South Africa doubles down on destructive policies costing thousands of jobs

The closure of British American Tobacco’s (BAT) Heidelberg plant is a symbol of the effect of the government’s destructive policies and failure to listen to private industry. 

This slow decline and collapse can be seen in other sectors of the South African economy, such as mining and manufacturing, that have seen their output steadily decline over the past 20 years. 

Apart from the effect of destructive policies, another common thread is the government’s unwillingness to listen to industry leaders and private businesses regarding what they need to invest in the country, grow their operations, and employ more people. 

This trend was made clear in BAT’s statement about the closure of its Heidelberg plant, with a significant portion of it being dedicated to its efforts to get the government to act on the rise of the illicit cigarette industry. 

BAT explained that it has engaged with the government and law enforcement for more than a decade, raising concerns about the growth in the illicit trade and calling for effective enforcement. 

These appear to have fallen on deaf ears as the illicit industry appears to go from strength to strength, with it now making up 75% of the market. 

“In 2014, local manufacturers declared about 22 billion cigarettes to SARS and generated R12.6 billion in excise revenue, according to National Treasury figures,” BAT Sub-Saharan Africa Head of Corporate & Regulatory Affairs Johnny Moloto said.

“A decade later, declarations collapsed to just 8.3 billion cigarettes in 2024 — while excise collected by SARS on that was R8.3 billion, despite large excise increases over the period.

“While the legal market and excise tax revenue from cigarettes have collapsed, total annual cigarette consumption in SA has actually increased due to illicit trade.”

BAT pointed to the rise in the illicit trade as a key reason behind the closure of its Heidelberg plant, with government policy only making the problem worse over the past decade. 

The 2020 Tobacco Sales ban ensured the local industry never recovered from the surge in illicit cigarette sales. The ban gave illicit traders a significant foothold in the market from which they have only grown. 

This was exacerbated by the repeated above-inflation excise tax increases on cigarettes in South Africa, BAT said. 

These increases make legitimate products increasingly expensive, pushing customers towards illicit alternatives that are substantially cheaper, as they do not collect the required taxes and levies. 

The government doubles down

Worryingly, it appears as though the government is doubling down on these destructive policies that have caused BAT to shut down its only local production facility. 

The same policies that resulted in BAT’s decision are being reproduced in the local alcohol sector and sugar industry, for example. All the while, the government is doubling down on its policy failures in the tobacco industry. 

BAT said in its statement that adding to the current challenges faced by local cigarette producers is the new tobacco legislation currently before Parliament. 

Despite pushback from the industry and SARS, this piece of legislation is currently before Parliament and has a reasonable chance of being passed. 

BAT said if this legislation is passed, it will exacerbate South Africa’s illicit trade issues, making it harder for legitimate producers to stay in business. 

In a presentation to the Portfolio Committee on Health last year, SARS stated that it believed the proposed legislation would worsen the illicit tobacco trade.

“BAT South Africa has raised these concerns for years, providing data and proposing solutions. While some in government have genuinely tried to help, the overall response hasn’t been enough to protectlegitimate businesses and the jobs they create,” Moloto said. 

“With the illicit industry’s current size and scale, only a coordinated, whole-of-government response can make a real impact.”

Should there be a substantial and sustained trend change in the local illicit trade environment, BAT will re-invest in local production in South Africa, Moloto confirmed.

The closure of BAT’s Heidelberg facility provides a cautionary tale for the government with regard to its treatment of other sectors of the economy. 

While much of the focus has been on the illicit cigarette trade, the alcohol sector has also experienced a strong rise in the illegal trade of beverages. 

The excise taxes levied on alcohol have risen in lockstep with those on tobacco, at above-inflation rates. This makes legitimate products more expensive for consumers. 

Consumer Goods Council CEO Zinhle Tyikwe has pointed out that repeated increases to excise taxes have exacerbated the affordability issue and pushed South Africans towards illicit alternatives. 

Tyikwe has repeatedly criticised plans to increase sin taxes sharply, saying that it would only drive more South Africans towards illicit suppliers for cheaper products. 

“Proposing to increase the so-called sin taxes is both anti-growth and counterproductive and will simply encourage the already entrenched illicit trade,” Tyikwe said.

“With such an entrenched illicit market, whose growth was fuelled by Covid-19 restrictions on liquor and tobacco sales, an increase in taxes will drive consumption to the illicit market where the selling prices are unaffected.” 

“Smokers and drinkers will switch to cheaper, illicit or counterfeit brands, denying National Treasury much-needed revenue to balance the budget.”

A similar story is playing out with South Africa’s sugarcane industry, with the Health Promotion Levy, more commonly known as the sugar tax, putting this sector under immense pressure. 

In a statement released early this year, SA Canegrowers called on the government to scrap the sugar tax in light of a surge in imported sugar. 

This imported sugar, the organisation warned, is increasingly displacing locally produced sugar and threatening the survival of the South African sugar industry. 

SA Canegrowers pointed out that the local sugar industry supports more than one million livelihoods, directly and indirectly, across KwaZulu-Natal and Mpumalanga.

The challenges of imported sugar are being exacerbated by the sugar tax, which SA Canegrowers said punishes local manufacturers who include sugar in their drinks. 

“While the industry fully supports efforts to address public health challenges, there is no evidence that the sugar tax has delivered any meaningful health outcomes, while it has inflicted significant economic damage on growers, millers and workers,” the organisation said.