If you were looking for the best concrete example of how SA has slipped off the tracks over the past decade, it would be difficult to beat the mesmerising, twisting, grotesque story of the country’s tobacco wars.
The tobacco industry’s recent history has everything: high politics and low skulduggery; ideological battles and press manipulation; well-intentioned state intervention that has ended up a disaster; and a fierce internecine battle between factions of the industry. And, of course, spies. The only thing it does not have is Guptas.
It’s an important morality tale too: a functioning system suddenly turns into a huge train smash, dragging good people through the mud and providing bad actors with free rein.
All this comes, of course, amid a high-stakes battle for companies like British American Tobacco (BAT), which has lost 41% of its share price so far this year on the JSE, as the market has come under siege from new rules. Investors are running for the hills, as they might. "There are no angels in this industry," says Johann van Loggerenberg, former SA Revenue Services (Sars) official and one of the key players in the drama.
In a way, it’s hardly surprising. Start with the product: an addictive drug that increases the risk of death.
The extent of the problem has been revealed in all its ugly glory in testimony to the Nugent commission, and it has resulted in the firing of Sars commissioner Tom Moyane, who, the commission heard, shut down the investigation units working on various aspects of the industry’s tax compliance. The result was, inevitably, a huge revenue slump.
The commission heard two pieces of crucial evidence. Cecil Morden, the former chief director in the economic and tax analysis unit at the National Treasury, revealed just how steeply excise revenue from cigarettes had nosedived.
In 2013/2014, R11.5bn was collected, and that increased the following year to R13.1bn.
After Moyane’s appointment in September 2014, revenue peaked and then began declining — fast. In 2015/2016, Sars collected R13.5bn in excise, a 3% year-on-year increase, but in 2016/2017 that dropped to R12.6bn and in 2017/2018, to R11.4bn.
The second significant testimony before Nugent came from former head of enforcement at Sars, Gene Ravele, who said Moyane’s deputy and confidant Jonas Makwakwa (the same person who was captured on camera stuffing ATMs with cash) ordered Kumaran Moodley, then the head of the technical interventions unit, to "stop inspecting cigarette factories". Moodley himself was later suspended.
For Sars to toss at least R2bn a year out of the window through the deliberate action of its own executives was enough to make the Nugent commission recommend the dismissal of Moyane, despite his fearsome protestations.
The key to the problem lies in the huge excise tax that has gradually been added to the cost of cigarettes over the years, in an attempt to curb smoking for public health reasons and as a budget-balancing stopgap.
Research shows that it worked. Smoking incidence is down by about a third since 1994, when excise started going up in a meaningful way.
But the gap between the production price and the sales price is now so large — it can be about 50% of the cost of a packet, depending on the price — that by merely not paying the excise, new industry players can significantly undercut the traditional producers on price.
The huge excise tax has, as the industry warned it would, inadvertently created a new market. Those unintended consequences economists are always telling us about … well, they’re here.
The shocking thing is that these players are not smugglers; they are licensed cigarette makers with factories in SA.
That they are able to get away with this is alarming. Yet the new players (sometimes called the local producers, to distinguish them from the three big international companies, BAT, Philip Morris, and Japan International Tobacco) vociferously claim they do pay their excise in full.
More on this later, but the result is that there is a battle royal taking place between the two organisations that represent the new/local industry Fair-trade Independent Tobacco Association (Fita) and the established/international industry represented by the Tobacco Institute of Southern Africa (Tisa).
The dimensions of the shortfall in excise today are difficult to measure, because the estimates involved some hypotheticals: how many people do in fact smoke and how much? The size of the market, after all, would materially change the estimated incidence of excise noncompliance.
Three academics at the University of Cape Town — Nicole Vellios, Corné van Walbeek and Hana Ross — have been examining this question. They allowed the FM a preview of a new "gap analysis" they have produced recently on the difference between annual self-reported cigarette consumption and annual taxed-based sales.
Using data from the All Media & Products Survey (Amps) between 2002 and 2011, as well as the National Income Dynamics Study (Nids) for years thereafter, they find that since 2009, illicit trade has increased sharply. They estimate that illicit trade made up about 40% of the total market in 2017, confirming the claims of the established industry.
"The acceleration in the growth of the illicit market since 2015 corresponds with a turbulent time in the SA Revenue Service, during which many of the enforcement functions were greatly reduced," the trio conclude. These findings have been submitted to the Nugent commission.
Van Walbeek’s previous work studied the effect of rising excise duties over an extremely long period, and the findings are important in two crucial respects. First, by examining the real (inflation-adjusted) price of retail cigarettes, he found that in its initial stages, making smoking more expensive worked to improve public health.
On the other hand, the measures the government took in the early 2000s to restrict smoking areas, banning smoking in restaurants and adding warnings to packets had little effect, and cannot be seen. In fact, between 2004 and 2008 smoking actually increased because, Van Walbeek shows, these were strong growth years and household income was rising.
Still, all of this was going swimmingly until 2010, when there was a sudden decrease in excise paid, but that rebounded the following years. However, from 2014 onwards, in the gap between smoking incidence and excise started opening up, and locally made, very cheap cigarettes started appearing in spaza shops and the informal trade in SA.
And then, as the academics’ gap analysis shows, from 2015 things just went crazy.
Their numbers are vastly higher than a Tisa-sponsored investigation by research company Ipsos earlier this year, which audited 2,058 independent retail outlets in SA and found that 27% of the cigarette market in SA was illicit — defined as a price below R17.85 a pack, which is the excise tax and VAT applicable in 2018.
Ipsos reports that illicit cigarettes were sold in almost three out of four of the outlets audited. It finds that smaller local manufacturers were the producers of the illicit brands. Its estimate of the "duty not paid" share of the market (cigarettes costed at below R22) was about 42% of the market in 2017.
There are some numerical disputes here, however. Tisa apparently claimed that their members paid duty on 19.5-billion cigarettes in 2017. Van Walbeek says that according to the Treasury’s estimates, the entire tobacco industry, including the non-Tisa members, paid excise tax on only about 15.3-billion cigarettes in 2017/2018. The difference, the industry says, is locally produced exported cigarettes.
Van Walbeek’s research is suggestive in another way. After the small real decline in excise duty paid in 2010, Sars gradually started gearing up, and launched what became Project Honey Badger in 2013, under Van Loggerenberg’s direction.
Van Loggerenberg put the industry on terms in 2013 and again in early 2014, writing to all industry participants to say that Sars was going to step up its enforcement. The ultimatum affected Tisa and Fita members alike, and Van Loggerenberg is at pains to stress that though it was clear some members of the industry were errant in paying their excise tax, one of the international players, BAT, was also under investigation for illegally shifting capital.
"You always have to be careful that you don’t focus on the jaywalker and ignore the bank robber," he says.
Sars had used the same approach in the early 2000s in the electronics industry and then, later in the decade, the cash and carry industry. It was a standard practice by Sars to address sector-wide noncompliance. The motto was "width, depth and leverage", Van Loggerenberg says.
Width meant going industry-wide and touching everybody. Depth meant running each case to the end, and leverage meant giving people the opportunity to come forward, confess and clear up past noncompliance. The courts, he says, approved this approach because when cases did end in court, the outcome would tend to favour Sars if it used a less draconian process and gave the industry a chance to comply.
As it happens, the strategy began to work. In Jacques Pauw’s book The President’s Keepers, he describes how Carnilinx boss Adriano Mazzotti actually signed an acknowledgment of wrongdoing, admitting to unlawful and wrongful smuggling of two tons of tobacco every week for 40 weeks to avoid paying excise duty.
But then the deputy head of Sars, Ivan Pillay, was ousted, along with Van Loggerenberg and a host of other officials. It is not known what came of Mazzotti’s confession, but he has since claimed that Carnilinx has paid what it ought to have paid.
However, the tide turned. Both sides of the industry began to use different approaches, Van Loggerenberg says. "I absolutely underestimated the backlash that would follow, and I absolutely underestimated the dirty tricks that would be used. I was completely surprised by the ability of these people to put law enforcement officials onto us, and I did not expect other people who had no interest in the cigarette industry to capitalise on the situation."
The turmoil at Sars began to play into national politics. When then president Jacob Zuma appointed the head of prisons, Moyane, as the new Sars commissioner in September 2014, Sars was caught between the radical economic transformation (RET) faction intent on defending Zuma and the anti-RET faction, intent, as it later transpired, on getting him out of office.
A seemingly small incident played into this battle when lawyer Belinda Walter, notionally working for Fita, began a process which turned into the Sars "rogue unit" narrative. It is only vaguely recalled now, but initially, her allegations were aimed at Van Loggerenberg, and didn’t involve any notion of a "rogue unit". But, says Van Loggerenberg, they gradually mutated and ultimately she supported and enhanced the stories that appeared in the Sunday Times and were widely repeated on radio and television.
By 2015 the allegations suggested that the "rogue unit" had, among other things, been spying on politicians and Zuma, unlawfully intercepting taxpayers’ communications, using sophisticated spy equipment and running a brothel and front companies with over R500m in "slush funds".
But Walter was playing all sides. Not only had she worked for Carnilix as well as the Stae Security Agency, she was also being paid directly by BAT to spy on local manufacturers, including Carnilinx, as well.
And she was a former girlfriend of Van Loggerenberg.
She had resigned from Fita and Carnilinx and stopped spying (or so she claimed) — Van Loggerenberg had apparently made this a condition to their dating in late 2013. In early 2014 they fell out and this culminated in Walter’s allegations against him.
Van Loggerenberg says the story began "morphing" from the initial point as it was taken up by people associated with both the Tisa and the Fita groups for their own purposes by others within Sars, some from within law enforcement and intelligence services and ultimately everyone that had a beef with Sars.
It also began feeding into the larger battle between ANC factions. With the RET faction now much more confident that the ANC and, most importantly, the president were onside, it’s worth noting that Zuma’s eldest son, Edward, was on the board of one of the Fita members, Amalgamated Tobacco Manufacturers at the time.
Moyane used the "rogue unit" press stories and Walter’s allegations as a basis to disband the Sars executive committee, initiate several "investigations" and revamp Sars, ousting almost the entire leadership and key investigators from the organisation in a matter of months.
Among those were the majority of people involved in six different units investigating the industry. One of these was the high-risk investigation unit (HRIU), the so-called "rogue unit", which consisted of a mere six investigators, Moyane had described that unit as "vomit" and "a cancer" that needed to be cleaned up and eradicated.
Former Sars officials Pillay, Van Loggerenberg and Andries Janse van Rensburg are awaiting trial on charges relating to the rogue unit case, which have been gradually trimmed down to almost nothing.
The solitary accusation that remains concerns an amount of "approximately R100,000.00" relating to an alleged incident at the erstwhile Directorate of Special Operations that supposedly happened sometime in 2007.
The brutality of this process was extraordinary. Hlengani Mathebula, who was responsible for enforcement at Sars, told the Nugent commission that Moyane allegedly called him to his office one day and gave him a list of names of people he was to "dismiss or suspend".
He said Moyane also gave him an additional list of names of people to be appointed in senior and executive positions, all without any due process.
So where do we stand now? Even in the face of this apparent evidence, Fita chair Sinenhlanhla Mnguni is adamant that all members of his organisation are tax-compliant. "One of our members, Gold Leaf Tobacco, has revealed it pays R1.4bn per annum in excise," he says.
So how is it possible that huge numbers of informal traders in SA are selling packets for as little as R5?
"You have to understand how the informal trade works" says Mnguni. "You get a lot of price averaging." This is supposedly a process where informal traders sell cigarettes as a loss leader in the hope of attracting customers who then also buy other products.
Mnguni says it’s not only the international brands that get smuggled into the country, but also the local brands. "A lot of our members’ brands are manufactured in Zimbabwe by different manufacturers, and smuggled across the border."
In one case, a factory was discovered in Lesotho making packets of the popular brand RG, owned by Gold Leaf Tobacco.
He also argues that there has to be transformation in the cigarette market. Fita members are producing "value brands" and are confined to competing in the informal sector. But one multinational has 80% of the local market, he points out, referring to BAT.
"The multinationals control retail space and we aren’t able to compete," he says. Fita has made representations to the Competition Commission in this regard, based mainly on the ownership of display cabinets in shops.
It must be said, Fita members include some colourful characters. Mazzotti, the head of Carnilinx, not only paid the political deposit of the EFF but, according to Pauw’s book, also contributed to Nkosazana Dlamini-Zuma’s political campaign for ANC leadership. Though not a Fita member, Craig Williamson, former apartheid spy and letter-bomb murderer of activists Ruth First and Jeanette Schoon and Schoon’s six-year-old daughter Katryn, is now involved in the Botswana tobacco industry. Glenn Agliotti, the drug-dealer associate of jailed former head of police Jackie Selebi, who died in 2015, is trying to start a Mauritian tobacco company, according to local press reports.
Francois van der Merwe, chair of Tisa, which represents the established industry, says the claim that Fita members are paying their excise is "absolute rubbish". "You go to any informal trader on any given day and cigarettes are being sold at R5 a pack, which is the cheapest in the world," he says. The Ipsos study also found that illegal cigarettes are on sale in more than 100,000 shops for around R10 a pack of 20, on average.
As for the claim that Fita cigarettes are being smuggled from outside SA, Van der Merwe says this is just irrational. If you were smuggling cigarettes, he says, you would never go for the cheapest brands, you would naturally choose the expensive brands to knock off.
A new and updated Ipsos study is coming out, he says, which shows the market share of the illicit trade is still increasing fast. It shows that RG has now overtaken Peter Stuyvesant as SA’s most popular cigarette. As for RG paying excise of R1.8bn, Van der Merwe says this ought to be about R5.5bn.
This is not the end of the argument. Fita has another claim, and this is strongly endorsed by Van Loggerenberg: that Sars should be looking at more than just excise.
What lies behind this claim is a huge, unresolved corporate tax claim by Sars against BAT.
BAT says it’s "completely normal" for there to be disputes between compliant taxpayers and Sars, and points out that the amount relates to a 12-year period, 2006 to the present day. Over that period BAT SA has paid over R100bn in taxes to Sars, and it paid R14bn last year alone.
However, the claim is not "completely normal" in one respect: it’s huge, now amounting to more than R2bn. It’s the largest outstanding dispute between a taxpayer and Sars. Like all Sars’s efforts in the industry, however, the investigation is moribund.
A fierce fight is being waged for the hearts and lungs of SA’s smokers, with cheap and illegal cigarettes gaining ground
— What it means
There is one other big dispute between the two tobacco factions, and this is where the spies come in.
In 2016, seemingly out of the blue, a huge pile of documents were loaded onto Twitter on an account called @espionageSA (subsequently moved to @espionageafrica).
There were thousands of pages of information on illegal spying, corruption and money laundering.
The company implicated was called Forensic Security Services (FSS), which was funded by Tisa and BAT SA. It showed, allegedly, that BAT was paying spies within the factories of Fita members, had police on the payroll, and was embedded in the government’s own tobacco task team through one-time Fita chair, cum informant, cum Svengali, cum seductress, cum propagandist, Walter.
What lay behind the documents, which make the most fascinating reading, was ironically a decision by the formal industry to try to clean up its act, and jettison these underhand activities, by closing off funding to FFS in 2015. The result: some very angry and very exposed spies.
Van der Merwe acknowledges the organisation did fund the FSS, but says it explicitly told the organisation not to do anything illegal. "If they did anything illegal, it’s up to them," he says.
Van Loggerenberg snorts at this claim. "Practically everything they falsely claimed we were doing in the so-called ‘rogue unit’ in Sars, in actual fact they were doing," he says.
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