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Tobacco

The High Cost of Plain Packs?

Opposition is growing to the Government’s proposed introduction of plain packaging for tobacco products.

THE number of dissenting voices to the proposed introduction of plain packaging on cigarettes and tobacco products in Ireland is growing.

Well-known economist Dr Constantin Gurdgiev, lecturer in Finance at Trinity College, Dublin, and the Smurfit School of Business, UCD, tells Retail News that he believes the proposal “is informed by a poorly-researched view of consumer behaviour”.

“With smoking being a highly addictive activity, behavioural incentives and constraints that apply to other consumption goods work differently for tobacco consumption,” he explains. “Plain packaging of tobacco products, in my view, will likely lead not to a reduction in smoking but to substitution in favour of cheaper brands and supply alternatives. This may or may not result in an increase in tobacco consumption overall, but it is almost a sure bet that it will lead to no reduction in smoking.”

Dr Gurdgiev argues that there are two basic reasons why such an outcome is likely. “Firstly, reducing visibility of the brand identity on legally sold cigarettes can increase the brand value to consumers. This is the ‘forbidden fruit’ argument. If so, it will raise the value of counterfeit and illegally smuggled cigarettes, and will also increase the value of cigarettes purchased legally outside Ireland.

In the same way, plain packaging can perversely increase the ‘coolness’ factor for branded cigarettes not only for already consuming adults, but for those starting to smoke.

“Secondly, with all legally sold tobacco no longer differentiable by brand and product type,” he continues, “consumers will be more able to substitute in favour of cheaper and/or stronger alternatives to reduce the cost of their consumption, without reducing the signalling value of their consumption. This also can result in increased consumption of tobacco. Crucially, in both cases,

Dr Constantin Gurdgiev, economist and lecturer in Finance at Trinity College, Dublin, and the Smurfit School of Business, UCD.

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Tobacco

John Freda, General Manager, JTI Ireland.

“Plain packaging of tobacco products, in my view, will likely lead not to a reduction in smoking but to substitution in favour of cheaper brands and supply alternatives.” – Dr Constantin Gurdgiev. plain packaging adoption is likely to increase the amount of smuggled and counterfeit cigarettes, as well as cigarettes imported legally for personal consumption.”

The economist doesn’t expect the introduction of plain packaging to have any significant effect on investors’ and markets’ perception of Ireland as a place to do business. Neither should we expect a significant loss in terms of markets’ view of our intellectual property protection regime or other reputational and institutional capital, he notes.

“However, we have to be careful not to set a precedent whereby such an approach to social and health policy can generate a risk of IP restrictions on other products and services,” he warns. “There is a real and legitimate concern that the introduction of these measures on tobacco products can serve as a precedent for applying similar restrictions on IP of producers in other industries such as, for example, alcohol, sugar-containing foods and/or fast food in the future.”

He argues that in order to avoid any potential adverse impact that such concerns can generate, we need to make certain that Irish Government sets out an iron-clad empirical case for the importance of such actions with respect to tobacco. “This case must be made in advance of the introduction of the restriction and it should be subject to open and informed consultation process, involving not only the health authorities, but also other stakeholders in the issue including, for example, the Revenue, Consumer Rights representatives, retail services and the tobacco industry. For the reasons outlined above, in my view, making such a case will be a hard task for the Government.”

Intellectual Property Rights The Law Society of Ireland is also concerned with the legal implications of the concept of plain packaging and how it might affect the standing of

intellectual property rights here in Ireland and abroad.

In his submission to the Joint Oireachtas Committee on Health & Children’s pre-legislative consultation on the Public Health (Standardised Packaging of Tobacco) Bill 2013, Law Society President, John Shaw reiterated the Society’s view from February 2013 that: “A fully functioning intellectual property system, which operates consistently and transparently across all sectors and provides certainty for intellectual property owners, investors, international partners and traders and members of the public, is vital to the future of both the EU and Irish economies. Reforms which have the effect of undermining that system should be considered very carefully.”

The Law Society advised that any move to introduce plain packaging could be anti-Constitutional. The Irish Constitution requires the State to protect property rights and the Irish Supreme Court has previously struck down legislative provisions as unconstitutional where they involved restrictions on the exercise of property rights or a deprivation of rights all together without compensation for such interference.

“Were this matter to come to court, it is likely that the Court would be asked to consider evidence available regarding the effectiveness of plain packaging on smoking habits as against the range of other actions that can be considered to minimise or eradicate smoking,” Shaw noted, citing examples such as taxation, educational and cessation initiatives, sanctions and penalties etc.

Plain packaging would have consequences not just for the Irish Constitution, however, but also in an international context, including the

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Tobacco

Andrew Meagher, Managing Director, John Player

EU’s freedom of movement of goods as tobacco products sold in another members state, would not have the same access to Irish markets as a result of the Bill’s provisions.

Ireland is also a signatory to the WTO, and specifically the TRIPS agreement (Trade-Related Aspects of Intellectual Property Rights). Under that Agreement, we have committed to respect a number of key provisions that impact on the nature of trademark rights, including Article 7, which provides that the nature of goods ‘shall in no case form an obstacle to the registration of the mark’ “The Law Society is concerned that the extent of interference envisaged by the proposed Bill may give rise to potential actions against the State, and Europe under the provisions of the TRIPS agreement,” Shaw noted.

The Law Society is concerned that ‘unintended consequences’ of the Tobacco Bill could result not only in claims against the state, but could also adversely impact on businesses and employment. “The role of the IP in foreign direct investment should not be underestimated, and perhaps should be included in the regulatory impact assessment of the Bill,” Shaw argued.

Regulatory Impact Assessment Indeed, the issue of Regulatory Impact Assessment was mentioned again and again in submissions to the Committee.

Andrew Meagher, MD, John Player, warned that “the fact that a Regulatory Impact Assessment has not even been conducted in advance of this proposal will surely set alarm bells ringing in the HQs of Irish and foreign multinationals”.

John Freda, General Manager, JTI

Ireland, urged the Committee to call for an independent and robust Regulatory Impact Assessment to be completed and reviewed before the plain packaging Bill goes any further. “The Irish Government must now ensure that the proposed Regulatory Impact Assessment includes a thorough review of evidence and consider alternatives that will work,” he said.

Steven Donaldson, General

“There is a real and legitimate concern that the introduction of these measures on tobacco products can serve as a precedent for applying similar restrictions on IP of producers in other industries such as, for example, alcohol, sugar-containing foods and/or fast food in the future.”

– Dr Constantin Gurdgiev.

Manager of PJ Carroll, argued that according to the Cabinet handbook and Taoiseach’s guidelines, “an RIA should have been carried out before Minister Reilly brought the proposal to legislate to Cabinet last November, and this committee should not have been asked by the Minister to hear evidence without having an RIA to assess the costs and benefits”.

“This Committee must consider the outcome of a Regulatory Impact Assessment before making any recommendations to the Minister,” stressed Donaldson, who urged the Committee to look further at the evidence from Australia. “The evidence clearly shows that the Australian plain packaging experiment is failing and we would urge the Committee to await the outcome of the major dispute at the WTO,” he argued.

A number of countries are currently challenging Australian plain packaging legislation at the World Trade Organisation. It is one of the biggest disputes ever to appear before the WTO, with 35 parties (including the EU and therefore, Ireland) involved.

All of Ireland’s major tobacco producers (JTI Ireland, John Player and PJ Carroll) argued in their submissions that the proposed legislation on plain packaging would bring with it a number of unintended consequences, including a rise in “tobacco tourism”, as consumers travel abroad for cheaper tobacco, as well as driving more consumers to the illicit trade. The most recent KPMG report points to a 13% increase in the level of tobacco smuggling in Australia in the first six months after plain packaging was introduced. If these figures were to be replicated in Ireland, it would undermine the interests of honest retailers, the tax compliant tobacco industry, Government excise returns and public health objectives.

Furthermore, the evidence from

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Tobacco Australia indicates there has been no change in rates of smoking, or in the amount of people that smoke, even though plain packs have been in the market for some 15 months; Submissions called for alternatives to the introduction of plain packaging, which they argued would be more successful in achieving the government’s aims of reducing smoking levels.

“Ireland’s 2012 smoking rate of 29% is the same as it was in 2006,” argued Andrew Meagher. “28% of young Irish people start smoking at 15 years and younger compared to the EU average of 17%. The ban on press advertising, the ban on smoking in pubs, the ban on 10-packs, the ban on display of tobacco in shops, significant excise increases...none of these have had any measureable impact on smoking rates. Ireland’s tobacco control model is simply not working.”

Education Programmes He, and indeed his colleagues in JTI and PJ Carroll, pointed out how in other countries, certain education programmes have proven particularly successful at stopping children from starting to smoke.

“The German tobacco control strategy, which is education based, has produced striking results,” Meagher argued. “This is a country that permits billboard and cinema advertising of tobacco. Tobacco products are openly displayed in their shops. Yet youth smoking initiation rates are 17% in Germany, compared to 28% in Ireland.”

“Introducing similar programmes in Ireland from primary school right through to second level could be equally successful and w e respectfully ask the Committee to consider this as one of a number of serious alternatives to plain packaging,” argued Freda.

“Packaging is not why children or adults start smoking, and plain packaging will not make them stop,” noted Steven Donaldson.

“The criteria for introducing new laws should be based on objective fact, real world robust evidence and demonstrable results. There is no evidence, there are no results and no Regulatory Impact Assessment was

conducted to justify this Bill,” Meagher argued.

However, he continued, this does not mean we cannot and should not immediately implement measures to prevent minors from smoking. We can: • By implementing programmes to give minors the life skills to be able to say no to peer pressure when it comes to tobacco use or indeed other habits; • By preventing minors from accessing tobacco by prosecuting any retailer that sells tobacco to those under age; • By resourcing the enforcement authorities to put the criminals who sell illegal cigarettes out of business.

John Freda maintained that the introduction of plain packaging will actually increase children’s access to tobacco products in this unregulated market because of the price.

Both he and Donaldson called on the Government to introduce legislation to punish adults who knowingly buy tobacco products for children.

He explained how a key challenge for Government and society is to make sure that children can’t access tobacco products. “The best way to achieve this is to maintain a regulated disciplined market where tobacco can be legally sold and stamp out the selling of untaxed and unregulated tobacco at a fraction of the price to children by organised criminals and illegal traders,” he said. “These people don’t care about the quality of their product or how young the person is they are selling to.”

Incentivising Healthy Alternatives Speaking to RETAIL NEWS, Dr Constantin Gurdgiev also believes that there are alternatives available to the Government to achieve the same aims.

“To reduce abuse of tobacco and other harmful behaviour, consumers should be firstly incentivised to adopt healthy

JTI Launches Plain Packaging Website JTI Ireland has launched www.theplainfacts.ie - a website dedicated to communicating information about ‘plain’ packaging of tobacco products. The website highlights the lack of evidence in support of this measure and addresses the consequences it could have on foreign investment, legitimate retailers, and the tax losses to the government. “’Plain’ packaging is not as simple as it sounds”, states John Freda, General Manager of JTI Ireland. “All sides of the debate should be made available to people - they deserve to understand what this proposed legislation entails.”

Steven Donaldson, General Manager of PJ Carroll.

alternatives and choices,” he argues.

“Such incentives should take the form of both positive payouts on good choices and negative costs associated with poor choices. We have plenty of the latter and virtually none of the former. For example, incentives can be provided by allowing health insurers to differentiate pricing of health policies for smokers and non-smokers.

“Likewise, we need to develop a more functional approach to supporting those smokers who are willing to cease harmful behaviour through the process of quitting. Education is a critical step in the direction of reducing tobacco addictions and abuse. The smoking statistics to date suggest that using incentives and education to reduce smoking in Ireland is working, albeit not at the speed we would have liked to see. Strengthening the positive tools in addressing the problem of nicotine addiction and supporting consumers willing to give up tobacco should be considered the least risky approach to policymaking on the issue of tobacco abuses.”