Is digital labeling a tool for enhancing business transparency or a factor contributing to its "shadowing"?

The digitalization of our economy is entering a new phase, specifically the phase where producers of water and soft drinks must transition to the second stage of digital labeling, known as "aggregation." This means that not only should each unit of the sold product be marked with an identification code (which was to be implemented in the first stage), but also the "group packaging."

The first question that should be posed to the initiators of the digital labeling for water and soft drinks is: WHY IS THIS NECESSARY? I can understand the need for labeling for alcoholic beverages, tobacco products, and medicines.

— It's necessary because there is a high share of counterfeit products (fakes of well-known brands) and smuggling.

— Poor-quality goods can harm health and may even pose a threat to consumers' lives.

— The number of sales points for these categories of goods is limited: these are retail outlets authorized to sell cigarettes and alcoholic beverages, plus pharmacies. Consequently, effective control can be established during sales, providing points of sale with the necessary (and expensive) control measures.

In contrast, the situation with packaged water and soft drinks is entirely different:

— Leading producers and importers do not complain about the presence of counterfeits, and if smuggling exists, it is very limited (transporting tons of water over long distances makes no economic sense; it is more profitable to establish local production of such goods; exceptions are medicinal waters or expensive types of beverages).

— Cases of health hazards from poor-quality soft drinks are much rarer than cases of poisoning from perishable products. There is simply no pressing issue here. Therefore, there is no need for additional state control.

— There are many more retail outlets for water and soft drinks than for cigarettes and alcohol. Hence, the costs for implementing control measures are significantly higher.

However, the simple and obvious question about the necessity of implementing digital labeling for soft drinks has long gone unasked, as the answer is always the same: BECAUSE... It is needed simply because someone wants it. It is needed to cover the costs of implementing labeling, and producers and consumers of soft drinks are indeed a fitting "cash cow" for this.

And the fact that this "wonderful" initiative increases the costs of production and sale of these goods (purchase and installation of expensive equipment, buying codes for each (!) unit of product, etc.), and consequently their price for consumers – well, that’s just the way it is. Creating barriers to free economic activity is the favorite and, I would say, primary occupation of our officials.

Meanwhile, local producers represented by the "Association of Producers of Soft Drinks and Juices of Uzbekistan" no longer question the feasibility of implementing labeling. They only request to postpone aggregation. And they present quite reasonable arguments:

— The purchase and installation of additional equipment for aggregation require significant financial resources, which will lead to an increase in production costs, and thus the final prices of products. This is an inflation factor (which we seem to be fighting against), as well as losses for both producers and consumers. In some cases, it may even lead to the closure of certain production facilities and job losses.

— There are no specialized technical solutions for the implementation of aggregation for high-speed lines and certain types of packaging. Aggregation will hinder uninterrupted production with minimal defects and affect the speed of production on high-speed bottling lines. This will again lead to increased production costs and loss of competitiveness for legal producers.

— The existing labeling system (implemented in the first stage) works extremely poorly and significantly increases the costs of conducting legal business. In particular, producers complain that codes that are lost, torn, or poorly printed cannot be reused, and each new code must be paid for. Another issue is frequent interruptions in code application due to weak internet connections, equipment malfunctions, and difficulties in integrating with the CRPT "Turon" operating system (the labeling operator), which leads to production stoppages and again results in losses for producers. Moreover, "Turon" periodically has maintenance days when production must be halted, which can be catastrophic for certain technological lines. Finally, in Uzbekistan, there is a lack of sustainable technical maintenance for equipment, implementation, and operation of software necessary for labeling, partly due to a severe shortage of qualified specialists.

— There is still a significant number of producers in the market who have not implemented labeling in their production processes. This leads to unfair competition and creates additional incentives for the diversion of production and sales of beverages into the "shadow." As a consequence, it results in the displacement from the market of products from companies that comply with the legal requirements for mandatory labeling. With the introduction of "aggregation," this trend will intensify.

— Retail outlets that sell soft drinks (of which there are more than 50,000 in the country) are technically unprepared to carry out proper control over labeling. The overwhelming majority of them simply do not have the required equipment. One might ask: what is the point of this entire initiative? What is the point of moving to the second stage of labeling implementation for soft drinks if the tasks of the first stage have not been fulfilled? Furthermore, even with the necessary equipment, servicing customers becomes more complicated and slows down.

Thus, the implementation of mandatory labeling for soft drinks, instead of ensuring market transparency and creating conditions for the legalization of informal turnover, leads to entirely opposite results: increased costs for legal businesses, rising prices for legal products, and creating incentives for the "shadowing" of the sector.

For digitalization to work positively for the development of the economy, it is essential first to create the necessary technical and institutional conditions, as well as to minimize the costs of implementing labeling. This includes ensuring that distributors and all points of sale are equipped with the appropriate technical means. Without this, the implementation of mandatory labeling simply makes no sense.

Until the necessary conditions are created, producers are requesting a three-year postponement of the implementation of "aggregation." They argue among other things that even in Russia, whose experience is often cited by our supporters of digital labeling, and which was even technologically better prepared for digitalization, the transitional period to "aggregation" lasted 2.5 years (in Uzbekistan – 6 months).

However, I would broaden the question: about the feasibility of mandatory digital labeling for soft drinks.

Yuliy Yusupov