Privatized Cigarette Enterprises and Public Health:

Evidence from Turkey and Ukraine

By

Ayda A. Yurekli, Ph.D

World Bank

KOBE- Japan , December 2001

The Key Policy Question

• Does privatization exacerbate the adverse health impact and market failures that beset tobacco products? if so, what regulatory or other measures would be appropriate?

Objective of the Study

• To examine the impact of the entry of private sector cigarette manufacturers in Turkey and Ukraine from a public health perspective looking at changes in:

production and consumption levels cigarette prices product appeal.

Expected Benefits and Outcome of Privatization

Efficiency

and

Productivity

Lower Prices

Higher Quality

More Variety

• Increased

- Consumption

- Users

- Accessibility

- Affordability

EXPECTED OUTCOME

EXPECTEDBENEFITS

LEADS TO

How does Privatization of Cigarette Enterprises affect Public Health ?

• Increased

- Consumption

- Users

- Accessibility

- Affordability

EXPECTED OUTCOME

on PUBLIC HEALTH

Increasing deaths and diseaseIncreasing health care costsIncreasing burden on • smokers• non-smokers• families• society• economy

Factors Affecting Efficiency

Ownership matters– Public ownership– Private ownership

Market structure matters– Competitive environment– Government intervention

Labor productivity in Private Cigarette Enterprises in Ukraine

Labor Productivity of Private Cigarette Enterprises in Ukraine,

1995-1999

0

200

400

600

800

1000

1200

1995 1996 1997 1998 1999

Pro

du

cti

vit

y

PM Product. Reemstra

Labor productivity in State Cigarette Enterprises

Labor Productivity by State Cigarette Producer TEKEL in Turkey

1988-1999

0

2

4

6

8

10

12

14

Prod

uctiv

ity- t

on o

f pr

oduc

tion/

empl

oyee

Labor Productivity of State Cigarette Producers in Ukraine- post

privatization period

0

50

100

150

200

250

300

350

1995 1996 1997 1998 1999

prod

uctiv

ity

Labor Productivity: Private vs. state cigarette

enterprises

Labor productivity in Private and State Cigarette Enterprises in Turkey, 1998

2847

1953

784

0

500

1000

1500

2000

2500

3000

3500

RJR Philsa Turkish

1000 p

acks o

f cigar

ette

produc

tion pe

r emplo

yee

Labor Productivity in Cigarette Enterprises in Ukraine and difference in productivity (%) compared to UkranianCigarette

Factories

2%

122%

551%

568%

352%

30%83%

328%367% 281%

0

200

400

600

800

1000

1200

1995 1996 1997 1998 1999

1000

pack

prod

uced

per

emplo

yee

Philip Morris Reemstra Ukranian Factories

Privatization and Production:Is production higher after privatization?

Cigarette Production by State and Private Cigarette Enterprises in Turkey

0

20000

40000

60000

80000

100000

120000

Cig

aret

tes

(to

n)

Total Cigarette TEKEL Private

50% increase since 1992

21% increase since 1992

730% increase since 1992

Private production started

Would privatization increase consumption?

Trend in Cigarette Consumption in Turkey, 1987-1999

0

20000

40000

60000

80000

100000

120000

140000

Mill

ion

Pie

ces

Total consumption

TEKEL

Private

Cigarette Consumption Trend in Turkey

Cigarette Consumption in Turkey, 1970-2000

20000

40000

60000

80000

100000

120000

140000

1970 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000

Ove

rall

Cig

aret

te

Con

sum

ptio

n (M

illio

n P

iece

s)

50

60

70

80

90

100

110

120

130

Cig

aret

te

Con

sum

ptio

n P

er

15+

(pac

ks)

Overall Cigarette Consumption Cigarette Consumption Per 15+

Real Price Matters

Nominal and Real Cigarette Prices in Turkey, 1994-2000

0

100200

300

400500

600

700800

900

1994 1995 1996 1997 1998 1999 2000

No

min

al P

rice

(00

0 T

L/p

ack)

0

10

20

30

40

50

60

70

80

Rea

l P

rice

(00

0 19

95

TL

/pac

k)

Nominal Price, Foreign Brands Nominal Price, Domestic Brands

Real Price, Foreign Brands Real Price, Domestic Brands

Non-price tobacco control measures and marketing

• Since the late 1980s, Ukraine and Turkey introduced rather comprehensive tobacco control measures

• Problem with these measures are: They are:

– Weak– Not being implemented– Easily abused

• Aggressive Marketing and Distribution System

– Tailored products to existing smokers, – Made it accessible even in remote areas – Hired additional sales people in Turkey for distribution – Increased point-of sale advertising

The Impact of Privatization on Prices

If privatization leads to higher efficiency and lower unit costs of production, then an enterprise may choose to reduce consumer prices

If state-owned enterprises were being subsidized by the government, a reduction in subsidies after privatization might result in higher consumer prices.

Competitive Environment and Pricing Policies in Turkey and Ukraine

Prices for Privately Produced Ukraine Cigarettes

0

0.2

0.4

0.6

0.8

1

1.2

1996 1999 2001

US

$/p

ack

Prima (Reemstra) L &M (PM)

Marlboro (PM)

Cigarette Prices for Selected Brands in Turkey

00.20.40.60.8

11.21.41.61.8

US $/

pack

Tekel 2000 Bafra nofilter Marlboro short

Price Control in Turkey and its impact on cigarette prices

Brand/

Price

Samsun 100mm

pack

Tekel2000 100mm

pack

Maltepe 85mm

pack

Birinci 68mm

pack

Production Cost +Taxes

362,325 601,404 323,873 318,223

Retail Sale Price

325,000 650,000 275,000 200,000

Profit/Lost Per Pack

-37,325 48,596 -48,873 -118,223

Government subsidy and its impact on prices

• Tobacco has been one of the most highly subsidized agricultural products in Turkey

– In 1996, US$9.1 billion - through transfers

• US$7 billion implicit taxing of consumers

• US$3 billion directly from tax payers

– Internal and external borrowings

• In the long run, this is unsustainable

• Given apparent TEKEL pricing policy and subsidies, it is possible that prices of TEKEL brands could be increased when it is privatized

The impact of privatization on qualityFrom Public health perspective:

Quality is a problematic concept with respect to cigarettes

Definition: produced from high grade tobacco leaves and packaged in appealing ways, and has smooth taste.

But all cigarettes – even those produced with the highest grade leaves –

harm the health of smokers and of non-smokers who inhale the smoke.

The Impact of Privatization on QualityFrom economic perspective

State-enterprises –less incentive to improve quality Protected from competition High import barriers Inability to invest in new technology

Private enterprises – high incentive To increase sales and market share Capture all income groups by product

differentiation, and packaging To stay competitive

Pros and Cons of PrivatizationPros• Increases foreign investment• Increases government revenues• Funds can be reallocated to other good uses • less conflict of interest for government (increasing cigarette

production and reducing demand)• In the short run, price may increase• Products may be more appealing to consumers

Cons: Health and economic burden may increase1. Private producers may:

1. influence government’s decision on TC measures2. abuse TC measures using loopholes in the regulations

2. Aggressive marketing, promotion, distribution, 1. Smoking age is getting younger- early teens 2. may raise consumption

Conclusion:• For efficiency

– policy towards competition and regulation appears to be very important.

• Privatization will likely increase – production – consumption of cigarettes

• Government should intervene in the market before or after privatization by setting regulatory tobacco control framework to protect consumers– Especially, when market failure and externalities exist

• Government intervention affects pricing– Pre-privatization- price control, subsidies– Post-privatization- tobacco tax policies

• No compromise and discussion on TC measures with the private enterprises