Cannabis market stunted by misalignment of policy and law

The ease of doing business has been identified as an overriding factor in supporting the development of emerging economies. Liberal economic scholars note that business is fundamentally improved by developing evidence-based regulations that provide certainty and consistency — in how they are understood, interpreted and applied.

SA scores 67.6 out of 100 in the Ease of Doing Business (EODB) index established by the World Bank Group in its Doing Business report, which  “ranks countries against each other based on how the regulatory environment is conducive to business operations”. The higher a country’s score the more favourable its commercial environment for companies to do business there. SA’s score indicates a relatively progressive and conducive environment, but the report also notes that the private sector still faces fundamental challenges in advancing business in the country.

In recent years the government has earmarked the cannabis sector, including medical cannabis and industrial hemp, as a growth industry. The Department of Agriculture, Land Reform & Rural Development issued notice in November 2021 that companies could apply for hemp cultivation permits. According to the department’s guidelines, the hemp permits will provide regulations for commercialising cannabis hemp flower in SA with tetrahydrocannabinol (THC) levels at or below 0.2%.

However, the cannabis regulatory environment remains unclear, highlighting deep policy incongruence and regulatory uncertainties. One of the biggest problems is that cannabis remains a prohibited substance in terms of the Drugs & Drug Trafficking Act. In addition, despite a 2018 Constitutional Court ruling that it is no longer a criminal offence for an adult to use or be in possession of cannabis in a private place, the recreational use of cannabis remains technically illegal.

Making matters worse, the Department of Justice appears to have stalled in amending the Drugs Act, which classifies cannabis as an undesirable dependence producing substance, to align with the Constitutional Court’s ruling. The Act provides for harsh penalties, including jail terms of between 12 months and 25 years for persons found to have violated its stipulations. Several serious investors have flagged this grave misalignment of policy that has resulted in relatively few investments in the sector.

Regulatory hurdles

Companies in the CBD hemp market continue to face various regulatory hurdles that hamper their business and raise the risk profile of launching ventures in industrial hemp in SA, including:

1. The current 0.2% THC threshold for hemp flower is out of kilter with international trends.

THC is the principal psychoactive constituent of cannabis, but this limit is extremely difficult to achieve in SA, given the country’s weather and land conditions and requires exorbitant financial and technical resources. Countries such as Switzerland and Germany have, or are moving towards, THC thresholds of 1%. The department’s imposition of such a low threshold is a major barrier to entry for local smallholder farmers who wish to access the international market, and should be revised as a matter of urgency.

2. Cannabis certification companies, which play an important role in exports of cannabidiol (CBD) hemp, which is non-psychoactive, aren’t supporting hemp cultivators.

CBD hemp must be tested and certified by a reputable certification company before it can be exported. As common practice, European buyers have identified one certification company in SA as a condition for sale. Regrettably, the certification company has refused to recognise hemp cultivation permits issued by the department as a valid basis for testing CBD hemp flower. Instead, medical cannabis licences, issued by the SA Health Products Regulatory Authority and operating under a different legal framework, have been demanded as a precondition for testing hemp flower.

Locked out

The prevailing situation is tantamount to locking out an entire CBD hemp industry from competing in Europe. While testing companies have full rights and powers to structure internal policies as they see fit, these policies should not only recognise and appreciate regulatory privileges awarded to local hemp companies but, more importantly, ought to be aligned to the government’s development vision for the sector.

The latest draft of the Country Investment Strategy issued by the presidency on May 27 sets out a clear, export-led growth plan for SA’s commercial cannabis sector. As a matter of principle, all stakeholders with business operations in the commercial cannabis sector of SA should support this vision.

It is in government’s best interest to play a proactive role on behalf of local hemp cultivators in encouraging testing companies to service the local hemp industry, which would enable local companies to compete in international markets. There are several ways this can be achieved. Notwithstanding diligently petitioning testing companies on behalf of local cultivators, the government could also assess the feasibility of incentives, such as subsidies and tax rebates, to testing companies that elect to include the testing of local hemp flower as part of their service offering.

Government facilitation

As the SA hemp industry enters its first official cultivation season armed with the necessary permits, it is vital that elements of the supply chain required to support commercialisation be put in place. Ultimately, in attending to the matters mentioned above, government must facilitate the alignment of current regulations to emerging market trends — which would ensure that SA’s cannabis regulations are scientific, evidence-based and fit for purpose — and take critical stakeholders into their confidence by diligently advising them on hemp regulations.

A practical expression of this could be the provision of social partners, including other government departments, industry and labour, with platforms for broad-based public participation and consultations; the goal being to guide government and industry on regulations and practices for the cultivation, sale and export of CBD hemp. There lies potentially deeper collaboration between the departments of agriculture; trade, industry & competition and health, in creating necessary policy synergies to address the regulatory uncertainties in the CBD hemp sector.

Greaver is a director, and Maposa a business adviser, at Inkwazi Farming Group. They write in their personal capacities.