TOBACCO SA

1. 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

2. 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.

3. 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

4. SA TOBACCO INDUSTRY

5. INTRODUCTION • Tobacco world-wide > 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

6. 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 >1000 to 300 currently, only the best farmers survived all the changes.

7. Implication of Changes • Production of FCV declined from >30 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 >20% in 10 yrs)

8. 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.

9. ZIMBABWE SOUTH AFRICA: TOBACCO GROWING REGIONS = BOTSWANA LIMPOPO NAMIBIA MPUMALANGA NORTH WEST GAUTENG FREE STATE KZN NORTHERN CAPE LESOTHO EASTERN CAPE WESTERN CAPE WESTERN CAPE

10. 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 NAMIBIA FREE STATE KZN NORTHERN CAPE LESOTHO EASTERN CAPE WESTERN CAPE WESTERN CAPE

11. 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.

12. Manufacturing Industry >R 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 >R 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. KEY STATISTICS

13. 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.

14. 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

15. 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)

16. 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 don’t pay taxes, don’t comply with legislation, grow a huge market share at the expense of the legal industry

17. EXCISE DUTIES

18. EXCISE DUTIES 1996 – 2006: Excise tax increased by almost 440%

19. Price vs Volume of legal products

20. 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 >R1 billion annually due to illegal trade. • Industry working with Government to find solutions, intensity of cooperation needs to be increased.

21. ILLEGALTRADE

22. 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.

23. Illegal Trade as Competitor If ranked as a tobacco company, ILLEGAL TRADEwould rank as third in the market place. It is everyone's biggest competitor.

24. 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

25. Youth Smoking Prevention

26. 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

27. YSP: RETAIL AWARENESS PROGRAMME

28. NEW LOOK AS OF 2006

29. TOBACCO CONTROL LEGISLATION IN SOUTH AFRICA

30. 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.

31. 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.

32. 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.

33. 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.

34. 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.

35. 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.

36. SECTION 75 BILLMain Issues for TISA ISSUE: • If no product and testing standards exists in the export country, SA’s prescribed standards apply. TISA VIEW: • SA should not seek to impose its standards on foreign jurisdictions.

37. 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.

38. 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.

39. 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.

40. 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.

41. 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. It’s 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 wouldn’t 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.

42. 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.

43. 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.

44. 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.

45. 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 don’t 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.

46. 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.

47. 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.

48. 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 couldn’t 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

49. 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.

50. 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.