British American Tobacco Plc (BAT) Kenya says it needs more confidence in the fiscal [taxation] and regulatory framework to fully commercialise its new factory for non-combustible oral nicotine pouches.
The company has spent Sh1.5 billion out of a planned Sh2.5 billion capital expenditure on the plant.
The remainder — meant for testing of the plant, marketing and distribution of the new category product — is awaiting a deal with the government over an “appropriate” regulatory framework.
The Nairobi venture is part of a global strategy by parent BAT Group of London to keep up with health-conscious consumers who have been gradually moving away from tobacco smoking for fear of the increased risk of contracting life-threatening diseases such as cancer as well as lung and heart ailments.
BAT Kenya managing director Crispin Achola spoke to the Business Daily on the company’s plans for the new facility and navigating the country’s excise tax regime.
What is holding up commercial production at the oral nicotine products plant?
To fully commercialise it, several elements still need to tick up. The first one, for the domestic environment, we need to feel confident that the fiscal and regulatory environment is sustainable.
We also need to open up the export market so that when we start up the factory, we have a significant economic load going through it for it to be commercially viable.
The third one is that as much as the factory has been fully built, we still have to complete tests on the factory to ensure that the capability is synced with our expectations.
We remain optimistic and we believe that in the second half of this year, we should be in a position to start producing out of our factory.
For cigarettes, you’re increasingly relying on export market to drive sales. Do you see the same applying to oral nicotine pouches?
For our cigarette side of the business, 75 percent of the products ends up in export markets. The investment that we have put in the factory here for modern nicotine pouches has gone in with the same theme.
We will produce for the domestic market, but it will also have to produce for the export market based on the installed capacity that we have invested in.
How difficult is it to manage in the current operating and regulatory environment, which appears to be more unpredictable compared with the past decade or so?
If I go back, five, seven, eight, 10 years, I would say that it is getting tougher to profitably run a manufacturing business in Kenya. As an organisation we have undergone transformation in terms of the product we bring to market.
We are now in a situation where we are bringing novel or new products with new science which regulators are trying to play catch-up with.
They are evolving so fast that the regulatory environment sometimes struggles to keep up. So we are spending some time trying to educate the regulators on the science behind the product and the data being generated, and that takes a lot of time.
It is a massive investment in an effort to get them upskilled to be able to reach a place to regulate.
Consumers are also changing…
We have consumers who demand a lot more than they did in the past. As a consequence of this, as an organisation, it means that you also have to up your game to be able to deal with much more discerning and sophisticated consumers. It is exciting, but also challenging.
How do you cope with unpredictable increase in excise duty which most of the time happens annually?
This is one thing that keeps me awake at night. We have got into a perfect storm in Kenya where we have seen very aggressive and frequent increases in taxes. This has forced us to pass it on to consumers through increased prices.
This has seen a drop in our volumes and subsequently an increase in the quantity of illicit cigarettes we consume. This has been happening more in the last two to three years. The annual increase is not sustainable.
How will the proposed increase in the cost of excise stamps impact the pricing of your products?
If you increase the price of excise stamp by 80 percent for our case [cigarettes], we will be obliged to pass this on to the consumer.
Given one in every four cigarettes is illicit, we will have a situation where we will be forcing consumers out of the legitimate part of the market into illicit trade just because of affordability issues.
Our effort is to try not to increase prices aggressively but such measures will go against that particular wish. If this increase does go through, Kenya will be charging the highest rate for tax stamps for all countries where stamps are applied.
Why don’t you feel the raise is justifiable given that the last adjustment was in 2017?
That speaks to ease of doing business. Beyond that, the bigger problem I have is that tax stamps are not supposed to be a revenue-collecting mechanism, but a control and administrative mechanism that allows systems of the government to monitor and validate the production or importation vis-a-vis duty payment.
But when we start seeing the cost being applicable to tax stamps, it does seem like stamps are now becoming an indirect tax in a category that already is being heavily taxed.
We don’t think that this leads to driving the sustainability of manufacturing.
Excise tax has been flagged as a major revenue leakage area, and now there’s a proposal to overhaul the monitoring systems in your production lines with a view to giving the taxman round-the-clock access in real-time. What is your take on this development?
At BAT, we actually welcome the amendments that are being proposed to the Excise Duty Regulations of 2023. There has been an Excise Duty Act and these are just regulations to support the Act.
Even before the regulations came, we were pretty consistent on what we saw the Act was trying to achieve. For example, the regulations say that there should be CCTV surveillance on the production lines.
Here at BAT, we have had that for years. There’s also a requirement for a customs officer on the premises to aSSess production and movement of stock into our excise stock room, and we had this in place for years.
We are largely already compliant with the regulations. If everybody who pays excise duty does get to the same level of compliance, this should support the government agenda in terms of trying to heighten measures that will help curb tax evasion and reduce the prevalence of this in manufacturing.