RIS Ratification of the Framework Convention on Tobacco Control and Consequent Need to Amend the Smoke-Free Environments Regulations

Regulatory Impact And Compliance Cost Statement
Ratification of the Framework Convention on Tobacco Control and Consequent Need to Amend the Smoke-Free Environments Regulations

Date of publication: February 2004

Statement of the Nature of the Problem and the Need for Government Action

1. Negotiations for the Framework Convention on Tobacco Control (FCTC) were successfully concluded in March 2003 and the FCTC was adopted by the 192 countries of the World Health Assembly in May. New Zealand signed the FCTC on 16 June 2003. A National Interest Analysis on the FCTC has subsequently been prepared and this has concluded that there would be a net benefit to New Zealand of ratifying the FCTC.

2. Article 11 of the FCTC requires that all packages of tobacco sold within the jurisdiction of a Party to the FCTC must, within three years of entry into force of the FCTC for that Party, carry health warnings that take up a minimum of 30 percent (and preferably at least 50 percent) of the principal display areas of the packet. New Zealand tobacco products do not currently meet this requirement. While for many tobacco packages this would comprise a small change (most packets of manufactured cigarettes, for example, have warnings that take up 29.17 percent of the principal display areas), some products (for example some small and irregularly shaped tobacco packages) have warnings taking up as little as 15 percent of the packet. The cost of changing packaging is expected to be the same per brand variant, regardless of the magnitude of the change in size. When tobacco packaging requirements were changed in 1999, the Tobacco Institute estimated the likely cost would be $5.7 million.

Statement of the Public Policy Objectives

3. The objective is to enable New Zealand to ratify the FCTC.

Statement of Feasible Options (Regulatory and/or Non-Regulatory) that may Constitute Viable Means for Achieving the Desired Objectives

Status quo

4. The Smoke-free Environments Regulations 1999 set out the required location, size, content and format of warnings, explanatory messages and information on constituents to be displayed on tobacco packaging. For example, the regulations require standard packets of cigarettes to carry health warnings that take up one quarter of the front, and one third of the rear, of the packet. Accordingly, taken together, a total of 29.17 percent of the principal display areas (the front and rear panels) of a standard “flip-top” pack of cigarettes is taken up by warnings.

Other tobacco packets have varying requirements for health warning coverage, often comprising even less coverage of the principal display areas than a standard packet of cigarettes. The size requirements for warnings relate more to the size and shape of the packets, than to the type of product (ie cigarettes, cigars, etc). The regulations also allow an exemption for imported products to carry warnings “substantially to the same effect” as those required by domestic regulations provided they comprise less than 0.2% of the market.

5. Accordingly, the status quo does not enable the Government to ratify the FCTC.

Preferred option: Amendment of the Smoke-free Environments Regulations 1999

6. The existing Smoke-free Environments Regulations 1999 would be amended to expressly state that all tobacco packaging must carry warnings that take up a minimum of 30 percent of the principal display areas of tobacco packets. However, the increase in the minimum size of health warnings on tobacco packets would be delayed until a wider review on tobacco labelling, focussing on optimal tobacco health warnings (size, content, location, format) is completed by the Ministry of Health in 2003/04. If this wider review should conclude that more extensive changes to labelling are required (beyond the 30 percent size commitment detailed in this RIS), then it is likely that an entirely new set of regulations would replace the existing Smoke-free Environments Regulations.

7. Transition times would apply for the change in labelling and the running down of old stocks. These times will be decided after consultation with industry. An exemption is likely to be retained in the regulations for the importation of products with warnings “substantially to the same effect” as those required by domestic regulations provided they comprise less than 0.2% of the market. The term “substantially to the same effect” would be clarified to relate to those warnings that, among other matters, meet the mandatory requirements under the FCTC.

Statement of the net benefits of the proposal, including the total regulatory costs (administrative, compliance and economic costs) and benefits (including non-quantifiable benefits) of the proposal, and other feasible options

Government

8. The benefit of the change to the regulations is that commitment to the making of the regulations would ensure New Zealand’s compliance with Article 11 of the FCTC and hence enable New Zealand to ratify the FCTC.

Tobacco Industry

9. The tobacco industry is defined here as manufacturers, importers, distributors and retailers of tobacco.

10. Implementation costs to tobacco manufacturers and importers arise from making the necessary changes to tobacco packaging. There will be costs associated with the design of new packaging, the making of printing cylinders that print packaging materials, and final proofing of packaging materials, including liaison with the Ministry of Health. The last changes to tobacco packaging (1999) were estimated at the time by the Tobacco Institute as likely to cost the industry approximately $5.7 million (this would have included some packaging for offshore markets (eg in the Pacific)).

11. British American Tobacco has advised that in its view the cost of changing current packaging would be likely to run into the “millions of dollars” (but this estimate would include products that fall below the 0.2% threshold – see paragraph 4 above). Philip Morris has estimated that the costs to that company of giving effect to the minimum changes required under the Convention would amount to approximately $500,000. Using Philip Morris’ estimates of costs, assuming they are accurate and relevant to New Zealand companies as well, and considering the number of brand variants that tobacco manufacturers and importers currently supply to the New Zealand market, it is considered that the cost of the changes to packaging arising from this proposal would be of a similar order to the costs experienced by tobacco companies last time they were required to change packaging ($5.7 million being a high end estimate of these costs).

12. The intent is that the minimum packaging changes required under the FCTC be delayed until a full review of tobacco labelling requirements is undertaken. This will ensure industry has to change packaging only once, and will limit costs.

13. Distributors and retailers source their products from the tobacco companies. The costs to distributors and retailers are expected to be minor as a result of the transition time being provided to run down existing stock.

Smokers

14. There is unlikely to be any impact on cigarette smokers from increasing the size of warnings on those cigarette packets that currently have warnings taking up 29.17 percent of the principal display areas to the minimum 30 percent. It is conceivable that consumers of those tobacco products which currently carry smaller warnings by virtue of their small or irregularly shaped packaging, may notice larger warnings and respond positively to them (in terms of quitting smoking or cutting down). The costs of industry implementing changes to tobacco packaging may be passed on to consumers.

Statement of consultation undertaken

15. The Ministry of Health has consulted with the following departments over the ratification of the FCTC and consequent need to change regulations relating to tobacco health warnings: Environment, Treasury, Te Puni Kokiri, Foreign Affairs & Trade, Economic Development, Justice, Consumer Affairs, Pacific Island Affairs, Youth Affairs, Women’s Affairs, Agriculture and Forestry, Department of Prime Minister and Cabinet, Social Development, Commerce Commission. No departments have expressed concerns over the proposal.

16. Tobacco companies were consulted on tobacco labelling changes required to enable New Zealand to ratify the FCTC. All tobacco companies that responded (British American Tobacco, Imperial Tobacco, Swedish Match, Philip Morris) expressed concern about, and opposition to, Article 11 requirements for warnings to take up a minimum of 30 percent (and preferably at least 50 percent) of the principal display areas on tobacco packets. Other concerns (and responses to these) included that:

Specific health warnings for cigars and pipe tobacco are not appropriate because of the lesser harms from smoking these products. However, while the profile of disease risk from cigars and pipe smoking is different, this does not negate the value of large health warnings (of some form) on cigar and pipe tobacco packaging.

Larger health warnings would be excessive and interfere with trademarks owned by the companies. However, previous analysis has indicated that suggestions of interference with trademarks are erroneous as sufficient area on the pack is left for trade marks. Several other countries (Canada, Brazil, European Union countries) have warnings that take up 50 percent or more of the principal display panels of tobacco packets.

The Trans-Tasman Mutual Recognition Arrangement poses a barrier to ratification. However, in the event that Australia reversed current efforts to improve tobacco labelling and to ratify the FCTC, the possibility of excluding Australian tobacco products from the application of the TTMRA principle could be explored. It is still too early to determine whether such action will be necessary.

Business Compliance Cost Statement

17. Costs will arise from learning and understanding the change to the minimum size of warnings. New Zealand tobacco manufacturers, importers, and retailers will be affected by the proposals.

18. The two New Zealand-based tobacco manufacturers, British American Tobacco (BAT) and Imperial Tobacco, together share approximately 95 percent of the New Zealand tobacco market. They directly employ an estimated 350 and 120 people respectively. There are a number of other multi-nationals with a smaller presence in New Zealand (Philip Morris (an estimated 4.6 percent of the market), Japan Tobacco, Swedish Match, Reemsta). Other, smaller, domestic-based importers source products from off-shore tobacco companies. The domestic-based importers are estimated to share less than 1.0 percent of the tobacco market, and many are transient, trading for a year or two and then disappearing from the market. While the number of people they employ are unknown, they are expected to be small employers with between one and five employees each.

19. There are an estimated 10,000 retailers of tobacco, including supermarket chains, service stations, tobacconists and dairies.

20. While the compliance costs relating to learning about and understanding the new regulatory proposal have not been quantified, the costs are expected to be minor as the tobacco industry is well versed in government regulation and practices.

21. The wider options for future tobacco labelling will be communicated to the tobacco industry in the form of a discussion document.

22. The minimum size requirement for tobacco warnings will be communicated directly (in writing and/or via meeting(s)) to the tobacco industry and it will be made clear that the Government has committed to such changes as a minimum. This will minimise information gathering and assessment costs for industry. Distributors and retailers will be advised via written communication about the transition period for phasing out old stock, once the final content of the regulations has been decided.