Philip Morris warns illicit tobacco trade poses significant challenges for SA's industry

Regulatory uncertainty and the rapid expansion of illicit trade have emerged as the biggest challenges facing South Africa’s tobacco industry this year, according to Philip Morris South Africa (PMSA), as industry players react to British American Tobacco South Africa’s (Batsa) decision to place its only local cigarette manufacturing plant on hold.

Earlier this month, Batsa said it would suspend operations at its Heidelberg plant, citing the unchecked proliferation of illicitly traded tobacco products. The move has renewed concern over the scale of the illicit cigarette market, which has grown sharply in recent years.

South African Revenue Service (Sars) Commissioner, Edward Kieswetter, said this week that significant work still needed to be done to curb the illicit tobacco trade, which is costing the fiscus billions of rand annually.

Buena Barnes, Philip Morris’ new general manager for South Africa, on Wednesday said illicit trade was worsening an already fragile operating environment for legitimate tobacco manufacturers.

She noted that “regulatory uncertainty, particularly around the Tobacco Products and Electronic Delivery Systems Control Bill currently before Parliament” was a major challenge for the industry.

“The rapid growth of illicit trade, which has come to dominate large parts of the market, is also a concern (and) this undermines legitimate businesses, erodes government revenue, fuels organised crime, and places compliant companies at a significant disadvantage," Barnes said.

"At the same time, the industry is operating in an increasingly complex regulatory environment where high excise taxes and restrictive, one-size-fits-all product policies weaken control measures and risk driving consumers towards unregulated and illegal products market,” said Barnes.

Barnes added that rampant illicit trade in tobacco cigarettes was distorting competition, weakening supply chains, and significantly reducing the viability of compliant manufacturers and retailers.

Batsa has already fallen victim to this although it has said that it will consider reopening the Heildelberg plant should the government address illicit trade, with the share of black market tobacco cigarettes falling below 25%.

This would require bigger government interventions, especially at a time South Africa is currently ranked 60th out of 158 countries on the TRACIT Illicit Trade Environment Index. This scoring highlights South Africa’s lagging enforcement capacity, supply chain control and corruption.

Currently, research estimates put the share of illicit tobacco cigarette trade in South Africa at over 70% while Batsa puts this at a higher 75%.

According to Batsa, illicit tobacco trade will further impact on South Africa’s unemployment rate due to the closure of local manufacturing, with revenue flows to Treasury also curtailed.

Kieswetter disclosed that South Africa was losing up to R28 billion a year in lost tobacco taxes as illicit tobacco cartels and traders price cigarettes way below the R26.22 minimum tax collectible per 20-pack.

Barnes said this meant that compliant local businesses were increasingly competing against products that evade taxes, safety standards and regulatory oversight.

“Illicit trade is a serious concern, not just for Philip Morris International, but for South Africa’s economy and regulatory system as a whole. It undermines the legal market by giving an unfair advantage to criminal operators who do not pay taxes, do not comply with regulations and do not contribute to employment or investment in the country," she said.

"Ultimately, this erodes government revenue that could otherwise support essential public services."

According to PMSA, the rapid growth of illicit trade in tobacco cigarettes in South Africa is driven by prospects of high profitability for organised crime, high excise taxes on cigarettes, and enforcement gaps across the supply chain.

Another contributory factor are porous borders, with most of the illicit cigarettes imported from neighboring countries.

Apart from illicit trade, the SA tobacco industry is also battling to convince regulators that new laws on the industry should clearly differentiate between combustible cigarettes and smoke-free alternatives.

Barnes said South Africa risks adopting a one-size-fits-all approach that could undermine harm reduction, limit adult smokers’ access to information and awareness on better alternatives, and slow progress toward a smoke-free future.

“A well‑regulated, legal market – including for smoke‑free products – helps to marginalise illicit trade, protect adult consumers, and create a more sustainable ecosystem for retailers, suppliers and workers," she said.

"Ultimately, combating illicit trade and encouraging the shift to better alternatives are aligned goals that support both public policy objectives and long‑term economic stability.”

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