STATUS AND FUTURE OF

THE PHILIPPINE

TOBACCO INDUSTRY

Presented by:

Hon. Edgardo D. ZaragozaAdministrator, NTA

to:

The Management Association of the Philippines

ABCD Breakfast Forum

15 January 2013

OUTLINE OF DISCUSSION

� Coverage of the Philippine Tobacco Industry and its Stakeholders

� Significant Contributions to the Philippine Economy and Rural Development

� Production, Export and Importation

� The National Tobacco Administration,

Mandate, Vision and Plans and Programs

� Issues and Challenges. and Prospects for Growth

� Possible Investments Areas

More fitting title could have been:IS THERE LIFE AFTER SIN TAXES?

(Republic Act No. 10351)

LOCAL INDUSTRY INVOLVES

� The production, trading & redrying/ preliminary processing of leaf;

Three Tobacco TypesFlue-cured (FCV) - Virginia (57%)

Bright Air-cured (BAC) - Burley (23%)

Dark Air-Cured (DAC) - Native (20%)

� The manufacture, distribution and sale of

tobacco products:

Cigarettes – 99 % +

Cigars, etc.

� The exportation and importation of

tobacco leaf and manufactured products.

COVERAGE OF THE TOBACCO INDUSTRY AND ITS

STAKEHOLDERS INDUSTRY STAKEHOLDERS:

� Tobacco Farmers, Farmers’ Organizations/Cooperatives

(Total Registered Farmers: 65,000; Registered Area: about 42,000 hectares; although the number actually planted varies from year to year, 56,000 farmers and 38,000 hectares in 2011)

� Local Government Units (27 provinces, nationwide )

� Tobacco Leaf Trading Center Operators (53) and Field Representatives (444)

� Wholesale Tobacco Dealers and Redryers (14)

� Cigar/Cigarette manufacturers (6)

� Tobacco Exporters and Importers (58)

� Farm, Factory and Office Workers

Significant Contributions to the

Philippine Economy and

to Rural Development

THE TOBACCO INDUSTRY…

� IS ONE OF THE STRONGEST PILLARS OF THE COUNTRY’s

ECONOMY AND THE LIFEBLOOD OF THE NORTH

� provides livelihood and sustenance to about 2.9 million

people including the

� Tobacco farmers, farm workers and families (0.84 m)

� Trading center, redrying plants, manufacturing plants(0.05 m)

� Marketing /distribution and sale (2.1 m)

� generates nearly PHP 30 B in

excise taxes yearly, about PhP40B including other fees and duties, which help the GOV’T fund its education, health, welfare, infrastructure and economic programs over the country (target 60 B in 2017) under RA 10351

� EARNS and saves dollars for the country , average of US$ 272 M from 2009-2011; US$ 342M in 2011

CONTRIBUTION TO RURAL DEVELOPMENT:

FLOW BACK OF EXCISE TAX

A part of excise tax is flowed back to the tobacco growing provinces/beneficiary

local government units (LGUs), pursuant to existing laws

� RA 7171 - 15% of excise tax collected on locally manufactured virginia-type

cigarettes, to virginia tobacco growing provinces

� RA 8240 – 15% of incremental revenue collected from tobacco products

(benchmark,1996), for burley and native tobacco growing provinces

In the recent years, these amount to about PhP6 Billion a year.

(To increase to PhP15B in 5 years under RA 10351)

The amount is used by beneficiary LGUs (provinces, municipalities, cities

and congressional districts) to fund priority projects pursuant to the above

RAs, to include concrete roads and bridges, municipal halls, gyms/sport

centers, health, welfare and scholarship programs, livelihood enterprises

and barangay economic development activities, among others.

Production, Export and Importation

Tobacco production has been steadily growing from more than 36 million in 2006 by an average of 17 % yearly, to more than 79 million kilos in 2011.

Leaf Production is set at 100 million kilos for the Medium Term (2017), with the targeted growth in export and import substitution

TOBACCO PRODUCTION

YEAR PRODUCTION

2006 36.50

2007 41.92

2008 42.75

2009 58.57

2010 73.77

2011 79.33

Total Exports (in million kilos), CYs 2006-2011

For the past five (5) years (2007-2011), export of unmanufactured

tobacco has been steadily rising at 23%, per year, with 2011 as the highest, at forty-three 43 million kilos; and, manufactured tobacco, at 29 million kilos.

EXPORTS

Total Imports (in million kilos), CYs 2006-2011

Local manufacturers imported unmanufactured tobacco at an average of 80 million kilos yearly, with 2011 as the highest at more than 94 million kilos.

There is a BIG ROOM for growth for the local industry through import substitution.

IMPORTS

The National Tobacco Administration,

Mandate, Vision, Plans and Programs

The NTA at present is the sole government Agency

that is mandated under its charter, EO 245, S. 1987, to

administer the development and regulate the local

tobacco industry

CORPORATE PRIORITIES FOR CY 2013 and beyond

1. Market-Driven Quality Tobacco Production, addressing the growing demand for domestic manufacturing and export markets, primarily through the Tobacco Contract Growing System

(TCGS), that will include the production of improved and full flavor/blending type tobacco. This also includes:

� Continuing enhancement of production technologies; and

� Integrated Farming and Other Income-Generating Activities (IFOIGAP),where the NTA

� provides assistance to tobacco farmers in the production of rice, corn and high value crops, hog and poultry raising;

�established the Agri-Pinoy Tobacco Farmers Food

Processing and Trading

Center in Ilocos Region in 2012, which will buy farmers produce, and process and sell to Bagsakan Centers, govt. offices and hospitals in Region 1 and Metro Manila; and, a Milling Complex in 2013.

2. Continuing Exercise of Regulatory Authority under existing laws. At

present, NTA has covered production and trading of leaf and the importation and exportation of tobacco leaf and tobacco products.

3. Quality Assurance for Tobacco Leaf and

Manufactured Products, will concentrate in the provision of services that ensure the quality of land, water, fertilizer and leaf tobacco, including the continuing study and monitoring of physical and chemical quality of cigarettes, as an input standards formulation and effective regulation enforcement and compliance.

4. Continuing Research and Development, and

implementation of pioneering ventures (the other industrial uses of tobacco), to include among others, the enhancement of technologies and profitability of the production of tobacco dust, tobacco handmade paper and tobacco extracts as pesticide for vegetables, fruits and ornamentals.

(Corporate Priorities, continued)

5. Farmers’ Organizational Development, to include continuing registration of farmers, strengthening farm clusters, farmers organizational development and livelihood assistance, to enable the farmers to become self-reliant, food-secured and become active partners of development.

6. Scholarship Program for Tobacco

Farmers Children/Dependents

(National Free Public Education). In collaboration with the CHED and TESDA, in regions 1, 2 and CAR.

7. Renewable Fuelwood Energy Farm and

Restoration of Ecological Integrity of Tobacco Growing Regions will address the fuelwood requirement of the farmers in the flue-curing for Virginia tobacco, as well as assist in the reforestation efforts of the tobacco growing regions.

(Corporate Priorities, continued)

ISSUES, CHALLENGES AND

CONCERNS

ENACTMENT OF RA 10351 (SIN TAX LAW)

The law increased the taxes for the low-priced cigarettes (PhP2.72/pack) by 341% in 2013 and 1003% in 2017;

the medium-priced cigarettes (PhP7.56/pack),

by 58% in 2013 and 297% in 2017; and,

the high-priced (PhP12.00/pack), by 108% in 2013 and 150% in 2017.

“

Particulars Y e a r s of Implementation (starting Jan 1 of every year)

2012 2013 2014 2015 2016 2017 Onwards

Packed by Hand

PhP

12.00 15.00 18.00 21.00 30.00 + 4%/yr

Packed by Machine

(PhP)

a. Low Tier

P11.50 and below

Percent Increase

2.72 12.00

341%

17.00 21.00 25.00 30.00

1003%

+4% /yr

Medium Tier

Percent Increase

7.56

58% 297%

b.High Tier-

Above P11.50

12.00 25.00 27.00 28.00 29.00 30.00 +4%/yr

Percent Increase 108% 150%

Increase in Excise Taxes pursuant to RA 10351

ASSUMED REDUCTION PER 10%

INCREASE IN TAX

2.5% (per Tobacco Atlas)

Years Low High Total

Total Removals in 2012 78.53 42.29 120.82

Remaining Removals in 2013 17.10 30.84 47.94

% Reduction 78.22 27.07 60.32

Additional % Reduction

from 2014-2017 5.22 0.94 2.39

OVERALL REDUCTION (B sticks)

(Per Cent % Reduction)

65.49

83.3912.87

(30.43)

78.36

(64.86)

PROJECTED REDUCTION IN CONSUMPTION/REMOVALS DUE TO RA 10351

Resulting from the drastic increments, following Tobacco Atlas’ assumptions, the low-priced cigarettes, will reduce by 83% and the high-priced by 30.43% or combined 65% reduction.

By 2017, consumption/removals will amount to a total of 43 billion sticks, composed of 13 billion and 30 billion from the low and high tier, respectively.

PROSPECTS FOR GROWTH

Despite above projection, there is a way by which the local tobacco

industry WILL NOT GET AFFECTED by the said reduction and even

PURSUE MORE MEANINGFUL GROWTH.

For this purpose: there is a need to accord due emphasis on:

1. Quality cigarette production ; and, High Quality leaf tobacco production

To continue to take advantage of the growing exports markets and address quality requirement for domestic cigarette manufacturing.

This will be done primarily through the tobacco contract growing system addressing above requirements.;

. Zonification/Mapping of best growing areas for each tobacco

type and subtypes;

(Mitigations Program, cont.)

2. Encouraging more investment by the private sector/

Mobilization of resources for Production Assistance to fully

support quality tobacco production as planned

3. Research and Development

Focus on technology enhancement on topped tobacco, farmers training and quality assurance services.

On Product Development by the tobacco private sector and farmers focusing on more affordable, cheap but quality cigaretteproducts – roll your own tobacco, organic tobacco, etc., similar to the domestic cigarettes of India and Malaysia and other countries, special blends in European countries.

4.More Aggressive Market Exploration and Development Ventures of the NTA, on a global scale, to promote Philippine tobacco.

Possible Investment Areas

Program/Project Amt. Required

(PhP M)

1.Credit Assistance for Market-Driven Quality Leaf Production 500

2. Curing Barn Assistance for Virginia Tobacco Production and Curing Shed Assistance for Burley and Native Tobacco (at 6,000 farmers

x PhP70,000) 420

3. Tobacco Leaf Trading, Wholesale Tobacco Trading and Redrying

4. Exportation of Tobacco Leaf and Manufactured Products

5. Cigar/Cigarette Manufacturing