Developing track and trace solutions for the unique African environment
Telita Snyckers, Michael Eads
INTRODUCTION
A recent multi-part story by the Guardian highlighted the tobacco industry’s strategic focus on Africa as a growth market[1]. Indeed, recent months have seen increasingly more revelations about the extent to which big tobacco will go to capture markets in Africa. Facing increasingly stronger regulation elsewhere in the world, dramatically reduced rates of smoking in the West and increasingly hostile regulatory environments, Africa holds a number of strategic advantages for the tobacco industry[2]. Africa, with its growing wealth, booming youth market, generally low excise taxes (and cigarette prices), patchwork regulations, and relatively weak government structures, is ripe for the picking. Tobacco is a business after all and business will always gravitate to these types of market conditions. The downside for governments is that history has shown that as the industry executes its Africa-centric strategy, it brings with it a bevy of negative impacts.
There are numerous reports of the industry turning to increasingly aggressive and some would argue “dirty” tactics; threatening and bullying governments, and filing lawsuits in order to delay or stop further regulation[3].
General estimates put the illicit trade in tobacco in Africa at around 43 billion sticks a year – with a trade share in some countries as high as 38% (Ethiopia,) and in several others hovering around an estimated 25% (e.g. Cameroon, Zambia, South Africa, Algeria, Nigeria etc.[4]), resulting in annual tax losses of around $10billion a year across sub-Saharan Africa alone[5].At the same time, African revenue agencies are under ever more pressure, with most facing daunting revenue challenges driven by the global economic downturn which bites especially hard when most countries’ economies are based on extractive industries (e.g., oil and gas, mining etc.). Tax stamp and track and trace service providers should take notice as they are uniquely well placed to form strategic partnerships with agencies to develop solutions that will translate into tangible results. Realising this unique opportunity will require some out of the box thinking and an appreciation for the unique challenges of Africa.
AFRICAN CONSTRAINTS & CHALLENGES
With approximately 18% of surveyed countries in Africa having a tracking regime of any kind in place,[6]opportunities are rife for service providers. However, developing solutions for the African market is not like developing solutions for mature agencies in developed countries with advanced infrastructure and regulatory environments. Africa is unique – and solutions meant for it need to acknowledge that uniqueness. Experience across Africa highlights a number of aspects that solution providers may need to tailor their approach and service offerings:
INSTITUTIONAL CHALLENGES
Limited agency budgets, competing challenges and a negligible focus on customs and excise:Agencies the world over face budget constraints, but in Africa the challenges seem magnified. Most agencies in Africa are allocated miniscule budgets, with which they are required to improve compliance, replace legacy systems, professionalise staff, clamp down on corruption, and tighten long stretches of highly porous borders. Some government offices are still using old 286MB desktop computers, if any at all; most do not have professional data analysts, business intelligence capabilities or any concept or risk and compliance management; the majority do not have an explicit illicit trade strategy. For many, customs duty collections are a critical revenue driver (e.g. Lesotho, where 68% of tax revenue comes from customs); whilst for others, customs duties are virtually inconsequential from a tax revenue perspective (Mauritius at 2%, Algeria at 3%[7]).
Tobacco industry revenues far exceed the gross national income of many African countries, making the playing field inordinately unequal:the average gross national income across Africa is $53 billion per annum–Imperial Tobacco makes $228 billion, JTI $235 billion, BAT $239 billion, and PMI $309 billion, per annum[8].
Service providers face two key challenges – a) securing financial support through external aid, technical assistance or donor funding, particularly for traceability projects (whose strategic importance may not be immediately apparent to agencies); and b) managing agency expectations in terms of the impact lower-cost solutions can be expected to have on illicit trade and compliance more generally. Best performing service providers may well be those who offer augmented strategy offerings beyond just traceability solutions, with a view to securing compliance beyond that which a tax stamp can secure, and offering governments the best possible value for money. This could include assistance with the development of broader illicit trade strategies, data matching and mining, targeted business intelligence offerings, and potentially outsourced field enforcement functions.
Small budgets directly contribute to high levels of both corruption and capture: On the Corruption Perceptions Index published by Transparency International, countries with a score of less than 50 are regarded as having a serious corruption problem – in Africa, that accounts for 89% of countries[9]. While corruption is pervasive and potentially colours the entire continuum of a traceability project, service providers should not underestimate the extent to which many agencies have been captured by the industry – in everything from providing the intelligence on which an agency acts, assisting with the destruction of illicit goods on behalf of the agency, to developing illicit trade strategies for the agency, advising the agency where to target its enforcement activities[10]and prompting the agency on which solutions to choose – sometimes as part of overt partnerships that potentially flout FCTC rules[11], and sometimes more subtly.
Regime change and lack of continuity: Throughout Africa we continue to see numerous examples of systemic instability that impede the functioning of government – we’ve seen unconstitutional changes in government in Algeria, DRC/Zambia, Ethiopia, Egypt, Nigeria, and more than a hundred coup d’états and counter-coups[12]. Unlikemany modern democracies, a change in government frequently results in a change in administration, often to the extent of replacing even lower level managers. The resulting lack of continuity, skills and loss of institutional memory and change in rhetoric is catastrophic for many projects – no matter how well conceived or justified, especially considering most track and trace programs require longer terms to yield positive returns for service providers. Consequently, contingency plans – in particular making sure that institutional knowledge and impetus are maintained in the event of a change in government – are perhaps more critical in Africa than in other more stable democracies. Service providers should pay close attention to how they structure contracts to minimise risk and disruption as a result of potential regime changes. They should be creative and look at ways to build in stability such as Public Private Partnerships (PPP) or other models that encourage a close working relationship with government.
Exchange rate volatility:In Africa, some 14 countries use the CFA franc pegged to the euro, and three to the South African rand[13]. Forex volatility has escalated across most of the continent. In South Africa, political turbulence and international pressures have been reflected in the instability of its currency, and in its Volatility Index (a type of “fear gauge.”)[14],[15]. Angolahas had its currency almost double in the past four years to the US dollar. In Nigeria the naira has fallen from about N200 to $1 to almost N300.High volatility translates into risk for service providers and governments alike, potentially increasing the cost of solutions over time significantly. Finding local sources for key services and supplies is one way to ensure the solutions are not completely exposed to forex risk. This is a win-win for both since governments generally want to encourage investment and capacity development and typically do not favour solutions that are wholly “imported”.
INFRASTRUCTURE
Limited internet and mobile phone connectivity: Africa has a relatively low internet penetration rate compared to the rest of the world (with the exception of concentrations in South Africa, Morocco, Egypt, Mauritius and Seychelles). A large percentage of internet traffic goes through expensive satellite links, making both internet and broadband access unaffordable to most[16]. Of the ten countries with the highest fixed-broadband costs in the world, seven are in Africa. Chad tops the list at $501 a month for a connection – in a continent where about 40% of people live on less than $1.90 a day.[17]Only around 43% of Africans can get a 3G data signal, and just 16% can access fast 4G mobile broadband.[18]The costs of downloading data are also higher in Africa than in most other parts of the world, in part because the data has to get there over thousands of miles of rough terrain. This means that it may not be possible to stream production data live to the agency; it may not be possible for officers to validate production data live during in-field inspections; and it may not be possible to capture enforcement findings directly to a central system. African markets likely need greater redundancies, offline solutions and backup systems.
Unstable electricity supply: The entire installed generation capacity of sub-Saharan Africa (excluding South Africa) is only 28 Gigawatts - equivalent to that of Argentina[19]. In many places less than a third of the country has electricity, and only around 26% of rural areas have electricity. Even being connected to the grid doesn’t ensure electricity supply – in South Africa up to 14% of electric connections never work, in Zimbabwe it is as high as 44%[20]. Ghana, Ethiopia, Nigeria, Zambia, South Africa and others have all been battling rolling power cuts[21],[22],[23]that have left the countries in darkness and businesses crippled. Solution design, in terms of marking solutions, data management and field enforcement solutions, need to be mindful of the impact of intermittent electricity supply and the impact of frequent power outages (and power surges) on equipment, battery life, and backup solutions.
Rugged field conditions: Africa’s red dusty soil, corrugated roads, variable temperatures, torrential rains and intermittent flooding demand more from digital and technological solutions – especially those intended for field enforcement – to ensure that devices can hold up to a range of environmental stresses over the device’s operational lifetime. While devices might not need to comply with all 28 of the testing methods the U.S. Military requires (covering everything from temperature to fungal infestation and gunfire[24]), devices should at least be rugged enough to deal with both high and low temperatures, and be water resistant, humidity-proof, sand-proof, shock-proof, and oftentimes altitude-proof. Service providers could benefit from reviewing how best to reference standards like the US Army’s MIL-STD-810G standard, and Ingress Protection (IP) ratings[25], as a way of securing a strategic advantage for their in-field solutions.
BORDERS AND GEOGRAPHICAL CHALLENGES
Porous borders:African governments find it difficult to police long, porous borders that are often the focus of conflict, separatism and smuggling[26].Nigeria has 84 official border crossings with its neighbours – and up to 3,000 fairly established unofficial ones, where most real trade is believed to take place[27], [28].South Africa’s long, porous borders comprises some 96 illegal points of entry [29]- 50 of them with Zimbabwe, and most known to be used by cigarette smugglers.[30](Police note that the borderline between South Africa and Zimbabwe is at a state of “complete collapse”.)[31]While some smuggling is effected corruptly at legal border crossings (for around $350-750 per container[32]), much of it is believed to be done at illegal crossings away from border posts – which is easily done with more than 61,000 kilometres of land borders stretching across the continent,[33]making managing the movement of people and goods an effort in near-futility. Effective solution design for client countries has to assume that national borders lack integrity, and include the development of complementary strategies that counter smuggling both at legal and illegal crossings.
MARKET CONSIDERATIONS
Unique packaging configurations – conquering the continent stick by stick: In low-income countries it is common practice to sell consumer goods in the smallest possible volumes – you don’t need a dollar to buy a pack of cigarettes when you can buy a single stick for as little as 5 cents each (it’s twice as profitable to sell single sticks,[34]and is a way of securing a new generation of smokers). It is very commonplace – and generally not illegal - to find vendors in Africa breaking up cigarette packs and selling single cigarette sticks (often to children)[35]. Of course, the sale of single sticks severely limits the traceability of packs,[36]something that solution design needs to cater for.
Some of the drivers of illicit trade are relatively unique: A small component of the illicit trade in tobacco is arguably attributable to activities aimed at sanctions busting in countries like Zimbabwe: because of sanctions the country cannot freely export what is regarded as premium tobacco to Europe, so dealers re-brand Zimbawean cigarettes as South African[37]. Different drivers result in different behaviours and require a different response in terms of how solutions are structured.
CONCLUSION
Cigarette consumption in Africa continues to grow exponentially. Western Europe saw a decline in consumption by 26% - over the same period Africa’s consumption grew by 57%.[38]And with 41% of its population under the age of 15, and the relative lack of regulation (compared to e.g. Western Europe) Africa is expected to continue to be a growth market for the tobacco industry. With only around 18% of African countries having a traceability solution in place, it also constitutes a growth market for traceability service providers. Africa poses a unique opportunity to develop holistic solutions that cater for the unique attributes of African customers. Solution providers should think beyond traditional tax stamps and find ways to offer innovation and develop capacity. Across many industries, too often solutions offered to Africa are far too price focused and attempt to offer only basic functionality. Instead, solutions should be aimed at generating more revenue for governments and paying for themselves over time. A traditional, low cost tax stamp solution can only lead to a race to the bottom for the solution provider industry. Instead service providers should define unique value-added solutionsthat partners them with agencies. This could include assistance with the development of strategies targeting illicit trade more broadly, playing an advisory role in respect of FCTC implementation, assistance with data analytics, risk management and investigations. It could even include the potential outsourcing of certain functions (e.g. market monitoring or even field enforcement) where government lacks capacity.
There is an old saying that goes “Africa is not for sissies” and that is certainly true. If you’re looking for a traditional, low risk market, Africa may not be for you. But if you are willing to take the time to understand the client – from their perspective – and be creative about what you can offer, Africa may be worth your time. Big tobacco has it sights set on Africa - so should traceability solution providers.
[1]See for instance https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-marketand https://www.theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east
[2]http://articles.latimes.com/2012/dec/12/world/la-fg-south-africa-smoking-20121213
[3]https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-marketand https://www.theguardian.com/world/2017/aug/18/british-american-tobacco-cigarettes-africa-middle-east
[4]http://www.tobaccoecon.uct.ac.za/sites/default/files/image_tool/images/405/Training/Emerging_Researcher_Programme_2015/Illicit-Trade-Africa.pdf
[5]https://www.standardmedia.co.ke/business/article/2001235698/how-african-countries-lose-sh1tr-to-illicit-tobacco-trade
[6]As at the last FCTC implementation readiness survey, measuring “Tracking regime to further secure the distribution system developed”
[7]https://www.indexmundi.com/facts/indicators/GC.TAX.IMPT.ZS/rankings/africa
[8]Own analysis - industry revenues from http://www.statisticbrain.com/tobacco-cigarette-industry-sales-statistics/
and country GNI from https://data.worldbank.org/indicator/NY.GNP.ATLS.CD?year_high_desc=false
[9]Sub-Saharan Africa scores an average of 31 (Botswana the highest at 60, Somalia the lowest at 10.) https://www.transparency.org/news/feature/corruption_perceptions_index_2016; http://www.ey.com/Publication/vwLUAssets/EY-Transparency-International-Corruption-Perceptions-Index-2016/$FILE/EY-Transparency-International-Corruption-Perceptions-Index-2016.pdf
[10]See for instance BAT’s strong influence over South Africa’s illicit trade strategy over a period of years
[11]Something not just happening in Africa – see for instance recent coverage from Australia - http://mobile.abc.net.au/news/2017-08-26/big-tobacco-propping-up-law-enforcement-freedom-of-information/8841700?pfmredir=sm
[12]http://www.academia.edu/3034124/Unconstitutional_Regime_Change_in_Africa_TREND_PERSPECTIVES_AND_POLITICAL_REQUISITES_FOR_STRICTER_LAW_ENFORCEMENT
[13]https://www.fxstreet.com/analysis/african-currencies-nigerian-naira-and-the-new-us-dollar-volatility-201612071522
[14]https://www.jse.co.za/content/JSEBrochureItems/46%20-%20JSE%20New%20SAVI%20-%20April%202014.pdf
[15]https://vlab.stern.nyu.edu/analysis/VOL.SAVI:VIND-R.AGARCH; https://www.brookings.edu/blog/africa-in-focus/2016/10/14/figures-of-the-week-volatility-in-the-south-african-rand/
[16]https://en.wikipedia.org/wiki/Internet_in_Africa
[17]https://www.economist.com/news/middle-east-and-africa/21711511-mobile-phones-are-transforming-africa-where-they-can-get-signal-mobile-phones
[18]https://www.economist.com/news/middle-east-and-africa/21711511-mobile-phones-are-transforming-africa-where-they-can-get-signal-mobile-phones
[19]http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/AFRICAEXT/0,,contentMDK:21935594~pagePK:146736~piPK:146830~theSitePK:258644,00.html
[20]https://techcentral.co.za/inside-africas-electricity-crisis/64637/
[21]https://qz.com/422357/charted-how-electricity-problems-are-limiting-growth-in-many-african-countries/; https://www.euractiv.com/section/development-policy/news/energy-crisis-looms-near-for-africa/
[22]https://qz.com/411384/nigeria-is-shutting-down-for-business-thanks-to-its-worst-ever-fuel-shortages/
[23]http://www.theigc.org/blog/lights-out-zambias-electricity-crisis/
[24]MIL-STD-810G is a standard issued by the United States Army's that is used to prove that equipment will survive in the field. They were designed specifically to test military equipment, but are now used to test a wide range of both military and civilian products, including mobile computers.
See e.g. https://gcn.com/articles/2013/05/08/8-tests-behind-mil-std-ratings.aspx
[25]See e.g. https://www.handheldgroup.com/why-rugged-handheld-computers/what-is-rugged/, and https://gcn.com/articles/2013/05/08/8-tests-behind-mil-std-ratings.aspx
[26]http://edition.cnn.com/2015/07/24/africa/kenya-back-door-porous-border-security-threat/index.html
[27]http://www.nation.co.ke/oped/Opinion/In-defence-of-smuggling-and-Africas-porous-borders/440808-2687084-857een/index.html
[28]http://studies.aljazeera.net/en/reports/2013/09/201398104245877469.html
[29]https://www.idsa-india.org/an-may-8.html
[30]https://audioboom.com/posts/2419944-50-illegal-crossing-points-from-zimbabwe-to-south-africa-pose-a-major-health-terrorism-threat-to-the-population
[31]Major General Meetsi, South African Police Service, https://www.saps.gov.za/resource_centre/publications/maj_gen_kr_meetsi_presentation.pdf
[32]See e.g. http://www.news24.com/Africa/Zimbabwe/Illegal-border-crossings-flourish-20100817
[33]https://www.sporcle.com/games/skSK/african_long_borders
[34]http://articles.latimes.com/2012/dec/12/world/la-fg-south-africa-smoking-20121213
[35]https://www.theguardian.com/world/2017/jul/12/big-tobacco-dirty-war-africa-market; https://www.pressreader.com/south-africa/pretoria-news-weekend/20161210/281659664671990
[36]Other commodities pose unique challenges too, like beer being sold in plastic bags.
[37]http://www.b-metro.co.zw/cigarette-smuggling-big-business/
[38]See for instance https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4498629/