TOBACCO SA

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TOBACCO SA

• Presentation by the TISA Chairman/CEO to the
• Portfolio Committee on Health at the Public
  Hearings on the
• Tobacco Products Control Amendment Bill, no 24 of
  2006
• 23 JANUARY 2007

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Tobacco Institute of SA (TISA)

• Represents more than 98 of legal industry in SA.
• Represents Manufacturers, Leaf Dealers, Tobacco
  Farmers.
• All views of TISA always balanced to represent
  the wider interests and positions of the entire
  industry.

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Content of Presentation

• Brief Introduction to S.A. Tobacco Industry
• Challenges/Obstacles for the Industry
• Industry view on Tobacco Control Legislation
• Consequences of high taxes and over- regulation
• Our input re Bill 24 of 2006
• Myths/Disinformation about the Industry
• Conclusion

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• SA TOBACCO INDUSTRY

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INTRODUCTION

• Tobacco world-wide gt 500 years old
• Tobacco in SA 350 years old
• Industry in SA Seed to smoke cigarettes and
  pipe tobacco products
• Pre-1994
• Government controlled marketing of agricultural
  products in SA
• Government assistance to farmers, minimal tobacco
  control legislation
• Illegal trade almost non-existent in SA

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After 1994

• Free market introduced
• Tobacco in SA globalised
• Farmers had to compete on world market against
  fair and unfair competition (Government
  subsidies)
• Manufacturers of tobacco products became
  multi-national players
• Competition in cigarette market increased
  dramatically due to many new entrants into the
  market
• Multi national leaf dealers entered SA market,
  introducing SA tobacco leaf to other countries in
  the world, earning valuable forex for SA.
• Tobacco farmers decreased from gt1000 to 300
  currently, only the best farmers survived all the
  changes.

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Implication of Changes

• Production of FCV declined from gt30 mill kg to
  12 mill kg, 15 000 job losses on farms.
• Production of DAC decreased from 6 mill kg to 3
  mill kg, 2 000 job losses
• Main reasons
• globalisation of SA Industry (competitive issues,
  strong local currency)
• drastic increase in tobacco control measures, (4X
  in 10 years), bringing 1st world legislation into
  a developing economy, exceeding requirements of
  FCTC.
• dramatic increase in tobacco taxes, (440 in 10
  yrs)
• huge growth in illegal trade (0 to gt20 in 10
  yrs)

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TOBACCO IN SOUTH AFRICA

• Farming Industry
• One of the most labour intensive crops in the
  agricultural sector
• 300 farmers
• 20 000 workers
• 80 000 dependents making a living in deep rural
  areas
• 6 000 hectares
• 60-70 of tobacco used in SA for manufacturing
  high quality products.

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ZIMBABWE
SOUTH AFRICA TOBACCO GROWING REGIONS
LIMPOPO
BOTSWANA
NAMIBIA
MPUMALANGA
NORTH WEST
GAUTENG
FREE STATE
KZN
NORTHERN CAPE
LESOTHO
EASTERN CAPE
WESTERN CAPE
WESTERN CAPE
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SOUTH AFRICAN TOBACCO Total Production 2005/06
14 850 t Flue-cured 12 500 t Air-cured 2
350 t
ZIMBABWE
BOTSWANA
LIMPOPO
MPUMALANGA
NORTH WEST
GAUTENG
FREE STATE
NAMIBIA
KZN
NORTHERN CAPE
LESOTHO
EASTERN CAPE
WESTERN CAPE
WESTERN CAPE
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MANUFACTURING INDUSTRY

• British American Tobacco (manufacturing in SA,
  investment, jobs, exports, etc)
• Swedish Match (manufacturing in SA, investment,
  jobs, exports, etc)
• Japan Tobacco International (manufacturing in SA,
  investment, jobs etc)
• Phillip Morris International (import products)
• Gallaher SA (manufacturing in SA, investment,
  jobs, exports etc)
• All above are multi-national companies
• Many more smaller manufacturers and importers
  creating jobs, exporting products, investing in
  the SA economy.

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KEY STATISTICS

• Manufacturing Industry
• gtR 8 billion to Government (VAT Excise duties)
  in 2005, (2 of total Government income)
• 52 tax incidence on tobacco products
• 35 billion sticks manufactured in SA per year
• Pipe tobacco products equates to
• 4 billion sticks more
• 3 000 employees in manufacturing industry

• Turn-over manufacturing industry gtR 17 billion
• 5 million adult smokers (22 to 25 of adults)
• Consumption of legal products 25 billion
  sticks/year
• Consumption of legal products declining, (30 in
  10 yrs), more consumers buying illegal products,
  total consumption probably very stable or even
  increasing.

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MAJOR CHALLENGES FOR SA INDUSTRY

• To remain relevant, growing and competitive in
  the long term, the industry will have to deal
  with
• Tight regulation by Government
• Increasing excise duties
• Growth in the illegal trade
• Declining legal local market
• Proper dialogue between DOH, other stakeholders
  and industry is non-existent. Not the way it
  should in a democracy, tobacco is targeted
  unfairly.
• Farmers and labourers suffering consequences of
  government actions against tobacco in deep rural
  areas. It is not that easy to change to other
  commodities.

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WHAT IS THE BIG DEBATE ON TOBACCO ALL ABOUT?

• Simply because the industry produces a product
  that comes with health risks.
• Industry view-point
• Acknowledge the health risks associated with
  smoking, therefore industry and use of products
  need to be regulated
• Tobacco is addictive
• To smoke is a choice to be made by adults over 18
• Against youth smoking
• People can and do quit smoking
• Harm reduced products need to be given more
  attention

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WHAT IS THE OTHER SIDE OF TOBACCO?

• Substantial economic, social benefits worldwide.
• Livelihood for 100 million people worldwide.
• Billions of dollars to governments worldwide.
• Powerful industry creating infrastructure, jobs,
  social upliftment, environmental upliftment.
• Important industry in SA context where jobs in
  rural areas, infrastructure, investment from
  multi-nationals, taxes, etc, are crucial factors
  for building the country.
• Most important crop in many African countries.
  (Malawi, Uganda, Tanzania, Zambia, still in
  Zimbabwe, Mozambique and others)

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WHAT IS THE OTHER SIDE OF TOBACCO?

• 1 billion smokers worldwide enjoying the habit of
  smoking
• Industry supports sensible regulation on tobacco
  products, work with Government
• Industry seeking balanced debate between health,
  economic and social issues through constructive
  dialogue
• Governments have a choice Deal with a legal
  industry which is willing to co-operate, or deal
  with a faceless illegal industry run by ruthless
  syndicates with attitude of catch me if you
  can. They dont pay taxes, dont comply with
  legislation, grow a huge market share at the
  expense of the legal industry

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EXCISE DUTIES
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EXCISE DUTIES
1996 2006 Excise tax increased by almost 440
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Price vs Volume of legal products
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EXCISE DUTIES/

• Tax incidence on SA tobacco products 52,
  pressure for further increases.
• One of main reasons for decline in legal
  products, increase in illegal trade.
• Legal products decline by 3 per year.
• Alarming growth in illegal trade (already more
  than 20 of market), growing rapidly.
• Government and Industry both losing gtR1 billion
  annually due to illegal trade.
• Industry working with Government to find
  solutions, intensity of cooperation needs to be
  increased.

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ILLEGAL TRADE
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Shocking Statistics

• More than 10 million illegal cigarettes sold in
  SA daily.
• Almost 4 billion sticks in a year, which should
  have been sold by the legitimate industry.
• Estimated more than R1 billion loss in revenue
  for Government, similar losses for legitimate
  industry.
• Currently illegal trade estimated at around 20
  of total market and growing, almost non existent
  10 years ago.
• Affects cigarette and pipe tobacco manufacturers,
  legal importers, leaf dealers, tobacco farmers,
  government, smokers, wholesalers, retailers,
  transporters, general public etc.

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Illegal Trade as Competitor

• If ranked as a tobacco company,
• ILLEGAL TRADE would rank as third in the market
  place. It is everyone's biggest competitor.

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Effects of the illegal trade

• Loss in revenue for Government
• Growth in organised crime
• Stimulates consumption through lower prices
• Illegal products do not comply with regulations
• Trade mark infringement
• Greater health risks to the smoking public
• Government not achieving its health objectives

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Youth Smoking Prevention
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• YSP
• Longstanding view of industry age of sale from
  16 to 18
• Retail Awareness Programme launched March 2003,
  strengthened in 2004, again in 2005 and 2006.
• Message No Cigarettes to Under 18s
• More than 18 000 retailers received material
• Positive feedback, incl various Government
  stakeholders

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YSP RETAIL AWARENESS PROGRAMME
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NEW LOOK AS OF 2006
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• TOBACCO CONTROL LEGISLATION
• IN
• SOUTH AFRICA

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Brief Background

• First tobacco control act introduced in 1993,
  with regulations in 1994, act amended in 1999,
  more regulations in 2000.
• Tobacco industry in SA already operating in a
  very restrictive regulatory environment.
• TISA supports the need for the tobacco industry
  and the use of tobacco products to be regulated.
• During FCTC negotiations, the SA DOH drove the
  agenda for Africa.
• SA one of the first countries to sign FCTC on 16
  June 2003, ratified 19 April 2005.

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Brief Background

• MOH introduced a further draft bill on tobacco
  control in October 2003, one of main aims to
  align with FCTC.
• A period of one month was given for comment.
  Over 2000 submissions were received incl from
  tobacco industry.
• Revised draft was made available in Parliament in
  June 2006.

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SPLITTING OF BILL

• After advice of Parliamentary Law Advisors, it
  was decided that the Bill be split into two, a
  Section 75 Bill dealing with issues not affecting
  provinces and a Section 76 Bill, issues affecting
  provinces.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• Amendment to definition of Tobacco Product to
  include all tobacco products including snus
• TISA VIEW
• Harm-reduced products like especially snus, but
  also other smokeless products, need separate
  regulation, and should not be treated the same as
  cigarettes.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• Amendment to definition of Organised Activity to
  include the name of a tobacco product
  manufacturer.
• TISA VIEW
• May prohibit manufacturers from using company
  name in doing normal business, (names on
  buildings, letterheads, advertising for jobs,
  etc) or organising corporate events to which
  only suppliers and stakeholders are invited.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• Amendment to definition of Brand Element.
• TISA VIEW
• Definition should be deleted and included in the
  proposed Section 76 Bill. It should be dealt with
  alongside definitions of Advertisement and
  Promotion, as was the case before the Bill was
  split. It makes no sense as a stand alone.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• If no product and testing standards exists in the
  export country, SAs prescribed standards apply.
• TISA VIEW
• SA should not seek to impose its standards on
  foreign jurisdictions.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• Carte blanche powers to the Minister to regulate
  on any matter as he/she sees fit to achieve the
  objectives of the legislation.
• TISA VIEW
• Parliament will abdicate its watchdog role, does
  not bode well for future of a democracy. The HPC
  should always have the final say and will lose it
  if you pass this as proposed.

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SECTION 75 BILLMain Issues for TISA

• ISSUE
• The introduction of low ignition propensity
  cigarettes.
• TISA VIEW
• The introduction of LIP cigarettes, should only
  be done on the basis of extensive consultation
  and research inter alia taking into account
  prevailing capacity in this country.

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INDUSTRY EFFORTS

• Our message to the Committee
• We fully accept that the industry and use of
  tobacco products must be regulated, but we need
  balance. Over-regulation of the legal industry
  leads to further growth in illegal trade.
• Consequence Legal industry will eventually be
  severely strangled, even battle to survive. If
  this happens, Government will not achieve any of
  its health objectives, and will have to try and
  deal with rogue traders. Consumers will use
  products of which the origin, quality standards
  etc are unknown, which will increase health
  impact. Total consumption can even increase.

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Myths/Disinformation about the Tobacco Industry

• The link between over regulation, high taxes and
  illegal trade is serious and it affects the
  achieving of the good intentions of tobacco
  control legislation. This needs serious
  discussion and proper measures.
• The perception created by the NCAS that stricter
  control measures and higher taxes will not harm
  the economy or cause job loss, is totally untrue.
  I will show you the reality and expose this
  propagandistic statement.

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Myths/Disinformation

• The policy of the NCAS is not to talk to the
  tobacco industry, yet they claim to be industry
  experts, how is this possible?
• They make sweeping and unsubstantiated statements
  all the time, which are emotionally presented to
  cover their ignorance. Its time the HPC and DOH
  start challenging them on many of these issues.
• While the industry has moved forward, the NCAS
  still stick to arguments which are 30 yrs old and
  so predictable. (youth, smuggling, economics,
  science of the product etc, etc)
• The only reason why one wouldnt engage with a
  major industry, is because you feel threatened to
  hear the truth. Where would all of us be if
  Nelson Mandela never engaged with F.W. de Klerk?
• The only solution in sustainable tobacco control
  legislation will be found in the principle of ALL
  stakeholders sitting around the same table and
  work towards workable solutions.

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Myths/Disinformation

• Tobacco control policies will not harm
• the economy or cause job losses
• Legal tobacco product volumes have declined by a
  third over the past 10 years.
• During this period, 12000-15000 direct job losses
  have occurred in the farming industry negatively
  affecting the livelihoods of around 40 000 people
  in our rural areas.
• The largest cigarette manufacturer is closing
  down a factory in Paarl this year as a direct
  consequence of declining volumes with more than
  400 mostly bread winners losing their jobs.

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Myths/Disinformation

• The tobacco industry is involved in smuggling.
• Illicit trade in tobacco products is the single
  biggest threat to the legal tobacco industry in
  SA.
• Tobacco has for some time and currently still is
  one of the main focus areas of SARS.
• The SA tobacco industry works closely with the SA
  Revenue Services to combat illicit trade in
  tobacco products.
• The industry is regularly audited by SARS and
  found to be fully compliant with all relevant tax
  legislation.
• SARS have concluded that illicit trade is driven
  by organised crime syndicates and not the legal
  tobacco industry in SA.

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Myths/Disinformation

• A cigarette manufacturer can add anything it
  wishes to cigarettes without any regulatory
  oversight.
• Within the tobacco industry very high standards
  have to be adhered to from the tobacco seed right
  through to the end product.

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Myths/Disinformation

• Manufacturers can add up to 1400 chemicals to
  Tobacco
• When will the DOH accept our invitation to
  come and see firsthand what happens in a factory
  before making claims which are sensational and
  unfounded. Why dont you make the effort to visit
  tobacco farms, processing factories, meet the
  tobacco people, engage in a proper and democratic
  way. Tobacco people are not people with horns,
  knob kieries etc to kill other people.

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Myths/Disinformation

• Manufacturers can add up to 1400 chemicals to
  Tobacco
• There are many questions and misconceptions on
  how tobacco products and specifically cigarettes
  are manufactured.
• Some of these questions could be answered here
  today, but not all, given the technical nature of
  the process.
• Honorable Members of this Committee have the
  right to know the facts and therefore it is
  proposed that the Committee afford an opportunity
  to an expert at separate occasion to explain the
  process and clear up any misconceptions.

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Myths/ Disinformation

• Manufacturers can add up to 1400 chemicals to
  Tobacco
• A simple example Many people are under the
  impression that there are jars of tar and
  nicotine in a cigarette factory which is poured
  onto the tobacco during the manufacturing
  process.
• This is not correct.
• Nicotine occurs naturally in the tobacco plant.
• Tar is formed when a tobacco product is smoked.
• Some of the Honorable Members present here today
  had the opportunity to visit a cigarette factory
  and view the manufacturing process. We would
  like to extend an invitation to Honorable Members
  of this Committee to visit a tobacco farm, visit
  a processing plant, a cigarette factory.

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Myths/Disinformation

• We have consulted with the industry.
• Depending on what we see as consultation, this
  needs serious attention by the DOH. Until today,
  a major industry like the Tobacco Industry
  couldnt secure a meeting with the MOH. I
  seriously request the HPC to facilitate genuine
  engagement between the DOH and the industry in a
  constructive way like the DTI and the DOA

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Myths/Disinformation

• Snus, even as a new product, should be damned
  and regulated like all products.
• Honorable members of this Committee have the
  right to know what snus is and how it is
  manufactured. Here again it is necessary that an
  expert address the Committee and we respectfully
  request that an opportunity be afforded for an
  expert at a separate occasion to address the
  Committee in this regard.

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CONCLUSION

• We remain committed to working with all
  stakeholders to ensure that we have fair,
  practical, workable and enforceable legislation.
• We need to develop legislation that can work for
  SA, not bring across blue prints from other
  countries with different circumstances. (Where is
  our law applied)
• Our current legislation is working well and very
  progressive, we rather need better enforcement
  than another major overhaul in legislation
• We support separate, carefully researched
  legislation re snus and other smokeless products.
• If the relatively minor changes we have proposed
  are made, we will not object to the passing of
  the Section 75 Bill.

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• THANK YOU AND
• BEST WISHES