SA alcohol industry can stimulate — or slow down — investment
Consistent excise tax policy in the alcoholic beverages sector is critical for the country’s economic growth
Tax policies are a major indicator of the policy direction of a country and one of the major considerations by investors in determining a potential return on their investment. Excise tax applied on alcoholic beverages and other commodities, and adjusted accordingly during annual budget speeches by the finance minister, is one such a tax that can either stimulate or slow down future investment.
As with other sectors, the alcoholic beverage sector has been affected by elevated levels of global volatility with a major impact on emerging markets. The short-term outlook for SA remains poor — medium-term recovery is set to lag the rest of Africa with a projected growth of about 1.5% for 2017.
Economic pressures have seen consolidation and re-organisation of the global alcohol industry with a direct effect on the South African market. In September last year, we saw a completion of an estimated R1.9-trillion deal in the takeover of SABMiller by global beer maker Anheuser-Busch.
Part of the conditions of the deal was a commitment of R1bn investment in various areas, including support to some 800 small, emerging farmers and resultant 2,600 jobs, as well as funding of entrepreneurship and social programmes locally. The current 6,000 jobs should also be retained over a five-year period and the South African market should open up for better competition.
As part of the deal, SABMiller had to dispose of a 26% shareholding in Africa’s leading wine, spirits and cider maker, Distell. There is now a possible takeover of this stake by the Public Investment Corporation, which the media has speculated to be worth about R9bn.
Global spirit player Diageo and beer maker Heineken dissolved their 10-year joint venture in SA and invested in building two separate business entities in the country. A UK-based investment group Vasari acquired the operational assets of South African wine and spirits producer KWV for an estimated R1.15bn.
The major investments in the local alcohol industry have become possible partly due to a more consistent application of the excise tax policy over the past years. Updated through a consultative process in 2014, the current policy addresses the structure of the excise duty regime, the level of duties, and their potential effect on the level of alcohol consumption.
The policy sets the excise duties on alcoholic beverages at a fixed percentage of the weighted average retail selling prices per specific category of alcoholic beverages. Wine would attract tax of up to 11% of the average retail selling price for the category, beer 23%, while spirits would be at 36% — all excluding VAT. The tax rate is adjusted every year for inflation and to reach the percentage target per category over the medium to long term.
The government and business have made tremendous progress in boosting investor confidence, including averting what was an imminent credit downgrade for our country. Maintaining consistency, predictability and transparency of the tax policy — including excise tax — in the 2017 budget statement will only serve to enhance the efforts made to turn the economy around.
This has become even more important as the FNB/BER consumer confidence index in SA dropped to -10 in the December quarter of 2016, highlighting households’ concerns about the weak outlook of the economy. The economic realities of weak household income growth, poor credit extension and soaring food prices once again exerted downward pressure during the last festive season.
While looking at economic benefits, we cannot deny the detrimental effects of the misuse of alcohol in various communities. The liquor industry has proposed an investment of R150m a year into programmes to reduce alcohol harm — separate from more than R16bn in annual tax contributions.
The investment will be a major boost to the current estimated annual budget of R5m spent by the National Liquor Authority in promoting responsible alcohol use. Benchmarked against spend in other major social campaigns, such as HIV prevention, the resources should be managed by an independent body to support the various research and civil society programmes to turn the tide against alcohol abuse.
Working together with the government, civil society and other sectors, we can build a socially inclusive and economically prosperous SA.
• Mngadi is chairperson of the South African Liquor Brand Owners Association.