry; although both of the large tobacco companies that made submissions were invited to appear before the committee today, only one accepted the invitation, the other responding that it was unable to provide a spokesman at such short notice.

On that note, I take this opportunity to thank everyone who has accepted the committee's invitation for making time to speak with the committee today. I welcome our first witnesses. The committee does not require you to speak under oath. You should understand that these hearings are formal proceedings of the Commonwealth parliament. Giving false or misleading evidence is a serious matter and may be regarded as a contempt of parliament. I will ask you to make a brief introductory statement and then we can proceed to questions.

Mr Crow : We will take the opportunity to give a brief introductory statement, which will hopefully help the discussion and the questions you have. Firstly, thank you for having us here and inviting us here today to make representation on the Tobacco Plain Packaging Bill 2011 and the Trade Marks Amendment (Tobacco Plain Packaging) Bill 2011. We are representing British American Tobacco Australia. We welcome this committee's investigation into the plain packaging proposal. Yours is the first such parliamentary committee in Australia to hold an inquiry solely into plain packaging.

Let me say at the outset that there is no question that smoking tobacco can cause serious and fatal disease. We believe that tobacco products are only suitable for adult consumers and we do not want children to smoke. I do not think anyone in this House or anyone in society wants children to smoke. As a result, tobacco should be regulated, and we do not wish to prevent workable tobacco regulation.

We support regulations that are the product of evidence based and consultative policymaking, and in the development of the plain packaging proposals we are talking about today such a process did not occur and has not occurred. There has been a lack of engagement, consultation and transparency in the development of this legislation. Not only is this unfair and unworkable but it will inevitably bring with it significant unintended consequences. Government documents released to us under the Freedom of Information Act show that due diligence and robust investigation into the evidence base or the possible consequences of plain packaging, including a regulatory impact statement, were not undertaken. As this is a standard procedure when developing new laws, we would respectfully ask the committee to recommend further investigation, including a RIS, a regulatory impact statement, to be carried out before these bills proceed further in the House.

The time we have today does not allow us to go into the full detail and complexity of the concerns as laid out in British American Tobacco Australia's submission, but I note you have copies of that submission. However, I will state that BATA is opposed to the introduction of plain packaging. The government's power to introduce plain packaging is constrained also by domestic and international law, including the World Trade Organisation agreements that this country has signed. Accordingly, we ask the committee to recommend that further investigation be undertaken into the ability of the government to take away our intellectual property rights.

Should the plain packaging proposal pass without robust investigation, a series of significant unintended consequences could and will unfold. This stripping of property rights could lead to growth in the illegal trade of tobacco, which would in turn lead to greater availability of untaxed, cheap products in the market and a possible increase in tobacco consumption.

Furthermore, the structure of the bills and the draft regulations mean that the tobacco industry would not be able to comply with the legislation within the short time frames provided for. We would need at least 12 months preparation period, with a minimum of six months retail flush-through—this is where a product is moved through retail—to ensure that the legitimate market can adapt to the new regulatory regime. This was the case when we moved to the reduced fire risk cigarettes and also when we moved to the graphic health warnings back in, I think, 2004 and 2005. It is standard practice, in consultation with the ACCC, and an 18-month period seems to be the norm not only in Australia but also internationally. If it assists the committee, we extend an offer to tour our factory in Sydney to obtain an understanding of the manufacturing process for tobacco products and the time frames involved. It would allow you to see firsthand how it looks and the size and scale of what we would have to change so you can get a really clear understanding. Over 1,200 submissions have been lodged with the Australian government on the draft bill, coming from countries, retailers, retail associations, professional bodies, individuals and a raft of others. The majority of the submissions raise concerns about the plain packaging proposals. The bill has also been discussed at the World Trade Organisation where it was questioned by a significant number of member states and we understand that it has also been discussed in the EU forums in the last couple of weeks.

There is a great deal to consider and we wish to assist this committee as much as we are able to. At the end of the day, this bill is about removing intellectual property from a legal product. It will be the very first time this has ever been done in Australia. I respectfully ask the committee members—in fact, I ask all members of this House and the Senate—to think about the implications of this very seriously. Are you sure that removing intellectual property rights will not result in compensation being paid to tobacco companies? Furthermore, would you be comfortable removing intellectual property rights if it meant that an illegal market grew and made tobacco more available to young people? This is an issue which concerns us.

It is worth considering whether voting to remove intellectual property would create a dangerous precedent that would be used for other products in the future, not just for this parliament but obviously for parliaments for the next 100-odd years. This bill is really about the removal of a legitimate company's property, legitimate brands, legal product, legal industry. Is that really the role of this parliament and the Australian government?

Thanks for allowing us to make some introductory remarks. Mr Chairman, if Mark and I answer questions that go beyond the scope of this committee's inquiry, please let us know. I take this discussion to be around the plain packaging bill and the Trade Marks Amendment Act, if that is right. Thank you very much for the time.

CHAIR: I take your last points that you made about the trademarks et cetera. I will just make it quite clear again that we are the health and ageing committee. We cannot control what is referred to us, but we will look at the impacts on health. That is our duty here. That is the expertise that we have. I do feel that perhaps some aspects of this bill should have been referred to the economics or the legal committees as well as they are better equipped to deal with those particular aspects.

Mr Crow : That is understood.

CHAIR: Certainly we are quite happy to deal with the health impacts and to ask questions and get some ideas of where we are heading. Why, in your view, should the fact that other national governments who have not implemented this type of legislation unnecessarily deter Australia from leading the way? What are the reasons? I am reading that in your submission.

Mr Crow : We have seen a lot of governments have a look at this in the past. The Australian government had a look at this in 1995. It took advice from many parts of the government, including the Attorney-General, and made a decision not to progress for whatever reason. There were obviously some issues in that Attorney-General's report and that is subject to some work by us at the moment to see if we can get a view of that. I recommend if you can see that report—obviously we cannot—to do so. It will be quite good reading, no doubt, and will give you some more information. But many governments have had a look.

The UK government recently had a look, about eight or nine weeks ago. They had a good look at this, including a retail display ban—commonly called RDB—where the cigarettes are put behind steel doors. They have agreed not to progress with the process at the moment. The health minister came out on public record. They are looking for evidence and proof. They are also looking for the consequences, what we are calling the unintended consequences, of this bill. They have issues around intellectual property rights, compensation and competition, but they also have issues around their international trade agreements, so they are spending time sitting back and having a look at it.

Canada has had a look at it just recently as well and has agreed at this stage not to progress. I do not think anyone has ever said, 'We're never going to do it'; I think they are saying, 'There's no evidence, there's no proof at the moment, so let's do the work and look at the consequences'. I also understand that France and Poland have both made similar moves to stop or halt the process for a short period of time so they can look at the evidence and the consequences that may prevail in their jurisdictions.

We note from the WTO that a raft of countries were involved in some discussions in the last couple of weeks in the WTO. They have done the same thing. I do not think they are rejecting the idea; I think they are saying at this stage there is no evidence, there is no proof, and there are quite serious consequences, depending on the law in those countries. We also understand the EU has done some things as well. A general consensus is that it needs time and thought. It needs what in Australia we call a regulatory impact statement: a wide-sweeping review of all the impacts across government but also stakeholders so that we can get the evidence and the proof on the table and make really pragmatic and workable law.

CHAIR: Has British American Tobacco conducted its own research into the psychology behind plain packaging and marketing as it is today and, if so, what were the results?

Mr Crow : We have not done any specific research on the psychology of plain packaging per se, such as why people would choose plain packaging over something else. That has been done by other people. We do normal research in the course of our business but nothing specifically on plain packaging. Obviously we will have to, in the future, look at the impacts but at this stage we have not. We are focusing on the dialogue here.

CHAIR: I heard you say it has been done by other people before. Do you know what the results were?

Mr Crow : No. I think there is reference in the preamble to the minister's bill about studies that have been done looking at the choice of plain packaging versus branded packaging and looking at just the mere choice: if you had a choice, where would you go? That kind of work and that kind of research is very limited in its scope. The minister herself has been very open about this, saying that there is no robust proof on this issue. This is an expensive experiment at the expense of the Australian taxpayer at this stage. That is why we are very concerned. Our job today is to try and impress on you that we have concerns that should be known by everyone involved in the passage of this bill and that they really understand the consequences of what is going on.

CHAIR: I asked the question of whether you have done any research into the psychology of plain packaging. What about marketing and packaging? You obviously conduct marketing research.

Mr Crow : We do market research on our brands and our packaging across many years going back 40 or 50 years. It is a very standard practice that we do in FMCG markets. Whether you are marketing Coca-Cola or whether you are marketing jeans, you look at the product you are offering the consumer and see how that resonates with the consumer. Some consumers like certain products and other consumers like others. We are trying to work out what is in that. That is what market research does.

CHAIR: How much money would be spent on marketing the packaging?

Mr Crow : We would not disclose the exact money but we would spend more than $1 million a year on market research, which would be commensurate with any normal big FMCG product.

Mr IRONS: You spoke about the illegal trade and that illegal tobacco maybe would lead to a higher consumption of tobacco by younger people. What sort of investigations have you done in that? Is there anything you think the Australian government should do to change the bill that would enhance the protection against the illegal tobacco trade?

Mr Crow : The illegal trade issue is a very serious consequence of this bill. If I can take you through the basic logic, we have a current illegal trade in this country of 16 per cent or one in five cigarettes. It represents around about $1.1 billion of lost excise today. In the forward estimates, if you look at it over four years, we could call it 4½ or five billion dollars in lost revenue to the fiscus. It is obviously a very challenging issue. The trade has grown by 150 per cent in the last three years, which is obviously concerning not only for us but also for the government and for consumers. This illegal product comes in from Indonesia, it comes in from China, it comes in from the Middle East and has come from some parts of Eastern Europe in the past. The trade has grown over the last 15 years in Australia. It is not an Australian-only problem. This happens in a lot of countries. We have seen illegal tobacco rates as high as 40 and 50 per cent in certain countries like Canada and Malaysia at the moment. Even in the UK at one stage it was in the high 30s. It is now down at 30 per cent.

Our concern is that plain packaging will make cigarettes easier to counterfeit because obviously everything is in the same kind of packaging so it is a pragmatic thing. It makes it easier to print lots and lots of packets because they all look the same. It makes it easier to hide those counterfeit products in the store when you are selling them, which obviously makes a dramatic increase in illicit trade. Remember, illicit product sells for around 30 to 50 per cent of the regular retail price of the legal product depending on its form. As prices go down, consumer volume goes up. That is obviously concerning.

I cannot compete with the illegal product because I pay tax, I am highly audited and I am governed by thousands of regulations and laws, and rightly so—to be brutally honest. As I said in the preamble, we are not afraid of legislation in our industry; we know that it must be there. The issue becomes really big with that illegal product flowing into the market. I would then have to reduce my prices at some stage to compete because I would be losing market share to that big illicit trade combined with reduced pricing. Reduced pricing, we believe, will allow children to access the product more readily. One of the big statements that comes from this government and many governments is that pricing is one of the best means to stop access for children. Seeing prices go down is not smart—not smart from our point of view, not smart from your point of view and not smart from the point of view of anyone involved. It means having more kids smoke. That is what we mean by unintended consequences. I just do not think the homework was done in the background as the bill was drafted to look at these consequences. The other consequences, as I mentioned, are around things like compensation to the industry—we will obviously defend ourselves—and that process. The issue of having no evidence means that it is a punt; it is an expensive experiment. I am not sure this is an area we should be experimenting on without evidence.

I am not saying you should just stop, park the legislation and can it. We are very realistic. Obviously there will be legislation; we understand that. What we would like this committee to do is take the time, and not a huge amount—not years and years and years. Take the time to do a RIS. Get the evidence. Get the consultation across all the departments of government, and include people like us, if we are allowed, retailers, concerned parties, medical associations and anti-tobacco organisations. Get them into a room like this and build evidence-based legislation that is going to reduce smoking. We understand the intent of the bill and we are not afraid of that. That is what we would like to happen.

Mr IRONS: One of the things that the retailers have been in contact with me about—and I guess they have been in contact with you, or you have contacted them—is the packaging as well. In a situation where currently the cigarettes are behind barriers and you cannot see them, what is the real consequence of having a plain cigarette packet that no-one can see anyway?

Mr Crow : I understand the question and where it is coming from. The issue we have is one of confusion. Let us just start with the retailer point of view. There are about 300 to 350 different SKUs, or stock-keeping units—they are like brands—in the marketplace. They are all looking the same in this future environment. Yes, they have a name on them, printed in Lucida 14—highly confusing. It is a massive supply chain. We deal with 30-odd thousand to 35,000 retailers. The retailers deal with thousands of customers every day. That ability to navigate through that process is extremely difficult.

For the individual concerned, remember that we are talking about a smoker who has chosen to smoke. They are 18 or over; they are an adult. They have all the information on the health issues of smoking. We know that, because the government advertising campaigns are very good. They talk about how 'everybody knows'. The awareness numbers we hear from government research are that it is 100 per cent awareness. The issue is about the ease of navigation. The only real things left in terms of the consumer choice issue are the blend or style of the tobacco that they smoke and the price, and the brand allows consumers to make a very easy navigation through that process—to say, 'Look, I want that one over there; it's that name and it's that colour,' or whatever it is. 'That's the one I want.' That is also the case for the retailer. So it assists in the process. All the days of advertising are, as you know, long gone. It is illegal for us to market to the consumer directly. It is illegal for the retail trade to market to the consumer directly. They cannot advertise and they cannot promote in their stores. It is illegal by law, and that is very normal. We see that branding being a very normal part of consumer choice in a country which prides itself on choice, and we will defend that choice as much as we can through the process.

As I have said, in some of the comments you have may have read people are attributing to me the statement that we are going to have this huge legal action. We are not even planning anything like that yet. We are looking at legal options that we have, but that is way down the track. Our focus, as I said in a lot of the media I did about a month ago, is that we want dialogue. That is why I say to the chairman: thank you. This is the first two-way dialogue that we have had on this issue since April, when it was launched by the previous Prime Minister and the Minister for Health of Ageing. I applaud you for that. Thank you; it is great to see.

Mr IRONS: Also, with regard to the plain packaging, you have just outlined the difficulties it is going to cause for the retailers. The fact is, I think, that the plain packaging is going to come in, but what changes to the bill can you see—changes that maybe the government could implement in the bill—that would make it easier for retailers to identify and distribute that product when someone comes in and asks for it?

Mr Crow : Pragmatically—and you knew I would say this—I would say that, if you did a proper regulatory impact statement that was evidence based with proof and fundamental engagement, I am not sure you would pass a bill that removes branding and the equity of intellectual property from a legal business in a legal company. Under the Constitution I do not think you can, and I do not think you would if you had evidence. What I do believe is that, given that consultative forum, if the objective is to reduce consumption then you would move towards areas which have been evidence based not only in this country but in others around the world—things like education, which have been proven to work and have been the focus of many studies across the world. They have been proven to work very, very well. We have great examples in this country not only on tobacco but on things like skin cancer and drink driving laws, where they have changed consumer behaviour. We have seen that being effective not only here but elsewhere. There should be more, more and more on that. We need uniformity on pricing; we need to get pricing right and excise regimes right. We understand that the price going up when the excise goes up reduces consumption. We saw that last year very effectively with the increase in excise. There was a 25 per cent increase in the excise and we saw the volumes go down by about 10.2 per cent; there was about a 10.2 per cent reduction in the industry last year in Australia. So there are ways of achieving the objectives that do not infringe on the property rights, do not breach the laws and the international commitments and do not mean that the Australian government would have to compensate people.

On the question of what would happen, I do not think that the bill would progress with plain packaging. If it did, if you conjecture and look forward, I am sure that there are lots of elements of branding and of identification that could be provided in, for example, colour-coding systems that the government could allow that would allow the consumer and the retailer to navigate through the process. But, if I was very straightforward, that would just be another form of intellectual propertyand branding and we would say, 'Why would you remove our branding anyway when it is illegal to remove our branding under the current Constitution?' So we are quite firm on that. As we represent this company and what it stands for, we would defend that constitutional right to have our intellectual property on our brands. That is the tough part of this debate. I know that it is not this committee's debate, but it goes to the impact on the retailer and the problems that the retailers are facing. And I know that they have made representations.

If you get a chance to call them to this process at some stage, please do so. They have a lot of views. They are very vocal. We deal with 30,000 of them. They are amazing people. They are the cornerstone of every shop that we go to. They would give you, and they give all of us, fairly good feedback. I get it every time I walk into my corner store in Sydney. They are vocal, and not just on tobacco, by the way—they are vocal on everything. They are a rich vein for feedback.

CHAIR: I want to add to that. It is extremely unfortunate that they have not been given that opportunity. The referral of the bill to us should have been thought out more carefully to give these people the opportunity to come and contribute on the legal and economic sides of this matter. That is a point as chair that I would like to make.

Mr Crow : If you do get the chance, that would be good. I do not know how that would work procedurally.

CHAIR: As I said, we cannot control what is referred to us.

Mr Crow : Fair call.

CHAIR: Early in your submission you state that the illicit tobacco trade is 16 per cent of tobacco consumption. What is the source of this figure? Government figures have it a lot lower than that.

Mr Crow : I will try to answer that as quickly as possible. We commissioned a series of reports by Deloitte consulting. Two have been done. You may have seen the recent one, which came out in May-June. There was also one done at the back end of last year. Previous to that, BATA also commissioned reports through PricewaterhouseCoopers. They use very similar and robust methodology. Roy Morgan Research also does a lot of research not only for government but also for industry. These reports looked at the purchase patterns and the volume assessments of the industry. We chose Deloitte because they are very thorough. This report was funded by BATA, Phillip Morris and Imperial Tobacco. Rightly, you might challenge us, saying, 'My god, you paid for it, and therefore you are going to get the answer that you want.' We chose Deloitte, being open and straightforward, because the government's procurement department has sanctioned Deloitte to do independent reporting for the government. Ironically, we held a press conference on the 17th. The same day or the day after, the Deloitte report into the carbon tax came out, an independent report on carbon. That was huge. This report swamped ours. It obviously cost the Australian government a lot of money. That is why we chose Deloitte.

It is robust research. It is based on thousands of interviews of consumers done in a very thorough way by Roy Morgan Research, who work with Deloitte. The aim was to estimate—and you will never get a real answer—the size. That size has been consistent over the last 18 months. The last report found that around 15.6 per cent of the industry is illicit. We say one in five; one in 5½ cigarettes smoked in this country is illicit.

Those illicit cigarettes come in three forms. Firstly, there is loose tobacco. That is the bulk of it at the moment. About 90 per cent of it is loose tobacco. It is like the bags of tobacco that you buy in your fruit or vegetable shop. You buy half a kilogram or a kilogram. Sometimes, the retail store that you buy it from tubes it up, which means that they take the tobacco and put it into cigarette tubes with filters on the end. It is like a cottage industry. They sell those. Another type is counterfeit, where they copy our brands. We are obviously all aware of that one. The other type is contraband, which is where they take our product and move it across borders without paying tax. Obviously, there is no tax, no health warnings, no control, no excise, no legal compliance—nothing. And there are additives in there that are not smart to smoke and that we would never be allowed to use under Australian law.

CHAIR: It is not a big deal, but the figures are different from the government figures.

Mr Crow : Yes. The research that came out just recently was done for a very different reason. It did not look at volumetrics in the industry. That is what this Deloitte report specifically does. One of the things that we implore the government to do is to do their own research into the illicit trade, given the size of the fiscals. We are losing $1.1 billion. If we could control that and halve it, say, there is a lot of money there to pay for a piece of research once you can track it. Customs and excise are doing an amazing job, as is the ATO. They are under huge pressure, because this industry is growing really quickly at the moment—150 per cent in the last three years. They do not have enough resources. One of the recommendations that we put in our submission—and I do not know whether your committee can do it—is for you to recommend or put a file note in that says, 'They do not need billions; they just need some resources to go after this.' This industry is getting out of control, unfortunately, at the moment.

Mr LYONS: Do you anticipate that there would be fewer brands in the market if plain packaging came in?

Mr Crow : That is an interesting question. I do not think so in what I would call the midterm, which is sort of five to 10 years. If anything, there might be more, as we would have lost the ability to represent a brand with a colour or a name for easy navigation. The retail industry would probably try to stock as many choices as they could, and there might be even more. But that would just be a projection. I would not know. There were lots of projections around retail display bans when they came in in Canada and in some parts of Europe. The suggestion was that that would reduce the number of products sold, because they could not be seen. But it has not so far. It has stayed about the same. If I had to give an answer, I would not know. But my gut feel projection is that it would probably stay the same. Some brands would get tired, with people not liking them anymore. But something different would come in.

Mr LYONS: In your submission, you talked about it being around 30 months for turnover and about 18 months for clearing out stock. You talked about 18 months today. Are you saying that it would take you about 30 months to change your plant and equipment and then another 18 months for it to be cleared out of the system? Is that what you are claiming?

Mr Crow : Let me and packaging clarify. In our submission, I think that we say 12 and 6. There would be 12 months work to change the product, which would involve changing the product and the processes to get it through. Remember that some of our product comes from Holland, some comes from Singapore, some comes from Malaysia and some is produced in Australia. Our competitors, no doubt, have similar supply chains, although we do not know for sure. Imperial have production in New Zealand as well, I think. This is the conversation that we had with the ACCC when we were making the graphic health warning changes in 2004-05 and when we were doing the reduced fire risk changes to packaging, where every packet changed with that claim, back in 2008-09. The ACCC were very open with us. They were very straightforward. They worked out an 18-month period—which includes the retail flush-through, by the way. So that included 12 months for manufacturing change and probably a six-month minimum retail flush-through. That 18-month period was seen as being pragmatic for the industry. It also seems to be—and my colleague may be able to find a quote from the ACCC—a very normal number used internationally. It is literally to do with the pragmatic issue of changing loads of stuff.

In our submission, we also highlighted the issue of there being specific changes to the specifications. This is one of the problems that we have at the moment. I have two bills in front of me and I have a draft set of regulations that have lots of Xs. I do not know what is in there. And everyone keeps asking us, 'But aren't you preparing now?' I cannot. I do not know what machine to order. These machines cost millions of dollars to buy. They come from Italian or German manufacturing plants. They take about 24 months to order and tool in the global industry. So if we are asked to change some of the specifications, it becomes a really simple problem: we will be out of stock. BAT will not break the law. We pride ourselves on this. We follow every law diligently all the time—we have to; we are under huge scrutiny. We have a huge governance process to ensure that we do. Next July, if the bill stands, with about 120 days between when the bill is propagated and the regulations come in and by the time we have to cease manufacture on 20 May, I will then have about six weeks to clean the industry out, which is basically impossible. I will be out of stock on 1 July. I would imagine that Philip Morris—and you will have to ask them; please feel to write to them; we know them well and they will respond—would probably be the same. In the submissions from them that we have seen, they have said the same kinds of things. With Imperial, I do not know. We would have to check the data for you.

We would be out of stock. If the industry goes out of stock, the only people who would have stock would be a bunch of guys out of Indonesia and China who currently supply 16 per cent of the market. And they will flood the market with cheap cigarettes. This would not be good. This would not be good for my business. And let us be very honest about vested interests: I represent a commercial concern that wants to make money in this country out of its investment in this country. It is a company that is owned in England. They want to get normal profit growth, as any company would. If we saw that happen, we would not be able to break the law to supply the market, to put it bluntly. We will not. We would refuse. I would not sanction that as a CEO and neither would any governance structure known in this country. That would become a clear, present and real problem for us. We are pragmatists. I am hoping that with the opening of dialogue today I can convince the department of health, who are represented here and will be appearing later on today, to sit down and have a proper conversation with us. We have not had that. I keep asking for that. I wrote to the minister again on Monday or Tuesday asking for half-an-hour before this committee to have a chat. There was no response. That is getting frustrating, because there are practical issues that we need to get on to and we are not getting any response. If you can help on that, I would appreciate it. I would appeal to you to help with that if you can. We would like them to sit down and have a two-day meeting—or a half-a-day meeting—with the industry and the retail sector. If it is going to pass—and your view is that it is going to pass; our view is that it should not—then we want to sit down and have a proper pragmatic conversation, as we have with the ACCC in the past. If you could give us any assistance—and I know that I am probably not allowed to ask for that—that would be good. If that has to be struck, it will be struck.

CHAIR: I have another question. In that last part of your statement, you spoke about BAT being a pragmatic company. Obviously, you have shareholders and you need to make a profit; you need to make money. If we look at the history of the advertising and marketing of tobacco products in Australia from when I was a kid to the present day, it has changed dramatically. It was on our TVs and in our newspapers. We had the Marlboro Man and a whole range of things. What marketing is done currently by tobacco companies or by your tobacco company to sell, market, brand et cetera the product? Your industry, certainly here in Australia, has had diminished sales over the years, because people are giving up tobacco at a growing rate. You made a statement about you needing to make money and that everyone understands you, because you have shareholders and you are a company. There is marketing done. What sort of marketing is currently done? What advertising can you still use? When I say advertising, I am not talking about TV advertising, but I am talking about marketing.

Mr Crow : I understand.

CHAIR: Would you be able to walk the committee through the marketing that you do?

Mr Crow : Good question. I will try to lay out how it works. Very simply, BATA is banned by the Australian government from using any form of direct consumer marketing—as are retailers, by the way. A retailer cannot run an ad in the paper saying, 'Here are cheap smokes.' They are not allowed to by law. They are governed by the same kinds of laws that we are. So there is no advertising in its classical sense. There is no TV, no outdoor, no sponsorship, no Tina Turner flying into the grand final to sing a song.

CHAIR: What about displays?

Mr Crow : All consumer advertising is gone; it is banned. That started in 1976 and has continued all the way up to retail displays getting banned. That is all gone. We will never breach that. We are not allowed to. We would not do it anyway. It would be a stupid thing to do. So that is gone.

The marketing that we do now we do not call marketing any more. Lots of people refer to tobacco marketing. It is called trade marketing. It is very simple: we cannot market to the consumer but we can talk to the trade and deal with the trade. So we sell stuff to the trade and we ensure that the right product is sold at the right price, in the right volume and at the right outlets to ensure that consumers can buy their product every day when they walk in. I cannot tell the trade what to price that product at. I can recommend the price to them under law. But under the Trade Practices Act, which is now called the Australian Consumer Law, I cannot set a price point for them. So the retailer must make a decision about what they will sell it at. That is called trade marketing. We do that on a regular basis and we have a team of guys who talk to Woolworths, Coles and 30,000 independent retailers.

CHAIR: How are those displays that we see at supermarkets and shops part of this trade marketing?

Mr Crow : Yes. Those displays are just about over. By the end of this year, in very close to all of Australia, the product will be behind steel doors. So there will no displays anymore. In New South Wales, for example, that has moved through. There is no display of tobacco product available—except in tobacconists, I should say.

CHAIR: What were the displays picturing?

Mr Crow : Just product. It was literally just product sitting on a shelf being displayed to the consumer with a price point. That was governed by state based laws.

CHAIR: So it was a display with a picture of the brand?

Mr Crow : No. Just the packet on the shelf. Using imagery that would have been considered advertising in the old days was removed many years ago.

CHAIR: Has there been research by British American Tobacco into the effects of those displays? Have you done any research into that?

Mr Crow : Not into displays behind steel doors, no.

CHAIR: No, as they were previously.

Mr Crow : I do not think that we have done specific research into the effect of a steel display versus plastic versus wood.

CHAIR: What about the actual displays? For example, if you walked into the shop and you saw Marlboro all around. There must have been some sort of marketing that went into that.

Mr Crow : I see where you are going. In the old days, when you were allowed to use advertising imagery—which is what you are talking about—and when that was allowed to be associated with the packaging on the shelf, I am sure that companies not only in this country but also in other countries would have done research into that imagery to find out whether the imagery was reflective of the brand at market. The stuff that you are talking about—signs with Marlboro or Horse or whatever it was around the side of the packaging—was removed many years ago. We were allowed to put only the package on the shelf. Now those packs are on a shelf but they are not to be visible to the consumer. There are some places where it is allowed. I think that if you are a tobacconist in New South Wales there is about a year to go during which you are still allowed to do that. They wanted to allow those industries time to change, so they were given that time by the New South Wales state government. But I think that just about every state government has banned or is in the process of finalising those bans in law. So we are down to product behind a steel door and the retailer turns around and opens the door.

The issue that we are facing today is that when you have illicit trade and you see this trade coming in from China and the product is in the same packaging as required under the bill—it is all drab brown or khaki or olive; whatever the colour is—it is all going to look the same and you are not going to be able to find things. That is one of the big concerns that we have. That is why we have raised the issues that we have here. We are very concerned about this. More illicit trade leads to lower pricing which leads to more children smoking. Then there is the waste of government resources in trying to hunt it, find it, shut these groups down and prosecute people. Then there is the compensation that will go to us because of the branding and the intellectual property that will be removed. We will get into trouble with this. That is why we appeal to you to as much as we can as citizens, as members of the company and of the industry to do this properly. And I do not want it to take 15 years; I am not looking for delay; I want you to do it really well; I want you to build effective and workable law that you have widely consulted on and is based on evidence and proof. It is beholden on all of us in this society to do that.

Mr IRONS: You have mentioned compensation a couple of times during your presentation. Has the industry done any background work on what sort of compensation they would try and get because of the loss of sales and intellectual property? You said that you have had no engagement with the department of health at all on this. Can you confirm that?

Mr Crow : We have not.

Mr Connell : In terms of the engagement with the department of health, we have had a number of meetings with the department. I do not know how many meetings that we have, but it is probably around five.

Mr Crow : On traceability, at least.

Mr Connell : Yes, on the upcoming legislation. But we are still at a point when in looking at the regulations we are no clearer as to how we will be operating, what will be expected of us and what the ramifications might be. You can meet with the department and talk about the technical regulations but it is very difficult in the political context to talk to them about the real unintended consequences or what the fallout might be from the legislation, because that is not really their job. They are following direction from above, I suppose.

Mr Crow : In terms of compensation, we have not calculated a number. We are looking at legal options. We have not started any legal action. We would not do that. That would be something that happened way down the track. We have focused in the last three months since this bill started to get more awareness on dialogue. We have tried to get dialogue going. I have written to and spoken with the minister's office four times personally. I cannot get 15 or 20 minutes. I cannot even get 10 minutes. I spoke to the chief of staff—Angela, I think—and said, 'Just give me 10 minutes, so that I can lay out the issues on one piece of paper and ask them to please consider it.' Not a chance at this stage. We have written to all the members of parliament and we have written to all the senators. We have unfortunately had to go to the public with a campaign. Personally, I think that it is crazy to have to try to get dialogue through the public, but we have made the choice to do that. It is getting the issues out there. I would have preferred not to have gone into political advertising. I would have preferred to have been able to sit down in a very pragmatic process—which we do with a lot of governments around the world, by the way—in a one-day session with her team and maybe even with her as well to talk through this, knowing that we are not going to agree on certain elements. Obviously, there are things that the minister wants to progress. That is understandable. On other elements, we would probably agree very easily.

Mr IRONS: So the main issue for you is probably the introduction time for the plain packaging.

Mr Crow : Yes. The introduction time is obviously problematic. The intellectual property is the core, and obviously we will defend ourselves. We are talking to our legal firms to look at what the options are, and no doubt that will get adjudicated at some later stage by a court. Whether that is the High Court or the Federal Court, it will happen, but we will defend ourselves in the process.

The minister has been really good. She is very open on this. Obviously she has a different view and says that pretty openly in the media—and says a few cheeky things about me, and that is normal—but she has been pretty open about the fact that there is no robust proof. That worries me. We are passing a law that has big implications, and there is no proof. Personally, as a citizen—but also as a guy representing a company—I do not think that is a smart way to build effective, workable legislation. Is it really the role of this government to take away those brands, which are legal property? I am not sure that it is.

CHAIR: What would be acceptable evidence for your organisation?

Mr Crow : I was just saying before to your colleague that what we would like to see happen is that you as a committee would literally take your time, do an RIS and get evidence based policy that is actually effective—things like education that have been proven to work. I would not progress the plain packaging, because it is not proven to work, but I would go after education. I would go after looking at excise and pricing and getting modulation on pricing in the marketplace. I would get funding for federal agencies—Customs and the ATO—to nail the border, to stop those containers of illicit tobacco coming into the country. I would look at areas around a forum like this, but an ongoing forum so that you would not get to this crescendo of disagreement. I would do it early and have a proper consultative forum, and I would have uniform point-of-sale laws. That is why we really call for a RIS.

Mr Connell : Perhaps I could add to that. It really is about the regulatory impact assessment that the bill never really had in the first instance. Normally with legislation like this a regulatory impact statement or assessment would have taken place, but the Office of Best Practice Regulation, I think it was, decided that the bill did not require an RIS. The announcement was such that it formed government policy on the spot. There is some sort of technical regulation that once an announcement has been made it is government policy and therefore does not get an RIS.

To speak very briefly to David's earlier point, there was a draft RIS prior to the introduction. There are a number of issues, but I will just talk about one, which is price. The Department of Health and Ageing actually said, in April 2010:

Smokers could face lower costs of purchasing cigarettes—and higher health impacts and costs associated with higher rates of consumption—if plain packaging leads manufacturers to disinvest in branding and compete solely on price, driving tobacco prices down.

That is just one part of a number of things that could fall from this legislation. I do not think the government's intention here is to see tobacco prices fall. I think that would be the opposite of the intention of this bill, but that is one instance in which we would urge the need for a regulatory impact statement, because those sorts of things are not the intention of the legislation at the outset.

Mr IRONS: Maybe it is time to take the point of view that you could try to protect your intellectual property. Maybe you could go to the minister and do a bit of horse trading: say, 'We'll spend so many millions of dollars in education programs in schools for the right to protect our intellectual property.' You could be a bit proactive and try some negotiation.

Mr Crow : We would concur with that completely. We would love to sit down and have a proper open dialogue. We are not afraid of law. Tobacco companies have got used to legislation. Unfortunately for us, we do it as a job. We are not afraid of it. That is exactly what we want to do: we want to sit down and talk about things. We are not afraid of volumes actually moving down. Governments all over the world are trying to reduce tobacco consumption. It is the right thing for societies to do. We are not stupid about that; it is really normal. Doing things that work, that are evidence based and that have been proven to work—either in this country or in others—seems to be really smart. I agree that we should be able to sit down and say: 'Don't take the brands. No doubt there is going to be some big legal bust-up down the track, which is not healthy for anyone. On my point, fighting with the government or legally challenging governments is not a clever thing to do. We vote you guys in for a good reason. You do not want to fight and we do not want to have a legal fight, but we will defend it if we have to, because we have laws that protect that. So I agree with you completely. If you could help us on that—I do not know if you can personally or as a committee—please, we would love to get a three-hour block of time to talk openly and pragmatically with the Department of Health and Ageing about these issues whichwe have discussed today.

CHAIR: Currently, even though smoking rates have been reduced in Australia, new people are taking up smoking at some stage, whether a small number or a big number. Has any research been done by your company into why new people take up smoking tobacco?

Mr Crow : No, we cannot. By law we are not allowed to research anyone under the age of 18. I know the health department does.

CHAIR: They could be 20-year-olds.

Mr Crow : Adults. No. We compete in the market for people who have chosen to smoke already. They are over the age of 18 and have to be aware of the risk, which they are in Australia. We know because of the work we have done.

CHAIR: I will change the question a little. Why do you think those people take up smoking?

Mr Crow : There is a raft of reasons for people choosing to smoke. It is such a personal thing. People choose to do it because their friends do it, their mates do it, they like the flavour, they like the sensation, they like what it stands for—there are a million reasons.

CHAIR: Do you think they do it because they like the colour of the packet or the packaging?

Mr Crow : We were talking about this before. I do not think anyone who is a nonsmoker wakes up one day and says, 'I really like the look of that pack; I'm going to start smoking.' It just does not happen. People smoke because they want to smoke. It is like when you buy a soft drink. You do not go: 'The colour of that wavy red thing is really interesting—I'll drink that.' You will think first: 'I'm thirsty; I need a drink. Okay, what are the options available?' Then you will choose.

I think that is one of the big change points in this whole debate. The debates around advertising 30, 20 or 10 years ago have been transported into: what is branding? It is an ability to take a commodity and allow consumers to navigate that commodity, to say one is different from another and one stands for something different from another—be it a different flavour, a different price or in a pack of 25 cigarettes not 20. That is what branding is—it takes a raw commodity and puts a brand on it. You see it in the fruit and veg stores today. Oranges used to be just oranges; now they all have stickers on them because they want you to know that one comes from this country or this part of Australia with this kind of flavour. They are trying to help you navigate all those oranges. It is the same kind of process, and I think that has been misconstrued.

To sum up the process, that is why we are asking you guys to get some time—not a lot of time—to do a RIS and get the evidence. Sit down with the evidence, get the proof, talk to a wide stakeholder set and ask the fundamental questions from my preamble: are you aware of those issues; are you aware of the compensation issues; and is it really the role of this parliament and this Australian government to remove intellectual property that is legally owned by these companies—mine and the other companies—on legal brands in a legal industry? Is that really the role of this government? I would contest that it is not the role very openly, very happily and very pragmatically. Thanks very much for your time.

CHAIR: Thank you very much for appearing before the committee today and giving evidence; it is really appreciated. Your evidence will form part of our recommendations. If we wish to ask you any more questions, we may contact you—and vice versa if you feel there is something else we need to know regarding this bill and the impact on health. I know there were a lot of other things you wanted to discuss—the economic aspects, the legal aspects—but, as I said at the opening of this public hearing, this committee cannot control what is referred to us. I think the message should be that those who referred it to us should have thought it through carefully and ensured that other aspects of this bill were covered as well. We will be looking at the impact of this bill on health.

Proceedings suspended from 11:38 to 11:49