PROVINCES GEARING UP TO BATTLE WITH `BIG TOBACCO'

Bolstered by U.S. news, B.C. launched its own lawsuit. Others are following suit

Inspired by the huge success of their peers south of the border, Canadian
provinces are beginning to line up behind British Columbia in its
multi-billion-dollar lawsuit against this country's tobacco industry.

Ontario Liberal leader Dalton McGuinty promises he'll join the fight if
elected premier, Newfoundland's Brian Tobin has pledged to come on board,
and Manitoba's Conservative government is already in serious talks with
B.C.

The dollars at stake are huge.

Two months ago, the United States tobacco industry agreed to pay the states
$250 billion (U.S.) - or about $400 billion Cdn. - over the next 25 years,
to compensate for the health-care costs they incur treating tobacco-related
illnesses.

But whether that boon to the states is really a blow to the industry
remains in question.

The share prices of U.S. tobacco companies rose smartly after the
settlement was announced - partly because it removed uncertainty, but also
because the industry's payout of $10 billion a year will ultimately be
borne by smokers through higher prices, not by the companies.

What is clear, however, is the lawsuit's attraction to provincial
governments struggling with huge health-care costs. B.C. alone reckons it
spends about $400 million a year dealing with ailments linked to smoking.

``When the news broke out in the States of the billion dollar reward, it
was like a bucket of water on the heads of politicians in Canada,''
McGuinty said in an interview last week. ``It woke us up to the
possibilities here.''

The most recent figures from Health Canada show 45,215 Canadians died of
tobacco-related illnesses in 1996, up from 37,330 a decade earlier. A
report made public by Health Canada late last year found tobacco-related
illnesses directly cost Canada's health-care system $3.5 billion a year.
But the report estimates the total economic cost of tobacco-related
illnesses to Canadian society is $15 billion per year.

``We estimate $2 billion is lost each year in work absenteeism,'' said
Murray Kaiserman, a researcher in Health Canada's tobacco control office,
and a co-author of the report. ``The rest of the money comes from the lost
income of smokers who die prematurely.''

Armed with study results, many provinces are trumpeting a united provincial
front in suing the tobacco industry for health-care compensation.

``I think it would be great if all the provinces joined the lawsuit,''
McGuinty said. ``Tobacco alone costs Ontario's health-care system $1.1
billion a year. We should get some (of that money) back.''

David Sweanor, a lawyer with the Non-Smokers Rights Association in Toronto,
thinks the provinces should sue the three companies that make up Canada's
tobacco industry for at least $40 billion.

``A decent ballpark figure would be one tenth the U.S. cost,'' said
Sweanor. ``So that would be around $40 billion Canadian.''

While that might sound like an enormous amount for any industry to pay, it
might actually have no effect on Imperial Tobacco Ltd., Rothmans Benson &
Hedges Inc., and RJR Macdonald Inc. - Canada's three tobacco companies.

The U.S. tobacco industry has coped with the financial strain of its $250
billion out-of-court settlement by inflating the retail price of cigarettes
by 45 cents (U.S.) a pack.

Gary Black is a tobacco analyst at Sanford Bernstein & Co., an investment
management firm in Manhattan. The stock price of the U.S. tobacco companies
jumped up on news of the settlement in November, he said.

``Investors saw the settlement as positive, because it removed the
uncertainty of litigation,'' he said. ``Investors hate uncertainty,
especially when it's brought on by a huge lawsuit. Remove that and people
will invest again.''

But what about the huge cost to the companies? ``You can't think of it as a
$250 billion settlement,'' he said. ``Tobacco settlements aren't real. What
it is, is a 45-cent increase in the price per pack. The real economic
impact of a tobacco lawsuit is in the consumers' pockets.''

Black went on to say the U.S. tobacco companies will lose about 7 per cent
of their consumption level due to the price increase, but they'll get that
back when consumers adjust to the increase and through bolstered
advertising campaigns.

``Even though it sounds like a large sum, the truth is that there's no real
economic loss to these companies,'' he said.

Nevertheless, Canada's tobacco companies aren't amused by the prospect of
being sued by the provinces.

``These lawsuits are very hypocritical,'' said John McDonald, director of
public affairs for Rothmans Benson & Hedges Inc.

``It's always been popular for politicians to claim they're going to be
tough on the tobacco industry. But if you look at the revenue generated,
the lion's share goes to the government.''

Canadians spent $7.6 billion buying cigarettes and other tobacco products
in 1997. The federal government and the provinces took $4 billion of that
in excise taxes.

The Canadian Tobacco Manufacturers Council estimates the government took
another $1 billion in PST and GST, bringing the governments' final take in
1997 to $5 billion - 66 per cent, or two-thirds of the $7.6 billion in
cigarette sales.

For the provinces to turn around and sue the tobacco firms is like to
slaying one of their most productive golden geese, the industry says.

``The truth is that the main beneficiaries of the tobacco industry are the
governments,'' said Michel Descoteaux, a spokesperson for Imperial Tobacco
Ltd., the largest tobacco company in Canada. ``They take more money than
any of the companies see.''

The huge profits Canadian governments reap from the tobacco industry may
account for what critics call the slow movement of legislation designed to
curb the advertising and sales practices of the tobacco companies.

The federal health department planned to impose a partial restriction on
tobacco companies' sponsorship of sports events by Oct. 1, 1998. But last
year Federal Health Minister Allan Rock announced that deadline was being
extended to Oct. 1, 2000.

According to Sweanor, the tobacco companies have a very powerful political
lobby that threatens the government with job losses and the closing of
cigarette plants if they implement legislation to curb advertising or
impose higher taxes.

``These companies have lost the war on science, they've lost the war on
economics, the only way they can survive is by winning the war on
politics,'' he said. ``Anytime the government threatens legislation the
companies don't like, they say they'll close plants in places like Montreal
and Quebec city, which is a real political hot potato.''

Robert Allen, a professor of economics at the University of British
Columbia, wrote a study on the employment impact of Canadian tobacco
policy. He notes that the companies operate with very few workers less than
4,000 employees nationwide this year.

The money spent on cigarettes is disposable income that consumers will
spend in other sectors if they stop smoking. Allen's conclusion was that
shutting down tobacco manufacturing in Canada would have little impact,
except on the federal and provincial governments which would lose the
revenue from excise taxes.

Making the political quagmire worse is the fact that many politicians both
past and present have graced the boards of the tobacco companies.

After his political career was over, former Prime Minister Louis St.
Laurent joined the board of Rothmans. And before Finance Minister Paul
Martin was elected to parliament in 1988, he sat as a director with Imasco
Ltd., the parent company of Imperial Tobacco.

Bernard Roy, former chief of staff to Brian Mulroney, currently sits on the
Imasco board. Members are paid a salary of more than $50,000 a year plus
$1,000 for each board meeting they attend.

The current chairman of Rothmans Benson & Hedges Inc. is Progressive
Conservative senator William Kelly, and until recently another Progressive
Conservative senator, Roch Bolduc, also sat on the Rothmans board.

``There's definitely hypocrisy on the government regulatory side,'' said
Michael Perley, director of the Ontario Campaign for Action On Tobacco.
``But the end question for a lawsuit is, do the taxes taken in by the
government equal the over-all cost to our health system? And the evidence
says no.''

Rothmans' McDonald said the tobacco companies are tired of government
threats, the tightening of legislation, and are weary of the possibility
all the provinces will now turn around and sue them.

``Cigarettes are a legal product,'' he said. ``The governments regulated
it, and are taking the lions share of the profits. And now they're going to
turn around and sue us?''

Descoteaux said the three tobacco companies will fight to defend themselves
in court.

``We don't look forward to a lawsuit,'' he said. ``They are expensive to
defend and drain resources. But we are confident that if it comes to that,
we'll successfully defend our record as a business.''

Many health-care experts worry that even if a settlement is reached in
Canada, the companies will just jack up the price of cigarettes, as they
did in the U.S.

Rob Cunningham, a lawyer at the Canadian Cancer Society, said even though
consumption of cigarettes decreases by about 4 per cent with every 10 per
cent price increase, governments can't sue the tobacco companies and then
sit back.

Rather, politicians need to stop working for the tobacco industry and start
enacting more legislation to change their corporate behaviour, Cunningham
said.

``The tobacco companies are the worst case of corporate misbehaviour in
Canadian history,'' Cunningham said. ``They've caused the premature deaths
of hundreds of thousands of people, and deny it.''

Cunningham went on to say that Canada's public health-care system makes the
case for a lawsuit stronger than in the U.S., where the majority of medical
care is privatized.

``Our universal health-care system is paid for by taxpayers,'' he said.

``And that makes the case for a lawsuit stronger in Canada than in the
States. It really makes such economic sense that I think you'll see lots of
provinces file.''