The tobacco ban in South Africa is expanding the horizons for profit from illicit trading.

There are approximately 7 million smokers in South Africa,¹ the majority of whom have continued to purchase cigarettes despite the temporary ban on tobacco products introduced by the government on 27 March 2020. A survey carried out by the Research Unit on the Economics of Excisable Products (REEP), based at the University of Cape Town, found that as many as 90% of respondents had bought cigarettes during the period surveyed (29 April to 11 May).² But while access to cigarettes has not changed significantly, prices have been significantly affected. The REEP report shows that over the 13-day period surveyed, the average price of a packet of 20 cigarettes rose by 53%.³

The GI-TOC’s own research, as well as media reports, indicates that price increases over the course of the ban may be much more substantial. Tobacco consumers in Cape Town and Pretoria interviewed by the GI-TOC in May and June 2020 reported paying seven to 14 times more for a packet of cigarettes following the government ban.⁴ Local media painted a similar picture, reporting that as of the end of May, independent cigarette brands – which are usually priced at between ZAR 10 and ZAR 20 (US$0.60–US$1.20) per pack – were selling for anywhere between ZAR 60 and ZAR 180 (US$3.50–US$10.50), while the so-called ‘Big Tobacco’ brands were selling for as much as ZAR 200–250 (US$11.50–US$14.50).⁵

According to the REEP study, the steepest price increases were observed in the Free State and the Northern Cape provinces, while Limpopo, Mpumalanga and North West experienced comparatively lower increases.⁶

Perversely, the ban on tobacco products may have actually exacerbated the coronavirus crisis in South Africa. With the exorbitant price increases, the sharing of cigarettes has reportedly become more common, leading to an increased risk of transmitting the virus.⁷ In addition, harmful alternatives are being explored by desperate smokers, such as unfiltered black tobacco rolled in banana leaves.⁸

Figure 2 Relative cigarette price increases and seizures of tobacco products across South African provinces.

SOURCE: REEP/UCT study; local media reports on tobacco seizures

Big Tobacco suffers, independents boom

According to the REEP study, the Big Tobacco brands have been the biggest losers under the ban. The aggregate market share for the three largest international brands (BAT, Phillip Morris and Japan Tobacco International) has fallen from 81% to 36%.⁹ In their place, lower-priced independent brands have flooded the market. It is not correct to label these independent brands as illegal outright, but they have had a chequered legal history in South Africa. These products often sell at retail prices below the local tax threshold of R19.16 per pack of 20, which at face value indicates rampant tax evasion. However, claims of illegality have been strongly denied by these manufacturers.¹⁰ However, even if some local companies continued to operate clandestinely during the ban, they have suffered from lower productivity due to disruptions in the labour market, as well as to the transport industry.

A smoker protesting the tobacco ban outside South Africa’s parliament on 2 June.

© Nardus Engelbrecht/Gallo Images via Getty Images

There is a strong possibility that these independent brands will maintain their greater market share after the coronavirus crisis passes. Cheaper brands may find traction among the most price-sensitive smokers, who will now be more familiar with these products, meaning that the loss in government revenue due to tax evasion on the part of independent brands may become a long-term concern. South Africa generated ZAR 14.5 billion (US$835 million) in the 2019–2020 fiscal year in excise taxes on tobacco products, a figure that might significantly drop should the independent brands cement their greater market share.¹¹ Researchers at REEP also fear that a price war may ensue between Big Tobacco and the independent producers, with inevitable detriment to public health.¹²

The gangs get involved

Independent tobacco companies are not the only ones who stand to profit. During the ban, South African gangs have begun selling cigarettes in addition to their usual trade in narcotics and illicit liquor.¹³ Some gangsters have reportedly established contacts in neighbouring countries to source their cigarettes, with one claiming that his stock comes from Namibia.¹⁴

A researcher in the gang-afflicted Cape Flats neighbour­hood told the GI-TOC that selling cigarettes has become more profitable for these gangs than selling drugs such as methamphetamines.¹⁵ In addition to profiting economically, supplying cigarettes to communities in which they operate could potentially add to gangs’ legitimacy, as they are providing a product that many feel has been unjustly denied to them by the government. In addition, flare-ups in violence have occurred over control of the cigarette and liquor trade in gang-ridden areas of Cape Town.¹⁶

Law-enforcement officials have also been involved in the illicit economy, and a number of police officers have been arrested for the trafficking and sale of tobacco products.¹⁷ Selling cigarettes has also become a subsistence activity, with children in some underprivileged areas pedalling loose cigarettes to support their families, whose income has been adversely affected by the coronavirus-induced lockdown restrictions.¹⁸

Increased prevalence of cross-border smuggling

With local South African tobacco manufacturers forced to shut down or limit their operations, cross-border smugglers have sought to fill the supply vacuum.¹⁹ In this, they are aided by the fact that cigarettes are still readily (and legally) available in much of the wider region: of South Africa’s six neighbouring states, only Botswana has instituted a similar ban on tobacco products.²⁰ South Africa is also a prime target for profiteers in the region, given that most of South Africa’s neighbours have small populations, low population densities and lower disposable incomes.²¹

GI-TOC sources, both civilian and police, from the Limpopo border region have reported a perceived increase in the number of cigarettes being trafficked over the border since the beginning of the lockdown.²² A farmer living along the border told the GI-TOC that the scale of cigarette smuggling across the Limpopo River was unprecedented. ‘From the odd group of five to eight carriers [per week] a year ago, we now have 60-plus every few days crossing in front of our camp on the Limpopo with impunity. There is a permanent army roadblock kilometres up the road from the crossing point, but they do nothing,’ he said.²³

The increase in the South African market share of Zimbabwe-based Pacific Tobacco products, from 1% to 5% during the ban, corroborates the perceptions of Limpopo residents.²⁴ Seizures of Pacific Tobacco products have been reported across the country, including in Limpopo, KwaZulu-Natal and Western Cape provinces.²⁵ One consignment was seized in Cape Town after having been traced back to Polokwane, a city in Limpopo province.²⁶

If the REEP survey is an accurate reflections of trends, the brands being purchased by Gold Leaf, a company with factories in Zimbabwe, Malawi and Democratic Republic of Congo, has significantly grown in South Africa, from 12% to 30%.²⁷ Other cigarette brands from Mozambique, China and France that were not found in South Africa previously have suddenly appeared during the tobacco ban.²⁸ Counterfeit products have also become more prevalent during the ban. With the presence of Big Tobacco brands markedly diminished, counterfeit versions of these companies’ products made a resurgence.²⁹ China has been identified as the primary source of many of these products.³⁰

Inadequate enforcement

On 1 April 2020, the commissioner of the South African Revenue Service (SARS), the primary custodian tasked with combating illegal tobacco products, was quoted as emphasizing the need for the service to ‘start from scratch’ in addressing the illicit trade in cigarettes.³¹ This is indicative of the predicament in which SARS now finds itself following the dismal period of state capture between 2014–2018.³² During this period, investigations into large-scale smuggling and tax evasion in the tobacco industry slowed or ceased altogether, allowing those involved in the trade to operate with virtual impunity.³³ Although efforts to crack down on the illicit trade have been stepped up under the new leadership at SARS,³⁴ the past hollowing out of the service has left South African agencies unable to effectively implement the government’s ban on tobacco products.

Unintended consequences

The tobacco ban, along with other coronavirus measures imposed by the South African government, faced a variety of legal challenges. On 26 June, however, the High Court in Pretoria ruled that the government had had a ‘firm rational basis’ for instituting the tobacco ban, meaning that it is likely to remain in place until a decision is taken to lift it.³⁵

The ban, however, has already had numerous unintended consequences. Firstly, it has led to an increase in smuggling along South Africa’s borders. Secondly, it has furnished established criminal gangs with a new source of illicit income. Most of all, the ban – based on an unsubstantiated link between smokers and the incidence of COVID-19 – may be counter-productive in limiting the spread of the virus, with cigarette sharing forming a new vector for transmission.

Finally, competition within the tobacco industry may increase once the lockdown ends, presenting a long-term challenge to both public health and government revenue.

The South African government’s ban on tobacco products, while marginally reducing the number of smokers in the country in the short term, has exacerbated the scale of the illicit trade and undermined the very purpose for its implementation. The longer the ban persists, the greater the risk that the changes in illicit trade it has precipitated will become permanent.

Notes