Asia 11 study on illicit tobacco in 2012

Andy Logan

Associate Director, Oxford Economics

2 July 2014

Methods to estimate the scale of illicit cigarettes

Smoker surveys

Empty pack and cigarette butt collection and analysis

Household surveys/consumption estimates compared with tax-paid products

Seizures

International trade data

Empty pack surveys

Collect empty packs and analysing discarded butts.

Industry recognizes EPS as best practice as evidence of actual activity.

Run by external agency.

A few minor problems with EPS

Geographical coverage – e.g. is the coverage of urban vs rural locations appropriate?

Timing of survey – e.g. is there a possibility that the findings are not representative as they cover periods when tourist flows are greatest?

Brand coverage – e.g. does the survey exclude important brands given market composition?

Packs versus sticks – e.g. how does the survey treat differences in pack size and what implications does this have for estimates of non-domestic/illicit incidence?  

Other tobacco products (OTPs) – e.g. to what extent do the surveys include the illicit trade in OTPs?

Direct surveys of smokers

Asking samples of smokers where they buy their tobacco products.

Advantage

Provides a more direct route to assessing the size of the problem of illicit purchases at any point in time.

Problems

Respondents under report the extent to which they smoke.

Under report the extent they consume illegal products.

May not even be aware that they are purchasing illicit tobacco.

Compare duty paid to estimates of consumption

Legitimate Consumption

Duty Paid Consumption

Cross-boarder shopping

Duty Free

Illegitimate Consumption

Total Consumption

Legitimate Consumption

Compare duty paid to estimates of consumption 2

Total consumption

Estimates of prevalence (proportion of the population that smokes cigarettes)

Estimates of cigarette consumption per smoker

An uplift factor covering under-reporting

Estimates of the adult population

Problems:(1) There are some smokers who do not admit they smoke(2) Some of the smokers who admit they smoke do not know how

much, or choose to under-report the amount

Seizures by police or customs authorities

The quantity of illegal cigarettes seized by the authorities

Advantages

Official government statistics.

Useful to understand illicit trade routes.

Problems with this measure

Can only represent a small proportion of the illicit trade.

If comparing over time, ignores effort and expenditure levels of the enforcement authorities.

Some element of luck.

Using trade data

Focuses on inwards flows of cigarettes into a country

Does the value of country A’s exports of tobacco to country B should equal B’s imports from A.

Advantages

Trade data readily available.

Problems

Different countries’ trade recording systems have different accuracies.

Exchange rate valuations.

Lessons on measurement techniques

All five methods have their strengths and weaknesses.

Empty pack surveys are probably the best method of calculating the size of the illicit market.

Useful to repeat the same method over time to understand whether the illicit trade is growing or decreasing and at what rate.

But should monitor a number of the methods to see if you get a consistent picture.

Asia 11 report

To establish credible estimates of consumption of illicit cigarettes and the impact this has on tobacco tax revenue for 11 markets in Asia. To do this it:

Validate illicit incidence levels, reviewing and refining estimates currently available through Empty Pack Surveys and other sources.

Estimate Illicit Consumption in terms of volume, including where possible a breakdown by country/market of origin and a breakdown between legal and Illicit Consumption.

Estimate annual government revenue losses from excise, VAT/GST, and earmarked taxes on cigarettes.

Countries in the study

Whole market

Asia-11: Consumption breakdown

Estimates of individual country shares

Estimates of the number of illicit cigarettes

Estimates of illicit market share

Estimates of tax losses

Further analysis of illicit

Estimated make-up of illicit in each country

Conclusions from Asian 11 report

In 2012, 9% of cigarettes consumed in Asia-11 were illicit.

Illicit share was over 25% in five markets (Hong Kong, Malaysia, Singapore, Pakistan, and Brunei)

Illicit volumes were highest in Pakistan, Vietnam, and Malaysia.

Domestic illicit cigarette volumes were highest in Pakistan and the Philippines.

Asia-11 government tax revenue losses from Illicit Consumption totalled US$ 3.4 billion in 2012.

Thank you