The contribution of British American Tobacco South Africa to the Western Cape economy

The contribution of British American Tobacco South Africa to the Western Cape economy A study conducted by Quantec Research, 2016

Contents 2 The contribution of British American Tobacco South Africa to the Western Cape Economy

GDP 3

1. Introduction 4 The contribution of British American Tobacco South Africa to the Western Cape Economy

About British American Tobacco South Africa BAT South Africa is the largest cigarette manufacturer and distributor in South Africa. Its portfolio includes the country s top six cigarette brands Peter Stuyvesant, Dunhill, Rothmans, Benson & Hedges, Pall Mall and Kent. Operational since 1904, BAT South Africa operates a large-scale factory and nationwide distribution network for tobacco products, providing employment and income to thousands of households in South Africa and making a vital contribution to government tax revenue. However, the direct economic impact of BAT South Africa constitutes only a small fraction of its total contribution to the national economy. In the process of manufacturing, packaging, exporting and distributing cigarettes and cut-rag tobacco, the company stimulates economic activity throughout the entire tobacco value chain, encompassing a wide range of producers and suppliers (upstream linkages) as well as retailers, distributors and the hospitality industry (downstream linkages). These upstream and downstream activities generate additional income and tax revenue which, in turn, is spent in the economy, thereby inducing further economic benefits. Purpose of this report The purpose of this study is to provide a credible assessment of the direct contribution of BAT South Africa to the economy of the Western Cape, as well as its and induced impacts (also referred to as the multiplier effect 1 ). It will examine the company s impact on production, employment, labour remuneration, capital stock, tax revenue and the gross domestic product in the province. The company s economic impact is measured in terms of value added (i.e. gross domestic product), sales, intermediate output (or production), employment (by skills level and population group), labour remuneration, capital stock and tax revenue. No analysis was done on the health implications of smoking. The study was commissioned by BAT South Africa and conducted by Quantec Research. BAT South Africa provided data and other information on its direct economic impact, as well as estimates of total cigarette sales volumes and value. This was supplemented by independent analyses undertaken by Quantec Research. Quantec Research modified and utilised its Social Accounting Matrix (SAM) for the South African economy to model the multiplier effects of BAT South Africa. Unless otherwise stated, all figures are dated 2015. A study conducted by Quantec Research for British American Tobacco South Africa, October 2016. 1. For a detailed explanation of the direct and multiplier effects, see Section 6. 5

2. Provincial impact 626 EMPLOYED PEOPLE STAFF REMUNERATION TOTALLING R498 MILLION INTERMEDIATE OUTPUT Purchased goods & services worth R776 MILLION from local suppliers SECTORS THAT BENEFITED THE MOST These suppliers bought R651 MILLION worth of goods & services Trade & Accommodation R2.43 BILLION TOTAL PRODUCTION STIMULUS IN THE WESTERN CAPE (including all the economic multiplier effects) Financial & Business Services (Inc. retail, wholesale) Manufacturing TAX CONTRIBUTION OPERATIONS GENERATED R940 MILLION in TAX REVENUES Economy-wide ENOUGH TO PAY FOR: impact generated 0.1% R1.24 5,661 OF NATIONAL TREASURY S TOTAL REVENUE 6 The contribution of British American Tobacco South Africa to the Western Cape Economy BILLION IN TAX REVENUES HIGH SCHOOL TEACHERS 1. Introduction 04 2. Provincial impact 06 3. National impact 08 4. Key findings 10 4.1. Employment impact 11 4.2. Contribution to labour income 12 4.3. Contribution to government tax revenue 13 4.4. Contribution to intermediate output 15 4.5. Capital requirement 17 4.6. Impact on gross domestic product 18 5. Conclusion 20 6. Methodology 22 7. Tables and figures 24

EMPLOYMENT Each BATSA job IN TOTAL SUPPORTING 5 3,785 JOBS GENERATES additional jobs across the economy IN WESTERN CAPE Manufacturing SECTORS THAT BENEFITED THE MOST Business services 0.16% OF WESTERN CAPE EMPLOYMENT IN WAGES across the province 08 4. Key findings 10 4.1. Employment impact 11 4.2. Contribution to labour income 12 4.3. Contribution to government tax revenue 13 4.4. Contribution to intermediate output 15 4.5. Capital requirement 17 4.6. Impact on gross domestic product 18 OF JOBS ARE INFORMAL 6. Methodology 22 7. Tables and figures 24 ARE IN THE SECTOR TO WESTERN CAPE S GDP vs. provincial average of 19 26JOBS R1.4 BILLION to 3. National impact 20 creates the Western Cape s GDP 06 5. Conclusion ECONOMY-WIDE IMPACT CONTRIBUTES of 2. Provincial impact OF JOBS LABOUR & GDP TO CAPITAL RATIOS R1.91 R1 SALES REVENUE IS ADDED 04 40% R10 MN For every CONTRIBUTING R723 MILLION 1. Introduction 18.2% SEMI-SKILLED GDP CONTRIBUTION GDP CAPITAL INVESTED stimulates R10.3 MILLION OF THE WESTERN CAPE S GDP 7

3. National impact 75% share of legal cigarette market 2,187 EMPLOYED PEOPLE 27 BN CIGARETTES DISTRIBUTED TO SA & 22 COUNTRIES PRODUCED EACH YEAR INTERMEDIATE OUTPUT Purchased goods & These suppliers bought R6.06 services worth R11.95 BILLION BILLION from local suppliers (including BATSA s value added) worth of goods & services FROM LOCAL SUPPLIERS Retail & wholesale Business services Agriculture R34.26 BILLION TOTAL PRODUCTION STIMULUS IN SOUTH AFRICA (including all the economic multiplier effects) Transport Communication TAX CONTRIBUTION OPERATIONS GENERATED R14.49 BILLION in TAX REVENUES Economy-wide ENOUGH TO PAY FOR: impact generated 1.46% OF NATIONAL TREASURY S TOTAL REVENUE R18.75 BILLION 8 The contribution of British American Tobacco South Africa to the Western Cape Economy 8 The contribution of British American Tobacco South Africa to the Western Cape Economy IN TAX REVENUES 87,233 HIGH SCHOOL TEACHERS 1. Introduction 04 2. Provincial impact 06 3. National impact 08 4. Key findings 10 4.1. Employment impact 11 4.2. Contribution to labour income 12 4.3. Contribution to government tax revenue 13 4.4. Contribution to intermediate output 15 4.5. Capital requirement 17 4.6. Impact on gross domestic product 18 5. Conclusion 20 6. Methodology 22 7. Tables and figures 24

EMPLOYMENT Each BATSA job IN TOTAL SUPPORTING 32 72,279 JOBS GENERATES additional jobs across the economy IN SOUTH AFRICA Retail & SECTORS THAT BENEFITED THE MOST wholesale 0.64% OF NATIONAL EMPLOYMENT 40% Business services OF JOBS ARE SKILLED & SEMI-SKILLED GDP CONTRIBUTION TO SA S GDP R10 MN CAPITAL R1 SALES REVENUE For every of R1.54 IS ADDED to the country s GDP 86% OF ECONOMY-WIDE JOBS HELD BY PREVIOUSLY DISADVANTAGED INDIVIDUALS creates ECONOMY-WIDE IMPACT CONTRIBUTES R18.38 BILLION IN WAGES across the country LABOUR & GDP TO CAPITAL RATIOS Contributed 0.52% to South Africa s GDP GDP CONTRIBUTING R5.84 BILLION INVESTED 37JOBS vs. national average of 16 stimulates R9.4 MILLION OF THE COUNTRY S GDP 9 9 1. Introduction 04 2. Provincial impact 06 3. National impact 08 4. Key findings 10 4.1. Employment impact 11 4.2. Contribution to labour income 12 4.3. Contribution to government tax revenue 13 4.4. Contribution to intermediate output 15 4.5. Capital requirement 17 4.6. Impact on gross domestic product 18 5. Conclusion 20 6. Methodology 22 7. Tables and figures 24

4. Key findings 10 The contribution of British American Tobacco South Africa to the Western Cape Economy

In this chapter the ripple effects of BAT South Africa s activities in the Western Cape are traced. The direct, and induced impacts of the company s operations on intermediate output, capital requirement, employment, labour income, government tax revenue and value added (GDP) in the province are discussed. 4.1. Employment impact Just under a third of BAT South Africa s total workforce (626 people) is based in the Western Cape, making the province the second most important in terms of job creation after Gauteng. When taking into account the first-round effects on employment, the company s operations sustained an additional 840 jobs in the Western Cape among its direct suppliers to the company. The and induced impacts accounted for another 1,160 jobs. Altogether, BAT South Africa s operations supported 3,785 full-time equivalent jobs across the Western Cape, representing 0.16% of all employment in the province and 5.2% of the company s economy-wide impact on employment (see Table 1). Figure 1 outlines which sectors of the economy benefited the most in terms of employment from the company s operations. Table 1: Impact on total employment (Number of people) Region BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 626 840 669 2,135 1,650 3,785 Rest of South Africa 1,561 30,618 8,791 40,971 27,523 68,494 South Africa 2,187 31,458 9,461 43,106 29,173 72,279 Western Cape as % of South Africa 28.6% 2.7% 7.1% 5.0% 5.7% 5.2% Source: Quantec Research Operations support 3,785 jobs across the Western Cape Figure 1: Impact on employment, by industry (Number of people) Transport, storage & communication 233 (6.2%) Construction 98 (2.6%) Other N.E.C 157 (4.1%) Trade & accommodation 964 (25.5%) Community, social & personal services 356 (9.4%) Manufacturing excl. BAT South Africa 503 (13.3%) Financial & business services 88 (22.4%) Source: Quantec Research 11

4. Key findings For each person employed in the Western Cape, five additional jobs are created across the province Figure 2: Impact on employment, by skill (Number of people) Informal 691 18.2% Skilled 437 11.6% Semi-skilled 1,501 39.6% Formal and informal employment The vast majority of jobs sustained by BAT South Africa s operations in the Western Cape were in the formal sector (81.8%). Considering only formal employment, the company s province-wide employment multiplier was estimated at 4.94. Thus, for each person directly employed by the company in the Western Cape, almost four additional upstream or downstream formal sector jobs were sustained in the province. When taking the informal sector into account, the employment multiplier increased to 6.05. That is, for each person employed directly by BAT South Africa in the Western Cape, five additional formal or informal jobs were supported in the province. Skills development Figure 2 shows the skills composition of BAT South Africa s province-wide employment impact. Although skilled positions in the province covered only 11.6% of the company s total employment mix, the majority of job opportunities sustained by the company s Western Cape value chain were semi-skilled positions (39.6%). 4.2. Contribution to labour income Low-skilled 1,157 30.6% Source: Quantec Research BAT South Africa s remuneration in 2015 for employees based in the Western Cape amounted to R498 million. When the labour remuneration of the company s direct and suppliers and the multiplier effects of consumer income and spending throughout the provincial economy are taken into consideration, the total contribution to labour remuneration grew to R732 million (see Table 2). In contrast to the skills breakdown of employment, the labour income figures favour the skilled (i.e. higher remunerated) occupations. Approximately 90.9% of the labour income generated can be ascribed to the skilled and semi- skilled groups in the formal sector. Generated labour income of R732 million across the Western Cape 12 The contribution of British American Tobacco South Africa to the Western Cape Economy

Table 2: Impact on labour income (remuneration) (Rand, million) Region BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 498 70 49 617 113 732 Rest of South Africa 685 1,701 526 2,911 2,198 5,106 South Africa 1,183 1,771 575 5,528 2,310 5,838 Western Cape as % of South Africa 42.1% 3.9% 8.6% 17.5% 4.9% 12.5% Source: Quantec Research tax revenue The financial proceeds arising from the taxes on cigarettes manufactured by BAT South Africa constitute a key source of government revenue in South Africa. 2 Excluding any multiplier effects, the tax contributions of the company, its employees and customers in the Western Cape totalled R940 million in 2015, accounting for 0.1% of the National Treasury s total tax revenue. Indirect taxes paid by consumers (in the form of excise duties or VAT) remained the most important revenue source, at R819 million, which is about 87% of the total initial tax contribution by BAT South Africa in the province. This was followed by corporate taxes, totalling to R104 million (or 11.1%) (see Table 3). The tax revenue arising from the direct, and induced impacts (i.e. all the multiplier effects) of BAT South Africa increased the National Treasury s take to R18.75 billion, with the company s Western Cape operations contributing R1.24 billion (or 6.6%) (see Table 4). BAT South Africa s direct and impact accounted for approximately 86.7% of the total province-wide tax impact in the Western Cape, which is indicative of the tax burden borne by the tobacco industry. Western Cape operations contributed tax revenues worth R1.24 billion Table 3: Distribution of initial tax contribution (Rand, million) Region Indirect taxes Total Direct taxes Income tax Corporate tax Western Cape 819 122 17 104 340 Rest of South Africa 11,795 1,752 247 1,505 13,547 South Africa 12,614 1,873 264 1,610 14,487 Source: Quantec Research Total tax contribution 2. The tax contributions generated by BAT South Africa s provincial operations are paid nationally to the South African Revenue Service and redistributed to provinces throughout the country. 13

4. Key findings Table 4: Impact on the total tax contribution (Rand, million) Region BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 940 78 58 1,076 172 1,242 Rest of South Africa 13,547 1,011 705 15,262 2,278 17,509 South Africa 14,487 1,088 764 16,339 2,450 18,751 Western Cape as % of South Africa 6.5% 7.1% 7.6% 6.6% 7.0% 6.6% Source: Quantec Research TAX CONTRIBUTION IN PERSPECTIVE BAT SOUTH AFRICA S WESTERN CAPE TAX CONTRIBUTION OF R940 MILLION IS ENOUGH TO PAY FOR: 5,661 HIGH SCHOOL TEACHERS WITH AN AVERAGE ANNUAL SALARY OF R166,068 PER TEACHER. OR 237,000 CHILD SUPPORT GRANTS AT R330 PER MONTH PER CHILD. OR 5,857 LOW COST HOMES AT A COST OF R160,500 PER HOUSE. Source: BAT South Africa, PayScale, National Treasury and South African Institute of Race Relations 14 The contribution of British American Tobacco South Africa to the Western Cape Economy

4.4. Contribution to intermediate output The production of cigarettes requires inputs from a number of sectors in the economy. These inputs range from tobacco leaf and wood pulp harvested by the primary industries, to paper, adhesives and wrapping material supplied by manufacturers, as well as water, electricity, transport and storage services. In addition, BAT South Africa also utilises equipment and machinery, requiring regular maintenance, and depends on a range of other service providers, including security, cleaning, information technology, marketing, telecommunication, finance, accounting and consultancy. BAT South Africa and its direct suppliers purchased goods, services & capital equipment worth R651 million from suppliers located in the Western Cape Table 5: Impact on intermediate output (Rand, million) BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 776 651 297 7,724 705 2,429 Rest of South Africa 11,174 5,407 4,087 20,668 11,165 31,834 South Africa 11,950 6,059 4,384 22,393 11,870 34,263 Western Cape as % of South Africa 6.5% 10.8% 6.8% 7.7% 5.9% 7.1% Source: Quantec Research Figure 3: Goods, services and capital procured from first-round suppliers located in the Western Cape, by industry (Rand, million) Transport, storage & communication 41 (6.2%) Manufacturing excl. BAT South Africa 58 (8.9%) Agriculture, forestry & fishery 20 (3.1%) Construction 15 (2.3% Other NEC 6 1% First round and direct impacts During 2015, BAT South Africa procured goods, services and capital equipment to the value of R651 million from its direct suppliers located in the Western Cape (i.e. the first-round impact on industrial output or production (see Table 5). This was 10.8% of the company s total first-round procurement in South Africa. With 58.3% of the total first-round impact in the Western Cape, the trade and accommodation sector which includes retailers, wholesalers and the hospitality industry was the biggest direct beneficiary in the province (see Figure 3). Financial & business services 132 (20.2%) Trade & accommodation 380 (58.3%) Source: Quantec Research 15

4. Key findings Indirect and induced impacts In order to meet BAT South Africa s cigarette manufacturing, storage, distribution and export needs, the direct suppliers must, in turn, purchase goods and services from their suppliers also known as the impact. Successive rounds of purchases by suppliers create a chain of economic activity that involves not only the production of output, but also the remuneration of workers and tax contributions. This generates income that is re-spent in the economy the induced impact. These multiplier effects are included in the company s total impact on intermediate output (production) and are shown in Table 5. The Western Cape contributed R2.43 billion (7.1% of BAT South Africa s country-wide impact) to intermediate output. Figure 4 shows the sectors of the Western Cape economy which benefited substantially from BAT South Africa s operations, including the trade and accommodation sector (22.2%), the financial and business services sector (18.5%), and the manufacturing sector (excluding BAT South Africa manufacturing) (12.3%). If BAT South Africa s cigarette manufacturing activities are included in the manufacturing sector, the sector becomes the largest beneficiary (44.2%) of the purchase of goods and services province-wide. Figure 4: Goods, services and capital procured by BAT South Africa s value chain in the Western Cape, by industry Community, social & personal services 85 (3.5%) Transport, storage & communication 143 (5.9%) Manufacturing excl. BAT South Africa 299 (12.3%) Source: Quantec Research Agriculture, foresty & fisheries 51 (2.1%) Other NEC 88 (3.6%) Trade & accommodation 539 (22.2%) Financial & business services 450 (18.5%) Stimulated production worth R2.43 billion across the Western Cape 16 The contribution of British American Tobacco South Africa to the Western Cape Economy

4.5. Capital requirement BAT South Africa s operations require the use of different capital goods, including machinery, transport equipment, office buildings, manufacturing sites and distribution centres. The value of capital required by the company and its direct and suppliers to sustain the supply of cigarettes in the Western Cape amounted to R740 million in 2015 (see Table 6). Table 6: Impact on capital required (Rand, million) When taking into account all production and household effects (i.e. the direct, and induced impacts), BAT South Africa s Western Cape operations utilised 7.3% of the capital required by the company nationally, with capital stock to the value of R1.43 billion. This amounted to 0.11% of the total fixed capital stock required for economic activity in the province. BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 72 438 230 740 693 1,433 Rest of South Africa 1,083 3,558 3,766 8,362 9,748 18,110 South Africa 1,111 3,995 3,996 9,101 10,441 19,543 Western Cape as % of South Africa 6.5% 11.0% 5.8% 8.1% 6.6% 7.3% Source: Quantec Research 17

4. Key findings GDP 4.6. Impact on gross domestic product BAT South Africa s contribution to the gross domestic product (GDP) of the Western Cape was estimated at R1.48 billion or 0.3% of the province s GDP (see Table 7). The company s GDP multiplier for the Western Cape is estimated at 1.91, indicating that for every one rand of sales revenue generated (i.e. turnover at company level, excluding taxes), R1.91 of value was added to the provincial economy. The provincial return to capital (gross operating surplus) totalled close to R751 million, with R635 million as net operating surplus and R116 million as consumption of fixed capital. Table 8 considers two indicators of the efficiency with which BAT South Africa employs scarce resources in the province, namely the labour/capital ratio 3 and the GDP/ capital ratio. 4 Table 7: Impact on GDP (Rand, million) Region BAT South Africa Firstround Rest of Direct & Induced Province wide Western Cape 694 290 151 1,135 346 1,480 Rest of South Africa 5,928 3,384 1,972 11,284 5,623 16,907 South Africa 6,621 3,674 2,123 12,419 5,969 18,387 Western Cape as % of South Africa 10.5% 7.9% 7.1% 9.1% 5.8% 8.0% Source: Quantec Research Contributed R1.48 billion to the Western Cape s GDP 3. The labour/capital ratio, which measures the additional employment opportunities that can be created by every R1 million invested in capital. 4. The GDP/capital ratio, which measures the value added to the economy for every R10 million worth of capital expenditure in the province. 18 The contribution of British American Tobacco South Africa to the Western Cape Economy

Table 8: Employment and GDP multipliers and efficiency ratios Region Western Cape South Africa GDP multiplier (BAT South Africa) 0.89 055 GDP multiplier (Province-wide)* 1.91 1.54 BAT South Africa province-wide* GDP/capital ratio 1.03 0.94 Labour (excl. informal)/capital ratio 2.16 2.90 Labour (incl. informal)/capital ratio 264 3.70 Provincial GDP/capital ratio 0.37 0.36 Labour (excl. informal)/capital ratio 1.36 1.15 Labour (incl. informal)/capital ratio 1.85 1.59 *Economy-wide in the case of South Africa. Source: Quantec Research Labour/capital ratio BAT South Africa s labour (including informal labour) to capital ratio is 3.70 nationally and 2.64 for the Western Cape. That is, for every R10 million of capital investment, BAT South Africa s operations in the Western Cape and its value chain created 26 jobs. This is well above the national and provincial averages (including all industries) of only 16 jobs and 19 jobs, respectively. GDP/capital ratio The company s GDP/capital ratio is 0.94 (nationally) and 1.03 for the Western Cape. Therefore, for every R10 million worth of capital expenditure, BAT South Africa and its direct, and induced activity stimulates R10.3 million in GDP for the Western Cape, which is also considerably higher than the national and provincial averages of around R3.6 million. Both the labour/capital ratio and GDP/capital ratio suggest that BAT South Africa is more efficient in utilising a unit of investment in the Western Cape (and nationally) compared to most other industries in the province and in South Africa. For every R10 million of capital investment, 26 jobs are created across the Western Cape 19

5. Conclusion 20 The contribution of British American Tobacco South Africa to the Western Cape Economy

Not only is BAT South Africa s head office located in Cape Town in the Western Cape, but the company also has a sizeable marketing and distribution network in the province. In 2015, the company s initial contribution to intermediate output (or production) in the province amounted to R776 million. To supports its operations, BAT South Africa employed 626 people, with a total wage bill of R498 million. The company generated R940 million in tax income, while contributing R694 million to the total GDP of the Western Cape. In addition to these substantial initial contributions to the Western Cape s economy, BAT South Africa s operations also have high spin-off effects in the province. Considering the company s direct, and induced effects, its impact included: Generating intermediate output of R2.43 billion, arising from the purchase of local goods and services. Supporting 3,785 full-time equivalent jobs. Contributing labour income (remuneration) to the value of R732 million. Raising R1.24 billion in tax revenues for the National Treasury. Contributing R1.48 billion to total provincial GDP. The value of the company extends far beyond the manufacturing, packaging, distribution and exporting of cigarettes and cut-rag tobacco. As the findings of this report show, BAT South Africa s operations have a significant impact on a number of sectors across the Western Cape and the broader South African economy. As the findings of this report show, BAT South Africa s operations have a significant impact on the Western Cape s economy 21

6. Methodology This study aims to quantify the economic impact of BAT South Africa on the South African economy as well as the economic multiplier effects. The project commenced with the collection of financial and labour statistics from BAT South Africa, as well as research by Quantec Research on the structure of the broader tobacco industry and findings from similar research projects (e.g. multiplier studies) around the globe. The results presented in this report derive mainly from desktop research and imputation from the following data sources: Published data and reports from official sources, such as Statistics South Africa, the National Treasury, the South African Reserve Bank, the Department of Trade and Industry and the Department of Agriculture, Forestry and Fisheries; Public and internal management documents, as well as emails and other written and verbal communication from BAT South Africa staff, supplying information on the company s key financial statistics, cigarette sales revenue, tax contribution, operational expenditure, exports and imports, employment and labour remuneration numbers, corporate social investment and training expenditure for the 2015 calendar year; Estimates of legal and illicit cigarette sales volumes and retail selling prices for the total South African market; Information published on BAT South Africa s website, as well as that of the Tobacco Institute of Southern Africa (TISA); and, Quantec s input-output tables for the South African national and provincial economies (used to determine the national and provincial impacts). 22 The 22 contribution The contribution of British of British American American Tobacco Tobacco South Africa South to Africa the Western to the Western Cape Economy Cape Economy

The macro-economic impact assessment conducted for this study is based on a detailed input-output analysis and comprehensive Social Accounting Matrix (SAM) based economic model for South Africa. Input-output analysis is, in essence, an accounting framework that provides a snapshot of the economy at a specific point in time (i.e. the base year: 2015 in the case of this study), describing the composition and level of economic activity and the interactions and dependencies (backward and forward linkages) between industries and institutions. The SAM offers a complete model of the economy at hand, focusing on relationships among production activities (split between various industries), labour, households, and the public sector. Additionally, the SAM offers insight into the total impact on employment and income (including the distribution among different skills and population groups). SAM multiplier models are, therefore, well-suited for modelling the intricate linkages of industries and measuring the economy-wide effects of a specific sector. These models are often used for economic impact analysis, where the economic implications of a potential action (e.g. a large infrastructure investment) or new policy or regulation can be evaluated prior to taking that action. The SAM model traces these impacts and provides estimates of total economy-wide employment, income and returns on capital. Quantec s SAM model identifies 170 activities or industries in the South African economy. The labour component of the SAM accommodates labour by skill level. Capital stock and expenditure are available for three asset classes, namely, building and construction work, machinery and transport equipment. The SAM analysis begins with an injection of demand into the economy (initial impact) and estimates the total (economy-wide) impact in the following sequence: The initial economic impact (injection) is the result of operational and capital expenditures by the company and represents BAT South Africa s own employment numbers, capital expenditure and tax contributions. The first-round effects consider the impact of ongoing spending on and by direct suppliers to the tobacco industry (e.g. production, employment and tax revenue stimulated at first-round suppliers). The sum total of the initial injection (e.g. the total production/turnover of the company, the intermediate goods bought, the salaries and wages paid and the profits generated by the company) and the impact on its first-round suppliers constitute the direct impact. The impact (also referred to as the rest of or ROI) measures the contribution of direct suppliers who purchase goods and services from their suppliers, who in turn remunerate their employees and pay taxes. The supplying sectors and their employees and households re-spend in the economy, generating further economic activity. This is known as the induced impact. The total economy-wide impact is the sum total of the direct, and induced impacts. 23

7. Tables and figures Commodities BAT South Africa First-round Rest of Direct and (=) Induced Economywide (=) Sales - revenue (Basic prices including trade margin) 776 Sales - revenue (Market prices) 1,737 Fixed capital formation (including depreciation 91 Total sales by commodity (Rm) 1,828 885 161 2,874 838 3,712 Agriculture, forestry and fisheries - 24-1 23 37 60 Mining - 4 1 6 7 12 Tobacco: BAT South Africa 1,737 - - 1,737-1,737 Manufacturing excl. BAT South Africa 62 44 30 136 266 402 Electricity and water - 2 3 5 25 30 Construction 16 11 11 38 13 51 Trade and accommodation 7 410 38 454 111 565 Transport, storage and communication 0 67 15 82 75 157 Financial and business services 6 305 63 374 197 571 Community, social and personal services - 19 2 20 108 128 Sales multiplier 1.00 0.48 0.09 1.57 0.46 2.03 Activities Total output by activity (Rm) 776 651 297 1,724 705 2,429 Agriculture, forestry and fisheries - 20-2 18 33 51 Mining - 0 2 3 7 9 Tobacco: BAT South Africa 776 - - 776-776 Manufacturing excl. BAT South Africa - 58 56 114 185 299 Electricity and water - 1 5 6 24 30 Construction - 15 21 36 13 49 Trade and accommodation - 380 48 428 111 539 Transport, storage and communication - 41 28 69 75 143 Financial and business services - 132 138 269 181 450 Community, social and personal services - 5 2 7 78 85 Output multiplier 1.00 0.84 0.38 2.22 0.91 3.13 24 The contribution of British American Tobacco South Africa to the Western Cape Economy

Capital BAT South Africa First-round Rest of Direct and (=) Induced Economywide (=) Total capital requirement (Rm) 72 438 230 740 693 1,433 Buildings and construction works 50 314 170 536 512 1,048 Machinery and other equipment 12 89 42 141 126 266 Transport equipment 10 35 18 63 55 119 % Share of RSA capital stock 0.01 0.03 0.02 0.06 0.05 0.11 Production factors Gross domestic product at factor costs (Rm) 694 290 151 1,135 346 1,480 Gross operating surplus 196 220 101 518 233 751 Capital - Net operating surplus 189 181 83 452 183 635 Capital - Consumption of fixed capital 8 40 19 66 50 116 Compensation of employees 498 70 49 617 113 729 Formal 498 64 48 609 109 719 - Skilled 215 25 23 263 51 315 - Semi-Skilled 266 25 16 307 39 348 - Low skilled 16 14 9 39 19 58 Informal - 6 2 8 3 11 GDP as % of Provincial GDP 0.14 0.06 0.03 0.23 0.07 0.30 GDP Multiplier 0.89 0.37 0.19 1.46 0.45 1.91 25

7. Tables and figures Employment BAT South Africa First-round Rest of Direct and (=) Induced Economywide (=) Employment (Number) Formal and informal 626 840 669 2,135 1,650 3,785 Formal 626 546 560 1,732 1,363 3,095 - Skilled 117 84 96 297 140 437 - Semi-Skilled 460 318 296 1,074 426 1,501 - Low skilled 49 143 168 361 796 1,157 Informal - 294 110 403 287 691 Employment by industry Total employment by industry (Number) 626 840 669 2,135 1,650 3,185 Agriculture, forestry and fisheries - 0 2 2 95 97 Mining - 0 5 5 7 12 Tobacco: BAT South Africa 626 - - 629-626 Manufacturing excl. BAT South Africa - 86 87 174 329 503 Electricity and water - 6 6 12 36 48 Construction - 33 44 78 21 98 Trade and accommodation - 504 177 682 282 964 Transport, storage and communication - 44 54 98 135 233 Financial and business services - 158 279 437 411 848 Community, social and personal services - 7 15 22 333 356 Employment multiplier (in terms of initial jobs) Employment multiplier (Excluding informal) 1.00 0.87 0.89 2.77 2.18 4.94 Employment multiplier (including formal) 1.00 1.34 1.07 3.41 2.64 6.05 % share of provincial employment 0.03 0.03 0.03 0.09 0.07 0.16 26 The contribution of British American Tobacco South Africa to the Western Cape Economy

Household income BAT South Africa Firstround Rest of Direct and (=) Induced Economywide (=) Household income (earned) by quintile - Rm Quintile 1 24 3 2 27 5 32 Quintile 2 48 7 5 55 10 65 Quintile 3 92 13 9 109 20 129 Quintile 4 149 21 15 183 34 217 Quintile 5 185 26 18 244 43 289 Total household income (earned) 498 70 49 617 113 732 % contribution to household income (earned) Quintile 1 4.78 4.80 4.76 4.35 4.42 4.35 Quintile 2 9.61 9.61 9.54 8.88 9.06 8.89 Quintile 3 18.39 18.38 18.31 17.60 17.60 17.65 Quintile 4 29.99 29.93 29.92 29.62 30.08 29.70 Quintile 5 37.23 37.28 37.47 39.56 38.46 39.41 Total household income (earned) 100.00 100.00 100.00 100.00 100.00 100.00 Government Government income 940 78 58 1,076 172 1,242 Indirect taxes 819 18 22 859 66 925 Direct taxes 122 59 36 217 106 316 Household 17 22 7 46 30 75 Enterprises 104 38 29 172 76 241 % share of government income 0.10 0.01 0.01 0.11 0.02 0.13 27

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