How to Prevent the Tobacco Law from Going Up in Smoke?

The ISET Economist, a blog about economics in Georgia and the South Caucasus by the International School of Economics at TSU (ISET) 

By Giorgi Mzhavanadze

After a hike in excise tax on cigarettes in January 2017, the Parliament of Georgia is to introduce legislative changes to the existing tobacco control law (TCL) in March. Since its enactment in 2003, TCL has been modified several times. However, the recently proposed changes can be considered the most radical step towards a tobacco-free society in Georgia. The new draft law comprehensively covers production, packaging, marketing, advertising, selling and consumption of tobacco, and other activities of the tobacco businesses. The main changes can be defined as follows:

1.     Consumption – total ban on smoking in public places (restaurants, café-bars, stadiums);
2.     Advertising – total ban on all kinds of advertising (outdoor, printed);
3.     Marketing activities – totalban on all kinds of marketing activities;
4.     Product placement – total ban on visible placement of tobacco product at the point of sale;
5.     Packaging – increasing size of health warning from 30% to 65%;
6.     Other tobacco products – including e-cigarettes in tobacco products (applying same regulations to e-cigarettes);
7.     Industry exclusion – not allowing public officials to meet with representatives of tobacco business;
8.     Industry liability – imposing liabilities for damage caused from production and consumption of tobacco product on tobacco business;
9.     Philanthropy – total ban on tobacco businesses donating to various social and cultural purposes.

Initiator of the new TCL, Guguli Magradze explains the necessity of the changes with some dramatic statistics: “Georgia takes second place by number of smokers in the world”. Apparently, this statement is an exaggeration, but it is not too far from reality – according to the World Health Organization, Georgia takes 6th place out of 129 countries by smoking prevalence among males aged >=15 years (57.7% in 2015). In addition, smoking prevalence among females in Georgia constituted 5.7% in the same year, while the prevalence of current tobacco use among adolescents aged 13-15 years was 16.5% and 7.8% for boys and girls correspondingly.

There is a common misconception in Georgia that most if not all of the changes to the existing laws are obligatory under the new EU Association Agreement. It is true that the Agreement requires Georgia to approximate the laws, regulations and administrative provisions concerning the manufacture, presentation, sale, advertising and sponsorship of tobacco products. However, not all proposed changes to the TCL are obligatory under the EU Association Agreement and have the deadline 2018 and 2020. Some of them are just EU recommendations or are initiatives of the law authors.

If we compare Georgian legislation to other countries in the region, similar TCLs were recently adopted in Turkey, Ukraine and Russia. Strict laws on tobacco control were implemented long ago in most European, North and South American countries. No doubt, given the prevalence of smoking in the country, Georgia’s laws are in need of an update. However, the coin always has two sides. Here, I will try to impartially analyze both, the possible positive and the negative effects of the new TCL (not an easy task for a non-smoker).

PROS OF TCL:

1. Removing a negative externality for non-smokers. Probably the most restrictive and ‘’uncomfortable’’ proposition for smokers is the proposed total ban on smoking in public places including café-bars, restaurants, stadiums and public transport (including private taxis). While this is good news for non-smokers, smokers might argue that the law is becoming increasingly restrictive, limiting their freedom. Although, when speaking about freedom, one should be careful: “Your Liberty to Swing Your Fist Ends Just Where My Nose Begins” (Oliver Wendell Holmes, Jr.). From an economic standpoint, smoking has a negative externality effect on the health of those who happen to be nearby (i.e. passive smokers). Thus, smokers’ freedom may violate the freedom of non-smokers to lead a healthy lifestyle.
2. Smokers cutting down or quitting smoking. Empirical evidence from several studies shows that bans on smoking in public places do not just protect non-smokers, they also create an environment that encourages smokers to cut down or quit smoking by reducing opportunities to smoke and by reinforcing non-smoking social norms. For instance, in New York City, a ban on smoking in bars and restaurants (and a large increase in the tax on cigarettes) which came into effect in 2003 is being credited with contributing to an 11% decline in the number of adult smokers from 2002 to 2003. This was one of the steepest short-term declines ever measured, according to surveys commissioned by the city.
3. Discouraging new smokers. Considering the experience of other countries, implementation of a total ban on advertising and marketing is the most problematic step for legislators due to strong lobbing from tobacco and advertising businesses. Empirical evidence shows that a fully comprehensive advertising ban covering all media and all forms of direct and indirect advertising reduces tobacco consumption and reduces  the social desirability of smoking in particular, among young people. The World Bank optimistic estimation is that comprehensive bans can reduce tobacco consumption by around 7%.

Research studies highlight that the most effective TCLs are based on a comprehensive approach, which includes the majority of the initiatives listed above, as well as gradual increases in the excise tax on cigarettes and increasing awareness about the negative effects of smoking on health.

Experience of neighboring countries

To evaluate the possible effect of proposed changes on smoking behavior in Georgia, we can use the experience of neighboring countries which implemented similar legislation in the recent past (Turkey in 2008, Ukraine in 2008-2010, Russia in 2013). The effect on smoking was similar in these countries - active consumption of tobacco products declined from 31.2% to 27.1% and from 25.6% to 21.8% in 2008-2012 in Turkey and Ukraine, respectively. According to the Russian Health and Social Development Ministry, active consumption of tobacco products decreased by 17% in two years after adoption of the law.

Based on this information, the authors of the new TCL conclude that in the first year after implementation of the law, active consumption of tobacco in Georgia will be reduced by 2%, while in the next four years on average by 1% (assuming there will be no other changes, such as further increase of excise tax). This will not only decrease spending on cigarettes, but will also improve health outcomes and labor productivity of the population (outcome which in itself is difficult to quantify).

CONS OF TCL:

1. Advertisement and marketing losses. The benefits which would bring a new law on tobacco control, will of course be accompanied by painful financial losses not ony for tobacco and related businesses, but also for retailers and for advertising and marketing companies. A total ban on advertising will harm the outdoor advertising companies, which estimate that “30-35% of revenues come from advertising tobacco products”. Just to give an idea about the total possible loss to this industry: the overall tobacco industry budget for advertising and marketing was above 60 million GEL in 2016.
2. Retail sector losses. As other types of tobacco advertising and promotion are restricted, package displays and adverts at the point of sale (POS) have become increasingly important in the marketing strategies of tobacco companies. Tobacco businesses pay retailers for prominent display space, including displays behind the counter facing customers, and counter top displays. The total retail universe for tobacco product is around 10,000 POS. Out of that total universe, selected retailers have contracts for placement, and prices vary from 1,000 GEL to several thousand GEL per year. The average payment is 6,000 GEL per contracted retailer for one Tobacco Company per year. Rough calculations show that this is around 35 million GEL in annual income for retailers from the tobacco industry just for product placement.
3. Loss of philanthropic contributions. Today, the tobacco industry is involved in various philanthropic activities, spending millions of GEL every year. For example, in 2016, it provided support to art institutions and theaters, including projects to alleviate poverty, as well as other social and public projects. Such activities might be banned after implementation of the new law.
4. Possible reduction in employment. Authors of TCL do not consider its possible negative impact on employment. Each of the tobacco importers cigarette companies employ between 100 to 150 people, while local producers employ several times more. According to the KMPG 2016 study, about 22,000 employees were involved in tobacco manufacturing and retail trade in 2014. The new TCL legislation will reduce production and sales, and part of this labor force will definitely be fired.
5. Losses of government budget revenue. From a fiscal perspective, the tobacco industry is an important accumulator of budget revenues. In 2016, according to the Ministry of Finance of Georgia, budget revenues from excise tax on cigarettes alone accounted to 548.6 million GEL, while VAT generated by the tobacco industry was about 200 million GEL. According to ministry calculations, increased excise tax will collect an additional 200 million GEL in 2017, resulting in up to one billion GEL from excise and VAT, not including income, profit and import taxes generated by the industry.

Projected decline in tobacco consumption will proportionally reduce budget revenues from the tobacco industry by 2% in the first year after implementation of the new TCL, and by 1% in the following years (about 20 and 10 million GEL). Tax revenue losses from marketing agencies, advertising companies and retailers will be much higher.

RECOMMENDATIONS:

Despite possible significant financial losses, TCL in Georgia will benefit society overall but only if implemented in the right way. Here are some ways to make the legislation more efficient and effective:

• Improve the enforcement of existing TCL, which in some cases remains only on paper. For example, there are cases of sales of tobacco products to persons under 18, within a 50-meter radius of educational institutions. The sales of single cigarettes still take place, despite the fact that the existing law prohibits the practice. If the old law is not abided by, there is no reason to believe that a new law will be effective.
• Modify and specify definitions. One of the most important paragraphs prohibits the selling of tobacco products under production cost. In the absence of an antidumping law and any legal mechanism of calculating production costs and losses due to “dumping”, this provision is subject to “creative interpretation” and may lead to inconsistent and questionable decisions by the court, such as the recent cases between Georgian manufactures and importers of tobacco. The same goes for point number 8 on the list of the proposed changes, namely industry liability. Liability measures are not specified in the new TCL.
• Modifying or removing certain paragraphs. Enforcement of some provisions of the proposed law will be almost impossible, given Georgian reality. For instance, “Smoking is prohibited in any building, except individuals’ personal houses (where he or his family actually lives), specialized laboratories, and prisons”. Considering the proposed definition of a building (any construction with any kind of roof, floor, and walls, which covers no less than 50% of the area), it means that smoking will be prohibited for self-employed car-repairers at their workplaces, in private garages and on the verandas of café-bars. Needless to say, a law that cannot be credibly enforced will lose its appeal to the general public. It may even undermine the credibility of the government.
• Introduce pictorial health warnings instead of (or along with) increasing the size of health warnings. Canada, in 2001, was the first country in the world to introduce health warnings accompanied by pictures, occupying 50% of the front and the back of the packs. The Canadian Wave surveys, which were commissioned by Health Canada before and after health warnings increased in size from 25% to 50%, do not demonstrate a large impact on smoking behavior. However, data suggests that pictorial warnings have a greater impact on noticing anti-smoking information, thinking about the health risks of smoking and quitting decisions.
• Philanthropic activities by tobacco companies should not be outlawed. This provision could be modifiedin the way that will prevent the use of these activities for the purposes of advertising tobacco products and companies.
• Think of how to minimize losses of employment and revenues. Here, there is no good prescription to follow, but thinking of how to attract new industries to employ people released from the tobacco retail and production sector is an essential part of “selling” the new policy to smokers and non-smokers alike. A regulatory impact analysis could be performed to estimate the costs, the benefits and the possible ways to reduce the costs of the new legislation. The government might consider conducting proper RIA analysis to get a clear understanding about the possible consequences of the planned regulatory changes.