HUNDREDS of jobs are on the line at the Maluti Mountain Brewery (MMB) if the government implements the 15 percent alcohol levy recommended by Finance minister Moeketsi Majoro in his 2020/21 budget speech. Dr Majoro said the levy on alcohol and tobacco would boost government revenues by at least M200 million annually.
His sentiments are not shared by MMB managing director Sesupo Wagamang (SW) who said the levy would be detrimental to the country as hundreds of jobs could be lost. In this interview with Lesotho Times (LT) reporter Bataung Moeketsi, Mr Wagamang also explains that the government stands to lose dividends and tax revenue as an increase in alcohol prices would mean a sharp reduction in sales volumes and an increase in the smuggling of beverages from neighbouring South Africa.
LT: Please give us an overview of the operations of MMB. What does the looming 15 percent alcohol levy mean for MMB?
SW: MMB is a state-owned entity. The government of Lesotho collectively owns a 56.25 percent stake in MMB through the LNDC and the Privatization Unit of the Ministry of Finance (51 percent and 5.25 percent respectively). Anheuser-Busch InBev (AB InBev) owns 39 percent stake, is also the managing partner of the business.
We manage the business on behalf of the shareholders. We have a board which is predominantly made of employees of the shareholders. This is how it has been structured from a long time ago.
AB InBev Bloemfontein business sells about four times more than the Lesotho business but they do not have a brewery. They produce in Johannesburg and distribute here. However, despite the low volumes, setting up a brewery in Lesotho was necessitated by the need to create employment through sustainable manufacturing. That’s why in the 1980s there was this infancy protection to allow MMB to import beer on the basis that the volumes did not necessarily require us to set up a brewery here.
However, since the long-term view was to create employment, and grow the business, the shareholders decided to set up a brewery here. It’s important to note that the size of this operation is small. Having a brewery here is not necessarily the most efficient way of doing business but creating employment was the first priority. That’s why this brewery was set up.
LT: How many people do you employ?
SW: At the moment we employ about 350 people including staff in the soft drinks department. So, as you know, we have sold the Coke business back to Coca Cola and the government of Lesotho. I’m hoping that this deal is completed this year but the negotiations have been on going.
This business plays a vital role in Lesotho’s economy. Just to give you context; Lesotho’s tourism contributes roughly 1,2 percent to the country’s gross domestic product (GDP) while the brewery contributes at least three percent. Whatever policy direction is taken be it positive or negative, it will impact the economy of the country.
If you look at the growth trends of the alcohol industry in the three-year compounded annual growth, we have about seven percent. The forecasts for 2020 were about 2, 5 percent but have been brought down to about 1, 7 percent in line with South Africa. Whenever South Africa catches a cold, Lesotho sneezes. In my view, it will still be reduced from 1, 7 to a lower number depending on how South Africa perform.
And obviously the impact of coronavirus and how the global economy performs, I think because of this we have to readjust our forecast and we’re looking at lower single digits growth for Lesotho again. Inflation should hover around 5 percent.
What I have picked from the Honourable Minister’s budget in nominal terms is that he is forecasting GDP to grow at eight percent. From a revenue point of view, his biggest drivers are taxes and Southern African Customs Union (SACU). But if you scratch deeper and look at his expenditure, you will realise that his expenditure is growing at about 15 percent, three times more than inflation.
Why are we growing ahead of all the economic indicators? It’s because we made a conscious decision to price below inflation to stimulate demand. We understood that the consumer is under pressure from inflation and unemployment. So, if we look at the disposable income that the consumer has at the moment, it’s under pressure. That is what has driven this growth or the growth that we are currently experiencing.
For me, the issue for the government is expenditure. If you look at what Dr Majoro has forecasted to grow his revenue, I would assume if he is under pressure for revenue, his expenditure budget at best grows at inflation. At best, we’ve adjusted on inflationary purposes.
South Africa has gone completely the opposite to what we are doing, because Honourable Minister Tito Mboweni realised that forecasting for taxes or increasing taxes and forecasting for revenue for taxes and what you actually receive don’t match. He constantly has shortfalls because what he envisaged collecting doesn’t normally come to fruition. Hence, the strategy this year is to reduce all the taxes, why, to relieve pressure on the consumers so that the consumers can spend more. We are going the opposite direction; put pressure on the consumer so that the consumer spends less.
Straight away, I can tell you based on trends across the region that the forecast of taxes that the minister wants to collect, chances are that he is going to miss that target. This is based on trends. That is what happens… This year South Africa has reduced the excise to about 4, 4 versus the 7, 4 last year and the reason is that they know if they put taxes on alcohol, sales will drop and their taxes will also drop and they will be unable to collect more. For me, that is important. It is key to note that an economy that is bigger than ours is going completely the opposite direction with us yet we are expecting to generate more revenue by raising taxes.
Perhaps they will be able to raise more from SACU this time around because I see that he has forecasted SACU to grow at 50 percent, which is quite bold. But I’m not sure what drives those numbers.
Getting back to MMB’s growth, when the volumes grow; a few things happen. This is one of the things that we have communicated to the government to say, “if you have a revenue problem, we’ll help you manage that revenue problem in two ways. As a business, we will become more efficient so that we don’t price above inflation. Our sales grow and when that happens, our taxes grow”.
Because our sales increase, we hire more people and we pay more excise to the authorities. For example, in the last three years we have paid more than M1 billion while our growth from 2016 to 2019 is almost 25 percent. Those are big numbers. It tells you where we are addressing government’s problem of revenue because we are giving government revenue year on year.
In 2018 and 2019 alone, our tax base went up by almost six percent because we grew the sales. We had this conversation with the government for a very long time before the Minister of Finance announced the 15 percent levy. We did some case studies to show him that our theory holds water. We looked at Botswana where a 30 percent levy was introduced. Botswana went through two phases. They introduced the levy 30 percent on recommended retail price.
Volumes dropped 30 percent immediately after the 30 percent levy was put in. So, it was one for one. We showed this to the honourable minister and his colleagues to say this is the problem. So, what we are telling you it’s not thumb sucked numbers, it’s numbers that we have experienced and we have acts of.
LT: When was the engagement done, last year?
SW: Yes. It was communicated last year. The issue was implementation, which I think is in the current budget speech, the minister said let us craft the legislation. The reality is, if you drop volumes by 30 percent it means even the taxes that we were paying will drop. Also, what we highlighted to him is the Botswana business used to employ between 1200 and 1400 people. When the changes were made, the workforce was halved. Now about 400 people work in that business.
This is why the Botswana government then revisited the levy and changed the methodology of charging. They have also gone and reduced it because they realised that it’s not working. The results were actually the opposite of what they were trying to achieve then.
We also realised at the time that Botswana’s biggest beer at the time had low alcohol by content before the levy. It had 3, 5 percent alcohol content. After the levy, Black Label became the biggest brand which has a high alcohol content, as well as cheap wines and spirits which put more pressure on the health sector because people were drinking stronger stuff. We normally refer to this as bang for a buck, because alcohol was so expensive. But unfortunately, the younger generation moved to drugs. For the first time, crack cocaine was available which created problems that the country was not ready for.
We showed the minister this to say for Lesotho, it would be catastrophic if we put the current ailing health sector under more pressure because of the decisions that we are making. We have also showed him a case study where the government and the private sector work together to create employment and raise revenue.
We gave him an example of a cassava-based beer that we are making in Mozambique where we kick started the rural economy by getting rural farmers to plough cassava. This beer was heavily subsidised in terms of excise by the government. For instance, if Mozambique was charging excise of 20 percent, but this specific beer was charged at five percent, so it was priced lower. And guess what happened? It stimulated demand, beer grew again, the rural economy was kick-started and it grew the economy of Mozambique. We’ve painted different scenarios to the government to say this is how we can partner to help you raise revenue because revenue is your problem. I think the other thing as well is that I’ve told you government owns 61 percent of this business. Again, we have constantly delivered dividends and if you look at the three year CAGR (Compound Annual Growth Rate), we have delivered at least half a billion of dividends to the government Lesotho.
As far as I remember, there’s not even a single time we skipped a dividend. It is important because these dividends get paid to the Lesotho National Development Corporation (LNDC). LNDC has a mandate from the government of stimulating or looking for investors as well to create employment. If we are one of the biggest funders of the LNDC and all of a sudden, we are unable to deliver the same dividends to the LNDC, it means that the LNDC’s mandate gets impacted and at some point, the government will have to fund the LNDC to deliver its mandate. At the moment, the government does not fund the LNDC.
The impact of the levy, because of our size, i.e. we are 3 percent of GDP, you can work on a multiplier of 1.4 in terms of beneficiation of our size. It is quite massive so if you hurt this industry negatively, for sure it will hurt your economy.
LT: To put it in layman’s terms, would one be correct to say that should the government go ahead with the 15 percent levy, they are essentially killing the goose that has been laying the golden egg?
SW: In a nutshell that is what it is. It will definitely hurt the business for sure. Remember we are the biggest brewer by size and pricing is what we do all the time. We see this in different markets first hand, not through a consultant who puts a model together and simulates the numbers.
LT: Apart from the revenue generation and everything else there’s the employment component and then there is the flagship, the Maluti beer that is also under threat?
SW: They normally say great countries have got great national football teams and great beer but luckily in Lesotho we have a great beer which is Maluti.
LT: And it is under threat?
SW: That is exactly the point because if the model changes and we say the operating model is not sustainable in the current form because of the levy, we would therefore have to go onto an import model. Essentially; it means Maluti won’t be produced here, it will be purchased somewhere else. That’s what it means.
The other important thing is the white paper that we shared with the honourable minister. We made concessions on that white paper. One of those concessions was that we would help the government generate revenue because we will find other efficient ways within our business to price below inflation so that we continue growing demand and looking at innovation to introduce other products into the market. We also said in terms of harmful consumption, we’ll launch a non-alcoholic beer which we just recently did.
We also committed to creating employment for youths and women. We are about to launch now what we call a retailer development programme. With this programme, we are looking at spending close to M8 million over a three-year period. This programme is essentially empowering women in rural areas to set up their own businesses, so it helps Basotho get into the retail space.
I am sure you are aware of our partnership with PostBank. One of the things that we picked up was because of cash flow issues, Basotho retailers struggle and I can tell you now, the minute we have this levy it’s going to impact this relationship with PostBank negatively because sales will drop and when sales drop, it becomes difficult to service this facility that PostBank has passed on to the retailers. When that happens, it puts pressure again on the government because someone must to bail out PostBank if Basotho are unable to pay back their loans.
The decision of enforcing the 15 percent levy is not one that can be made over a simulator. The impact is huge.
Another big component of the retailer development programme is creating employment for the youth, unemployed graduates. We all know how much of a problem it is in Lesotho. Instead of just opening it up to people who are already working or those who have experience, we focused on specifically unemployed graduates. People that have the skills but have no way to utilise their skills.
All of these projects are at risk. We are able to carry these projects because we are growing, we’re able to afford. The minute we decline, these projects will no longer be feasible. Just to give you context. Remember the minister put M200 million to be recouped from the levy in his budget speech and we do not know the methodology. We don’t know how he’s going to calculate it. Let’s say for instance, he calculates it on recommended retail price. A 750ml bottle of Castle Lager is R15. You put 15 percent on that, it means that bottle costs you R17, 25. And because of coinage most probably the next price point is R17, 50. What that means is you are R2, 50 more expensive than South Africa. And guess what happens when that happens? Smuggling across the across the border? That’s the problem. Currently, at least 400 000 litres of alcohol get smuggled through the border with a value of close to M100 million. This is a study that we did with the Euromonitor in 2018 to understand the size of the problem. The fiscal loss of that is almost R30 million. This is when we are still producing and when we are still pricing, because we are pricing at least a rand below South Africa. Part of the reason is to avoid this cross-border smuggling that is currently happening. But unfortunately, still with that, you are still having this problem. That money could be going to the Lesotho Revenue Authority (LRA).
LT: From your studies, what do you pick up per year in terms of the losses? These are the numbers on average per year?
SW: Yes. That is what it is. But these are the numbers while we are a rand or more cheaper than South Africa without the 15 percent levy. The minute you become R2 above South Africa, that number is going to grow exponentially .
This also increases the prevalence of illicit homebrews which will lead to revenue losses. The minute that the phenomenon grows, people will start looking the cheapest ingredients and may even end up using harmful substances and eventually put pressure on the health sector. These are realities that we’ve seen in other markets, so Lesotho is not unique.
Another issue is the consumption of cough mixture among the youths because they cannot afford alcohol. Add R2 more, this problem grows and I am not sure if we are ready to manage that.
When the volumes go down, we will have to look at other ways of becoming efficient because we cannot tell the government what not to do. What we can do is advise the government that you can do it this way. We are experts in this business. We understand the business better than the government but we can only advise. If the government doesn’t heed that advice, we will find ways of becoming efficient and finding ways to become efficient could mean relooking at the model of the business. And if you relook the model of the business, it means some people will lose jobs, we can’t guarantee we’ll still be having the 350 people.
LT: Is the closure of the manufacturing plant something that could possibly happen?
SW: It is an option. Remember we are going to interrogate all the options that are available to us. At the moment, we don’t know, because perhaps the government can also turn around and say, “Sorry, let’s rethink. We are not going to do the levy anymore because of all these issues”. It is possible. That’s why I’m saying we are going to explore all available options. Obviously, first and foremost, we will try and preserve as many jobs as possible but if it’s impossible and we see that it’s not viable, if the only option that is viable is going with the import model, then we’ll have to engage the shareholders and tell them of the other way of making the business efficient. Remember we are protecting shareholder value more than anything else. We will advise the shareholders accordingly and then the shareholders will make the decision in terms of what they want to do. But definitely, it’s one of the options that we’ll look at. If you look at our cost structure, almost 40 percent of our costs come from the manufacturing business and of that 40 percent plus 20 percent goes to excise. So, if you combine those two, it’s 60 percent of our business.
LT: You engaged the government when the topic came up last year and it didn’t happen then. Now here they are; they are talking of implementing it now and they’ve gotten to the stage where they are saying they’re crafting the legislation and tabling it in Parliament. Have you engaged them lately?
SW: No, We haven’t engaged because for us, the train left the station when the minister announced the 15 percent levy in his budget speech last year. Despite engaging with them, the minister went ahead and communicated the levy. However, we still have hope, because the budget speech for this year is still being debated. We are hoping before Parliament passes the law that we would get the opportunity to also share the same information that we shared with the ministry to share it with the members of Parliament so that when they vote, they know what they’re voting for because I’m not sure if they understand the implications. Our hope is that the MPs, at least when they vote, they should vote understanding the impact. We hope we get that opportunity to be invited at some point when Parliament debates the issue, then we can help them unpack.
LT: Seeing as there’s another business-related ministry, the Trade and Industry ministry, have you also engaged them to maybe say they could do something in terms of talking with their counterparts at Finance?
SW: Trade is represented here by LNDC. So, through the board, we’ve engaged with the board and LNDC as well to say, this is the risk to this business. We presented the white paper to LNDC as well as the Ministry of and Industry shared with them the issues. Remember the levy is predominantly driven from Honourable Majoro’s office more than anywhere else because of diversifying revenue. We have engaged with both. I for one have started my engagement with Honourable Mapesela before he was moved to a new ministry. We’ve engaged with all the ministers just to show them the risks and I guess for the Minister of Finance to go ahead and announce it, it would have been agreed at Cabinet. They would have aligned at Cabinet and Cabinet would have said they are comfortable with what you have proposed. That’s why now our only hope is the members of Parliament because their people will be the most impacted if this happens.