Hike in alcohol levy lose-lose for stakeholders
MATHATISI SEBUSI
MASERU – Annual revenue paid into state coffers by the Maluti Mountain Brewery (MMB) is anticipated to drop drastically if government goes through with its plan to increase alcohol to 15 percent.
MMB has paid to government M1.1 billion in taxes, M250 million in dividends and spent M150 million on local procurement which economic commentators also suggest cannot be guaranteed in future if the levy increment goes through.
The Lesotho government owns 61 percent shares in MMB and MMB and ABInBev owns 39 percent. The brewing company anticipates that the increment will also result in their sales volumes dropping by at least 19 percent, according to Managing Director Sesupo Wagamang in an interview with this paper.
Wagamang argues that the in implementating a 15 percent alcohol levy in the hope of collecting M289m to supplement a budget deficit, Lesotho is doing itself a disservice as other African countries have already been down this road and have proven that higher levies result in less revenue for the state.
Wagamang, also AB InBev Lesotho representative, government will inadvertently leave itself and its people even more strapped for cash when it so desperately needs it.
“Lesotho is surrounded by South Africa, for which AB InBev or South African Breweries is a primary source for alcohol imports. But, with the imposition of an alcohol levy, massive losses in sales due to three alcohol bans and an 8 percent excise tax increase for 2021 severely affect – the profitability of the industry is left in tatters,” he said.
Wagamang believes that all these factors only serve to demolish alcohol sales in Lesotho and will cause its citizens to either turn to more affordable illicit alcohol and resort to smuggling due to porous borders – all of which will see Lesotho lose tax revenue instead of filling the gaps of its budget deficit.
Let Botswana be a lesson to us all
To illustrate his point, Wagamang provides a case study where the negative impact of alcohol levies was felt not only felt by the industry, but by the very government that set it in motion.
“It was in 2008 when Botswana first introduced a 30 percent levy on alcohol products in 2008. By 2015, the levy had risen to 55 percent. This was devastating for the local alcohol industry, with heavy drops in volumes and revenue that the Botswana government expected to gain,” explains Wagamang.
He says this levy, on top of the excise taxes levied on other South African Customs Union (SACU) countries, increased the price of beer as it was fully passed on to the consumer as the brewery could not absorb it into their cost structure. “In the end, the loss of jobs and livelihoods in the brewery value chain were catastrophic and much opportunity was lost.”
According to Wagamang, Botswana’s own Kgalagadi Breweries could have doubled in size and provided much needed employment in the time that the alcohol levy was enforced. He says the government of Botswana could have earned 23 percent more in revenue had they not introduced the levy.
“This is the unintended economic impact of a levy in Southern Africa, but obviously Botswana was not looking to increase revenue but rather reduce harmful consumption of alcohol.
Not only were people drinking less, but many drinkers were forced to procure more illicit, and dangerous, alternatives to their preferred brand of legal brew, as well as shifting from low alcohol by volume (abv) products to high abv products which created more harm and put the health system under pressure” says Wagamang. In 2018, the Botswana government reduced the alcohol levy to 35 percent, ostensibly to attract foreign investment and create employment but Wagamang says this will likely take years to come to fruition from an alcohol perspective.
Can Lesotho learn from this?
Even though there is a long line of Lesotho Ministers of Finance who have touted private sector growth through investor-friendly policies, the current finance minister, Thabo Sofonea, has gone so far as to refer to extending a red carpet treatment for real investors.
Wagamang argues that Lesotho-born Maluti Mountain Breweries falls into the ‘real investor’ category having contributed almost M2 billion in taxes and dividends to the fiscus over the last six years.
This is over and above the direct employment of 350 Basotho and the support of 1 220 traders who also employ workers. He estimates that the entire value chain is valued at 25,510 direct and indirect employees.
“If Lesotho goes the same way as Botswana, then the industry and its contributions to the government will no doubt follow suit. Given the high unemployment being faced in the country right now, this is hardly the outcome that the Lesotho government is banking on,” he continued. Wagamang argues that private sector growth goes hand in-hand with investor-friendly policies.
“Consultations with industry should be encouraged to ensure win-win solutions are mutually agreed. We cannot survive on restrictive policies that may see us drown in unintended consequences. Lesotho needs to make the smart choice and let industry in.”
“We are quite a major player in the economy of Lesotho and any policy decisions made will impact the economy either positively or negatively. Over the past three years, from 2016 to 2019 tax paid to Government has grown by at least by 25 percent which translates to more than M1billion. In 2019, our contributions in terms of revenue have also grown with by 6 percent,” he said.
He said the reason they are getting these growth is because as a business they understand that alcohol is sensitive to price and every year they strive to price below inflation to stimulate demand. “When demand is stimulated sales grow and when sales grow we get to pay more taxes to government through exercise while also creating more employment.
“When we create more employment opportunities people get to also pay PAYE tax,” he said. He noted that MMB is one of the most consistent cooperatives that have been consisted from start when it comes to paying dividends to the government. He further said they have streams of revenue to help the country raise revenue and the numbers talk for themselves.
He, however, noted that they have a challenge of 15 percent levy which was introduced last years by the finance minister and its implementation process will be taking place this financial year.
“This poses a big risk for MMB. The 7 percent growth in sales volumes that we achieved in three years was due to stimulating demand by pricing below inflation.
The biggest challenge now is that if the Levy increases to 15 percent as proposed by Minister of Finance, we will experience a drop in sales, a drop in revenue paid to the Government and we will be forced to raise prices, resize the business and withdraw from projects were are doing to empower local businesses,” he said.
Wagamang said he presented this information to the government of Lesotho and other stakeholders including World Bank, IMF and Lesotho Champers of Commerce and parliament’s Economic Cluster Portfolio last year during the budget debates to show them that alcohol is price sensitive and even shared a number of case studies but government still pushes for the levy increment.
He said since the government is the majority shareholder, the only thing they can do as managers of the business on behalf of the Government is to advice on what they think is realistic or is the right thing to do and the decision will always be made by the government.
Wagamang gave a number of case studies where increment of levy on alcohol backfired on the country. He said in Botswana the Levi was increased by 30 percent and their sales volumes declined by 30 percent.
He said eSwatini also increased their alcohol levi and their sales declined with the same percent. He further noted that South Africa has gone to a rate of 4.4 percent Levi this year after experiencing a huge drop in sales in 2018 when the Levi was at 10 percent.
Wagamang said what concerns him most is that the minister’s speech is driven by taxes, not by anything else other than increasing taxes which puts pressure on the consumer and essentially reduces disposable income that is available to people to actually generate or fuel the economy.
He said to avoid this, South Africa has gone the other way round by reducing taxes including cooperate taxis and exercise tax to ensure that it grows its economy again while Lesotho is doing the opposite.
“Lesotho will not benefit from this increment because increasing the Levy will result in a drop in sales and the taxes we are already paying to the Government which were over M1 billion over the past three years, instead it will be worse off because the little money consumers have will be under pressure as inflation is also going up. Lesotho does not have a revenue problem; it has an expenditure problem.
If the levy increase is implemented, we anticipate that our volumes will decline by at least 19 percent. Reality is if we decline by 19 percent, everything goes backwards. The taxes we pay will also drop and of course unfortunately when the costs go up, sales will drop and we will have to relook the operating business model and currently we cannot guarantee jobs,” he said.
He said the other concerning issue is smuggling. “As a strategy from pricing point of view, one of the things we have done is to always price lower than South Africa because we understand the dynamics in the economy and minutes required to work for one to get a beer.
The lowest income earner in South Africa has to work for at least 274 minutes to afford a 500ml bottle of beer while in Lesotho a consumer has to work for 314 minutes for the same product.
“This explains that Lesotho is already under pressure in terms of affordability and to cushion that we find other ways to make the operation more efficient in order to fund the price discount that we give to consumers but very unfortunately with the levy increase we cannot we will shift possibly the rest of the extra costs to the consumer.
This will make beer in Lesotho more expensive than in South Africa which essentially means people will smuggle beer in to the country.
At the current moment even when our prices are low than South Africa, Lesotho economy is losing at least M29 million revenue per annum through smuggling. You can now imagine what will happen if we price above South Africa,” Wagamang said.
He told this paper that because of the uncertainty in levy increase, they had to put on hold a project on expanding capacity at the brew house because they cannot put an investment of M50 million in to the plant when they are not sure that they will need the capacity if their volumes drop by 20 percent.
He said despite the minister’s reason to increase alcohol levy to control alcohol usage, people will still drink alcohol but the problem is that they will opt for other harmful stuff which will put the health sector under pressure.
“I understand the minister comes from a good place in terms of raising revenue for the country and reduce harmful drinking but I believe the unintended consequences are huge,” he said.
Giving his view on the levy hike Private Sector Foundation head, Thabo Qhesi, also points out that should alcohol levi increase, Lesotho will experience a lot of alcohol smuggling from South Africa and eventually MMB will lose clients.
“When MMB losses clients because of expensive alcohol, it will be forced to retrench workers and outlets that sell the product will also follow.
Managing Partner, RL Business Advisors – Management Consultants & Chartered Accountants, Robert Likhang, posits that that the country will also lose revenue it receives from MMB should government’s plans go thorugh.
“Tax on alcohol is called sin tax, and the purpose is to reduce consumption, thus it is addressing social rather than economic problem. It is always hoped that the reduced consumption could be redirected to other uses which could include capital expenditure or investments, and if that may become a case, then the sin tax will address both the social and economic problems,” explains Likhang.
The reduced consumption will certainly reduce sales of the breweries and every business in that value chain, and reduced sales could lead to job reductions and possibly disinvestments, he continued.
“The bigger decision any society should make is whether to sell health, and social pleasure for money. Good health, sober minds and fewer accidents on the road may lead to long-term economic growth, even though in the short-term we could see negative economic performance.”
