British American Tobacco South Africa (Batsa) is using confusing figures to explain why 200 workers could be laid off by 2023, according to public health researchers.
In a January 13 statement, the company said its business has been crippled by the illegal cigarette trade, which is estimated to make up 70% of the country’s cigarette business.
An independent study shows that although multinational companies such as Batsa lost a lot of business due to illegal trade during the Covid 2020 key cigarette ban, their sales are increasing again, although not as much as before.
Batsa’s estimate of 70% comes from a survey that the tobacco giant paid for the market research company Ipsos – except that the Ipsos paper did not reach this conclusion.
Exaggerating the size of illegal trade is an industry tactic often used to argue that higher taxes will lead to an increase in illegal trade.
But there is a change in the fundamentals of the tobacco trade in South Africa.
This time, the illegal trade is really growing (from 35% in 2017 to 54% in 2021) and the easy access to cheaper illegal cigarettes may undermine the anti-smoking policy.
Experts, however, argue that there is more to Big Tobacco’s concern than meets the eye. What looks like a company trying to be a good corporate citizen, he says, is more likely to be a new approach to an old cave — to protect its bottom line.
We untangle the web of public health history, business disputes and bad Covid policies and explain how multinational tobacco companies can make their own mess.
Batsa misquote study yourself
How did Batsa get to 70%?
For two years, the multinational manufacturer periodically released the findings of a six-part study (each called a wave) looking into illegal trade.
The first report is published in 2021 and the sixth and final one in October 2022.
After the findings of the fifth wave were made public, Batsa general manager Johnny Moloto told the media that illegal trade comprised 70% of the tobacco market.
But this figure is different from that published in the study.
The results showed that 68.9% of the sampled shops in Gauteng and 79% of the shops in the Western Cape sold illegal cigarettes for less than R22.79 (R19.82 sin tax + 15% VAT).
This is the amount of tax to be paid for a pack of 20 cigarettes in 2022 when the survey was conducted. If the store sold a pack of cigarettes for R22.79, the manufacturer made no profit on the sale, unless they failed to pay tax on the product.
As a comparison, the study also looked at how many boxes were sold at R27.89, the price at which manufacturers will be able to turn a profit and probably will not be illegal to trade goods.
Batsa’s statement is misleading for three reasons, explains Nicole Vellios of the University of Cape Town’s Research Unit on the Economics of Excisable Products (Reep).
First, these figures only show the proportion of shops that sell illegal cigarettes one province, it is not an accurate picture of the size of all illegal markets, she said. “Batsa would rather say that 70% of the shops we sampled in Gauteng sell illegal cigarettes.”
Second, shops that sell illegal cigarettes can also make legal sales, thus increasing the number.
Third, placing undue emphasis on the 70% figure obscures the finding that, for the country as a whole, the number of shops selling illegal cigarettes will in fact decrease from 47% in 2021 to 34% in 2022.
How big is the illegal trade in South Africa?
According to Vellios estimates, around 54% of the country’s cigarette market will be illegal by 2021.
They used a method called “gap analysis” to calculate this number and, although it is not a perfect technique, it gives a good idea of the number. (One of the problems with this method is that it depends on how many people smoke – and people often assume that they use substances such as cigarettes and alcohol.)
It’s a simple deduction: the number of cigarettes burned per day minus the number of cigarettes collected by the South African Revenue Service (Sars).
South Africans will smoke 29.1 billion cigarettes in 2021, according to calculations made by Vellios based on the National Income Dynamics Survey and the Global Adult Tobacco Survey conducted by the South African Medical Research Council.
The math goes like this:
Twenty-five percent of South Africans smoke daily by 2021. That’s 8.6 million smokers (based on United Nations population data available during the study).
Each person smokes 8.8 cigarettes per day, which is a total of 27.6 billion cigarettes for the year.
Finally, they factored in an additional 5% to compensate for the fact that people might think they smoke. Final tally: 29.1 billion cigarettes.
But Sars only got a sin tax for 13.5 billion barrels in 2021.
Here’s how he got it:
With R18.79 tax levied per pack in 2021, tax people are expected to earn R9.16 million from smokes made in the country, which will translate into 487 million packs.
There is a catch, though. The calendar year is from January to December but the financial year is from April to March. So, to get a realistic estimate, they need to use a quarter of the sin tax from 2020 and three quarters from 2021.
That brings the number down to about 474 million packs, or 9.474 billion individual cigarettes.
Then add another 3.97 billion imported bats that Sars collected money to count.
That gives a total of 13.5 billion sticks (give or take a few).
So: 29.1 billion cigarettes minus 13.5 billion that are taxed leaving 15.6 billion cigarettes (or 54%) that are sold illegally.
Sars relies on tobacco companies to report production which means there is little incentive to report. With gap analysis, however, “you can track trends in illicit trade over time”, explains Corne van Walbeek, head of Reep.
He added: “If you have an idea of the trend, you can see whether the illegal trade is increasing or decreasing.”
How can it be bad?
The illegal tobacco trade in South Africa has ballooned since 2009.
It was about 5% between 2002 and 2009. Since then, it started to increase, reaching about 20% in 2013. After an initial decrease the following year, it increased to 33% between 2014 and 2017. Why?
Because, said Van Walbeek, the tax expert was not authorized and the senior tax expert was fired under the former Sars commissioner Tom Moyane, who was appointed at the end of 2014.
Big Tobacco’s hand also lurks in the shot. In his book The Tobacco War whistleblower Johann van Loggerenberg accused Batsa of using his political connections to evade investigations into the tobacco business.
But Sars has also failed to keep up with international practice when it comes to tax administration.
The most effective strategy to stop smuggling is a digital stamp system called “track and trace”, but in South Africa, most cigarette cartons are marked with a diamond-shaped excise stamp to show that the product has been declared to Sars and is destined for it. for sale in South Africa.
Stamps are easily faked and cannot be verified, researchers say. It is almost invisible and has no link to the payment of taxes.
Instead of a track-and-trace system, Sars relies on strategies not supported by the World Customs Organization, such as placing customs officers in manufacturing plants, according to the University of Bath research group Stopping Tobacco Organizations and Products.
The death knell for the legal tobacco business and the public purse comes in 2020 during the initial stages of the national lockdown, when the government bans tobacco sales for five months between March and August.
People continue to smoke whatever they can find, no matter the cost. Research shows that some smokes are going for more than four times the usual price although, on average, people doling out 2.5 times what they usually pay.
As a result, researchers argue, the progress made by Sars in curbing illegal trade in 2019 was reversed. Any measures taken by the government to reduce tobacco use will be less effective, the researchers wrote Tobacco Control. Price increases work well to get people to quit smoking but the strategy is less powerful when people can easily get their fix at a lower price.
The key policy bungle lost Sars tax R 5.8 billion in 2020, according to the 2020 National Income Dynamics Study. But it is also the key to the new Big Tobacco call for Sars to understand why manufacturers play by the rules – they are losing money.
The market share of local manufacturers more than doubled during the sales ban. The market share has increased from 28% to 67% during illegal sales, increasing the top years owned by multinational companies.
The local company began to save many customers who still bought cheaper cigarettes. Their market share dropped to 47% when the ban was lifted (which is still almost half of what it was before Covid).
But Sars is around the corner. In 2022, the revenue service announced that it will investigate the local manufacturer Gold Leaf Tobacco Corporation for possible tax crimes.
Price wars: a taste of your own medicine?
Multinational tobacco companies consistently point to local tobacco producers as the biggest contributors to the illegal market. But the pricing tactics of international companies played a role in driving illegal trade between the 1990s and the first decade of the 2000s, research shows.
Since the early 1990s, multinational companies, including Batsa, have controlled retail prices and sold cigarettes at higher prices than excise tax increases. This enables them to guarantee high profits even when cigarette sales decline.
Their juicy profits enticed small local producers such as Carnilinx and Gold Leaf Tobacco Corporation to enter the market at lower prices than possible through tax evasion.
Big Tobacco brings its own misery
Big Tobacco only worries about the illegal trade when it doesn’t work, Van Walbeek said.
But an analysis of industry documents shows that engaging in illegal trade has been part of BAT’s business plan to increase profits in Africa since the 1980s.
BAT also exports cigarettes to countries where there is armed conflict, such as Mali. There, it is very likely that the product will end up in the hands of smugglers but that will not stop sales, Van Walbeek said.
In addition, Big Tobacco’s fingerprints are all over the international illegal trade.
Tobacco giants, including BAT, Philip Morris International and Japan Tobacco International, have been fined billions for smuggling, according to a World Health Organization report.
In response to a request for comment, Batsa said it could not respond to media inquiries because “BAT South Africa is in the midst of a complex section 189(1) [retrenchment] process”.
Inconvenient solutions: Will SA track and trace?
South Africa has yet to ratify the World Health Organization’s Protocol to Eliminate Illicit Trade in Tobacco Products, which also recommends track and trace.
Sars opened a tender for the system in 2019 but it was extended several times and finally cancelled.
At the time, local manufacturers said the lost tender was a sign that the government was being influenced by international tobacco giants, whose now-defunct industry body, the Tobacco Institute of South Africa, rejected the tender after it was announced.
In response to questions, Sars said they have an arsenal of tools to fight illegal trade, including policies and technological instruments, and added that management is still looking into track-and-trace technology as a solution to illegal trade.
However, there is no set time.
Batsa has asked the government to launch a track-and-trace system,
But if South Africa implements the prevention, it is important that the tobacco industry has no say in the process, stressed Van Walbeek.
The industry has its own tracing system, called Codentify. But local researchers say it’s too expensive for most governments. It takes a lot of people to work, and unless monitoring is done well, it’s ineffective at stopping smuggling.
He wrote: “Enforcement officers in countries with Codentify systems have no chance of detecting large-scale fraud but will have the illusion of control.”
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