The burgeoning illicit cigarette industry is likely to claim new victims — 150 small-scale farmers in Limpopo, Mpumalanga and North West have received notice from cigarette giant British American Tobacco South Africa (Batsa) that it will no longer source raw tobacco from them.
As a result, thousands of farm labourers may lose their jobs.
Batsa said sales of illicit cigarettes by manufacturers who evade excise duties are undercutting its market. In a bid to make up this loss, Batsa said it might have to source its tobacco more cheaply from suppliers in countries such as Zimbabwe.
At present Batsa has a five-year rolling agreement, first signed in 2007, with Limpopo Tobacco Processors (LTP) to supply raw tobacco in a deal that aims to support farmers, particularly those identified as emerging. LTP represents 300 commercial and emerging farmers.
LTP supplied nine million kilograms of tobacco to Batsa last year and is predicting a crop of 11-million kilograms this year, said LTP managing director Christo van Staden.
“It will be extremely difficult to replace the Batsa business, which has anyway been shrinking for the last few years since illegal cigarettes started to boom. At current levels of demand it is extremely difficult for our business to remain profitable,” he said.
And 8 000 to 10 000 farm jobs will be lost if Batsa starts sourcing its tobacco from other countries, Van Staden said.
“Illegal manufacturers do not buy a single ounce of tobacco leaf from South African farmers,” he added.
Batsa said in a letter to LTP that its sales have decreased from R15-billion in 2016 to R11.5-billion in 2018 because the market was saturated with illicit cigarettes. If the government does not act against the illicit industry Batsa forecast that its sales could fall to R9.5-billion.
The value of the contract between Batsa and LTP is worth about R90-million a year.
“We supply 8.9-million kilograms of tobacco each year to Batsa. However, our crop this year is 11-million kilograms,” said Van Staden.
The agreement was extended for five years in 2016 — as long as Batsa’s cigarette sales do not fall below 10-billion.
“All our farmers are diversified into other crops — grain, citrus, grapes, potatoes, macadamias and cotton. [But] tobacco is a cash crop and their primary income,” said Van Staden.
“Now they are attempting to rebuild Sars [South African Revenue Service], but it’s not happening fast enough. Illegal cigarettes grew its market share by about 25% in just three months last year, according to research.’’
Batsa told the Mail & Guardian that illicit manufacturers source their tobacco from Zimbabwe, Brazil and China.
Jonny Moloto, the head of external affairs at Batsa, said: “The speed at which our business is contracting due to illegal cigarettes is alarming. It is therefore necessary to review all aspects of our cost base. Leaf demand has declined as a result of reduced demand for legal cigarettes given the availability of cheap illegal cigarettes.
“This also means a significant loss of scale, and at a point, which is fast approaching, the economics of tobacco leaf production and procurement no longer work.”
Tobacco excise revenue collection has dropped by R1.94-billion in two years, according to a report by economic consulting firm Econometrix for Batsa and released this week.
The gap between expected and actual tobacco excise income was R1.65-billion in 2016-17, which increased to R1.71-billion in 2017-18.
Econometrix’s Azar Jammine said: “Resistance to higher prices on excise duty, deterioration in the control of illicit cigarettes sales by Sars, coupled with the change in leadership at the tax authority in 2014, resulted in a growing illicit economy.”
He said excise duty should not be increased by treasury and Sars needed to enforce a minimum price of R23 for a packet of 20 cigarettes. “The challenge is with compliance … but if it’s going to take a while to make companies pay, let’s minimise the damage by not increasing the excise duty any further.”
Sars spokesperson Scelo Mkosi said: “Illicit trading of tobacco and cigarettes is one of our main focus areas,” adding that the revenue service is doing what it can to root out companies that do not pay their taxes.
“We have increased customs audits and in-depth investigations into possible risks inherent in manufacturing,” he said.
“The establishment of the illicit economy unit is more evidence of Sars’ resolve to tackle this problem head on.”
Tshegofatso Mathe is an Adamela Trust journalist at the M&G