A R700bn hole in the economy, as valued by the Treasury, is now large enough to push one of South Africa’s biggest listed manufacturers out of local production. British American Tobacco says the state is losing the fight against the syndicates behind it.
BAT, worth nearly R2-trillion on the JSE, is months away from shutting its South African factory after contraband cigarettes came to constitute 75% of the domestic market. The London-based group said in January that the infiltration of illegal cigarettes had made local production unviable. It has since shifted to an import model to meet local demand.
The financial damage is already on the books. The Heidelberg plant in Gauteng, once the eighth largest in BAT’s global network and an exporter to several countries in the wider Southern African region, is running at just 35% of total capacity. The company considers that level unsustainable. In February BAT booked a £14m charge on the site as it prepared to mothball it at year-end, barring what it describes as a miraculous intervention by the government.
Johnny Moloto, head of corporate and regulatory affairs for BAT Sub-Saharan Africa, framed the closure as a signal to investors and operators across the economy. “BAT’s decision earlier this year to close our South Africa factory, a direct result of illicit trade taking over the market, is an early warning for the rest of the economy of what the future looks like unless we get serious about dealing with illicit operators,” he said.
The stakes extend beyond one manufacturer. Moloto estimated lost government excise tax revenue at R30bn a year. “This is not just about the survival of the legal industry or lost government excise tax revenue, which we estimate at R30bn a year. It is about the formal jobs and livelihoods being lost to illicit trade across the economy,” he said. “It’s about the sprawling criminal networks taking over our country, crippling our law enforcement bodies and operating with total impunity. It’s about the ability of our economy to grow and provide employment. It’s about our future as a country.”
The market data underpinning the warning comes from research firm Ipsos, commissioned by BAT, which has run the study for several years. The company has often been accused of sponsoring a false narrative to shield its business interests. The latest findings are stark regardless: four of five stores surveyed were selling illicit products, and cigarettes at the ultralow end of the market, priced below R20 a pack, were available in almost two-thirds of stores. Such prices sit below the taxes due on every legal pack, which Moloto said shows illicit manufacturers operating openly and with impunity.
Meanwhile, government has responded, though the company argues the effect has yet to register. President Cyril Ramaphosa announced the formation of the National Illicit Economy Disruption Programme, known as Operation Ukubusa, as part of a broader strategy against organised crime, illicit trade and economic crimes that undermine the country’s fiscal integrity. Yet according to the Ipsos research, the operation has made no dent in the black market.
“Sars must demonstrate that there are consequences for profiting from illicit trade. South Africa is losing the battle against illicit trade,” Moloto said. “The only conclusion from these results is that South Africa is losing the battle against illicit tobacco and on the current trajectory will end up with an entirely illicit tobacco market, with no legal industry left.”
BAT attributes the paralysis to lax enforcement of the country’s laws, which it says is emboldening illicit economy players. Allegations of a deeper problem have surfaced at the Madlanga commission, where claims have been made about links to cigarette smugglers at the top echelons of the police service.
By contrast, the response elsewhere in the state apparatus came late. BAT noted that authorities only took notice of the damage when the plant closure was announced, and that the same phenomenon is becoming increasingly prevalent in the liquor industry. Research commissioned by the Consumer Goods Council of South Africa and released in August estimates the illicit economy across 12 key sectors, including alcohol, tobacco, food, pharmaceuticals, clothing and fuel, at R280bn.
For market watchers, the arithmetic is unforgiving: a legal producer paying excise cannot compete with untaxed product at under R20 a pack. Without enforcement that closes the price gap, capital will continue to exit.