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1 Beverage Association of South Africa written submission to Standing Committee on Finance and Portfolio Committee on Health on the proposed taxation of sugar sweetened beverages 26 th May 2017

2 Contents 1. Executive Summary 2. Detailed Analysis 3. Proposed Solution

3 Executive Summary The Beverage Association of South Africa is an industry body for importers, producers, bottlers, distributors, merchants and resellers of non- alcoholic beverages, which represents 92% of the industry that excludes juice and dairy. The association exists to ensure a sustainable growth of the non- alcoholic beverage sector in an open market whilst continuing to create and maintain a thriving business environment. The industry is concerned about the rate of obesity in South Africa, which is significantly high and is committed to working with all stakeholders and be part of the solution. This obesity problem in South Africa is generally caused by calorie intake and insufficient physical activity. In order for the country to be successful in combating this problem it is imperative that the entire calorie intake across all foodstuffs be considered, which should be informed by proper research. The industry however, does not believe a permanent and sustainable solution can be found through the Health and Promotion Levy, which can have unintended detrimental effects on the economy and job creation efforts. Further to this, owing to the fact that this is in fact a new tax rather than an amendment of an existing tax, it s placement in the Rates and Monetary Amounts and Amendment of Revenue Bill is misplaced. The industry believes that further engagements across the SSB value chain should be explored and consider other options available which can potentially help government achieve better health outcomes, while maintaining the economic role that the industry plays. The industry and it s members respect governments intentions in reducing the prevalence of obesity and Non Communicable Diseases, and is committed to being an essential partner in helping in achieving those intended objectives.

4 Detailed Analysis The industry contributes significantly to the economy of the country and supports job creation efforts outlined in National Development Plan and other related policies and legislation. These include empowerment of SMMEs throughout the value chain e.g. agriculture, retail and distribution etc. The non- alcoholic beverage industry plays an important role in the South African economy The industry continues to make significant contributions to GDP and job creation 1.6% of South African gross value add1 (R62.1bn contribution) 1.7% of South African jobs (c thousand jobs) 1.7% of South African tax (R17.5bn contribution) Since 2002, the industry has achieved sustained economic growth and job creation employment has grown at c.5% per annum gross value add has grown at c.4.5% per annum

5 The Health and Promotion Levy is aimed at reducing the rate of obesity and non- communicable diseases in the country, however in its current form the said levy is misplaced in the Rates and Monetary Amounts and Amendments of Revenue Bill. Added to which, the levy does not consider the socio economic impact in its entirety and most importantly bears insufficient evidence that supports this option in obtaining the desired health objectives. 1. The Health and Promotion Levy should not form part of the Rates and Monetary Amounts and Amendment Bill. The proposed SSB tax policy is not merely a proposed change in rate of a tax, but a newly proposed tax: - The Monetary Amounts and Amendment Bill seeks to address already long- standing and existing taxes. As there is currently no sugar added tax, this cannot be seen as an amendment but rather as an introduction of an entirely new tax. As an integral part of the bill amendment process, it is imperative to clearly outline objectives, recourse and remedies to be undertaken in the event of the unintended consequences of the tax, and a comprehensive Socio Economic Impact Assessment (SEIA) that examines both the economic and health consequences of the implementation should be prepared. A related procedural concern is that the policy was set absent the conclusion of a comprehensive SEIA, which up until today has not been completed to DPME standards - a SEIA that does not meet necessary prescripts was provided to industry and Labour as late as 15 May BevSA is also of the view that as the stated intention of the levy is specifically for health outcomes and not for revenue purposes it is misplaced as a new tax in the Monetary Amounts and Amendment Bill. (See attached anaxure) - In light of these technical complexities we are of the view that the Health and Promotion Levy is misplaced in the Rates and Monetary Amounts and Amendment Bill and should in fact be considered as a new tax and should follow the appropriate administrative procedure where all social partners are afforded adequate time to further consult and engage on the matter.

6 2. The sugar tax takes a narrow view of the socio economic impact it will have on the broader value chain: Assuming that the revenue is used for deficit reduction and not reinvestment, as is the case with other taxes that are not reinvested in a specific sector, the proposed SSB tax will reduce the GDP by R1.85bn with unavoidable job losses. The largest loss is expected to be experienced in the informal sector where an anticipated closures of informal outlets is foreseen, outlets where SSBs are estimated to contribute 17% of revenue and 30% of margin to Spaza stores. The total jobs losses across the industry and value chain will number around jobs in our view, and not the 5000 that have been shared by those promoting the tax. SOURCE: Econex

7 The industry also has over 45,000 women who have been empowered, with 17,100 women having received business skills training, 180 women small- scale sugar cane growers are further supported. The tax would lead to a negative impact on agriculture, agro- processing, transport and logistics which will mostly be felt by small scale sugar cane farmers - as the industry adheres to the principle of preferential procurement as well as small entrepreneurs in the retail and distribution value chain. 3. The sugar tax will undermine government intention to reduce obesity and non- communicable diseases, as SSBs contribute only 3% of total daily calorie intake The industry is concerned with the obesity rate, however general drivers of the increases in obesity rates is overall calories consumption, which has seen a recorded increase from 2816 kcal/day in 1991 to 3007 kcal/day in 2011 and continues to grow. The biggest growth coming from the increased consumption in cereals, vegetable oil and poultry, indicating dietary shift towards meat and processed foods and accompanying declining levels of physical activity. In order for the country to be successful in combating the obesity problem, it is imperative that the entire calorie intake across all foodstuffs be considered. Source: Ng et al. Global, regional, and national prevalence of overweight and obesity in children and adults during : a systematic analysis for the Global Burden of Disease Study 2013.The Lancet volume August 2014; Food and Agriculture Organization of the United Nations

8 As the consumption of added sugar in the form of liquid products is only about 3% of daily calorie intake, and the impact of the tax on SSB will only achieve a 0.24% % reduction of intake, the levy would have no discernible impact on obesity and non- communicable diseases. 4. BevSA believes further consultation on this matter should be considered for proper implementation that will lead to better health outcomes and mitigate economic impacts More effective solutions are possible to reduce obesity in the country, improve overall health and improve food security through a transition to a sustainable and growing agricultural sector, which provides required food and nutritional products. Many of the leading studies have confirmed that these solutions include, inter alia: Portion control; Reformulation; High calorie food/beverage availability; Weight- management programs; Education; Healthy meals - encourage use of home prepared food based on a balanced diet; improved labelling; and Increased physical activity. All social partners should be given adequate time to further consult and engage on the matter as it is clear that among industry, and in our view labour, there is strong commitment to find a win- win solution for health outcomes that preserves jobs and support positive economic outcomes. Many of the leading studies have confirmed that these solutions include, inter alia: Portion control; Reformulation; High calorie food/beverage availability; Weight- management programs; Education; Healthy meals - encourage use of home prepared food based on a balanced diet; Improved labelling; and Increased physical activity. Industry already has well advanced measures to be discussed across interventions such as reformulation, a wider range of diets/lights/zeros and packaging. The industry has also already committed itself to Health Food Option (HFO) programme - Binding and measurable health and economic commitments of a - 15% calorie reduction through reformulations 59-75kj reduction as well as introduction of smaller pack sizes to drive moderate consumption.

9 Proposed Solution 1. Remove the Health and Promotion Levy from the Rates and Monetary Amounts and Amendment Bill - Introduce the Levy as a new tax and follow required tax implementation with an appropriate consultative process, which considers all affected social partners. 2. Finding cost efficient interventions that are more effective than a SSB tax in combating obesity without adverse economic impact - In it s current form the levy intends on driving a 0.24% % calorie reduction however the industry has committed to programmes that will drive a 15% calorie reduction by 2018, which is four times that of the envisioned proposed levy through reformulation and introduction of extended lower or sugar free products - Drive overall change in social behavioural consumption of sugar- sweetened beverages through partnership programmes. BevSA believes further consultation on this matter is required for proper implementation that will lead to better health outcomes - - Our respectful request of this Committee is to facilitate the consultation underway in NEDLAC by supporting a recommendation for removal of the Health Levy from the Rates and Monetary Amounts and Amendments of Revenue Bill to placement in a Taxation Laws Amendment Bill, in order for all parties to find a solution that we are fully committed to: namely one with the necessary health outcomes and job preservation. - Finally, that BevSA be afforded the opportunity to present to this Committee on the 31 st and/or at a later date. END.

10 Key: No adherence Some adherence Full adherence SEIAS Requirement Report Adherence Comments From 1 October 2015 Cabinet Memoranda seeking The impact assessment was only conducted after the policy was passed approval for draft policies, Bills or regulations must include an impact assessment that has been signed off by the SEIAS Unit. Phase 1: Initial Impact Assessment What is the social or economic problem that you are trying to Adequately covered (arguably) solve? What are the main causes of the problem? That is, why does the Adequately covered (arguably) problem arise and why does it persist? Whose behaviours give rise to the problem, and why does that This links to problems of not disaggregating the analysis into the various socio- economic groups, discussed below behaviour arise? Identify the major social and economic groups affected by the problem, and how they are affected. Who benefits and who loses from the current situation? As above Which of the five top priorities of the state that is, social cohesion, security, economic growth, economic inclusion (job creation and equality), and a sustainable environment is negatively affected by the problem? List at least three options for addressing the problem, including (a) your preferred proposal, and (b) an option that does not involve new or changed regulation. What social groups would gain and which would lose most from each of the three options? Consider specifically the implications for households earning under R7000 a month; micro and small business; black people, youth and women; and rural development. For each option, describe the possible implementation costs, compliance costs, and the desired outcomes, listing who would bear the costs or, in the case of outcomes, enjoy the benefits. In addition, note the risks that could threaten implementation of each option. Based on the table on costs and benefits, describe how the different options would contribute to or detract from national priorities. For each option, indicate what can be done to mitigate the identified risks. Based on your analysis, as reflected in the discussion of the three options above, summarise which option seems more desirable and explain why. What specific measures can you propose to minimise the implementation and compliance costs of your preferred option, to maximise the benefits? What are the main risks associated with your preferred option, and how can they best be managed? Only economic factors are referred to, and this is superficial. The report is only on the impact of the SSB tax. There are no other possiblities identified to tackle obesity and enact behavioural changes in sugar consumption. This is particularly problematic as the cost burden of the tax is disproportionately carried by the poor. For example a 10.6% increase in the price of SSBs (figure quoted in the report) results in a percentage point increase in the proportion of household income spent on beverages for households with incomes less than R For households with incomes greater than R57 100, this drops to a percentage point increase (own calcualtions using Survey of Income and Expenditure of Households, StasSA 2010). While this might be considered correct in terms of a cost driver aimed at reducing consumption in these high consumers of SSBs, the desired behavioural change is shown to mostly occur in wealthier groups - as evidenced in Mexico. This is not the target population as the poor are (likely) the greatest consumers of SSBs, and generally at greater risk of obesity. An aggregate assessment does not provide the necessary detail for a proper impact assessment. As above As above As above As above For example is the ~10% tax appropriate to achieve the intended outcomes? The Mexican example indicates not. How will this be addressed? The risks have not been adqequately accounted for, particularly unintended ones. Unintended consequences from other countries that have implemented similar taxes include: Hungary: government revenues less than expected, jobs lost, and low- income earners affected negatively; Mexico: disproportionate effect on lower- income households, smaller effect on obese individuals thus missing the target market; Berkeley, USA, price impact lower than anticipated - lower fall in consumption and thus lower health improvements. What additional research should you do to improve your understanding of the costs and benefits of the option adopted? Phase 2: Final Impact Assessment Summarise the proposal, identifying the problem to be addressed and the roots (causes) of the problem that will be addressed by the new rule. Describe the intended outcomes of the proposal. Describe the groups that will benefit from the proposal, and the groups that will face a cost. These groups could be described by their role in the economy or in society. As a minimum, consider if there will be specific benefits or costs for the poorest households (earning R7000 a month or less); for black people, youth or women; for small and emerging enterprise; and/or for rural development. Add more lines if necessary. No additional research is referred to. Adequately covered (arguably) Adequately covered (arguably) As per the comment above on the importance of this ommission. Describe the behaviour that must be changed, and the main mechanisms to achieve the necessary changes. Identify the groups inside and outside of government whose behaviour will have to change to implement the proposal (add more lines if required). Report on consultations on the proposal with the affected government agencies, business and other groupings. What do they see as the main benefits, costs and risks? Do they support or oppose the proposal? What amendments do they propose, and have these amendments been incorporated in your proposal? These are implied rather than outlined directly. There has been no identification of different groups. The report is only an aggregate account. These consultations did occur, but not sufficiently accounted for in the report. Describe possible disputes arising out of the proposal, and the system for settling and appealing them. How onerous will it likely be for members of the public to lodge a complaint and how burdensome and expeditious is the proposed dispute- settlement procedure? Describe the costs and benefits of implementing the proposal to the groups identified Describe the changes required in budgets and staffing in government in order to implement the proposal. Identify where additional resources would be required for implementation. It is assumed that existing staff are fully employed and cannot simply absorb extra work without relinquishing other tasks. Describe how the proposal minimises implementation and compliance costs. Describe the main risks to the achievement of the desired ends of the legislation and/or to national aims that could arise from adoption of the proposal. Describe the measures taken to manage the identified risks. Describe the mechanisms included in the proposal for monitoring implementation, evaluating the outcomes, and modifying the implementation process if required. Estimate the minimum amount of time it would take from the start of the implementation process to identify a major problem and remedy it. No account of any disputes is recorded Again, the report does not differentiate between different groups in society These are additioanl costs that are not accounted for in any way There is no reference to this in the report This a key omission as evidence from other countries: evidence from Mexico indicates variuos reasons for the limited impact observed, including the relatively small proportion of the tax (~10% of the cost of a beverage), and cultural factors ('sweet- tooth' of the population, sugary beverages are a way of life). Substitution of sugar consumption is not considered at all, only substitution of beverages. If some one is no longer getting their desired sugar from a beverage they are likely to get it from other foodstuffs such chocolates, sweets etc. with an associated increase in the consumption of these items. If total sugar consumption is not reduced, there will be no associated reduction in obesity. There is no suggestion of how to manage the the economic risks, especially relating to employment, that will occur. This is especially important if the estimated figures are incorrect Linked to the previous comments.

11 Summarise the impact of the proposal on the main national priorities: Social cohesion; Security (safety, food, financial etc.); Economic growth and investment; Economic inclusion (employment creation and equity); and Environmental sustainability Identify the social and economic groups that would benefit most and that would bear the most cost. Summarise what should be done to reduce the costs, maximise the benefits, and mitigate the risks associated with the legislation. Identify areas where additional research would improve understanding of the costs, benefits and/or risks of the legislation. Only the economic factors have been considered, and superficially so. As previously discussed Linked to previous comments While not mentioned, additional research is required on various topics, including: the subsitition of sugar consumption; the differential impact across the various socio- economic groups; the wider economic impact of the tax on corporate tax; up and downstream suppliers (eg fruit farmers), restaurants etc. (also see summary document)