Document 03
Ref. Ares(2019)7058576 - 14/11/2019
Expert Revision of the Draft Interim Report I from the Implementation Study
on Traceability and Security Features in the Field of Tobacco Products.
Author:
Date: September 22, 2016
I have read the draft Interim Report I v0.2 (‘Interim Report’) titled Implementation
Study for EU Tobacco Traceability (N° Chafea/2015/Health/40) issued by the
consortium of PwC and Everis (hereafter "the consortium") 13/09/2016 The main
inputs for the Interim Report are the Feasibility Study (Chafea’s tender n°
EAHC/2013/Health/11 concerning the provision of an analysis and feasibility
assessment regarding EU systems for tracking and tracing of tobacco products and for
security features) published on the 7th of May 2015 and the Inception Impact
Assessment published by the European Commission on the 5th of July 2016.
I have participated (via teleconference) in the one-day workshop with other
independent experts, the representatives of the consortium, and the representatives of
the Directorate-General for Health and Food Safety of the European Commission (DG
SANTE).
This document contains my written comments on the draft Interim Report according
to the specifications of purchase order SANTE/2016/B2/045/2 issued after tender n°
2016/B2/035 Expert revision of the Draft Interim Report I from the Implementation
Study on traceability and security features in the field of tobacco products.
My remarks made during the workshop and comments provided in this document are
based on my knowledge and experience as an economist working on tobacco control
issues for over 18 years. I have specific knowledge and expertise in at least three
areas relevant for the task under tender n° 2016/B2/035. I have specific knowledge
about the illicit trade in tobacco products, I understand and conduct cost/benefit
assessments related to public health interventions, and I am familiar with the
traceability concepts and solutions proposed to design and implement tracking and
tracing for tobacco products.
I have checked the draft Interim Report for completeness, comprehensiveness,
quality, and consistency in view of the tasks specified in N° Chafea/2015/Health/40.
The Interim Report builds nicely on the wealth of information provided in the
Feasibility Study. It summarizes the main findings of the Feasibility Study and points
to advantages and disadvantages of each Option. It also provides additional
information and data and presents them in a format that will be useful for moving the
project forward towards the Final Report (Work Package 4).
The Interim Report points out that no solution offered in the Feasibility Study is
perfect and highlights incoherencies between different Options' implications in the
Feasibility Study (p. 27). I concur with the conclusion of the Interim Report on this
point.
I also concur with the Interim Report's legal analysis on p. 28 where it states that the
requirements of Directive 2014/40/EU of the European Parliament and the Council
(‘TPD’) and of the WHO Framework Convention on Tobacco Control (‘FCTC’)
Protocol discard all the options based on solutions entirely operated by the industry
such as Option 1 and Option 3a.
The TPD articulates a number of purposes for further regulating the manufacture and
distribution of tobacco products and that regulation includes T&T. One purpose is to
promote the smooth functioning of the internal market (Whereas clause (2), p.1).
Another purpose of the TPD recognizes that, “Legislative action at Union level is also
necessary in order to implement the WHO Framework Convention on Tobacco
Control (‘FCTC’) of May 2003, the provisions of which are binding on the Union and
its Member States.” (Whereas clauses (7) and (8)). Most important, the TPD spells
out the reason for implementing a T&T system in Whereas clauses (29), (30), and
(31), where it discusses illicit cigarette trade and stresses the importance of T&T’s
independence from potential influence. These purposes for greater regulation of
tobacco products would be thwarted if the tobacco industry were permitted to manage
and implement T&T.
The potential risks posed by industry-operated T&T are too great, especially given the
industry’s propensity to divert product into illicit channels (see, for example, the
recent case in which British American Tobacco was fined £650,000 by the U.K.
government for oversupplying cigarettes into the low-tax Belgian market, from which
they could be smuggled back into the U.K.(Reuters, Nov. 13, 2014). If a tobacco
company, in operating T&T, somehow failed to subject products to all features of the
T&T system so that they could be diverted, the system would be rendered ineffective
as to those products.
The Interim Report states, "From a legal standpoint, an industry-operated solution
may be in conflict with Article 15.8 of the TPD and Articles 8.2 and 8.12 of the
FCTC Protocol that require the system to be kept under control of the competent
authorities." In fact, an industry-operated solution
is in direct conflict with Articles
8.2 and 8.12 of the FCTC Protocol.
Option 3b would also undermine the smooth functioning of the internal market
because different Member States (‘MS’) could choose different providers for T&T
whose systems may present a challenge for compatibility, thus adding complexity to
the solution and pushing up costs. Even though Option 3b would provide a lot of
autonomy for the MS, it would also introduce a level of complexity that could
jeopardize the functionality of the T&T system. For that reason, I favor a T&T system
that would introduce a uniform standard across the EU, as the TPD indicates. Such a
system will be more effective and easier and cheaper to implement. Data storing and
processing should be centralized to simplify compliance and enforcement. The
Interim Report adequately critiques the weaknesses of the Option 3 of the Feasibility
Study.
Option 4 for T&T represents an outlier among the options in the sense that it answers
a different question than Options 1 – 3. Options 1-- 3 deal primarily with governance
(Who? in the Inception Impact Assessment), but Option 4 deals with the mechanism
of implementation (How? in the Inception Impact Assessment). It confuses the issue
of the "Governance model" with the "Method of adding a security feature". The
Interim Report should critique Option 4 for T&T on these grounds in addition to the
faults it addresses.
After reading and digesting the information provided in the Interim Report, I believe
that the way forward is to further develop Option 2 for T&T described in the
Feasibility Study, because it will best accomplish the purposes of the TPD. Given that
illicit trade undermines both internal market functioning and health, and that the terms
of the FCTC are binding on MS, it would be a mistake to pursue any option with an
industry-operated solution. The Interim Report is explicit in this regard.
Other Comments
Most of the Interim Report‘s criticisms of Option 2 for T&T can apply to all the other
Options as well. However, the Interim Report offers some improvements for Option
2. It suggests, for example, that the tobacco traceability query should be developed
and maintained by the competent authorities (as opposed to the Solution Providers).
The Interim Report engenders some confusion by stating in one place that Option 2
features a distributed database (p.111) and elsewhere that Option 2 is the only one that
suggests a centralized database (e.g. p 36, 109), while only Options 1, 3, and 4 feature
a distributed database (p. 24). The Report then goes on to describe how, if access to
data is not immediate and easy, data mining and analysis, and hence surveillance, will
be difficult to perform properly (p. 111). On p. 116, this distributed data access
complexity is attributed to Option 1 even though Option 3 is discussed on this page,
which is a bit confusing.
Two aspects of the Options have the potential to impact this access issue: technical
and governance. What is clear is that any T&T solution must meet or exceed the
standards for performance and security. Whether to go with a distributed or
centralized database should be decided on the basis of its ability to meet or exceed
these standards. It is important to note that relevant authorities have already reported
difficulty getting access to Codentify data1 in countries where this industry solution
has been piloted. I personally favor the centralized database, since the only potential
weaknesses are the level of performance and security, both solvable given the current
state of technology.
The issue of the database centralization/decentralization is separate from the
governance issue. Any industry-operated solution runs the risk of being ineffective.
This issue arises, for example, regarding who will provide the equipment for marking
products, validation, and reading the unique identifiers on all forms of packages. The
Feasibility Study assumes in Option 2 for T&T that the Solution Provider will provide
this equipment. In some comments, the Interim Report also assumes that it will be the
responsibility of Solution Providers (p.131, 133). However, the TPD states that the
tobacco manufacturers will “provide” the equipment to all economic operators in the
supply chain (Article 15.7). In this regard, the Interim Report introduces additional
confusion on p. 109 where it interchangeably uses the words "equipment" and
"infrastructure".
The Feasibility Study suggests that the Distribution Chain Operators provide
"infrastructure and networks connectivity", but it does not seem to suggest that these
1 European Commission. Study on the measuring and reducing of administrative costs
for economic operators and tax authorities and obtaining in parallel a higher level of
compliance and security in imposing excise duties on tobacco products; 2014.
operators would also provide the equipment. In my opinion, the Solution Providers
should provide the equipment.
The Interim Report states that Option 2 for T&T will have a high impact on tobacco
industry production. As far as I know this has not been the experience of countries
where partial T&T systems have been implemented using a 3rd party provider (e.g.
Kenya, Brazil, Turkey, etc.). It would be good to bring the experience of other
countries in controlling their cigarette supply chain to this report to better assess the
anticipated impact with empirical evidence.
The Interim Report could consider whether human readable codes (the data carrier)
do need to apply to all packaging sizes. Perhaps human readability is important for
packs and cartons, but not for master cases or pallets.
The Interim Report should mention that any solution for T&T needs to meet the
guidelines proposed by European Interoperability Strategy (EIS).
The Interim Report lists EMCS in the Glossary and Terms of Reference, but does not
mention it in the body of the text at all. What will T&T mean for EMCS?
Page 85 of the Feasibility Study mentions that the tobacco product supply chain
already has a standard for data sharing. It would be beneficial to explore this a bit
more, perhaps in the next phase of the project, so that the systems already in place are
better understood.
I think that the Feasibility Study describes very well the characteristics of a T&T
system on p. 82. It would be good to reflect on those characteristics either in the
Interim Report or in future work packages.
The Interim Report handles the critique of the security features options proposed by
the Feasibility Study quite well, leaving some room for further analysis, given the fast
pace of this industry. I only disagree with the report's interpretation that the
Feasibility Study only considers stamps as the data carrier. I do not see it that way.
(See, for example, section 9.1.1. Method of Application on p. 240 of the Feasibility
Study.)
One of the weakest parts of the Feasibility Study is its cost benefit analysis. It is
criticized to some extent in the Interim Report, but the critique could go a bit further.
My main concerns with the cost benefit analysis are the following:
1. The expected efficiency of the T&T system according the Feasibility Study is
low in my opinion. For example, it assumes that there will be a 30% reduction
in contraband. This is based on information from the industry that an effective
tracking and tracing system reduces illicit contraband by 30% in five years2.
Why is it only 30% if the contraband represents legal industry products that
leaked into the illegal supply chain? The experience in countries that have
2 Cited in the Inception Impact Assessment, but taken from the TPD Impact
Assessment, p. 108.
implemented even partial T&T systems shows much greater reductions in
contraband.
2. The assumptions behind many of the calculations are not explicit. For
example, we do not know how the analysis splits the impact between
quitting/non-initiating and reduced consumption (among those who will
continue to smoke). There are no details about the cost saving calculations and
the assumptions used either.
3. The calculation assumes that a smoker dies 14 years earlier than people who
never smoked. No citation is provided. The latest evidence presented in the
US Surgeon General Report 2014 states that this loss is 12 years for males and
11 years for females, for example
(http://www.surgeongeneral.gov/library/reports/50-years-of-
progress/index.html).
4. The calculation estimates higher tax revenue, but forgets to estimate higher
industry profits from the reduction in the supply of counterfeits and illicit
whites.
On a few occasions, the Interim Report is concerned about the costs to tobacco
manufacturers. Just a side note: if the goal of the TPD is to improve public health, the
costs to tobacco manufacturers should be regarded as a plus (not as a minus), since
these costs will increase product prices, and thus reduce their consumption.
Minor comments:
Not all abbreviations are listed in Annex D: Glossary and Terms of Reference – e.g.
SLA (p. 22 and elsewhere), IS (p. 61). The terms in Annex D are not in alphabetical
order – e.g. SME is below TPD.
Typos – e.g. p. 106, 110 (DSPDSPs), p. 108 (ore)
Missing reference p.24, Figure 7
The report uses both "decentralised" and "decentralized".