How South Africa stubbed out an industry

The contemplated closure of the Heidelberg factory of British American Tobacco (BAT) is being described, politely, as a consequence of “illicit trade”. That is true, but it is not the whole truth. The more interesting question is why the illicit trade was allowed to grow so large, for so long, that a multinational eventually decided it was no longer rational to manufacture cigarettes in South Africa at all.

BAT’s own numbers are stark. In 2014, manufacturers declared 22-billion cigarettes to the South African Revenue Service (Sars) and generated R12.6bn in excise revenue. A decade later, declarations collapsed to 8.3-billion cigarettes, while excise revenue fell to R8.3bn, despite repeated above-inflation tax hikes. Total cigarette consumption, meanwhile, rose – the difference captured almost entirely by the illicit market, now estimated at 75%.

This did not happen overnight. BAT says it spent more than a decade engaging government and law-enforcement agencies, warning that enforcement failures were allowing criminal networks to hollow out the legal market. The warnings were noted, minuted, acknowledged – and largely ignored. By the time the Heidelberg factory closed, enforcement had lost not just momentum, but credibility.

Legislation vs enforcement

What makes this episode particularly revealing is that it unfolded alongside an extraordinary faith in legislation. South Africa has never lacked laws. It lacks time, capacity and incentives to make them work.

A good example is the Protection of Personal Information Act, which was published for public comment (after being discussed for years) in 2009, passed by parliament in 2013 – and only became meaningfully enforceable in 2020, with compliance deadlines stretching into 2021. There are plenty of other examples. 

Faced with this extraordinary time lag, ministers have started listing getting legislation passed as key performance indicators for government departments.

But now we have a different problem: legislation being passed with little or no thought to its enforcement – or even whether it can be enforced. For example, South African directors-general are assessed on performance agreements anchored in departmental plans and budget outcomes – not on quantified enforcement achievements – reinforcing a system where passing policy is more visible and rewarded than enforcing it.

The problem is not merely administrative. It is structural.

Passing legislation is visible. It produces gazettes, press releases, speeches and political credit. Enforcement, by contrast, is expensive, technical and rarely celebrated. It requires investigators, prosecutors, customs officials, police co-ordination and sustained political backing – none of which generate quick wins.

Directors-general are assessed against annual performance plans, which emphasise policy delivery, strategic milestones and compliance with process. Enforcement outcomes – seizures, prosecutions, dismantled syndicates – appear, if at all, deep in technical sub-programmes. The incentive is obvious: it is safer to produce policy than to pick a fight with criminal networks.

Doubling down on policy

This helps explain the strange spectacle of a state that can design increasingly ambitious regulatory frameworks while failing to protect the industries it regulates.

Tobacco is not unique in this process.

• In alcohol, repeated above-inflation excise hikes, layered on top of Covid-era sales bans, have driven consumers towards illicit and counterfeit products. Industry bodies have warned that enforcement has not kept pace – and that tax increases now reward illegal suppliers rather than the fiscus.
• In sugar, the health promotion levy has coincided with a surge in imported sugar, undermining local producers. SA Canegrowers warns that an industry supporting more than 1-million livelihoods is being punished without evidence of meaningful health gains.
• In mining and manufacturing, output has steadily declined over two decades, weighed down by regulatory complexity, slow permitting and policy uncertainty – all while illegal mining and informal production flourish.

In each case, government responds not by fixing enforcement, but by doubling down on policy. More rules. Higher taxes. Tighter controls. The same approach that helped hollow out the cigarette market is now being replicated elsewhere.

Not doing enough

It’s not like government is unaware of this problem: Sars in particular has made an effort to combat this problem, but even it points to a lack of support from other departments. Sars spokesperson Siphithi Sibeko says in response to inquiries from Currency: “Though Sars plays an important and active role in combating illicit activity, addressing illicit tobacco requires a co-ordinated response that extends beyond a single institution. Success depends on joint efforts across government as well as constructive co-operation with compliant industry stakeholders to disrupt illegal supply chains and deter unlawful behaviour.

“Over the past few years, Sars has strengthened its illicit economy strategy and broadened enforcement actions. This includes targeted operations, greater seizure activity and the deployment of enhanced monitoring and analytical tools. These measures have delivered tangible outcomes, with notable increases in both seizures and recovered revenue.

“Consistent with Sars’ strategic objectives of strengthening tax compliance, enhancing revenue collection, and safeguarding the tax and customs system, Sars will continue to intensify its efforts to combat illicit trade.”

The department of trade, industry and competition did not respond. 

That sounds great, but the numbers refute government’s claims: the illicit industry continues to gain market share, suggesting that whatever Sars and government are doing, it’s not enough.

An economically destructive policy regime

Defenders of the government’s approach make a familiar case. Tobacco, alcohol and sugar, they argue, impose real social and health costs. Higher excise taxes and tighter regulation are meant to discourage consumption, reduce long-term healthcare spending and nudge behaviour in healthier directions. If illicit trade rises, that is a problem of policing – not policy.

This argument is appealing in theory. In practice, it collapses under its own assumptions.

First, it assumes a capable enforcement state. South Africa does not have one. Designing policy as if customs officials, prosecutors and police can seamlessly absorb new responsibilities is not prudence; it is wishful thinking. When enforcement capacity is weak, price shocks and regulatory bans do not reduce consumption – they simply reroute it. 

Second, the argument assumes that higher taxes always mean higher revenue. The BAT numbers refute this directly. Cigarette excise revenue fell even as taxes rose, because legal volumes collapsed faster than rates increased. A policy that shrinks the tax base while enriching criminal syndicates is not public health strategy – it is fiscal self-harm.

Third, defenders argue that industries exaggerate the threat of illicit trade to protect profits. Yet Sars itself has warned that proposed tobacco legislation risks worsening illicit activity. When the tax authority and regulated firms arrive at the same conclusion, the issue is no longer lobbying – it is arithmetic.

Finally, the counterargument assumes time is neutral: that laws can be passed now and enforced later. But markets move faster than parliaments. Criminal networks adapt in weeks; legislation matures over years. By the time enforcement “catches up”, the market has already shifted – permanently.

The result is a policy regime that is morally confident, administratively fragile and economically destructive. The state declares its intentions; the illicit economy executes.

A symbol of failure

South Africa’s problem is not that it regulates too much, but that it regulates as if enforcement were automatic. Until policy ambition is matched with institutional capacity – and incentives reward results rather than rhetoric – the counterargument will continue to sound reasonable in hearings and fail catastrophically on the ground.

BAT has said it would reconsider local production if illicit trade falls below 25% of the market. That is a remarkably low bar – and a damning one. It suggests that South Africa did not lose cigarette manufacturing because tobacco is unsellable or regulation is immoral, but because the state could not enforce its own rules.

The Heidelberg factory is therefore not just an industrial closure. It is a symbol of a deeper failure: a state that confuses lawmaking with governance, and process with outcomes.

South Africa does not suffer from a shortage of legislation. It suffers from a shortage of enforcement capacity, institutional incentives and political willingness to confront organised illegality.

Until that changes, factories will keep closing, illicit markets will keep growing – and parliament will keep passing laws into an economy that no longer obeys them.

The key issue is this: passing laws that cannot be enforced is worse than no law at all – it signals impotence, invites evasion, erodes public trust and cripples legitimate industry. The Heidelberg factory closure shows what happens when regulation becomes a blunt instrument: jobs are lost, taxes go unpaid and criminal markets grow.

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