Governments need holistic solutions, not just tax stamps

Governments need holistic solutions, not just tax stamps

By Telita Snyckers and Michael Eads

As we discussed in our previous article[1]withat least 117 countries being unable to meet the requirements under either the FCTC Convention or the Protocol in the foreseeable future, what should be an undeniably enticing opportunity for potential solution providers may prove to be a challenging and complex environment to navigate. Of the 117 countries that potentially need your help, any number of them probably don’t even know it, and many likely can’t afford it. The long-standing history and prevalence of tax stamps make them an ideal platform for FCTC implementation, but with two possible distractions: they are often thought of as simple tax collection structures, belying their potential value as a platform around which broader excise modernisation strategies can be developed; and with cheaper, less-sophisticated, less effective stamps and marks potentially diluting the value proposition around marking.  

The same intractable challenges time and again

While the 117 countries certainly pose an opportunity, experience suggests that at least some level of scepticism is warranted. The tax stamp and secure printing industry appears to face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged both in court and in the media; tenders are awarded for solutions that are never implemented; intentions to expand to other products never materialise; implementations are criticised as being ineffective; contracts are not renewed; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programs that never materialise. 

 Four key reasons for low implementation rates

There are arguably four key drivers that explain why tax stamp and secure marking programs meet with less success than they could (or should): absolute inertia at tax and customs agencies; agencies being at the mercy of industry-driven rhetoric around illicit trade and potential solutions; failing to leverage potential allies in the public health fraternity and academia; and a myopic focus that concentrates simply on pre-existing solution models that may not necessarily meet agencies’ overall needs.  

Agency inertia

 As we saw in our previous article[2], only 35 percent of agencies with obligations under the FCTC Protocol have or are considering implementing track and trace solutions[3]. Only 52 percent of them collect data on cross-border trade in tobacco products; and only 18 percent keep data related to the smuggling of tobacco products. 

Agency inertia – when it comes to managing the risks around excisable products like tobacco – is understandable: For many agencies, excise duties constitute a very small part of their revenue take (in some countries as low as 2 percent of total tax revenues), and with nothing to suggest otherwise, large manufacturers are assumed to be compliant and are treated as strategically important taxpayers. There tends to be a limited understanding at agency level of the different faces of illicit trade in excisable products, and little appreciation of how they are often intricately interwoven with organised crime more broadly. Little effort has likely gone into assessing the revenue losses from illicit trade or developing a comprehensive strategy to counter illicit trade. Even assuming agencies clear these hurdles, they tend to be fundamentally unschooled in terms of technology in general or the role a secure marking solution could play in curbing illicit trade in particular; have a limited understanding of the revenue optimisation potential; or succumb to the pressure of what are often undeniably some of their biggest employers and taxpayers (as a result of capture, corruption or simple political pressure).

 There is no burning platform jolting agencies out of their state of lethargy.  Or if there is, may well be driven by an industry agenda focused on eliminating smaller competitors, with information, rhetoric and agendas largely being driven by big tobacco or their proxies (see for instance the series of events now playing out in South Africa, with a controversial illicit trade survey funded by big tobacco being used to lobby for the targeting of smaller local manufacturers[4].)

The tax stamp industry tends to be in the business of selling what often boils down to “ink and paper,” and not holistic solutions, not crafting a strong-enough business case to jolt agencies out of their torporous state.

Industry controlling the rhetoric

By far the majority of the rhetoric and arguments around illicit trade and curbing it comes from the well-oiled machinery of the tobacco[5]industry and its proxies and intermediaries, with industry rhetoric drowning out the voices of more independent academics and NGO’s. 

This means that the public and policy makers most likely – but wrongly - believe that illicit trade is solely attributable to smaller local manufacturers and crime syndicates; that tax stamp programs are expensive and ineffective; that all tax stamps are easy to counterfeit; and that additional regulation simply increase levels of illicit trade as legitimate manufacturers struggle to compete; and that the increase in illicit trade will likely result in plant closures and job losses. 

 With little to balance this out in the media, this is the rhetoric that pervades, and the rhetoric that very often drives policy decisions. And as the tax stamp initiative traces its way through conceptualisation to the drafting of tender documents, the awarding of the tender, implementation and operationalisation, the attacks follow a fairly predictable course - one that could easily be countered with the right data points and factoids, but too often isn’t. 

Instead of pre-emptively empowering agencies with the relevant data and research and factoids that consolidate the best of academic research on what arguments to expect from industry, and how to respond when industry pushes back (either through capture, corruption political pressure or aggressive media campaigns), much of it is relegated to the chronicles of academia, and hardly ever dusted off and given the prominence it deserves. 

The tax stamp and secure printing industry has an opportunity to fundamentally shift the paradigm of considerations that shape public opinion and policy makers’ decisions. The result can only be more informed decision-making, with more tax stamp programs being implemented. 

Failing to leverage potential allies in public health and academia 

We remain astonished at the relative disregard the public health community has for the tax stamp industry. What should be an obvious partnership is instead characterised by distrust and almost no interaction. Where the tax stamp industry should have a seat at the table when it comes to developing and implementing secure marking solutions for cigarettes as part of something like the FCTC Protocol, it does not, and is instead pertinently excluded - even as observers during the 2017 MOP1 and COP8 meetings (made all the more egregious because the tobacco industry is known to have had a voice through proxies, as is evidenced by e.g. the Dirty Ashtray Awards handed out to some countries for parroting industry rhetoric.)

The tax stamp and secure printing industries are undoubtedly the single best and most uniquely positioned to deliver on some of the Protocol’s most fundamental objectives.  Instead there is poor if any communications and no formal structures for two parties who should be allies to come together.  The result may well be the tobacco industry’s solution paradigm (largely based on Codentify/Inexto) being implemented as a track and trace solution for governments. (There are already indications of this happening with the EC approving related entities as data service providers under the EC’s weak criteria for independence set out in the Commission’s Implementing Regulation (EU) 2018/574.[6])

If the collective aim is to eliminate the illicit trade in excisable products like tobacco (or even if only driven by a profit motive that seeks simply to increase the number of tax stamp programs implemented), the enmity and scepticism on the part of the global health fraternity needs to be far better managed. Arguably the best way to mitigate that risk would be by creating a network of allies working towards the same goal: reducing the illicit trade in cigarettes, through the use of proven technologies and strategies. In that sense, a partnership between organisations like ITSA and other trade associations, illicit trade experts, and something like the FCTC Secretariat seems like a natural fit. Unfortunately, the Protocol’s track and trace regime is largely developing without the inputs of subject-matter experts who have real-world experience in implementing tax stamp or secure marking programs, or more broadly in curbing illicit trade, simply playing into the hands of the very industry it was meant to control.  

Solutions that only partially solve the problem 

Tax stamps and secure marks are an inordinately important part of the ecosystem of solutions that help ensure better production control, traceability and overall compliance in respect of excisable products across the supply chain. But secure track and trace is only one element in an agency’s illicit trade strategy.  In order to be fully effective, and provide a comprehensive service offering it needs to be augmented by strong business intelligence, data analytics, enforcement capabilities and oftentimes additional cargo tracking and container security initiatives. 

This is not necessarily always immediately apparent to client agencies, who may well naively implement a secure marking and traceability solution believing it to be a panacea that does not require additional investment or capacity on the part of the agency.

This dilutes the effectiveness of tax stamps, secure marks and traceability programs across the board: how do you superimpose a generic solution if you don’t know what problem you are trying to solve? If your service offering only focuses on the secure track and trace component, but little else, how does that substantively translate into value-for-money for cash-strapped agencies? How does it actually improve not just production control for local manufacturers, but contribute to actually reducing the prevalence of illicit trade? And how does it help to mitigate rhetoric (very often planted by industry) that tax stamp programs are ineffective?

Focusing on broader outcomes

There is nothing wrong with being driven by a profit motive. There is nothing wrong with touting cost-effective solutions that maximise a company’s return on investment. But until the tax stamp/secure printing industry begins to develop holistic solutions that actually speak to illicit trade in very real terms it will continue to face the challenges it now does, and will continue to limit its potential success. 

Never forget why we have tax stamps, secure marks and traceability programs: to ensure that taxes are paid on excisable products, rooting out illicit traders that benefits from not paying taxes and duties. The challenge in 2019? Do more than just sell stamps – empower agencies to make informed decisions, and sell holistic solutions that have a quantifiable impact on illicit trade and transforms the way in which agencies administer their excise portfolios. 

Our next article explores just how that can be done by helping customer agencies better understand the problems they are facing, tailoring solutions to fit the problem taking agency capacity into consideration, help agencies position marking regimes within the context of a broader illicit trade strategy, and using tax stamp and fiscal marking programs as a platform to more broadly transform customs and excise administration.

[1]“117 countries may need your help. Some don’t know it. Many can’t afford it”, Tax Stamp News November 2018

[2]Ibid

[3]This number excludes countries who are not signatories to the Protocol. Moreover, only 78 percent of Parties submitted reports, which means that the actual extent of readiness is likely far lower than these numbers would suggest. http://www.who.int/fctc/mediacentre/news/2018/launch-global-progress-report-2018/en/

[4]For a brief summary, see e.g. http://www.tobaccotactics.org/index.php?title=South_Africa-_Country_Profile

[5]Although of course increasingly also alcohol, sugar and other manufacturers of excisable products.

[6]https://ec.europa.eu/health/sites/health/files/tobacco/docs/primaryrepositories_approvedproviders_en.pdf

117 countries may need your help. Some don’t know it. Many can’t afford it.

117 countries may need your help. Some don’t know it. Many can’t afford it. (For Tax Stamp News, published by International Tax Stamp Association)

By Telita Snyckers and Michael Eads

The Protocol to Eliminate Illicit Trade in Tobacco Productsfinally came into force on 25 September 2018, which means that signatories – formally referred to as “Parties” – now have five years to implement a series of obligations. With track and trace obligations under both article 15 of the Convention, and article 8 of the Protocol, this leaves some 181 potential new customers obligated to have track and trace solutions for cigarettes. Many of the parties, for the most part, are nowhere near ready to fulfil these obligations.

A report issued by the World Health Organisation in October 2018 measured, amongst other things, the readiness of the respective Parties against the requirements of the Convention, in particular highlighting the overall lack of maturity of authorities and the lack of funding available for implementation. (Unfortunately the report does not separately track the readiness of signatories to the Protocol, as opposed to the broader Convention, but still sheds light on the relative readiness of countries to implement track and trace solutions, whether under the Convention, the Protocol, or simply because it is a sensible strategic investment to make.) Our own experience in working directly with governments on excise modernisation and track and trace solutions, validates the generally low level of knowledge of track and trace and related concepts and technologies in most agencies.  This is a treaty developed largely by the public health community and not customs – neither of whom have a core competence in developing track and trace solutions.  This raises very real concerns around the probability of substantive compliance.  It also keeps the door wide open for the tobacco industry to promote its own solution.

Opportunity

 The Convention and Protocol requirements to implement a track and trace regime pose an obvious opportunity for the secure printing and tax stamp industries. While[1]66 percent of Parties[2]have noted that they already mark tobacco products to establish if packs found on the market are legitimate[3], and 63 percent reportedly mark packs so their origin can be established, only 64 Parties – 35 percent – report that they have or are currently in the process of developing a track and trace regime (a number which is likely overstated)[4].  

Complex environment

With at least 117 countries unable to meet the requirements under either the Convention or the Protocol in the foreseeable future, the opportunity is undeniably enticing for potential solution providers. However, this may prove to be a challenging and complex environment to navigate – of the 117 countries that potentially need your help, any number of them probably don’t even know it, and many likely can’t afford it.

·     There may not be any real impetus for implementation with the actual implementing agency:The Convention and Protocol are both predominantly driven by a health agenda – not a revenue one. Its signatories may or may not have coordinated with their local customs and revenue counterparts during the process prior to ratification. As a result, the agency that would traditionally be responsible for the implementation of a track and trace system (the customs or revenue agency) may well not even be aware of its obligations, or may view them as a simply burdensome requirement that has little to do with their core mandates of revenue collection and border protection. Additionally, customs and revenue and health agencies are not natural partners as might be the case with other government agencies that have a border control mandate, like agriculture, immigration, or standards, which have developed close operational ties and in many cases share facilities at ports and borders.  With more than a quarter of the Parties not yet having established a tobacco control coordinating mechanism[5]the likely result is that, without some prompting, either from the local health department or solution providers, the agencies actually responsible for implementation (customs and revenue) may be slow to pursue their track and trace obligations. With five years for Protocol signatories to procrastinate, an active campaign is likely needed to popularise both the actual requirements, and to craft a suitably inspirational call to action. Finally, the tobacco industry has invested a lot of time, money and effort to “partner” with customs agencies and already have relationships and influence in the law enforcement domain (and their position on independent track and trace is no secret.)  

·     The lack of financial resources may dilute the effectiveness of the solutions chosen. A significant65 percent of Parties noted that they lacked the necessary finances needed to comply with their obligations (and this wasn’t even focused on the track and trace systems, but just in general)[6]. This is exacerbated by the fact that the recommendations made by a panel of experts were not included in the draft MOP budget,[7]putting far greater pressure on Parties to secure cost-effective solutions. While low cost, less-sophisticated tax stamp solutions may tick the FCTC box, they are generally little more than “white elephant” systems that do little to actually address illicit trade, in turn diluting the effectiveness of the Convention and Protocol.

·     Small volumes in low income countries will likely discourage solution providers from tendering.Although countries have the option of getting the tobacco industry to bear the costs[8], this could still be a significant issue for low income countries with small volumes, where it could take a considerable amount of time to recover costs.  The traditional funding models used by the tax stamp industry – price per thousands of marks – may prove to be prohibitively expensive and may not be appropriate in some cases.  Between the limited funding available, and the fact that volumes may not make for an attractive business case, some countries may well have little choice but to choose cheaper industry-favoured solutions simply using digital codes printed directly onto packs – which come with the unavoidable risks of copying, cloning and counterfeiting, and are unlikely to achieve the actual objectives of the Convention, compromising the integrity of the FCTC program. 

·     Many agencies simply don’t understand either the problem or potential solutions well enough. Far more work may be required to create an empowering environment where particularly less sophisticated Parties see the value of track and trace solutionsbeyond simply being something prescribed in a health treaty, but as strategic revenue optimisation and enforcement tools that they would do well to invest in. Only 52 percent of Parties keep data in respect of cross-border tradein tobacco products.Only 18 percent of parties have data on the smuggling of tobacco products in their jurisdiction[9]. Our own interactions with client agencies highlight how many customs officers – on whose shoulders these implementations would rest – do not understand the simple difference between GPRS tracking devices (used on conveyances), and item level track and trace, let alone the difference between digital and material security features. But perhaps just as importantly, agencies who dochoose to invest in track and trace systems often erroneously believe that they are sufficient in and of themselves to curb illicit trade – which of course they are not, instead requiring a series of complementary capacities and capabilities to fully curb illicit trade. This leaves the tax stamp industry with some distance to go in terms of educating their potential customers and helping them design solutions that are fit for purpose and that serve a broader purpose in support of the agency’s core objectives.  

FCTC ‘s failure to engage an own goal?

The FCTC Secretariat and local health departments are quite capable of introducing most of the provisions detailed in the Convention and Protocol. The illicit trade provisions – and the track and trace provisions in particular – are different. They place obligations on third parties – customs and excise agencies - who in large part are not ready to fulfil those obligations. The main driving force behind FCTC compliance in a country – usually the department of health – is typically not heavily invested in engaging with solution providers or illicit trade experts (and indeed COP sessions in Geneva were heavily criticised for excluding interested parties from any engagement). With a significant proportion of countries not ready to implement a track and trace regime, not understanding the concepts or technologies related to track and trace – many not even having started on that journey – the Convention and Protocol requirements around track and trace are at risk.   

In the absence of a far more coordinated approach to empowering Parties to implement their track and trace obligations, and if simply left to develop organically, many Protocol signatories are either unlikely to meet their obligations by 2023, or will be more susceptible to choosing low cost, unsophisticated solutions that tick the FCTC box but that do nothing to actually counter the illicit trade in cigarettes. 

Arguably the best way to mitigate that risk would be by creating a network of allies working towards the same goal: reducing the illicit trade in cigarettes, through the use of proven technologies and strategies. In that sense, a partnership between organisations like ITSA and other trade associations, illicit trade experts, and the Secretariat seems like a natural fit. Unfortunately, opportunities for engagement have not materialised, and the track and trace regime is largely developing without the inputs of subject-matter experts who have real-world experience in implementing tax stamp or secure marking programs, or more broadly in curbing illicit trade – simply playing into the hands of illicit traders.  

Will the Convention and Protocol make a substantive difference to countries’ ability to curb the illicit trade in cigarettes? It very well could. But unless we address the obvious shortcomings in the current paradigm, and those briefly explored in this article, perhaps it won’t.

[1]Only 78 percent of Parties submitted reports, which means that the actual extent of readiness is likely far lower than these numbers would suggest. http://www.who.int/fctc/mediacentre/news/2018/launch-global-progress-report-2018/en/

[2]To the Convention, not necessarily signatories of the Protocol

[3]This number is likely over-stated, with reports typically being completed by local health departments who experience shows do not necessarily understand what a track and trace system actually is. These marks do not necessarily pose an effective solution in combating illicit cigarettes. So e.g. the diamond stamp used in SACU countries is a simple die impression which constitutes a mark, but serves little real purpose and does not meet FCTC requirements. The number of countries requiring new solutions that meet FCTC requirements is therefore potentially higher than the 117 countries referenced in the remainder of this article. 

[4]WHO FCTC Global Progress Report 2018, http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf

[5]Ibid

[6]WHO FCTC Global Progress Report 2018, http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf

[7]See e.g. What’s Next After Historic MOP1?Tax Stamp News October 208 (Volume 10) https://www.reconnaissance.net/tax-stamp-news/issues/october-2018/

[8]Ibid

[9]http://www.who.int/fctc/reporting/WHO-FCTC-2018_global_progress_report.pdf

Tax stamps and secure marks: Five avenues to a strategic advantage

Tax stamps and secure marks: Five avenues to a strategic advantage

In one of our earlier articles we explored how difficult it can be for tax stamp and traceability programs to gain traction, which will likely become increasingly more difficult as more potential solution providers enter the market, and even as more governments begin to seek compliance with their track and trace obligations under the FCTC.  

Watching from the side-lines, and particularly in the role of advising government agencies, I was struck by how many untapped opportunities there remain, to both improve the take-up rate of traceability solutions in general, and to improve individual companies’ potential success rates. Between ITSA and its members, there seem to be a number of avenues that would even better position the industry, including doing more to demystify track and trace; leveraging partnerships with untraditional partners; doing more around pre-sales marketing; creating more narratives around the successes that have been achieved through tax stamp and traceability programs; and preparing agencies to better anticipate and counter industry tactics aimed at derailing traceability programs.

The first avenue is both obvious and daunting: doing more to demystify tax stamps and track and trace. Even the simplest of concepts remain poorly understood by the officials who need to choose them, and the politicians who are supposed to fund them. There is very little real support to agencies, politicians, the media and the public in general aimed at demystifying exactly what these pieces of paper or codes are and what they do. What little is available is often highly academic and not written in an accessible style, on obscure websites that you and I may know about but that are hardly likely to feature on the average person’s newsfeed. Much of the narrative that isavailable, is critical of tax stamps and the companies that develop them (most likely driven by the very industries the tax stamps are meant to better control). 

If I were a lawyer at a customs and excise agency, facing a challenge of rampant illicit trade in excisable goods or needing to urgently bolster excise revenue collections, where would I start? It’s a veritable maze, with rabbit holes and back doors. Trying to understand the options and solutions and implications is more herding cats than science. Knowing who to trust – and, by contrast, whose opinions come with a heavy dose of self-interest – is tricky.

As an industry, we tend to be so quick to jump into conversations around overt and covert security, or the difference between digital and material tax stamps, that we often forget to start at the very beginning. Agencies often literally do not understand the difference between track and trace as we know it, and GPRS tracking devices on trucks. There are no simple guides aimed at translating industry jargon into something an average excise officer can relate to. Presentations are often highly sophisticated and overwhelming, potentially leaving agencies with little real understanding of the implications of the options they choose, or the alternatives that might be available to them, and are not empowered to ask the right questions that would help them in choosing the best possible solutions for their individual situations. 

Investing in a solution provider-agnostic, simple guide, that speaks to the average excise officer and their political masters, detailing what questions to ask, what options they could potentially choose from, and what the implications of those different options would be, would be a substantial strategic win for the secure marking and tax stamp industry. It would allow agencies to make more informed decisions, and in doing so, would be a sound PR win for the industry.

A second avenue, that would similarly constitute a bit of a PR triumph, perhaps lies in better leveraging partnerships with – in particular – the health fraternity. Of course tax stamps and traceability programs go far beyond just securing compliance with the FCTC, but it has the potential to be a powerful promotional driver for the industry. 

Unfortunately, much of the tax stamp and secure marking industry is viewed with some scepticism by the health community, which refuses to partner or even engage with industry. At the FCTC meetings in Geneva in 2018, the MOP and COP sessions explicitly excluded securing marking industry representatives – while the tobacco industry managed to get a seat at the table through its proxies. It represents a real lost opportunity for two sectors who at least in this one regard have a common goal in mind – reducing the illicit trade in excisable products. 

The relative lack of trust and engagement is a loss to both industry and the health fraternity, and something of a win for those manufacturers of excisable products out to cheat the system. We end up attending our own conferences, reading our own newsletters, preaching to the choir, and not leveraging what could be an inordinately powerful ally in better securing supply chains.

 I firmly believe that the tax stamp and secure printing industry shouldhave a seat at the FCTC table, and developing a roadmap that begins to deliver on this goal would similarly be a strategic investment in even more robustly positioning the industry. 

Part of developing both the simple guide and gaining more trust within the health fraternity perhaps lies in a third avenue of strategic advantage: doing more to exploit the real value that tax stamps and secure marks can potentially contribute. 

We were recently asked to compile a quick list of examples of successes achieved using secure marks. As it turns out, this is quite a tricky request. The studies that are available tend to repeatedly focus on the same small number of sample countries, and don’t necessarily convincingly make the case – in a powerful and accessible way – that investing in tax stamps and secure marks goes beyond simple rhetoric or an obligation imposed by the FCTC, but actually yield real, substantive, measurable successes. We need far more substance around the success stories attributable to tax stamps and secure marks.

It is extremely difficult to sell a product or a service when there isn’t a compelling story to tell – and without a comprehensive list of country examples where secure marks made a notable difference, there simply isn’t a compelling story. Perhaps what is needed is an anonymised case study – ensuring that specific vendors or countries aren’t identifiable – detailing simply what type of security features were used, and what impact they had on excise collections, excise declarations and illicit trade in general. 

A big part of this conversation should arguably expand the way in which success is measured, beyond simply the number of products marked, or an increase in excise revenues, to broader measures around a decrease in illicit trade, and strike rates of enforcement activities, and the rate of successful prosecutions – all of which should be the real reasons governments invest in tax stamp and secure marking programs.

Implementing tax stamps and secure marks should be an easy sell, but often is not. A consolidated, global study that anonymises solution provider data, whilst still detailing the nature of the different solutions (and perhaps what other supplementary solutions were implemented), together with an indication of type of successes achieved, would be a win for the industry as a whole – particularly considering the fact that agencies indisputably in practice dohave a choice whether or not to pursue what is often a contentious issue. 

A last worthy investment for the industry would be very strongly investing in more robust guidance to agencies on the kind of pushback and obstacles they can expect from the industries they are trying to regulate – whether this is the tobacco industry, or alcohol, or sugar, or whatever other behemoth agencies may have in their sights. 

We know from experience that these industries tend to have a somewhat generic set of tactics, arguments and rhetoric that they use to dilute, derail or delay the programs that are meant to better regulate their supply chains.  And we also know from experience that much of these tactics and rhetoric is easy enough to counter or engage with constructively, but that an unprepared agency may well not be able to do so. As a result, we see far too often how even the best of programs fall by the wayside, simply not gaining traction, as the larger manufacturers flex their fiscal muscles, relying on the soft power that comes from being a significant revenue contributor; argue that they are capable of self-regulating; propose that government should instead be focusing its efforts simply on low-cost manufacturers; deflect more sophisticated solutions with concerns about costs; and on occasion even capture or corrupt agencies. And far too many agencies bend and bow and sway to this pressure, walking away from engagements which they could easily direct – if only they had easier access to facts and counter-arguments. 

A simple generic guide to the reasons why tax stamp and secure marking programs fail, highlighting the type of narratives and arguments and agency is likely to be faced with, and a set of facts and counter-arguments for agencies to rely on, would go a long way to ensuring that even more programs make it out of the gate and actually get implemented. 

What is needed is more generic, industry-wide efforts, that do more to simplify what is otherwise a somewhat opaque business. What is needed is far more technology-agnostic publications on the principles, options and implications of different choices, written in a simple, accessible style. What is needed are compelling stories that sell the concept, and I’m convinced we’re on the road to even greater things. 

Developing track and trace solutions for the unique African environment

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/

The SARS tender: Can an agency in turmoil be both agile and prudent? (for Tax Stamp News)

The SARS tender: Can an agency in turmoil be both agile and prudent? (written for the Tax Stamp News, published by the International Tax Stamp Association)

By Telita Snyckers

About the author: Telita Snyckers is an international tax and customs transformation consultant. Key clients include the International Monetary Fund and Sovereign Border Solutions, after having previously worked as an Executive at SARS and a compliance manager with the taxman in Singapore. 

At the recent Tax Stamp Forum in Budapest one question kept coming up: the status of the SARS tender for a tax stamp or secure marking solution for tobacco products. (The current SARS tender has already been extended twice, with the current closing date for submissions now set for 31 October 2019.)The tender has elicited great interest from potential solution vendors with more than a hundred people attending the briefing by SARS in May 2019. The short answer, of course, is that no one really knows as SARS has said little about the project from its original announcement earlier this year.  The tender was issued four days before new Commissioner Edward Kieswetter took office - following the dismissal of his predecessor Tom Moyane ( whose legacy of failure and corruption was described by a Commission of Enquiry as having turned the tax institution – once hailed as a world-class system – “on its head.”) The process is high profile, politicised and directly associated with much broader issues in relation to South Africa’s struggle against state capture. 

The question dovetails nicely with the presentation I did at the conference, on what more solution providers – and the secure marking industry in general – can do to improve their conversion rates and actually get solutions implemented.

As we’ve pointed out in earlier articles, and as we again explored at this year’s conference, it seems that solution providers face the same intractable challenges time and again: solutions are pitched that never go to tender; tenders are issued but are never awarded; awarded tenders are challenged or cancelled; tenders are awarded for solutions that are never implemented; and the tax stamp and secure printing industry ends up expending a considerable amount of resources on programs that never materialise. 

A quick recap of the SARS history may be in order:

SARS efforts to address illicit trade in a meaningful way is long overdue: In 2007 the agency included a focus on illicit tobacco in its strategic plan. In 2010 it implemented a tobacco marking pilot project using an industry-developed solution. In 2013 SARS said it was considering replacing the diamond stamp, but indications are that resistance from the manufacturers made SARS walk away from the process. In 2016 SARS tabled a legislative amendment that would in theory have allowed for the use of secure fiscal marks and noted that it had completed a track and trace study into the cigarette supply chain. In 2017 SARS simply noted that it was working on developing a way of detecting illicit cigarettes and allowing it to better manually track the movements of cigarettes. In 2018 SARS signalled its intention to introduce production counters on cigarette manufacturing lines (arguably a simplistic, outdated, ineffective solution.) 

So, for SARS to finally have published a tender in 2019 was making big strides indeed.  

So why has it taken so long to get this over the line? Perhaps as a result of an interplay of several key reasons: conversations around secure marking are being driven almost entirely by the tobacco industry; the benefits of secure marks are being under-sold in general; SARS – like most agencies, has no experience with track and trace and the related technologies; and given recent scandals that have literally rocked the once-darling agency to its core,  SARS has reason to be extremely cautious.

The conversation is entirely being shaped by the tobacco industry 

A large part of the answer may lie in the presentation I did at the TSF: because the rationale behind secure marking, and the benefits it could potentially offer the country, has simply not been surfaced sufficiently. In fact, the only voices being heard on better securing the supply chain, and on the proposed marking of cigarettes, are those of the tobacco industry.

I did a quick analysis. In the few months since SARS announced the tender, around 22 directly-related articles appeared in the media. Of those, only 3 argued in favour of a secure marking solution: one by ITSA, one by my colleague Michael Eads, and one by South Africa’s Council Against Smoking. So, in South Africa, arguments supporting a sensible, proven solution to illicit trade feature in around 13 percent of media articles since the publication of the tender. 

The rest of the articles argue why the introduction of a secure marking and traceability solution would spell sheer devastation: secure marks “would not address the main problem of illegal tobacco trade,” the new system was described as “rushed” (well, it’s only taken them 10 years), the “paper-based fiscal markers are more easily stolen, counterfeited or forged,” “the system specified in the tender will capture only the legal market and could drive illicit trade up further”, and the industry noted its concern about SARS introducing“such a sophisticated, IT-intensive system” (SARS actually has a pretty good track record when it comes to rolling out sophisticated IT systems.) Alarmist statements have become common, with industry noting that: “The resultant adverse economic effects will not be limited to the loss of jobs and state revenue, but also all the local leaf growers and others who supply goods and services to the tobacco factories in SA. Ten thousands [sic] farmers will be immediately wiped out, putting another 35,000 dependents at risk.” And the system would simply see“a multi-billion rand tender awarded to a monopoly.” Every single one of the statements come from the industry body representing big tobacco. 

We know that the tobacco industry frequently meets with SARS to “coordinate” efforts to combat illicit trade.  And yet they are vehemently opposed to the one measure (track and trace) as agreed by experts and embodied in the FCTC Protocol that can best address the issue. (Any industry that legitimately wanted to fight against illicit trade should welcome the initiative. The fact that the big players in the tobacco industry do not do so may suggest that the companies themselves would prefer the tobacco supply chain to remain opaque. One can only speculate why that might be so). 

(Instead, the industry’s proposed solution is a simple one: SARS should rather station customs officers at manufacturer’s premises. Anybody who knows anything about best practice when it comes to compliance and risk management can tell you that human interactions are inherently fraught with integrity risks, and no modern tax administration would ever introduce manual processes reliant on human discretions given a choice.) 

The problem, of course, is that public policy tends to follow public opinion. And public opinion has been shaped almost entirely by the very industry that SARS is trying to regulate. 

So, the first part of the challenge, then, lies in bringing more balance to the conversation around the importance of supply chain management and why tobacco supply chains are so inherently risky. It lies in at least bringing a more objective view to “Joe Public” on what tax stamps and secure marks do, how they work, and their importance in better securing the tobacco supply chain. 

What is the ROI?

Something we also touched on at the recent TSF was the importance of being able to tell a compelling story about the return an agency can expect to see if they implement a secure marking solution. 

There certainly are compelling examples of successes, some of which were featured in Budapest. 

In our interactions with agencies this is one of the first questions they ask, and one that we find hardest to answer. It is also one of the key bits of rhetoric that is ultimately often used to get governments to walk away from secure marking programs. The few studies that are available are often old, cover very few countries, and seem to be limited in focus.

Writing captivating, engaging content to better balance the current debate – not just in South Africa, but the world over – would be so much easier if there was a more substantial, comprehensive body of evidence covering a wide range of countries on how solutions indisputably can and do make a difference. 

 Agencies are not traceability or secure marking specialists

The development of a marking solution does not fall within the core competence of the typical tax or customs agency – even an organisation like SARS that has actually developed and implemented other world-class and highly sophisticated IT systems. 

Through something like the most recent Tax Stamp Forum, an agency like SARS would have had the opportunity to interact substantively with the very solutions they are trying to implement. Many of its Southern African neighbours attended and actively engaged – SARS did not. SARS’ failure to attend the TSF represents a real missed opportunity for the agency. 

This highlights the importance of the ITSA initiative to include government agencies as members. It may perhaps come too late for SARS, but for other agencies it may well help to both gain better traction for solutions that work. 

An agency in turmoil: can it be both quick and prudent?

SARS has had a traumatic few years (and quite a bit of it related to the tobacco industry). The new Commissioner, Edward Kieswetter, grapples with depleted capacity, low staff morale, and weakening tax morality. He has inherited an agency that is viewed with scepticism by many, in a country where allegations of state capture and cronyism have become rife. (SARS is actively lobbying to have global powerhouses Gartner and Bain, along with international law firm Hogan Lovells,banned from doing business with any government departments in future for their role in the capture and collapse of the institution.[1]McKinsey has already had to pay the country’s government back around $68million for other tenders that were unduly awarded to it, and is already on the list of companies government won’t touch.) The tender was announced just days before he officially took on his new role. He has to be seen to be both decisive in dealing with illicit tobacco – which is easily the single most visible issue in the media facing the organisation - and transparent in how he does so.  He has to move both quickly and prudently – in an environment that is complex and with many that would be happy to see him fail.

We have long argued that SARS should have moved much faster in better securing the tobacco supply chain, and that secure marks and traceability are key in doing so. Indeed, it should have done so when there was some impetus behind the process some years ago. While we continue to argue for the introduction of these and other sensible policy solutions, we also have some sympathy for SARS in trying to navigate what has become a veritable minefield.

Conclusion

It’s anybody’s guess what SARS’ next move will be. 

We’d like it to move faster because it estimated that illicit trade sits at between30-35 percent of the cigarette market[2]– equating to more than 66,000 policemen’s salaries a year. But we’d also like them to move cautiously, to make sure that their decisions are informed by more than simple anti-regulation rhetoric. In the meantime, we need to do far more in terms of bringing balance to the public narrative – so that we move beyond a very low 13 percent of media coverage actively supporting the introduction of secure marks, to telling a far more compelling story about how supply chain security actively and substantively serve to curb illicit trade. 

[1]https://www.businesslive.co.za/bd/national/2019-09-18-sars-wants-to-ban-state-capture-firms-bain-and-gartner/; https://www.pressreader.com

[2]The calculation depends on whether AMPS or NIDS data is used, and what percentage of under-reporting is used (5, 10, 15 or 20%). See Nicole Vellios, Illicit cigarette trade in South Africa 2011 – 2017, https://tobaccocontrol.bmj.com/content/early/2019/08/05/tobaccocontrol-2018-054798

Tobacco Industry Interference Index – What it means for secure track and trace (for Tax Stamp News)

NOTE: This article first appeared in the Tax Stamp News, published by the International Tax Stamp Association

Background

 The 2019 Global Tobacco Industry Interference Index[i]was just released. Tthe concept is not a new one, and borrows from the methodology originally developed by South East Asia Tobacco Control Alliance[ii]to assess the extent to which the tobacco industry was unduly influencing governments in Asia.)

The report confirms what we already know: how the tobacco industry works strategically to delay and defeat tobacco control measures using various tactics. Governments have identified tobacco industry interference as the most serious barrier to
passing strong tobacco control measures[iii]– and yet better controlling this lies almost entirely in government’s own hands.

In support of the World Health Organisation’s Framework Convention on Tobacco Control a set of recommendations were adopted to protect governments from industry interference. The Interference Index measures the extent to which governments have adopted those recommendations, across a number of dimensions: tobacco industry involvement in policy development; the use of CSR campaigns to influence government relationships; the securing of preferential treatment for the industry; the extent of unnecessary interaction between government departments and the tobacco industry; the transparency of government engagements with the industry; and the extent to which there may be a conflict of interest on the part of government officials vis-à-vis the tobacco industry. 

Customs agencies at particular risk

The first Global Tobacco Industry Interference Index shows that major improvement is needed, with a lack of transparency in many countries when dealing with the tobacco industry, and with particularly non-health government departments (like tax and customs authorities) remaining vulnerable to industry interference. This is particularly true because tax and customs agencies have historically developed close relationships with the tobacco industry, in part because of the ongoing operational interaction between them, but also because these companies invariably end up being significant revenue contributors, and frequently enter into MOU’s with government. The close nature of the relationship – and the very significant capacity constraints that tend to face most government agencies – means that governments often resort to policy positions advanced by the industry itself. 

Country performance on the index

 The 10 countries most at risk from tobacco industry interference are rated as Japan, Jordan, Bangladesh, Lebanon, Indonesia, Egypt, China, USA, South Africa and Tanzania.

In respect of these countries in particular, the report highlights a number of examples: 

In Japan, government owns 33 percent of JTI, allowing JTI significant clout of interfering in policy development. When senior government officials retire, they move to key leadership positions in JTI. (The current Chairman of JTI started his career in the Ministry of Finance, including a stint as Special Advisor to the Cabinet before being appointed as Chair of JTI.)

In Pakistan, the previous previous Finance Secretary and Secretary General, Finance and Economic Affairs, became the Chairman of the Board of Pakistan Tobacco. In Bangladesh the former Senior Secretary of the Ministry of Agriculture and the former Secretary of the Ministry of Industries are both Independent Directors of BAT. In Cambodia, the owner of a cigarette business was appointed a Senator.

In Egypt closed meetings held with government allowed for pricing agreements to be reached; in several countries, non-health ministers were involved in endorsing tobacco-related CSR activities; in Indonesia, VAT for all consumer products is charged at 10 percent - cigarettes are taxed at 8.7 percent.  

In South Africa, promises to introduce a secure marking solution have (to date) come to nought, with government now indicating its intention to rely on production counters in factories – a solution that was apparently proposed by the tobacco industry. 

The tobacco industry is known to have had closed door meetings with the Finance Ministry on taxation issues, without disclosure of the agenda, in at least Bangladesh, Indonesia, Malaysia and South Africa. And Bangladesh, Brazil, India, South Africa, Jordan, Lao PDR, India, Lebanon and Ukraine all receive some form of technical assistance from the tobacco industry in the fight against illicit trade.

Two thirds of the countries reviewed in the Interference Index allow political contributions from the tobacco industry. 

The challenges are equally pressing in countries where governments enter into state-owned enterprises (SOEs) or joint ventures, as happens in e.g. China, Egypt, Japan, Lao PDR, Lebanon, Thailand and Vietnam, where government officials may find themselves inadvertently conflicted in adopting tobacco control measures – and with many of countries performing poorly on the Interference Index because of pressure to give preference to business interests over tobacco control and creating situations with senior officials moving from government to the industry. 

The bottom line is that countries where the tobacco industry has a stronger influence, are less likely to adopt policy positions that may antagonise these behemoths, because they are often viewed more as partners than as subjects to be regulated. Influence too easily becomes administrative capture, leaving governments adopting rhetoric that favours the industry, without applying its own mind objectively. 

How does industry interference influence the implementation of secure marking traceability solutions?

I did a quick analysis, comparing the ranking of countries in respect of the Interference Index  and the WHO Country Reports on the status of FCTC implementation to assess at a very rudimentary level whether there is any correlation between the extent of interference, and the policy positions governments adopt. 

A key issue immediately become apparent: at least some of the data in the WHO Country Reports is either simply wrong, or outdated. So, for instance, the Country Reports note the USA, Tanzania, Iran and France as not using tobacco tax stamps, when we in fact know that they do. And on the “best performing” list – where the WHO Country Reports suggest that  Iran, France and the UK don’t use tax stamps - it would in fact only be Uruguay that doesn’t use tobacco stamps.

Bottom line: 90 percent of the best performing countries on the Interference Index use a combination of tax stamps and secure marks, against only 50 percent of the worst performing countries that do.

More work is required to fully understand the statistical relationship between industry interference and the statistical likelihood of secure marking and traceability solutions being implemented. But even a very cursory provisional assessment suggests that traceability solutions are more likely to find application in countries where there influence of the tobacco industry is more restricted. In the ten worst performing countries on the Interference Index, only 50 percent have introduced some kind of tax stamp or secure marking – compared to 90 percent in the best-performing countries on the interference index, suggesting that industry interference may have a role to play in how governments choose to respond to illicit trade. 

There is also a second observation worth mentioning: countries with a poorer score on the Interference Index are also less likely to adopt sound policy measures relating to the countering of illicit trade in general. Comparing the scores of countries that are rated on both the Interference Index and the Economist’s Illicit Trade Index highlights how countries with higher levels of interference have a lower chance of adopting good policy practices (which would, obviously, include the use of tax stamps and secure marks.) The average score in respect of the adoption of good policy practices on the Illicit Trade Index for countries that perform poorly from an interference perspective is 61 – for countries with lower levels of interference, the average score for adoption of good policy practices is 75 percent. 

However, these observations are made simply as a place holder, and more work is required to unpack other indicators around the statistical impact that industry influence may be having on the types of solutions governments choose in curbing illicit trade. 

Importance of findings for secure marking and traceability

Experts agree that the single biggest way in which to curb the illicit trade in cigarettes is to better secure the supply chain, and a critical component of that lies in securely marking cigarettes, and being able to trace them through the supply chain. Despite the value of the solution being indisputable, it often fails to gain traction – in large part because of the disproportionate power the tobacco industry has, and its influence over government agencies. 

For solution providers to increase their conversion rates, an understanding of the extent and impact of industry inference is critical – as is the development of a strategy that allows them to counter some of that influence, by making it easier for governments to understand the dynamics at play, simplifying how solutions are pitched, and increasing the visibility of the importance of better securing the tobacco supply chain and the best ways in which to do so. 

[i]http://exposetobacco.org/wp-content/uploads/2019/10/GlobalTIIIndex_Report_2019.pdf

[ii]https://seatca.org/dmdocuments/SEATCA%20TI%20Interference%20Index%202018.pdf

[iii]World Health Organization. 2018 Global progress report on implementation of the WHO Framework Convention on Tobacco Control. Geneva: World Health Organization; 2018. Licence: CC BY-NC-SA 3.0 IGO.