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