The Presidency has selectively released its Phakisa Hemp and Cannabis Action Lab Final Report, a ground-breaking document that adopts an “Afro-centric” approach to developing South Africa’s cannabis economy that also has far-reaching international implications. 

Although it is classified as “private and confidential”, the report has been circulated to the 130 participants of the Phakisa initiative which took place at between 19 and 23 June 2023 in Pretoria, and Cannabiz Africa feels a compulsion to share the report's content with the broader cannabis community - it really is positive news!

The Phakisa is the first voice of reason to emerge from South African officialdom on cannabis policy and will give direction to the vacuous National Cannabis Master Plan (NCMP) drawn up by the Department of Agriculture, Land Affairs and Rural Development (DALRRD). DALLRD were co-hosts for the initiative and input from The Phakisa “workstreams” will be incorporated into the NCMP going forward.

For the first time South Africa has a coherent vision of how cannabis should be legalized and what practical steps need to be taken.

The key take outs from The Phakisa’s final report are:

• THC restrictions are to be dropped from the definition of industrial cannabis, alternatively known as “hemp”;

• This allows legacy growers to be incorporated into the legal mainstream relatively seamlessly (they don’t have to be persuaded to switch existing landraces to lower-value, lower-THC varietals – as if that was ever going to happen!);

• Full adult use is seen as the kicker for the long-term development of a local cannabis economy and will account for over 50% of the value chain;

• Although cannabis still remains illegal on the statute books, Government is moving urgently to amend the Drugs and Medicines Act and will reign in the SAPS on arrests;

• Three workstreams, involving non-government stakeholders, have been created to fast-track regulatory reform and to deal with science and innovation and business development.

Below are excerpts from the Phakisa Hemp and Cannabis Action Lab Final Report:

Overview

The Cannabis and Hemp sector is one of fourteen priority sectors identified in government’s Country  Investment Strategy as holding significant potential to secure investment, job creation, support for  sustainable rural livelihoods, and in recognition of people’s rights.   

Given the need for more urgent implementation, under the auspices of the Department of Agriculture  Land Reform and Rural Development (DALRRD), together with the Presidency, government convened  a Phakisa Action Lab from 19 to 23 June 2023.   

The Phakisa brought together about 130 participants representing national and provincial  government, business, labour, communities, traditional leaders, Rastafari leaders, scientists, legal  experts, and other key stakeholders.   

The purpose of the Phakisa was to secure much-needed policy coherence and agreement on a  stronger programme of well-defined, time-bound and assigned activities across multiple government  departments working in close collaboration with all stakeholders.   

In his letter to the Phakisa participants, President Ramaphosa indicated his trust in the process: 

“I am confident that the collaborative commitment to work together which characterises our society,  will find expression in the Hemp and Cannabis Phakisa, leading to immediate short term regulatory  reform, the adoption of a set of foundational policy principles to achieve longer term legislative reform  and a detailed plan to achieve inclusive growth and investment.

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Fast-tracking Regulatory Change

A high-level programme has been developed across focused Phakisa Workstreams – legislative & regulatory reform, science & innovation, and inclusive business growth. This programme creates a foundation for the development of a more detailed programme of activities which are assigned to Workstreams (with leads from departments); which are time bound; and include performance management provisions. This will be captured in a more detailed and updated Cannabis Master Plan document.

Summarised this work is:

• A short and longer term regulatory reform process to enable investment and inclusive growth across key demand pathways.

• Scaling up the research and innovation effort, including the existing catalytic projects put in place by the Department of Science and Innovation (DSI) and the Council for Scientific and Industrial Research (CSIR) to support and enable private sector investment in product aggregation, processing, and manufacturing technology for downstream end-user demand.

• Securing an optimal financing framework which enables private sector investment principally in the intermediate value added processing sub-sector (market development) with constrained public sector financing support, targeted mainly at Black farmers and SME entrants in the emerging market and where appropriate, assisting to de-risk private sector investment.

• Deploying a set of pragmatic industrial development interventions concerning investment promotion, export support, and standards and conformity assessment. These form key components of a country competitive strategy and fall under the Department of Trade, Industry and Competition (DTIC).

• Working with all provinces to secure collaboration and alignment with respect to national and provincial interventions and activities currently underway.

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Regulated Adult Use

The existing illicit recreational market, both with respect to the domestic market and as research suggests that South Africa is a major exporter into global illicit markets, constituting the overwhelming percentage of existing demand for high THC cannabis. The responsible adult use legal market remains the single largest cannabis demand pathway, accounting for 56% of the total cannabis legal market in 2021 (New Frontier, 2021). While cannabis flower (and extracts made therefrom) is used for the recreational adult use market, it is argued that a whole plant approach would allow for all parts of the cannabis plant to be used in a variety of demand pathways.

This would potentially diversify the revenue sources of indigenous farmers by allowing all parts of the cannabis plant to be used in various other demand pathways. Ultimately a regulated adult use market, which lowers and mitigates societal harms and enables the full economic and commercial potential of the sector will be the main driver of investment and growth.

The Phakisa agreed on the need for longer term legislative reform that is aligned with the National Drug Master Plan produced by the Department of Social Development. In addition, this process should be shaped by a set of foundational policy principles; taking into consideration country comparator research and experience; and a regulatory sandbox evidential approach. 

A further consideration in this process will be the difficulties associated with transitioning from an illicit to a licit market. The principles, methodology and operational framework for regulatory sandboxes should be the subject of further detailed preparation, including with respect to the need for an emphasis on the inclusion of Black rural farmers and indigenous communities.

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Traditional Use

The traditional medicine, and cultural and religious use cannabis demand pathway generally involves whole plant usage. The African traditional medicine, cultural and religious use demand is significant, although difficult to quantify given its informal status and the absence of recorded data. Various reports suggest that approximately 80% of South Africans depend on traditional medicine for primary health care, which may serve as a rough proxy for the size of the informal traditional and cultural use market.

A significant hurdle to further unlock the commercial value of this demand pathway is the need to strengthen the existing regulatory framework, specifically the Traditional Health Practitioners Act of 2007. Specifically, this will require the constitution of a permanent Traditional Health Practitioners Council that will provide a clear articulation of how traditional healers can issue cannabis to their patients. This proposal will require further evaluation by the Department of Health (DOH).

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Animal and Human Consumption of Cannabis

A whole plant approach is necessary for human and animal product consumption. A standards and conformity assessment framework is a critical pre-requisite to enable the opening of this fast-growing subsector. 

At present, human food products of a wide variety are being imported into SA and are widely available in the retail market. These products include hemp seed oil; nutraceuticals, and additives to a wide range of products. 

It is estimated that the size of the human and animal feed demand pathway is considerable, and likely constituting the third or fourth largest demand pathway.

As an indication, the cannabis infused edible products market was estimated, by some analysts, to be about USD 10 Billion in 2023 (Mordor Intelligence, 2023).

The three main constraints to investment and growth in this demand pathway are the regulatory environment; a standards and conformity assessment eco-system; and the availability and access to processing facilities.

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Pharmaceutical and Medicinal Use

Pharmaceutical demand (registered and complementary medicines) constitutes a significant demand pathway, with a global market size of USD 10.2 billion in 2021 (New Frontier, 2021). Cannabis has been used in countries where it is legal to treat a wide variety of medical conditions and/or their symptoms, including HIV/AIDS, chronic pain, cancer, high blood pressure, seizures, epilepsy, and several other neurological disorders (IDC, 2022).

Registered medicines, complementary medicines, cannabis cultivation, processing and prescriptions are currently regulated by SAHPRA. The proposed regulatory reform will need to ensure that cannabis is regulated by SAHPRA when it will constitute part of the regulated pharmaceutical market, as has been proposed in Workstream one discussions.

Deliberations in the Workstream focussed on the need for a review of the current SAHPRA licences, administrative efficiency and stronger communication of the terms and conditions of the licencing framework. In turn the private sector should ensure conformity with the existing regulatory framework.

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Industrial Use

Cannabis has multiple industrial applications, including in construction, textiles, bioplastics, packaging, biofuels, the automotive sector, and in paint and chemical additives of a wide variety. Investment in the mid and downstream sectors of the cannabis value chain is highly constrained by the existing legislative framework.

Proposed regulatory reform will contribute significantly to the creation of an enabling investment climate downstream of the farm gate. Upstream of the farm gate, South Africa has significant capabilities, given the overlap with other agriculture and agro-processing value chains including with respect to machinery and equipment, indoor agricultural infrastructure and equipment; water reticulation equipment, and so forth.

The absence of product and process standards and a conformity assessment framework and capacity is also a constraint in the downstream industrial sub-sectors.

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The Seed Ecosystem

The main stakeholders within the seed ecosystem are DALRRD, South African National Seed Organisation (SANSOR), the Agricultural Research Council (ARC), SAPS, and SAHPRA. DALRRD is responsible for controlling and monitoring the importation, registration, multiplication and distribution of seeds.

Currently, there are no domestic registered hemp or cannabis seeds in South Africa.

In the cannabis sector, imported seeds constitute a risk to landrace varieties as they are increasingly used by rural Black farmers and are utilised for the cultivation of high THC product for the illicit market.

In the hemp sector, although the ARC has conducted trials on locally derived and suitable hemp seeds, these have not been registered or multiplied as yet.

This is a significant problem which has not been resolved with the next planting season only a month or two away.

The importation of seeds was identified as a risk to the landrace varieties due to cross pollination that can occur.

One proposed solution is for DALRRD to issue farming permits by location and variety. The other constraint that was identified was that landrace varieties were not on the DALRRD varietal (seed) listing, making it impossible for Black rural farmers and indigenous communities to sell their seeds legally.

Furthermore, communal land does not benefit from the normal title deed/Deeds Registry system, which is a necessary requirement for seed registration, however, it appears that permission from a chief to use the land i.e., a PTO, is sufficient and DALRRD has issued permits on this basis.

The success of this proposed solution will depend in large measure on the resolution of financing arrangements for Black rural farmers that do not have title deeds to the land that they have worked for generations.

SANSOR is an industry association which is responsible for the registration and certification of seeds to ensure quality assurance, including in respect of exports. The ARC is a DALRRD entity which is responsible for research and development in agriculture. ARC has developed two industrial cannabis cultivars (hemp 1 and hemp 2) which will be registered in 2023 with the support of a gene bank to monitor the seed genetic make up to rejuvenate and reduce genetic erosion. ARC conducts adaptation trials with funding from the Gauteng Department of Agriculture Rural Development (GDARD) and DALRRD.

It was described as self-evident in the Phakisa that the cultivation of cannabis is essential for the building of the broader sector and Master Plan development and implementation.

It is critical that the seed registration, certification, multiplication, storage and distribution eco-system with the required conformity assessment and the protection of South Africa’s landrace varieties is put in place as expeditiously as possible.

Training Agricultural extension and training for farmers, and the training of Small Micro and Medium Enterprises (SMMEs) and commercial enterprises is critical for sustainable development.

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Finance for SMEs

Finance is one of the critical enablers to any industry.

However, the cannabis industry has faced enormous obstacles in relation to investment and financing owing to the existing legislative framework. Presentations on the current cannabis finance ecosystems were provided, with discussions on the current opportunities that can be leveraged to accelerate access to finance for the industry. There are three main barriers to financing the cannabis industry:

• The first is the legislative and regulatory uncertainty, especially the criminalisation of cannabis trade, particularly when this is often treated (inviting harsh penalties) as organised crime, money laundering and racketeering.

• The second barrier is the lack of a cohesive industry strategy to guide investment to ensure industry growth.

• The third barrier is the lack of a consolidated industry body for public and private investors to engage. The regulatory landscape was mentioned as the main constraint with the overarching theme being “industrialisation cannot exist with criminalisation”.

Until amendment to the Drugs Act is secured, this will remain the case even for hemp investment and financing. Within the current landscape, there has been limited progress in financing arrangements by national and provincial governments.

The Industrial Development Corporation (IDC) has opened its investment portfolio to fund legal cannabis markets such as medicinal cannabis cultivation with a SAHPRA license, low THC cannabis processing facilities, plant propagation and breeding, food and drinks products, analytical services and distribution and mid-stream industrial cannabis (excluding cultivation).

There is some public sector funding available in the cannabis industry but research is underway to map the existing financing and incentive instruments available in the public and private sectors and to advance proposals for a stronger cannabis financing eco-system.

These proposals will need to address the key constraintsfaced by new entrants in the sunrise cannabis industry. Specifically, the constraints exist in the pre-start up and start-up phase, which are high risk investments.

A further challenge is that public sector and Development Finance Institution (DFI) financing should cover both large-scale industrial projects (IDC) and smaller scale SME’s (Small Enterprise Development Agency (SEDA) and the Small Enterprise Financing Agency (SEFA)). However, large ‘calls’ on the government fiscus will unlikely yield significant results given other pressures on the fiscus.

The critical issue is to remove the regulatory and bureaucratic hurdles to secure private sector funding where public sector financing can de-risk and lower the cost of capital.

Additionally, formal financial sector (including DFIs) requirements for accessing these funds is for applicants to have the capability to prepare the requisite project business case, which may exclude some farmers.

While basic financial skills training is offered by extension officers, small farmers face multiple hurdles to accessing finances. Many farmers are in the informal (and illicit) economy and these farmers operate without company registration and tax compliance status.

A further challenge is that the Land and Agricultural Development Bank of South Africa operates as a commercial bank with credit requirements and interest rates similar to those of commercial banks, which further increases the barriers to accessing finance for SMEs operating in the cannabis industry.

There will be a need to identify an approach to introducing concessional financing or means to easing access to finance. 

The Department of Small Business Development (DSBD) is one of the departments that can offer support to SMEs in the cannabis industry through SEDA and SEFA. SEDA is a DSBD entity which supports SMEs by the provision of non-financial services such as training and business incubation. SEFA is the DSBD entity which offers financial support to SMEs through its different funds, e.g. youth funding, women funding, township funding etc.

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Conclusion of the Executive Summary of the Final Report

The Phakisa Action Lab has produced a solid and legally compliant foundation for more urgent implementation of the Cannabis Master Plan. A programme of detailed, assigned and time-bound interventions has been agreed on, with stronger implementing institutional arrangements across National and Provincial government departments and in collaboration with business, labour, communities, traditional leaders, faith-based communities, and scientists and legal experts.