Illicit trade in South Africa:
Can we trust the industry rhetoric?
Corné van Walbeek and Lerato Shai
School of Economics, University of Cape Town
ECONOMICS OF TOBACCO CONFERENCE
SCHOOL OF ECONOMICS, UCT
16-18 JULY 2014
Some background information
 This study was made possible by funding from the
Bill & Melinda Gates Foundation
 It was recently published in Tobacco Control
 This presentation was prepared for a workshop on
illicit trade, hosted by the Deputy Minister of
International Relations, but (as it turns out
subsequently) funded by the tobacco industry

The presentation was excluded from the programme at the last
minute
Illicit trade in South Africa and the region
 Is illicit trade bad for government revenues and
public health?
YES
 Should the government take illicit trade seriously?
YES
 Is the problem as bad as the tobacco industry makes
it out to be?
Let’s look at the evidence from a number of angles
Cigarette consumption
 Total cigarette consumption has two components:
 Legal consumption
 Illicit consumption
 Legal consumption can be tracked quite easily
through the National Treasury’s records
 Illicit consumption has to be estimated
 The crucial question:
 Do the tobacco industry’s estimates of the illicit market make
intuitive and logical sense?
Legal consumption
Financial
year
Total
Excise tax
Legal
revenue
per pack consumption
(R million) (nominal)
(million
(nominal)
packs)
Percentage
change
2006
6 784
R5.56
1 220
2.2
2007
7 665
R6.16
1 245
2.0
2008
8 659
R6.82
1 270
2.0
2009
9 188
R7.70
1 193
-6.0
2010
9 368
R8.94
1 048
-12.2
2011
10 172
R9.74
1 044
-0.3
2012
10 978
R10.32
1 064
1.9
2013
11 461
R10.92
1 050
-1.3
The situation in 2009 and 2010
2009
2010
Percentage change in legal consumption
-6.0%
-12.2%
GDP growth
-1.5%
+3.1%
16.1%
(from R19.17 to
R22.26)
11.5%
(from R22.26 to
R24.83)
Inflation rate
7.1%
4.3%
Approximate percentage change in the real
price
9.0%
7.2%
Yes
No
Percentage change in the nominal price of
the most popular brand of cigarettes
Can the decrease in legal cigarette
consumption be explained by “economic
fundamentals”?
Percentage change in excise tax
12.9%
16.1%
(from R6.82 to R7.70) (from R7.70 to R8.94)
Illicit consumption
Relative share of the illicit market, based on data
provided by TISA
Year
2008
Percentage
8%
2009
10%
2010
21%
2011
26%
2012
30%
2013
Source: Presentation to National Treasury, September 2013
Total cigarette consumption
If the tobacco industry’s estimates are correct, we have the
following situation (approximately):
Year
Percentage
Percentage
Approximate
change in legal change in illicit
percentage
consumption
consumption change in total
consumption
2008
2.0%
2009
-6.0%
2%
-4.0%
2010
-12.2%
11%
-1.2%
2011
-0.3%
5%
+4.7%
2012
1.9%
4%
+5.9%
2013
-1.3%
Can this alleged increase in total
cigarette consumption be explained?
 An increase in smoking prevalence?
 No, adult smoking prevalence in 2012 was between 20% and
21%, according to three independent surveys (AMPS, NIDS
and South African National Health and Nutrition Examination
Survey), down from 24% in 2003 (AMPS)
 Strong economic growth?
 No, GDP growth in 2011-2013 averaged only 2.7%
The tobacco industry’s estimates of the illicit
market
Year
2006
TISA numbers
quoted in
numerous
articles at the
time
20%
December 2010
June 2012
May 2013
article in
presentation to presentation to
Business
National
authors (TISA)
Report (BATSA)
Treasury
(BATSA)
21%
2007
20%
-
-
11%
2008
20%
11.0%
7.9%
8%
2009
20%
16.6%
10.4%
10%
2010
20%
23.1%
21.0%
21%
2011
25%
-
26.0%
26%
2012
30%
-
27.8% (30%)
30%
What can we conclude?
 The spike in the illicit market in 2010 is real
 The alleged large increases in illicit trade in 2011 and
2012 are not supported by other data
 The tobacco industry has a record of rewriting history in
order to create the impression that the problem is
particularly pressing right now
 If previous estimates were incorrect, are the current
estimates credible?
ADDITIONAL SLIDES
The industry’s role in determining the
value of the excise tax
 How the excise tax is set in South Africa:
 Total tax (excise tax plus VAT) should be 52% of the
recommended retail price of the most popular price category of
cigarettes
 National Treasury passively responds to the pricing strategy of
the dominant player in the tobacco industry
 This policy has been in place since 1994 (with an increase in
the target tax burden from 50% to 52% in 2004)
 Bottom line: The industry sets the quantum of the
excise tax
Example: How this works in practice
 In February 2009 the RRP of Peter Stuyvesant was R19.40, consisting of the
following components:



VAT (14%, but 12.3% of VAT-inclusive price): R2.38
Excise tax: R6.82
Net-of-tax price: R10.20
 National Treasury wants a total tax burden of 52% = R10.08 (R2.38 VAT and
R7.70 excise)

Increases excise tax from R6.82 to R7.70 (12.9%)
 If there is 100% pass-through of the tax, the retail price increases by R0.88 +
14% VAT = R1.00
 But the tobacco industry increases the RRP from R19.40 to R22.50 (i.e. R3.10
or 16%) between February 2009 and February 2010

The net-of-tax price increases from R10.20 to R12.04 (18%)
Example (continued)
 In February 2010 the RRP of Peter Stuyvesant is R22.50, consisting of the
following components:



VAT: R2.76
Excise tax: R7.70
Net-of-tax price: R12.04
 National Treasury wants a total tax burden of 52% = R11.70 (= R2.76 VAT and
R8.94 excise)

Increases the excise tax from R7.70 to R8.94 (16.1%)
 And so the process continues….
 The increase in the net-of-tax price (and the RRP) in the previous year
is directly responsible for the increase in the excise tax in the current
year
Excise tax
Net-of-tax price
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
Real excise tax and net-of-tax
price per pack (2012 prices)
Trends in the real net-of-tax price and the
excise tax
12.00
10.00
8.00
6.00
4.00
2.00
0.00
What this graph indicates
 During the 1970s and 1980s the real net-of-tax price
remained largely constant


Tobacco industry wanted to grow the market
There were no legislative impediments to this growth
 The landscape changed dramatically in the early 1990s



Anti-tobacco legislation passed in 1993 and 1999
Using its near-monopoly power BAT increased the net-of-tax prices
This was good for profitability and good for public health
 The net-of-tax price increases were overdone by about 2010


Entrance of nimble, low-cost producers into the market (FITA-aligned firms)
A competitive situation is being presented as a pure illicit trade problem
CIGARETTE CONSUMPTION
AND REAL PRICES
Price per pack, constant 2012 prices
2009
Cigarette consumption, million packs
Cigarette consumption (million packs,
tax-paid only)
0
2005
0.00
2001
500
1997
5.00
1993
1000
1989
10.00
1985
1500
1981
15.00
1977
2000
1973
20.00
1969
2500
1965
25.00
1961
Average price per pack, 2012 prices
Aggregate cigarette consumption and the
real price of cigarettes