Government decisions helping criminals break important South African industries

The South African government’s banning of the legitimate trade of cigarettes and alcohol during the pandemic has been coupled with repeated increases in the excise tax levied on these products. 

This combination has resulted in illicit cigarettes now taking up 75% of the market in South Africa, resulting in legitimate businesses being unable to compete and, thus, closing down. 

A similar pattern is developing in the alcohol sector, with illicit trade having an increasingly significant impact on the legitimate market. 

The most notable casualty of this so far has been British American Tobacco’s (BAT) production facility in Heidelberg, which at its peak produced 26 billion cigarettes a year. 

This facility directly employed 1,000 people at its height and, indirectly, supported 35,000 jobs. As a result, it was the backbone of the local municipality and supported livelihoods across Southern Africa. 

BAT’s decision to close the factory came after operating it at only 35% capacity, as illicit trade flourished and the government took little action to address the issue. 

Business Leadership South Africa CEO Busi Mavuso explained that it was not only the government’s failure to take action and its decision to ban legitimate sales during the pandemic that boosted the illicit sector. 

Mavuso told Newzroom Afrika that repeated increases in the excise tax levied on cigarettes have made legitimate options increasingly expensive relative to their illicit peers. 

This means that an increasing share of smokers in South Africa are choosing illicit alternatives for economic reasons and not just ease of access. 

As a result, many individuals who purchased illicit cigarettes during the pandemic-era ban are now doing so to save money, with the illicit supply chain becoming entrenched in South Africa. 

“The acceleration in the growth of the illicit sector really came from a number of policy missteps during the Covid-19 pandemic,” Mavuso explained. 

“The legal cigarette market and alcohol sales were banned, allowing the illegal networks to establish distribution networks that never closed.” 

This also effectively undid all the work SARS had done in the 2000s and early 2010s to clamp down on the illicit trade and reduce its impact on the fiscus. 

The effect of tax increases

A forgotten factor is the repeated increases in the excise taxes levied on tobacco and alcohol products, which have greatly increased the price of legitimate alternatives for consumers. 

This is a longer-term driver of the illicit trade in South Africa, with its effect only being apparent in recent years and increasingly severe as illegal traders gained market share. 

“I really think that the steep increases in excise duties on legal products have created a significant gap that illicit traders could exploit,” Mavuso said. 

“You are sitting in a situation now where illegal boxes of cigarettes sell for about R15 to R20, while the excise duty on a box of legal cigarettes is about R26.”

Member of Parliament Alan Beesley has recently shared that he has found boxes of cigarettes for sale for as little as R10. 

The box of cigarettes in this case was able to be purchased from a spaza shop near South Africa’s Parliament complex. Beesley said the illicit trade is destroying our country and our economy. 

“You can see that there is no way for the legal market to actually compete against illicit traders, as they pay more tax per box than illegal trader can sell theirs for,” Mavuso said. 

“It is clear how that just kills the legal economy, especially when you are sitting with a South African consumer who is seriously under pressure.” 

“If they have to sit and decide whether to buy a legal product or an illegal alternative that is less than half the price, that decision is obvious.” 

However, this does not mean that the illicit trade is not an issue of inadequate law enforcement, as illegal alternatives should not be easily available. 

“It is an enforcement issue, and I think we need to be really clear and honest about placing this failure and the BAT plant closure firmly at the doorstep of the government,” Mavuso said. 

“Many arms of government have failed to intervene insofar as reining in the illicit economy. This is a textbook case of a car that has been heading towards a crash in slow motion.” 

“Warning lights were flashing for years, with businesses repeatedly raising alarms. Yet, these have fallen on deaf ears with the government.” 

Mavuso said that businesses have repeatedly engaged with the government and proposed solutions to the issue, with no action being taken.