The South African government had been expected to hike up the Health Promotion Levy on Sugary Beverages last month: but decided instead to keep it at its current rate for the next two years. That’s welcome news to the country’s sugar industry, which had campaigned tirelessly against the ‘job-killing’ increase.
But neither does the government appear to have any intention of abandoning the tax: it's simply stated there will be a hiatus to any increases, and says it is considering expanding the levy's reach to a wider range of beverages.
So the sugar industry needs to find its path for the future: which could include turning to other uses for sugar such as sustainable aviation biofuel (SAF), animal feeds, alcohol and co-generation of electricity.
One million livelihoods at stake
With the highest level of obesity in sub-Saharan Africa, the sugar tax was introduced in 2018 to try and reduce sugar intake. A 2021 study published in The Lancet suggested that South Africa has indeed seen large reductions in purchases of sugary beverage volumes since plans for the levy were announced in 2016.
But South Africa is a large sugar producer: with the R18bn ($1bn) industry ranking consistently in the top 15 of around 120 sugar producing countries worldwide (the October 2022 cane crush came in at around 17,963,900 tons).
Furthermore, it’s the lifeblood of many rural communities, and a significant contributor to the national economy, according to the South African Sugar Association: one million livelihoods depend on South African cane sugar.
Sugar growing challenges
The levy sugar tax was introduced at a time where sugarcane growers and millers were recovering from a prolonged drought: and since then the industry has continued to be plagued by a number of challenges, ranging from cheaper sugar imports and lower global sugar prices.
The South African government had intended to make a 4.5% increase in the levy from April 2022: which was pushed back to 2023 and now will not take place for at least another two years.
In its budget released on February 22, the finance minister confirmed that the levy will remain unchanged ‘to enable the sugar industry to diversify or restructure’.
That’s welcomed by industry organization SA Canegrowers, which says that – with cane sugar growers already plagued by several serious challenges – the levy increase ‘would have decimated the industry’.
The decision to not increase the #sugartax is a welcomed reprieve for #canegrowers, value chain partners & the #onemillionlivelihoods that the #sugarindustry supports. It is a major step in creating a stable environment for the industry. https://t.co/Hkb5cTVvr8pic.twitter.com/ysxxc5wG4c— SA Canegrowers (@sa_canegrowers) March 10, 2023
The industry is already facing more than R700m in lost revenue due to loadshedding, a milling crisis, and the impact of recent floods alone, says SA Canegrowers. And it believes the HPL increase would have been another hit for sugar farms.
Modelling from The South African Sugar Association showed the planned increase in the Health Promotion Levy would have 'cost the sugar industry more than 6,000 jobs and jeopardised the businesses of nearly 3,000 small-scale growers.'
That adds to the 'total of more than 16,000 jobs and R2 billion lost because of the levy in the first year of its implementation alone', according to the industry organisations.
The SA Sugar Association says the HPL has been one of the factors in a ‘perfect storm’ of challenges for the industry: alongside distorted global prices and cheaper imports.
Meanwhile, the pandemic, civil unrest and the burning of sugarcane fields in June/July 2021, have added to the sugar cane industry’s woes.
"The HPL (sugar tax) has had a deleterious impact on the industry since its introduction in April 2018, leading to multi-billion-rand revenue loss, thousands of job losses and permanent closure of two sugar mills in KwaZulu-Natal," it says.
Can the sugar industry make a living from biojet fuels and animal feed?
The decision not to increase the levy, says SA Canegrowers, marks a critical reprieve for the growers, value chain partners, and the one million livelihoods they support.
“We are hopeful that this two-year reprieve will also be used to foster further engagement about the effectiveness of the Health Promotion Levy and the possibility of crafting alternative, less destructive and holistic health interventions," said Andrew Russell, Chairman of SA Canegrowers.
"At the same time, growers will use opportunity to revive the industry, and to position it for long-term profitability and sustainability.”
- In April 2018, South Africa became the first country in Africa to introduce a sugar tax as part of its Health Promotion Levy. As well as seeking to reduce obesity, its introduction was significant as a potential model for other African nations.
- The sugar tax applies to drinks with over 4g sugar per 100ml, with each gram above this taxable at 2.21c per gram (a tax rate of 12.1%)
- For the 2018/2019 fiscal year, tax revenues collected from the levy reached R2.3bn, some R700m above budget estimates.
- But the following year saw this decline to R2.6bn, suggesting a ‘significant degree’ of reformulation.
- In most instances, part of the costs related to the HPL were passed onto consumers. In other cases, manufacturers have used the opportunity of the introduction of a HPL to increase prices by more than the effective tax rate. As a result, the burden of the HPL was passed onto consumers in the form of higher prices.
- The most significant increases were observed in the price indices related to ‘fizzy’ drinks in cans and bottles, which increased by 4.2% and 3.7% month-on-month in April 2018, respectively.
Source: Economic Impact of the Health Promotion Levy on the Sugar Market Industry: Impact Assessment Report, November 2020 – National Economic Development and Labour Council (NEDLAC)
The industry needs to restructure and re-model around current market expectations. One way to help farmers is to encourage people and manufacturers to buy sugar from local, South African growers. But this will only go so far.
The SA Sugar Association has already produced a plan of how the sugar industry can look to the future: highlighting product diversification.
“We are grateful to government for acceding to our request for a moratorium on any increases to the HPL while we vigorously pursue opportunities identified during Phase 1 of the all-important Sugarcane Value Chain Master Plan to 2030,” said Trix Trikam, Executive Director.
“These diversification projects have the potential to change the trajectory and performance of the industry. The HPL remaining unchanged gives us time to achieve a just transition of the sugar sector into new activities and industries."
So what could these other opportunities be? The industry has turned to the world’s largest sugar producers – India and Brazil – for inspiration. These markets have developed their industries on a ‘far more diverse set of foundations’, with sugarcane being used to produce a wider range of downstream products in addition to sugar including biofuels, animal feeds, alcohol and co-generation of electricity.
Producers are investing on further downstream production of a range of platform and specialty chemicals that are the key feedstocks for the production of bio-based products and materials for application in several sectors such as plastics, packaging, automotive, pharmaceuticals, textiles and industrial uses.
Some sugar millers in South Africa have already diversified into electricity generation for use within mills and some surplus sale to the grid, while others have accessed animal feed, alcohol and furfural markets.
And other opportunities could exist in areas such as biojet fuel, biogas, no and low calorie sweeteners. SA Canegrowers calculates, for example, its members could produce 433 million liters of sustainable aviation fuel (SAF) a year.
What is #SAF? SAF is sustainable aviation fuel, a low-carbon fuel alternative for the aviation industry, that can be manufactured from #sugarcane. To find out what SAF could mean for South Africa's #sugarindustry, click here: https://t.co/BGR2a7UYm8pic.twitter.com/tLxleGPfIn— SA Canegrowers (@sa_canegrowers) March 22, 2023
The viability of many of these possible value-streams, however, will depend on the economics of each market – which need to be carefully researched. And there’ll also need to be ‘significant restructuring’ of the existing value chain and investment in additional and upgraded technologies.
Levy could extend to lower sugar beverages
Meanwhile, the sugar tax discussion is not over. While the government has pledged not to increase the levy over the next two years, it says it will soon publish a discussion paper for consultation on proposals to extend the levy to pure fruit juices and lower the 4g threshold.
That will please South Africa’s Healthy Living Alliance (HEALA) – a key supporter of the levy – which had been pushing for the tax to be raised to 20% per liter (up from the current 12.5%) and widened to include fruit juices and beverages containing more than 2g of sugar per 100ml.
Annual sugar production in South Africa has declined by nearly 25%, from 2.75 million to 2.1 million tons per annum, over the past 20 years, according to the SA Sugar Association's Master Plan.
The number of sugarcane farmers has declined by 60% during this period, and sugar industry related jobs are estimated to have reduced by 45%.
It says that ‘many of the issues plaguing the sugar sector have little to do with the Health Promotion Levy’.
Instead, it highlights problems such as cheap sugar imports, climate change, floods, loadshedding and the 'sugar industry’s own inefficiencies' (such as high labour outputs and outdated technology).
"The HPL cannot be the main reason for the sugar industry’s problem," says Nzama Mbalati, Programme Director at Healthy Living Alliance (HEALA). "It is important for industry to begin addressing its own inefficiencies that affect jobs and stop scapegoating the HPL.”
Like in other markets with sugar taxes, the South African beverage industry has learned to deal with the sugar levy through reformulation. While the sugar industry's challenges may be much more acute, it too needs to find a way to adapt to the future.