R7 cigarettes expose scale of illicit tobacco trade in SA

The illicit trade in tobacco is winning the battle in South Africa. A grave concern, revealed by a recent study commissioned by British American Tobacco South Africa (Batsa), is the penetration of illicit products into the formal market.

The Ipsos study shows that illicit cigarettes sold in the market increased from 27% in 2022 to almost 75% this year.

This translates into tax revenue losses of R30 billion as cigarettes are being sold below the minimum collectable tax price (MTC) of R27.12.

Source: Ipsos study

These startling figures show that the Illicit Economy Disruption Programme announced in February has had little impact.

President Cyril Ramaphosa announced the programme, also known as Operation Ukubusa, in his State of the Nation Address as part of government’s broader strategy to combat organised crime, illicit trade and economic crimes that undermine fiscal integrity.

Not just tobacco

Johnny Moloto, head of corporate and regulatory affairs at BAT Sub-Sahara Africa, referred to a study by the Consumer Goods Council which revealed that illicit trade is not only confined to the tobacco industry.

It affects no fewer than 12 industries in the economy.

The total size of the illicit economy is estimated at around R280 billion, resulting in lost production within the legal industry of more than R190 billion and a direct employment impact of as many as 87 500 jobs.

The cheapest cigarettes

Erika Terblanche, chief researcher at Ipsos, says their study used a sample of 4 704 purchases by fieldworkers in the informal sector (spaza shops), formal sector (grocery stores, forecourts) and wholesale stores.

Fieldworkers asked for the cheapest cigarettes available and were not allowed to negotiate the price. They found products being sold as low as R7 per pack.

Source: Ipsos study

The MTC is made up of R23.58 excise per pack, and value-added tax on excise of R3.54 per pack.

“How can you compete against a R7 per pack of cigarettes when the taxes alone are R27.12?” Moloto asks.

Terblanche notes that the illicit trade leans towards the informal sector but the size of illicit product in the formal market is alarming.

LEVP = lowest economically viable price. Source: Ipsos study

Running out of time

The legitimate sector is running out of time, says Moloto.

“It is only a matter of time – the legal industry will cease to exist if things continue [on] this trajectory.”

Batsa announced in January, shortly before the launch of Operation Ukubusa, that it will close its manufacturing facility in Heidelberg this year.

The facility operates at just 35% of total capacity due to severe volume losses, directly attributable to the exponential growth of the illicit tobacco trade in South Africa.

SA Tobacco Transformation Alliance spokesperson Francois van der Merwe says there is a direct link between the demise of Batsa volumes and the demise of tobacco farming.

“Since the Covid-19 pandemic the legal industry volumes declined by 53% and production declined by 54%,” he says, adding that this is where the “sensitive underbelly” is.

“We see the impact on Heidelberg, but a reduction of 53% is a direct loss of jobs to more than 3 000 farmworkers and more than 10 000 livelihoods in rural communities.”

Although there has been some disruption in the market it is only scratching the surface, says Van der Merwe. The controllers of the illicit industry should be brought to book.

“This is not impossible to tackle as long as there is political will. We think, but we are not sure, that the announcement by the president at the beginning of the year was an expression of that political will.

“We still need to see that being backed up by action.”

Vested interests

When asked about the controllers who have a vested interest in keeping the illicit trade alive and what the study reveals, Moloto would not be drawn out.

“The report speaks for itself, the product speaks for itself, the availability speaks for itself, and the price point speaks for itself. That is the position we have maintained over the years,” he said.

“I cannot draw any conclusion who is connected to who. That is the job of the law enforcement agencies and that is why we make this report publicly available for them to validate it themselves.”

Moloto suggests halving the excise on cigarettes (currently R23.58 per pack). Then all players can compete on equal footing.

“There is evidence that in countries where this stability has been introduced illicit trade reduced and governments were able to collect more tax.”

Hopefully Finance Minister Enoch Godongwana will hear this plea when he announces his plans for the next three years in the Medium-Term Budget Policy Statement next week, Moloto adds.

The industry is also calling for a minimum retail price which represents the lowest economically viable price (LEVP).

When adding distribution cost, logistics and retail market mark-ups to the MCT the minimum retail price should be set at R38 per pack.

“This will close the price gap between the legal and illicit manufacturers. Everyone can then compete on an equal footing.”

This article was republished from Moneyweb. Read the original here.