The illicit cigarette barons’ annual R29-billion tax robbery…
With the latest VAT increase, South Africa is set to lose R29 billion in excise tax revenue a year. In this interview, Johnny Moloto, the Sub-Saharan Head of Corporate and Regulatory Affairs of British American Tobacco (BAT), describes how the illicit cigarette trade exploded during the 2020 COVID-19 tobacco sales ban – and now accounts for 75 percent of the total cigarette market. He says the industry still has not seen the effects of the dismantlement of an illicit gold and tobacco network announced by President Cyril Ramaphosa in his recent SONA speech. "It took us all by surprise…We would like to hear more about which syndicate that was," he says. As for persistent rumours that the cigarette barons have friends in high places, he says: "Why is it always the usual suspects that are always being picked up by … research? Maybe we ought to look into this, if only to satisfy our curiosity and put this matter to bed so that there isn't this speculation about the complicity of politicians as well as government authorities." Moloto lists proposed solutions to combat this arm of organised crime more effectively.
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Highlights from the interview ___STEADY_PAYWALL___
In this interview, Johnny Moloto, Sub-Saharan Head of Corporate and Regulatory Affairs at British American Tobacco (BAT), discusses the alarming rise of the illicit cigarette trade in South Africa, which he attributes largely to the COVID-19 tobacco sales ban. According to Moloto, illicit cigarettes now account for about 75% of the country's total market, up from around 50% in 2019. This surge has resulted in significant revenue loss for the government, estimated at 29 billion Rand annually in excise taxes alone.
Moloto highlights the devastating impact on BAT, which has seen a 47% reduction in its workforce and a 53% drop in sales volume. He proposes several solutions to combat the illicit trade, including increasing resources for the South African Revenue Service (SARS) to improve tax enforcement, as well as setting a minimum retail price to make it easier for law enforcement to identify illicit products. He also calls for better regulation of reduced-risk products like vaping devices to help consumers transition from traditional tobacco.
Moloto critiques the Tobacco Control Bill, arguing that its lack of evidence-based regulation and practical enforcement measures could worsen the situation. He also questions the government's response to dismantling illicit tobacco syndicates, suggesting that the problem may involve high-level corruption. Overall, Moloto stresses the need for stronger leadership and coordinated efforts to curb the illicit trade and its harmful effects on th e economy and public health.
Edited transcript of the interview
Chris Steyn (00:01.514)
The illicit cigarette trade exploded during the 2020 COVID-19 tobacco sales ban. Let us find out how it has spiralled out of control by speaking to Mr. Johnny Moloto of British American Tobacco. He is the Sub-Saharan Head of Corporate and Regulatory Affairs. Welcome, Mr. Moloto.
Johnny Moloto (00:23.438)
Thank you very much for having me, Chris. I appreciate the opportunity.
Chris Steyn (00:27.07)
Sir, what percentage of South Africa's total cigarette market does the illicit cigarette trade account for now?
Johnny Moloto (00:34.83)
By our estimate, based on studies that we've been conducting for the past six or seven years, it's currently sitting at just around 75 per cent, which is a significant jump from where it was in 2019 ahead of the sales bend that we experienced in 2020 during the COVID lockdown. So it's a significant rise here.
Chris Steyn (00:55.198)
Where did it stand before the ban?
Johnny Moloto (00:59.062)
We estimated that just before we went into the sales ban, we're hovering somewhere in the 50s. And this was a number also corroborated by independent research that was not commissioned by the industry. UCT at the stage also estimated it to be in the 40s, upper 40s. But regardless of the number, even then it was quite a significant number where you had over 40% of the market being illicit. That means significant revenue leakage that was not collected at the time.
Chris Steyn (01:29.866)
So how much does it cost South Africa in excise tax revenue annually or monthly?
Johnny Moloto (01:33.858)
Yeah. Yes. So yes, with the recent increase in excise, which was done last week, it jumped to about 28 billion Rand that we looking at a year. That is just excluding the VAT component onto that.
If you take the VAT component onto that, you are looking somewhere around 29 billion, which is a significant number when you look at where the country is in terms of, you know, shortage of revenue collections, as well as where the government is in terms of the budget deficit, in terms of addressing its socio-economic priorities.
Chris Steyn (02:11.21)
So this could have made all the difference to the Budget that was tabled last week.
Johnny Moloto (02:17.805)
Yes, even if, Chris, your government was not able to collect the full 29 billion. If you collect just even half of it, you could at least cushion, you know, hard pressed South Africans from the advent of a VAT increase. So that could have been a welcome cushion in addition to all the other taxes that the SARS Commissioner spoke about that, you know, if he gets given more budget, he could chase after that.
And this is low hanging fruit in as far as we're concerned, because the majority of these players are right there in our borders, you know. If you look at South Africa compared to other markets, such as Australia, Brazil that have high illicit incidents. If you look at South Africa, a lot of ours are homegrown rather than where you have it in other markets where it's smuggled product into the market. So a missed opportunity really, but we think that with the Commissioner's commitment that he's going to chase after those uncollected taxes, it's still something that can be turned around. Time is not on our side. All of us, not just us as an industry, but just all of South Africa.
Chris Steyn (03:24.532)
Meanwhile, how cheap are the illicit cigarettes?
Johnny Moloto (03:27.821)
They're very cheap. mean, Excise currently sits at about 26 Rand now with their latest adjustment, but you still get packets I've seen over the weekend as cheap as five rand, which there is no way you could have paid tax on those products, even if you were running a loss leader. At five, 10 rand a pack, that is way, way, way below the collectible tax. It makes you wonder how those businesses are being able to sustain themselves under these very tough economic conditions.
Chris Steyn (03:57.834)
How has this affected BAT?
Johnny Moloto (04:01.325)
From BAT specifically, the impact has been quite severe. In the last, I would say, since 2019, year in, year out, we've been reducing our headcount. We've been introducing more efficiencies to make sure that we can still be able to compete, which is a very tough thing to do if you look at the differential between the cheapest or the most expensive illicit brand compared to our cheapest brand that we sell in the market.
We estimate that we have shared about 47% of our volume and we are looking actually 47% of our head count and 53% of our volume. So that's quite significant.
Chris Steyn (04:42.526)
What are your proposed solutions, Sir?
Johnny Moloto (04:45.197)
So what we have said, we realised that we are competing amongst many other priorities that the authorities have to tackle across the spectrum in relation to organised crime.
The one immediate solution that we proposed, which we're very, very excited to hear the Minister announce, was that capacitates SARS, give them more resources for them to be able to go after the money that has not been collected.
So we requested for an increase in the budget of SARS to allow them to go after the illicit players and ensure tax compliance just across South Africa, but specifically in our industry that has been crying for years to see enforcement happening. So that is the first step.
Now, the major challenge is in the police now, as it were, in the Commissioner's court to now actually deploy those resources towards collecting that a tax that is not paid. A lot of faith has been put into him. There were a lot of parties, you know, stakeholders in society commenting on this, you know, even independent economists say, give SARS more resources.
The Commissioner now has a singular opportunity to once and for all tackle this problem that has been with us for years. We had said, once you have the resources, the easiest things that you can do, you can actually place enforcement officers at the manufacturing sites. We saw the opportunity that came in 2019 where they placed custom officers at our factories to monitor production, to account for every single stick produced that it pays tax. And we saw an uptick in terms of revenue collections. We saw prices increase in the market to reflect their true value rather than the artificial value that was selling way below the minimum collectible price.
So we believe that even this may not be able to be permanent solution, but it is a very good deterrent to ensure that everyone pays their fair share of tax. So that is number two.
Number three. We have called on for a minimum retail price which is a policy tool that can help the SARS Commissioner as a force multiplier. Because I am sure you see every day in the news that the police in the North West, in Limpopo wherever across the country have seized so many cigarettes, but the reality that most of those don't necessarily end up…
Johnny Moloto (07:06.415)
…in prosecutions, right? And the simple reason for that is that the police are not really well, that well equipped to enforce the Customs and Excise Act. They are able to seize what they believe to be illicit products simply because of the price they see. But that is not necessarily yet anchored in law. So what we are proposing is the National Treasury to anchor that in policy to say that any product selling below this price could not have been, you know, could not have paid taxd, could not have accounted for production and distribution costs, for their employment costs and so on and therefore, that could not be the real price of product.
Before the excise increase, our figure was at around 34% as a minimum retail price. And this is borne out by evidence. We conducted our own study through our industry association in 2022, which put the price then in 2022 at around 32% as the most economically viable price at which you can sell and even break, even not necessarily make a profit. But if you sell below that, how are you then surviving? UCT also came out and came up with a similar narrative to us. In fact, they had put the price even higher than our research had projected.
So we believe these are tools that can then make it easier, not only for SARS, which is a threat for resources, but all other law enforcement agencies to say, if you just see a product that is below this value.
You do not have to be an expert in customs and exercise matters to be able to defend this in court, to be able to justify the seizures and the arrests against those players. So this is just yet another innovation or proposal that we're putting in the table to say that we know government has so many other conflicting priorities that they have to, or competing priorities that they have to address. Here's a tool at your disposal that can quickly turn things around for you to…
Johnny Moloto (09:02.767)
…and give you a realistic chance of prosecuting against these illicit players.
Chris Steyn (09:07.712)
Do you think the proposed Tobacco Control Bill will make any difference?
Johnny Moloto (09:13.803)
Look, as BAT we support regulation because we have seen that a market that does not have proper regulation can lead to all sorts of problems like this where there is uncertainty in the market as to what is legitimate, what is not. However, the biggest problem, South Africa has never struggled in terms of putting regulation in place, is the proportionality of that regulation that's problematic and has become more problematic in recent years where the consultation has just been a tick box exercise, it's not been evidence based. In the past, at least, we used to do socioeconomic impact assessment, regulatory impact assessments, cost benefit analysis. Now regulation is just a tech desktop exercise, a tick box, and you know, you just put that and dust it off. Problem is you do that and you don't have any enforcement measures behind that you have an even bigger problem.
Give you a simple thing like for example if you put in place a retail display band. We know that around the biggest portion of our market is informal, right? In the informal market where you have single-stake sales, where you have tabletop sales, how are you enforcing a retail display ban? Because that presumes that you'll have to hide the product behind a screen. In organised retail, you can put that behind counters and hide that. But on tabletops, where the small traders depend on actually showing their wares, what is available so that the consumer may choose. You have a bigger challenge there. So it's something that government ought to have looked at in terms of the practicality of. Otherwise, you already criminalise a huge portion of economy.
Johnny Moloto (10:56.289)
Then we looked at things like the proportionality in terms of how do you differentiate between the categories in the market? Because when this bill was drafted, I mean, it didn't take into account that so many new products have entered the market, like your vapour products, your nicotine patches. And these all are products that we regard, at least based on scientific evidence, as reduced risk products. That is based on the weight of evidence and based on a consumer switching complete to use these products. So this is intended as an innovation to assist those adult consumers because we focus on only adult consumers who would want to quit but have struggled with traditional methods such as cessation or nicotine patches that haven't worked for them but they would really like to quit. So we're saying this is like an approach that helps those consumers to migrate to reduce risk products and we think that it will also be not just a benefit for the industry but a benefit for government as well to help them in terms of reducing smoking incidents which we think is a bit on the higher side for South Africa.
But the way the bill is being pushed through, we don't see that it's going to have a lasting effect or it's going to achieve the desired outcome simply because it's not really evidence-based which is the biggest concern that we have.
And firstly, like I said earlier, Chris, if you have your market sitting around 75%, that means in essence, you are regulating for 25% of the market. You need to actually bring everybody into the net first and make everybody compliant first. Then you know you have a bigger size of the market that you can control. Put it differently, I would rather the government regulate 75% of the market and you can encourage the remaining 25% over a period of time to come on board.
But if you start from a smaller scale, what you're simply saying is that, well, if you're not compliant, it's okay. You can continue doing what you do with impunity. All we care about is the least common denominator, the 25% that we have in our hooks now, and forget about the rest.
Chris Steyn (13:06.784)
Now during President Cyril Ramaphosa's recent SONA speech, he announced that an illicit gold and tobacco network had been dismantled. Did you notice any difference?
Johnny Moloto (13:19.853)
Well, if that is the case, we would still love to notice that difference because…I assume that we don't know where the effects of these are because there was no detail around it. Probably the SARS Commissioner will still unpack that in his own revenue announcements in April. But in as far as what the president said, it took us all by surprise to say, well, if you dismantle the syndicate, if you refer to a syndicate, a syndicate is a massive thing. It should show in the market that one player or one syndicate has been removed. Therefore, that space shows that you have a significant decline in illicit trade numbers. But that is also news to us. We would like to hear more about which syndicate that was, and we're not seeing the results yet.
Chris Steyn (14:08.606)
You must have vast intelligence on the operations of these syndicates. Do they have friends in high places?
Johnny Moloto (14:18.625)
Well, that's something that you you can only speculate about the friends in high place. All we know is that some years ago, we know that one of the owners of a company called Carnilinx came out and that was subject to a court process where self-confessed tobacco smuggler, you know, that was also owned up by one party that, you know, said, you know, yes, these guys founded the establishment of the party. So you can summarise that since then and with the growth of the illicit trade problem that it might be more pervasive than we could ever have imagined. And the fact that it's growing without any abatement or it's growing with impunity, it could point towards that.
What we do know for sure now, now from an evidence-based point of view is that the research that our industry, the value chain conducts on a year-on-year basis, it reflects consistent brands that keep on popping up, you know, your Shasha brands, your RG brands and whatever by the same manufacturers. So I would have thought that common sense would dictate that there's something to this. Why is it always the usual suspects that are always being picked up by this research? Maybe we ought to look into this, if only to satisfy our curiosity and put this matter to bed so that, you know, there isn't, you know, this speculation about the complicity of politicians as well as government authorities.
So like I said, we can only surmise that the fact that it's persisted for so long, it's a problem for us.
I mean, if it was any other industry, you can just imagine, you know, if it was, we see with the clothing industry, for example, how much government has taken an interest. We've seen with the food safety related issues where government has even now put laws in place to make sure that, you know, they enforce against these unscrupulous traders…
Johnny Moloto (16:18.391)
…they make sure they register as Spaza shops because this has now led to deaths. How many deaths, how many losses, and how much loss of life can be attributed to this illicit trade is yet to be computed.
Exactly the scale of the problem simply tells you that this is not how a normal society functions, right? But it seems as if this is something that we think is a normal thing in South Africa, that this is how things ought to be. And I'm yet to hear, at least from a BAT point of view, where we hear, you know, politicians taking accountability and showing political leadership and saying this is something that must be tackled at the highest level so that we deal with this matter once and for all.
Chris Steyn (17:04.906)
Thank you. That was Mr. Johnny Moloto of British American Tobacco speaking to BizNews about the illicit cigarette trade. And I'm Chris Steyn. Thank you, Sir.
Johnny Moloto (17:14.008)
Thank you for your time.
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