Comment: Taxing Africa to Death

Image: Flickr, Roland Klose
Image: Flickr, Roland Klose

High taxes on drugs drive up health costs and block access to treatment for Africa's poor, says medical researcher Richard Tren

IN RECENT years global efforts to improve access to medicines and decent medical treatment have been successful at lowering drug prices. Manufacturers have cut prices, but access to drugs, particularly for HIV/AIDS treatment, is only slowly increasing.

One factor is rarely discussed yet has a drastic negative effect on health treatment in Africa: poor countries impose high taxes and tariffs on their own citizens for medicines and medical supplies. In this way, governments fund themselves by taxing the poorest and most desperate members of society.

On a recent trip to KwaZulu-Natal province in South Africa, I met Emma (not her real name) who sat quietly waiting her turn to tell her sad story of HIV infection. Like her husband, Emma is HIV positive and her health is deteriorating. A month’s supply of antiretroviral triple therapy is likely to cost R586 ($86) for the drugs alone. Of this amount, R72 ($11) is paid directly to the South African government in the form of sales tax. Emma tells us that it’s a struggle to pay for medicines. To Emma, like so many of the other young women I have spoken with, the sales tax charged on her drugs means she can’t afford decent food for the whole week. As she breaks down and cries: ‘my two children (currently not on treatment but who are HIV-positive) also don’t have enough to eat’, she wails.

Unfortunately Emma is not alone. There are millions of Emmas in rural areas and in almost every town and city, struggling to survive and trying to make sense of the government’s apparent indifference and intransigence in the face of their plight.

Tariff and tax policy

There are at least two reasons why governments impose tariffs and taxes: to protect domestic industries from international competition and to raise revenue. The main job of tariffs is protectionism. There is little theoretical or empirical evidence to support protecting domestic industries – ordinary people pay more for goods for the sake of powerful special interests. Take the odious US steel and farm subsidies – they protect US corporations by reducing their need to compete and increase the price of food and steel products for US consumers.

Brazil and India, with powerful local pharmaceutical industries, impose tariffs on medicines with this aim in mind. Historically, many wealthy countries imposed tariffs on medical products, but a decade ago most of the wealthiest 22 countries (including the original 15 EU members and the US), and some not so wealthy, like the Slovak Republic and Macau China, agreed to a reciprocal elimination of import tariffs under the WTO (then the GATT) on around 7,000 pharmaceutical products.

It is the sovereign right of any nation to raise revenue as it sees fit. But according to a press statement from numerous NGOs, including Africa Fighting Malaria, which I co-direct, ‘taxing the poorest and sickest in society seems like an odd choice for countries that have craved aid from the international community and demanded lower drug prices from western pharmaceutical companies’.

In many countries, taxes are imposed not only on commercial sales of medicine but also on donated drugs and supplies.This hypocritical practice has caused some US Senators to introduce a clause into a newly tabled bill that will outlaw US government donations to countries that impose tariffs on donated medicines. Section 9 of the ‘The Neglected Disease Results Act of 2005’ states that ‘….no agency or department of the US may donate or otherwise supply medicines or medical devices, including insecticide-treated nets, insecticides, and other essential consumables required for disease control to a foreign country if such country imposes import tariffs or other import duties on such medicines or medical devices.’

But the backlash against medical taxes extends far beyond the US. The Geneva-based Global Fund to Fight AIDS Tuberculosis and Malaria inserts this clause in its donation policies: ‘the assistance financed hereunder shall be free from any customs duties, tariffs, import taxes, or other similar levies and taxes (including value-added tax) imposed under laws in effect in the Host Country.’

The reason that US Senators, the Global Fund and assorted NGOs are angry is that their efforts to treat people like Emma are undermined by the very states they want to help. Some countries impose significant obstructions: Kenya, Tanzania, Uganda, India, Nigeria, Brazil, Morocco, to name a few, all impose financial barriers of over 27%.

Statistical analysis of tariff rates and access to essential medicines shows a significant relationship: a 1% reduction in tariffs will lead to a 1% increase in access. This is a tentative conclusion given the nature of data inaccuracies and inevitable time-lag for data collection. There are other possible explanations for lack of access, such as illiteracy or low healthcare expenditure, for example, although income level is included in the analysis. But the relationship strongly implies that tens of millions more people could gain access to life-saving drugs if their governments removed tariffs.

While India has possibly 8.5 million HIV cases – the highest in the world – it also has one of the lowest world figures for access to medicines – 35%. This sorry state has begun to change under a new government following a reduction in total financial barriers from a shocking 61% to 20%. This is still high, but at least a move in the right direction.

On the other hand, on 1 January 2005, both Kenya and Uganda imposed 10% import tariffs on all imported medicines in line with East African Customs Union protocols. The harm that these newly imposed tariffs will cause is likely to be considerable. The Kenyan government failed to meet its target of treating 45,000 patients on antiretrovirals at the end of 2004, treating only 24,000. The increased cost of treatment adds another hurdle to the government’s already ambitious aim of treating 95,000 by the end of 2005. According to Dr Patrick Orege, director of the National AIDS Control Council, the tariff issue is ‘…problematic, this increase should be addressed urgently, so that we can meet our goals.’ Meanwhile the treasuries of Kenya and Uganda remain silent.

Few Southern African countries have tariffs and the Southern African Customs Union scrapped all import tariffs on drugs several years ago. Some countries however do impose burdensome taxes on medicines. Lesotho, the poverty stricken mountain kingdom surrounded by South Africa, imposes a 10% withholding tax on all imported medicines.

If a supplier presents an invoice of $100 to the Lesotho government, it only pays $90, withholding 10% of the invoice. Inevitably the suppliers simply inflate their invoices by that amount so they are square in the end. But the tax doesn’t necessarily make its way to the Ministry of Health’s budget and so it is likely that fewer Basotho are treated as a result.

On the whole however, Southern African governments are not the worst tariff offenders, but most still impose sales taxes. While these taxes are simply absorbed into the general state fiscus to become an anonymous part of general expenditure, they can make a very real impact on the lives of ordinary people. The table below shows basic food items that could be bought if the sales tax on a month’s supply of antiretroviral triple therapy was removed.

The survival rate of HIV patients is strongly dependent on adequate nutrition, and without eating more many HIV patients are unlikely to be able to get the full benefit. Indeed Emma’s CD4 count (a measure of the strength of the immune system) is improving but not as fast as many of her better-fed peers. The South African Minister of Health has frequently promoted a balanced diet, including plenty of garlic, olive oil and beetroot, as the best way of maintaining a high CD4 count, remaining healthy and thereby not requiring treatment. Yet her government’s own taxation policy means that medicines are more expensive and good quality healthy food less available. The fact that the South African government has dragged its feet over the provision of free antiretroviral therapy in state hospitals makes these taxes on privately-bought medicines even more offensive.

Dr Anban Pillay, director of pharmaceutical economy evaluations within the South African Department of Health, alleges that the reduction or removal of VAT on medicines has been under discussion for some time.

‘We’ve called for this ourselves but there seems to be a number of reasons why the Treasury is not willing to do so yet.’

It doesn’t appear that the treasury will budge anytime soon, but pressure is building, and if the Senator’s Act passes then US donations will be dependent on the removal of tariffs. Given that the US will be donating over $4bn in health aid this year (and a decent portion on drugs) this will be a powerful incentive to finally remove these odious tariffs and taxes.

Although there will doubtless be resistance from various departments of finance, poor country governments will probably have an easier time removing or reducing the taxes and tariffs on medicines and medical devices than the other barriers to treatment. Another such barrier is the burdensome bureaucracy that slows the registration and marketing of new medicines in many poor countries.

Bureaucratic barriers

In South Africa, a medicine that is registered for use in the US, EU and Japan can often wait for more than two years before the Medicine Control Council authorises its use. This not only adds greatly to the costs of doing business for drug companies, but constitutes a colossal opportunity cost and denies often crucially needed medicines to patients. Thousands of patients are forced to wait far too long before nameless, faceless bureaucrats satisfy themselves that the drugs are acceptable. This is not only incredibly disempowering for patients, but can be quite deadly.

Although Southern African governments were supposed to be harmonizing their medicine bureaucracies nearly a decade ago, little progress has been made. In fact, some countries have gone in the opposite direction. Several years ago Namibia dreamt up what must be one of the most pointless and burdensome new regulations in that country’s history. Namibia achieved its independence from South Africa in 1990 and prior to that any medicine that was registered for use in South Africa was automatically registered in Namibia. After 1990, with a new independent department of health and a new medicine regulator, the Namibian government decided to require the re-registration of all medicines registered prior to 1990.

Companies that had been selling medicines in Namibia for years were suddenly forced into a hugely expensive, wasteful and pointless exercise that must have left head offices in the US and Europe in despair. Namibia is a tiny county with a miniscule market for drugs, and yet that government was actively discouraging any drug company from doing business there.

Changing these regulations and reforming the bureaucracy will take longer and will be more politically difficult than removing taxes and tariffs, particularly in countries that do not have a significant domestic drugs industry. Decades of shameless bureaucratic empire-building have left many civil servants clinging on to the rules and regulations that they impose. It is these rules that keep them in jobs, despite the harm that these regulations cause patients, and so making these essential reforms will require some political savvy.

Act now

In the long run, poor countries simply have to grow faster and create more jobs and wealth in order to improve the health of their population. This will require changes to economic policy and greater economic freedom, but these will not improve healthcare overnight. However, there are some further crucial steps that governments can and should take now. Removing the pernicious taxes and tariffs on medicines should be at the top of the list. Reforming the medical bureaucracy will also be essential and though difficult, any lack of leadership on these issues makes a mockery of many poor country governments’ stated objectives of improving healthcare for all.

Next time a celebrity draws attention to some worthy cause, let us hope that he or she has the decency to investigate the situation fully and not to simply point the finger at the popular villain, but to champion change for what may be less reported and less obvious, yet far more harmful.