ADVOCACY

Track & Trace

Track and trace is a system for monitoring the manufacturing and distribution of tobacco products, with the stated aim of combatting the illegal trade of tobacco products in Europe. The 2014 EU Tobacco Products Directive (“TPD”) requires the establishment of a Europe-wide tracking and tracing system by 2019 for cigarettes and fine-cut tobacco, and by 2024 for all other tobacco products. On 16 April 2018, just a year before the expected implementation deadline, the European Commission (DG SANTE) published in the Official Journal of the European Union the Implementing and Delegated Acts establishing a tracking and tracing system for tobacco products. According to these Acts, each tobacco package will have to be scanned up to five times before it reaches shops. This process requires an entirely new level of data transfer, as well as a highly developed IT infrastructure, which is still to be designed. Finally and most importantly, the entire system needs to be tested to make sure it is operationally feasible.

Tracking and tracing tobacco products in the EU means that the movements of around 29 billion tobacco packages per year are monitored, or 80 million units per day.

From a technical perspective, the system requires that each European manufacturer or importer of tobacco products requests a ‘Unique Identifier’ (UI) for each individual package from an independent organisation (‘ID Issuer’), to be appointed by the Member States. Each manufacturer or importer of tobacco products must also set up a database (‘Primary Repository’) to store all the data related to every individual package, and to copy all information into an EU-wide database (‘Secondary Repository’). This second database will be operated by another independent third-party to be appointed by the Commission four months prior to the implementation deadline. In addition, each tobacco packaging unit will also carry a ‘security feature’ which must consist of at least five authentication elements, to be determined by each Member States for its own market.

Track & trace in a nutshell

ESTA believes that this secondary legislation is a clear example of bad law-making, and is far removed from the Commission’s avowed commitment to better regulation. These Acts lack coherence, setting standards where no competency exists while failing to set standards where they are mandated and badly needed. Where it correctly sets standards, many are too complex, making them unlikely to be internationally shared.

The problems with the regulation are myriad. For example, according to the implementing regulation, the competent ID Issuer is the entity appointed in the Member State in which the products are manufactured or imported, and should be recognised as such by other Member States. However, the regulation also allows Member States to derogate from this mutual recognition principle, mandating that its own appointed ID Issuer is the only competent entity for its market. This entirely defeats the internal market objective of the European Tobacco Products Directive. As a further example, the Decision on security features completely ignores the harmonisation purpose of the 2014 TPD by not setting uniform standards.

Many elements that are crucial for the operation of the track & trace system are still unknown today. For example, the obligation for tobacco products to carry a Unique Identifier also applies to products intended for export outside EU jurisdictions, even though these do not fall under the scope of the 2014 TPD. However, the Commission failed to anticipate that the EU Unique Identifier could be incompatible with existing packaging regulations in third countries. For example, plain packaging regulations in Australia and New Zealand prevent European manufacturers from exporting EU-made products to these countries, and it is still unclear whether EU companies will be able to as of May 2019.

Ultimately, implementing this tracking & tracing system will be extremely costly for mid-sized and smaller firms, risking further market consolidation. It obliges all companies in the tobacco supply chain to reorganise and modify their business and trading practices beyond what was necessary to establish a well-functioning track and trace system, as specified in the TPD. Whilst the Impact Assessment indicates an overall and annualised cost of 0,005216 EUR per packaging unit, an estimate which was solely based on the cigarette production speed and volume of the largest companies, it is already clear from the little information that is available that this system will cost 10 to 15 times more for smaller companies manufacturing fine-cut tobacco.

Tracking and tracing tobacco products in the EU means that the movements of around 29 billion tobacco packages per year are monitored, or 80 million units per day.

The European Commission adopted the Track & Trace Regulation disregarding smaller, mid-sized and family-owned companies. It left manufacturers and Member States with the responsibility to implement an incredibly complex system with insufficient standards, too little harmonisation, inadequate support, and not enough time. For these reasons, Member States should allow flexibility to ensure the system can become operational by the May 2019 deadline.

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Tracking, Tracing & Authentication

The track and trace system proposed by the European Commission is unnecessarily costly, burdensome and complicated, both for those involved in the industry and EU Member States. By purposely pursuing an infeasible policy option, the Commission is exceeding its mandate in certain areas, while failing to provide the legal clarity required by the EU’s own Tobacco Products Directive (“TPD”) under Articles 15 and 16.

The proposed system is multiplying third parties and increasing the bureaucratic burden and costs for operators and Member States. The burdensome proposal also shows a lack of understanding of trading practices. By making it virtually impossible for smaller and mid-­sized companies to survive in the market, it would further concentrate the market in the hands of the largest companies. The proposed governance model for the track and trace system will also perversely stand in the way of establishing an EU-­wide surveillance system to combat the illegal sale of tobacco.

Read ESTA’s Position Paper on the Commission’s Draft Implementing Regulation

Unique Identifier (UID)

The Commission’s proposal mandates that all tobacco products must have a unique identifier (UI) on the pack to comply with the tracking, tracing and authentication requirements. The draft Regulation proposal to issue UIs for products before production takes place is unworkable for smaller producers. The UI ignores the particular requirements of niche products such as traditional European snuff, which is packaged in small containers. Constant changes to the rules would require entire product packaging lines to be rebuilt, leading to economic waste.

While the Commission correctly understands that the timestamp can only be applied on the packaging line as individual unit packages are produced, it has proposed that the timestamp be added separately to the UI, which must be requested in advance of production. Unless the UI and timestamp are created at the same time, the timestamp can never form part of the unique identifier, as clearly specified in the Directive.

In order to avoid these issues, the UI should be generated and applied at the time of packaging. The choice of ID issuer should also be led by manufacturers, according to standards set and audited by the Commission. This is the only way to avoid unnecessary complexity and to comply with the TPD.

The UI requirement in the draft Regulation will also capture products for export outside the EU. This would severely distort a vital market for European tobacco companies, such as fine-­cut tobacco producers that manufacture in western Europe for a global customer base. A number of third countries, such as Australia, have regulations insisting that only approved national markings appear on packaging. Under the proposed rules, tobacco products made in the EU would be effectively banned from these countries, thereby undermining European manufacturers and distorting competition. While large operators could move their facilities outside of the EU, the cost of this would be prohibitive for smaller producers, hence leading to further consolidation within the sector.

Security Features

The proposed security features are too diverse and complex to be practical in the fight against illegal trade. While a combination of overt and covert authentication elements is most effective in tackling counterfeit goods and Intellectual Property Rights infringement, the combination of five of them is disproportional and unrealistic, especially for products that are often packaged in very small sizes. The structure of the security feature and authentication elements should be compatible with current packaging materials used for traditional and niche tobacco products, which are mainly manufactured by smaller and mid-sized companies. By not acknowledging these limitations, the Commission’s draft decision threatens smaller operators, and would lead to further consolidation of the sector.

The Commission’s draft proposal also mandates the introduction of an anti-tampering device on production lines, supplied by an independent commercial third party. The introduction of an anti‐tampering device, besides increasing the complexity of the system, cannot be simultaneously integrated into the packaging line and be independent from the manufacturers. Furthermore, this provision is not even included in the Tobacco Products Directive. This overstep of the Commission’s mandate raises legal and liability concerns, and fails to ensure compliance with European competition laws.

The Commission’s proposal wrongly assumes that manufacturers can themselves complete tax stamps with additional types of authentication elements, if so lacking. In all national jurisdictions, tax stamps can only be applied without further changes and the Directive does not allow any tax stamp as the security feature if they do not comply with all the standards set by the Implementing Decision. Tax stamps cannot therefore be complemented with authentication elements by the manufacturer, as the draft Decision suggests.

In the few Member States that are not using tax stamps, smaller and mid­‐sized companies will be disadvantaged as they will have to bear the full cost of the technologies for the combination of five authentication elements. In the 22 other Member States using tax stamps, the cost of compliance upgrades will be supported by the State, if tax stamps are used as the security feature.

Read ESTA’s Position Paper on the Commission’s Draft Implementing Decision

Impact on Small and Mid-­Sized Firms

It is essential for any track and trace system to reflect industry practice and the different specifications of different markets. In particular, the system must be sensitive to the practices of smaller and mid-­sized firms, which have different business models, production methods and modes of distribution compared to larger cigarette manufacturers.

The Commission has so far failed to take account of market realities in its track and trace proposal, particularly for smaller producers. Despite indicating that companies can start preparing for the system’s entry into force, the draft Regulation fails to provide the necessary details and specifications for companies to start preparing, such as adequately specifying the security features to be placed on tobacco packaging, or the selection of a third party for an anti-­tampering device.

Furthermore, smaller companies often do not produce enough of a single product and ship their products in mixed consignments of different goods. The proposed track and trace system would be very time consuming and costly for this type of distribution and disproportionately disruptive for small and mid-­sized companies generally, whether they are manufacturers, importers, wholesalers or distributors.

Implementation

Implementing a track and trace system demands significant changes in manufacturer hardware and software, a new database architecture, and multiple changes to production lines. The requirements for the data carrier specified in the draft Regulation are incompatible with current printing technologies, machinery and GS1 standards in use.

The Commission has ruled out pre-­implementation tests and ignored the inevitable risk of technical failure in its proposal. In doing so, the EU’s approach to creating a track and trace system is seriously misguided, and must be reconsidered in order to be viable.