By Kotie Geldenhuys
Towards the end of March 2020, the President, Mr Cyril Ramaphosa, announced that as of midnight on 26 March 2020, South Africa would go into a "hard lockdown". Various regulations were also issued in terms of the Disaster Management Act 57 of 2002, which to the shock of millions of South Africans included a ban on all domestic trade in tobacco products. Smokers did how-ever not take kindly to this decision and even though many stocked up for the initial three-week lockdown period and subsequent ban on the sale of tobacco, they were less than impressed with the government when the ban was extended for many more weeks. For many smokers it was simply impossible to stop smoking overnight which is why the illegal cigarette trade in South Africa got an overnight boost. The entire market for cigarettes and other tobacco products went underground almost overnight as formal retailers had to remove their stock and the legal supply chain suffered the consequences.
Prior to the lockdown and subsequent ban, British American Tobacco South Africa (BATSA), South Africa's leading tobacco company, stated that illegal cigarettes account for approximately 33% of all cigarettes sold in South Africa. Such cigarettes are particularly prominent in the informal trade, where they make up an astounding 42% of the informal market (BATSA, 2020). But after the ban had been implemented, between Risk Adjusted Alert (lockdown) Levels 3 to 5, 100% of the market became illegal.
Categories of illegal tobacco products
According to the World Trade Organisation (WTO), there are four recognised categories of illegal tobacco products that can be found globally:
- Contraband which is smuggled into markets from either neighbouring markets or transnational routes;
- illegal whites which are unbranded, mass produced, unpackaged loose cigarettes which are smuggled;
- local tax evaded cigarettes which are locally produced cigarettes that enter the market from production leakages in the manufacturing and excise declaration process; and
- counterfeit cigarettes with the intellectual property infringement of tobacco brands.
In any of these examples, illegal cigarettes are selling at a price that is significantly lower than either the taxes due or standard market prices. As of 2020, the minimum collectible tax on a pack of 20 cigarettes is R20.01, making any pack selling for less than this amount in normal circumstances, suspect of being illegal (BATSA, 2020).
Common practices to avoid compliance with export and import requirements are found at the secondary and tertiary levels of the cigarette value chain and include the following:
- Round tripping/ghost exports which are the processes whereby legally manufactured cigarettes are marked for export, which abolishes the requirement to pay local taxes, but they never make it to the declared destination. Instead, these cigarettes find their way back into the local market, where they are sold tax-free (Van Loggerenberg, 2019). Round tripped cigarettes are legally produced cigarettes where the stock arrives at its destination, and is then filtered back into the country of origin. With ghost exports, the cigarettes which are intended for export, never leaves the country of origin (McLaggan, 2020).
- Undeclared production involves the illegal manufacturing of cigarettes which are not declared to the authorities and on which no tax is paid. These cigarettes can either be sold on the local market or smuggled across borders to be sold in foreign markets (McLaggan, 2020).
- Stock lost in transit refers to products manufactured in one country that are marked for export to another but never reach their purported destination. They find their way into the market of a third country, in which they were never supposed to have arrived, to be sold on the black market (McLaggan, 2020).
- Smuggled products are those that are illegally trafficked across borders to be sold in the country to which they are trafficked. These are products that could have been undeclared when manufactured, lost in transit or simply bought in one jurisdiction but moved across the border illegally to avoid paying the required duties (McLaggan, 2020).
Prices of illegal cigarettes skyrocket
During the initial lockdown period in South Africa, illegal cigarette prices skyrocketed and low-cost illegal cigarettes were nowhere to be seen. Research conducted by the University of Cape Town’s Research Unit on the Economics of Excisable Products (REEP), involving more than
23 000 respondents, found that the average price of cigarettes increased by nearly 250% compared to pre-lockdown levels. Based on a second online survey conducted between 4 and 19 June 2020, REEP researchers found that the average price per cigarette was R5.69 or R114 per pack of 20. Some respondents reported prices as high as R300 per pack of 20 or R3000 per carton of 200 cigarettes (Van Walbeek et al, 2020).
During the ban, illegal cigarettes were easily found on South African streets, especially in townships, but informal sellers also devised new ways to reach customers. In more affluent suburbs, residents would share phone numbers to have cigarettes delivered to their homes (Boussion, 2020). The REEP report indicates that an estimated 93% of smokers who continued to smoke during the lockdown, bought their cigarettes from illegal sellers, such as friends and family, spaza shops, street vendors and via WhatsApp groups (Van Walbeek et al, 2020).