DAVID CHRISTIANSON: From bad to worse
Data suggests half of SA’s cigarette market is now illegal, while trade in illicit alcohol is larger than the wine and cider subsectors combined
When SA banned trade in cigarettes and alcohol last year in response to the Covid-19 epidemic critics warned that this would serve largely to drive these industries underground. Drawing on more than a century of experience going back to the 1919 Volsted Act, which introduced prohibition to the US, these commentators suggested the main beneficiaries would be criminal networks.
In mid-2021 it is becoming apparent that these fears were well founded. It seems the illicit trade has become more deeply entrenched and thus more difficult to root out. Illicit cigarettes are by definition not taxed and thus sell for about half the price of the legal alternative. In its 2021 results presentation retail group Spar said cigarette sales at its SA franchise outlets were down 13.1% in the six months to March 2021 compared to the same period before the ban. The loss of market share to criminal operators has robbed the grocery retailer of nearly R500m.
Spar said it had not seen any meaningful recovery since the ban on buying cigarettes was lifted last August. What has clearly happened is that cash-strapped SA smokers have chosen to continue purchasing the illicit products they were driven to by the ban. Research suggests no more than 5% of SA smokers quit smoking and that 90% admitted to purchasing illicit cigarettes.
Nearly half the cigarette market is now illicit, according to both the industry and the University of Cape Town’s Research Unit on the Economics of Excisable Products. A similar trend has been identified by consultants in the liquor market. A recent study for the industry by Euromonitor found that 22% of alcohol consumed in SA is sourced illegally. Measured by volume, the illicit alcohol trade is larger than the wine and cider subsectors combined. Euromonitor found that the illicit alcohol market had doubled in size more than the past three years and is now estimated to be worth R20.5bn.
There can be little doubt that the epidemic demanded extreme countermeasures. But governments around the world have had to learn along the way and there have been many missteps. Confronted with definite and often contradictory advice on issues such as the usefulness of lockdowns, “herd immunity” and even the wearing of protective masks, governments have flailed haplessly as they sought to find measures to keep their populations safe. Given the degree of uncertainty they faced it is appropriate to assess many of their actions and omissions with a degree of understanding. But the bans on cigarettes and alcohol that led to the growth of the illicit trade in SA were simply an own goal.
In a recent assessment, the Transnational Alliance to Combat Illicit Trade (TACIT) argues that one of the policy instruments deployed, outright bans (of tobacco and alcohol), were “accompanied by a number of unintended consequences, most of which conveyed negative impacts on economy and society beyond public health objectives”. The consequences, TACIT argues, “have been more harmful [to consumers] and more damaging [to the economy] than policymakers anticipated”. This, it might be suggested, is a good summary of the SA experience. Criminals have been enabled while legitimate industries have suffered immense losses.
SA, which is singled out in the TACIT report as an example of the boost to criminal markets provided by outright prohibition, has yet to come to terms with the implications of these trends. The growth of the illicit trade in cigarettes robs the fiscus of about R8bn a year and illegal liquor about R11.3bn.
But the impact is much wider than lost state revenue. Livelihoods in the 1.1-million strong liquor trade have been badly damaged, especially among taverners and independent small retail outlets. Criminality has become entrenched and the ensuring criminal turf wars are probably a factor in the country’s rising murder rate. The new Border Management Authority, which among a multiplicity of tasks will have to manage cross-border smuggling, appears to be all but stillborn, with the implementing agency, the department of home affairs, doing little beyond appealing for a bigger budget.
Meanwhile the porousness of SA’s borders has been illuminated by recent research into the international drug trade that shows SA is a route of choice into the European and Australian drug markets. The estimated 40 tonnes of heroin trafficked through Mozambique is not destined for local markets. Instead, the organised criminals behind the trade are taking advantage of SA’s role as a regional transport hub and its weak enforcement capacity to move their product on.
The same porousness facilitates the illicit trade in cigarettes and alcohol. It is now apparent that most of the illicit cigarettes sold in SA are sourced in Zimbabwe and smuggled into SA. The big formal players in the cigarette and alcohol industries did abide by the rules imposed under Covid-19 conditions. Not unexpectedly, the criminals did not.
What is to be done? It is clear that excise taxes, a traditional tool used to reduce consumer demand for cigarettes and alcohol, are off the table for the foreseeable future. Raising taxes and thus prices will simply deepen the grip illicit networks have on the industry, depriving the fiscus of yet more revenue and further reducing the resources available to deal with the problem. But complimentary enforcement strategies are also not viable given weaknesses in border controls and general policing, both badly exposed by the pandemic. Institution have to be rebuilt and that takes time.
There is no sign of a coherent strategy on the part of government, to deal with the surge in the illicit trade. Attention is quite rightly been focused on the vaccine rollout at the moment, but sooner or later the scale and more entrenched nature of SA’s illicit market is going to have to be confronted. It will be a far bigger task after the bans of 2020.
• Christianson, a freelance writer, has been a political scientist, NGO researcher and development banker. He entered business journalism in 1997 and was Diageo African Business Writer of the Year in 2006.
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