Opinion: Sugar tax: opportunity for transformation of an industry?

BY BY PIETER FABER - AUGUST 29, 2016

In the Budget Review 2016, the Minister proposed that a sugar tax should be introduced to address obesity in South Africa (i.e. a behavioural tax). The basis for the proposal apparently does not stem from collecting revenue, but rather on the basis that “fiscal interventions such as taxes are increasingly recognised as complementary tools to help tackle this epidemic”.

In conjunction with the Department of Health, government aims to reduce obesity by 10% by 2020.

Off to a controversial start

Many controversies surround this statement above, from whether sugar is a high contributory factor to obesity, whether behavioural taxes actually work as claimed or whether artificial sweeteners can compromise your health. Many people also question why a tax is needed at all if government could just prohibit manufactures of all sweetened goods, not just beverages, from adding excessive levels of sugar, which by implication would reduce consumption drastically.

 In fact, the global trend towards consumption and stealth taxes seems more to be a political choice for governments to obscure per person tax collections, as direct taxes are more visible and have become more unpopular and difficult to impose in a tax competitive global economy. Ironically, this exact point of “migration” of purpose is referenced in the Policy Paper released by National Treasury on 8 July in respect of Ireland’s policy on sugar tax where it states:

“It is reported that the principal reason of the tax was to generate revenue, however new proposals for the reinstatement of the tax is to change consumer behaviour due to population health concerns.”

Notwithstanding all these unanswered questions National Treasury are seemingly forging ahead with its proposals for the taxation of sweetened beverages. However, all these questions are not what has drawn my attention to the topic, but rather the broader economic impacts of this proposal and whether it could be used as springboard to transform the sugar industry, in specific the farming component thereof, in some shape or form?

Farming for our economic future

The proposed rate of 20% is based on the premise that it will then have significant impact on consumption and production patterns. So if production is also targeted, what is the possible agricultural impact we are looking at?

Sugar cane farming represents about 50% of crops grown in KZN and Mpumalanga according to the South African Sugar Association (SASA). Doing some rough maths from the various dated sources from SASA, the sugar industry in South Africa produces about 2.2 million tons of sugar per season. Commercial farmers produce 75% of this. Therefore, 20 000+ small farmers’ produce 550 thousand tons. Based on the 2012 consumption figures and gram per litre data in the Policy Paper, we can estimate that soft drinks manufacturers consume between 364-627 thousand tonnes a year or a rough average of 496 thousand tonnes, nearly all that the 20000+ small farmers produce. 

If we achieve best international comparison results (Mexico) consumption (i.e. ultimately production) reduced by 10% or 49.6 thousand tonnes and if we assume that directly translates to number of farmers, that’s 2000+ small farmers going out of business. Using the same rough maths for employment that is about 1 759 (based on the SASA’s job numbers) jobs lost for every 10% per year decrease in consumption of sugar drinks that is achieved.   

The above does not make for good reading in a country that nearly has 0% economic growth and endemic joblessness. However like all difficult policy decisions this one is one of opposing priorities that government will have to make and it is not as easy as just obesity vs. jobs.

According to the World Wildlife Foundation, sugar as a crop consumes very large amounts of water compared to other crops, leads to a degradation of biodiversity, annual burning creates air pollution and ammonia is released during the concentration process. The recent drought in KZN has highlighted just how much of a water scarce country SA is and how dependent the country is on properly looking after our water resources. The WWF generally concludes, “The removal of plant matter from the fields makes the production of sugarcane unsustainable as it is currently practiced”.

Alternatives

So how do we get to a win-win rather than win-lose policy situation? The solution seems to be that government must ensure it has a proper alternative for productive agricultural use of this land before it implements the sugar tax. Policy alternatives should either be repurposing sugar crops or repurposing sugar fields for other crops.

Repurposing seems to be limited to the bio fuels industry of which Brazil has thus created the “first sustainable biofuels industry” from sugar, having done this since 1970s creating ethanol for vehicles and waste for biogas. What Brazil seems to have done right is to ensure that the sugar cane industry firstly conforms to the most efficient agriculture technology and then created an immediate offset market by compelling blended car fuels.

They therefore did not wait for market forces to create the offset market. It would therefore require a very coordinated approach by government to transform the agricultural, motor manufacturing and fuels industries. This also lessens the impact of any job losses from the sugar retail and goods manufacturing sector.

As to alternative crops, a 2011 SWOT analysis[1] on the sugar industry indicates that essential oils, macadamias and bananas are considered alternative crops to sugar cane. Once again, government would have to engage with the farming community and provide support in migration to these crops but also creating offset markets which market forces may take too long to do by themselves to make the change sustainable.

Conclusion

The sugar tax may look like an easy way to collect revenue or change behaviour, whichever view you follow, but what is clear is that without looking at its downstream impact, its implementation will only be a lose-lose situation. Government would do well to make sure that its policy decisions on this matter considers all relevant long term factors and that inputs from all role players are obtained before a final decision and implementation policy is decided on. However, challenges should not be seen as reasons not to do but rather to do things differently to be more responsible and sustainable.