Big Tobacco as caring corporate citizen

Surely we're being far too tough on Big Tobacco, as so many disparagingly refer to it, after the failure of its High Court challenge to the plain packaging legislation. If we'd only open our minds to what British American Tobacco and the others are saying, we'd see how remarkably public spirited they are.

They're worried not for themselves but about the "serious unintended consequences" they fear plain packaging will bring. According to their spokesman, Scott McIntyre, its only benefit will be to "organised crime groups which sell illegal tobacco on our streets".

Huh? "The illegal black market will grow further when all packs look the same and are easier to copy," he says.

In case you hadn't heard, this country faces a rampant illicit tobacco problem, with "criminal gangs now smuggling three times the amount of counterfeit and contraband cigarettes into Australia" last year, compared with the year before.

Overall, the illegal tobacco market is equal to 13.4 per cent of the legal market. How does the industry know? It commissioned a report from Deloitte, a financial services firm.

The industry has been terribly concerned about the illicit tobacco market for some years. Why? Not for itself, of course, but for what it's costing the taxpayer in lost tobacco excise. Last year, almost $1 billion, according to Deloitte.

You've often seen me criticise industries trying to hit the taxpayer for subsidies but with the tobacco people it's all the other way. Last year they ran ads desperately trying to dissuade the government from persisting with its plain packaging notion and thereby obliging the industry to cost the taxpayer millions in legal fees responding to Big Tobacco's High Court challenge - not to mention the billions the government stood to lose in compensation should the court agree the government had appropriated the industry's intellectual property.

Fortunately, the court didn't agree. It also awarded costs against the industry, which I'm sure will come as a great relief to the public-spirited tobacco people.

But the industry's concern for the taxpayer doesn't end there. It opposed the 25 per cent increase in the tobacco excise in 2010 because of the hit to revenue it would cause as the jump in the price of legal cigarettes forced more of the market into the hands of the cut-price criminal black market.

You may in your innocence think plain packaging will reduce the number of young people taking up smoking but that's where you would be wrong.

As the industry explained in full page ads last year, plain packaging "could drive the cost of [legal] tobacco down. Because with no branding, companies will have no option but to compete on price. And lower prices will make tobacco more accessible to young adults".

The boss of British American elaborated elsewhere that this was a worry because it would undermine government health initiatives to curb tobacco consumption. See what caring people we're dealing with?

As I discuss in my little video on the website today, I think plain packaging may force down the prices of "premium-brand" cigarettes. That wouldn't be a good thing but it would be easily (and lucratively) remedied by increasing the tobacco excise.

The tobacco companies aren't the only critics. According to the Australian Retailers Association, "retailers now face the costs of plain packaging transactions, which will see a significant increase in the time taken to complete a transaction as all products will be near identical".

"Transaction time increases are estimated to cost businesses up to half a billion dollars, which is the equivalent of 15,000 jobs," we're told. No back-of-an-envelope was offered in support of this remarkable claim, in which case I'd be inclined to view it with scepticism.

But what about the supposedly booming black market - how worried should we be about it? Not very. We've really only got the industry's word for how big it is and a detailed critique by Quit Victoria casts doubt on the reliability of the report commissioned from Deloitte.

Deloitte's calculations are built on a poll with a very small sample, which doesn't seem completely random. It asks smokers about their purchases of unbranded tobacco (mainly loose tobacco in plastic bags), contraband cigarettes (those imported without excise payment) and counterfeit cigarettes (those with fake brand names) and adds their answers together, even though you'd expect virtually all counterfeit smokes also to be contraband.

How do people know the cigarettes they've bought are illicit? Because of perceived poor quality, cheap prices, labelling in foreign languages and a different taste. Trouble is, these days a lot of cheap, foreign-made, funny-looking cigarettes are imported legally.

According to Quit Victoria, Deloitte's estimates imply one cigarette in eight is illicit. That's a bit hard to swallow.

Quit Victoria used an official survey by the Australian Institute of Health and Welfare in 2010, which had a very much bigger sample, to estimate the total use of illicit tobacco products is more like 2 per cent to 3 per cent of the overall market.

This implies the revenue forgone by the taxpayer is closer to $165 million a year than $1 billion.

I'm sure taxpayers everywhere thank the industry for its concern on our behalf but I don't think we need to be losing too much sleep over it.

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Coles and Woolies loom as Big Tobacco's rivals

What do the big foreign-owned mining companies have in common with the big foreign-owned purveyors of cancer sticks? A lot of money to con punters and pressure pollies, and a lot of weak arguments.

One argument the two industries have in common is that the resource super-profits tax and the plain packaging of cigarettes lack any proof they will work and have never been adopted anywhere in the world. Great argument: it has not been done before, therefore you shouldn't do it.

This is the poor little stupid Australia argument. We should always merely follow the lead of other countries because we're not smart enough to dream up anything good ourselves. Its logic is foolproof: if it has never been done before there's no evidence it works, and if we never try it there never will be.

But if the idea's so unlikely to work, why are the global giants fighting so hard to stop it being tried? Why not leave the stupid Aussies to stew in their own juice? Perhaps because the rest of the world is watching our ''experimental legislation'' and if it works - as it's most likely to - other, bigger countries will copy it.

The big miners claimed the supposedly retrospective introduction of the super-profits tax would increase Australia's ''sovereign risk''. The big tobacco-pushers claim plain packaging would rob them of their brands and infringe ''international trademark and intellectual property laws''.

They've claimed they'll contest the issue to the fullest extent of the law - this I do believe - and are crying bitter tears over the ''billions of dollars'' this will cost taxpayers in legal fees and compensation to the injured companies.

From what the experts say, however, the companies' legal case seems weak. About the only people convinced they'll succeed in this are from the libertarian Institute of Public Affairs. (If the institute isn't receiving tax-deductible donations from the tobacco industry, I'll be happy to record its denial.)

Libertarians are tireless fighters for private property. They're willing to pay taxes pretty much only to the extent they're necessary to finance government actions to protect private property from being stolen or overrun by foreign invaders.

But I find it curious the institute is so ready to extend its attitude towards the protection of physical property to the protection of intellectual property such as patents, copyright and trademarks. Protection of intellectual property involves much more overt intervention in the market. It's the nanny state creating monopolies and conferring them on private firms.

This intervention can be justified only by acknowledging the existence of market failure (something libertarians are usually most reluctant to do) and then being satisfied the intervention won't make matters worse.

You're actually giving some firms a licence to charge higher prices (by constraining their competitors from copying them) and recent history is full of instances of industries successfully lobbying the nanny state to extend intellectual property rights in ways that benefit the rights-holders at the expense of the public interest.

Yet another argument put up by tobacco companies is that plain packaging will backfire and lead to increased smoking because taking away the companies' distinctive branding (though not their brand names) will lead to greater price competition. Lower prices would lead to higher consumption, which would defeat the object of the exercise and actually increase smoking rates among young people. (Just why this would be a bad thing the companies don't explain. Cigarettes aren't bad for you, are they?)

I suppose when you're fighting to defeat some government measure it's always handy to have some argument it would be counterproductive, but this is a strange argument for them to be running. If there were an outbreak of price competition in response to plain packaging, the government could fix the problem easily by increasing its tobacco excise and forcing the retail price back up to where it was. This would be a nice outcome. The extra tax revenue would, in effect, be coming from the companies, leaving smokers no more out of pocket than before the new arrangement.

Though in these circumstances industries on the make usually lay it on pretty thick, the companies have made no attempt to claim the price war would send them broke, oblige them to lay off thousands of workers or move to China. This is a tacit admission that their degree of profitability - on their own admission, fattened by the ability branding gives them to charge higher prices - is so great it would survive a price war.

After examining the companies' rates of return relative to competitive norms, Dr Richard Denniss, executive director of the Australia Institute, estimates about half their profits - $500 million a year - flows from the premium prices charged for ''branded'' tobacco.

The companies say they fear the increased price competition would come from illegally imported tobacco, with smuggling ''spiralling out of control''. But Denniss thinks it's more likely to be the reactions of the big two supermarket chains the companies are worried about.

At present, the ban on tobacco advertising effectively protects the established players from having to compete with new entrants to the market. Apart from starting a price war, advertising would be the only way you could draw smokers' attention to your arrival in the market. (This is advertising doing what it suits economists to assume it always does: not using allusions and illusions to entice people to buy, but merely informing potential purchasers of your availability and price.)

But when plain packaging robs the established players of their last legal form of marketing, it would be a lot easier for Coles and Woolworths to enter the market with their own cheaper, imported no-frills brands.

Being done over by Coles and Woolies? Couldn't happen to a nicer bunch of blokes.

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