Issue 2, 2013. April-May

   

ABRUPT ANTI-TOBACCO LEGISLATION DIVIDES GOVERNMENT, BUSINESS

Georgia Health officials want to implement new tobacco regulation legislation to ban advertising, increase excise tax and expand anti-addition outreach. Opponents, however, caution that abrupt regulatory changes, without proper consultations with the industry, could have unintended economic and budgetary consequences.

Nick Clayton

The Georgian Cabinet is currently discussing proposed anti-tobacco legislation that would restrict how tobacco products can be sold, advertised and displayed, however, the government remains divided on what role the tobacco industry should play in the process.

Former Health Minister and current Head of Georgia's National Center for Disease Control Amiran Gamkrelidze said the primary goal of the new legislation is to bring Georgia in line with the recommendations of the Framework Convention on Tobacco Control (FCTC) passed by the World Health Organization in 2003.

The FCTC calls for a total ban on advertising tobacco products, an increase in the size of warning labels on packets, a gradual excise tax increase, and the introduction of a gamut of anti-addiction and educational outreach programs.

Nikoloz Mchedlishvili, the director of corporate affairs and communication in the Caucasus for Japan Tobacco International, said that multinational tobacco firms have experience with adapting to FCTC regulations in other markets, but he emphasized the importance of involving the industry in the policymaking process.

"We're not against tobacco regulations necessarily, but we have to be involved and we want to offer our expertise from dealing with this process in other markets," he said.

The tobacco industry is big in Georgia: 59.8 percent of Georgian men smoke, according to statistics collected by the Georgian Ministry of Health. Women (14.9 percent) and children under the age of 16 (12 percent) are also active smokers. Recent studies by the ministry found that the average Georgian smoker smokes 19.5 cigarettes a day and 11,000 Georgians die of smoking-related illnesses every year.

Mchedlishvili said that his company estimates the tobacco industry annually contributes 500-600 million GEL ($300-362 million) in tax revenues to the Georgian budget, and radical legislation changes could have a ripple affect through the economy and state budget.

However, Article 5.3 of the FCTC specifically urges signatories to "protect the formulation and implementation of public health policies for tobacco control from the tobacco industry to the greatest extent possible," and says governments should "interact with the tobacco industry only when and to the extent strictly necessary to enable them to effectively regulate the tobacco industry and tobacco products."

Gamkrelidze, who authored the draft currently being discussed by the Cabinet, said that he had already turned away industry representatives hoping to be involved in the drafting process and he is against their inclusion into policymaking in the health sector whatsoever.

This is not a consensus position within the government, however. A source close to the ongoing discussions told Investor.ge there was "almost literally a fight" between representatives of different ministries over the question of whether the tobacco industry should be excluded or invited to consultations, and in the end Prime Minister Bidzina Ivanishvili expressed the opinion that the final document should be "communicated and agreed" upon with the industry.

But Levan Agdgomelashvili, general manager of Omega Group Tobacco, whose factory in Georgia produces about 6.5 billion cigarettes per year, said many of the reported details of the bill show cause for concern, specifically the ban on all forms of advertising. It is already prohibited to advertise tobacco products through traditional mass media in Georgia and he said companies have since resorted to advertising online and on billboards.

"Outdoor advertising is a very good way to communicate with your customers about innovations, new brands, or new changes in existing brands. It allows us to present and explain innovations. By restricting this advertising, we think that it will be a violation of the customers' rights to get information about the product they consume," he said.

The draft also calls for an increase in the size of health warning labels on tobacco product packaging to 50 percent of the surface area on each side. Gamkrelidze said he is also pushing for higher taxes on tobacco products while recognizing that the Ministries of Finance and Economy will have the final say to develop "more flexible and appropriate" levies. Ultimately, according to the proposal, this increased revenue will go towards anti-addiction and educational programs for youth.

But, both Mchedlishvili and Agdgomelashvili said that previous tax hikes on tobacco actually led to a decrease in overall revenue for the government because they spurred a dramatic increase in tobacco smuggling. In 2005-2006, the Georgian government briefly increased the excise tax on tobacco products to .90 lari per package of imported cigarettes and .70 lari for domestics.

They both pointed to a report commissioned by British American Tobacco (BAT) that in 2006 found that the percentage of smuggled and counterfeit cigarettes in the Georgian market by that time reached 60-65 percent of the total market, and up to 85 percent in certain regions.

Another source in the tobacco industry in the region who spoke on condition of anonymity because he was not authorized to speak with the press said he was aware of the report and its findings, but, because Georgia now has some of the cheapest tobacco prices in the region, a tax increase would merely balance the market out. In fact, he said, the only major smuggling his company had observed recently was going the opposite direction with Georgian cigarettes being funneled into Turkey.

He also downplayed the overall affects of the measures on the industry's bottom line, as the multi-national tobacco companies have observed the market effects of FCTC regulations in other markets over the last 10 years.

Generally, he said, price increases and public smoking bans drive consumers to cheaper brands and slightly lower levels of consumption, while funds that the industry would have put into advertising are instead reinvested in the product. In the end, only small numbers of smokers drop the habit and the industry's bottom line isn't severely affected, the source said.

Predictability is the most important factor in the regulations, Mchedlishvili said. For example, if the Georgian government decides to increase or modify warning labels on packaging, tobacco companies will need to know a year in advance, otherwise their supply chains will be disrupted and they may be forced to waste products that cannot be consumed before the regulations are enforced.

A nearby example of how to do this, he said, is Russia. In February, Georgia's northern neighbor passed a law that conforms local legislation to the FCTC and totally banned smoking in public places, increased prices and restricted where cigarettes can be sold. The new regulations will be enforced starting in 2014.

Nick Clayton covers the Caucasus for Mergermarket, a part of the Financial Times Group.