Tobacco, the R12.5bn question

2013-09-01 14:00

A study released this month has sparked debate on whether smoking is decreasing or increasing, writes Dewald van Rensburg

Depending on who you ask, smoking in South Africa is either radically decreasing due to two decades of successful tobacco control laws and taxes, or massively increasing again because those laws and taxes have opened the door to a colossal black market.

Based on tax figures, legal cigarette sales are now at their lowest level since 1976.

A study released this month also estimated that the prevalence of smoking has dropped dramatically to 16.4% of adults, from 22% five years ago.

The tobacco industry disputes the figures and argues new laws or taxes are actually increasing the prevalence of smoking, and will continue to do so.

As new, stricter smoking regulations loom, the economic stakes are, however, as high as ever. Irrespective of who you believe about how much is being smoked, there is more money involved than ever.

South Africans smoked about 1.12?billion legal packs of cigarettes last year, based on data from the National Treasury on so-called “sin taxes”.

Those excise taxes of 52% added up to R11.4?billion and are expected to reach R12.5?billion this year.

That is equal to the entire skills levy on employers that funds the skills education training authorities system, and could pay for more than a month’s social grants.

If you believe the Tobacco Institute of Southern Africa (Tisa), another 340?million packs of illegal cigarettes were sold in South Africa, costing the treasury billions.

This in itself created “unfair competition” for the legitimate tobacco industry and, according to Tisa, actually leads to an increase in smoking.

If the industry estimates are added to government data on legal sales, it shows a “massive increase” in smoking – not the steady decline most stakeholders assume is happening, according to Cornelius van Walbeek, an associate professor at the University of Cape Town’s school of economics and head of the school’s economics of tobacco control project.

The research done for Tisa is “in principle, very plausible”, says Van Walbeek.

It entails surveys of cigarette-buying customers at retail outlets, including buying packets of cigarettes from smokers in order to inspect and test them for signs of illegality.

The findings they have produced are “unbelievable”, he adds.

Van Walbeek says his own research indicates that there was a “pretty significant spike” in illicit trade in 2010.

But the subsequent figures do not make sense, he says. In 2008, Tisa estimated that 6% of cigarettes were illegal and that rose to 21% in 2010.

Last year, it jumped to 30%.

The industry has an interest in presenting the illicit trade as a big problem, he warns.

The rising cost of cigarettes is “by far” the most powerful antismoking tool, says Van Walbeek. The extent to which it is being undermined by illegal cigarettes is key to the debate around tobacco control into the future.

“Since 2002, all the price increases have been due to the tobacco companies,” says Dr Yussuf Saloojee, the executive director of the National Council Against Smoking – a veteran of the local tobacco control movement.

According to him, the excise tax has remained constant at 52% and only increases every year in reaction to the industry’s price increases.

“The industry is going for profits over volumes. Treasury hands over its tax policy to the cigarette companies,” he said.

The World Health Organisation recommends that taxes on cigarettes should make up 75% of the total price, making the local sin tax relatively low.

“My view is that illicit trade has gone up, but that it is the tobacco companies themselves that are doing it,” says Saloojee.

Excise taxes create the incentive to “round-trip” cigarettes, meaning to manufacture them for export to avoid the tax, but then return them to the local market.

He also thinks the industry’s claims about the extent of illicit trade are “crazy”.

Tisa CEO Francois van der Merwe feels much the same about opponents’ estimates about the decrease in smoking.

“My argument is that you should just stop the smuggling and enforce the existing regulations,” he says. “That will achieve a decrease in smoking.”

Tisa calls the pending regulations “extreme” and argues that they will harm small businesses like taverns and push more of the tobacco market into illegality.

The 52% sin tax, which has been in place since 2002, “created the opening” for illegal cigarettes, says Van der Merwe.

Since then, other regulations have widened it, he argues.

According to Tisa, South Africa has far higher taxes on cigarettes compared with neighbouring nations, which has led to a “suction down into South Africa from the region”.

Van der Merwe claims 50% of the illegal cigarettes originate from Zimbabwe. These are legitimate cigarettes smuggled into South Africa to avoid excise taxes. “In South Africa, we do not have counterfeit cigarettes that impersonate well-known brands,” he said.

The other half of the “illicit market” involves dodgy local operations that produce cigarettes that look legitimate, but cut corners on manufacturing standards like nicotine levels and the low ignition propensity cigarette paper that has been mandatory since 2011.

“You have to give credit to (Minister in the Presidency) Trevor Manuel and (Finance Minister) Pravin Gordhan,” says Van der Merwe.

“They know that if you increase the tax, smuggling will grow.”

South Africa adopted its first real antismoking law in 1993 and by 2001, banned cigarette advertising and partially banned smoking in public.

New regulations, published last year, aim to ban all indoor smoking in public areas and restrict smoking outside.

Who is smoking?

The Human Sciences Research Council (HSRC) made waves earlier this month by estimating that the prevalence of smoking in South Africa has dropped to 16.4% of the adult population, down from 22% in 2007.

Even the World Health Organisation doesn’t see a total elimination of tobacco as a realistic goal.

The aim is to get it below 10% or so, according to Saloojee.

“We are well on our way there,” he told City Press.

But the tobacco industry disputes the new figure and Van Walbeek says he was “quite shocked” by the HSRC’s finding.

“I would not have expected it to be that low,” he said.

Tisa’s Van der Merwe dismissed the number, saying it is unclear what they measured.

“16% of what?,” he asked, despite the HSRC indicating that they were estimating prevalence among adults.

The generally accepted estimate of smoking prevalence in 1993 was 33%.

“We think 22% of adults smoke,” said Van der Merwe. “The real question is ‘what is absolute consumption?’”

Based on Tisa’s estimates around smuggling and illegal cigarettes, absolute consumption is on the rise.

Based only on official numbers, the absolute consumption of cigarettes has levelled out, with a slight increase last year. publishes all comments posted on articles provided that they adhere to our Comments Policy. Should you wish to report a comment for editorial review, please do so by clicking the 'Report Comment' button to the right of each comment.

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