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 EXPECTED BENEFITS LEADS TO

How does Privatization of Cigarette Enterprises affect Public Health ? Increased - Consumption - Users - Accessibility - Affordability EXPECTED OUTCOME on PUBLIC HEALTH Increasing deaths and disease Increasing health care costs Increasing 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 in State Cigarette Enterprises

Labor Productivity: Private vs. state cigarette enterprises

Privatization and Production: Is production higher after privatization?

Would privatization increase consumption?

Cigarette Consumption Trend in Turkey

Real Price Matters

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

Price Control in Turkey and its impact on cigarette prices Brand/ Price Samsun 100mm pack Tekel mm pack Maltepe 85mm pack Birinci 68mm pack Production Cost +Taxes 362,325601,404323,873318,223 Retail Sale Price 325,000650,000275,000200,000 Profit/Lost Per Pack -37,32548,596-48, ,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 quality From 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 Quality From 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 Privatization Pros 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 increase 1.Private producers may: 1. influence governments decision on TC measures 2.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