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Equity Research Europe March 14, 2001 WHO Will Regulate Tobacco? Table of Contents Executive Summary An Introduction to the World Health
Organisation Areas of Low/Moderate Risk to the Industry Areas of Higher Risk to the
Industry Areas with Potential Upside for the
Industry Time Line Limited Ability to Enforce on National
Governments ... but Tobacco Industry May Need to
Comply Health Agenda Drives Process That Could
Result in an Unenforceable Treaty Thoughts on Additional US Tobacco
Regulation March Litigation Time Line Company Profit and Loss Accounts Executive Summary We believe that the World Health Organisation (WHO)
tobacco initiative has some important risks that investors will see as becoming increasingly high profile as the 2003
deadline approaches. Despite a currently low profile among the investment
community, we see the WHO's attempts to create a framework within which to
become the global tobacco regulator as potentially one of the most important
regulatory developments for several years. Regulation could affect a range of
key areas including cigarette taxation, advertising and promotion, packaging,
smuggling, litigation and health warnings. This new regulatory threat is
emerging at a time of an improving litigation outlook. In summary, we anticipate that there will be some
over-run in the negotiations beyond the 2003 deadline and that many member
states will ultimately fail to ratify the treaty. However, will think that
there will be significant political pressure pin on the companies that we
follow to comply with the treaty to the extent that they are able, even if this
puts them at a competitive disadvantage relative to smaller local emerging
market companies that are unlikely to comply. The WHO has become very astute at using the media to
create anger about tobacco issues and this will increase pressure on both
national governments to enact local legislation and more importantly on the
tobacco multinationals to comply with WHO regulation as we move through the
next several years. Key areas of risk Advertising promotion and sponsorship is likely to be
restricted significantly under a WHO treaty, given the points raised in the
draft. While most western markets
probably already comply, the provisions are likely to make a more
significant impact on emerging markets.
We believe the most company would be
BAT, which will deliver approximately
55% of its group 2001 EBIT from emerging markets, on our estimates. However,
all the companies we follow are currently gaining market share in emerging
markets based on brand equity, which could potentially be at risk. Product descriptors such as light and mild, are likely
to be banned. Brands like Philip Morris's Marlboro Light and Japan Tobacco's
Mild Seven would seem most at risk.
However, we believe that packaging can communicate tar and nicotine
content differences more subtly through colour difference, for example. The size of health warnings required may be increased
to the extent of infringing on brand equity. If a sufficient part of the pack
surface is taken over by a health warning the brand imagery is likely to be
compromised clearly an issue for all the companies that we follow that charge
premium prices based more an brand imagery than product content. A further
significant risk to brand equity would be any move towards generic packaging. Although the WHO is keen to make progress on issues
such as harmonisation of cigarette taxation and encouraging more global
litigation, we see the risks in these areas as low. Key areas of opportunity The WHO initiative could provide the industry with the
opportunity to reduce the political pressure on it by addressing key areas of
concern such as youth smoking and attempts to produce a safer cigarette. We
think a key opportunity would be the
introduction of a global minimum age for smoking of 18, a measure that the
industry supports and which would seem to be in line with the aims of the WHO.
It seems to be in the public interest to encourage the tobacco industry to work
towards a safer cigarette. While the major companies do invest resources in
R&D into safer cigarettes, a framework within which the companies could
operate and then communicate to smokers any health benefits relative to
conventional cigarettes would, we believe, be a clear positive for the
industry. The WHO has a tobacco agenda The WHO (a specialised agency of the UN) has 3,800 fulltime
experts working for it, and tobacco is one of the most high-profile issues
currently being addressed by the Organisation. The WHO has never before issued a legally binding
treaty on any issue. This attempt to create a legally binding treaty on tobacco
is therefore unique. The WHO wants to create a framework convention on tobacco
control (FCTC) that has general provisions and separate protocols addressing
the detail of specific tobacco issues. The nearest parallel, in our opinion, is the UN
Climate Change Treaty, which took 12 years to agree. Tackling tobacco provides
the WHO with a high media profile and a great deal of support from non
government organisation (NGO) health lobby groups. The WHO has already developed a draft FCTC that covers
tobacco excise tax, advertising, sponsorship and promotion, packaging and
labelling, smuggling, youth smoking and passive smoking. It will be the health ministers of states of the UN
who vote on the negotiated treaty. The treaty will have to be ratified by at
least two-thirds of the heath ministers to be passed. The process by which this
is then put into national law varies by country. In many countries this is
automatic, in others there will have to be a separate acceptance process. There
is therefore a risk to the WHO that a treaty is agreed but does not get passed
into law by national governments because it fails to address the concerns of
these governments on issues like tax and employment. The WHO focus is on western multinational tobacco
companies In our opinion, the WHO is likely to focus on
modifying the behaviour of western multinational tobacco corporations rather
than focusing on local emerging tobacco issues. We base this view an the focus
of WHO documents and those of health lobby groups involved in the negotiating
process. There is a clear view that tobacco is a western 'disease' sold to
developing markets. Although the WHO will not be able to enforce the treaty
itself (national governments must enforce it), it will have access to the
world's media, which can focus attention on those companies that fail to
comply. It is important to note that BAT operates in most emerging markets as a
long established local company, with local employees and often with local
shareholders. For example, ITC is a 32% owned associate company of BAT, which
has over 60% of the Indian cigarette market. We believe that, to an extent, BAT
will be able to mitigate some of the pressure focused on 'western companies'
through this local ownership. Timeline The initiative to create a FCTC started in 1999 and
the deadline for completion is May 2003. We expect that there will be some
over-run on the FCTC and that the more important and specific issues will have
to be dealt with in separate protocols that could take a further two to three
years. Increased regulatory threat at a time of reducing
litigation threat. We see the underlying US litigation outlook as
improving. We base this on a declining outstanding case load against the US
industry (ex Broin II), numerous recent positive court room developments, the
fact that in only one case to date has money been paid to a smoker in a product
liability claim (US$l million, which is on appeal to the US Supreme Court) and
the election of George W. Bush as president (see appendix for a detailed
update). We believe that the tobacco industry would welcome
moderate increases in the regulation in sensible areas (such as FDA (Food and
Drug Administration) regulation in the US), since this could help reduce the
political pressure on the industry and reduce controversy in areas such as
youth smoking. There are, however, significant areas that the WHO
hopes to address that go far beyond what the industry would consider
appropriate, in our view. The WHO has limited the involvement of the industry
in negotiations, creating, we believe, a higher degree of risk than in cases
where national governments have increased the level of regulation. Conclusion We do not see the WHO initiative as having an impact
an forecasts for the companies we follow on a five year view and we are not
changing our price targets or ratings on the stocks we follow. However, there
is potential for the WHO to put regulatory pressure on the companies we follow,
which could moderate their long-term emerging market growth rates. We believe the company most at risk is BAT, as it has
strong emerging market positions in Latin America, East Europe, Africa and
Asia. However, all the companies we follow currently benefit from strong export
growth into emerging markets, which may moderate if the competitive playing
field becomes too biased against them. Tobacco - March 14, 2001 An Introduction to the World Health Organisation The World Health Organisation was formed in 1948 at
the suggestion of members of the United Nations. The WHO is a specialised
agency of the UN, which is staffed and financed by member governments. The
WHO's mission statement makes it clear that it sees itself as the authority on
organising and coordinating international health work. The WHO has 3,800 full-time health and other experts
working both at the headquarters in Geneva and at its six regional offices.
These staff support the day-to-day running of the WHO as well as work on policy
proposals. Suggested regulations and frameworks are voted on by the Executive
Board of 32 appointed health experts, which meats at least twice a year in
Geneva. Above the Executive Board sits the World Health
Assembly, which meats once a year and has one representative from each of the
191 member states. The Executive Board fully reflects the political interests
of all member states, and is therefore very bureaucratic. Its key role is to
set the WHO's budget. Prior to 1998, the UN Commission for Trade and
Development had responsibility for tobacco issues. The UN had issued
pronouncements on the subject of tobacco, but with no meaningful real world
impact. In 1998 the responsibility for tobacco issues was transferred to the
WHO. The current General of the WHO, Dr. Gro Harlem
Brundtland (the former Prime Minister of Norway), took office in July 1998,
having previously worked at the UN. Dr. Brundtland has been closely associated
with the proposed tobacco treaty, which has generated much support from NGO
health lobby groups as well as a high media profile. It is our assessment that
Dr Brundtland has placed tobacco as one of the WHO's top three priorities. The WHO has established a working group to deal
exclusively with tobacco issues. The working group is called the Tobacco Free
Initiative. On our estimates, there are approximately 25 professional staff
based in Geneva working in this group with approximately a further 20 people
based in regional offices in other countries. Although the WHO has had an important impact on world
health, helping to eradicate smallpox, for example, the WHO has not yet passed
any legally binding treaties. Instead, the WHO has focused on offering advice
and help where requested. The current tobacco initiative is therefore unique in
that it is an attempt to agree a legally binding treaty to deal with tobacco
issues on a global basis. What Is the Framework Convention on Tobacco Control
(FCTC)? According to the WHO, the FCTC is intended to provide
a way of ensuring that national government health policies on tobacco are
consistent both between countries and with achieving the overall goal of
reducing tobacco consumption and moderating the rate of increase in tobacco
related deaths. Note that this is a moderation from the original WHO intent of
eradicating smoking entirely. From our analysis of WHO and health lobby group
documents we conclude that the driving factor behind the FCTC is the WHO's
desire to be seen to tackle western multinational tobacco corporations like
Philip Morris and BAT, which sell cigarettes into emerging markets. The framework convention will have legal status, but
will have general rather than specific legal obligations. These legal
obligations will be enforceable on the member states. For example, there will
be an obligation to ensure that taxation on cigarettes increases over time. It is intended that, alongside the FCTC, specific
protocols are developed. These protocols will be much more tightly drafted,
address specific issues and have specific legal obligations, for example, a
minimum level of excise tax per pack. We believe that it is the development of the protocols
that is the highest risk area for the tobacco industry. WHO's track record on tobacco is mixed. The World Health Assembly has, over the last 25 years,
adopted 16 resolutions on tobacco. Resolutions do not have legally binding
status. These resolutions have had mixed success, with some member governments
adopting them and others failing to implement them. Probably the main benefit
of the resolutions has been to raise the profile of tobacco issues with
governments and indirectly encourage local legislation to be passed. This lack of tangible success can be blamed partly, we
believe, on the WHO's failure to
include all interested parties in
negotiations, including the tobacco industry.
This, combined with the high media profile of tobacco and the perception of tobacco being a
western 'disease' spread to emerging markets, has created the desire within the
WHO to move to a more legally binding set of conventions and protocols. Areas of Low/Moderate Risk to the Industry The following are areas that the WHO draft FCTC has
set out to address but that we believe have low relative risk in terms of the
likely impact on tobacco industry earnings. Excise Tax The original draft drawn up by the WHO working group
had suggested a minimum of two-thirds of the retail price of cigarettes in all
countries be accounted for by taxation. However, this has since been modified
to the requirement that governments "impose taxes on tobacco products so
as to achieve a stable and continuous reduction in tobacco consumption".
While the WHO has said that this may mean that tax in excess of two-thirds of
the retail price is appropriate, we believe that the modification reflects the
difficulty of getting governments to agree to substantial tax increases. Although we see prices rising in real terms as one of
the most important factors in creating volume decline in the tobacco industry,
the WHO's FCTC is unlikely to have a material short-term impact on national
government policy, in our view. However, over time it may prove to be a
catalyst to national governments reviewing their tobacco taxation policies. In many emerging markets, the current level of
taxation is substantially below this level (for example, Russia in January 2001
nearly doubled the level of excise tax, but the current rate is still only
approximately 10% on cigarettes priced above the commodity cigarette Prima).
Moving to a substantially higher level of tax would reduce levels of
consumption, and therefore have an impact on our earnings forecasts for tobacco
companies. It must be noted that increasing tax may also reduce
levels of government revenue if smuggling and counterfeit product are not
controlled, meaning that practical implementation may prove difficult. The WHO believes that there are no examples of
increases in excise tax leading to a lower overall tax take for governments.
However, we see a clear and current example of this in the UK market where even
on UK government estimates up to œ3 billion per annum in tax revenue is lost due
to the smuggling of cigarettes triggered by price differentials driven by high
taxes. Smuggling Some form of international action to reduce smuggling
is proposed by the working group. Cigarettes are by value the most smuggled
consumer product in the world. We see this as a function of 1) the high weight
to value ratio, 2) the substantial price differences between markets, and 3)
the ease with which known international brands can be sold through informal
distribution networks. The tobacco industry has argued that the primary
reason for smuggling is the large tax-induced price differences between
markets, and that without these tax differences the majority of the economic
incentive to smuggle the product would be removed. It is unlikely that tax
rates will be harmonised in the near term and so the WHO is likely to focus on
requiring governments and companies to directly monitor shipments of cigarettes
to ensure that duty is paid. This is likely to have only limited success given
the enormous volumes involved. We believe that the tobacco companies that we follow
would broadly benefit from the introduction of these measures to reduce
smuggling and do not therefore see this as an area of concern. This is based on
the view that cigarettes tend to be smuggled from low manufacturer margin
markets into higher manufacturer margin markets. Most major tobacco companies
already cooperate with governments to reduce smuggling through accounting
controls, pack markings, restrictions of supply to illegal trade channels, and
so on. Note that, within the EU, it would on the face of it be contrary to EU
free trade law for a company to refuse to supply a wholesaler in another EU
member state. Threat of litigation The WHO intends to promote litigation against tobacco
companies. In a WHO document from a February 2001 meeting in Jordan, the aim of
this litigation is spelt out: "The primary goal of tobacco litigation
should focus on improved tobacco control policies that will reduce the public
health impact of tobacco." To an extent, therefore, we believe Philip Morris is
correct in its view that the WHO wants to be able to "regulate through the
court room!'. The WHO lists the areas in which it believes
litigation could be used against the tobacco industry as:
The areas in which the WHO hopes litigation will bring
positive results include:
The tobacco industry has one of the best court room
track records of any consumer product industry. It is important to note that
there is only one example in the world of the tobacco industry making any
payment to a smoker following loss of a product liability law suit and that
case (Carter) is still on appeal. This strong track record is based on the
traditional tobacco industry defence of the smoker's awareness of and
assumption of risk. In order to be successful in the court room, the WHO
accepts that it will need to rely upon novel legal theory to avoid this strong
industry defence. There are two basic avenues that the WHO is considering
following. 1) Using a strict liability principle. An example is the United Nations' 'polluter pays'
principle. This principle has been used to make industries whose activities
cause environmental pollution make payments to reflect the cost to society of
the pollution. There have not, however, been any cases of using a UN convention
to attempt to create a private civil liability to private individuals. In
addition, in many countries the introduction of strict liability in a civil law
suit would represent a significant change in the country's legal structure (for
example, the US or UK). We see it as relatively unlikely that there will be
meaningful progress in this area. 2) Change the
legal framework. The WHO's public documents refer to the Canadian
province of British Columbia, which has changed its law to facilitate a health
cost recovery claim against the tobacco industry, as a leading example of how
changes in the legal framework might be structured. The British Columbia legislation provides for:
We see tobacco law of this type being created as a
somewhat higher degree of threat for the tobacco industry. it should be noted,
however, that it will extremely difficult to argue that new legislation should
affect the assessment of past alleged wrong-doing. It is a fundamental
principle in the legal system of most countries (including the US. UK, France,
Germany and others) that retroactive legislation that changes the legal rules
governing private conduct after the conduct has occurred should not be allowed. The WHO is as alive to these shortcomings as we are,
but, in our opinion, believes that the mere process of litigation whether
ultimately successful or not can raise the profile of the issue with both the
public and politicians. In short, it views litigation as one of the methods of
keeping the tobacco debate alive and keeping tobacco issues in the media. Areas of Higher Risk to the Industry Duty free sales A ban on duty free sales is recommended by the working
group. These sales tend to be high margin for both the retailer and the
manufacturer. This is clearly a risk area, in our view, as it is one of the few
areas that is international in its dimension and where the WHO is likely to
have persuasive influence. However, note that intra-EU duty free was banned in
1999, and the company most affected was Philip Morris. We estimate that
intra-EU duty free accounted for more than 50% of global duty free and
therefore the hit to the industry of the ban being extended to global duty free
would not be material to our forecasts. Advertising, promotion and sponsorship We see advertising and promotion as an area where the
tobacco companies we follow are most at risk. Although we think the WHO may
find it difficult to enforce advertising promotion and sponsorship restrictions
on member states, we believe that the tobacco companies that we follow may find
it politically difficult not to be seen to comply with the requirements of a
WHO protocol in this area. This could lead to a competitive disadvantage
opening up relative to local manufacturers that do not comply with the WHO
regulations (see enforcement issues below). On our estimates, approximately 25% of the cost of
getting a cigarette onto the retailer's shelf is taken up by marketing. Within
marketing, price promotion is a very important component. We believe that it is unlikely that the WHO will seek
to restrict price promotion (as the Irish government effectively has, for
example) but will instead concentrate on tax as a way of increasing price and
discouraging consumption. Beyond price promotion, the industry relies upon
advertising and sponsorship to help build brand equity, It is this element of
the marketing spend that is at risk, we believe. It is critical to the
companies we follow that international brands continue to command a price
premium to local and discount brands. On average, we estimate that international
brands make three times the profit per pack for a manufacturer than local
discount brands. This pricing premium would be put a risk if advertising were
banned in markets where these international brands are not currently
established. The WHO working group has received support from member
countries for broad restrictions on tobacco advertising and sponsorship. A
number of countries, including the US, have expressed concerns about breaches
of constitutions' rights to free speech, but we see this as an area of risk for
the tobacco industry. Outright bans on advertising would be unlikely to have
a meaningful near-term impact on the overall levels of consumption, but could
make it more difficult for international brands to penetrate markets where they
currently have limited awareness or market share. The risk to companies we
follow is therefore that they will find it difficult to change current market
share dynamics. For example, in South Korea, where local brands have 90% of the
market an outright ban on all advertising would make it difficult for BAT or
Philip Morris to penetrate the market over time as they would otherwise be
expected to. We see outright bans as unworkable and not a practical
option for the WHO due to the very different local attitudes to tobacco and
freedom of speech. It is much more likely that the WHO will attempt to adopt
some guidelines on advertising and promotion restrictions. We believe that the
industry would support and benefit from an increased level of restriction. A
lower profile marketing effort from tobacco companies (particularly in emerging
markets) that did not put any one company at a competitive disadvantage would,
in our opinion, reduce the political pressure on the industry. It is important
to note that BAT and Philip Morris have internal marketing standards and often
put themselves at a competitive disadvantage, where local manufacturers are not
bound by such strict guidelines. A more level playing field would therefore be
to the advantage of the international tobacco companies. Package design The working group is likely, in our opinion, to work
on ways to reduce the impact of cigarette brand imagery. We see this area as
linked to the concern of the WHO that western cigarette brands are increasing
the attraction of smoking to developing market youth. There are several ways
the WHO might achieve this, for example by requiring that health warnings cover
a certain percentage of the pack surface or requiring that product descriptors
are banned. Generic packaging The absolute worst-case scenario for the tobacco
industry, in our view, would be a requirement to move to generic packaging. Over time, the increasing restrictions on advertising
and promotion are pushing the tobacco industry to focus on the package as the
key method of communication with consumers. Given that the quality of the
product tends not to vary meaningfully from brand to brand, the ability to
charge a premium price for international brands will increasingly depend on the
package itself. The inclusion of larger health warnings is clearly a parallel
issue (see below) but we believe the worst case is a monotone colour being
required for all brands of all companies. This would encourage down trading to
lower price and substantially lower manufacturer margin cigarettes. Over time,
the lack of brand imagery could reasonably be thought likely to reduce the
level of appeal of cigarettes in general to image- conscious upwardly mobile
young adults. Ban on product descriptors 'Light' and 'Mild'. A related area that the WHO is attempting to ban is
product descriptors such a, 'Light', 'Ultra Light' and 'Mild', which are
thought by the WHO to mislead the public on the relative levels of risk
attaching to the product. It seems that Philip Morris, as the leader of the low-tar
segment, with Marlboro Lights, is the most at risk, but all the companies we
follow benefit to some extent from the sales of light brands extensions. Note
that it appears that light families, such as Kent and Silk Cut, would not be
affected. If the WHO were to agree and ratify a treaty that
included a ban on product descriptors, we believe that the companies we follow
would come under political pressure to comply. This could be despite local
cigarette companies in emerging markets continuing to use these descriptors at
a competitive advantage. Health warnings The working group is likely to work to require that
health warnings be put on all cigarette packets worldwide. Note that this would
not have a direct impact on the companies we cover as none of them sells
cigarettes without health warning labels. In fact, we would argue that the
companies we follow would benefit from this requirement given that it would
result in competitors having to put health warnings on packets for the first
time. The companies we follow make it clear that they
support the use of health warnings. Philip Morris states that it supports
legislation that requires cigarette manufacturers to place health warnings on
packages and in advertisements, and believes that government health officials
should determine the text of the message. The main area of conflict between the industry and the
WHO will be, in our opinion, on the size and positioning of the health
warnings. The WHO is likely to seek to increase the size of health warnings, as
the EU is currently attempting to do through a draft directive. This is more of
an issue for the manufacturers, since it reduces the amount of the pack surface
that is available to communicate the brand message. Philip Morris says that it
opposes health warnings that would "dominate the cigarette packages".
The tobacco companies clearly need to be able to preserve the ability to
communicate brand imagery. Canada has gone farthest with health warnings, which
now include graphic photographs of diseased body organs as an attempt to
communicate the risks of smoking. The EC is currently drafting legislation that will
increase the size of health warnings in Europe. The proposed legislation will
require that the health warning covers 30% of the front of the packet and 40%
of the back of the packet. The commission is also thought to be considering
requiring the same graphic images that are used in Canada. Areas with Potential Upside for the Industry Although an adversarial approach to WHO and tobacco
industry communication has developed, there are, in our opinion, several areas
where the FCTC could be of benefit to the industry. This is particularly true
in areas of political controversy such as youth smoking, where a level playing
field for all manufacturers with consistently applied rules could help to
reduce the political pressure on the industry. Safer Cigarettes The tobacco industry would like to cooperate with
governments and health bodies on research into producing a safer cigarette. To
date, the industry has felt little incentive to invest meaningful resources in
this area (other than lower tar products) because of two factors: 1) the
possibility of litigation if the product were to be subsequently criticised as
making false health claims; and 2) the
limited ability to advertise the product's health benefits as a differentiating
point. In its submission to the WHO, Philip Morris sets out
its current research programme; innovations have, however, been few. Philip
Morris has set out how it would like to see efforts in this area develop:
It is the final point that is vital if the safer
cigarette is to achieve commercial success, and it is on this point that the
WHO is unlikely, in our opinion, to be willing to cooperate. We believe that
the WHO would see the public advertising of a cigarette's reduced health risk
as a serious hindrance to efforts to encourage people to quit and may even
encourage people to smoke who otherwise would not have done so. We believe that the global tobacco leaders Philip
Morris and BAT would be most likely to benefit from changes in attitude to
safer cigarette development. We base this on both companies' scale and ability
to fund large R&D efforts. However, Philip Morris is the leader in this
area and would, in our opinion, be the most advantaged by any change in
government attitude to communicating the benefits of lower risk products. Minimum age for smoking The tobacco industry is lobbying for the introduction
of a worldwide minimum age for smoking. Philip Morris notes that, of the WHO's
191 member states, nearly 60% do not have any age restrictions at all on the
sale of tobacco products. We see this as an area in which the WHO should be
able to work with the industry to achieve a common goal, although it is likely
that implementation will be slow in some countries. When age restrictions were
put in place in 1999 in Rumania, Hungary and parts of India, there was little
noteworthy impact on industry volumes in these markets, reflecting the fact
that while underage smoking tends to be politically high profile, it has a low
share of the overall market. Over time, age restrictions will benefit the
industry in reducing the political pressure surrounding the youth smoking
issue, in our opinion. Counterfeit product A subject related to smuggling is the recent rapid
growth in the production of counterfeit cigarettes, particularly in China. We
estimate that counterfeit cigarettes account for a significant part of total
world consumption of cigarettes. On Philip Morris's estimates, it is
approximately 30% more profitable for smugglers of cigarettes in China to
smuggle counterfeit product than to smuggle legitimate product. There is a clear risk to the industry, in our opinion,
that if measures to cap smuggling are introduced, the growth in counterfeit
product just accelerates to compensate. We believe the company most at risk is BAT, which has
substantial market positions in areas where smuggling is an issue, such as
Brazil, China and south-east Asia. Imperial Tobacco and Gallaher may also be at some risk
given the long-term move in the UK market to non-UK duty paid cigarettes
(currently 30% of the market): if the UK Manufacturers where unable to supply
these cigarettes there would be a real risk of counterfeit product becoming an
issue in the UK market. Sensible regulations supported by tobacco Industry We believe that the tobacco industry supports
increased regulation (see appendix for a discussion of the issues in the US). Time Line It is intended that the Framework Convention on
Tobacco Control (FCTC) be adopted by May 2003, but we see significant problems
in meeting this deadline. What has been achieved so far On May 24, 1999 the
governing body of the WHO, the World Health Assembly (WHA), unanimously voted
for a resolution that would begin work on a Framework Convention an Tobacco
Control. A team has been set up, based in Geneva, to coordinate
activities. There has been one round of negotiations so far in October 2000.
This set out areas that should be covered by the FCTC. The next round of
negotiations will be from April 30 to May 6, 2001 and will concentrate on the
more precise measures to be adopted. The negotiations are likely to take place
twice a year in April and October, leading to increasingly detailed agreements
on the measures to be included in the FCTC and any additional tobacco
protocols. Health ministers must get ratification from two-thirds
of national governments One of the key challenges that the WHO will face is
ensuring that the interests of all ministries are included in the negotiation
process. In many countries, including the US and the UK,
national government must ratify the WHO treaty before it becomes embodied in
law. We see the current low level of involvement of
ministers for finance, trade, employment and agriculture as likely to result in
friction between national government interests and those of the WHO. For
example, a member state's minister for health might see increased excise tax as
an important measure to reduce cigarette consumption, but other ministers might
be concerned by the impact of large excise tax increases on tax take,
employment and trade balances, leading to the national government refusing to
ratify the FCTC. The WHO believes that the process of involving both
other UN agencies and ministers of all interested departments is on track. It
is likely that these interested parties will take an increasingly large part in
the negotiation process. Likely over-run at timetable It is important to remember that this is the first
time that the WHO will have attempted to negotiate a legally binding
convention, so that any time line is unlikely to be adhered to. Note that
comparable negotiations of the UN Climate Control Treaty over-ran by eight
years. While we think it possible that a broad framework
(with general rather than specific legal obligations) could be agreed by 2003,
we see it as likely that the timetable to develop detailed protocols on
specific issues will be very much longer. In other words, it should be
relatively easy to reach agreement where the near-term practical implications
are limited, but when specific legal requirements come to be negotiated we
expect significantly more delays. Limited Ability to Enforce on National Governments ...
but Tobacco Industry May Need to Comply Although the FCTC and protocols are technically
legally binding once they arc ratified by national government, the WHO does not
have the direct legal right to enforce the protocols that it passes. Its
primary method of enforcement is to encourage implementation through diplomatic
pressure. The WHO sets out three areas where it believes that it can work to
bring about the implementation of the international agreements:
The WHO accepts that treaties rarely cause a state to
immediately reverse its behaviour, but believes that they can produce
significant shifts in behaviour, "both because they change a state's
calculation of costs and benefits, and because most states feel that they ought
to comply with their promises." Politically, the global tobacco companies will need to
comply where possible We believe that the major tobacco companies that we
follow seek to resolve areas of controversy, such as youth smoking and second
hand (or environmental tobacco) smoke, and move to an environment where
cigarette manufacturers are treated in a similar way to other consumer
companies producing a legal product. Given this strategy we believe that it would be a
tactical blunder for the tobacco companies to fail (where able) to comply with
a WHO treaty, even if it is not enacted into national law. It would be a high
profile media event if a WHO protocol ratified by the majority of member states
were not adhered to where possible by a major western tobacco company,
particularly in an emerging market setting. To be clear, however, the tobacco
companies that we cover all comply with existing national law and generally
have higher levels of internal regulation than is currently required by most
national governments. There will be some areas where compliance will not be
possible. For example, the tobacco companies cannot themselves comply with a
protocol on the minimum level of excise tax. In many other areas the tobacco companies will be able
to comply with WHO protocols even if national governments and local tobacco
companies do not. We see these areas as including, among others: advertising
promotion and sponsorship, health warnings, product descriptors, design and
ingredients disclosure. Loss of emerging market advertising a risk In our opinion, one of the biggest risk areas will be advertising and promotion r |
