Four things you need to know about the illegal alcohol trade

BY: Hellen Ndlovu director of Regulatory and Public Affairs at South African Breweries

In his address to the nation on 13 May, President Ramaphosa admitted and apologised for any mistakes government may have made during this indefinite lockdown. He particularly (and vaguely) talked about certain regulations that may have caused a public outcry.

Although he didn’t mention it specifically, the alcohol ban is definitely on the top of the list. This ban has given rise and funded a criminal enterprise unlike anything the local alcohol industry has ever seen…

Today, the illicit trade of alcohol is bigger than it has ever been and it is syphoning millions of Rands from our economy in a time when it really needs it. Some economists predicting that it would take South Africa at least six years to recover from the impact of this lockdown.

Here are some interesting insights into the illicit alcohol trade and its current impact on the South African economy and its citizens.

Beer bottles Image by Manfred Richter from PixabayWhile beer represents the majority of legal alcohol volumes sold in South Africa, this doesn’t hold true in the illicit market

What gave rise to the illicit alcohol trade in South Africa?

Illicit trade thrives in any market where the normal conditions that affect supply and demand are artificially altered. In today’s market, but before the lockdown, that this can broadly be attributed to high taxes and stringent regulations.

Consistently, high excise tax in this country have been a primary factor in driving the growth of the illicit alcohol trade in recent years. This led to a well-established and fully operational illicit market able to manufacture, smuggle and trade under the counter.

How big is the illicit market?

Before the lockdown and any notion of a global pandemic, Euromonitor’s 2018 Illicit Alcohol Research Review indicated that illicit trade in alcohol was valued at almost R13 billion in 2017 relating to roughly 50 million litres of absolute alcohol (i.e. 100% ABV). Additionally that illicit alcohol sold represented only 15% of total alcohol volumes in South Africa.

Today, with the alcohol ban, it is safe to say that the illicit alcohol market in South Africa represents 100% of the market.

How much is South Africa losing due to illicit alcohol?

According to Ndlovu, before the lockdown, the estimated excise tax losses due to illicit trade represented roughly 30% of the total excise contributions to SARS. With the lockdown and ban underway, 100% of this revenue is lost to criminal enterprises.

This goes way beyond lost excise tax. We are also talking about the loss of subsequent VAT and income tax, which would have otherwise gone to the country’s fiscus.

From an SAB perspective, this year the company may have paid more than R14bn in excise taxes, equating to a monthly average contribution to the South African economy of more than R1bn every month. With no production in April, an entire month’s excise on beer is lost and probably won’t be able to made up in this year.

Zooming out to an industry level, the Euromonitor study found that a staggering R6.4bn was lost in excise duties alone in 2017. At today’s excise rates, and factoring in all the other taxes involved, Ndlovu reckons this number is now considerably higher.

The kind of alcohol sold in illicit circles

Ndlovu says that illicit alcohol also poses a great health risk for its consumers. While beer represents the majority of legal alcohol volumes sold in South Africa, this doesn’t hold true in the illicit market.

Euromonitor found that illicit traders focus on high margin, low volume products. This makes beer undesirable for illicit traders. Illicit trade is more focused on high alcohol, low volume products where the opportunity to make higher margins are greater.

It goes without saying that illicit hard liquor, poses a great danger to our society as those looking for a drink will get more than they bargained for.