Revenue goes up in smoke as illicit trade thrives

Johnny Moloto, general manager of British American Tobacco South Africa (Batsa), says the government doesn’t appear to have the political will to clamp down on illicit cigarettes, which have flooded the market, costing the fiscus R20bn a year and forcing his company to retrench more than 30% of its workforce.

“Closing the illicit market is all about political will,” he says. “The solutions are there.”

Encouraged by President Cyril Ramaphosa's promised “New Dawn” in 2018, Batsa raised  its concerns about the illicit trade with the authorities and suggested solutions. At the  time, this trade accounted for 30% of the market, having started in the state capture era under president Jacob Zuma.

“We engaged with government quite significantly to put measures in place to deal with illicit trading.”

Inspectors were placed in local cigarette factories in December 2018 to monitor production and tax declaration, and after two months were making a difference. Then they were removed and it was “back to business”, says Moloto.

Then came minister Nkosazana Dlamini-Zuma's Covid ban on tobacco sales, which was later ruled unconstitutional.

Before this, illicit cigarettes were mostly produced in South Africa. During the ban, they flooded into the country from Mozambique and Zimbabwe.

We can speculate on the role of political connections in keeping this alive and growing, but our research doesn't go into this and we wouldn't be able to prove that illegal operators have political cover. But the way things are going in our country, you never know

—  Johnny Moloto, general manager, British American Tobacco SA

“They became popular then and never went away,” Moloto says.

The biggest offender was allegedly Zimbabwe's Gold Leaf Tobacco Corp. The South African Revenue Service (Sars) froze the assets of the company  and its directors last year, creating a gap other illegal operators were quick to fill.

“We haven't seen any drying up of the market. The product is still out there as much as before,” he says.

The Sars action has had no effect on Gold Leaf brands, which are “as available and strong in the non-organised market as ever”.

As a result of the “explosion” of illicit cigarettes during the lockdown ban they now constitute 70% of the market, according to research company Ipsos. The global average of illicit trading in cigarettes is 11.6%.

Before Zuma and state capture, illicit cigarettes accounted for about 5% of the market.

“We can speculate on the role of political connections in keeping this alive and growing, but our research doesn't go into this and we wouldn't be able to prove that illegal operators have political cover,” says Moloto. “But the way things are going in our country, you never know.”

What is known is that the illicit trade has continued to grow seemingly unchecked. 

Moloto says that in financial 2010, cigarettes contributed R20bn to taxes; but in the latest financial year the figure was down to R8.9bn, despite consumption remaining more or less constant at  32-billion “sticks”. The excise loss translates to taxes on about 9.6-billion sticks.

R7bn of this comes from Batsa, whose sales have fallen 40%.

“This is damning proof that authorities have failed to bring South Africa's colossal criminal market in cigarettes under control,” says Moloto.

“The solutions are there. We've been advancing these solutions to the authorities. We've invited them to come to our factory and see exactly how they can clamp down on under-declaration at other production plants.

“It's fairly straightforward. So with political will, we believe this illicit trading trend can be reversed, like all the other problems in the country. If you have the political will, you can resolve these problems.”

Given the huge stakes involved — tax expert and retired judge Dennis Davis says illicit trade is costing the fiscus R100bn a year — Moloto says the government's failure to address the problem is inexplicable.

“Over and over we've been saying to Sars, 'Do the calculations. The country's in desperate need of money. What you're leaving on the table in any given financial year from the sale of illicit cigarettes is close to R20bn.'”

Beyond Sars, however, an all-government approach is needed, he says.

The product flowing through the borders means there is a lot more the police and home affairs' border control officers could and should be doing.

The flow of illicit goods into the country is now “so prevalent it's a free-for-all”, says Moloto.

The solutions are there. We've been advancing these solutions to the authorities. We've invited them to come to our factory and see exactly how they can clamp down on under-declaration at other production plants

Batsa has engaged the National Treasury about the problem and suggested solutions “year in, year out, but the results are still the same. It's like it's falling on deaf ears,” he says.

The company has called on the government to ratify the international protocol on illicit trade and implement the track-and-trace solution that has been effective in curbing the trade  in Europe. “I don't know how long it's going to take before it's implemented.”

Moloto concedes that Sars has done “a lot of things well”, but says there still hasn't been a single prosecution. “Only when we see a case in court ... and we see these illicit products being reduced and an increase in excise revenue will we be able to say something is happening. For now, it's only getting worse.”

A double whammy for Batsa has been blackouts, which have played havoc with machinery at its huge manufacturing plant in Heidelberg.

“It's not possible to suddenly stop and start and stop and start a factory without machine breakdowns.”

Though Batsa has installed, “at huge cost”, some backup power generation in the form of solar panels and gas boilers, it is still dependent on Eskom. The unpredictable stops and starts are also playing havoc with operations and the cost of doing business has risen “substantially”, he says.

Meanwhile, the effects of illicit trading have forced Batsa to retrench 30% of its 1,800-strong workforce and a further 200 jobs are at risk. 

Moloto can't say how many more job cuts there'll be, but there will have to be further “restructuring” to cope with a situation that is as unsustainable as it is unpredictable.

“In our country today, so much is uncertain. Whether the plans the president is talking about will be implemented, whether corruption is going to be dealt with, whether crime is going to be dealt with, we don't know.

“We're all just trying to make sense of the regulatory environment in South Africa in which the rules are not applied consistently and are not applied to everybody.”