This article first appeared in The Edge Malaysia Weekly on February 28, 2022 - March 6, 2022

THE three largest tobacco companies, which collectively control 95% of the legal industry’s market share, have long been fighting the scourge of counterfeit or illegal tobacco trade in the country. At the heart of that fight is the high prevalence of illicit cigarettes — and how they rob the country of RM5 billion in unpaid taxes every year.

Yet, just as British American Tobacco (Malaysia) Bhd (BAT Malaysia), JT International Bhd (JTI Malaysia) and Philip Morris (Malaysia) Sdn Bhd (PMM) were making headway, a new threat has recently emerged, with the question mark over their contribution to the economy never more pronounced.

What happened?

On Feb 17, Minister of Health Khairy Jamaluddin announced that Malaysia would introduce a bold new law to ban smoking and possession of tobacco products, including vape, for people born after 2005, as part of a “generational endgame” for smoking in the country. He had first raised the prospect of introducing the law during an address at a World Health Organization (WHO) meeting in Geneva last month.

Khairy was reported as saying that the country hoped to pass the legislation this year. This effectively means that Malaysians who turn 17 this year, and those who are younger, will never be able to legally buy cigarettes and other tobacco products for the rest of their lives.

Currently, the legal minimum age for buying tobacco products is 18.

Department of Statistics Malaysia data shows that the population in the third quarter of 2021 was 32.67 million. Of the total, 7.53 million individuals, or 23%, were aged 14 and under. This gives a rough idea of the pool of children who will be particularly affected by the proposed ban.

The proposed regulation changes closely follow a move by New Zealand. It was reported last December that its government would ban all sales of tobacco from 2022 to anyone born after 2008, as part of its goal to reduce the number of New Zealanders who smoke cigarettes to just 5% of the population by 2025. Touted by public health experts as one of the world’s toughest crackdowns on the tobacco industry and “an endgame” in the fight against tobacco, it will see the country effectively banning the sale of tobacco to anyone aged 14 and below.

For comparison on a population basis, New Zealand’s plan has been proposed for the country of more than five million, where, as at last year, 11.6% of those aged 15 and above smoked. The government’s goal is to reduce the overall number to below 5% by 2025.

The National Health and Morbidity Survey (NHMS) 2019 estimated that 4.8 million Malaysians aged 15 years and above smoked. This is equivalent to a smoking rate of 21.3% in 2019, slightly down from 22.8% in 2015 and 23.1% in 2011.

Still, New Zealand is not the first country to propose such a ban, which ties the right to buy tobacco to a person’s birth date, not their age. Brookline, Massachusetts, a suburb of Boston in the US with about 60,000 people, had reportedly enacted such a policy in September 2021, making buying tobacco and vape products off-limits for anyone born after Jan 1, 2000. This means that people aged 22 and below this year cannot ever legally purchase cigarettes or vaping products in Brookline.

Although the proposed law to ban tobacco sales to people born after 2005 may appear harsh on legal tobacco companies, economists point out that the government has long been firm on its position to discourage smoking. In 2005, Malaysia became a signatory to the WHO Framework Convention on Tobacco Control (FCTC), a legally binding multilateral treaty aimed at reducing tobacco use and exposure to tobacco smoke. As at September 2020, the WHO FCTC had 182 parties.

For its part, Malaysia has developed a National Strategic Plan on Tobacco Control 2015-2020 (NSPTC) to strengthen the implementation of tobacco controls in the country. The NSPTC has a medium-term target to reduce smoking prevalence to 15% by 2025, as well as a long-term target to achieve the “endgame” of tobacco in Malaysia by 2045.

When announcing the plans to introduce the new law, Khairy said that tobacco use is the leading cause of cancer in the country, contributing to 22% of cancer deaths. He also pointed to an 11% rise in the number of cancer cases — to 115,238 (from 2012 to 2016), from 103,507 (from 2007 to 2011). The cost to treat lung cancer due to smoking was estimated at RM132.7 million annually, he said.

In a December 2019 interview with The Edge, former deputy health minister Dr Lee Boon Chye said studies had shown that the government and the private sector each spend RM7 billion to RM8 billion a year to treat smoking-related illnesses such as lung cancer and heart problems. “This brings the total cost to about RM16 billion a year,” he said, adding that the RM5 billion in lost excise duty and sales tax revenue pales in comparison to the cost of treating patients with smoking-related illnesses.

While he acknowledged the plight of tobacco firms in the fight against the illicit tobacco trade, Lee had said health came first and the fight was in line with the Ministry of Health’s (MoH) and WHO’s objective to reduce cigarette consumption and the number of smokers.

This time around, MoH did not respond to The Edge’s request for comment.

Lee Heng Guie, executive director of think tank Socio-Economic Research Centre (SERC), estimates that the tobacco industry contributed only 0.2% of gross domestic product from 2019 to 2021.

The sector employs close to 1,200 people, which accounts for 0.05% of employment in the manufacturing sector.

“Malaysia is a net importer of tobacco products, which represent about 0.05% of total imports. The share of exports is even smaller at 0.02% of total exports,” he tells The Edge. This follows the closure of BAT Malaysia’s and JTI Malaysia’s two manufacturing factories in 2017.

Heng Guie explains that the government collects tax revenue from the tobacco sector on two fronts: sales tax on locally manufactured cigarettes and excise duty levied on imported cigarettes. “The latter carries the largest revenue — about RM3.3 billion in 2021, which accounted for about 2% of the country’s total tax receipts.”

In contrast, for many years, tobacco companies had been arguing that the total amount of tax evaded by Malaysia’s illicit cigarette trade is more than RM5 billion, or almost 3% of total tax receipts.

Nevertheless, Heng Guie believes the proposed law is a good effort by the government, which is in line with MoH’s strategic objectives under NSPTC.

“To some extent, as the country gradually phases out smoking altogether, the contribution from the tobacco industry in terms of tax revenue, production and activities will also reduce accordingly. The question is whether it is going to be a big loss to the country. If the government has decided to take that path, it will have to weigh the net impact/economic losses to the country. But I think all this can be compensated.

“Still, the government really needs to evaluate whether the gain [from the sector] will outweigh the health cost to the country. The health minister recently said tobacco use contributes 22% of cancer deaths, but there are also deaths caused by smoking-related illnesses and second-hand smoke inhalation. There is a lot of scientific data that shows smoking is harmful. As a responsible government, it would have to prioritise the collective health cost over the profit of a few companies in this industry,” he says.

“When it makes an informed policy decision like the latest proposal, I am sure it has placed the priority on whether the economic loss from the revenue contribution from the tobacco sector will offset the overall impact of the health of the community in terms of assessing the consequences of tobacco use, such as increased medical expenses, loss of productivity and human lives, and the health risks.”

According to NHMS 2019, it is estimated that more than 27,200 of deaths annually are related to smoking. Smoking causes diseases such as cancer, heart disease, stroke, lung diseases, diabetes and chronic obstructive pulmonary disease.

Like New Zealand and Brookline, the proposed law has been met with mixed reactions in Malaysia. Concerns have been raised about a growing black market for tobacco.

The Confederation of Malaysian Tobacco Manufacturers (CMTM), which comprises BAT Malaysia, JTI Malaysia and PMM, points out that the proposal, while similar to that of New Zealand, is untested, unproven and without any scientific evidence.

“Such a move may prove counterproductive and further fuel the black market, which will see syndicates benefiting the most as illicit activities fund criminal activities,” CMTM says in an email reply to The Edge.

“The tobacco black market currently commands close to 60% of the total market in Malaysia and, over the last five years, the government has already lost RM25 billion in tax leakages to the tobacco black market. A generational smoking ban would only worsen this situation, as a complete prohibition leads to a rise in the tobacco black market. Bhutan, for example, demonstrated that a complete ban did not work, as reports have shown that the country has a thriving tobacco black market despite the ban.”

CMTM notes that significant headway has been made in managing the tobacco black market crisis, following multiple measures announced two years ago in Budget 2021, including transshipment restrictions as well as heightened enforcement by the government.

In 2015, the government raised the excise tax on cigarettes by a whopping 40%. Since then, the incidence of illicit cigarettes in Malaysia has been more than 50%, increasing every single year to the peak of 63.8% in 2020. Nielsen’s latest Illicit Cigarettes Study in Malaysia shows, however, that the incidence of illegal cigarettes fell to 57.9% month on month last May, from 59.5%.

CMTM says: “Introducing the generational ban will undermine these measures in tackling the tobacco black market and erode any efforts the government has made against the black market. Instead of an outright ban, CMTM urges the ministry to pursue a science-based approach to lessen the impact of smoking and establish a specific regulatory framework for reduced-risk products.

“Given that MoH is preparing to table a new law to regulate tobacco and reduced-risk products in the upcoming parliament session, it is important that the ministry considers proportionate regulation for all products. We also call on the ministry to include industry players in the overall consultation process in developing the laws to ensure views from all stakeholders are taken into consideration.”

Dr Yeah Kim Leng, professor of economics at Sunway University Business School, says while the proposed generational endgame goal is a laudable initiative that ranks among the country’s topmost public health priorities, which include tackling obesity, stunting and unhealthy lifestyles, it should be recognised that unhealthy habits and lifestyle choices can be addressed only through health education, awareness and appropriate incentives.

“Draconian measures such as prohibitions and cutting off supplies to curb vices or unhealthy habits such as smoking will only drive such activities underground,” he tells The Edge.

“The plan to phase out all cigarette sales in the country is likely to transform the cigarette industry into a black market with all the attendant negative consequences, similar to illegal drugs. More studies and statistics on the healthcare costs of smoking are needed to provide a convincing case for the endgame strategy. Without clarity on the short- and long-term social, health and economic costs and benefits, the proposal will be highly contentious.”

Yeah believes the economy will be negatively affected by the loss of value added, tax revenue and employment generated by the tobacco industry.

“The indirect inter-industry effects associated with production, logistics, marketing and distribution will also be felt by the local economy that involves many micro and small enterprises.

“The country’s tobacco tax revenue is estimated at over RM5 billion annually, with an equivalent amount reportedly lost through illicit cigarette sales. The industry’s value-added output generated in 2021 amounted to RM2.8 billion, with 1,200 workers employed. It is a relatively small industry and its importance lies in its contribution to a greater diversification of the economy,” he says.

Still, Yeah agrees that the health benefits far outweigh the economic benefits, especially if the capital resources and workers deployed in the tobacco industry are able to find alternative uses and opportunities. “Like other ‘sin’ activities such as gambling, the challenge is to find the optimal balance for society so that they are not driven underground,” he says.

SERC’s Heng Guie concurs. “The only concern is that you must make sure you do not create a bigger black market for illicit products. MoH, together with enforcement agencies such as the Customs Department under the Ministry of Finance and the Ministry of Domestic Trade and Consumer Affairs, needs to be given more resources to prevent people from flooding the market with illicit tobacco products.

“Even if you place a ban to prohibit the sale of cigarettes and tobacco products to those born after 2005, people will find ways to reach them. It then goes back to enforcement. But since the government has shown determination to move towards this path, all stakeholders must be united in their support for it,” he says.

Acknowledging the challenges, Khairy had said: “Of course, we will have challenges in enforcement and black markets. But those are not excuses for us to continue to allow the sale [of such products] that cause cancer in our young people. We hope with this step, we will spare our future generations from being exposed to cigarettes and tobacco.”

While vape players laud the introduction of vape regulations in the country, they have expressed alarm that the proposed move to outlaw smoking for the next generation includes the sale and use of vapes and electronic cigarettes (e-cigarettes). Unlike what is being proposed in Malaysia, New Zealand’s new laws will not affect vaping.

Malaysian Vapers Alliance (MVA), a lobby group that champions the use of vape products to help smokers quit, says any regulations developed for vaping must be different from traditional cigarettes, because 84% of vape users believe the substance to be a less harmful alternative to traditional cigarettes.

“Despite an ever-growing amount of independent evidence proving that vaping has risks but is much, much less harmful than smoking, the government continues to group vape products together with traditional cigarettes. These products could not be any more different from one another, and our survey proves that the vaping community in Malaysia is in agreement,” MVA president Khairil Azizi Khairuddin said in a statement dated Feb 21.

“Findings from MVA show that vape consumers want regulations that are in tandem with their usage and preference. For example, 79% vape users have indicated that they use vape liquids containing 40mg to 50mg nicotine. If regulations cap nicotine levels lower than that threshold, then 85% have said that they would resort to purchasing vape liquids that are not regulated.

“In addition to creating a black market for vape products, such a situation may also be detrimental to the safety of vape consumers if they opt for unregulated products.”

JTI Malaysia managing director Khoo Bee Leng has previously said that illicit vape liquids are fast becoming a national crisis, with the volume of nicotine liquids smuggled into Malaysia already equivalent to 12½ billion cigarettes — almost double the volume of legal cigarettes, at 6.3 billion in 2020. This is based on the conversion that one millilitre of vape liquid is equivalent to 20 cigarette sticks.

“According to Nielsen’s illicit cigarettes study, illicit cigarettes comprised 64%, or two-thirds, of total consumption [in 2020]. The figure gets worse if you include vape liquids, which are basically illicit in Malaysia because they contain nicotine — we are talking about 79% of the market being illicit,” she had said.

According to a dipstick survey by Retail and Trade Brand Advocacy Malaysia Chapter (RTBA Malaysia), a non-governmental organisation, 85% of those surveyed said the proposed ban would not work and instead create a black market for cigarettes and vape.

The dipstick survey, which was open to the public for close to a week, saw close to 1,200 Malaysians giving their views on the proposed ban on cigarettes and vape.

Respondents to the survey also said the ban would be difficult to enforce and ultimately affect legal and local businesses in Malaysia.

“While RTBA Malaysia understands MoH’s motive, the proposed ban on cigarettes and vapes for the next generation is 100% theory and 0% evidence,” said Datuk Fazli Nordin, managing director of RTBA Malaysia, in a Feb 11 statement.

“There is also the issue of enforcement. Such a policy will be very challenging to enforce, and there will be a lot of [complexities for businesses to deal with]. The government must thoroughly review the repercussions of any new policies before implementation by conducting full, proper studies. Otherwise, it can lead to inconsistent enforcement and severely affect the local business community.”

It remains to be seen whether the ban will become law in the near future as the move puts into question the future of tobacco players in the country. All eyes are now on the new Tobacco and Smoking Control Act, which will include the regulatory framework for vapes and e-cigarettes and is expected to be tabled in the next session of the Dewan Rakyat.

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