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

Setting the record straight: Tax stamps work (published in The Sowetan)

Setting the record straight: Tax stamps work

By Telita Snyckers, Michael Eads and Saveera Kalideen

We read with some amusement the article “SARS’s track plan might not work,” that appeared in the Sowetan on 10 September 2019. 

The article is disconcerting on many levels. SARS is indeed poised to implement a track and trace system for tobacco products.  That much is true. Such systems are endorsed by the World Health Organisation, law enforcement agencies and pretty much anyone who knows anything about tackling the illicit trade problem.  So, when a publication simply publishes sound bites from a party that is inherently biased (like BAT), the record must be set straight.  

The article does remind us that it is a heartening indicator that SARS is indeed on the right track, and SARS should continue along the road that lets it better secure the tobacco supply chain. 

Ultimately, illicit trade flourishes for one simple reason: because the tobacco supply chain is almost entirely opaque, making it virtually impossible to figure out where packs come from, where they are supposed to be, and whether tax has been paid on them.  So, when someone buys a pack of cigarettes irrespective if it came from a national chain or a corner tuck shop, there is no way of knowing if the product is licit or illicit. The traceability solution that SARS is seeking to introduce is one of a range of measures that work together to fix this. 

There are a number of fundamental issues with the article:

First, research shows that as much as 98% of illicit cigarettes come from licensed, known tobacco manufacturers. Second, research also shows that as much as one third of all export consignments of cigarettes go missing somewhere along the supply chain. When one considers that BAT South Africa, on its own account, ships its packs to at least 22 other countries the fact that we have no way of knowing that those packs actually left or where they went,  should give us all pause.  SARS is planning to implement a track and trace system for tobacco products - albeit with some delays – and as it is obliged to do under the Framework Convention on Tobacco Control – which South Africa has signed – that requires track and trace systems to be implemented.  

The current paradigm used by SARS to “prove” that taxes have been paid, known as the “diamond stamp” is nothing short of useless. There is no control of the supply of physical die stamps (that simply make a dent in the shape of a diamond on the bottom of the pack) and they tell you nothing about the origin of the packs, where they are supposed to be or if the taxes has been paid.   This needs to change if SARS is to have any chance of fighting the growing scourge of illicit tobacco on the market.

The benefits of such programs are both obvious and well documented.  The article cites a BAT company statement about the Kenyan system and states “the system that SARS wants to introduce has not worked in Kenya and may therefore also not work in South Africa”.  This is patently false and contradictory to what the Kenyan Revenue Authority (KRA) officially reports on their highly successful system. Portraying Kenya’s use of secure marks as a failure is nothing short of disingenuous. The truth is that Kenya is widely held up as a case study of the very positive impact the introduction of a tax stamp can have. Through their program the Kenyan Revenue Authority managed to seize more than 350,000 illicit packs; secured a 100 percent prosecutorial success rate in more than 400 criminal cases; and increased their excise revenue collections by 53%[1]. 

In fact, according to an official with the Kenya Revenue Authority who saw the article, the tax stamp program there resulted in a reduction in the illicit trade in cigarettes, from 15 percent, to less than 5 percent, and indeed actually benefited BAT, as it resulted in the closure of all of the other local manufacturers – BAT is now the only licensed manufacturer left in Kenya. 

Tax stamps and secure marks work: More than 140 billion tax stamps used by more than 150 national and local governments around the world. Other country case studies show clear successes: In California the tax stamp system resulted in a 37 percent drop in tax evasion within two years of implementation, and an additional $870million in excise tax revenues. Some countries have noted a 61 percent reduction in smuggling and 38 percent less tobacco-related fraud; they’ve seen their tax revenues increase by as much 50 percent and the illicit trade prevalence drop by a significant 6 percent. 

In the article, BAT is quoted as raising other spurious claims about highly secure modern tax stamps. 

Suggesting that “the system will make it difficult for manufacturers to export to other countries” displays a distinct lack of understanding of how the solutions are implemented– cigarette packs are marked differently depending on whether they are intended for the local market, or for export.  The use of secure marks has not presented in this respect a problem in any of the other 150 countries and states where tax stamps have successfully been implemented, and it is patently simply an alarmist statement intended to scare SARS off. 

The statement in the article that “ten thousands farmers will be immediately wiped out, putting another 35,000 dependents at risk" is equally simply alarmist rhetoric. The simple fact is that BAT only employs around 2,187 people in the country. The rest of the number includes what BAT itself elsewhere has called “indirect and induced” numbers[2]which essentially includes the cashier at the fuel station who rings up your pack of cigarettes – making their numbers a bit of a stretch.

The truth is that what BAT is doing is laying the groundwork for an argument that SARS should use a traceability system that the tobacco industry itself developed (the “digital market printed on a pack at the machine,” that is referenced in the article) 

The problems facing the industry-developed and punted solution are substantial: BAT is unlikely to tell you that this very same traceability solution was initially developed by the tobacco industry to fulfil an obligation under an EU court order where they were fined a few hundred million euros, for the smuggling of their own packs[3]. The solution was developed by the industry, for the industry. It was never meant to be an anti-illicit device for government.  And the digital codes – which is only a simple a alphanumeric number – are incredibly susceptible to fraud themselves, because a legitimate code can simply be “cloned” or copied, and used multiple times without anybody being any the wiser. Why would any government choose a solution that lets the foxes guard the henhouse? 

The BAT statement, and the article that followed, is aimed very simply at getting SARS to adopt a solution that favours the very industry that is being told to toe the line. BAT has been extremely vocal about how SARS should be clamping down on illicit trade. Introducing a secure mark that makes it possible to see where packs came from, and to validate that they are where they are supposed to be, is the very best way to do so. Any company that legitimately wanted to fight against illicit trade would welcome the initiative. The fact that BAT does not do so may suggest that the company itself would prefer the tobacco supply chain to remain opaque. 

SARS would do well to learn from the Kenyan story, and ignore industry rhetoric designed to preserve the status quo.

[1]http://www.wcoomd.org/-/media/wco/public/global/pdf/media/wco-news-magazines/wconews_75.pdf

[2]http://www.batsa.co.za/group/sites/bat_a2elad.nsf/vwPagesWebLive/DOA2LJ7R/$FILE/medMDAG2LAG.pdf?openelement

[3]https://tobaccocontrol.bmj.com/content/25/3/254#ref-25; https://tobaccocontrol.bmj.com/content/25/3/254

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.