SA needs new post Covid-19 approach to growing illicit tobacco sector
By Zacharia Motsumi
It is becoming increasingly clear that South Africa needs a new post-Covid-19 approach to the tobacco industry and the growing illicit tobacco sector.
If drastic action is not taken, the more than 150 black tobacco farmers struggling to make a living in rural South Africa will soon go out of business.
I’m in the tobacco industry myself and interact regularly with farmers and other processors. And it is no understatement to say that our lives have all been devastated by the economic consequences of the pandemic, in which the legal sale of cigarettes and other tobacco products was banned for almost five months.
All the members of the sector’s value chain organisation, the South Africa Tobacco Transformation Alliance (Satta) – which includes the Black Tobacco Farmers’ Association, BAT South Africa, the Limpopo Tobacco Processors and Tobacco Producers Development – suffered tremendous losses because of their compliance with the law.
The same impact was felt by our extended value-chain partners, small traders and spaza shop owners, of whom the vast majority are black.
But perhaps the biggest loser of all from the Covid-19 pandemic was the national fiscus. It is estimated that excise revenues for the current fiscal year will fall by 32%, while R13.7 billion in excise revenue will be lost to the illicit market.
There can be absolutely no doubt who the biggest winners are – the shady characters who deal in illicit cigarettes.
According to an independent study by the Research Unit on the Economics of Excisable Products at the University of Cape Town, the illicit trade – known as the duty not paid (DNP) trade – grew by an unprecedented 104% during the lockdown period.
What is more concerning is that the ban allowed the development of strong and sophisticated trans-border criminal networks of illicit players. The market has been almost completely taken over by criminal syndicates.
There are two obvious problems as we slowly emerge from the devastation of the pandemic:
The government needs to maximise its recovery of excise on legally sold products, and it needs to find new ways to break the back of those behind illegally sold products.
There are two ways for the government to increase excise revenue from the sale of tobacco products.
Option one is to act in such a way that encourages increased legal sales volumes, which will increase the amount of revenue. This would mean keeping the price of tobacco products at an affordable level.
Option two is to increase the excise on tobacco products which, in our view, would decrease the number of legal tobacco products being sold and thus decrease the amount of revenue. It would also, we have no doubt, open up more and more space for illicit traders.
We believe that option one – not to increase excise on cigarettes and to keep the prices at current levels – is by far the best option.
Law enforcement agencies must directly tackle the illicit trade in cigarettes. It hinges on setting a “minimum price level” (MPL) for cigarettes. This will enable law enforcement agencies (and consumers) to recognise illegal cigarettes purely by how cheap they are – which is the most obvious sign that excise duties are not being paid.
An MPL strategy would need to be supported by a deterrent criminal penalty regime that includes big fines and jail time for traders who contravene the law.
Zacharia Motsumi is the spokesperson for the SA Tobacco Transformation Alliance.