Illicit tobacco trade costs SA R20bn annually

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JEREMY MAGGS: South Africa’s hosting of the G20 presidency comes with big ambitions and, I guess, bigger accountability. From cross-border tax cooperation to the war on illicit trade, the stakes couldn’t be higher. At a recent progress briefing, the Foreign Relations Minister, Ronald Lamola, says we’ve entered a period of what he termed purposeful leadership. But the numbers, I think, tell a more complicated story.

Illicit financial flows, smuggling and runaway tobacco trade, draining the fiscus and are also undermining our Financial Action Task Force [FATF] commitments. So what’s the real state of reform and are we getting serious or just getting by?

Someone with a strong view on that is economist Sifiso Skenjana, and I want to unpack with him where policy is gaining traction and perhaps where it is falling apart. So, Sifiso, welcome to you. The minister talks of purposeful leadership. But with South Africa still grey-listed, isn’t that just optimism covering for inaction?

SIFISO SKENJANA: I think just on the grey listing, Jeremy, we did get feedback from the FATF simply on the action items that we needed to respond to last year. They came back in February this year again with a view on some of the items we had made progress on. I think that gave a sense for South Africa that we’re probably at the next announcement, which is coming, I think now end of June, we probably might see a revision of South Africa coming out of the grey list.

But with that said, we are finding weaknesses in other parts of the issues that need, of course, to be dealt with from an illicit trade point of view. We, from a tobacco point of view, for example, South Africa is the only country in the world where illicitly traded cigarettes are cigarettes that are traded over the counter. We’re seeing that growing in terms of illicit alcohol sales as well.

We’ve seen a moderation, at least, in illicit textiles. So these are some of the issues that also then create a burgeoning environment for illicit money flows, as well as illicit industry product flows that I think could continue to put pressure in terms of where we are on the FATF perspective in terms of our grey listing. But as per their February note to us, however, it seemed like we were making some progress.

JEREMY MAGGS: So let me pick you up on tobacco, if I can, and two quick issues here. One is that that figure of 60% of the market is astonishing. Does that mean that Sars [South African Revenue Service] itself is outgunned or underprepared? Also, the new tobacco bill itself completely ignores illicit trade. So it would be safe to say, surely, that it’s toothless from the start.

SIFISO SKENJANA: Ja, I think starting with the Sars point of view, they’re absolutely, absolutely, at this point in time under-capacitated, to be able to respond to that. If you remember, there is a case that Sars did take to court where some of the manufacturers, in essence, to be honest with you, when Sars went in to do inspections in the factories, they dropped the cameras to look at the floor. Sars took that to court and the court found that the guys argued specifically that this would hamper their competitive positioning.

Read: Sars loses its appeal to install cameras in tobacco factories

So I think there’s certainly some rethinking around some of the work that happens there. But I think from an SABS [South African Bureau of Standards] point of view, which is in essence, the standards, we’ve seen Kenya make really, really interesting progress there in terms of track and trace. So all the way from the paper that’s used in the cigarettes and so on, each of them has got a serial number. I think that then ultimately enhances the ability to track and trace and therefore to be able to follow the money from a revenue point of view.

We know that from a tobacco point of view, we’re now losing close to about R20 billion in terms of fiscal leakage just on the back end of that. So I think capacitation, from a Sars point of view, is a massive, massive agenda, as well as I think in terms of the value chain, which then goes to the standards and specifications.

Read: Illicit tobacco sales a drag on excise tax collections

I think then looking specifically at the tobacco bill, I think one of the things that is a challenge is when you’re looking at issues with sin goods, as we often call them, is that public health promotion becomes the be-all and end-all. Sometimes the overemphasis on public health promotion can create a blind spot in the way in which we need to think about all the other things that are moving parts in the sector.

So when you look at, particularly some of the provisions that are ignored insofar as the bill is concerned, is if South Africa really then is a melting pot for illicit trade, surely then we must understand that the bill must address those things.

I think the bill has wholly failed to address issues that can lead to illicit trading in South Africa. I think that’s one of the things that I think is going to be a big pressure point when the bill or if the bill does get pushed through.

JEREMY MAGGS: There’s also a revenue paradigm to all of this. So you suggest that we’ve passed the Laffer Curve peak, but the response is we keep hiking excise taxes. So surely, it’s an indication either of revenue blindness, just not understanding the issue or just political posturing?

SIFISO SKENJANA: No, I think it’s definitely both. Then the posturing is simply that, if it’s a sin product, you must tax it forever and ever. That’s the kind of the thinking, that it’s the one thing you always expect. Without looking at the industry and market dynamics of that particular sector, looking at whether or not you’re going to run the sector to the ground through more excessive taxing or looking at alternative models of actually, one, getting value out of the industry. Because, as you said, once you’ve passed the Laffer Curve, any additional percentage in taxation actually results in negative growth outcomes in that particular sector.

So certainly, I think when we look at that particular sector, we’ve missed opportunities of looking comprehensively at, in essence, what I would call the smoking economy, when you look at the growth in vaping, then there’s non-burn products, heat-not-burn products. You’ve got the products that you put underneath your tongue and so on. Therefore, when you’re thinking about taxation, differentiation becomes quite important.

Read: Why a risk-based approach may be the best way to tax e-cigarettes

So once you start to say the extent to which the product creates a certain risk, the level of taxation must be commensurate to that. Therefore, when you look at Article 14 coming from the World Health Organisation, talking about cessation, which simply speaks about then trying to move people to smoking less, and therefore your tax regime must be responsive to a cessation programme.

So when people are moving to heat-not-burn products, and so people aren’t exposed to secondary smoke, that must expose itself to a different taxation regime. So all this is the kind of thinking, innovative thinking that we need to be thinking about at a National Treasury level when we are now starting to think about a dynamic and a changing industry.

It’s no longer just cigars and cigarettes. It’s moving into different types or parts of the industry, and I think those are some of the things that could improve some of the revenue collection outcomes at the National Treasury level.

JEREMY MAGGS: I’ll just need a quick answer to this, because time is against us. You suggest that we’re at something of a tipping point. So are we there yet? And what’s the real economic cost to the country if we don’t act right now?

SIFISO SKENJANA: The massive economic cost, I think, is that 60% of the illicit market is going to get higher. Then it means that all your efforts to curb negative health outcomes from cigarettes are actually going to be moot. I think that’s the first big issue is that everything around public health promotion is actually going to regress.

Secondly, the revenue that you’re going to be able to collect from the sector is going to regress as well. So we’re at a tipping point in terms of public health promotion, as well as future revenue collection from the sector.

JEREMY MAGGS: Well, the warning certainly has been sounded. That’s economist Sifiso Skenjana, I appreciate your time. Thank you.

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