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
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