CUSTOMS MODERNIZATION INITIATIVES C A S E S T U D I E S Editors Luc De Wulf · José B. Sokol THE WORLD BANK Customs Modernization Initiatives: Case Studies Customs Modernization Initiatives: Case Studies Editors Luc De Wulf and José B. Sokol THE WORLD BANK Washington, D.C. © 2004 The International Bank for Reconstruction and Development / The World Bank 1818 H Street, NW Washington, DC 20433 Telephone 202-473-1000 Internet www.worldbank.org E-mail feedback@worldbank.org All rights reserved. A copublication of the World Bank and Oxford University Press. 1 2 3 4 07 06 05 04 The findings, interpretations, and conclusions expressed herein are those of the author(s) and do not necessarily reflect the views of the Board of Executive Directors of the World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, World Bank, 1818 H Street, NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail pubrights@worldbank.org. Library of Congress Cataloging-in-Publication Data Customs modernization initiatives: case studies / edited by Luc De Wulf and José B. Sokol. p. com. Includes bibliographic references and index. ISBN 0-8213-5752-2 1. Customs administration--Developing countries. I. Wulf, Luc De, 1942- II. Sokol, José B. HJ7390.C87 2004 352.4'48--dc22 2004050364 Contents Foreword vii Acknowledgments ix About the Editors xi Abbreviations and Acronyms xiii 1. OVERVIEW 1 Luc De Wulf and José B. Sokol 2. BOLIVIA 7 Flavio Escobar 3. GHANA 19 Luc De Wulf 4. MOROCCO 33 Marcel Steenlandt and Luc De Wulf 5. MOZAMBIQUE 49 Anthony Mwangi 6. PERU 65 Adrien Goorman 7. PHILIPPINES 85 Guillermo L. Parayno Jr. 8. TURKEY 101 M. Bahri Oktem 9. UGANDA 113 Luc De Wulf BOXES 4.1 Customs Clearance Sites Outside Customs Zones 39 4.2 Improvement of Risk Analysis 40 4.3 Personalized Management of Special Import Customs Procedures 41 TABLES 2.1 Customs Clearance Time, January­July 2003 16 4.1 Imports, 1996­2002 46 4.2 Customs Revenue Indicators, 1998­2002 46 4.3 Customs Revenue by Category, 1998­2002 47 v vi Contents 4.4 Average Time for Customs Clearance, January 2001­June 2003 47 5.1 Number and Types of Crown Agents Consultants, July 2000­January 2003 52 5.2 Academic Qualification of Customs Staff after the Reform, 1996 54 5.3 Planned Staff Profile 55 5.4 Customs Revenues, 1995­2001 59 5.5 Penalties for Misconduct, 1997­June 2000 61 6.1 Tariff Regime, Selected Years 69 6.2 Customs Staffing, Selected Years 72 6.3 A Comparison of the Customs Administration, before and after the Reform, 1990 and 2002 76 6.4 Value of Imports, Customs Revenue, Rate of Increase, and Average Collection Rate, 1990­2001 78 8.1 Revenue Importance of Customs Duties and Taxes, Selected Years 103 8.2 The TCA's Four-Year Action Plan 104 8.3 Customs Clearance Times, 1996 and 2001 110 9.1 URA Revenue Preformance, 1990­2002 116 FIGURES 2.1 Import Taxes as a Share of Overall Budget Revenue, 1994­2000 8 2.2 Customs Revenue as a Share of Total Tax Revenue, 2000 8 2.3 Evolution of Effective Customs Rates, 1994­2001 9 3.1 The Pre-Reform Trade Transaction System 23 3.2 TradeNet Concepts 24 3.3 Simplified Import Procedures 27 5.1 Average Number of Days Required for Import Clearance, Selected African Countries, 2000 60 6.1 Organizational Structure of the National Customs Service 70 Foreword In recent years, policymakers have become increas- failed to meet their objectives. To help our member ingly aware of the importance of policies that can countries draw lessons from the successes and fail- facilitate the flow of goods and services across bor- ures of such reform efforts, the International Trade ders. Sound trade facilitation policies are indeed Department of the World Bank is preparing a series essential if countries are to realize the potential of tools anchored on its Customs Modernization gains available from enhanced market access, low- Handbook. This publication is a companion to the ered tariffs, reduced transportation costs, and Customs Modernization Handbook. It documents improved communications. Such gains can allow the lessons to be learned from eight case studies countries to achieve higher growth rates and reduce that were prepared to inform the Handbook. The poverty. case studies reflect the realities of extremely diverse Customs administrations are a critical compo- countries in terms of development, culture, and nent of this framework and are therefore important geography. catalysts of economic development. Well-designed We hope that both the Customs Modernization programs that focus on improving the efficiency of Initiatives volume and the Customs Modernization customs administrations can generate significant Handbook will contribute to successful reforms that gains by helping to integrate developing countries will help developing countries' to integrate into the into the global trading system. In this context, many global economy and achieve their ultimate objec- countries have undertaken customs reform and tive of poverty reduction. modernization initiatives, often with the assistance of the World Bank or other development agencies. Uri Dadush The outcomes of those programs have been Director mixed because, unfortunately, many programs have International Trade Department vii Acknowledgments The country case studies are the product of a col- Inter-American Development Bank, is also grate- laborative effort on the part of customs experts and fully acknowledged, particularly in supporting the consultants who either participated in the reform preparation of the Peru case study. In addition, Paul processes in the countries reviewed or have accu- Duran (consultant) helped the editors ensure the mulated significant technical knowledge about cus- consistency and coherence of all the case studies. toms reform and modernization processes in a The views expressed are entirely those of the con- worldwide context during the course of their pro- tributors and do not necessarily reflect the views fessional experience. The studies were prepared of the World Bank Group, the institutions with using a methodology developed by Luc De Wulf which the authors are affiliated, or the countries and Michael Lane. The editors have revised and they represent. updated the studies submitted by the authors so as This book is a product of the World Bank's to obtain greater uniformity. Trade Department. It was initiated by the Africa The editors reviewed the country case studies on Region under the leadership of Larry Hinkle, who an individual basis, as did a number of peer review- at that time was completing a study on Africa's ers, including Amparo Ballivián (World Bank), trade reforms ("How Far Did Africa's First Genera- Michael Engelschalk (World Bank), Carlos Ferreira tion Trade Reforms Go?" Africa Region Working (World Bank), Guillermo Gutierrez (National Paper Series No. 58a, June 2003). That study sug- Customs of Bolivia), Allan Katiga (Uganda Rev- gested that the benefits from trade liberalization enue Authority), David Kloeden (International policies would be greatly enhanced by reforms in Monetary Fund), and Michael Lane (formerly with the trade facilitation area, particularly in customs the U.S. Customs Service). The editors also wish to administration. thank the staff members of the Ghana Community The editors are indebted to Melanie Faltas, Network, who were most helpful to the author in Zeba Jetha, and Lili Tabada for their excellent undertaking the Ghana study, especially Emmanuel administrative support throughout the project. Darko and Nigel Gregory. Comments were received Alice Faintich of The Word Doctor edited the docu- from the respective World Bank country teams. ment, which greatly improved its readability. Their The contribution of Peter M. Kalil, chief of the dedication has significantly enhanced the quality of Integration Trade and Hemispheric Issues Division, this product. ix About the Editors Luc De Wulf, a Belgian national, joined the Fiscal José B. Sokol, a Panamanian national, joined the Affairs Department of the International Monetary World Bank in 1977 following a career as a senior Fund in 1972 and later worked on China in the Asia government official responsible for economic, Department before moving to the World Bank in budgetary, and financial matters at Panama's 1988, where he worked in the Africa Region and Ministry of Planning and Economic Policy. At the the Middle East Region. He retired from the Bank World Bank, Sokol worked in the Latin America in 1999. and the Caribbean Region and in the Africa Region. Initially, De Wulf's interest in the taxation of He retired in May 2001. foreign trade was driven by the important revenue Initially, Sokol's work focused on macroeco- contribution of taxes in many developing coun- nomic issues and the contribution that policies in tries. Recently he has worked intensively as a con- this area can bring to a country's development sultant on trade and development issues, particu- efforts. His work on Argentina, Colombia, and the larly in Mauritania and Senegal. During the course Commonwealth Caribbean countries gradually of this work, he increasingly recognized that trade shifted to the area of structural adjustment with liberalization, with its emphasis on improving mar- an emphasis on trade liberalization, particularly ket access and lowering both tariff and nontariff on reducing tariff and nontariff barriers to trade. trade barriers, would not fulfill its promises of Later his work in the Africa Region shifted to growth and poverty alleviation without significant addressing growth, poverty reduction, governance, strengthening of trade facilitation. In the area of and capacity-building issues. His more recent work trade facilitation, customs is a key agency that in a has focused on evaluating both the impact of coun- number of countries fails to reduce the cost of trade try assistance strategies and adjustment operations sufficiently, and its potential contribution to trade on growth and poverty reduction and the contribu- facilitation is frequently not fully realized. Hence, tion that trade facilitation and customs modern- this publication emphasizes increasing the effec- ization can have on strengthening a country's tiveness and efficiency of customs operations. outward-looking growth orientation. xi Abbreviations and Acronyms ACIT Administration of Customs and MOF Ministry of Finance Indirect Taxes (Administration des MOTI Ministry of Trade and Industry Douanes et Impôts Indirects) (Ghana) (Morocco) NCB National Customs of Bolivia ACV Agreement on Customs Valuation (Aduana Nacional de Bolivia) ASYCUDA Automated System for Customs NCS National Customs Service Data (Superintendencia Nacional de BOC Bureau of Customs (Philippines) Aduanas) (Peru) CCMS Computerized Customs PSI preshipment inspection Management System (Turkey) PTCP Philippine Tax Computerization CEPS Customs, Excise, and Preventive Project Services (Ghana) SADC Southern African Development COMESA Common Market for Eastern and Community Southern Africa SGS Société Générale de Surveillance CSCC Computerized Support for SPACE selectivity, postaudit, advance Customs Clearance clearance, client self-assessment, DFID Department for International and electronic data processing Development (United Kingdom) TCA Turkish Customs Administration DIS destination inspection services TIMS Trade Information Management DTI direct trader input System EDI electronic data interchange TURC Technical Unit for Restructuring EU European Union Customs (Unitade Técnica de GCMS Ghana Customs Management Reforma das Alfãndegas) System (Mozambique) GCNet Ghana Community Network UNCTAD United Nations Conference on GDP gross domestic product Trade and Development ICT information and communication URA Uganda Revenue Authority technology VAT value added tax IDB Inter-American Development Bank WCO World Customs Organization IMF International Monetary Fund WTO World Trade Organization ITS Intertek Testing Services MEF Ministry of Economy and Finance (Peru) xiii 1 OVERVIEW Luc De Wulf and José B. Sokol This volume presents case studies of customs mod- of trade and customs processes took the lead in the ernization initiatives in eight developing countries: trade facilitation and customs reform. Bolivia, Ghana, Morocco, Mozambique, Peru, the The country case studies were prepared by cus- Philippines, Turkey, and Uganda. The purpose toms experts and consultants who had either par- of these case studies was to obtain a firsthand view ticipated in the reform processes in the countries of how these countries undertook customs reforms reviewed or accumulated significant technical and to assess their success. The overall lessons knowledge of customs reform and modernization learned from these studies are presented in chap- processes in a worldwide context. The selection of ter 2 of the Customs Modernization Handbook countries aimed to assess initiatives used in differ- (World Bank forthcoming), a companion volume ent continents in the hope that their unique charac- that provides policymakers, practitioners, and proj- teristics would yield interesting insights. ect managers from development agencies with an The country case studies were undertaken with a overview of the key issues they need to address in common approach to ensure comprehensiveness preparing and implementing customs moderniza- and comparability. They targeted five areas of the tion initiatives. The audience for the Customs reform process: Modernization Handbook is customs officials who are called on to design and implement customs 1. The background of the reform and moderniza- reform and modernization strategies, as well as tion process, including its economic and institu- staff members of the World Bank and of other tional context, factors leading to reform deci- multilateral and bilateral development agencies sions, supporters, objectives and design, and who support developing countries in implement- financial and technical support ing such strategies. All the case studies except for 2. The issues pertinent to the reform process the one on Ghana were prepared using basically the 3. The reform measures themselves, including same methodology, which aimed at identifying legislation; management changes; staff-related the origins of the reforms, the main drivers, and questions, such as pay, selection, training, the outcomes. The Ghana case study is somewhat integrity, and corruption; information technol- different, because it focuses on how the automation ogy; valuation; experience with preshipment 1 2 Customs Modernization Initiatives: Case Studies inspection; special import regimes; and selectiv- customs reform in Bolivia aimed at total transfor- ity in pre- and post-release control mation. One of the key elements of the reform was 4. The outcomes, including the effect of reform on a complete staff renewal, designed to rid the fiscal performance, trade facilitation, corrup- customs service of deeply embedded corruption. tion, staffing and workloads, and conformity Under the reform, new staff members were with international standards plus, where avail- selected on the basis of competitive recruitment of able, an assessment of quantitative performance qualified candidates conducted by outside consult- indicators and users' reactions ants. With the adoption of the Automatic System 5. The lessons that each of these reforms contain for Customs Data (ASYCUDA ) software, the a judgment about the sustainability of the mod- National Customs of Bolivia (NCB; Aduanas ernization initiatives Nacionales de Bolivia or ANB in Spanish) was able to achieve random selectivity in the inspection of The findings and conclusions of each case study are shipments and limit physical controls to 20 percent based primarily on interviews conducted in the of shipments. The upgrading of information and field with public sector representatives--mainly communication technology (ICT) allowed the customs officials--as well as oversight authorities NCB to monitor customs clearance times closely, and private sector representatives, including thereby enabling it to remedy weaknesses and help importers, brokers, carriers, and their professional design measures to reduce clearance times. The associations. The findings were at times comple- program also provided for a gradual handover of mented by further dialogue between the editors the valuation function to the NCB. In addition to a and others with valuable insights in relation to significant reduction in corruption, smuggling of reform processes and outcomes. products of mass consumption declined. However, Interviews were conducted at three levels: (a) control of informal trade remains a challenge. In with sponsors and originators of the reform recent years, smuggling activity in the informal process so as to identify the motivating and encour- sector appears to have increased sharply in aging actors behind the reform, (b) with customs response to a deterioration in economic condi- officials and other officials involved in implement- tions following adverse external and domestic ing reform who were in a position to provide details shocks. Also resources earmarked for the NCB to about the reform process and methodology, and cover its operations appear to be inadequate to (c) with users of customs services who are directly sustain the financial autonomy that it was granted affected by customs operations and who could help as part of the reform. assess the reform process and outcomes. Although the country case studies share the Morocco same approach and cover the same topics, they dif- fer in the depth and extent of treatment of the Although not codified in a detailed action plan, issues examined. This difference reflects the varying Morocco's program of customs reform and mod- expertise of the consultants who undertook the ernization reflected a comprehensive vision and studies, the information available about the details covered all aspects of customs operations. Reform of the reform, the specificity of the country initia- actions were undertaken in a deliberate and prag- tives, and the relative importance of different matic process. The priorities of the Administration reform elements in the various programs. Also, of Customs and Indirect Taxes (ACIT; Administra- because these studies were largely undertaken in tion des Douanes et Impôts Indirects or ADII in mid-2002, some of the findings may be somewhat French) changed significantly, away from revenue outdated. generation and law enforcement and toward the facilitation of trade and transparency. The reform process has benefited greatly from the close Bolivia involvement of the ACIT's private sector partners Initiated within the framework of an institutional in designing the reform, which included an over- reform covering the entire government and pro- haul of the Customs Code and the implementation vided with strong leadership by the vice president, of the Customs Valuation Agreement of the World Overview 3 Trade Organization. The ACIT actively engaged the Peru entire customs staff in elaborating and implement- In Peru, customs reform and modernization were ing the reform while strengthening training and high on the agenda of the president, who provided staff incentives. The close involvement of both staff strong political support throughout enactment of members and users of customs services in the the reform. The customs administration was vested reform effort benefited greatly from the early devel- with full ownership of the reform and maintained opment of customs communications. Substantially the necessary continuity to see the process through reinforced ICT led to considerable progress in to completion. Peru created the National Customs automating customs operations. With selectivity Service (Superintendencia Nacional de Aduanas) to limiting physical inspections to 10 percent of decla- grant the customs administration the operational rations and other process simplifications, customs flexibility required to improve services and to be clearance time was substantially reduced. This held accountable for the results. The reform pro- result, posted on the ACIT's Web site, put pressure gram was comprehensive, and it was implemented on other public and private sector agents to stream- in a systematic way that led to steady progress. An line their operations so as to reduce delays in releas- entire series of measures was taken at the begin- ing shipments to importers. ning, followed by a period of consolidation. Major areas that were addressed included adopting new Mozambique legislation; streamlining procedures; implementing full automation of operations based on an inte- In Mozambique, the most significant characteristic grated, domestically developed computer program; of the reform was the willingness to rely exten- introducing risk analysis and postrelease audits; sively on external consultants to manage and and initiating broadly based personnel renewal. implement the reform and to value imports The administrative and financial autonomy and exports for customs purposes. Mozambique granted to the customs administration allowed it adopted this unusual approach in the midst of to introduce effective management and personnel rebuilding a government service that had been policies that included the provision of attractive totally destroyed after many years of war. The salaries and the removal of unqualified and corrupt reform design was, from the outset, comprehensive staff members. The use of preshipment inspection and ambitious; however, its implementation was services illustrates how such services can contribute gradual and phased, with careful monitoring to effective and efficient customs operations. systems built in. Significant foreign financing supported the reform. Under the reform, the Mozambique Customs Administration (or Direcção Philippines Geral de Alfãndegas) introduced a modern ICT sys- tem and initiated a program of staff renewal, with Decisive factors in the success of the reform in the recruitment based on new standards of qualifica- Philippines included strong, top-level political tion and integrity, and a new salary scale. A sizable backing; strong, able, and sustained operational portion of the existing staff was scheduled to be leadership; ownership of the reform by the head of released. The contract for external consultants was the Bureau of Customs; and support that included extended twice because more time was needed to some funding by private sector users of customs prepare national management to direct an efficient services. Among the weaknesses of the reform were and effective customs organization and to gear up a failure of customs staff members to commit to it, for integration into the envisaged new central cus- caused partly by their inadequate compensation, a toms authority. Whether this innovative approach problem that the Bureau of Customs could not is the best way to ensure the sustainability of address because it lacked the requisite authority reform is yet to be determined. Mozambique has and funding. This lack of commitment, together still not completed the process of streamlining its with the loss of political interest on the part of the staff. It also needs to develop the ICT system fur- subsequent administration, led to later backsliding ther to deal effectively with persistent corruption on reform. In addition, other agencies involved and smuggling problems. in import and export clearance did not go along 4 Customs Modernization Initiatives: Case Studies with the modernization efforts and continued to autonomous revenue agency that also managed impede trade flows. Nevertheless, the adoption domestic taxes. Measures were implemented to of simplified procedures and the significant enhance staff member integrity, in part by signifi- progress in automation affected nearly all seg- cantly upgrading salaries and removing staff mem- ments of the clearance process. The introduction of bers who had been tainted by previous integrity ASYCUDA , with its support of risk assessment shortcomings. Those efforts were reinforced by a and selectivity, contributed to a substantial wide-ranging anticorruption campaign. In 2002, enhancement of customs controls and a reduction the reform also streamlined several steps in the in clearance times. clearance process. The reform process still has a considerable unfinished agenda, because audit con- trols are at an embryonic stage of development and Turkey a realistic database still needs to be developed. Now Two goals dominated customs reform and modern- that ASYCUDA has been adopted, the automa- ization efforts in Turkey: bringing customs legisla- tion of customs processes is making progress. How- tion and administrative structures in line with ever, no fully fledged risk management system is European Union standards, and automating cus- operational yet, and the physical inspection rate is toms procedures. The establishment of an inde- still close to 100 percent. The fight against corrup- pendent Modernization Project Unit with strong tion has proved to be an arduous task, requiring political support and steady management by the steadfast efforts with high-level political support. Turkish Customs Administration (TCA; Gümrük Yet some noteworthy successes have recently been in Turkish) was a critical element in the effective registered. In mid-2002, several high-ranking offi- coordination of automation activities. Such activi- cials were arrested, and the campaign against cor- ties included adoption of a new ICT system and ruption is still high on the agenda. As the reform its rapid deployment and application, which per- moves ahead, it may benefit from a greater focus on mitted automation of the entire clearance process; the promotion of integrity and trade facilitation in introduction of risk-based selectivity; and imple- combination with strong enforcement. mentation of postrelease controls. The TCA also witnessed a significant improvement in staff qual- Ghana ity, as well as improvements in physical infrastruc- ture, which were occasionally funded by private The Ghana case study is quite different from the sector contributions. Some regional customs offices other case studies. It was initially undertaken as a lagged in deploying the new ICT system, hiring case study of reform that would improve the invest- qualified personnel, and adopting automated pro- ment climate and would be used as an input in the cedures. The TCA's lack of autonomy in salary World Development Report (World Bank 2004). It setting and in recruitment hampered its modern- is reproduced with permission from the World ization effort. Inefficiencies in the procedures other Development Report team, because it clearly illus- agencies used to fulfill their own mandates, includ- trates how introducing ICT, even in the absence ing the Ministry of Health, Ministry of Agriculture, of comprehensive customs reform, can strengthen and Standards Institute, undermined the overall revenue mobilization and speed up cargo clearance. benefits that traders reaped from the customs Ghana has adopted a novel approach to the intro- reform. duction of ICT by commissioning this task to a joint venture company, the Ghana Community Network. The vision is to connect all members of Uganda the trading community in an electronic network so In Uganda, customs reform has been a long-term as to facilitate all aspects of the trade transaction process. Started in 1990­91, its main aim was to for both traders and the government agencies over- strengthen revenue mobilization and to combat seeing these transactions, each of which has its own corruption. At the beginning of the reform, the agenda. Progress so far has been good in terms of customs administration became part of an raising revenue and speeding up customs clearance Overview 5 times. The lessons learned from this experience References show that (a) ICT can serve as a powerful force to World Bank. 2004. World Development Report 2004: Making streamline trade and customs procedures; (b) the Services Work for Poor People. New York: Oxford University sustainability of the improvements registered will Press. ------. Forthcoming. L. De Wulf and J. Sokol, eds., Customs depend on modernization of the non-ICT aspects Modernization Handbook. Washington, D.C.: World Bank. of customs work; and (c) the inclusion of other members of the trading community in the elec- tronic network requires more political will than has been mustered so far. 2 Bolivia Flavio Escobar Bolivia successfully adopted an open market econ- applied to soft drinks, as well as a specific tax of omy model in 1985; however, economic growth Bs 0.3 to Bs 1.2 per liter applied to alcoholic bever- and employment generation have been insufficient ages. Bolivia also levies a special tax on the import for the country to make headway in narrowing its and domestic sale of hydrocarbons and their deriv- sizable inequalities in incomes and standards of liv- atives; for example, in 2002, the specific tax on ing. In an effort to address these issues, the Bolivian diesel oil was Bs 0.66 per liter. authorities pursued a comprehensive economic Import taxes account for a significant portion of reform program that included modernization of total tax revenue. As figure 2.1 shows, customs rev- the customs administration. enue from taxes on international trade represents between 30 and 40 percent of the National Trea- sury's total tax revenue. Customs revenue as a share Trade Policy and Taxation of total revenue peaked in 1997 and 1998 be- In 1985, Bolivia launched significant reforms in the cause of imports required for the construction of area of international trade that included reducing a gas pipeline between Bolivia and Brazil, as well tariffs and simplifying controls. Initially the as increases in foreign investment in privatized authorities introduced a uniform tariff of 20 per- companies. cent for capital and other goods, but the tariff Among the contributions of the various taxes on schedule is no longer uniform, because in 1987, the international trade to total National Treasury rev- authorities further reduced the tariff on capital enue, the value added tax, which is levied on all goods to between zero and 5 percent and lowered final imports of goods and services, is the most the tariff on other goods to 10 percent. important, representing about 21 percent of the In addition to customs duties, levies on imports total. Customs duties are the second most impor- include a value added tax of 14.9 percent and a tant source of tax revenue and account for about selective consumption tax that ranges from 50 per- 8 percent of total tax revenue (figure 2.2). cent on cigarettes and other tobacco products to Figure 2.3 shows the effective rates of import between 10 and 18 percent on automobiles. Other taxes as measured by the ratio of customs duty col- taxes include a specific tax of Bs 0.15 per liter lection to the total value of imports. In 1999­2001, 7 8 Customs Modernization Initiatives: Case Studies FIGURE 2.1 Import Taxes as a Share of Overall Budget Revenue, 1994­2000 Percent 40 35 Ratio of customs collections to National 30 Treasury revenue Ratio of value added taxes to National 25 Treasury revenue Ratio of customs duties to National 20 Treasury revenue Ratio of selective consumption taxes to 15 National Treasury revenue 10 Ratio of taxes on hydrocarbons and their derivatives to National Treasury revenue 5 0 1994 1995 1996 1997 1998 1999 2000 Source: National Customs of Bolivia data. FIGURE 2.2 Customs Revenue as a Share of Total Tax Revenue, 2000 Ratio of taxes on hydrocarbons and their derivatives to National Treasury revenue 2.56% Ratio of selective consumption taxes to Ratio of customs National Treasury duties to National revenue Treasury revenue 0.87% 7.83% Ratio of value added taxes to National Treasury revenue 20.78% Source: National Customs of Bolivia data. the effective rate of customs duties was about 5 per- measures.1 Moreover, in line with the central tenet cent, and the effective rate of all taxes collected by of its policy of free trade in goods and services, the customs service averaged more than 20 percent. Bolivia does not require prior permits or licenses The combined effective rate of all taxes on taxable for imports except in cases where they might imports actually amounts to 21.1 percent because endanger human, animal, or plant health; the secu- not all imports are taxable. The relatively low effec- rity of the state; or the nation's cultural heritage.2 tive customs rate for all imports is the result of exemptions from import duties included in 1. Except for a safeguard measure against imports of Argentine regional trade agreements and trade agreements wheat flour in February 2002, which temporarily suspended tariff preferences granted to the South American Common Market. with neighboring countries. 2. Supreme Decree Number 24440 of December 1996 establishes Bolivia avoids the use of nontariff barriers free importation for marketable goods without any prior licens- and has never taken antidumping or safeguard ing, import quotas, or other nontariff measures. Bolivia 9 FIGURE 2.3 Evolution of Effective Customs Rates, 1994­2001 Percent 25 20 Customs collection as a percentage of the value of total imports Value added taxes as a percentage of the 15 value of imports Customs duties as a percentage of the value of imports 10 Consumption taxes as a percentage of the value of imports Taxes on hydrocarbons and their derivatives 5 as a percentage of the value of imports 0 1994 1995 1996 1997 1998 1999 2000 2001 Source: National Customs of Bolivia data. Even though Bolivia has largely based its trade progressive devaluations of the national currency policy on unilateral liberalization, multilateral and have partly compensated for the negative impact on regional initiatives have played an important sup- tax collections caused by the decrease in imports. porting role. Since 1993, Bolivia has concluded new Before the reform, the general public perceived trade agreements with Chile, Cuba, Mexico, and the the National Customs of Bolivia (NCB) as one of South American Common Market. Bolivia has also the most corrupt institutions in the country continued to participate in the Andean Community because of its links to the political parties: the party integration process. Given Bolivia's geographical in power would take charge and manage the institu- location, most of these preferential initiatives have tion however it pleased. Services provided to traders the potential of increasing trade and investment. were directly related to the bribes offered, plus almost 40 percent of the total staff consisted of people who did not receive salaries from the NCB Customs Administration but simply kept a share of the taxes they collected The effects of improvements in the trade regime for themselves and for whoever had procured the introduced since 1986 were reduced by persistent position for them. Overall tax collection was rela- administrative weaknesses and the resultant tively efficient, because collections met the required unequal application of laws and regulations affect- quota, with the excess allocated to staff as efficiency ing the administration of the customs service, the rewards. heavy reliance on processing imports, the applica- An NCB estimate of smuggling between 1997 tion of intellectual property rights regulations, and and 1998 pointed to a tax evasion level that the use of sanitary and phytosanitary controls. exceeded US$800 million per year, an amount Difficulties also arose because of the size of the larger than Bolivia's total foreign financial assis- informal sector. tance. Subsequent analyses estimated the revenue Excise and hydrocarbon tax rates have been losses at an average of US$500 million per year. In changing constantly, the former because of revenue recent years, smuggling activity by the informal shortfalls and the latter because of the decision to sector appears to have increased sharply (mainly keep domestic prices constant (the domestic price from the port of Iquique in Chile) in response to of gasoline has been fixed since 2000). Conse- the deterioration in economic conditions following quently, revenue improvements for these taxes have adverse external and domestic shocks. Smuggling been negligible. Also during 1999­2003, total has a detrimental impact on the formal economy, imports decreased by US$300 million, contracting as reflected by lower tax collection and unfair com- the tax base for customs taxes. However, the petition with the formal private sector. 10 Customs Modernization Initiatives: Case Studies The NCB had traditionally maintained an anti- Program during its initial stages (1997­2001), quated legal and normative structure. The applica- thereby giving it the necessary authority and visi- ble legislation dated back to 1929 and was extremely bility. The program's main achievement was cus- complex, consisting of 285 decrees, 321 ministerial toms reform. Under Ramírez's direction the resolutions, and 215 administrative resolutions. In cabinet--particularly Minister of the Presidency addition, all goods had to be inspected, which made Alberto Leyton and Minister of Finance Herbert the process of merchandise clearance extremely Muller--fully supported the reform. time-consuming and increased opportunities for A new NCB commissioner, Amparo Ballivián, rent-seeking activities. spearheaded the implementation of customs reform, and her forceful management of the reform program was a major reason for its success. The International Objectives and Scope Monetary Fund (IMF) contributed significantly to of Customs Reform the design of the reform by providing technical sup- With a view to addressing these shortcomings, port to the government and to the reform team. Bolivia implemented a second round of reform in The private sector participated widely in the 1997. This round followed the opening up of the reform. The leadership provided by the National economy in 1985 and was aimed at strengthening Trade Chamber, the National Customs Forwarders institutions, with priority given to the customs Chamber, and the National Industries Chamber is service and to the gradual integration of informal especially noteworthy. The private sector was par- trade into formal trade channels. The consensus ticularly interested in stemming corruption and regarding the prevalence of corruption in customs fighting smuggling. Private sector representatives activities led to general agreement on the need for voiced the opinion that smuggling by the large overall reform. The reform aimed at a total reengi- informal sector was seriously affecting enterprises' neering of the customs organization, its staffing, viability and the fabric of domestic industry as a and its processes and procedures. The objective was whole. The private sector requested a new set of to make customs activities efficient and transparent rules and demanded new legislation that would so that customs officers could fulfill their proper credibly address corruption and smuggling. role of facilitating trade and collecting revenue. Before the implementation of the contingency Before the second round of reform, the Customs plan and the enactment of the new Customs Law, Police Force was implementing a plan whereby per- the IMF recommended that the government sonnel from the Special Unit for Assessing Internal prepare a medium-term plan for institutional Risk replaced customs staff. The objective was to strengthening. As a result, the Reform and Modern- restore institutional credibility, improve tax collec- ization Program of the Bolivian Customs Adminis- tion, and reduce the high levels of institutional tration (henceforth referred to as the Customs corruption. Modernization Program) was designed, prepared, and discussed in detail by the NCB with the govern- ment, the main stakeholders, and the international Reform Team, Support, donor community to achieve broad consensus and and Financing adequate financial support. The government set up the National Customs The NCB has received the support of the follow- Council during the preparation of the reform to ing international institutions and bilateral donors support the reform process. The president chaired through credit agreements and grants to finance the the council, which consisted of representatives Customs Modernization Program: the World Bank; from the Ministry of the Public Treasury, the Min- the Inter-American Development Bank (IDB); the istry of External Trade, and the private sector. The IMF; the United Nations Development Programme; government dissolved the council following the Andean Development Corporation; the Nordic approval of the new Customs Law in 1999, which Development Fund; and the governments of established the framework for the reform and initi- Denmark, Germany, Japan, the Netherlands, and ated the reform process. Sweden. The World Bank financed the new human The vice president, Jorge Quiroga Ramírez, resources administration, and the IDB financed the directed the leaders of the Institutional Reform new information technology system. Bolivia 11 The innovative aspect of the Customs Modern- managing the NCB. This structure implies that the ization Program's design relates to its cofinancing decisionmaking process is not discretional. The structure, which involves multiple donors. The gov- introduction of the implementing regulations was ernment set up a special coordination unit that is followed in July 2001 by approval of the Institu- responsible for (a) coordinating the efforts of the tional Reform Agreement by the NCB, the Bolivian authorities, the NCB, and external donors Ministry of the Public Treasury, and the Technical in implementing the program; (b) following up on Unit of the Institutional Reform Program. A local and monitoring the program; (c) keeping civil soci- consulting firm was heavily involved in preparing ety, donors, and the Bolivian authorities informed the agreement, particularly those aspects of the about the progress of implementation; and agreement that pertained to the NCB's financial (d) designing strategies and preparing terms of ref- sustainability. erence to ensure adherence to donors' procurement The agreement included commitments by the guidelines. NCB to implement the Customs Modernization Program and by the Ministry of the Public Treasury and the Technical Unit of the Institutional Reform Components of the Reform Program to support its implementation. Also The reform focused on the key issues pertaining to important were these entities' commitments of the legislative and regulatory framework, as well as financial resources and technical assistance to on required changes to managerial and operational ensure the implementation and maintenance of the procedures. institutional reform. The Customs Law specified that the NCB would be allowed to retain 10 percent of the revenue from customs duties on imports to Legislative and Regulatory Framework defray its expenses. However, this amount turned A change in customs legislation was one of the out to be too low to cover the NCB's costs, thereby main reform measures. The new Customs Law of undermining the reform's financial sustainability. July 1999 defined a set of rules that changed the law The authorities are now studying several options to governing customs procedures, regimes, personnel, overcome this problem, including consolidating the and administrative structures. It was designed to NCB with the Internal Revenue Service, disbanding carry out far-reaching institutional reform and the NCB, changing the NCB's revenue sources, and combat corruption, but the issuance of implement- collecting 1 percent of the total value of imports in ing regulations was delayed by almost a year, and as free-on-board terms. The debate was still ongoing a result the NCB was relatively limited in its ability as of the writing of this report. Despite the many to provide the legal guidance and transparency that changes that have taken place, the NCB's adminis- the new legislative framework had aimed for. trative structure is still being reviewed. Joint Nevertheless, the reform was well thought out and inspections by the NCB and the Internal Revenue its institutional and procedural provisions were Service as part of an inspection project were delayed eventually implemented. However, Article 4 of the because reforms at the Internal Revenue Service new law posed operational difficulties concerning have only recently begun. juridical issues related to the application of the new Code of Penal Procedure and to legal constraints Personnel and Pay Issues intended to combat smuggling by small traders. Personnel reform was part of a comprehensive effort by the Institutional Reform Program and Management Changes the Customs Modernization Program to reform the The implementing regulations for the Customs overall civil service that was aimed at strengthening Law came into effect in August 2000. They estab- the public administration and advancing the fight lished a new organizational structure that pro- against corruption. The personnel reform, which vided autonomy to the NCB in both financial and was based on the recently adopted Civil Service normative terms. The NCB's governance structure Statute and Civil Service Program, was fully imple- is based on a board of directors that sets out mented at the NCB and became an essential the operational directives and regulations for element of its transformation into an efficient and 12 Customs Modernization Initiatives: Case Studies transparent organization while significantly reduc- report with recommendations to the board or gen- ing corruption (IDB 2001). eral management. Appointees were required to The selection and hiring of customs personnel undergo a three-month probationary period before was to be based on transparent and competitive being given permanent positions. processes. All positions became open to the public, A total of 12,563 candidates applied during the with all senior professional and technical positions two recruitment periods and, because they were given temporary status. All those personnel who allowed to apply for up to three positions, filed had not received salaries but had kept a portion of 37,698 applications. Of the 8,763 candidates who the duties they collected were dismissed. Special- fulfilled all requirements, 2,718 passed the tests. ized consulting firms were hired through public Following screening and interviews, 1,653 candi- bidding to undertake the selection process so as to dates were shortlisted. The personnel consulting enhance the overall transparency of the operation. firms submitted reports to the NCB that included At the same time, the NCB's Human Resources short-lists of candidates for each position and a list Department developed a new market-based pay of positions for which no suitable candidates had system and offered competitive salaries and pro- applied. By July 2001, approximately 87 percent of motion opportunities. positions had been filled. Openings for top and mid-level positions and Under the new salary structure, salaries were for professional and technical positions were adver- raised by 73 percent for management staff, by 22 to tised in October 1999 and April 2000, respectively. 28 percent for mid-level officials, and by 41 percent The outcome of the effort to recruit senior and for support personnel. The maximum monthly mid-level staff was disappointing because of a lack salary rose from Bs 14,000 to Bs 29,000, while the of publicity, which meant that fewer applications minimum increased from about Bs 1,200 to were received than had been expected; the hasty Bs 1,300. Regulations do not permit performance rejection of a number of applications for border bonuses, but good performance is taken into positions; and an unreliable software system. account during the promotion process. Although a Because many positions remained unfilled, a sec- promotion reward system exists for teams that ond round of recruitment for senior and technical exceed predetermined goals, those rewards are con- personnel was initiated in January 2001. strained by the NCB's budget. Implementation of the selection process The customs reform opened up employment to required a series of prior actions, including defin- the general public and put it on a merit-based foot- ing the ideal profile of a customs officer (in terms ing. The staff training program was to be strength- of education, experience, and personal integrity) ened with World Bank support in the context of the and quantifying staffing requirements, which were Civil Service Statute. set at slightly more than 700, of which 575 posi- tions were open. The personnel consulting firms Integrity and Anticorruption Policies evaluated candidates on the basis of their profes- Upon entering the customs service, all staff members sional backgrounds and their technical abilities as must sign a sworn declaration that they will abide by determined by tests. A minimum score was estab- NCB rules and familiarize themselves with the Code lished for each position. The consulting firms also of Ethics. The staff training curriculum includes screened candidates to eliminate those who had modules on corruption, smuggling, fraud, and the previously been found guilty of violating customs Code of Ethics. The General Law of Customs pro- regulations or committing a felony in the service of vides for civil or penal procedures for violating the NCB. Once the tests had been graded, a shortlist customs regulations and for customs felonies. The of applicants to be interviewed was provided to the Office of Ethics handles internal administrative NCB. A final evaluation was conducted by means of procedures, and the Superintendency of the Civil a structured interview to evaluate the information Service considers appeals against dismissal. provided by the consulting firms, verify that all requirements had been met, and determine the Training candidate's suitability for a specific position. The final selections were carried out by a committee of Since the customs reform was carried out, educa- the NCB's board of directors, which submitted a tion requirements have become stricter; they are Bolivia 13 now defined according to the responsibilities of goods undergo physical and document inspection, particular categories of positions. Staff training yellow channel goods are subject to document has not yet been sufficiently strengthened. This inspection, and green channel goods are not insufficiency has occurred partly because, between inspected. For all the products that enter through 1999 and 2002, the NCB concentrated on hiring the yellow and red channels, reference prices can personnel and was not in a position to provide the indicate whether there are reasonable doubts con- requisite training. To date, and in the absence of a cerning the validity of the declared value and can customs training academy, training is outsourced. form the basis for a revised valuation. Customs officials must undertake a minimum The reform seeks to automate the entire process number of hours of training each year. The of entrance, exit, and clearance. For instance, con- Strategic Training Plan anticipates that individual trol systems have been installed for the entrance of training programs will be set up and provides a goods from the Port of Arica, Chile, and for clear- time frame for their implementation. Progress in ance in any of the customs offices in the Tambo implementing these training programs will be Quemado­La Paz circuit. Before the reform, one of reflected in the individual performance evaluations the main complaints of importers and customs of staff members. Importers are also given the brokers was that the customs administration opportunity to benefit from specialized training treated them differently depending on which office intended to acquaint them with the new customs they chose for the clearance process. The NCB procedures and facilitate their trade processing used to argue that this inconsistency occurred activities. Preshipment inspection (PSI) companies because of the lack of an integrated system and the provide 320 hours per year of courses and intern- excessive turnover of customs personnel. The imple- ships for NCB officials. mentation of the new legislation and the installa- tion of the ASYCUDA system have eased import and export procedures, but some customs offices Information and Communication Technology and some inspectors are still using old procedures Before the 1999 reform, the NCB used a for both imports and exports. Thus, further main- software program called SARA, which is basically a streaming of the new, simplified procedures is register of operations. The software it currently required. uses is the Automated System for Customs Data (ASYCUDA ), which has proved to be an Valuation Issues important factor in NCB's transformation. This new system was chosen because of the low cost of At the time of the customs reform, Bolivia was the software, the technical assistance provided by using a valuation system based on the Brussels def- the United Nations Conference for Trade and inition of value. The system was administered by Development, and the possibility that Bolivia could two PSI companies: the Société Générale de Sur- benefit from the experience of other countries that veillance and the Inspectorate. Bolivia has signed use this system. With the automation of operations, the World Trade Organization's Valuation Agree- a considerable number of staff members were freed ment but, like many other developing countries, it for redeployment elsewhere in the civil service, a was granted an implementation delay of several process that has not yet been completed. years. Now that this period of delay has ended, the Based on the assumption of users' good faith, main challenge for Bolivia is to correctly imple- the new information system made it possible to ment the agreement, which specifies that customs limit physical inspections. In accordance with valuation should be based primarily on the invoice Article 79 of the new Customs Law, physical inspec- price. This effort is expected to require a building tions of merchandise are to be limited to a maxi- up of the NCB's valuation services and a move away mum of 20 percent of declarations. Shipments are from reliance on reference prices. In this context, selected randomly by means of an automated the NCB decided not to renew its contracts with procedure, which runs counter to best practices, the two PSI firms and to progressively assume the whereby goods are selected for inspection based on customs valuation function. their risk profile. Goods are designated for one of The NCB originally turned to PSI companies three channels: red, yellow, or green. Red channel because it distrusted the values declared by 14 Customs Modernization Initiatives: Case Studies importers. The PSI companies charge 1.75 percent zones include storage, splitting of goods shipments, of the free-on-board value of imports for their val- ordinary handling, retail sales, and goods finishing. uation services. Whereas some people, including In these free trade zones, the NCB certifies the IMF staff members, doubt whether the PSI compa- entry and exit of goods, vehicles, and people. This nies have contributed to raising customs revenue, control is achieved by means of customs docu- the companies assert that they have prevented a sig- ments, such as shipping manifests, commercial nificant decline in customs revenue. They assert bills, and shipping documents. The concession- that discontinuing the use of their services would aires, which the Ministry of External Trade and be risky as long as the NCB does not have the Investment and the Ministry of Finance entrust to expertise to undertake the valuation responsibili- develop and manage the free trade zones, manage ties on its own. controls inside the zones. NCB staff members may still inspect imports that have a proper PSI certificate, a step that obvi- Achievements and Deficiencies ously delays customs clearance. The NCB is of the Reform planning to phase out its reliance on PSI. Under this plan, PSI companies would gradually restrict After only two years, and notwithstanding some their intervention to those tariff categories where shortcomings, the reform of the NCB has yielded such intervention is still warranted because of the positive results, particularly in substantially reduc- revenue importance of the imports. In June 2002, ing the pervasive and long-standing corruption. It the NCB exempted 48 chapters from PSI. In Janu- has also served as a model for the reform of other ary 2003, all PSI ceased, in preparation for which institutions in the country. New procedures have the NCB had strengthened it capacities to under- been enforced gradually, in accordance with the take pre- and post-release valuation control. new Customs Law, although further progress could be made. The reform is still ongoing and continues to require support. Important challenges remain, Experience with Free Trade Zones ranging from achieving financial sustainability to The Customs Code specifies two types of free trade rendering new procedures irreversible and improv- zones: commercial and industrial. Bolivia has a ing revenue collection. total of 15 free trade zones, including 12 commer- Regarding financial sustainability, the deputy cial free trade zones, 2 industrial free trade zones, minister of taxation has proposed increasing the and 1 that is a combination of the two. amount of customs revenue that the NCB retains to Sectors with activities in the commercial free cover its expenses to a 3 percent share of total cus- zones include vehicles, food, alcoholic and nonalco- toms revenue, including, in addition to customs holic beverages, clothing, electrical appliances, duties, value added, consumption, and energy taxes home and office furniture, industrial inputs, and on imports. The NCB considers this proposition to machinery and industrial equipment. The two be insufficient, as it would not provide it with the industrial free trade zones have only one active firm resources needed to operate efficiently. Alterna- each, one of which manufactures wooden furniture tively, a charge equivalent to 1 percent of the value and the other of which manufactures circuit boards. of imports could be earmarked to finance the NCB's According to current law, goods brought into com- operations. Such a charge would not represent a mercial free trade zones can remain unprocessed for new burden on trade, as it could replace the fee for an unlimited amount of time until they are either valuation services that the PSI companies charged. imported for domestic consumption, admitted with The planned merger of the Internal Revenue exemption from customs duties, temporarily admit- Service with the NCB may be premature, because ted for re-export in the same state, temporarily the two agencies have not yet consolidated their admitted for active improvement, transferred to own reforms. Over the medium term, the govern- another free zone, or re-expedited. ment could consider putting a sole revenue author- In the industrial free trade zones, goods from ity in place, but any integration of the two agencies abroad and from elsewhere in Bolivia are approved would benefit substantially from continued efforts and then either imported for domestic consump- to modernize the NCB and to make further tion or exported abroad. The activities in those progress with the reforms at the Internal Revenue Bolivia 15 Service. In addition, efforts under way to better the reform program through the Customs Mod- coordinate activities at both agencies should yield ernization Program's follow-up committee, its tangible results before further integration could quality committee, and its contracts with the have good payoffs in terms of the effectiveness National Association of Freight Forwarders. In and efficiency of revenue administration in general. addition, the private sector has been given the Bolivia's sizable informal sector raises important opportunity to comment on drafts of forthcom- issues for the reform process for which no easy solu- ing regulations and appreciates the fact that on tion is available. Because smuggling is an important many occasions its views and suggestions have source of income and employment in many regions, been taken into account. combating smuggling would have a significant · Information technology. The substantial upgrad- short-term social cost. Therefore Article 4 of the ing of information technology has allowed the Customs Law inhibits control over the domestic NCB to introduce selectivity into the process of retail trade, thereby preventing full attainment of physical inspections and to start monitoring the original objective of imposing sanctions on customs clearance time. smuggling and hindering the NCB's attempts to contain smuggling as much as it might otherwise Outcomes have done. As a result, traders who pay all required import duties complain of unfair competition. The outcome of the reform can be judged in terms of its effect on corruption, customs clearance time, customs controls and selectivity, enforcement, and Factors Contributing to the Reform's Success revenue performance. Several factors have contributed to the success achieved by the reform process thus far. The most Corruption Private sector traders recognize the important are the following: drastic curtailment of corrupt practices as one of the main achievements of the reform. Even though · Leadership role. The role played by the NCB's corruption has not been completely eradicated, the recent director general was crucial to the imple- present situation stands in stark contrast to the sit- mentation of the key reform measures. The uation before the reform, when corruption was director general was supported by a customs rampant. board and management team that provided consistent direction and follow-through for a Customs Clearance Time The reform has resulted complex reform. in a drastic reduction in the long clearance times · Replacement of NCB personnel. The drastic over- that characterized the period before the reform and haul of NCB staff radically reduced the preva- that traders greatly resented. For them, corruption lence of corruption. However, this staff renewal meant a major increase in their costs, in some cases has had a cost in terms of services being pro- proving to be as much a trade impediment as vided by personnel who are inadequately tariffs. As table 2.1 shows, during January­July trained. Only sustained efforts to train staff can 2003, customs clearance time averaged 39 hours for overcome this aspect of an otherwise successful goods designated to the green channel (no inspec- reform component. tion),3 49 hours for the yellow channel (document · Financial support. The financial assistance that inspection), and 71 hours for the red channel international institutions have provided to (physical and document inspection). Mendoza support customs reform has been crucial to its success. · Private sector involvement. The private sector has 3. Although clearing merchandise that has been slated for the green channel appears to take 39 hours, the actual clearance time participated actively in the reform process. Its for this channel is zero. Once the system assigns green to an participation in drafting the new Customs Code import declaration, it clears it immediately with no further ado. is noteworthy, even though the final draft did Thirty-nine hours is merely the average time that the importer not retain all the private sector's recommenda- or its customs agent takes between the moment it registers the declaration in the system and the time it picks up the merchan- tions. The NCB keeps the private sector dise; it has nothing to do with the time that customs officers take informed of the achievements and progress of to authorize the goods. 16 Customs Modernization Initiatives: Case Studies TABLE 2.1 Customs Clearance Time, January­July 2003 (average hours and minutes per shipment) Clearance Process Steps Green Lane Yellow Lane Red Lane Average 1. Completion of documentation 10:15 9:41 9:11 9:43 and payment of duties 2. Request for and decision 10:46 9:04 11:02 10:17 about lane designation Subtotal 1 2 21:01 18:45 20:13 20:00 3. Customs control and 0 17:28 33:50 17:06 inspection Subtotal 1 2 3 21:01 36:15 54:04 37:07 4. Preparation for exit of goods 18:23 12:49 16:44 15:59 from customs warehouse Total 1 2 3 4 39:25 49:05 70:48 53:06 Source: Mendoza and Gutierrez 2003. and Gutierrez (2003) compiled these data using physically inspected, with the selection randomly ASYCUDA , and they detailed the delays that determined. Some traders interviewed noted that take place between the various steps of the clear- the change in customs procedures has still not ance process. yielded satisfactory results; inspections are still Clearance time is measured from the registra- excessively detailed and cumbersome, and the tion of the import declaration until the exit of the truthfulness of the declaration is all too often cast goods from the customs warehouse. Excluding the in doubt even for traders who have a consistently time required to exit the customs' warehouse after good reputation. customs inspection, the average clearance time reached some 54 hours for the red channel, 36 Enforcement To date, no precise indicators have hours for the yellow channel, and 21 hours for the been established to measure the improvements in green channel. Table 2.1 shows the average length efficiency and the reduction in illegitimate trade. of time taken for the various components of the According to secondary indicators, customs reform customs clearance process. has reduced smuggling compared with the previous These data have only recently been compiled situation. These indicators include the number of and have led the NCB's management to consider judicial cases against smugglers; the volume of con- measures to further streamline the customs clear- fiscated merchandise subject to auction; and the ance processes and to introduce targeted actions to prices of some products, such as cigarettes and alco- reduce the relatively large difference in clearance holic beverages. A reduced level of smuggling is performance between customs offices, which evident for products of mass consumption for appears to result from failures to adequately follow which controls are better, such as flour and the prescribed procedures. The failure to follow cigarettes, but lower-volume trade has found ways to procedures is in all likelihood traceable to poor enter the country illegally. As noted earlier, controls training and officers' lack of familiarity with the on the informal import trade deliberately have been simplified and streamlined procedures. lighter than would otherwise have been the case. Customs Controls and Selectivity Compliance Collection of Customs Taxes Customs perform- with customs laws and regulations is significant, ance can be measured through the evolution of and the application of the principle of good faith effective customs tax rates before and after the largely prevails. In conformity with the Customs reform. Subsequent to the customs reform in 1999, Law, only 20 percent of the merchandise is imports have declined, reflecting the economic Bolivia 17 slowdown, the reduction in investments by priva- Private users have various recommendations for tized companies, and the completion of the improving the customs service. They suggest the Bolivia­Brazil gas pipeline. However, the drop in following: imports exceeded the decline in customs revenue, resulting in an increase in effective tax rates after · improving coordination with companies that the reform (figure 2.3). This result points to the manage customs warehouses favorable effect of the reform on customs efficiency, · ensuring that changes in release procedures are notwithstanding the possible adverse effects of implemented in such a way as not to cause prob- the staff changeover on expertise and of weaknesses lems for exporters in the implementation of new regulations. The · extending the NCB's workday beyond the pres- assignment of more staff members to inspections ent eight hours when required by trade flows and more expedient enforcement of the new regu- · generalizing the practice of accepting the prin- lations might have enhanced the effects of the ciple of good faith in establishing penalties reform on revenue. levied in the case of inaccurate completion of documents · devising a solution to the problem of smuggling Users' Reactions by small traders in the context of regulations that Traders in general are satisfied with the results of allow and encourage informal sector activities. the reform, particularly with the success that has been achieved in stemming corruption and the Traders are also worried that the NCB will attempt reduction in clearance times, as well as with the to ensure adequate financing for its operations by streamlined import processes. Traders have also increasing the fees and charges for its services. They expressed their appreciation of the increased trans- note that increases would undermine their compet- parency of the clearance procedures. Nevertheless, itiveness and further benefit the informal traders at times traders criticize how the reform was man- who are already sheltered from strict application of aged or the way in which some operational steps the Customs Code. run contrary to traders' immediate interests. Exporters note that they have not benefited as Risks for Sustainability much from the reform as they had hoped, because they still encounter major problems with obtaining The sustainability of the reform will depend greatly timely drawback refunds. Some exporters claim to on continued political support, as well as on the have curtailed their operations. They largely blame financial support provided for the NCB's opera- this failure on the introduction of the computer tions. Political interference in staffing matters and software, which has not been helpful in speeding up in favor of exceptional treatment for particular traders' receipt of adequate drawback refunds. The import shipments constitutes a major problem for NCB recognizes this problem and attributes it to the sustainability of the momentum of the reform. the fiscal difficulties under which the Ministry of The reform will also require that coordination Finance operates. between the Treasury and the NCB be maintained The reforms could likely benefit from some or even improved. The anticipated withdrawal of modifications to the Customs Code, from further the PSI inspectors also means that the NCB will improvements in customs automation, and from have to strengthen its own capacities in the area of improved customs infrastructure at borders, as well customs valuation. as from personnel training. Maintaining the trading community's support Much could be gained from shifting the selec- for the reform is important. If the private sector is tion of shipments to be inspected from a random convinced that it realizes benefits from the cus- basis to one based on risk analysis. If well executed, toms reform, it will provide support against such a program could further reduce the number of backsliding and may even ensure that adequate physical inspections and feed into the postrelease budget allocations for the NCB are forthcoming. verification program, without jeopardizing the Therefore, a good strategy for communicating NCB's revenue raising responsibilities. with the private sector should be put in place. 18 Customs Modernization Initiatives: Case Studies Disseminating performance indicators, such as the recruiting staff members who were well versed or recently produced data on customs clearance time, trained in customs inspections. Also, the cost of the on a regular basis may help. In other countries, transition to the ASYCUDA system was high for making sure that all relevant data and regulations some exporters, who claim that because of it they are transparently available on the Internet has also did not receive adequate refunds under the draw- helped customs authorities maintain private sector back system. Either the system needed to be better support. Also critical to the continued progress of explained and implemented or a financing mecha- the customs reform is whether the judicial system nism should have been put in place to prevent the can be sufficiently strengthened to support the problems resulting from the Ministry of Finance enforcement of the rule of law and of the sanctions interference with the payment of tax refunds due to that are meted out against infractions of customs exporters. regulations by the trading community and by NCB Budgets tend to call for the NCB to generate staff members. excessive revenues and set the organization up for apparent failure to live up to the revenue expecta- tions included in the budget. Also, the NCB claims Lessons Learned that funding for its operations is inadequate, thus Carrying out such extensive reform as is called for jeopardizing its sustainability. This claim may have in the case of customs procedures and processes to be reviewed in light of NCB's operational requires a clear political decision from the highest efficiency and the costs of running a customs authority. In Bolivia, support came from the organization in other countries. executive branch of government and from the Large-scale reforms, such as the one imple- National Congress, which approved the Reform mented in Bolivia, may have significant social costs Law by a majority of more than two-thirds. This and benefits. Some are explicitly recognized, and endorsement provided the legal and administrative other are not addressed. Bolivia was in the throes of framework to implement the reform. The general an economic crisis at the time the reform was imple- public appreciated the benefits to be reaped from mented. Job loss among customs staff and potential the reform and was generally supportive. The fur- loss of income for traders operating in the informal ther success of the reform will depend on maintain- sector were issues. By contrast, exporters, whose jobs ing this support by the body politic as well as by the would be protected, benefited, as did consumers, stakeholders. who gained from the lower transaction costs that The reform cannot succeed without dedicated eventually translated into lower prices. The cost- and well-focused leadership, both from the director benefit analysis could have been made more explicit general and from the Customs Board and the top and explained to the public at large. Although tran- management team. The reform also cannot succeed sitional measures have somewhat protected infor- without a vision of and strategy for its implementa- mal traders, such measures should have been phased tion. In this case, the vision of administrative out and not enshrined in the Customs Code. improvements benefited from the application of lessons learned from studying the best practices of References customs reforms elsewhere and of strategies to combat corruption. IDB (Inter-American Development Bank). 2001. "Bolivia: Insti- tutionalizing Human Resources Management in Bolivia's Good management is needed to implement the Customs Administration." In Customs Best Practices in East vision and strategy. In this case, some elements Asia and Latin America. Washington, D.C. of the reform could have been managed better. Mendoza, Jaime, and José Eduardo Gutierrez. 2003. "A Method- ology to Measure the Time Required for the Release of For example, the personnel renewal would have Goods." Working Paper WP/01/03. National Customs of been more successful if priority had been given to Bolivia, La Paz. 3 Ghana Luc De Wulf Ever since the World Trade Organization meeting The Singapore TradeNet in Singapore in 1996, international trade discus- The Singapore TradeNet links multiple parties sions and negotiations have focused on trade facili- involved in external trade, including 34 govern- tation. Trade facilitation was a key agenda point at ment units, to a single point of transaction for most the World Trade Organization Summit in Cancún trade-related activities, such as clearing customs in the fall of 2003. That is just one recent illustra- and paying duties and taxes, processing export and tion of how trade negotiators see trade facilitation, import permits and certificates of origin, and col- together with policies that reduce trade barriers, as lecting trade statistics. The introduction of this a powerful way to help countries integrate better system in 1989 drastically simplified trade transac- into the world economy and thereby enhance their tions (King and Konsunski 1995; United Nations growth prospects. Economic and Social Commission for Asia and the Singapore's achievements in speeding up trade Pacific 2003). TradeNet's main achievements since transactions and linking most members of the 1989 include the following: trading community by means of a single data network, known as TradeNet, have attracted the attention of a number of observers. Mauritius has · The processing time for cargo clearance was replicated Singapore's system, and Ghana has reduced from two to four days to only minutes. recently moved toward introducing key features of · The number of documents required for cargo this approach to its own trading community. This clearance fell from a range of 3 to 35, depending chapter briefly describes the origins and achieve- on the transaction, to 1. ments of Singapore's TradeNet and what other · The number of trade transactions processed per countries that want to facilitate trade transactions day rose from 10,000 to 30,000. might learn from Singapore's experience. The · The freight forwarders estimate that their costs chapter then turns to Ghana's experience to date, of handling trade documentation have fallen by including the results achieved and what Ghana still 20 to 35 percent. needs to do to fully capture the benefits that · The customs service receives customs duties TradeNet has to offer. payments much faster than before. 19 20 Customs Modernization Initiatives: Case Studies · The compilation of trade statistics has improved proposed TradeNet system and prepared initial substantially, benefiting both the trading com- designs. This step permitted the launching of munity and the national authorities responsible a competitive bidding process for a systems for trade policy and economic surveillance. integrator. IBM won the contract to develop an electronic data interchange system that would TradeNet was not created overnight. The idea orig- allow computer-to-computer exchange of business inated as early as 1979, when a high-level govern- documents among connected members of the ment committee recommended that Singapore Singapore trading community. should make maximum use of information and The focus was on accuracy and speed. The sys- communication technology (ICT) to overcome the tem was to be designed so that a trader would sub- handicap presented by its small size. A first step in mit one document to TradeNet, which would then that direction was to expand the skill base through forward it to all pertinent agencies and partners. accelerated training in ICT and to computerize Agencies that needed to make decisions would then government agencies. The government chose to be able to do so promptly to permit the trade trans- focus on the foreign trade sector as a priority area action to proceed smoothly. where results could be achieved quickly, par- The system became operational as of January 1, ticularly in speeding up the clearance time for 1989, and traders were invited to adopt its proto- exports and imports. The objective was to enhance cols on a voluntary basis. By the end of the year the competitiveness of Singapore's economy, an TradeNet was being used for 45 percent of all air issue that became more urgent in 1985, when and sea shipments, a share that rose to 95 per- Singapore experienced its first recession. cent by mid-1991, when the use of TradeNet had The authorities made the Singapore Trade become mandatory, two years earlier than origi- Development Board (officially renamed Interna- nally planned. Extensive training and continued tional Enterprise Singapore in April 2002) respon- high-level political support sustained the adoption sible for coordinating the aims, concerns, and process for traders, particularly small traders. activities of the trading community. The board Progress in linking all members of the trading reviewed trade documentation and proposed community benefited greatly from the fact that reducing the multiple trade document require- many of them had already acquired substantial ments to a single online form that would serve computer knowledge and were relying on sophisti- nearly all the country's trade documentation needs. cated computer equipment for doing their work. The board viewed this task as crucial, because This factor was in part an outcome of Singapore's automating the multiplicity of forms and data well-implemented government strategy to foster requirements that prevailed at the time was virtu- the use of ICT. Publicizing TradeNet's benefits early ally impossible. The challenge of coordinating the on contributed to overcoming initial reluctance to different agencies involved and their data require- participate among the various government agencies ments into a set of coherent and simplified proce- and the trading community. dures that could be automated was in many cases more political than technical. Background in Ghana In December 1986, the initiative received high- level backing when Trade Minister B. G. Lee, cur- In the 1990s, Ghana undertook fundamental trade rently deputy prime minister, publicly endorsed policy reforms, a move that bilateral and multi- the initiative and gave the TradeNet project full lateral donors strongly supported. The United political backing. Lee announced that TradeNet States provided support through two trade and would be launched in January 1989. In 1990, the investment projects, and the World Bank and Inter- government created Singapore Network Services national Monetary Fund provided substantial (whose name was changed to CrimsonLogic in adjustment lending as well as support for the devel- 2002) to own and operate the TradeNet system, opment of private enterprises and exports. This with the Singapore Trade Development Board, the reform drive benefited from the strong personal port and civil aviation authorities, and the interna- support of the minister of trade and industry, in tional airport as stakeholders. Singapore Network line with the government's vision of a Ghana that Services carried out an intensive review of the was open to the rest of the world and that could Ghana 21 attract foreign direct investment and promote Mauritius, New Zealand, and Singapore, countries business competitiveness. The vision implied an with which Ghana enjoyed excellent relations. open economy, low tariffs, and well-performing These missions included representatives of the pri- institutions. The reforms therefore included reduc- vate sector and of industry, the minister of trade, ing and then eliminating import quotas and export the chief executives of the Ghana Investment Pro- taxes, lowering the level of import tariffs, and motion Center, and members of the Ghana Export reducing the number of applicable tariff rates. Promotion Council. Those involved eventually Nontraditional exports were to be promoted so as became a broader stakeholder group of public and to diversify the economy and create much-needed private sector representatives. The delegations jobs. found the visits to Mauritius and Singapore par- By 1998, Ghana had implemented many of the ticularly fascinating. They saw in the TradeNet policy reforms, but foreign direct investment was approach a system that provided the dual benefits still lagging. A number of reviews by the World of speeding up trade transactions without jeopard- Bank, the International Monetary Fund, the For- izing government revenues while streamlining eign Investment Advisory Service, and the Multilat- trade transaction processes by bringing the various eral Investment Guarantee Agency, among others, members of the trading community into an inte- suggested that for the policy reforms to have the grated network. desired impact on trade, foreign direct investment, Under the leadership of the Ministry of Trade and growth they had to be complemented by the and Industry (MOTI) the delegates identified the lifting of a number of structural investment con- key elements of the approach that Ghana intended straints. In particular, the government needed to to pursue to rapidly achieve a major breakthrough improve the operational efficiency of frontline in trade facilitation. The scheme's design was heav- agencies at facilitating investment flows. Such ily influenced by Singapore's TradeNet and by the frontline agencies included the customs service, the desire to rely on strong outside financial and tech- immigration authorities, the port authorities, and nical support. Having seen the Singaporean model the Investment Promotion Council. The govern- and its Mauritian adaptation firsthand, the dele- ment took those suggestions to heart and decided gates were convinced that a combination of strong to launch the Ghana Gateway Project, for which it political support and excellent technical imple- solicited support from the World Bank. Ghanaian menting capabilities would be required to attain civil society, as well as the foreign donor commu- the objective of facilitating trade and investment nity, broadly shared this vision of Ghana as the while protecting, if not increasing, budget revenue. world's gateway to West Africa. The government The implementation of such a system, along with envisaged that the project not only would enhance other policy measures, in Mauritius propelled the the competitiveness of domestic business entities country into becoming a leading textile and gar- but would also make Ghana the most competitive ment exporter. With this example in mind, MOTI investment destination in West Africa, compared took the lead in these initiatives with a view to with other destinations such as Côte d'Ivoire, making trade the engine of future growth. Nigeria, or Senegal. The Ministry of Finance, which has ministerial Although Ghana was more competitive in terms oversight responsibility for the Customs, Excise, of costs than Nigeria as a transit corridor for the and Preventive Services (CEPS), supported the ini- Sahelian countries, its cost parity was about the tiative. It was attracted to the project mainly same as that of Côte d'Ivoire, but Ghana lacked because of the possibilities the project offered for the Ivorian infrastructure backbone. Thus Ghana strengthening customs services and increasing saw the introduction of an automated system for budget revenues. Even though CEPS had to under- customs clearance, along with other reforms initi- take much of the initial implementation, it was not ated for the frontline agencies, as steps that would asked to manage the project because, at that time, bring Ghana up to Côte d'Ivoire's level, if not actu- CEPS did not have the same vision with respect to ally giving it a competitive edge over Côte d'Ivoire. trade facilitation or the required implementation In search of new ideas and to investigate trade capacity. In addition, the government saw trade facilitation and promotion programs introduced facilitation as involving more than just customs elsewhere, official delegations visited Malaysia, operations. 22 Customs Modernization Initiatives: Case Studies The major elements of the proposed strategy the Ghana Shippers Council (10 percent), and two were as follows. A committee, the Inter-Ministerial local banks (5 percent each) as its shareholders. Gateway Oversight Committee, with its own secre- SGS had operated the Ghana preshipment service tariat, was to oversee the various components of until 1988, had expert knowledge of the country, this ambitious initiative. A capable public servant and wanted to expand its portfolio of services to was chosen to head the secretariat. After the com- the government. By participating with a majority mittee reviewed proposals from various software stake, SGS strove to meet its accountability obliga- and systems integrators, the government invited tions by having the necessary operational authority. the Singaporean firm that managed TradeNet, In November 2000, GCNet was incorporated with CrimsonLogic, to provide the electronic data inter- equity of US$5.3 million (total investments to date change system that would become the core of are now estimated at US$7 million). CEPS's contri- Ghana's version of TradeNet. Although Crimson- bution consisted of in-kind equity (namely, com- Logic had successfully transferred the technology puter equipment that it had procured with World to Mauritius and had convinced the Gateway team Bank funding under the Gateway Project). The of its ability to do the same in Ghana, it was not other equity partners contributed cash. prepared to commit investment funds directly for GCNet operates under a service contract with the development of the electronic data interchange, MOTI. The contract specifies that GCNet must as the government required. This undertaking was install the electronic data interchange and customs assumed by the Société Générale de Surveillance management systems. The contract does not (SGS), which had a strategic partnership with include any clear performance indicators or targets, CrimsonLogic as an investor and lead technical only the requirement to report periodically on the partner. SGS also had extensive experience in pro- progress of the project and its results. viding trade assurance services for Ghana. Thus Ghana adopted a customs management Rollout of the Vision system that had been designed for Mauritius and interfaced smoothly with its version of TradeNet. Implementing the vision of efficiently connecting As part of the arrangements, a company was to be all members of the trading community involved created that would be charged with implementing both simplifying the existing customs procedures both Ghana's version of TradeNet and the Ghana and building the institutional and infrastructural Customs Management System (GCMS) for CEPS capacity to manage the new procedures. by means of what virtually amounted to a build- own-operate-transfer contract. The Situation before Reform With a view to ensuring broad stakeholder com- mitment to the project, various private and public The GCNet vision was to transform a spaghetti-like entities were invited to participate in the equity of network that had connected the various agencies the company that would manage TradeNet and and entities involved in the trade transaction help computerize customs operations. In particu- process into a single network of trading commu- lar, the government approached communications nity members. Figure 3.1 shows the various com- infrastructure companies, several banks, chambers munication links that had existed in the years of commerce and industry, and associations of ship before reform. Each agency required a unique set of owners and freight forwarders. However, most documents that had to be submitted only to it and declined because of a lack of either vision or that it did not share with other members of the capital. Since the rollout of the system and as its trading community, even though those other mem- effectiveness and financial viability have become bers may have required similar documents. Thus, a apparent, most banks and some stakeholders, such great deal of paperwork was required, and the tran- as the Ghana Institute of Freight Forwarders, have scription of multiple copies was error prone. sought to subscribe to the company's equity. All this effort was time-consuming and costly. The company, known as the Ghana Community Various studies reported that clearing a con- Network (GCNet), was created as a joint venture signment involved 23 steps (see the appendix for company with SGS (60 percent), CEPS (20 percent), more details). These steps included submitting Ghana 23 FIGURE 3.1 The Pre-Reform Trade Transaction System Ministry of Finance Destination inspection CEPS services African Ground Ghana Ports and Operations Harbors Authority Freight Banks stations Ghana Shipping Shipping Council MOTI Traders Source: GCNet. an import declaration form, inspection reports, on diskettes and compiling them into different sets and a certificate or permit from the relevant regula- of statistical tables (kind of trade, countries of ori- tory bodies--for example, the Food and Drug gin and destination, and so on). The transmittal Board, the Ministry of Interior, the Free Zone and manipulation of the information needed to Board, and the Ghana Chamber of Commerce and produce the desired statistical data again took a Industry. In meeting these diverse agency require- great deal of time, was not particularly accurate, ments, trade operators were obliged to criss-cross and was produced only after long delays. from one agency to another to chase documents This situation created many opportunities for being processed, because the agencies were neither soliciting and providing "facilitation money" to networked to communicate with each other nor speed up transactions, to be permitted to jump the able to access to a common database. line, or simply to adjust a customs declaration to For instance, the carrier had to submit 13 copies suit the particular objectives of those involved. The of the shipping manifest to CEPS. CEPS then tran- overall lack of transparency left a weak audit trail, scribed this information into a different format and and in most instances left no trail at all. All those used it as a basis for checking the manifest to ensure problems impeded the competitiveness of the that all cargo that the carrier brought in had been Ghanaian economy. declared. This process was time-consuming and Figure 3.2 portrays a vision of a totally intercon- error prone and did not provide a transparent nected trading community, one that is similar to method for auditing whether all cargo had indeed Singapore's TradeNet and constitutes the objective been declared. The Statistical Service compiled sta- of GCNet. The idea is that the trader submits tistics by collecting all the documents on paper or one document online to GCNet that contains the 24 Customs Modernization Initiatives: Case Studies FIGURE 3.2 TradeNet Concepts Ministry of Finance Destination inspection Customs services African Ground Ghana Ports and Operations Harbors Authority Freight Banks stations Freight Shipping forwarders lines MOTI Traders Source: GCNet. information all pertinent agencies require either to structure and organization of CEPS, its ICT, and its fulfill their regulatory functions or to provide the human resources management structure and tools necessary permits. GCNet then sends the informa- were inappropriate for meeting the demands of tion to the relevant agencies, which respond imme- modern, effective, and efficient customs opera- diately either with requests for further information tions. Second, the system for data capture was or with the necessary permits. The objective of extremely labor intensive and slow. Numerous integrating all traders into a community of this manual records were kept, and the software in kind is to reduce traders' transaction costs and to place, the Automated System for Customs Data make the government's regulatory operations more (ASYCUDA), was grossly underused and poorly effective and efficient. maintained, thereby offering little value added. As a result, customs operations were inconsistent among the different clearance stations; inspection The Efficiency of Customs Transactions companies were called in to assist in valuation During the 1990s, customs operations were sub- work; transit trade was hindered by the require- jected to a number of reviews sponsored by the ment that vehicles involved in transit trade be World Bank, in the context of preparing the accompanied by customs staff during the transit Gateway Project. The reviews noted the commit- voyage to ascertain that they had left the country; ment of customs service officers and their general and revenue leakages resulted from weaknesses at acceptance of an obligation to meet revenue tar- every point of the clearance process, from manifest gets. The reviews also judged the legal framework declaration, to warehouse control, to payment for CEPS operations to be satisfactory, albeit of duties. requiring some modifications. However, the Various observers frequently made proposals to reviews also noted several weaknesses. First, the strengthen ASYCUDA, but no improvements that Ghana 25 had lasting results were undertaken, largely because transition period before the new cabinet members of the absence of a real champion for change, reviewed policy decisions made by the previous the lack of budgetary resources, and the inade- government for due diligence purposes, seriously quate support provided by the developers of affected the implementation of the Gateway the software. CEPS staff members were also some- Project. It prevented the secretariat from making what complacent, because the situation let them operational decisions, including the procurement of benefit in terms of significant payments of facilita- the computer hardware that was to be CEPS's con- tion money. Clearance times were extremely slow, tribution to GCNet. In addition, the appointment of with much of the blame falling on slow operations many new ministers meant that GCNet did not get at CEPS, even though other factors also accounted the political backing that had been expected at its for significant clearance delays. No accurate creation, when a powerful MOTI stood behind the estimates are available of the time importers had project and envisaged integrating the various trad- to wait between declaration and clearance, but ing partners into a single trading community. importers note that the fastest clearance time at the At CEPS, the leadership was initially not fully seaports was four days, while the average clearance informed about the reforms that the introduction time was several weeks. Clearance at the airports of the new customs management system required, was faster than at the seaports. particularly the documentation and process simpli- As installed and used in Ghana, ASYCUDA was fication it required. As a result of this information unable to turn a declaration around in fewer than gap and the uncertain political support, CEPS took 24 hours. Hence, a drastic upgrade of customs 14 months to provide GCNet with its capital con- operations was required if the government was to tribution. It also took until July 2002 for the legisla- attain its trade facilitation aims. To this end, Ghana tion to be modified to permit the automation adopted a phased program that would start with of customs operations. However, once the new CEPS simplifying its trade procedures and acquir- administration had completed its due diligence on ing a modern customs management system. This the relevance of the project and the operational system would consist of the various modules modalities to be followed, it supported the project required to manage imports, exports, warehousing, as a key feature of its revenue mobilization aims and the transit trade--that is, all relevant customs and its role as a facilitator for trade operators. operations from the declaration of cargo to the GCNet's service contract with MOTI contained payment of duties and clearance. The system would a commitment to help implement the electronic need to be as modern as possible and be modeled data interchange system and the GCMS at CEPS. In on systems that were fully operational elsewhere. return, it was to be paid a fee set at 0.4 percent of Once the new software system was entrenched, a the transacted value for each declaration processed fully fledged customs modernization program by TradeNet. In other words, GCNet was to be the could be initiated. This strategy was risky, as the systems integrator and needed to select the various new customs management system could run into systems that would make up the overall package. the same problems that had caused ASYCUDA With respect to the data interchange system, the to fail. Special safeguards were therefore required to choice was relatively simple, as the initial inspira- reduce this risk. Entrusting GCNet to support tion had come from seeing the CrimsonLogic plat- CEPS with the introduction of the system was form operating in Singapore and its subsequent intended to address this risk. modification for Mauritius Network Services. As a result, GCNet secured the services and support of both CrimsonLogic and Mauritius Network The Rollout of GCNet Services--itself a joint venture company between The rollout of GCNet was plagued with problems. the Mauritian telecommunications provider, the The timing of GCNet's incorporation, November Mauritian government, and CrimsonLogic--to roll 2000, was only one month before the December out its service. 2000 national elections. The opposition won GCNet had a hands-on approach during this the elections and did not install a new cabinet whole process, even when political commitment until March 2001. This power vacuum, and the was lackluster because of the political transition. In 26 Customs Modernization Initiatives: Case Studies addition, GCNet provided assistance to CEPS not communications hiccups, unlike the normal, unre- only for training its staff, which was included in liable communications networks. In the absence of the service agreement with MOTI, and installing a well-articulated national communications strat- the electronic data interchange technology, but also egy, this new communications network stands in for some infrastructure and maintenance expenses isolation without the necessary interface with other for which CEPS claimed not to have the budgetary agencies. resources. Indeed, GCNet stepped in wherever GCNet has worked closely with CEPS to reengi- necessary to ensure that TradeNet and the GCMS neer CEPS's operational processes, including the would operate smoothly, which included providing preparation of new customs procedures codes that air conditioning for some offices, ensuring that meet standards set by the World Customs Organi- backup generators for the GCMS were provided zation. The Ghana customs tariff book, which with diesel fuel, and making sure that maintenance provides for only four rates--0, 5, 10, and 20 contracts were paid up. GCNet also provided assis- percent--has also been reviewed extensively and tance in setting up a national customs selectivity updated to ensure that it meets standards set by team to coordinate and implement risk assessment the harmonized system of the World Customs and in training CEPS staff to undertake postclear- Organization. ance audits. Throughout the development of its systems, GCNet has sensitized all key stakeholders--for example, ship owners, clearing agents, importers, GCNet's Operations exporters, and banks--and has engaged them in GCNet operates a customized electronic system for interactive consultations to ensure that the systems processing trade and customs documents and for address their concerns and meet their expectations. recording the results of this processing and valida- In addition, GCNet has embarked on an extensive tion and the related duty and tax payments. It does training program for CEPS staff and declarants to so using two systems: the Ghana TradeNet and the ensure that all system users are adequately trained GCMS. Through the Ghana TradeNet's electronic in those aspects required for their trade and cus- data interchange platform, users can interface with toms transactions. GCNet has also prepared user the GCMS and can transmit messages to the vari- guidelines and posters, and explanations of proce- ous parties connected to the system and receive dures are available on CD-ROM and on a Web site. replies electronically. These parties include key Copies of the various documents are available at public sector agencies (such as MOTI, the Ministry GCNet's offices for registered declarants. of Finance, the Bank of Ghana, and CEPS), as well GCNet rolled out the TradeNet and GCMS sys- as entities in the private sector (for instance, the tems gradually. It began by conducting tests at shipping lines, African Ground Operations, freight Kotoka International Airport. On completion of forwarders, and banks). TradeNet thus provides a the tests, full rollout started. The systems were medium for exchanging trade information between introduced to small groups of traders at a time so businesses and government agencies, thereby mak- that the learning process was spread over a number ing GCNet a business-to-government company. of months, thereby permitting CEPS's employees to To enable users to access its services, GCNet has acquaint themselves with the new procedures and established its own private communications net- traders and their representatives to be trained work. This network consists of a fiber optic broad- in using the system. The first electronic data band link between the GCNet office and CEPS. The interchange declarations were lodged at Kotoka link is complemented by radio links that cover International Airport in October 2002 for import CEPS's collection stations, plus dedicated leased transactions. The transition was completed by lines and points of presence in locations outside December 2002. From March to June 2003, the sys- Accra. This network links CEPS offices throughout tem was implemented at Tema Harbor, also for Ghana and, in so doing, facilitates easy access to the import declarations. In November 2003, the system system by its users. The development of this pri- was introduced at the port of Takoradi and also vate network also ensures that the system will started recording exports. Other clearance stations always be up and running and will not suffer any will be connected in the coming months. Ghana 27 A Typical Import Transaction the process is not connected to GCNet. Banks use import declaration forms for payment pur- The following description of the steps involved in poses and the destination inspection services the import process illustrates the advantages of the (DIS) companies use them merely as a notice of new procedures (see the appendix for an outline intent to import the goods listed on the form. of the procedures that prevailed before the launch of · Step 2. The importer requests a destination GCNet). It also presents some of the problems that inspection form from one of the four DIS com- still need to be tackled before Ghana can fully mas- panies engaged by MOTI. Only two of these DIS ter the challenges of trade facilitation. Of course, companies are members of the International there are a number of special import regimes and Federation of Inspection Agencies, which certi- transit and export transactions, for which GCMS fies and regulates the operations of inspection foresees specialized modules. Figure 3.3 provides companies. At times, those DIS companies that a schematic view of the full customs clearance are members of the federation draw on resources process, which can be divided into eight steps. from the federation's members abroad. One DIS · Step 1. The importer obtains an import declara- agency relies heavily on scanning to examine tion form from MOTI at a cost of C50,000 containerized cargo. Scanning equipment is on (recently increased from C5,000). This aspect of order for the other DIS companies. The DIS FIGURE 3.3 Simplified Import Procedures 2a Destination Electronic transmission inspection services Paper transmission 2b Declarant Compliance at 6 Physical 3d 3a CEPS (yellow/red) examination, CEPS 1 3c GCNET GCMS Buys import 3b declaration form Document verification at CEPS (green) 7 Waybill 4a 4b 8 Bank 5a 5b Release from port Steps 1. Declarant buys import declaration form at MOTI 2a. Declarant submits import declaration form, invoice, and bill of lading to destination inspection services company 2b. Destination inspection services issues report 3. Declarant electronically validates customs declaration through Ghana Customs Management System (GCMS) and obtains response, consignment manifest is sent electronically from shipping agent to CEPS for electronic checking 4a. Declarant proceeds to bank and settles all duties and taxes 4b. Bank confirms payment electronically to GCMS 5. Declarant proceeds either to customs document verification (green channel) or to customs compliance (yellow or red channels) 6. Compliance routes declaration electronically to examination officer who conducts examination (no examination on green channel) 7. Officer releases consignment electronically 8. Waybill is issued and consignment is physically cleared 28 Customs Modernization Initiatives: Case Studies companies charge importers 1 percent of the clearance offices. The bank electronically noti- cost, insurance, and freight value of the shipment fies the GCMS that the taxes and duties for that for the DIS certificate. The companies provide particular declaration have been paid. the trader and CEPS with a final classification · Step 5. The declarant provides the supporting and valuation report on paper.1 documentation (printed declaration, invoice, · Step 3. The declarant (importer or shipping certificate of origin, DIS certificate, and so on) agent) prepares an electronic customs declara- to either the document verification section or tion on a computer that has GCNet-installed the CEPS compliance office at the clearance front-end software and submits it to TradeNet, point, depending on the risk profile. The risk which is located at GCNet's headquarters. The analysis module of GCMS determines whether declaration provides data required for that the cargo is to be cleared without further ado particular category of import. It also provides (green channel), will be subjected to document customs data, such as valuation, weight, Harmo- verification (yellow channel), or requires physi- nized Commodity Description and Coding Sys- cal inspection (red channel). tem classification, origin of the cargo, and taxes · Step 6. The GCMS randomly assigns the inspec- and other fees due, as well as data required by the tor who will do the physical inspection. The Ghana Standards Board and any other agency. GCMS informs the freight station of the inspec- The declaration is electronically forwarded to tion requirements. CEPS's headquarters. The GCMS validates the · Step 7. The GCMS issues the clearance statement declaration, a process that takes only a few min- and notes whether the declarant must make utes, and electronically notifies the declarant of additional payments and then releases the con- validation or sends it back through GCNet to signment electronically to the port authorities the declarant to provide further information and to the declarant. The port authorities issue or to resolve inconsistencies. In the meantime, the waybill (manually for the moment, but plans upon arrival of the imported goods, the are being finalized for electronic issuance by carrier's manifest is transmitted electronically to mid-2004). TradeNet, with copies to CEPS and to the Ghana · Step 8. The goods leave the port. Port and Harbor Authority. Thus CEPS is able to verify whether all cargo included in the manifest In addition to these steps for customs clearance, the has been declared within a reasonable period of declarant must also complete cargo handling and time and to remind the owners of cargo that they warehouse procedures and comply with controls must make a declaration or forfeit the goods. pertaining to such regulatory agencies as the Ghana · Step 4. The declarant prints the validated decla- Standards Board and the Food and Drugs Board. ration and pays the required taxes and duties at Step 3 through the first part of step 7 are managed one of the two banks connected to TradeNet, electronically. branches of which are located at CEPS's Outcomes 1. The author did not consult directly with the DIS companies. Although it is too soon to make a full assessment of However, from discussions with a MOTI representative, he the results, some preliminary observations can cer- learned that the largest DIS company claimed that in September tainly be made. 2003 it had increased the declared value of imports by about 75 percent. For 62 percent of invoices, the company changed the Harmonized Commodity Description and Coding System clas- Revenues Are Up sification, and for 65 percent of invoices, it increased the values without changing the declared classification. The company At Kotoka International Airport, revenues for July claimed that in September it realized additional payments of US$5.4 million. None of the importers had to pay fines. As is the to September 2003 were nearly 40 percent higher case in many other countries where DIS or similar companies than during the same period in 2002. Five percent- operate, their intervention is heavily criticized by importers and age points of this was due to the depreciation of the by customs officials, who claim that the companies lack integrity and that their processes are time-consuming. The author did not cedi against the U.S. dollar during that period. The examine the operations of the DIS companies in detail. increase does not appear to have been caused by Ghana 29 an increase in the volume of imports, because · The customs declarations are provided to CEPS estimates indicate that import volumes have stag- electronically. nated year to year. With no real change in the activ- · The banks inform CEPS electronically of pay- ities of the DIS companies during this period, ments made. GCNet operations are conservatively estimated to · The Statistical Service is connected to receive all have added 30 percent to the customs revenues relevant trade statistics from CEPS. Unfortu- from airport traffic. nately, the Statistical Service has not yet taken advantage of this opportunity. · The Ministry of Finance can download all trade Clearance Times Are Down information, as well as all transactions by tax- No firm statistics are available about clearance payers identified by a tax identification number. times before the introduction of GCNet, but The Ministry of Finance has not yet taken traders unanimously assert that improvements advantage of this connection, in part because its with respect to the time taken to clear goods both own management system is still based on man- at Kotoka International Airport and at Tema ual procedures. Harbor are major. · The Value Added Tax Service accesses informa- With respect to Kotoka International Airport, tion on imports made by firms that must pay GCNet notes that average clearance times have value added taxes. dropped from three days to four hours (18 percent of goods clear in fewer than two hours and 75 per- Some Have Won and Some Have Lost cent clear the same day). Customs document review, which in the past averaged 24 hours, now The clear winners of the GCNet initiative have averages 10 minutes. Bank payment, which used to been the traders, who benefit from faster clearance average a few hours, now averages 10 minutes. times through customs and a reduced need to pro- With respect to Tema Port, GCNet claims that vide facilitation money. Representatives of shipping clearance times have been reduced from a week, on owners and agents, as well as freight forwarders, average, to a few days. Customs document review were vocal in their support of GCNet, because they averages 15 minutes instead of 24 hours (14 percent now have to produce less documentation and of goods clear the same day and 30 percent clear in because vessel turnaround time has been reduced. 24 to 48 hours). Bank payments average 10 min- The Treasury also benefits from higher revenues utes, compared with a few hours in the past. and from faster access to tax payments. The losers are those CEPS personnel who had previously benefited from substantial facilitation Community Networks Are Being Initiated payments that traders had offered to accelerate A start has been made at connecting various mem- cargo clearance, to close their eyes when cargo left bers of the trading community, with the result that port premises without a declaration, or to accept trade transactions are easier for traders and that declarations that included underinvoicing and erro- government and regulatory agencies are beginning neous product classifications so as to lower the to have access to a centralized data source. Much amount of duties due. Some CEPS personnel are work still needs to be done, but the following mem- clearly unhappy with the current situation, afraid bers of the trading community have already been that any further modernization of CEPS will further connected: undermine their entrenched positions and involve drastic changes with respect to recruitment and · The shipping lines provide electronic manifests training requirements. Such personnel invariably to GCNet, which transfers them to the Ghana tend to frustrate traders with a view to extracting Ports and Harbors Authority. payments or delaying the process. Others have · The Ghana Shippers Council obtains all infor- tested the system to try to find any loopholes that mation about the movement of ships and they might be able to exploit. Decisive action against airplanes and, since early 2004, has stopped such officers, albeit not as severe as might have been demanding paper documentation from shippers. expected, serves as a deterrent against such actions. 30 Customs Modernization Initiatives: Case Studies Lessons Learned and the various trade-related agencies were fully inte- the Road Ahead grated into the network. In terms of necessary actions to complete the A number of valuable lessons have been learned trade facilitation project, customs reform must during the course of implementing the new system. now be tackled seriously. So far the reforms at First, partnerships between the private and public CEPS have been limited to introducing the GCMS sectors can work. GCNet anchored the reforms and its associated process simplification; however, and ensured the continuity of and a focus on the CEPS is still an outmoded and inefficient organiza- reform objectives during a period of political tran- tion. Its organizational structure suffers from seri- sition, when no other local organization had the ous shortcomings that will prevent it from fully wherewithal to effect such a drastic transformation internalizing the ongoing reforms and from taking of trade and customs procedures. If CEPS or the advantage of the possibilities they offer. Consider Gateway secretariat had been in charge of imple- the following issues: menting the trade facilitation project, it probably would have made little progress to date. The build- own-operate-transfer concept can be extremely · CEPS has limited specialized capacity in cus- effective when local institutions are relatively weak, toms valuation to provide support to the officers especially in relation to trade facilitation. It has in charge of document compliance checks. Most been tried in only a few countries, including Mauri- customs organizations have a valuation depart- tius, Singapore, and Tunisia, where its community- ment or unit staffed by specialists in various owned concept was favorably received. Further commodity categories. CEPS should gradually replication is worth looking into when the circum- take over such work from the DIS companies or stances warrant. could rely much more selectively--and more Second, making use of ICT can yield rapid economically--on valuation support from the results. It took only from early 2001 to mid-2003 to DIS companies. roll out TradeNet and GCMS in ports that account · The Ministry of Finance should take over the for more than 90 percent of all Ghana's trade. Clear- supervision of the DIS companies' activities ance times and revenue performance exceeded from MOTI. expectations during this short period of time. · CEPS does not have a team that can draw opera- Third, hands-on technical support to customs tional conclusions from the plentiful data that operations can speed them up. Whereas the cus- have become available to support modern man- toms service had struggled for years to upgrade its agement techniques. information system and make the best use of it, the · Modern risk analysis is absent. In October 2003, reform required an outside push and hands-on nearly 99 percent of all cargo arriving at Tema implementation support to force the process sim- Port and 88 percent of that arriving at Kotoka plification that was required and the adoption of International Airport were physically inspected. advanced ICT processes. This high proportion is only partly explained by Finally, top-level support for a project is the rigid requirement of MOTI and the Ghana extremely helpful in launching and sustaining it. Standards Board to inspect a large share of total Initially the project benefited from top-level MOTI imports, by the difficulties presented by the support that was perceived as bringing with it the imports channeled by informal traders, and by support of the whole government. When that sup- the shipments made by occasional importers that port wavered after the December 2000 elections, have no track record with the customs authori- the project floundered for a year and the Gateway ties. Proper risk analysis could drastically reduce secretariat could provide no real support. It was those numbers, if only by permitting large during that time that GCNet had to wait for more traders with recognized track records to auto- than 14 months to obtain approval from the matically pass through the green channel with a National Communications Authority to use a possibility for later audits. Some 10 percent of secure radio frequency as part of its communica- traders probably account for 50 to 70 percent of tions network. Also, the absence of dedicated sup- all imports; therefore, the introduction of a "gold port for the project made it difficult to ensure that card scheme"--that is, automatic green channel Ghana 31 routing and exemption from DIS--would drasti- data that they require for preparing various statisti- cally reduce trade impediments. cal trade reports. · Staff training and recruitment will need to be In the near future, it should also be possible to revised substantially.2 In the future, customs connect MOTI, with respect to the issuance of techniques will depend increasingly on fast clear- import declarations if they are still required in the ance with minimal physical and document future, as well as the documentation of the DIS inspection, requiring that teams perform effi- companies that operate under MOTI contracts. cient postclearance inspections. Such a shift Early connection of the Food and Drug Board and implies that staff will be reassigned from physical the Ghana Standards Board would also benefit inspection in the ports or airport to postclear- trade greatly by permitting greater streamlining of ance monitoring and audits, assignments that inspections. Similarly, connections could be made require substantially different skills. Staff with- by a whole range of agencies, such as the Ghana out the requisite skills will no longer be needed.3 Free Zone Board, the Investment Promotion Center, the Driver and Vehicle Licensing Authority, More members of the trading community should and the Minerals Commission, which have key be part of the GCNet community. Obviously, over- roles to play in processing trade documents and coming the lack of computer literacy at some clearing cargo. organizations will take time and require persua- Clearance time is not only a function of CEPS's sion, as will eliminating the latent rivalry between operations. Other agencies also need to carry their them. High-level visible support will help. weight. Now that CEPS's operations are faster and In the immediate future, the government should less costly than in the past, efforts should be made support ongoing plans that will allow the Ghana to reduce the overall clearance time by improving Ports and Harbors Authority to issue waybills elec- the operations of the DIS companies (which aver- tronically. In addition, the Statistics Service should age one week or more), as well as those of the activate its connection and start downloading trade ports.4 Some observers suggest that the drastic statistics. The Value Added Tax Service and the reduction in the time CEPS takes to clear goods Internal Revenue Service, which are already con- has overwhelmed and exacerbated inefficiencies nected, should prepare themselves to use the data elsewhere in the transport logistics chain. In any provided by the GCMS, for which a streamlining of event, assessing the improvements in clearance tax identification numbers will be needed. Such times resulting from improvements in customs data could be extremely useful for their own audit procedures has had a major result, such that blame work, particularly when full-year data become for the delays can now be laid where it belongs. available. The Bank of Ghana and MOTI could do That may be a major side benefit of carefully meas- likewise for the online, real-time collation of trade uring clearance times and making them public, in that such publicity may energize or shame other responsible parties into improving their own performance. 2. The training commitment that the DIS companies have recently signed with MOTI does not appear to be integrated with CEPS's business plan. Similar training commitments in other countries have never been able to replace a dedicated 4. The Ghana Ports and Harbors Authority is currently commis- training effort managed by the customs authorities themselves. sioning a new management tool that could provide substantial 3. Some CEPS staff are functionally illiterate and incapable of support for improved port operations. This system should be contributing to running a modern and efficient customs service. integrated with GCNet. 32 Customs Modernization Initiatives: Case Studies Appendix 3.A.: Import Procedures 10. CEPS reviews the declaration. Before GCNet 11. CEPS enters the declaration into ASYCUDA, which takes a minimum of 24 hours. Before TradeNet and the Ghana Customs Man- 12. CEPS prints the ASYCUDA form and confirms agement System were rolled out, all formalities or alters the tax liability. required for an import transaction to take place 13. CEPS numbers the declaration and affixes a were reviewed in detail. After this review, the proce- date and hologram seal. dures were substantially simplified to take advan- 14. CEPS detaches the 13 copies and dispatches tage of the possibilities offered by TradeNet and the them to the various recipients. Ghana Customs Management System. 15. CEPS's verification unit receives its copy of the A description of a typical import process before declaration. the reforms follows. For special import regimes 16. An examination officer is assigned to the par- the procedures could be substantially more com- ticular shipment. plicated. Multiple face-to-face contacts between 17. The results of the inspection are entered in the importers or their representatives and customs landing accounts book. officials could easily lead to integrity problems. 18. The entry in the landing accounts book is signed and given to the declarant. 1. The shipping agent submits 12 copies of the 19. The declarant pays handling charges to the port shipping manifest. authority and the shipping agent as required. 2. The importer or the importer's agent obtains 20. The port authority issues a waybill. shipment notifications. 21. The goods are moved to the gate, where fre- 3. The declarant purchases an import declaration quently they are again inspected before the form. release can take place. 4. The declarant submits documents for DIS. 22. CEPS checks the manifest. 5. The declarant buys 13 copies of the customs 23. Shipping agents report to CEPS on their activi- declaration form. ties every month. 6. The declarant submits the final classification and valuation report from a DIS company. 7. The declarant pays self-assessed duties at the References bank. Only one bank accepts payments. This King, John, and Ben Konsunski. 1995. Singapore TradeNet: A bank is located at the point of entry, which is Tale of One City. Case Study 9-191-009. Cambridge, Mass.: usually overcrowded and wracked with delays. Harvard Business School. 8. The bank issues a payment receipt and passes it United Nations Economic and Social Commission for Asia and the Pacific. 2003. "Trade Facilitation Framework." Expert on to CEPS, which is located at the same point Group on Trade Facilitation and Electronic Commerce, of entry. Bangkok. Draft report. 9. The declarant submits the declaration with supporting documents to CEPS. 4 Morocco Marcel Steenlandt and Luc De Wulf In the early 1980s, Morocco's political leaders process that led to the definition of a strategy, pres- decided to open their economy to world markets ents the framework for reform implementation, despite the danger of economic vulnerability. They describes the new working environment, and ana- adopted a series of priority measures to attract lyzes the results achieved to date. foreign investors into the country and ensure the safety of their investments. Because Morocco has Background to Customs Reform abundant skilled labor, the government encouraged foreign industrial and financial institutions to Several factors facilitated the customs administra- invest in major sectors such as textiles, electronics, tion reform: clear goals, abundant human and and automobile accessories. These export promo- institutional resources, and expert management tion efforts not only increased exports substantially guidance. but also encouraged export diversification. The Moroccan economy is now open and trade barriers Problems and Goals are almost nonexistent. Modernizing customs administration is an inte- In the early 1990s, to foster economic development gral part of trade promotion, and Morocco began and to sustain an infant processing industry, King reform of its customs administration and customs Hassan II envisaged a series of measures to boost services early on, before reform became an urgent foreign trade. During the implementation of these necessity. The country's pragmatic, open-door pol- measures, serious malfunctions were detected in icy called for three major areas of focus, namely: the customs service, for which some high-ranking officials were held accountable. In response to those · enhancement of customs management quality problems, the minister of finance issued clear-cut · development of an improved tariff schedule directives to his staff to analyze the criticisms lev- · simplification of customs procedures eled at the customs service, assess the existing sys- tem, and propose reforms adapted to developments After summarizing the factors that led the Admin- in the international trading environment. Morocco istration of Customs and Indirect Taxes (ACIT) to has been a member of the World Customs Organi- opt for modernization, this chapter describes the zation since the inception of that organization in 33 34 Customs Modernization Initiatives: Case Studies 1995 and has adjusted its approach to international implement its mandate correctly. On the external trade in accordance with the World Customs Orga- front, Morocco needed to honor its commitment to nization's successive conventions and agreements. join the community of trading nations and to In this context, it reformed its customs administra- implement the trade facilitation measures appro- tion to facilitate customs clearance transactions priate for an emerging economy--for instance, while securing customs revenue. support for the development of the export process- ing sectors (textiles, electronics, and so on). On the internal front, it needed to assess its legal frame- Institutional Resources work, reorganize the operations of customs serv- The customs administration was already disci- ices, reduce customs clearance time and costs, and plined and properly structured, which facilitated review personnel and equipment management the attainment of the reform objectives. Staffers in procedures. This approach allowed the customs all positions were able to emerge from a culture of authorities to set guidelines for devising a realistic exhaustive controls to lend their full support to strategy. They constantly analyzed proposed solu- trade facilitation measures that were introduced tions in light of their own and other entities' expe- progressively. In addition, representatives of the riences and adopted relevant suggestions. trading community attended meetings designed to With the coherence of the project design enlist the active participation of customs adminis- assured, the customs authorities provided continu- tration staff members. ous training to enhance overall efficiency and Foreign consultants reinforced the contribution recruited highly qualified university graduates to of national actors. France provided high-level provide sophisticated technological expertise and experts to propose changes in the Ministry of to counter any internal resistance to change. The Finance. Experts from the International Monetary approach was pragmatic, well thought out, and Fund contributed to an impartial initial diagnosis built in coherent phases. The authorities conducted and the formulation of recommendations for an the entire reform of customs services expertly in efficient strategy attuned to the most innovative terms of both human resources and funding. international practices. The World Bank consis- tently supported and backed those initiatives. Diagnosis and Strategy Specialized private firms applied their experience and skills to specific, highly technical aspects of the An initial assessment of the functioning of the cus- reform, including human resource management toms administration found four major areas on and the formulation of a master plan for customs which the reform process should focus, namely: computerization. 1. resource management 2. information exchange and relations between the Robust, Comprehensive, and Pragmatic Approach private sector and customs staff 3. tariff policy The customs administration did not limit its analy- 4. organization of services. sis and action to tackling immediate problems and constraints. Rather, it developed an ambitious, Instrumental in the success of the reforms was the overarching strategy. Morocco's commitment to revision of the legal and statutory framework a pragmatic approach has translated into imple- within which the customs administration operated; menting technical measures already included in a the simplification of procedures; and the introduc- 1995­96 master plan. More important, the govern- tion of a mode of management that incorporated ment has focused its energies on delivering better staff participation, programming of assignments, service. The sustained participation and commit- and improved communication. ment of civil service staff have helped internalize the reform objectives, thereby turning them into a Initial Observations set of commonly shared values. The first task was to identify what reforms In 1996, customs clearance operations were slow, were needed for the customs administration to cumbersome, contentious, unpredictable, and Morocco 35 completely ill-adapted to modern logistical require- The rigidity of civil service regulations sometimes ments for handling goods. In the port of hampered efforts to strengthen incentives. Thus, the Casablanca, releasing a container took 18 to customs administration took steps to improve the 20 days, and half of that time was directly attribut- regulations as they applied to customs staff. For able to customs formalities. Customs officers were example, paying bonuses for good work requires a regarded as having sweeping powers and few system for grading performance, but the existing traders dared to clash with them. evaluation system, which periodically graded staff The main objective of customs administration members on their professional skills, efficiency, out- personnel was to collect revenue. International put, and conduct on a scale of 0 to 3, was too unso- trade facilitation was not their concern. They phisticated to permit remuneration based on merit. imposed exhaustive controls and justified them by The system was replaced with semiannual appraisals the need to enforce the Customs Code, collect cor- whereby staff were evaluated on the basis of five cri- rect amounts of customs duties and taxes, and fight teria, using a graduated scale of scores ranging from customs evasion. 1 to 10, along with more individualized assessment The customs computerization scheme intro- systems, such as face-to-face meetings with staff duced in the early 1990s did not produce sufficient members and their supervisors to discuss their per- changes in customs procedures and working meth- formance, career paths, and training needs. ods. The management of temporary imports was As a result of being openly based on efficiency complex, and many related documents were not and merit, human resources management has processed by the time of the last reexportation. become more transparent and coherent. Neverthe- The reform process solicited the support of less, some operational staff members do not fully operators in searching for practical solutions to the appreciate the changes, because they penalize inef- obstacles they confronted. ficiencies and provide for greater differentiation in staff remuneration. Decentralization allowed the transfer of most Resource Management personnel management tasks from central to local levels. Customs staff members perceive this change Improving the ACIT's performance required heavy as a positive step, noting that they now can make staff involvement and better use of resources. their opinions known more readily and that they now are better informed. At the same time, decen- Human Resources Modernizing a country's cus- tralization improved the organization of work. The toms service requires active participation by the involvement of decentralized units in decisionmak- entire staff as essential agents of change. To that ing has allowed staff members in those units to end, the customs administration set out to accom- enhance their management skills and to become plish the following: more efficient. The customs authorities set up a regional body · Promote cooperation between headquarters to ensure the coordinated transfer of skills and staff and staff of the regional directorates and authority from headquarters to local entities. In the districts in defining realistic objectives and 1996, seven regional directorates were established, implementation methods. (Note that customs each covering two or more districts and having staff members are encouraged to express their jurisdiction over a number of geographic areas and views so as to better integrate regional concerns functions. This new setup was coupled with a rede- into policy, and the director general's annual finition of district managers' responsibilities. The policy paper reflects such comments and operational services became more autonomous, suggestions.) and the role of the central administration was · Improve staff training and keep staff members reduced to arbitration, consultation, and provision better informed. of expertise. Thus, decentralization resulted in the · Strengthen employees' motivation to make strengthening of regional units in relation to the valuable contributions to the ACIT's mandate, center and the elimination of unnecessary levels in including through bonuses and benefits. the management hierarchy. 36 Customs Modernization Initiatives: Case Studies The modernization that the customs adminis- maintenance and rentals and still covers payments tration hoped to achieve by enhancing its human through utility stamps for water, electricity, and resources was based on an analysis of job and skill telephone service. Those expenditures and pay- requirements. Based on this analysis and on work- ments reduce the real effect of the sought-after fis- load indicators, the following steps were taken: cal decentralization. In addition, assessing the true cost of services is difficult because of a lack of data · To optimize productivity and raise the quality of on the costs of staff salaries and benefits. services provided, the customs administration The planned computerization of customs man- reorganized customs services. agement will improve expenditure estimates and · To better specify the qualifications required by execution. The customs administration's Integrated staff members holding positions of responsibil- Resources Management System will permit ex- ity and to clarify career paths, the administra- penditure forecasting, control, monitoring, and tion ranked customs offices and subdivisions by analysis much more effectively than traditional importance. management methods. In fiscal year 2003, for the · To improve mobility so as to enhance job satis- first time, the Ministry of Finance provided funds faction, the administration redeployed staff for computerizing customs operations. Streamlin- members over time to positions that better ing and continuous monitoring of expenditures matched their qualifications. led to savings of DH 7.5 million, generated largely · To ensure uniform approaches by the different from such items as uniforms (only field personnel customs bureaus, the administration put now wear uniforms), administrative forms (many together a manual of customs procedures. forms have been consolidated), telephone bills · To build staff versatility and to allow staff mem- (telephone use is more closely controlled), and bers to rotate among different functions, the maintenance (which is managed more efficiently). administration designed a training program. · To reduce corruption, the administration Dialogue with the Private Sector encouraged integrity and compliance with pro- fessional ethics not only by means of legal sanc- One key to the success of Morocco's customs tions but also by clear signals that any abuse of reform is the inclusion of the private sector. power would not be tolerated. Bolstered by broadly based public relations and information campaigns, the open door policy Financial Resources In fiscal year 1999­2000, the adopted by the General Directorate of Customs ACIT began to decentralize financial resource reflects radical changes at all levels of the customs management and to engage contract staff members service. Those changes, which were geared toward from the Ministry of Finance. The extent of the transparency, efficiency, and partnership, resulted decentralization of budget funds has grown. Some in economic operators acknowledging the customs 4 percent of funds were decentralized in 1999­2000. administration's responsiveness and understand- This figure rose to 13 percent in 2002 and now ing. These characteristics were particularly appreci- stands at 26 percent of the operating budget and ated in a state agency and indicated a measure of 20 percent of the investment budget (excluding corporate social responsibility. funds allocated for computerization). Responsibil- The customs administration seeks to enter into ity for credit management was transferred to new partnerships not only with firms in good fiscal specialized units in the regional directorates. Perti- standing but also with professional associations. nent staff members attended training courses and Implementation in 1998 of the World Customs seminars on public expenditure management. Organization's customs valuation principles, which Financial decentralization has not yet fully are based on invoice prices, gave the customs achieved its goal. The regional directorates still administration an opportunity to reinforce its rela- emphasize expenditures that are driven by existing tionships with importers and licensed customs bro- operational needs rather than by envisaged service kers. The ACIT organized an effective information, objectives, which have not been clearly specified. training, and support campaign that simultane- Regional use of the decentralized funds still ously consolidated revenues and improved public covers expenditures through purchase vouchers for relations. However, valuation remains difficult, and Morocco 37 customs officers have remained attentive and vigi- consolidated with other levies, such as customs lant, because some traders still tend to undervalue stamps, into an import tax with a single rate of their imports. 15 percent (drugs and capital goods were exempt). The customs administration has gone beyond This irrational tariff and duty policy undermined minimal statutory requirements. It has set out to the continuity and predictability of the import foster the spirit of the International Convention on regime and was exacerbated by the use of reference the Simplification and Harmonization of Customs prices for more than 400 products (reduced to 210 Procedures (known as the revised Kyoto Conven- in 1996), which increased the effective protection of tion) and to meet firms' concrete needs. Today, any those products. All these successive changes were change in procedures is subject to prior consulta- designed to protect local manufacturers. The use of tions with the private sector. For example, dialogue reference prices has since been abandoned. with the textile industry resulted in substantial Morocco has now merged its external tariffs with modifications to the management of the temporary the import tax (eight rates, including a zero rate), admission regime. and has introduced a basic most-favored-nation The customs administration aims for a trusting tariff (four nonzero tariffs and a maximum rate of relationship with firms. For several years, the 40 percent). Under its association agreements with regional directorates have offered consulting serv- the European Union (EU), which took effect in ice to firms. In addition, extensive information 2000, Morocco will gradually remove its duties on is available through a Web site (http://www. imports from the EU. Trade with the EU represents douane.gov.ma).1 The ACIT also offers direct tech- more than 60 percent of the value of Morocco's for- nical services by telephone, by electronic messag- eign trade. Other bilateral and multilateral agree- ing, and through the Internet. To reach the general ments, primarily with Arab and African countries, public, the customs administration publishes and also affect the development of Morocco's tariff pol- disseminates brochures and pamphlets. icy. Agricultural products are not included in these arrangements, and their rate of taxation may vary Tariff Policy from 2.5 to 329 percent. Rates in excess of 50 per- cent are to be reduced at a rate of 2.4 percent per Despite tariff reforms in the early 1980s, no coher- year, according to Morocco's World Trade Organiza- ent, structured tariff policy existed before the cus- tion commitments. Since 1992, customs tariffs have toms reform of the late 1990s. The number of been based on the harmonized system nomencla- customs duties and taxes had been cut from 26 in ture recommended by the World Trade Organiza- 1987 to 13 in 1994, and the 1996 Finance Law fur- tion and the World Customs Organization. ther reduced the number to 6. In 1986, the maxi- mum rate was reduced from 100 percent of the value of imports to 45 percent, but an analysis of Organization of Customs Services nominal rates revealed that some rates were not In parallel with the reform of human resources being used.2 In addition to customs duties, a special management, a review of the organization and the import tax, created in 1916, was imposed. This tax functioning of customs services was undertaken had gradually been reduced from 15 percent to with a view to creating regional centers that would 5 percent. In 1988, the special import tax was be responsible for the daily management of cus- toms activities in the field. This decentralization had two objectives: it focused headquarters on the 1. The site has a wealth of information on such items as regula- tions, the Customs Code, tariffs, and international trade statis- design and revitalization of the regional network tics. It is constantly being updated and upgraded, and will soon and it brought the management of routine proce- include an online decision support system. The site also permits dures and problems closer to customs service staff access to software that assists clearance through customs of imports of goods and provides all information about import and users. Such customs decentralization also fos- taxes and regulations under normal import regimes as well as tered pragmatism and efficiency. under preferential import regimes. Since 1996, the ACIT has been organized on 2. In 1994, the 10.0 percent, 22.5 percent, and 40.0 percent rates the basis of regional jurisdiction and decen- were inactive. At the extremes, 32.8 percent of the value of tralized powers. The seven regional directorates are imports was taxed at 0 percent and 0.2 percent was taxed at the 45 percent rate. responsible for management decisions, auditing 38 Customs Modernization Initiatives: Case Studies and control functions, and staff training. Customs without inspection (which is now applied to a clearance offices are distributed across the country. significant share of total declarations) Mobile inspection forces ensure overall surveillance · the progressive redeployment of staff members of the country and of the customs zones. on the basis of their qualifications The headquarters of the ACIT was transferred · the dissemination of documentation and infor- from Casablanca to the administrative capital,Rabat, mation about deferred controls. to strengthen ACIT's ability to monitor and imple- ment the reforms. The relocated headquarters is bet- Surveillance The approach adopted in the fight ter integrated into the system of those who make against smuggling and other forms of fraud national economic, financial, and fiscal decisions. was practical and adaptable. Surveillance of the The creation of regional centers was necessary territory was initially organized through units to meet decentralization objectives, but it has located along the borders and the major highways. had some limitations. Some bureaucratization is Because of the geographical distribution of emerging, and some regional management staff smuggling, units along the northern border were members still refer too often to headquarters for assigned more staff than units in central and south- decisions that they could make at the regional level, ern Morocco. In addition to this frontline defense, thereby inhibiting the optimal use of management deterrent action was sustained throughout the close to where transactions take place. However, country and antismuggling units were reinforced decentralization has led to clear improvements in and their intervention methods enhanced. the organization of customs clearance, the general The geographical distribution of antismuggling surveillance of the territory and borders, and the units and their staff members has changed. An development of the audit function. attempt to curb smuggling only in the border zones became unrealistic in the 1990s, and highway con- Customs Clearance To make the customs system trols were reduced while control of places where more efficient, the customs administration empha- smuggled goods were stored was strengthened. sized the facilitation of processing customs declara- More emphasis was also given to gathering and tions. Systematic computerization, coupled with the exploiting smuggling-related intelligence. improvement in customs procedures, reinforced control over customs clearance and ensured the Audit Function The ACIT added an audit func- effectiveness of the fight against commercial fraud. tion to its inspection services to ensure the integrity The General Directorate of Customs sought to of overall customs operations. The audit and balance the organization of its services with the inspection function has recorded significant goals of facilitating trade and ensuring revenue. To advances. In addition to verifying that management make the overall system of goods processing more practices conform to legal and statutory standards, coherent, it initially focused its efforts on the qual- the function is designed for the following: ity of customs declarations (with the support of computerization) and then turned to postclearance · to ensure better use and enhancement of man- controls. The shift from a system of instant verifica- power and material resources tion to one of deferred controls after the release of · to assess adherence to procedures goods required the following:3 · to help simplify and standardize procedures · to evaluate organizational performance and · a mechanism for selective control and inspection assess the efficiency of services in customs clearance operations, including pro- · to contribute to the development of preventive, vision for selective, automated customs release anticipatory controls to avoid errors. The new function reflects a shift from an inquisito- 3. Deferred and ex post controls are intended to supplement rial, repressive system to one that provides consul- immediate controls. Deferred controls are based purely on cus- tative services to assist in decisionmaking. At the toms declarations and associated documents. Ex post controls apply at a later stage and involve reviewing the accounting books same time, the new audit function helps ensure that and registers of importers and other foreign trade operators. the behavior of ACIT personnel is ethical. Morocco 39 The New Working Environment possible of an enhanced, open computerization process that encourages communication. In this To enhance the competitiveness of Morocco's connection, its main actions were the following: private sector without reducing the quality of pub- lic services or the collection of revenues, the ACIT · improving cargo control for both exports and exerted considerable efforts to improve customs imports procedures and adapt them for computerization. · setting up customs clearance sites outside port or airport domains Improving Procedures · introducing selectivity in controls Before the reform, all the principal functions of the · computerizing document processing. customs administration seemed to be aimed at collecting duties and taxes. Users complained that The customs administration made a careful study the customs clearance process was long, cumber- of existing cargo control procedures with the aim of some, and often unpredictable. Those complaints making them more efficient and user friendly. It and the need to adapt to international trade imposes two obligations on common carriers: requirements were among the primary reasons for (a) going directly to border crossings (ports, air- the reform. Morocco was one of the first nations to ports, access roads) where customs facilities exist ratify the provisions of the Kyoto Convention as and (b) providing a summary declaration of their amended in June 2000. The ACIT, in cooperation freight upon their arrival at such locations. Those with representatives of other public sector agencies procedures were reviewed in comparison with best and the private sector, carefully reviewed existing practices and in terms of what was achievable using procedures and then began adapting them to inter- electronic data interchange. With computerization, national rules, giving priority to efficiency and the entire cargo control process is now much better simplicity. managed, resulting in more efficient clearance of manifests and enhanced revenue assessment and Enhancing the Quality and Efficiency of Customs collection. Clearance Operations The customs administra- Customs clearance sites outside port and airport tion has made adaptation of its procedures a premises permit the temporary storage of goods in constant priority, along with the maximum use approved areas before clearance (see box 4.1). The BOX 4.1 Customs Clearance Sites Outside Customs Zones Increased foreign trade created storage and han- and have only one entrance. The customs dling problems in ports and airports. In addition, administration is responsible for the oversight of the intensive use of road transit necessitated the customs clearance sites and must be given unre- prompt acceptance of cargo consignments to stricted access rights. The management of ware- reduce unnecessary stops and offloading. houses must post a bond or statutory guarantee. Customs clearance sites outside customs and Operators understand that customs clearance port premises help reduce the time goods sites can improve traffic control and have pro- remain in bonded warehouses and help prevent gressively opened such sites throughout the the underutilization of vehicles and containers. country, although those facilities are currently Those efficiencies reduce firms' transaction costs concentrated around Casablanca, the country's and enhance their competitiveness. principal port. Extension of the use of customs The creation of customs clearance sites clearance sites will encourage the building of requires prior authorization from the customs inland logistics platforms. administration, which approves site locations In 2002, a total of 92,476 customs declara- and layouts. Customs clearance sites are private, tions was registered in the customs clearance restricted premises for the temporary storage of sites of the Casablanca external bureau, of which goods pending import or export declarations 57,554 were for imports. Those operations rep- that may be company specific or may be resented 14.6 percent of all declarations regis- accessed by multiple users. They are fenced tered nationally. 40 Customs Modernization Initiatives: Case Studies BOX 4.2 Improvement of Risk Analysis The warehouse data system collects data and data select module is a decisionmaking applica- integrates it into a single database that helps tion operating in the management information staff members with monitoring and carrying out system that allows users to work with selectivity customs clearance operations. The foreign trade data and to observe the general activity of module deals with all information about com- customs officers and traders. Users also have mercial imports and exports. The revenue indicators needed to follow up and improve module provides for close monitoring of trends automated selectivity modules for imports and in different categories of customs revenue. The exports. sites help reduce congestion at wharfs, warehouses, involving other pertinent private and public agen- and airports and have demonstrated the advantages cies may be ineffective. of conducting customs clearance operations out- Improved and computerized procedures should side border-post premises. speed up the processing of all declarations and, in The customs reform has been based on restrict- the future, allow electronic payment of most duties ing examinations to only selected declarations and and taxes. Further reforms will eliminate the need on improving the method by which goods are to file paper declarations or keep archives of paper selected for examination. The customs admin- documents. For their part, traders will have clear istration has set a goal of releasing 95 percent of obligations, including tendering to the inspection filed declarations without immediate physical services, on demand, any documents mentioned in verification. The objectives are to increase trans- their electronic declarations, such as invoices and parency and fairness and, indirectly, to reduce cus- certificates of origin. toms processing times. Doing so would allow inspectors to concentrate on verifying 5 percent of Simplifying Procedures for Imports under Special declarations thoroughly, without undue time pres- Import Regimes The principal characteristic of sures. At present, the inspection rate is 10 percent, Moroccan foreign trade is the importance of certain down from 100 percent in 1996 and 35 percent in imports for which duties and taxes are temporarily 2000. The use of selective examinations reduced the suspended.4 In 2002, imports for domestic process- time required for issuing release notes to an esti- ing of eventual exports represented 35 percent of mated average of one hour in mid-2003. the value of total imports and 85 percent of the The electronic customs management system value of total exports. These figures explain why makes it easier to select shipments for inspection, special import regimes apply to such imports. and customs officials' ability to detect prosecutable Customs reforms started with regularization of offenses has improved significantly as a result. the accounts of exporters whose past duty-free The customs administration now hopes to improve imports had not been fully accounted for. Indeed, the selection mechanism even more through econo- in late 1996, more than 70,000 records for imports metric processing of data coming into the manage- under temporary admission accounts were still ment information system database (see box 4.2). awaiting regularization. Some files had been sub- Customs operations are carried out as expedi- mitted before 1990. About 30,000 other files were tiously as possible and in close cooperation with for accounts with values below DH 1,000 (US$55). customs brokers or traders. As noted earlier, the A number of factors contributed to the backlog: physical examination of imported goods has also become more focused. Nevertheless, the effects of those changes on the total time it takes traders to 4. Special imports procedures with temporary relief of taxes and obtain possession of their goods has so far been duties cover four key areas: storage, processing, use as inputs, limited: operators now average a waiting time of and transport. In customs terms, they cover warehousing, free 10 days before their containers can leave the port, industrial warehousing, temporary admission for inward pro- cessing, temporary admission for outward processing, tem- compared with an average of 18 days before 1997. porary exportation, transit, processing under customs control, Limiting the reform to customs operations without and drawback. Morocco 41 BOX 4.3 Personalized Management of Special Import Customs Procedures The simplification of procedures enables firms to the standard convention to the needs and work act swiftly, efficiently, and predictably. All three methods of each trader. characteristics are crucial for the consolidation The traditional methods associated with cus- and expansion of foreign trade. The customs toms clearance operations, declarations, and administration has sought an effective way to reconciliation of suspended regimes have been enhance the competitiveness of export firms. overhauled in the course of a few years. Com- The management of suspended regimes has pulsory practices, such as systematic sampling been streamlined to make control and declara- and exhaustive controls of manufactured prod- tion processes as simple and efficient as possible ucts for reexport, have been eliminated. The without detracting from the efficiency of verifi- innovative methods of control, divorced from cation. The customs service has detailed the import and export operations, are now part of exporter-specific import coefficient needed to normal customs management. effect account reconciliation. This change tailors inappropriate management systems, indifference to · revise the guarantee system to make it more the economic stakes and financial risks involved, accessible and less expensive. excessively meticulous handling of accounts, and insufficient determination to improve the prevail- The customs administration has introduced new ing legal and practical requirements that governed types of guarantees for special import customs pro- customs agents. cedures with suspended regimes. Customs officials To deal with those problems, the customs can now perform the following: administration adopted a pragmatic approach · allow exporting firms to post bonds as along with periodic campaigns to restore integrity guarantees to the management of these accounts. It decided to · exempt subcontractors' imports from surety do the following: obligations when the inputs remain the property of the foreign principals · facilitate access to preferential arrangments for · authorize a combination of bank and personal processing firms (mostly work-to-order enter- guarantees prises serving foreign customers), notably · allow a global guarantee that consists of a down through the free industrial warehouse system payment backed by a bank guarantee in an (industrial firms with at least 85 percent of total amount agreed on by the customs administra- turnover devoted to exports can benefit from tion and the trader. this system) · relax and simplify customs clearance procedures The customs administration further pursued its for trade in samples, damaged goods, and exports partnerships with firms. It has developed a frame- below a certain value work to assure firms of personalized management · simplify account management, especially in of their accounts following the firms' own specific relation to the treatment of the value of waste procedures (see box 4.3). More than 30 firms now · expedite the final reconciliation of accounts for use a personalized management facility. Those imports that entered under suspensive regimes firms account for 22 percent of the country's total by arranging for the relevant remittance certifi- exports, amounting to DH 18.5 billion.5 cates to be issued to traders at the premises Traders are no longer always treated as potential · promote the drawback system as an incentive for smugglers but are increasingly seen as full-fledged exports and extend it to cover energy products partners. At present, only large firms are eligible consumed during the manufacture of certain for the streamlined system of management: their goods · rely on more open and better adapted software 5. Key products exported by these companies include phos- to give traders direct access to their accounts and phoric acid, electronic components, natural and chemical fertil- release their guarantees izers, and food products. 42 Customs Modernization Initiatives: Case Studies imports represented 27 percent of total imports in Improving communications and listening to 2001­02. The facility is expected to be broadened in users gave the computerization project credibility the near future. and solved numerous vexing problems. Customs To simplify further, the customs administration brokers, in particular, expressed satisfaction with is studying a more innovative accounting system the direct information, assistance, and support now that will shift from a product-based management made available. Computerization improvements system to one that manages the suspended taxes were the primary reason for the positive public and the credit provided at the time of export. This reputation of the customs service. The improved new approach illustrates the commitment of CSCC System lets brokers and importers ben- the General Directorate of Customs to reconcile efit from an instrument that handles almost the traders' needs for trade facilitation and process entire customs clearance process without waiting simplification with the government's need to for a new computer system. Clients have com- ensure that revenues due are actually paid. pletely reversed their opinion of the customs administration and now consider it an example for other agencies. Adapting Information Technology to Improving the existing computer system was Customs Clearance Management extremely expensive, but the benefits were not The ACIT first used information technology in limited to enhanced services and reputation. 1992 when it adopted the Computerized Support Computerization improvement also reinforced for Customs Clearance (CSCC) System (known improvements in customs procedures and services. locally as the Systeme de l'Administration des The customs clearance system has improved con- Douanes et Impôt Indirect et de l'Office des siderably, and many new functions have been intro- changes, or SADOC). The CSCC System is essen- duced, including the following: tially a way to computerize the processing of cus- toms clearance formalities and the monitoring of · computerized processing of cargo manifests and special import customs procedures. It has made an of customs transit operations and termination, invaluable contribution to the success of the including computer-based management of the reform; however, newer technology would allow customs clearance sites better organization of data processing and better · control over the coherence, plausibility, and integrated trade management. compatibility of data · selectivity of examination of declarations The Contribution of the CSCC System The · automation of price references for inspectors master plan for customs computerization rests on a · computerization of the integrated tariff and of transitional strategy, including a five-year system electronic payment of duties and taxes migration to an open standard system (UNIX) that · consultations with traders on the status of decla- offers robustness, transparency, and amenability to rations during all stages of processing upgrades. The customs administration has also · date stamping during each phase of the customs taken steps to strengthen its capacity. It recruited clearance operation computer scientists and consulted with private · consultations on the cancellation of bonds upon traders in an attempt to reorganize its work, so that the completion of bonded transactions it could be more responsive to the needs of its cus- · management of accounts and consultations with tomers and could improve the quality of system traders on the status of their accounts for special support by means of revised procedures, standard- import procedures with relief from taxes and ized operations, and documentation of changes. duties New features were added to the system and have · management of guarantees significantly improved its reliability. For example, · use of price estimates. the so-called assistance to users feature focuses on the availability of a telephone line that promptly The customs administration has had success with became a standard communications channel the electronic storage of manifests. Ninety-five between such users as customs officers and traders percent of manifests in the port of Casablanca and CSCC System staff members. (55 percent overall) are now sent by electronic data Morocco 43 interchange. Air transport manifests are transmit- information and decisionmaking. It works for both ted to the customs administration the same way. In statistical and monitoring purposes. The customs addition, a successful pilot experiment of electronic administration is already using the system for help payments conducted with a local bank is being with customs revenue, foreign trade, litigation, extended to other banks and operators. Finally, all selectivity, and special import customs procedures. controls over the movements of goods through the warehouses and customs clearance sites at the air- The Integrated Resources Management System port in Casablanca are now computerized. The Integrated Resources Management System (Ressources Intégrées de l'Administration) reflects The Development of New Computer Systems the customs administration's goal of creating an The customs administration is developing several integrated computer system for managing all its new computer applications, largely with internal resources--staff, financial, and equipment--at resources, but occasionally these resources are both central and decentralized levels. The system supplemented by contractors. A service firm is will be developed internally, and its functions will preparing a new customs clearance application, but include human resource management and plan- customs computer experts have worked alongside ning, inventory management, procurement, and the service provider and expect to assume day-to- budget management. It will be user friendly and day management after the system has been launched. will include decision support functions. The Inte- grated Resources Management System is based on The Customs Computer Network System the same technologies as the Customs Computer Despite recent improvements, the CSCC System Network System (UNIX, Java), and access will be has outlived its usefulness and a more versatile through an intranet. Some parts of the Integrated information technology system, the Customs Resources Management System will be ready to Computer Network System (Base Automatisée des come into service in late 2003. Douanes en Réseau), is being rolled out. This sys- The Application for Managing Imports under tem will be based on state-of-the-art technology Investment Conventions The Application for and will complement the CSCC System's features Managing Imports under Investment Conventions with new modules for litigation, vehicles released (Application pour la Gestion Informatisée des for consumption, parcels, and postal packets. The Listes Annexées aux Conventions d'Investissement) Customs Computer Network System will incorpo- manages the lists of duty-free imports that are rate new, highly innovative concepts, such as antic- annexed to investment conventions. It is accessible ipation and online management of requests for through an intranet arrangement and allows con- modification, and will also offer the user total tinuous, real-time monitoring of the flow of duty- transparency through multicriteria lists and free imported goods. research services. In addition, the Customs Com- puter Network System will include the manage- Involving Public Sector Partners ment of the special import customs procedures, which will be based on the reconciliation of In addition to being attuned to its economic envi- accounts rather than on the reconciliation of the ronment, the customs administration has strength- relevant detailed import and export documents. ened its cooperation with other government The system's cargo control module went into serv- agencies and has set up ways to share information, ice in September 2003. The full system should be both with public sector partners such as ports and operational by early 2005. with private sector partners such as forwarding agents. However, those initiatives have proved The Management Information System The cus- slower and more difficult to implement than other toms administration has created a management aspects of the reform. information system (Système Automatisée d'Aide a Not all government agencies have attained the la Décision). The system uses information and data same level of modernization, and some initially from other systems (a form of data warehousing)-- could not keep pace with changes in the customs primarily from the CSCC System--to provide the administration. Some agencies are now actively customs service with an integrated system for reforming and have started their own equipment 44 Customs Modernization Initiatives: Case Studies programs. For example, the taxation service is now · adopting simple, controllable performance using unique taxpayer identification numbers, indicators which in the future should facilitate the exchange of · supporting work plans with a project manage- information between the taxation and customs ment tool for monitoring the progress of authorities. This freer exchange should enhance the reforms. efficiency of overall revenue administration and should, to some extent, compensate for the fact that Statutory Law The customs administration trade liberalization may reduce revenue from cus- secured reform of the Customs Code by focusing toms duties. on the basic changes required for improved opera- The Ministry of Trade, the Ministry of Industry, tion and for the prosecution of major offenses. The the Foreign Exchange Board, and the commercial administration examined the code in 1997 in close banks should all help enhance the efficiency of consultation with customs clearance professionals public administration by eliminating compartmen- and professional associations. The revised Kyoto talization and by better adapting their procedures Convention served as an inspiration in the drafting and statutory instruments to economic needs. The of the new Customs Code. planned introduction of an electronic payment sys- The new Customs Code was submitted to tem involving private sector banks is a step in that national consultative bodies and was then passed by direction. parliament with ease.The most restrictive provisions Ports and airports often use the same informa- of the previous code were either abolished or revised tion as the customs service, such as freight and to comply with the spirit and letter of trade facilita- cargo manifests. Coordinating efforts in data col- tion enshrined in the Kyoto Convention.At the same lection, validation, and use will be crucial to simpli- time, the ACIT issued a number of regulations that fying overall trade procedures. However, teamwork emphasized decentralization and the improvement has been difficult to implement for various reasons, of customs procedures. The trading community including internal resistance in other agencies, fear supports the new regulatory framework. of losing independence, incompatibility of com- puter and security systems, lack of funds, and Communications Strategy Institutional com- national regulations and legislation. Mechanisms munication was integral to the reform process. It to ensure the sharing of information among ship brought widespread understanding of reform owners, forwarding agents, and customs agents are measures. The customs administration has created progressively being applied. Progress is slow, but a modernized, consolidated communications serv- information sharing has started to bear fruit in the ice, building on lessons learned in pilot projects. area of cargo manifest management. The following have been the major recent achieve- The benefits of expeditious processing of cus- ments of the communications service: toms clearance transactions have now been widely recognized and have spurred other agencies to · Creating a Web site: http://www.douane.gov.ma. improve service delivery. Implementation of the Launched in 1997, the site has since been sub- Customs Computer Network System could help stantially improved. Users can submit questions consolidate the links among all actors in the trans- and suggestions directly to the director general. port system. Every message gets a personal reply. · Launching an intranet site for all staff members that contains professional information; pro- Employing Additional Instruments vides a space for the exchange of personal mes- for Monitoring Reform sages; and offers a number of services, such as The success of the ACIT has relied on the proper discussion forums, library access, analytical sequencing of a number of other reform initia- extracts of interesting articles, and newspaper tives--namely, the following: excerpts. · Organizing periodic meetings with the media. · overhauling the legal framework This public relations effort has been sustained · consolidating communications with partners with press briefings, books, thank you notes, and and staff other communications and has resulted in the Morocco 45 press conveying a broadly positive image of cus- Programming and project implementation is toms operations. monitored through a computer application that is · Being receptive to and providing information accessible to all staff members through the intranet. and guidance to users as part of a partnership The customs administration opted for project with the general public. management software that would serve as a fore- · Launching a program of public information casting and monitoring tool during the reform. through the distribution of technical pamphlets Once all the reforms have been implemented, the and brochures. These publications have clarified same software will become a day-to-day manage- the opaque and often complex customs laws and ment and evaluation tool. regulations. From the plan of action, projects are divided · Organizing staff meetings and conferences to into subprojects, then into basic tasks, then into contribute to better mutual understanding of detailed activities. Each basic task is evaluated in work-related issues. terms of workload (person-days) and scheduled to · Publishing regulations in the official bulletin match available means. The person responsible for from time to time. This bulletin is available on each task is identified by name and is given the task the Internet and can be delivered by e-mail. of regularly updating the software. This assignment enables the evaluation, monitoring, and readjust- The effect of the communication strategy was ment of the entire planning mechanism during much appreciated by customs staff members, staff implementation. The rigorous monitoring of the members from other agencies, members of the eco- implementation of all tasks has not only enabled nomic community, and members of the general detection of negligence and malfeasance but also public. In addition, it was well received in other allowed for timely responses to unexpected countries. problems. Management Indicators To support moderniza- Reform Outcomes tion, the customs administration prepared a set of management indicators, including performance This section assesses the striking achievements of indicators that measure the efficiency of its work the customs administration's reform and modern- and assess the costs of its services. Periodic reviews ization initiatives. and revision of this set of indicators, supplemented by a review of control functions, proved instru- Customs Revenue mental for decisionmaking in a complicated reform environment. It also encouraged active participa- Morocco's experience clearly illustrates that trade tion by staff members in the modernization facilitation does not necessarily reduce revenue. process.6 During the period of reform, commercial activities developed steadily and revenue increased. Programmatic Approach The customs adminis- Although fraud was not completely eliminated, it tration has adopted a systematic approach to its did not cause excessive revenue losses--despite business plan to ensure transparent management, some customs officers' resistance to the idea of to better define and plan its actions, and to ensure selective inspections, based on their claims that their consistency with the working environment. fraud would increase as a result. Examination of This approach contrasts with the lack of a forward- foreign trade statistics (table 4.1) shows the steady looking and coherent management approach in growth of the value of imports that enter Morocco earlier years. under the new special import regimes. Table 4.1 shows that revenue from import taxes and duties has remained stable since 1998 despite 6. The indicators include data on the number of travelers; the progressive tariff reductions (particularly on volume of imports and exports; the activity of the customs serv- imports from the EU). Revenue losses from agree- ice (for instance, the number of declarations); the results ments with the EU, estimated at DH 1.3 billion in achieved (for example, revenue collected and the number of 2001 and DH 1.5 billion in 2002, reduced the lawsuits); and the available resources used (such as vehicles, computers, active staff, and staff on annual leave or sick leave). tariff burden on capital goods and inputs not 46 Customs Modernization Initiatives: Case Studies TABLE 4.1 Imports, 1996­2002 (DH millions) Import Regime 1996a 1997a 1998 1999 2000 2001 2002 Imports other 62,109.1 63,515.1 69,708.8 74,064.4 88,208.5 87,147.3 91,840.4 than for home consumption ATPA imports 22,809.3 27,315.4 29,086.1 32,016.5 34,780.2 37,493.8 37,953.5 AT imports 1,294.2 1,193.3 2,209.5 2,370.7 2,423.4 2,675.4 1,543.6 Imports in 133.3 17.6 44.3 30.6 3,193.4 1,830.5 2,338.2 warehouses ATPA re-exports 27,297.2 29,733.8 46,043.4 50,129.0 53,850.1 56,9283 62,967.6 AT--Temporary admission. ATPA--Temporary admission for inward processing. a. Value of raw materials in ATPA not included for export. Source: ACIT data. TABLE 4.2 Customs Revenue Indicators, 1998­2002 (DH millions) Indicator 1998 1999 2000 2001 2002 Customs revenue 34,386.2 34,997.6 36,089.4 36,735.8 37,029.5 Import taxes 12,782.6 12,552.8 12,775.5 12,317.0 12,192.8 Tax revenue 74,005.0 75,632.0 74,034.0 77,123.0 80,496.0 Gross domestic product 34,6952.0 34,3131.0 35,4316.0 38,2897.0 40,9430.0 Value of imports 98,676.0 105,931.0 122,527.0 124,641.2 127,978.3 Value of imports net 69,708.8 74,064.4 88,208.5 87,147.3 91,840.4 of special customs regimes Customs revenue as a 46.5 46.3 48.7 47.6 46.0 share of tax revenue (1/3) Customs revenue as 9.9 10.2 10.2 9.7 9.0 share of gross domestic product (1/4) Ratio of import 3.7 3.7 3.6 3.2 3.0 duties to gross domestic product (2/4) Rate of tax 13.0 11.8 10.4 9.9 9.5 burden (2/5) Average effective rate 18.3 16.9 14.5 14.13 13.28 of import taxes (2/6) Source: ACIT data. manufactured locally. This revenue loss led to a remained a constant proportion of overall budget reduction of the effective rate of taxation (import resources, around 46 percent or slightly more, from duties as a percentage of the value of imports) from 1998 through 2002. 13 percent in 1998 to 9.5 percent in 2002. The rev- Customs revenue increased by about 7.7 percent enue reduction was offset by a rise in value added between 1998 and 2002 (table 4.3), primarily tax revenue from imports, so that customs revenue because of increased commercial activity, but also Morocco 47 TABLE 4.3 Customs Revenue by Category, 1998­2002 (DH millions) Category 1998 1999 2000 2001 2002 Import duty 12,872.6 1,2552.8 12,775.5 12,317.0 12,192.8 Inland consumer taxes 9,448.7 10,329.6 9,561.9 10,047.4 10,095.3 Inland consumer taxes (8,661.1) (9,618.4) 8,797.3 9,239.2 9,308.1 on energy products Value added tax 10,977.1 11,007.8 12,263.5 12,816.4 13,200.4 Value added tax on (1,494.6) 1,705.0 2,119.5 2,285.0 2,130.2 energy products Royalties on the 598.6 589.9 568.4 596.6 616.3 exploitation of phosphates Royalties on the gas 226.1 262.7 634.3 707.3 670.4 pipeline Other revenue 263.1 254.8 285.8 251.1 254.3 Total 34,386.2 34,997.6 36,089.4 36,735.8 37,029.5 Source: ACIT data. because of the improved quality of declarations, the TABLE 4.4 Average Time for increased customs productivity, and the quality of Customs Clearance, controls. Thus, customs facilitation and the open- January 2001­June 2003 ing of borders are not in themselves obstacles to Month Minutes sustaining the value of customs receipts. January 2001 84 June 2001 92 Efficiency of Service December 2001 111 The customs service does not yet deliver uniform June 2002 64 services to firms throughout the nation. Remote December 2002 60 regions have not yet benefited fully from the June 2003 57 simplification of transit procedures and from the extension of customs clearance to the traders' Source: ACIT data. premises. Because traders in Casablanca and Tangiers benefited disproportionately from recent suspended regimes is less than for other import reforms, the customs service supported the cre- arrangements: 40 minutes in July 2003 compared ation of logistic platforms and facilities such as with 55 minutes for imports under the ordinary warehouses and customs clearance sites in other arrangement. locations. At the same time, the customs adminis- tration simplified transit formalities and permitted Anticorruption Strategy customs clearance at firms' premises for those with The customs administration believed that the over- regular shipments. all process of modernization would reduce corrup- At the national level, the reduction in average tion and that existing legal remedies were sufficient. processing time for customs clearance has been one Indeed, the customs administration does not of the most impressive achievements of the reform. have a specific code of ethics. It explains observed The time between the validation of a customs dec- improvements as a consequence of the following: laration and the release of the goods is now less than one hour (table 4.4), a figure that places the · increasing efficiency ACIT among the most efficient in the world. The · enhancing staff motivation by improving the processing time for clearing goods imported under image of the customs service 48 Customs Modernization Initiatives: Case Studies · revising job descriptions for customs staff and · introducing an awareness campaign to publicize increasing staff accountability the effect of ethics on the success of the reform · increasing mobility for staff members in sensitive · organizing an annual "customs week" to rein- positions,which has helped forestall irregularities force employees' loyalty and their sense of · introducing work programming and regular belonging to the customs corps. controls that have helped improve integrity · enhancing the organization of procedures and reducing paperwork, which have reduced the Conclusion scope of staff interventions The changes made by the customs administration · introducing clearer procedures (including a in recent years have transformed it into a modern, listing of offenses and penalties), which have efficient entity that has adapted to its economic considerably simplified litigation and made it environment. Foreign trade operators now unani- unnecessary for traders to enter into protracted mously acknowledge that the customs admin- negotiations with customs officials istration is credible, industrious, and open. Such · initiating the outreach program with the private unanimous support and approval by foreign trade sector, which has led to improved dialogue with professionals is relatively rare. In most countries traders, as well as to behavioral changes on the they are more inclined to criticize or to be exasper- part of customs staff members ated with the customs service. · introducing frequent communication cam- The principal objectives of the reform have paigns aimed at the media, traders, and the gen- largely been attained: processing times for customs eral public. clearance have been reduced drastically; major pro- cedures indispensable for trade facilitation are all in In addition, the customs administration has place; guarantees are no longer a financial handicap attempted to enforce discipline more effectively by for processing industries; and conditions for pass- ing through customs are clear, transparent, and · reacting more severely to dishonest behavior predictable. In addition, the customs administra- · expediting the processing of disciplinary cases tion has shown that trade facilitation does not nec- and shortening deadlines for their resolution essarily reduce tax revenue. · adjusting the penalties in line with detected irregularities 5 MOZAMBIQUE Anthony Mwangi Mozambique's reform of its customs operations signed a preferential trade agreement with South was initiated in a difficult postconflict environ- Africa and is currently negotiating bilateral trade ment, which was characterized by a substantial agreements with Algeria, Cuba, Egypt, India, Kenya, disruption of government services. The approach Malawi, Mauritius, Russia, Zambia, and Zimbabwe. chosen was unique in that it relied heavily on out- Mozambique's exports enjoy preferential access to side contractors to manage customs services for the European Union market (under the Cotonou some time while preparing national authorities to Agreement) and to the markets of industrial coun- assume full responsibility for them. This experience tries in general through the Generalized System of contains useful lessons for other customs organiza- Preferences. In addition, Mozambique's exports are tions that face similar circumstances. eligible for duty-free import into the United States for commodities that qualify for the Africa Growth Opportunity Act. Mozambique is also a member of Background the World Trade Organization (WTO) and the Mozambique is located in southern Africa and World Customs Organization (WCO), and it has has borders with Malawi, South Africa, Swaziland, signed many of the agreements and declarations of Tanzania, Zambia, and Zimbabwe. It has a popula- those organizations.1 tion of 18.1 million and a total surface area of 489,192 square miles, with 2,841 miles of land bor- Economic Reform Program ders and 1,535 miles of coastline. After Mozambique achieved independence in 1975, its economy contracted severely during the next Regional and Preferential Trading Arrangements Mozambique is a member of the Southern African Development Community (SADC) and of the 1. Mozambique has made use of the WCO's services in various Cross-Border Initiative. Under the SADC trade pro- areas, including (a) hosting the International Conference on tocol, many goods exported from Mozambique, Integrity in Customs: The African Response, which was held in Maputo in March 2002; (b) training in the Agreement on largely raw materials, are exempt from duties in Customs Valuation; and (c) training in shipping, handling cargo, other SADC member countries. Mozambique has and examining containers. 49 50 Customs Modernization Initiatives: Case Studies 10 years because of civil war and because of inade- -- Civil society criticized the government for a quate economic policies. In 1987, the government lack of transparency in customs operations, launched its Economic Rehabilitation Program with for poor management, and above all for a the support of the International Monetary Fund lack of perceived dedication to tackling (IMF), the World Bank, and bilateral donors. The corruption. major reforms undertaken under the Economic -- Smuggling rings were firmly entrenched in Rehabilitation Program include (a) unifying and Mozambican society, and many believed that stabilizing the exchange rate, (b) eliminating most without a drastic change in customs manage- price controls, (c) privatizing public enterprises, ment, breaking them up would be difficult. (d) introducing extensive financial sector reforms, · Create a modern, effective, and reliable customs and (e) undertaking significant tariff reform and administration capable of sustaining and build- trade liberalization. Mozambique has made impres- ing on improvements made during the reform sive economic gains under the program. During program. 1987­97, real gross domestic product and exports grew, on average, by 6.8 percent and 15.6 percent, During the end of 1994 and the early part of 1995, respectively. However, Mozambique remains a rela- the government, together with multilateral donor tively poor country--its gross per capita income agencies (in particular, the IMF and the World was US$210 in 2001--with social indicators that are Bank), agreed on a drastic reform of the customs below average for countries in Sub-Saharan Africa. administration to enhance revenue mobilization A key component in the overall process of and ease trade impediments. The approach selected economic reform was the 1995 decision by the to solve those problems was a combination of dras- minister of planning and finance to reform and tic trade liberalization and radical reform and modernize the customs service, primarily to modernization of the customs administration. improve the government's revenue-raising capaci- The latter would cover all key aspects of the cus- ties and to control trade and transit flows better. toms administration: legislation, structures, man- The key features of the reform were the creation agement competencies, operational methods, staff of a special unit to initiate and oversee the reforms training, asset acquisition and management, audit- and the engagement of foreign companies to man- ing, enforcement, and a comprehensive anticorrup- age key parts of the reform process and implement tion program. Novel aspects of the approach were preshipment inspection (PSI) procedures. to bring in external expertise to manage customs operations and to rely on PSI services to help deter- mine the dutiable value of imports. Customs Reform Objectives and Innovative Approach Funding The government initiated customs reforms to accomplish the following: The U.K. Department for International Develop- ment (DFID) helped prepare the contract with · Increase budget revenue. Customs revenues had Crown Agents (the details of which are explained been on a downward trend since 1992. In 1994, later) and contributed about US$16 million of the this trend accelerated when a large volume of total US$37 million cost of the first three years of imports was exempted from import duties the contract. The government financed the balance under a variety of special programs. In addition, of US$21 million. The IMF supported the reform extremely high customs duties encouraged tariff by providing a legal specialist from 1996 to July evasion. 1999. The World Bank provided financing for the · Facilitate legitimate trade by combating corrup- Technical Unit for Restructuring Customs (TURC; tion and smuggling: Unitade Técnica de Reforma das Alfãndegas, or -- Domestic industries, the sugar and tobacco UTRA, in Portuguese) from its inception in 1995 industries in particular, complained repeat- until December 1999. The United Nations Devel- edly that they could not compete with smug- opment Programme paid for a customs specialist glers in the domestic market. and a part-time macroeconomist. Mozambique 51 In view of the need to sustain and build on the · establish the links required with other ministries successes of the first phase of the reforms, and in light of the needs of the customs restructur- following a comprehensive contract compliance ing process investigation carried out by the DFID, the govern- · prepare and manage the bidding process for ment approved a six-month extension to the initial selecting companies that would manage customs three-year contract with Crown Agents, which was services and carry out PSI of imported goods followed by a further contract of three years to con- · supervise the execution of the contract by the solidate the reforms. The cost of the extension and successful bidders to ensure that the govern- consolidation phases amounted to US$26 million, ment gained the maximum benefit from their of which the government financed US$15 million services and the DFID paid US$11 million. With the even- · manage the computerization of customs tual scaling down of Crown Agents' activities, services. Crown Agents' fees fell substantially, and for the last year of the consolidation phase they amounted to External Support only about one-third of what had been budgeted for the first year of that phase. The DFID also In 1996, TURC invited international bids for a com- helped fund a further extension of the contract pany to implement the customs reform process. The with Crown Agents for two years (starting in mid- major elements of the terms of reference were as 2003), with the objective of strengthening the follows: capacities of the customs agency and helping set up the Central Revenue Authority. · take over the complete management of customs, including training · appoint key customs officials to perform the Key Institutional Reform Elements contracted functions in accordance with local employment laws The minister for planning and finance created · supervise imports and other external trade TURC in 1995 to manage the reform process. A operations subject to the customs legislation, as Mozambican senior manager headed the unit, well as to prevent fraud and the evasion of tax supported by consultants provided by the IMF and and exchange control regulations the United Nations Development Programme. · maintain customs assets in good order and pre- Although the private sector was not directly rep- pare an effective assets inventory system resented, its participation was ensured through · procure and maintain equipment assigned to strong coordination with the Customs Higher the reform project, including vehicles and data Technical Council, which has a large number of processing software and hardware. private sector representatives. Strong participation by the private sector in the reform was guaranteed A team that included representatives of the minister when the proposed new customs legislation was of planning and finance, TURC, and the IMF discussed in the council. The plan was for TURC to analyzed the bids. Crown Agents was awarded a manage key policy aspects of the ongoing work of three-year contract commencing in January 1997 the customs administration and to accomplish the and ending in December 1999. By April 1997, following: Crown Agents had proposed work plans for each of the activities to be implemented during the con- · coordinate customs restructuring and represent tract. Operational management began in mid-1997 the minister of finance in all matters relating to in the south of the country and was progressively customs reform, including serving as a liaison to extended elsewhere. both private and public sector institutions inside A senior Crown Agents consultant was appointed and outside the country as delegated manager of customs and was responsi- · coordinate the drafting of all customs legisla- ble for implementing the reform program in accor- tion, including the Tariff Code and customs dance with the terms of the Crown Agents contract. procedures A Mozambican was retained as deputy national 52 Customs Modernization Initiatives: Case Studies TABLE 5.1 Number and Types of Crown Agents Consultants, July 2000­January 2003 July January July January July January Work Area 2000 2001 2001 2002 2002 2003 Customs operations 35 22 17 11 1 1 Sensitive operations 9 9 9 9 9 9 Development 3 3 2 2 1 1 Total 47 34 28 22 11 11 Source: Mozambique Customs Bureau data. director of customs to provide a legal basis for a controlled handing over of responsibilities to action in cases in which the legislation did not con- ensure the establishment of a sustainable customs fer the necessary powers to a nonnational or to service that would operate without external con- someone who did not belong to the Mozambique sultants. The contract specified that the number of civil service. Crown Agents consultants was to be reduced from At the end of the three-year contract in 47 in 2000 to 11 by mid-2003 (table 5.1). December 1999, some of the anticipated results-- In August 2002, a review of progress under the particularly in the institutional development areas, consolidation phase undertaken by the DFID and had not been achieved--and the newly created cus- TURC concluded that sustainability would not be toms service remained fragile. The newly appointed achieved by mid-2003 because senior management senior customs managers were not yet ready to fully was still considered fragile. Thus, the contract with assume their managerial responsibilities, such as Crown Agents was extended by another two years. financial planning, formulation of management This extension period was to cover a bridging phase policies, and monitoring, which thus far had been until the creation of the new Central Revenue assumed by Crown Agents consultants. Many staff Authority, into which customs activities would be members were relatively inexperienced and were integrated. The main objectives of the bridging not considered sufficiently advanced in acquiring phase are to strengthen management at the level of the necessary skills to take over from the consult- the Customs Board; upgrade skills and processes ants. Moreover, some of the institutional develop- at all management levels; strengthen capacity in ment objectives had not been addressed because of investigations, intelligence, anticorruption, infor- the need to assign local staff members to support mation and communication technology (ICT), and the external consultants in operational areas. In auditing; make further progress with the develop- addition, some of the operational procedures and ment of new legislation and control systems; and information systems were not sufficiently estab- reinforce the capacity of managers at borders, at lished to yield their expected results. terminals, and with mobile teams. Crown Agents This situation led to the extension of the con- was scheduled to focus its support on training, tract with Crown Agents until mid-2003. Under developing, and mentoring managers, while no the extended contract, which was referred to as the longer assuming direct management responsibility. consolidation phase contract, the role of Crown The contract called for 11 full-time consultants to Agents changed from an executive one to a super- be engaged for 2 years and for 3 consultants to be visory and mentoring one, except in the areas of engaged for 18 months. investigation and intelligence, staff irregularities, audits, and anticorruption, where Crown Agents Intertek Testing Services maintained its executive role. During the consoli- dation phase, Crown Agents was to maintain and To assist with valuation work, TURC launched a advance the improvements made in customs competitive bidding process to recruit the services services and to introduce the necessary new of a PSI company, which resulted in TURC award- systems and procedures. A major objective was ing a three-year contract to Intertek Testing Mozambique 53 Services (ITS). The reason for employing a PSI were zero for essential goods, 2.5 percent for company was the lack of control capacity by raw materials, 5.0 percent for fuels and capital the customs service and the donor agencies' lack of goods, 7.5 percent for intermediary goods, and confidence in the transparency of trade procedures. 30.0 percent for consumption goods. As of January The PSI company was to check for value, tariff cod- 2003, the maximum tax rate was reduced to ing, quantity of covered imports, and prohibited 25.0 percent. Mozambique uses the 2002 version of imports. The contract also called for ITS to verify the Harmonized Commodity Description and the expiration dates of medicines and food prod- Coding System. The appendix presents a detailed ucts and the value of smaller shipments, which classification of goods under each tariff structure were exempt from PSI requirements, to prevent and a comparison with neighboring Common importers from disaggregating consignments to Market for Eastern and Southern Africa avoid inspection requirements. (COMESA) and SADC countries. The customs administration paid the fee for the The tariff structure is progressive, and tariff preshipment. Importers were initially liable for a rates depend on the extent to which imports are penalty payment of 30 percent of the value of the processed. The simple average applied tariff was goods that were selected for PSI but lacked PSI 13.8 percent in 2001 (down from 15.7 percent in certificates on arrival. This penalty was reduced to 1998), which is among the lowest in southern 10 percent in February 2003 in parallel with a deci- Africa and compares with 20.1 percent in sion to sharply reduce the number of imports Zimbabwe, 24.0 percent in Tanzania, and 24.4 per- subject to prior inspection. cent in Mauritius. Of neighboring COMESA and ITS was appointed to start work in January SADC countries, only Malawi has a lower rate 1996, a full year ahead of the customs moderniza- (5.2 percent), whereas Zambia's rate is roughly the tion process. PSI was initially applicable to virtually same as Mozambique's. The trade-weighted tariff all imports; however, starting in 1999, coverage was with COMESA and SADC countries also fell from progressively reduced using risk management tech- 10.7 percent in 1998 to 8.7 percent in 2001, which niques that were developed and operational at that is well below that of Tanzania (19.8 percent), stage within the Crown Agents Trade Information Zimbabwe (19.3 percent), Malawi (14.1 percent), Management System (TIMS). A new tender for PSI and Zambia (12.9 percent). With four nonzero services took place in 2000, although evaluation of rates, Mozambique's tariff structure is also among this tender did not formally take place until early the most streamlined in the region. In comparison, 2002, and the services to be provided were not fully Malawi has 6 rates, Mauritius has 8, and Zimbabwe determined until July 2002. In the intervening has 14. To facilitate the lowering of tariffs without period, ITS continued to provide PSI services excessive overall revenue losses for the budget, under extensions to the contract signed in 1996. In Mozambique introduced a 17 percent value added August 2002, ITS was asked to train local staff tax (VAT) in 1999. The country also levies excise through coursework and in-the-field assignments taxes on automobiles, luxury goods, alcoholic bev- in the areas of local inspection, postshipment, and erages, and tobacco products. General Agreement on Tariffs and Trade valuation A number of nontariff barriers still impede the procedures. ITS also provided support equipment smooth flow of trade transactions--namely, the for training. complex standards testing, the labeling and certifi- cation requirements, the government's procure- ment rules, and a lack of adequate intellectual Accompanying Trade and Fiscal Reform property rights. However, the government has Mozambique has drastically liberated its trade embarked on an aggressive program to eliminate regime since 1987, including dramatically reduc- most of these barriers in line with WTO rules. ing the number of tariff rates and their levels. It Barriers are being sharply reduced, while govern- eliminated many special import exemptions that ment procurement is being simplified. In addition, had existed under earlier trade regimes. Most corruption and smuggling act as deterrents to the export restrictions and foreign exchange controls growth of legitimate trade. The government has were also eliminated. The applicable tariff rates therefore formulated policies and strategies to 54 Customs Modernization Initiatives: Case Studies combat corruption, including sponsoring the website, which also provides other relevant infor- African Conference on Integrity, which representa- mation, such as recent legislation, tariff classifica- tives from the customs services of 50 African coun- tion codes, and answers to questions frequently tries attended, and the appointment of a third asked by importers and exporters. The computer adjunct director general of customs responsible for software in operation is user friendly and easily internal controls and for the development of strate- accessible to companies, importers, and exporters. gic policies and action plans. The Customs Code was updated and reissued at the end of 2002 and encompasses all pertinent legisla- tion and procedures. Components of Reform Mozambique's policymakers conceived of the cus- Change Management toms reforms as a comprehensive program, and they therefore entailed a set of complementary and A steering committee made up of representatives interlocking policy measures. from TURC, the IMF, the World Bank, and the DFID oversees the process of change management implemented by Crown Agents. This committee New Customs Code has been meeting quarterly. In addition, the com- Customs laws dated mostly from the colonial mittee carries out yearly reviews that benchmark period, particularly from the 1940s and 1960s. Not and document progress against the original objec- only was the legislation obsolete in terms of the tives. No such oversight exists with regard to the control philosophy, approach, and methodology PSI contract. required in a modern customs service, but also the enforcement powers assigned to the customs serv- Staff, Pay, and Training ice were unclear and inadequate for effective action against customs crimes. Control systems were Before the reforms, customs personnel were under- based on 100 percent physical checks rather than qualified. In 1996, about a quarter of the staff had on risk assessment and the targeting of customs not completed high school, and one-third of those resources to consignments that presented the great- had only the most basic educational qualifications est likelihood of irregularities or fraud. Conse- (table 5.2). About 10 percent of all staff members quently, the systems were slow and inefficient. The had a university degree. outcome was a combination of inefficient public Pay levels were low and no adequate health care service and poor results in terms of revenue col- plan was in place. In addition, salary payments were lected and fraud prevented. The new Customs irregular. Working and living conditions were poor, Code was issued in 1998 and was made available especially at border posts, where even such basic on CD-ROM and on the customs administration's necessities as water and electricity were lacking. TABLE 5.2 Academic Qualification of Customs Staff after the Reform, 1996 Academic Qualification Number of Staff Percentage of Total Postgraduate degree 52 4 University graduate 82 6 Technical or commercial qualifications 284 22 High school graduate 529 43 Completion of ninth or tenth grade 217 17 Basic education or less 108 8 Total 1,272 100 Source: Mozambique Customs Bureau data. Mozambique 55 TABLE 5.3 Planned Staff Profile Staff Category Before Reform Changes During Reform After Reform Total Customs commissioners 33 (18) 15 Customs supervisors 15 29 44 Customs officials 8 58 66 Agents, trainees, assistants 146 731 877 Guards 125 63 188 First- and second-class 38 44 82 auxiliaries Total 365 907 1,272 Note: The parentheses indicate a reduction in staff numbers. Source: Mozambique Customs Bureau data. This situation called for a major reform in human allowance, which varies and is merit based. The resources. Table 5.3 shows how the staff renewal new compensation package also included health was envisaged at the outset of the reforms. insurance and a staff pension plan. These changes The overall staff size was to increase gradually were agreed to by the Ministry of State Administra- from 365 before the reform to 1,272 at the end of tion, which is responsible for state employees, the reform. However, of the 945 staff members on and were effected through a series of ministerial board in 1996, 750 were to be removed; 776 staff decrees. This compensation package has not been members were to be recruited according to newly extended to the rest of the civil service, where the established standards. However, civil service proce- proposed civil service reform is expected to make dures did not permit the implementation of the drastic changes. staff renewal process as rapidly as had been sched- Recruitment procedures were substantially uled. Even after the transfer of some staff members modernized and came to rely heavily on academic to the new VAT department and to some Planning tests and, in the case of senior staff members, on and Finance Ministry departments, by the end of psychometric tests conducted by independent 2002 about 260 staff members still needed to be national institutions and on individual interviews. released to complete the staff renewal project. New Background and integrity checks are carried out recruitment focused on attracting better-educated only for senior managers and for those appointed personnel. Between 1997 and 2000, 82 postgradu- to sensitive posts. Induction training for new ates, 52 university graduates, and 813 mid-level employees now includes paramilitary as well as staff members (with high school, technical, or com- basic customs training. mercial certificates) were added to the staff. A process of continuing education is in place. Recently, the target number of customs staff Consideration is being given to setting up a center members was further increased to 1,851. This for public finance studies that would cover all units increase was justified by the need to enhance mana- in the Ministry of Planning and Finance. The idea gerial capacity; to improve anticorruption opera- would be to start with a customs module. The tions, legal investigations, special operations, and authorities undertook a feasibility study and a sur- postimportation audits; and to reopen closed vey of training needs in 2003. In the meantime, the border stations. (Mozambique has approximately Customs Training Unit, which was established by 63 border posts.) Crown Agents, uses an institution owned by the The reforms included the introduction of a new Ministry of Health. ITS experts carried out a com- salary scale for customs officers. It is higher than prehensive analysis of training needs and assist that prevailing for other civil servants and com- local trainers by providing technical specialists to pares well with private sector pay. The remunera- present training activities and develop training tion comprises a basic salary and a customs materials, particularly in the area of valuation. For 56 Customs Modernization Initiatives: Case Studies specialized customs training, customs agents might The decision to adopt TIMS was influenced by be able to use the training academies of South TURC's limited technical capacity, which ham- Africa and Zambia. The customs service does pered its ability to coordinate contracts under not provide training to importers, brokers, or the customs modernization and reform program. forwarders. However, TIMS depends on technical and logistical support from London (like the Automated System for Customs Data, which depends on support from Integrity and Corruption Issues Geneva). The initial cost to the government of the Before the reform, corruption was rampant, and latter was estimated at US$3 million. there was no reliable system for detection and TIMS was especially tailored to Mozambique's punishment. Importers and customs officials fre- needs as it implemented its newly adopted customs quently colluded in undervaluing and misclassify- procedures. The system was first introduced in the ing imports. Management failures compounded south in 1998 and now extends to the whole coun- the problem: superiors acquiesced in corrupt prac- try. Data transfer to the PSI company by e-mail tices by staff members under their control and began in June 2000. Generalized and specialized probably shared in the bribes paid. Management training preceded the system's introduction. The and control systems for customs assets were com- main functions covered by TIMS include entry pletely absent. of manual declarations, duty payment (not elec- Mozambique is a signatory to the 1993 WCO tronic), manifest management, intelligence, risk Arusha Declaration, and the customs reform pro- management, trade zone management, export gram is based on the key points of that declaration. processing, warehousing, and exemptions. Crown Mozambique also signed the WCO 2002 Maputo Agents maintains and updates the computer system. Declaration on integrity. Against this background, The government invested in computer hardware to action on integrity and corruption issues centered equip various divisions at customs headquarters. on a tough program of disciplinary action against TIMS is not connected to banks, brokers, ports, staff members who violated the rules. Between or railway authorities, but a proposal is under con- 2000 and 2003, 171 customs officials were fired by sideration for establishing a central declaration means of a rigorous disciplinary process. During processing unit in Maputo that will accept declara- this period the government created the Directorate tions made by e-mail and process them automati- of Internal Control, which comprises the Depart- cally. Such a unit would significantly reduce the ment of Personnel Irregularities and the Anticor- number of declarations keyed in at clearance points ruption Unit. Parliament approved anticorruption and would speed up the overall clearance process. legislation toward the end of 2003. Valuation Information and Communication Technology Since the end of 2002, Mozambique has officially Customs operations did not have any substantial adhered to the WTO Agreement on Customs ICT support before the reform project was initiated Valuation, which is based on transaction values as and the staff was unfamiliar with it. The introduc- reflected in invoices. ITS maintains a valuation data- tion of modern ICT was carefully phased in so as to base to which the customs service does not cur- be in line with the introduction of modern customs rently have access. However, as of August 2000, its release and management processes. The software valuation data have been made available to the gov- selection process entailed a detailed comparison of ernment through ITS's Advanced Trade Assessment the advantages and disadvantages of introducing System, as part of the contract with ITS. This system either TIMS or the United Nations Conference on includes information about all inspections per- Trade and Development's Automated System for formed on imports into Mozambique, such as Customs Data. TURC performed this review, with declarations by importer and exporter, price per the assistance of an IMF representative. The exporters' invoices, importer and exporter details, detailed findings were not made available for this country of supply and origin, harmonized system review. codes, declared mode of transport, and form of Mozambique 57 payment. In addition, the database contains data on all agents involved, a process that has started with the results of ITS pricing and coding inspections; the support of Crown Agents and ITS in the areas of comparisons with identical or similar shipments in auditing and valuation training under Agreement similar or different quantities; and price trend analy- on Customs Valuation principles. A specialist valua- ses indicating the lowest, highest, and average prices tion unit has been created within the customs serv- during any given period. The database also contains ice, supported by a valuation module of the TIMS other statistics derived from the Internet and trade software that can carry out postimport audits of journals, commodity prices, and so on. Data on ITS traders' records and a visiting control team that can inspections in other countries are not revealed for determine value under the new procedures. reasons of confidentiality, but they do enhance the The second issue was that since January 2003, work of ITS inspectors. In mid-2002, informal refer- the scope of PSI inspections has been reduced ence prices still existed for most products, but this to commodities that have been identified as situation changed in 2003 with the implementation sensitive--for instance, medicines and certain of the WTO Agreement on Customs Valuation. chemical products--to verify tariff classification, No reconciliation is carried out between data quantity, and quality. If the PSI company has provided by the PSI company and the final calcula- doubts about the values declared, it advises the cus- tion of duties and taxes. ITS had initiated such rec- toms service so that customs officials can undertake onciliation in 1997 with support from the customs appropriate postimport audits. service and the National Statistics Institute, in con- nection with World Bank conditionality attached to Physical Inspections the release of US$50 million in debt relief. The rec- onciliation was designed to (a) compare import Mozambique's reform plans called for a drastic values certified by ITS and accepted in the calcula- reduction of the rate of goods that are physically tion of duties and taxes, (b) identify clearances inspected so as to speed up the clearance process. where the variation between duties assessed by Before the reform, all goods were physically ITS and duties actually paid varied by more than inspected. This rate has been reduced to 40 percent 10 percent, (c) verify the existence of exemptions since 1999, when the customs service and ITS agreed from PSI and clearances made without PSI docu- on a risk-based approach to select goods for inspec- mentation, (d) inspect movements of good into tion. This approach relies heavily on an analysis of and out of warehouses, and (e) analyze duties col- data on the importer,exporter,and country of origin lected per customs point. However, with the elimi- and on the Customs Code and can be applied even nation of preshipment declarations and the drastic before the goods arrive in the country. In addition, a reduction in the number of imports subject to PSI, small percentage of goods is randomly selected for the need for reconciliation diminished, especially inspection. The PSI company produces monthly because deficiencies in the statistical data made the management reports that the customs service uses to reconciliation results unreliable. determine the effectiveness of the PSI program. The program of PSI was under review at the time Particular problems arise with secondhand this report was written. Two issues appeared to goods, motor vehicles, and personal imports. To dominate the agenda. The first issue was the role of assist in the inspection of such goods, ITS has PSI once Mozambique adopts the WTO Agreement updated prices from the countries of origin on on Customs Valuation. Clearly, PSI activities are most of the goods and in some cases uses police compatible with the agreement. However, applica- records. The latter are used to detect smuggled sec- tion of the agreement requires more evidence to ondhand cars, especially from South Africa. create reasonable doubt than had been required under the Brussels definition of value, which Trade Procedures to Safeguard Mozambique had previously used to justify reject- Revenues and Facilitate Trade ing the invoice price as the customs valuation and moving to the alternative method allowed under the Mozambique's poor revenue performance before Agreement on Customs Valuation. This difference the reforms resulted largely from inefficiencies will require additional information and training for in collection and control procedures. Although 58 Customs Modernization Initiatives: Case Studies measures were introduced to enhance revenue Beira have honored this obligation. Trained cus- performance--for example, training along with toms officials are stationed inside the free trade reform of the customs administration--it would zones to monitor the movement of goods using take time to produce results. In the meantime, the computerized records. Customs audit teams peri- Crown Agents consultants focused on reinforcing odically examine the records. Free trade zones the collection and control procedures that already enjoy an exemption from customs duties on the existed. importation of goods and merchandise under the terms of free trade zone regulations. Importation Process Import licenses were abol- Approval for exemption from duties under the ished in 1998, but importers must obtain importer Code of Fiscal Benefits is carried out at the ministe- identification and taxpayer cards. Since January rial level, following an appraisal of investment proj- 2003, if the goods to be imported do not appear on ects by the Investment Promotion Center. The the list of sensitive goods that are subject to com- principal aim of the exemptions is to attract foreign pulsory PSI, importers may proceed to import the investment that will both generate local employ- products and submit their final declaration directly ment and reduce the country's dependence on to customs agents. All goods that appear on the list imports. The government pays duties on its own of sensitive goods must be submitted for PSI. In imports. Government departments include their such cases, importers notify the PSI company requirements in the state budget, and until directly by lodging their suppliers' pro forma November 2003, the Ministry of Planning and invoices and informing suppliers of the need to Finance issued Treasury orders to settle the duties submit the goods for inspection. The PSI company as imports were received. The arrangements aim to performs a physical inspection of the goods. If the ensure that ministries budget properly and plan results are satisfactory, then the PSI company issues their expenditures in line with their budgets. The certified single documents that the importers will use of Treasury orders has since been abandoned use to clear the goods through customs. Currently and accounting notes are now used to pay duties. the PSI company does not intervene in exports. Mozambique does not use a drawback system, and adoption of such a system in the future is not Special Import Regimes TIMS software is used advisable. However, temporary admission is per- to process declarations for special customs regimes, mitted for a wide variety of specified goods, espe- including temporary admission for imports and cially those used during international exhibitions. exports, free trade zones, and bonded warehouses. Such goods are secured by cash or bank guarantees, Since 1996, duty exemptions have been limited to which are refunded when the goods are reexported. imports that are covered by the Code of Fiscal Benefits; are going to free trade zones; or are Transit Trade Mozambique has transit trade with imported by nongovernmental organizations deal- Malawi, South Africa, Swaziland, Tanzania, Zambia, ing with humanitarian aid and medicines, diplo- and Zimbabwe under SADC and COMESA. Trade matic missions, and multilateral organizations. The is guided by protocols that depend on the regional government has heightened controls over duty membership of the particular country. The author- exemptions, and abuses are now rare. ities recently approved new transit procedures, Mozambique has two free trade zones: Mozal, and the procedures are being implemented. which is located five miles outside Maputo and spe- Guarantee centers are being established in each cializes in aluminum smelting, and Belita, which is region to be responsible for acquitting guarantees located in Beira and manufactures textile products once the transit process has been completed. In and apparel. The Free Trade Zone Law requires that addition, intelligence systems identify transit traffic at least 85 percent of the production of companies that either fails to move on or takes an abnormally operating in free trade zones be exported duty free. long time to do so, and they notify frontier Permission to sell locally is given for up to 15 per- locations to seize such shipments on sight, pending cent of the previous year's production in accor- further investigation. COMESA and SADC are dance with customs regulations. Both Mozal and implementing a regional customs bond guarantee Mozambique 59 system that will be cost effective and will be able to Revenue Performance control transit traffic in each member country. Customs reforms have contributed to improved Border controls at Ressano Garcia and revenue performance. Between 1997 and 2001, cus- Namaacha, the frontier points between toms revenues, including VAT collected on imports, Mozambique and South Africa and Swaziland, increased from 3.6 percent of gross domestic prod- respectively, had been quite weak. Both facilities uct to 6.0 percent (table 5.4). The largest increase needed to have their infrastructure upgraded to was due to the introduction of the VAT in 2000, enable installation of the latest technology so they which reduced the share of customs duties in total could better control transit traffic. The authorities revenues managed by the customs service from have undertaken a number of investments to 63 percent in 1995 to 33 percent in 2001. Despite strengthen those border control points, and in the tariff reform that entailed a substantial lowering of case of Namaacha, the facilities at the border have nominal rates, the ratio of customs duties to the been totally rehabilitated. value of total imports rose slightly from 8.9 percent Most goods imported through the border posts in 1995 to about 10 percent in 1998, 1999, and of Ressano Garcia and Namaacha are transported 2000, with a drop to 8.6 percent in 2001. The by truck and must proceed for customs clearance to increase was due partly to the reduction in the the privately owned road cargo terminal on the volume of goods previously imported under an outskirts of Maputo. The terminal charges a daily exemption regime and partly to more effective storage and parking fee that traders consider to be customs administration. However, with the intro- exorbitant and that the government does not regu- duction of the VAT, the effective import tax (cus- late. The prospect of building clearance facilities at toms taxes plus VAT over imports) rose from the frontiers has been raised periodically, but no 12.3 percent in 1995 to 22.6 percent in 2001. Limi- firm plans to do so have been prepared. tations placed on exemptions and better control of Outcomes to Date the remaining exemptions led to a drop in the share of exempted imports from 26 percent of all imports The following paragraphs describe the outcomes to in 1995 to 8 percent in 2001. date. TABLE 5.4 Customs Revenues, 1995­2001 Category US$ Millions 1995 1996 1997 1998 1999 2000 2001 Circulation tax/VAT 10.2 10.7 19.6 21.5 74.1 112.3 104.9 Consumption tax on imports 14.4 14.2 15.5 18.2 16.9 14.3 12.2 Custom duties 64.8 62.5 70.3 80.2 81.5 82.3 71.2 Total customs revenue 102.5 106.3 125.4 146.1 198.1 236.0 213.5 Taxes on imports 89.3 87.5 105.3 119.9 172.5 208.9 188.3 Value of imports 727.0 783.0 760.0 781.0 790.0 821.0 832.0 Percent Customs duties as a share of 8.9 8.0 9.0 10.2 10.3 10.2 8.6 the value of imports Total taxes on imports as a 12.3 11.2 13.9 15.4 21.9 25.4 22.6 share of the value of imports Customs revenue as a share -- -- -- -- 43.9 52.7 51.1 of total fiscal revenue Customs revenue as a share -- -- 3.6 3.8 4.9 6.1 6.0 of gross domestic product -- Not available. Note: The VAT replaced the circulation tax. Source: Mozambique Customs Bureau data. 60 Customs Modernization Initiatives: Case Studies Enforcement Advisory Service estimated the average clearance time in Mozambique at 18 days, substantially The new enforcement systems have reduced illegal more than in Botswana, Lesotho, South Africa, and imports. The number of seizures of illegally Swaziland but fewer than in Kenya and Zimbabwe imported goods by customs agents increased from (figure 5.1). The situation has improved since then, 559 in 1997 to 1,709 in 1999. In 1999, 1,602 cases of and Crown Agents estimates that in mid-2002 clear- diversion of duties, 61 of wrongdoing in relation ance times had fallen to an average of 8 days. This to importing goods, and 46 of smuggling were estimate is based on the time elapsed between when brought before customs courts. Consumer goods customs declarations are lodged and when delivery and alcoholic beverages--items that attract the orders are provided, which can be done only after highest tariffs--represent the largest categories of duties are paid. Having a clear indicator of clearance goods caught in antismuggling activities. time that is periodically communicated to private sector operators would enhance transparency and Customs Clearance Times could serve as an indicator of success or the lack thereof. Even though measurement of total clearance time does not seem to be fully satisfactory, the reforms Anticorruption Measures appear to have shortened overall clearance times, because several steps in the import procedure now All customs personnel sign a personal integrity seem to be carried out more rapidly. Goods are now commitment declaration, in accordance with the cleared 40 times faster than before the reforms. requirements of the Public Sector Employment The profession of clearing agent is strictly regu- Law. A staff handbook and a code of conduct have lated, and entry into the profession of clearing agent been prepared and are awaiting approval by is restricted. These restrictions undoubtedly under- TURC's director general. In addition, in 2002 the mine the quality of services provided to traders and Customs Board approved an anticorruption strate- negatively affect clearance time. In 2000, the Inter- gic plan. Overall procedures to detect staff miscon- national Finance Corporation's Foreign Investment duct have been strengthened. Between 1997 and Figure 5.1 Average Number of Days Required for Import Clearance, Selected African Countries, 2000 Zimbabwe 23.2 Kenya 19.9 Tanzania 18.6 Mozambique 18.2 Zambia 16 Swaziland 11.5 South Africa 8.6 Botswana 7 Lesotho 6.4 0 5 10 15 20 25 Days Source: Foreign Investment Advisory Service 2001. Mozambique 61 TABLE 5.5 Penalties for Misconduct, Maputo Declaration, a commitment to integrity in 1997­June 2000 customs services. Old New Penalties Staff Staff Total Users' Reactions Expelled 20 15 35 The Customs Higher Technical Council was created Dismissed 58 35 93 as a forum for consulting with trade association Demoted 24 15 39 representatives and clearing agents regarding their Other 16 5 21 views on progress under the customs moderniza- Acquitted 45 26 71 tion process. The Customs Higher Technical Coun- Under investigation 81 82 163 cil meets quarterly, or more frequently when the Total 244 178 422 situation demands it. Participants consider it to be a good forum for discussing and exchanging ideas Source: Mozambique Customs Bureau data. on a whole range of topics, from proposed legisla- tion to the effectiveness of the reforms. The Chamber of Commerce organizes an annual pri- June 2000, 188 cases of gross misconduct involving vate sector conference, during which participants both old and new staff members at middle and discuss constraints on private sector development, lower levels were detected and dealt with, while including those related to customs operations. a further 163 are under investigation (table 5.5). Although the community of private sector users By the end of 2001, a further 102 disciplinary appears to have no formal measures of improve- cases had been closed, with 55 expulsions and ment, general user opinion is that overall customs dismissals. performance has made substantial progress. Users Even though the Customs Tribunal has been in also believe that corruption in the customs admin- existence for some time, it has gradually been istration has declined somewhat but has not been reconstituted to bring it in line with the new eliminated. They are optimistic that the reform Customs Law and the new career plan set out in the process will help to close the gap between the per- tribunal's regulations. The Customs Tribunal deals formance of Mozambique's customs administra- only with matters of a fiscal nature. Human tion and that of more advanced neighboring resources personnel resolve disciplinary matters, administrations, such as those in South Africa, and these matters are subsequently referred to the Swaziland, and Zambia. Adjunct General Directorate for Operations and Importers and their representatives look for- Organization. TURC advises the Directorate when ward to the possibility of making electronic cus- necessary. This system needs to be strengthened to toms declarations and electronic payments for be fully effective. assessed duties and taxes. The customs administra- The application of sanctions to corrupt customs tion intended to enable electronic declarations officials is further hampered by the fact that cor- by the end of 2002, and TIMS was reengineered ruption must be dealt with under criminal law, over accordingly. which the Customs Court has no jurisdiction. Delays at the level of the Administrative Court are Selected Issues that Deserve lengthy, undermining the credibility of the cam- Immediate Attention paign to enhance integrity. Further undermining the anticorruption program is the failure of disci- The following are selected issues that deserve plinary action to always swiftly follow conviction. immediate attention. The seriousness with which Mozambique views corruption in the customs service is illustrated by Debt Management the March 2002 invitation to the WCO to hold an international conference in Maputo on Integrity in A review of debt management systems reveals that Customs: The African Experience. This meeting large amounts of money are owed to the govern- resulted in participants issuing and signing the ment. Those amounts include about US$500,000 in 62 Customs Modernization Initiatives: Case Studies uncollected fines and penalties for 2002 imposed by following guidelines. If unchecked, this situation the Customs Tribunal and about US$850,000 in will lead to corruption and other illegal activities. guarantees where importers have not fulfilled their The backlog of disciplinary cases in which staff legal obligations. To address the outstanding debt members have been convicted but no disciplinary issue, the government should introduce changes in action has been taken is reaching an unprecedented the customs structure that would lead to the cre- level. In mid-2002, it stood at 109 cases. This situa- ation of a secretariat responsible for collecting such tion undermines the achievement of the integrity debts. Regarding the Customs Tribunal, the govern- objectives. Also, the sanctions imposed may not be ment has appointed 11 justices and assigned them sufficient deterrents. to the tribunals of Beira, Maputo, and Nacala. Infrastructure Change Management The development and upgrading of communica- With the extension of Crown Agents' contract, the tions facilities to manage transit traffic require authorities must monitor the progress that Crown urgent attention. TURC should act on available, Agents makes in implementing its key assignment specific proposals to redress the situation. of upgrading management skills--including at the Customs personnel continue to live and work in highest levels--in order to establish a sustainable extremely poor conditions, especially at some of national customs service. the border posts that lack even water and electric- Mozambique's tax administrations, including ity. Decisive action to remedy this situation is the customs administration, are to be transformed warranted. into the Central Revenue Authority by 2005, much In addition, to achieve the objectives of the like the organizational structure of customs admin- bridging phase of the customs reform program, key istration in Kenya and Uganda. Studying the expe- infrastructure projects need to be completed, espe- riences of those countries would be useful, so that cially the communications infrastructure required Mozambique could benefit from the lessons to complete the installation of TIMS at all customs learned. offices. By mid-2003 all technical customs positions that go through a selection process were fully staffed by Smuggling local officials, except for the position of director gen- eral. In June 2003, a new customs director general Policies to check smuggling by informal sector was appointed and added to the management team. traders need strengthening, and arrangements need to be made early on to manage such risk in a sus- tainable manner. Elements of such a policy, some Staff and Management Issues of which are under consideration, could include The process of staff renewal has been completed, (a) encouraging greater cooperation between the meaning that the process of retrenching the customs administration, the police force, and fron- 263 staff members earlier identified for retrench- tier guards; (b) attempting to sustain pressure ment has been expedited. Nevertheless, the human at key locations over a number of weeks; and resources strategy to deal with retrenchment, (c) mobilizing the elite mobile rapid-response recruitment, and staff discipline needs to be teams that have been specially trained by the strengthened. Staff training also deserves more police and provided with quality equipment. To attention, and the establishment of a revenue acad- strengthen antismuggling efforts, the government emy deserves priority attention within the context approved regulations for the Council for Customs of government plans for creating the Center for Policy Coordination, which brings together the dif- Public Finance as part of the Ministry of Planning ferent ministries involved in antismuggling activi- and Finance. ties. The private sector, through the Mozambican The operations of key border posts and termi- Association of Sugar Producers, which represents nals are deficient, because managers are not all enterprises in the sugar sector, coordinates with supervising their staffs adequately and are not the customs administration in such efforts. Mozambique 63 Lessons Learned The sustainability of the reforms will depend greatly on actions taken during the bridging phase The reform and modernization project on which of the customs reform program before the with- Mozambique embarked in 1996 was unique in its drawal of the Crown Agents and on how the comprehensiveness and its reliance on expatriate customs administration is readying itself to take on consultants to whom the government granted the task of valuation. Several issues deserve to be managerial powers. However, the initiative turned highlighted in this regard. out to be more ambitious and complex than initial First, with all the key management roles now planning suggested, and as a result, the initial con- performed by nationals, the challenge is to enable tract with the consultant firm was extended twice. managers to provide effective leadership in a The acid test for the success of the reform will be a modern and efficient public service organization successful transition to a sustainable customs serv- and to develop customs strategies and policies to ice that is completely run by Mozambican staff and achieve the reform objectives, particularly the inte- the smooth integration of the customs administra- gration of the customs administration into the tion into the envisaged Central Revenue Authority. Central Revenue Authority. Mozambique's experience underlines the impor- Second, provisions should be put in place to tance of developing a detailed feasibility study of the ensure that the TIMS software is maintained and management tasks to be entrusted to an outside further developed so as to accept customs declara- agency before any contract is agreed. Such a study tion information electronically. To that effect, an would reduce the need for repeated contract exten- ICT strategy will need to be developed that will sions, while greater flexibility in relation to contract include recruiting skilled personnel and upgrading length could be useful for tasks related to capacity training. Eventually a system should be designed to building. permit trade information to flow between the cus- The following are key factors in the success of toms administration and other trade participants, the customs modernization initiative to date: such as freight forwarders, importers, exporters, port operators, and carriers over a wide area · The willingness to rely extensively on external network or the Internet. Electronic payment of companies, trainers, and facilitators to support taxes should also be made possible. the process of reform to supplement the acute Third, the newly created valuation unit should shortage of experienced local customs officers. be closely monitored to ensure that it will be able to · The prudent and gradual approach that placed operate autonomously from the PSI company over revenue collection above other reform processes time. Staff policies should be implemented without to avoid jeopardizing the relatively fragile delay so that the new customs administration does advances made in the overall context of economic not inherit the thorny problem of staff turnover reforms. The decision to adopt a gradual and and can concentrate on enhancing staff efficiency phased approach to reforms was helpful in that it and enforcing staff integrity. Attention to staff led to the introduction of new systems only when training should be given greater priority than at adequate support for their functionality was present. guaranteed. Examples are the reliance on PSI and Finally, civil service reform that improves the its move to greater selectivity and the phased performance of the police, the immigration service, introduction of the ICT system by Crown Agents. and the local administration at border points · The careful planning of the reform, with would greatly benefit the performance of the cus- progress rigorously reported and monitored by toms service. domestic leaders and external donors. This fac- tor gave added flexibility and authority to the process and contributed to donors' willingness Reference to extend their support beyond the period origi- Foreign Investment Advisory Service. 2001. African Competitive- nally envisaged. ness Report 2000. Washington, D.C.: International Finance Corporation. · The benefits provided to the reform by adequate political support. 64 Customs Modernization Initiatives: Case Studies APPENDIX 5.A. SADC and COMESA Country Tariff Structures, Selected Years Trade- Weighted Simple Rate, Number Average SADC and of Rate COMESA Tariff Country or Entity Tariff Structure (percent) (percent) (percent) Lines Malawi (2000) 0, 5, 10, 12.5, 15, 25, 30 5.16 14.05 5,443 Mauritius (2000) 5, 10, 15, 20, 30, 40, 55, 80 24.36 n.a. 5,481 Mozambique (1998) 0, 2.5, 5, 7.5, 35 15.74 10.69 5,172 Mozambique (2001) 0, 2.5, 5, 7.5, 30 13.80 8.70 5,243 Tanzania (2000) 0, 5, 10, 20, 30 24.00 19.84 6,215 Southern Africa 279 different taxes, both n.a. n.a. 7,804 Customs Union specific and ad valorem, (2000) with rates from 0 to 72 percent Zambia (2000) 0, 5, 15, 25 13.59 12.87 6,066 Zimbabwe (2000) 0, 5, 10, 15, 20, 25, 30, 40, 60, 20.14 19.25 7,099 65, 70, 75, 80, 85, 100 n.a. Not applicable. Source: Various national and regional databases. 6 Peru Adrien Goorman In 1990, the Peruvian government launched a pinpoint a fixed date when the new customs major customs administration reform. The reform administration was established. The most intense transformed what was generally considered to be years of reform were 1991­94, when the basics were an inefficient and "bad" customs administration developed and put into place, and 1995­98, when into an efficient and modern administration that the reforms were consolidated and deepened. Fol- observers see as a model for others to follow. More- lowing a brief leveling-off period, in 2000 the over, the improvements resulting from the reform reformers made a push for further modernization, have been sustained to date, consolidated, and increased administrative efficiency, and better serv- deepened. ice to the trading community with a program of The most important steps that would eventually second-generation reforms that were based largely ensure the success of the reform were taken at the on more intensive use of technology. Today the cus- very beginning and during the initial years of the toms administration continues to renovate itself in process, when the legislative basis for reform was light of changes in the trading environment and laid. With the support of the highest authority, technological developments. reformers were able to work toward achieving their Although Peru's achievements are formidable vision of a professional, modern customs admin- both in substance and in sustainability, continued istration characterized by integrity. Rather than vigilance and effort will be needed to prevent the tinkering with adjustments or improving existing quality of the customs administration from deteri- systems and procedures, the reformers started with a orating. Risks are mainly economic and political, clean slate;went for the best in organizational,mana- but some of a systemic nature may also arise. gerial, and operational systems; and largely achieved This chapter begins by reviewing the circum- their objective through quality design and planning. stances and factors that stimulated the reform and The customs administration changed dramatically underlie its success. Skeptics might reason that within a few years, and the consolidation and deep- being perceived as successful is easier when a coun- ening of the reform process continues today. try starts from an extremely low point of departure The modernization of a complex administration and establishes what should have existed in the first is, by its nature, a gradual process. One cannot place, but Peru's success in customs reform is much 65 66 Customs Modernization Initiatives: Case Studies more than that. By starting from scratch, in many contradictory, and neither customs personnel nor ways Peru surpassed the degree of modernization the private sector were familiar with them; as a and the quality of management systems that can be result they were not properly applied. Working found in many industrial countries. That is not to without guidelines or instructions, personnel acted say that the system is perfect, and improvements on suspicions rather than on good faith. Discre- and adjustments are possible or needed in a num- tionary action was the rule. Procedures were ber of areas, but that situation is characteristic of bureaucratic and cumbersome, with excessive customs administration. Given its position in the clearance controls. Customs valuation was subjec- middle of foreign trade operations, customs admin- tive; thus the duties and taxes charged on import istration needs to be flexible and able to adapt to shipments were unpredictable. On average, goods changes in the sector. were not released from customs until more than 20 days after the presentation of declarations. Such delays substantially increased costs for import and Background and Origin export businesses. of the Customs Reform Computing equipment was inadequate, and the customs administration lacked professional staff This section summarizes the characteristics of the members with adequate computer skills. The trade and tariff regime and the customs adminis- customs process was almost entirely based on tration in 1990 and how the economic crisis that paperwork. Statistics were processed through a erupted that year led to important policy and insti- mainframe computer at the Ministry of Economy tutional reforms, including the customs adminis- and Finance (MEF) that served the entire ministry. tration reform. Statistics, prepared only after huge delays, were obsolete by the time they were ready. Infrastructure Trade and Tariff Regime in 1990 was precarious and, at some customs offices, non- In 1990, Peru's trade regime was characterized existent. Vehicles were not available for operational by intervention, regulation, and protection. The activities, and communication links between head- import tariff regime was complex, consisting of 39 quarters and field offices were lacking. different rates, ranging from 10 percent to 84 per- The customs administration's collection func- cent, along with 14 different surtaxes. In combina- tion was not effectively controlled. Revenue collec- tion, the tariffs and surtaxes amounted to 56 rates tion procedures lacked rigor and resulted in a large ranging from 10 to 110 percent. The overall rate number of disputes and litigation cases. In addi- level was high. The unweighted, average, nominal tion, many payment checks lacked deposit cover- tariff rate, excluding surtaxes, was 46.5 percent. age, but the customs administration failed to take Multiple exemptions and numerous nontariff action to recover revenue. Customs policy was not barriers added further complexity. Peru also had clearly defined, and institutional development 130 special exemption regimes. Nontariff barriers plans did not exist. Also the customs administra- included quantitative restrictions, prohibitions on tion failed to provide the public with information 539 tariff items, licenses, importer and exporter about rules, procedures, and activities. Personnel registration, authorizations, and administrative changes in senior management positions were requirements. Exports were subsidized. frequent. Finally, the customs administration depended on the MEF for its budget. There was no investment budget, and budgetary programs were Customs Administration in 1990 not properly implemented. In 1990, Peru's customs administration was disor- ganized, inefficient, and corrupt, and it had a nega- The 1990 Economic Crisis tive public image. Out of 4,700 personnel, only 2 percent were professionals. Salaries were low and The Peruvian customs reform came about as a training was inadequate. In addition, discipline was result of the 1990 economic crisis. In 1990, Peru poor and the incidence of corruption was high. faced an unprecedented collapse of its public Laws and regulations were uncoordinated and finances. Tax revenue, which had averaged between Peru 67 15.0 and 17.0 percent of gross domestic product failings. During that period, she also obtained a (GDP) in the mid-1980s, had fallen to 8.7 percent certificate as a customs technician after attending of GDP, and GDP itself was also falling. Those a three-month course sponsored by the German developments coincided with hyperinflation and Technical Assistance Agency. In 1990, Higaonna and increasing terrorism by the Shining Path. To bring her team prepared a report for the president on the Peru out of the crisis, newly elected President state of the customs administration. Alberto Fujimori launched major policy and insti- Thus, when Higaonna was given responsibility tutional reforms. The old trade policy of interven- for reforming the customs administration, she was tionism and protection was replaced by a policy of in the excellent position of already having consider- deregulation, openness, and liberalization. Within a able insider information about every component of year, quantitative restrictions and other nontariff the administration. In addition, she had no politi- barriers had been virtually eliminated, the tariff cal affiliations and was given a high degree of free- structure had been simplified to only a few low dom in carrying out the reform. She put together a rates, and most exemptions had been abolished. reform team consisting of 20 officials, whom she On the institutional side, a January 1991 decree had brought in from the General Auditor's Office. mandated the reform of all public entities of the They had worked together auditing the customs central and regional governments and decentral- administration for many years, and 17 of them also ized public institutions. Customs reform was con- had obtained the German Technical Assistance sidered urgent because of the fiscal emergency and Agency's customs technician certificate. That core the need to reduce obstacles to trade. A March 1991 team was later strengthened with officers retained decree empowered the customs administration to from the existing customs administration, follow- reorganize itself. The subsequent Legislative Decree ing a stringent selection process. The team worked Number 680 stipulated that the reorganization full-time on the reform for about five years. must encompass the redefinition of a national cus- toms policy, a new organizational structure, the Support from the Highest Authority professionalization of staff, the implementation of an integrated computerized system for administra- Opposition from vested interests was strong during tive and technical operations, an overall moral- the initial stages of the reform. The policy of open- ization of customs staff, the reactivation of foreign ing up the economy and reforming the customs trade, and an increase in budgetary revenue. administration to facilitate trade did not sit well with business lobbies that were used to import protection and other special treatment. Customs Laying the Foundation for Reform officials also opposed the reforms, albeit for other This section reviews important initial measures reasons: they wanted to protect their jobs and taken to establish a solid basis for sustainable privileges. Congress strongly opposed the reforms, reform. which would have affected some well-entrenched vested interests. Despite such opposition, the reformers went Fully Dedicated Reform Manager and Team ahead, thanks to personal and unrelenting support In December 1990, President Fujimori appointed from the president, who met with Higaonna Carmen Higaonna as superintendent of the cus- frequently during the initial years of the reform toms administration with a mandate to reform and protected her from political interference. As the agency. Higaonna was eminently qualified for the reforms progressed, opposition decreased. the job. After obtaining her degree in economics, Opposition from Congress disappeared because the she worked for 10 years in the MEF's Tax Office, president disbanded Congress in 1992. Opposition where she gained experience in tax policy and from customs personnel disappeared with the new administration. For the next 10 years, she worked in staffing and working conditions that were intro- the General Auditor's Office, where she was respon- duced in the first year of reform. Business and sible for auditing the customs administration and industry began seeing the gains from reform and gained in-depth knowledge of its workings and eventually gave it their support. 68 Customs Modernization Initiatives: Case Studies External Support and Financing restructuring and transformation was needed. The reform team set out to develop a strategy and pro- In 1991, the reform received a substantial budget of gram to convert the administration into a profes- US$3.4 million from the technical cooperation sional, dynamic, modern, and efficient one that component of a trade adjustment loan financed by would be an effective instrument of fiscal policy the Inter-American Development Bank (IDB). The and foreign trade and would have a positive public IDB provided this support for Peru to prepare new image. The program was constructed around three customs laws and regulations, establish a new orga- basic themes: moralization, professionalization, nizational structure, streamline and computerize and modernization. The envisaged outcome was a operational procedures, upgrade the physical infra- customs system that would (a) facilitate trade; structure, adopt a new salary scale, and implement (b) operate on the basis of good faith; (c) limit the training programs in the National Customs School. discretion of customs officers; (d) be fully comput- The support covered the hiring of international erized; (e) implement a self-assessment system of and national experts; the acquisition of computers, duty liability; (f) selectively check transactions, communications equipment, and laboratory equip- with a maximum of 15 percent of transactions ment; and the hiring of highly specialized instruc- undergoing physical inspection; (g) rely on postre- tors for the National Customs School. lease checking; (h) delegate functions to the private The IDB continued its support with three more sector, such as banks (to collect duty payments), loans: a US$1.5 million loan in 1994 to consolidate privately operated warehouses, customs brokerage the reform, a US$750,000 loan in 1997 to establish services, and preshipment inspection (PSI) compa- a certified quality system, and a US$1 million loan nies (to help establish the customs value of in 1999 to consolidate and extend the quality sys- imports); (i) be professional; and (j) be quality cer- tem and introduce the World Trade Organization tified (International Standards Organization 9000). (WTO) Agreement on Customs Valuation. The The team planned to achieve this system by reform was also financed internally through the such means as revising and systematizing customs customs administration budget. Approved legisla- legislation, restructuring the organization of the tion granted budgetary autonomy to the admin- customs administration, adopting modern man- istration. Two percent of customs revenue was agement systems, revising personnel and training allocated to finance operational expenses, and 1 per- policies and systems, streamlining and computeriz- cent was allocated to the annual investment plan ing operational procedures, and modernizing designed to modernize the customs system. infrastructure. The reform team concretized the specific objectives and strategies in its reform plans Design, Planning, and Monitoring for the consecutive phases of the reform. Members of the reform team took study trips to countries that had modern customs administra- Reform Measures tions or had successfully reformed their customs The key measures that resulted in successful reform services to learn about best practices in customs involved legislation, organization and manage- administration and reform. The reform team ment, personnel recruitment and development, designed the reform plan, working closely with and computerization and other information and the MEF and with IDB experts in the context of the communication technology (ICT) applications that technical cooperation program. Throughout the supported clearance procedures and the new cus- reform, MEF and IDB experts monitored imple- toms control strategy. mentation. Legislation Reform Objectives and Strategies At the beginning of the reform process, fundamen- Given the chaotic state of the customs administra- tal legislation was passed to change the trade regime, tion, a piecemeal approach to reform would evi- thereby enabling and supporting the customs dently have been insufficient and an integral administration reform. Peru 69 TABLE 6.1 Tariff Regime, Selected Years Aspects of the Regime 1990 1997 2002 Number of rates 56 4a 7b Highest rate 110 25 25 Lowest rate 10 12 4 Nonweighted average nominal rate 47 14 11 Prohibitions 539 25 -- Nontariff barriers Numerous -- -- -- Not available. a. Basic rates of 12 and 20 percent and surtax of 5 percent combine to 12, 17, 20, and 25 percent. b. Basic rates of 4, 7, 12, and 20 percent and surtax of 5 percent combine to 4, 7, 9, 12, 17, 20, and 25 percent. Source: National Customs Service data. Trade liberalization policies not only made met with intense opposition from importers, reform of the customs administration necessary to not only because they had to pay for inspections remove administrative obstacles to trade but also but also because it made corruption more enormously simplified customs administration, difficult. The customs administration itself per- thereby creating conditions needed for the reform to ceived the measure as demonstrating a lack of succeed. Significant steps toward liberalizing and confidence in the administration. However, the simplifying the tariff and trade regime were made program proved useful because it provided duringAugust and September 1990 and were contin- price and product information that would ued in subsequent years. Table 6.1 highlights the key otherwise not have been available. The Import elements of the tariff regime in 1990,1997,and 2002. Verification Program has been renewed annu- In relation to customs administration, crucial ally, although its continuation has remained legislation was passed at the beginning of the re- controversial. form process, including the following: · The new General Customs Law and Regulations and the new Organizational Law on Customs · In 1991, a supreme decree and Legislative Decree became effective in March 1992 and December Number 680 set out the objectives and direction 1992, respectively. Customs legislation was of the reform. Those decrees are of utmost updated as the reforms progressed. The General importance because they provided the customs Customs Law of 1996 (Legislative Decree Num- administration with the autonomy to reorganize ber 809) has been the basis of customs adminis- itself. Such autonomy was crucial because it tration to date. greatly facilitated the development and imple- mentation of measures needed to achieve reform The new laws provided the necessary legal basis for objectives in such sensitive areas as personnel the professionalization, moralization, and modern- policy and management. It also allowed the cus- ization of the customs administration. They toms administration to use its budget effectively harmonized and systematized customs laws and and flexibly to operate and, thus, to achieve its adapted them to international norms and stan- goals much like a private business. dards and to the requirements of an open · Decree Number 659 of August 1991 introduced trade regime.2 The laws enabled the effective the Import Verification Program, the first measure geared toward outsourcing customs functions to the private sector.1 The measure 2. Peru has been a contracting party to the World Customs Organization since 1969, the multilateral agreements included 1. This measure was not part of Higaonna's program but was in the Uruguay Round decision since 1994, and the Harmonized imposed by the MEF. Commodity Description and Coding System since 1998. 70 Customs Modernization Initiatives: Case Studies FIGURE 6.1 Organizational Structure of the National Customs Service NATIONAL CUSTOMS SERVICE Organizational Structure: Phase 2001­2002 Statute, Resol. National Customs Service Nr 226 of 15.02.2001 National Customs Service Executive Office Internal Audit Office Legal Affairs Office General National Customs Attorney's Office Secretariat School National Information National Human National National Customs National Fraud Systems Resources National Audit Administration Techniques Prevention and Department Department Department and Collection Department Border Control Department Department Regional Customs Offices Source: National Customs Service. organization of the National Customs Service administrative goals through autonomy and (NCS, see figure 6.1); the effective management of accountability.3 human, budgetary, and physical resources; and The March 1991 supreme decree provided the the introduction and implementation of modern customs administration with administrative auton- administrative and control procedures and systems. omy on a temporary basis and in broad terms. The They also established the principles of good faith organizational law of March 1992 rendered that and presumption of innocence and were geared autonomy permanent and defined it more specifi- toward minimizing discretion in customs adminis- cally. The law established the customs administra- tration, providing for reliance on postrelease tion as a decentralized public institution under the audits, and facilitating trade. Finally, they regulated MEF with administrative, economic, budgetary, the functions that the private sector was to per- financial, and technical autonomy. The president form, such as acting as customs agents, warehouse selects the superintendent of the NCS on the recom- operators, and shipping agents. mendation of the minister of economy and finance, Organization and Management The objective of the reform was to establish an 3. A July 2002 decree stipulated the integration of the NCS and the organizational structure that would be functional Internal Revenue Service,to be effective within 90 days.The objec- tive was to expand the tax base through improved revenue control, and modern, have the necessary infrastructure and including more intense cross-checking of information, and to equipment, and allow management to achieve realize economies of scale in such areas as computerization. Peru 71 and the superintendent is appointed by a cabinet objectives in a timely manner. It also enables the resolution. The superintendent has the power to NCS to pay productivity bonuses to its personnel hire and fire customs personnel at any level. subject to certain conditions. More on this agree- Economic, budgetary, and financial autonomy ment is included in appendix 6.A. allows the NCS to finance its operations and invest- In 2003, the NCS and the Internal Revenue Ser- ments. The law allows the NCS to retain 3 percent of vice were consolidated into a single organization. customs revenue collections and to charge fees for its The objective of this recent organizational change services. There is no nominal upper limit. Two- was to expand the tax base through improved thirds of that income is to be used for operations and revenue control, including more intense cross- one-third for investment in customs modernization. checking of information, and to realize economies In general, the NCS decides autonomously how to of scale in such areas as computerization. use its budget; however, in addition to the require- One of the objectives of the reform was to estab- ment that it use part of its budget for investment, the lish an administration characterized by openness MEF's Office of State Institutions and Organisms and transparency. To this end, the NCS closely must approve the salaries of customs staff. Further- involves foreign trade operators, customs agents, more, budgetary autonomy depends on governmen- and the public in its reform plans and consults with tal approval: at the request of the executive branch, them on its proposals for changing customs law, reg- the allocation of 3 percent of customs revenue can ulations, and procedures. For instance, meetings be changed by a simple act of Congress. that included representatives of the NCS's Legal That extensive autonomy has been a decisive Department and foreign trade operators led to factor in bringing about reform. It has allowed the the realization that the Customs Law needed to be NCS to accomplish the following: revised. Following the drafting of an initial set of revisions,the NCS will solicit the opinions of foreign · Set and implement its personnel policy inde- trade operators, other users, and the public and will pendently, including firing and laying off staff; prepare a new draft that will reflect their comments. implement a new, rigorous recruitment system; The NCS makes information about rules, regula- and adopt a private sector employment regime tions, activities, and programs available through its that allows the NCS to pay much higher salaries Web site. Detailed data on foreign trade operations, than those prevailing in the public sector and including the details of every customs declaration reduces incentives for staff members to engage thattheNCSprocesses,arealsoavailable.Inaddition, in corrupt behavior. the customs valuation data bank is also accessible to · Develop administrative and operational norms, anyone interested in the value of specific imports. systems, and procedures that largely eliminate The transparency of customs operations not discretionary decisionmaking; reduce interac- only supports the customs administration's opera- tions between customs officers and foreign trade tions and reform plans through consultation and operators to a minimum; and make customs information but also helps preserve integrity and administration transparent and predictable. gives the customs administration a favorable image. · Develop norms and procedures that are inde- That is an important factor in securing the sustain- pendent of the standard rules set for public ability of the reforms. administration in general and freely adapt them to the needs of a modern customs Personnel Recruitment and Development administration. · Operate like a private business, unencumbered The first important reform measure was the by rules set by other agencies concerning travel, removal of all nonperforming, underperforming, procurement, and so on. and corrupt personnel. A voluntary withdrawal program was introduced whereby such personnel Every year, the NCS and the MEF sign a manage- were offered significant monetary amounts as an ment agreement that commits the NCS to the pur- incentive to leave. Personnel who opted not to leave suit of institutional objectives and management under this arrangement were required to pass an targets. The agreement provides for periodic evalu- external examination that was organized in cooper- ations to assess whether the NCS is achieving its ation with the National Engineering University. 72 Customs Modernization Initiatives: Case Studies Those who did not pass had to leave the customs performance under the Customs Quarterly Opera- administration. Those who passed had to take a tional Plan, and the amount available to be paid out one-year course at the National Customs School as bonuses depends on the operational cash flow and pass another test at the end of the course. balance at the end of every six-month period. Indi- Those measures allowed the NCS to get rid of vidual bonuses are based on performance evalua- 60 percent of its staff in 1991 (and more during the tions, which are carried out every six months. The next few years) and to retain only the best. management agreement that the NCS signs with At the same time, the responsibilities of the the MEF every year establishes the criteria and National Customs School were expanded to include parameters for distributing bonuses. recruitment. Before the reform, admission to the Individual performance evaluations of customs customs administration was regulated under civil personnel use such criteria as quality of work, service rules, and no more than a high school cooperation, discretion, knowledge, adherence to degree was required. Since 1992, recruitment has rules, meeting of targets, initiative, and interper- been controlled by internal NCS regulations. Under sonal relations. In addition, group evaluations are the new system, only university graduates who carried out on the performance and achievement of graduated in the top third of their class could enter objectives determined every six months for every the customs service. In addition, candidates had to administrative area under the Customs Quarterly pass a one-year National Customs School course. Operational Plan. Candidates were required to pay for the course, but Almost every measure taken in the context of they were guaranteed immediate employment if the customs reform can be considered a measure to they passed the examination. ensure or promote integrity, because together the Those measures resulted in a substantial increase measures create an environment that is conducive in the number of NCS staff members with univer- to integrity. In addition, the reformers took a num- sity degrees and a specialization in customs admin- ber of specific measures to ensure or promote istration, while the total size of the staff was greatly integrity in the service, including the following: reduced. By 1993, the number of customs personnel had decreased by some 30 percent (table 6.2). By · Issuing a code of conduct. 1997, about 50 percent of the personnel were pro- · Carrying out background checks to ensure staff fessionals, and this ratio has been maintained. members' quality and honesty. Those checks With the March 1992 Organizational Law of cover their academic levels (authenticity of diplo- Customs, the NCS was changed from a public sec- mas), criminal records, family situations, and tor employment regime to a private sector one. kinship (this measure, aimed at identifying cases This change placed customs employees on the same of nepotism, was introduced more recently). salary scale as those at financial institutions, and · Requiring a sworn declaration of income and their salaries increased by 600 percent. In addition assets. In 2002, the superintendent of the NCS to regular salaries, personnel are also eligible requested 81 management staff members to for productivity bonuses. Bonuses are based on make such declarations. TABLE 6.2 Customs Staffing, Selected Years (number of employees) Type of Staff 1991 1992 1993 1994 1997 2000 Professionals 67 552 686 1,065 1,280 1,440 Unspecialized technical staff 1,303 534 472 469 454 420 Technical specialists 0 118 134 198 231 250 Administrative staff 1,289 813 611 505 596 519 Total 2,659 2,017 1,903 2,237 2,561 2,629 Source: National Customs Service data. Peru 73 The National Customs School has played an impor- operations, control functions, audits, administra- tant role in professionalizing the customs service by tion, exchange of information with foreign trade means of its role in evaluating and training recruits, operators, statistics, and management. Its main in developing and implementing in-service training components are the Customs Management System, programs and specialized activities for customs per- the Payment Control System, the valuation data sonnel and customs agents, and in publishing perti- bank, and the Audit Management System. nent information. In combination with the increase All customs operations are computerized. Cus- in the number of personnel with university degrees, toms offices are interconnected through a system of the continuous training of staff, and the perform- 1,600 computers, 50 servers, and an e-mail network. ance evaluation system, the overall quality of NCS This computerization has permitted the following: staff has been significantly enhanced. Since 1991, 2,244 staff members have graduated · The NCS has a Web site that provides access to from the National Customs School. Although the institutional and operational information and a majority of courses are given in Lima, since 1997 place for electronic commerce. the school has increasingly organized courses in the · Trade and revenue statistics are now produced provinces. quickly and efficiently through electronic means. In recent years, the school has also increased · Cargo manifests are transmitted electronically. its focus on training personnel in institutional · Declaration processing and clearance procedures management. About 250 NCS staff members have are fully automated. A program of risk assess- participated in a senior management training pro- ment and management selects shipments for red, gram at the University of Piura. The program is orange, or green channels with payments made funded by the PSI companies that have been through electronic or other means. By law, no approved under the Import Verification Program. more than 15 percent of shipments can be phy- The PSI companies are required to train those sically inspected. Clearance times have been customs personnel who work on valuation. The reduced from an average of 20 days to 24 hours program includes inspection techniques and for the red channel (physical inspection), administrative and organizational procedures. In 12 hours for the orange channel (document veri- 1992­95, approved import verification companies fication), and 1 to 2 hours for the green channel delivered some thirty 15-day courses. Customs offi- (immediate release). An advance clearance sys- cers believe that those courses have been useful in tem is in place for operators in good standing. such areas as inspection techniques, goods classifi- · Postrelease checking of shipments or operators, cation, and valuation. About 15 percent of the as selected through the Audit Management Sys- courses were held abroad, bringing personnel tem, complements the clearance process. Penal- into contact with customs systems in other coun- ties for fraud are stiff. tries and with officials with whom they could For more details about the declaration processing maintain relationships afterward. Since 1999, train- and customs clearance system and the NCS Web ing has centered on the introduction of the WTO site, see appendix 6.B. Agreement on Customs Valuation. The extensive application of ICT has been a cru- The various measures taken in the areas of cial element of the reform by helping to achieve recruitment, training, salaries, bonuses, evaluation, and support several objectives: and integrity have been crucial in attracting and maintaining a professional staff, encouraging hon- · automating, simplifying, and establishing uni- esty, strengthening management, increasing admin- formity of operational procedures istrative efficiency, and improving performance. · implementing modern customs control strate- gies based on selective checking at the time of importation supported by postrelease audits Information Technology and Customs · minimizing contact between customs personnel Control and Clearance Procedures and foreign trade operators An integrated computer system was developed at · eliminating or reducing discretionary action by the NCS that encompasses all customs regimes, customs personnel 74 Customs Modernization Initiatives: Case Studies · selecting shipments for inspection before goods are shipped from the country of · reducing clearance times exportation. In the certificates, the PSI company · tightening revenue controls certifies the nature, quantity, value, and tariff classi- · improving and accelerating the availability of fication of the goods. Under the original procedure, management information those data were to be used by importers in their · permitting rapid and efficient production of import declarations and formed the basis for the trade and revenue statistics payment of duties. Customs officers verified the · increasing overall efficiency. consistency of import shipments with the data on the inspection certificates. In cases of discrepancy, the goods were released with security required for Audits any additional duties, and the case was submitted One of the objectives of the reform was to shift the to the NCS Valuation Division for a decision. emphasis of customs control from controls at the The Import Verification Program was originally time of importation, exportation, or other transac- created to address the failure of the old customs tion to postrelease audits. That objective lies at the administration to effectively carry out its core heart of the new customs control strategy and is responsibility of verifying import shipments for based on the view that the customs service should duty assessment and collection. Furthermore, the be a second-story administration, in which many program was consistent with another reform objec- functions are outsourced to the private sector while tive that called for outsourcing certain administra- customs personnel concentrate on postrelease con- tive functions to the private sector and leaving the trols. The reform included the creation of the responsibility for supervising and monitoring the National Audit Department. The department's outsourced activities to the customs administration. activities are divided into two main branches: the Even though the Import Verification Program Intelligence Management Branch, which is respon- was originally presented as a temporary measure sible for risk analysis and audit programming, and that would help prevent undervaluation and fraud the Audit Management Branch, which is responsi- until the NCS could build up sufficient capacity to ble for carrying out inspections and audits. During carry out the valuation function without PSI assis- 1999­2002, the number of customs auditors was tance, it is still in place. However, in view of the increased from 25 to 60. adoption of the WTO Agreement on Customs Val- The risk management system is used in the cus- uation and the WTO Agreement on Preshipment toms clearance process through electronic alerts or Inspection, the use of PSI services in the area of val- orders to retain shipments in terminals or through uation has changed.4 The role of PSI is limited to the assignment of shipments to the red or orange that of risk indicator, and importers are no longer channels. It is also the basis for postrelease controls. required to declare the value verified or observed by Audits are carried out in line with an audit plan the PSI company. Customs officers question the and audit program. The audit function is well declared value whenever they have reasonable developed, organized, and managed, but it needs to doubts about the accuracy of the declared value or be strengthened further. All the elements for the of the documents presented in its support. Reason- Audit Department to work efficiently and effec- able doubt may arise on the basis of the PSI compa- tively are in place; however, periodic amnesties nies' verification reports, the indicators from the granted by the government are negatively affecting Risk Assessment System, or the valuation data the results of audits and may eventually undermine bank. When customs officers have reasonable the entire new customs control strategy, which doubts, they use the procedures laid down in the hinges on the effectiveness of postrelease audits. Agreement on Customs Valuation to arrive at an acceptable value. The NCS's Valuation Division oversees the Valuation and the Import Verification Program activities and performance of the approved PSI Legislative Decree Number 659 of August 1991 established the Import Verification Program, 4. As a signatory, Peru implements the WTO Agreement on Pre- which requires importers to obtain certificates of shipment Inspection and the WTO Agreement on Customs Val- inspection issued by authorized PSI companies uation and has incorporated the agreements into national law. Peru 75 companies. The division is also responsible for are whether the NCS is ready and able to perform developing, interpreting, explaining, and supervis- the valuation function without the assistance of the ing the application of the valuation norm and approved PSI companies and whether doing so developing, maintaining, and updating the valua- would be more cost effective than the present tion data bank. The division deals with all valuation system. Opinions vary widely among both public matters and has a staff of 24. The price information and private sector representatives. The cost of the that is provided by the approved PSI companies has Import Verification Program amounts to some greatly facilitated the valuation work of the NCS. US$45 million per year. On the basis of its findings About 80 to 85 percent of import shipments are and analysis, the mission that carried out this subject to PSI intervention. Imports with a value reform evaluation believes that the NCS should below US$5,000 (US$2,000 for goods particularly now carry out its valuation function largely with- vulnerable to fraud) and those that fall in certain out assistance from PSI companies. PSI assistance other categories are exempt. From the implementa- could still be useful on a limited basis, especially in tion of the Import Verification Program in 1992 relation to shipments vulnerable to fraud and in the until March 2002, the approved PSI companies context of risk-based management of the pre- and issued 1,351,544 inspection certificates or verifica- postclearance verification process. tion reports, all of which have been used as a basis for duty assessment. According to data from the PSI Outcome of the Reform companies, the NCS found irregularities in the This section evaluates the overall effect of the reform quantity, quality, or value of shipments in only and examines its influence on revenue collection. 2,291 cases, or 0.17 percent of the total. The customs valuation data bank was created in Overall Effect 1992 and was gradually developed on the basis of inspection certificates and, since 1999, of verifica- Today the customs administration is a modern, tion reports. It now contains some 40,000 entries. effective, and efficient system that compares favor- Declared values, whether declared by importers or ably with other customs administrations in South observed by a PSI company, are automatically America, which operate in a broadly similar eco- checked against the values in the data bank, which nomic and trade environment, and with customs is continually being updated. administrations worldwide. According to both The Import Verification Program was helpful in public and private sector representatives inter- (a) providing the NCS with the elements needed viewed during the evaluation mission, the customs for duty assessment (for example, value, tariff clas- reform has been a great success. The gains in trade sification) for every shipment at a time when it facilitation, revenue collection, service to foreign lacked the capacity to perform these functions trade operators and the public, and administrative properly on its own; (b) supplying those data dur- efficiency are indisputable. Table 6.3 outlines the ing the subsequent years of the reform, while the achievements of the reform by comparing the situ- NCS was building up that capacity; (c) providing ation in 1990 with that in 2002. most of the price information that allowed the NCS There remains room for improvements and fur- to create and build up its valuation data bank; ther gains in efficiency, but if those gains have not (d) dissuading importers from misrepresenting been made yet, the lack of improvement has more the actual customs value of their imports; and to do with Peru's economic realities than with any (e) training valuation officers. inability to implement further reforms, particularly Ten years after the introduction of the Import with respect to trade facilitation. The economic Verification Program, the NCS has greatly in- reality is that substantial incentives to evade cus- creased its capacity by training personnel, com- toms duties and taxes still exist, and the degree to puterizing its activities and making extensive use of which further reforms can be achieved must be ICT applications, maintaining an updated valua- weighed against the risk of evasion. For instance, tion data bank, and ensuring stable organization the desirability of reducing the number of physical and management. It also has gained experience inspections of imports to less than 15 percent of since 1999 in implementing the Agreement on Cus- shipments is not obvious at this stage, even though toms Valuation. Thus, the questions that now arise it would be desirable from a trade facilitation point 76 Customs Modernization Initiatives: Case Studies TABLE 6.3 A Comparison of the Customs Administration, before and after the Reform, 1990 and 2002 1990 2002 Objective of customs Revenue collection; no explicit or implicit Revenue collection and trade facilitation objective to facilitate trade Legislation Tariff and trade regime · 39 tariff rates, 14 surtaxes, combining to 4 rates (7 rates including surtax) 56 different rates · Range of rates: 10­110 Range of rates: 4­25 · Prohibitions: 539 items Prohibitions: 1997: 25 items Administration (laws and regulations) · Contradictory and dispersed Clear and coherent Organization and management No autonomy; public sector regime Administrative and technical autonomy No institutional development plan Institutional development plan in place Inadequate and bureaucratic structure Structure adapted to the needs of a modern customs administration and the dynamics of foreign trade, with clearly established functions for each organizational subdivision and unit Centralized decisionmaking Delegation of functions and responsibilities Budget depends on the MEF and determined Budgetary, financial, and economic autonomy; through a national budgetary process; 3 percent of customs revenue to finance no investment budget customs operations and investment Precarious or nonexistent infrastructure Modern physical infrastructure No annual investment plan Annual investment plan No acquisition program Existence of an acquisition program Personnel and training Total staff: 4,700 Total staff: 2,540 Professionals: 2.5 percent of staff Professionals: 60 percent of staff Recruitment: no strict requirement Recruitment: rigorous evaluation process Low salaries Salaries equivalent to those in the private sector No career plan Career plan No training program One-year full-time course at the National Customs School as a condition of entry; special and refresher courses during career; 1,573 staff trained at the National Customs School by 1999 and 2,240 by 2002; training under the PSI program No training provided to customs agents One-year full-time course at the National Customs School for customs agents required for certification Computerization No computerization All customs functions and operations computerized; 1,600 computers and 50 servers; interconnection of all customs offices through an e-mail system; interconnection with foreign trade operators online through electronic data interchange and e-mail Huge delays in trade statistics and obsolete Statistics in excellent shape and produced rapidly when ready Electronic commerce Not available Electronic customs auctions, acquisitions, and sale of statistics via the NCS Web site Peru 77 TABLE 6.3 (Continued) 1990 2002 Customs control and clearance process Incoherent procedures Uniform, computerized procedures Paper declaration, clearance process, Electronic declaration lodging and processing and transactions Control system based on suspicion Good faith principle 100 percent of shipments checked Selective checking based on risk analysis; by law maximum of 15 percent of shipments physically checked; in 2001 18.9 percent were physically checked, documents were checked for 44.4 percent, and 36.7 percent were not checkeda Multiple procedural steps Automated procedure Payment at customs Payment at bank, electronic or otherwise Process discretionary and unpredictable Predictable, set rules and procedures virtually without discretion Multiple contact with foreign trade operators Little or no contact of customs officer with importers or exporters No facilities for reliable foreign trade operators Facilities for reliable importers and exporters: advance declaration system, temporary admission regime for export processing Clearance times: over 20 days Clearance times: red channel 24 hours, orange channel 12 hours, green channel 1­2 hours Revenue collection not effectively controlled Revenue collection tightly controlled Poor quality of service Quality certified (ISO 9000) Postrelease audits No postrelease audit; customs control Customs control system relies heavily on postrelease system relies on 100 percent checking audit; audit function established and fully operating at time of clearance with a staff of 50 based on the audit selection system and audit program Valuation Brussels definition of value system WTO Agreement on Customs Valuation introduced in 2000 Valuation discretionary and subjective Strict valuation methods and rules No valuation data bank Valuation data bank operated by customs on the basis of PSI and other data Revenue collection US$626 million US$2,403 million 23 percent of budgetary revenue 36 percent of budgetary revenue a. Although the law stipulates that no more than 15 percent of shipments should be checked physically, achieving exactly 15 percent in practice is difficult. The 18.9 percent rate resulted from adjustments of the declaration or the duty liability in 6 percent of cases. Source: International Standards Organization (ISO). of view. Customs administrations in industrial 1991, the fact that customs managers are still work- countries routinely inspect only 2 to 5 percent of ing on improvement of, and refinements to, the shipments, but they operate in an environment administrative and operational systems that were where incentives to evade are weaker and where established over the past 10 years or so is not audit-based controls are solidly entrenched. surprising. Although the trading sector lauds the Furthermore, as Peru's customs administration achievements without exception, it is not satisfied was built up anew under the reform beginning in 100 percent of the time. 78 Customs Modernization Initiatives: Case Studies TABLE 6.4 Value of Imports, Customs Revenue, Rate of Increase, and Average Collection Rate, 1990­2001 Value of Rate of Customs Rate of Average Imports Increase Revenue Increase Collection Rate Year (US$ millions) (percent) (US$ millions) (percent) (percent) 1990 2,726 n.a. 626 n.a. 23.0 1991 3,476 27.5 1,001 59.9 28.8 1992 3,791 9.1 1,283 28.2 33.8 1993 4,024 6.1 1,505 17.3 37.4 1994 5,435 35.1 2,032 35.0 37.4 1995 7,584 39.5 2,676 31.7 35.3 1996 7,774 2.5 2,726 1.9 35.1 1997 8,341 7.3 2,846 4.4 34.1 1998 8,042 3.6 2,838 0.3 35.3 1999 6,718 16.5 2,402 15.4 35.8 2000 7,344 9.3 2,502 4.2 34.1 2001 7,252 1.3 2,403 4.0 33.1 n.a. Not applicable. Source: NCS data and author's calculations. Influence on Revenue Conclusions Customs reform has had a substantial positive effect In addition to summarizing the main factors on revenue. Table 6.4 shows the value of imports, underlying the success and sustainability of reform, the revenue collected, the rate of increase, and this section also highlights some risks to its longer- the average collection rate for 1990­2001. During term sustainability and suggests a number of areas 1991­93, the first three years of the reform, cus- where reforms should now focus. toms revenue increased from US$626 million to US$1,505 million. The rates of increase in revenue Success Factors were substantially higher than the rates of increase A number of factors account for the success of the in the value of imports. In interpreting those data, reform, including the following: note that several factors were at play, the effects of which are difficult to isolate because adequate data · The political will and the continued and unrelent- are not available for 1990 and 1991. Apart from the ing support of the highest authority was the over- value of imports, those factors include tariff rate riding and single most important factor, a view reductions, which had a negative revenue effect unanimously shared by all those interviewed. with a given value of imports; eliminations of · The trade regime was drastically simplified and exemptions, which had a positive revenue effect most exemptions, restrictions, licenses, authori- with a given value of imports; and changes in rates zations, and other nontariff barriers were elimi- of and exemptions from the sales and consumption nated. Those steps simplified administration, taxes. However, those factors cannot account for reduced bureaucracy, and eliminated opportu- the substantial increases in revenue from 1991 to nities for bribery. 1993, a large part of which must therefore be due · The creation of a dedicated reform team allowed to the improved customs administration. After it to take ownership of the reform and work on 1993, the rate of increase in revenue was slightly it full-time for several years. lower than the rate of increase in import value, but · The definition of clear objectives and strategies this change is mainly an outcome of further tariff geared toward the establishment of best prac- rate reductions. tices led the reform in the right direction. Peru 79 · An adequate budget to implement reform was · The privatization of activities that could be made available to the reformers through a self- executed more efficiently or effectively by the financing arrangement and external support. private sector allowed the NCS to concentrate · The administrative, economic, budgetary, finan- on its core tasks of assessing and collecting cial, and technical autonomy gave the reformers duties and managing and supervising the cus- virtually a free hand in designing, establishing, toms control system. The Customs Law man- and developing modern systems. dates the delegation of activities to the private · The establishment of a simple, clear legal frame- sector. work for customs administration supported all · The computerization and the extensive use of the changes needed for the modernization and ICT applications allowed for less contact put the customs administration on a firm foot- between personnel and foreign trade operators, ing for the future. less discretionary decisionmaking, and uniform · The removal of corrupt and unqualified per- and speedy processing. sonnel from the customs administration by · The professionalization of customs agents means of a strict evaluation and testing process helped smooth the clearance process and allowed the reformers to begin with a clean slate. contributed to the achievement of operational Only the best personnel stayed, becoming the efficiency. foundation on which the reform was built. · The legal obligation of the NCS to obtain certifi- · The professionalization and moralization of cation under the International Standards Orga- customs staff members were achieved through a nization 9000 norm (Article 3 of the Customs comprehensive set of human resource develop- Law and Article 8 of Customs Rules) helped ment and management measures, including an achieve a high level of quality in systems, proce- effective personnel recruitment, development, dures, and overall service. and management policy; a private sector em- ployment system, which permitted a much Sustainability Factors higher salary structure than that of the public service; a performance evaluation every six Factors underlying the stability of the reform months, with these evaluations serving as the included the following: basis for merit or productivity bonuses; and an effective integrity policy. · The continuity in top management at the NCS · An environment for integrity was created ensured perseverance in the implementation of through the establishment of a simple and the reform. The NCS had only two superintend- transparent trade regime; clear, straightfor- ents during the reform, one from 1992 to 1999 ward customs norms and regulations; comput- and one from 1999 to the present. The change erization and ICT applications that left little or of superintendent did not change the direction no room for negotiation, influence, or discretion of the reform but rather continued the process in customs processes; strict staff evaluation and and gave it new strength. selection procedures; professional training; · The NCS has built-in mechanisms for good good salaries; performance bonuses; internal performance, timely adaptation, and renewal, control; a code of conduct; background checks; including administrative, financial, and budget- and appropriate and attractive infrastructure. ary autonomy, whereby customs personnel all All those factors combined to (a) create incen- have an institutional and direct personal interest tives for personnel to work well, (b) give them in performing well, increasing revenue collec- an institutional identity and sense of belonging, tions, and keeping standards high. Indeed, and (c) strengthen them against temptations to revenue collections determine the size of the engage in corrupt behavior. customs budget, which in turn supports salaries, · A modern customs control system was adopted. bonuses, equipment, and infrastructure. The system was based on self-assessment, selec- · The reform has been hard-wired into the cus- tive checking, risk assessment and management, toms administration's organizational systems, and postrelease audits. culture, and performance expectations. It has 80 Customs Modernization Initiatives: Case Studies been comprehensive and thorough, changing operations. That rigidity could build up resent- the normative, structural, administrative, mana- ment against the customs service and entice gerial, and technical components that all inter- trade operators to influence customs staff to act to make up the customs administration and solve problems informally. Such an approach allow it to perform well. would breed corruption. · The improvement in customs revenue collec- tions, much of which can be ascribed to the Areas to Monitor reform, should be a guarantee against govern- ment actions that might endanger customs Discussions with senior customs staff members and revenue. private sector representatives, as well as the author's · The enhanced service--in particular, the own findings, suggest that the following areas may reduced clearance times, the overall gains in warrant careful monitoring: efficiency and cost reduction achieved by means of ICT applications, and the transparency of · Improve human resource development and the whole system--is likely to encourage the management further to motivate and improve continuation of support for modernization by the staff. most of the business community. · Improve the distribution and allocation of staff members (for example, by moving personnel from handling files to more operational work, Risks to Sustainability including audits). Potential risks to the sustainability of the reform · Strengthen the training programs at the National include the following: Customs School, particularly in the areas of valu- ation and audits. · Lowered commitment to trade liberalization · Be aware of the limits of extremely strict appli- and facilitation would undermine the drive cation of rules, which was a reaction to the toward customs efficiency. Several representa- chaotic situation that existed before 1990 in tives from both the public and the private relation to customs operations. Customs staff sectors who were interviewed for this study members make great efforts to go by the rules expressed concern in this regard. and are closely controlled by the General Con- · Future governments may be less supportive of troller's Office. That approach works well for an efficient customs service and may appoint routine matters; however, the mechanical appli- superintendents who are less dedicated to con- cation of rules and regulations is at times coun- tinued modernization and high performance terproductive. Foreign trade operators complain standards. Decreased support might also inter- that customs personnel delay clearance proce- fere with personnel management and recruit- dures in cases, for instance, in which the docu- ment, thereby undermining the professionalism mentation contains small errors that have no of the staff. effect on either duty collection or other essential · During periods of economic downturn, the cus- matters, and that they have to solicit authoriza- toms service budget may be cut to the extent tions from superiors for routine matters. Also, that it cannot ensure the proper operation of the customs personnel frequently demand addi- NCS, thereby causing a spiral of deterioration in tional copies of documents they already possess performance and prestige. or that are available on the Internet. To counter · Periodic amnesties whereby duties and penalties this mind-set, customs personnel should be resulting from audits and other enforcement made more service oriented through training activities are forgiven could undermine the that emphasizes solving operational problems effectiveness of the control strategy, thereby expeditiously within the limits of rules and affecting the morale of the auditors and the instructions. prestige of the customs administration. · Monitor the need to continue outsourcing the · The NCS may become overly strict in applying valuation function to PSI companies. The cost its rules and procedures and become rigid in its of such outsourcing should be weighed against Peru 81 the feasibility of the NCS undertaking this task temporary inspection facilitation committee itself using risk analysis and postrelease audit consisting of representatives of the relevant methodologies, while further building up and agencies, who could be given a mandate to work updating its valuation data bank and occasion- out a solution within, say, two months. ally consulting PSI companies. In any event, · Improve revenue collections by further strength- a case can be made for exempting from PSI ening the audit function. inspections those importers that have an excel- · Improve management information to help man- lent reputation with the tax and customs agers make timely and adequate decisions in a authorities. constantly changing trade environment. · Coordinate the inspection activities of standard- · Enhance cooperation and coordination with the setting agencies (such as those concerned with Internal Revenue Service.5 agriculture and health) with customs clearance activities to prevent delays in the release of ship- ments that could result from the need to comply 5. The integration of the NCS and the Internal Revenue Service, stipulated in a July 2002 decree, should facilitate the exchange with all those agencies' regulations. This coordi- and cross-checking of information on taxpayers' activities and nation could be accomplished by means of a obligations. 82 Customs Modernization Initiatives: Case Studies Appendix 6.A. Management · agreeing not to increase salaries and bonuses Agreement between the National during the year, except increases that result from Customs Service and the Ministry collective negotiation or from the productivity of Economy and Finance bonuses provided for in the agreement Every year, a management agreement is signed · making progress in overall management by between the superintendent of the National Cus- designingandimplementingmeasurestoincrease toms Service and the Ministry of Economy and the quality and coverage of the customs service in Finance. The purpose of the agreement is to com- the following areas: human resources, services to mit the NCS to the pursuit of institutional objec- users, strategic planning, and transparency and tives and management targets for the year, with availability of accounts. a view to improving the quality and coverage of the customs service and increasing the efficiency, The signing of the management agreement enables effectiveness, and quality of the management of the NCS to pay productivity bonuses to its person- its resources. At the same time, the agreement is nel subject to the following conditions: an instrument for quarterly evaluations, through control and follow-up of partial targets established · A maximum amount is determined, as a frac- for the achievement of the objectives, and for tion of personnel expenditures. encouraging personnel to reach the targets on time. · The bonus has to be financed through savings in In the 2002 agreement, the NCS declares the the NCS's current expenditures for the year; that objectives of the customs budget for the year and is, a positive operating balance is needed from determines management indicators. The NCS is which the bonus can be paid. committed to the following: · The NCS must be in good financial health, and it must have sufficient liquidity so that its opera- · achieving performance targets and using agreed tions and the quality of its service are not units of measurement affected. · presenting a report to the MEF's national budget · The performance targets must be met at an aver- director on progress toward achieving the tar- age level of at least 95 percent. gets and performance indicators · presenting information on the execution and Failure to present the information about perform- evaluation of the budget ance indicators and about the execution and evalu- · informing the MEF about the personnel evalua- ation of the budget on time is penalized by a tion system and the criteria for assigning pro- 10 percent reduction of the bonus. ductivity bonuses Peru 83 Appendix 6.B. The Application This process is complemented by postrelease of Customs Information and checking of shipments or operators selected by the Communication Technology and Audit Management System. Penalties for fraud are Control and Clearance Procedures stiff. Integrated System An integrated computer system was developed that Advance Clearance System encompasses all customs regimes and operations, control functions, audits, administration, exchange Importers that have not incurred a penalty higher of information with foreign trade operators, statis- than US$897 in the preceding 12 months are tics, and management. Its main components are the allowed to process import declarations in advance Customs Management System, the Payment Con- of arrival of shipments and to have the shipments trol System, the valuation data bank, and the Audit delivered directly to their warehouses without a Management System. customs inspection. The importers are required to have their accounts audited every three months by a private audit company, at their own expense. Declaration Processing and Customs Clearance Procedures Cargo manifests are transmitted electronically to Electronic Payment Through Banks the customs agent and to the NCS. The lodging of and Control over Collection the customs declaration is also electronic. Customs Payment of duties and taxes must be made to the declarations and supporting documents, including bank electronically, through the e-mail system, or value declaration, input-output data, appendixes, in another form. Electronic payment requires regis- and cargo manifests and their amendments must tration of the operator and identification of the be sent electronically from the foreign operator's bank and account the operator wants to use for office to the customs office. This process takes automatic debiting. no more than five minutes. The system operates The Payment Control System brings together through public e-mail services and through the information from the NCS, banks, and warehouses, e-mail systems of the Customs Brokers Association thereby permitting tight control over the accuracy (a private company) and the NCS. Validation serv- and timeliness of duty and tax payments. Revenue ice for the declarations operates 24 hours a day and collections are checked daily, monthly, and annu- is available throughout the country. ally for all customs offices. The system allows for The customs agent (broker) verifies the value effective control over payments and for rapid declaration electronically by accessing the customs action in case of error or fraud. valuation data bank. The Customs Management System verifies and validates the data, issues a single declaration number, and prints the declaration. Customs Web Site Using a program of risk assessment and manage- The NCS has a Web site through which it makes ment, the system selects shipments for the red, available to users and to the general public infor- orange, or green channels. Payment is made to the mation on customs rules, regulations, activities, bank by electronic or other means. Inspection can and programs; its valuation data bank; and detailed be documentary and physical (red channel), docu- data on foreign trade operations, including the mentary only (orange channel), or not required details of every customs declaration. Recently the (green channel). Goods are released from ware- NCS has begun using its Web site for both customs houses after verification of payment. auctions and procurement. The NCS also sells sta- Clearance times for imports are as follows: tistical information over the Internet. In that way, 24 hours for the red channel, 12 hours for the more information is made available to more buyers orange channel, and 1 to 2 hours for the green at a lower cost. channel. 7 Philippines Guillermo L. Parayno Jr. The period 1992­98 was one of golden opportunity environment and the methods of work were for reform and modernization in the Philippine based on the philosophy of the Public Ethics and customs service. The country had just conducted Accountability Program, which was crafted and a national election that had brought into power implemented early in 1987. a government whose priorities included matters However, other factors also created an opportu- directly relating to the efficiency of the customs nity for reform. An experienced staff, whose unin- service. In his first state of the nation address, terrupted tenure enabled it to introduce projects President Fidel V. Ramos noted his intent to with long gestation periods, led the reform. The strengthen tax and customs collections. staff had the full trust and confidence of the presi- dent and his cabinet and was also supported by the business community. With the economy perform- Background ing well from 1992 until mid-1997, many of the Responding to Ramos's policy direction and to the development funds required to provide impetus to president's earlier instructions to the Bureau of the reform became readily available. In addition, Customs (BOC) commissioner to "clean up cus- the private sector contributed as part of a genuine toms," the BOC prepared the Blueprint for Customs collaborative effort with the government. This col- Development Towards the Year 2000. The previous laboration was a major factor behind the 1992­98 administration under President Corazon Aquino Customs Reform and Modernization Program. (1986­92) must also be given credit for sowing The program was basically successful, and it many of the seeds of change. Loan negotiations was recognized in the national business commu- with the World Bank; preparatory work with the nity, the country, and internationally for its signifi- International Monetary Fund (IMF) on the Philip- cant outcomes. However, the reform was not pine Tax Computerization Project (PTCP); and two fully sustained, as progress was reversed under the important and reform-minded laws, the Republic administration of President Joseph Ejercito Estrada Act Number 7650 and the Republic Act Number (1998­2001). 7651, were initiated under Aquino's administra- An investment climate study (Pernia and Gupta tion. Even the main underlying philosophy that forthcoming) points out that customs and trade reg- guided the massive reengineering of the customs ulations ranked seventh out of 18 specific constraints 85 86 Customs Modernization Initiatives: Case Studies evaluated by firms. Exporters and foreign firms the program, which also benefited from regular ranked customs as the major constraint on business assessments by IMF customs experts. operations.The survey also noted that bribery is typ- ically used to speed up the process of getting govern- Origins of Customs Reform and ment authorization or permits, thus encouraging Modernization Program public officials to slow down the process. Efforts are under way to revitalize the reforms and The 1992­98 Customs Reform and Modernization recover lost ground. As before, the key is to harness Program started when the new government took private sector support for the program, obtain full office and appointed a commissioner of customs, political commitment to the reform,fully implement who received full support from the president and the measures identified earlier, and work on remov- enjoyed direct access to him. Because one of ing all the constraints that hinder the achievement of the new government's immediate concerns was the those objectives. Issues that should be addressed budget deficit--the BOC was behind its revenue include adequate personnel compensation, staff target for the first six months of the year by retention, and continuity of direction and manage- more than P 3 billion--the initial work program ment even when the political leadership changes. concentrated on removing revenue leakages. This work entailed intensifying antismuggling opera- tions; disposing of seized goods more frequently Focus of the Study and efficiently; and collecting tax arrears, including The BOC observed its 100th anniversary in those from government corporations and agencies. February 2002. During its existence, its top manage- ment has changed about 40 times, and each admin- The Blueprint for Customs Development istration has claimed to have undertaken reform and modernization initiatives. During 1972­86, Work on the blueprint began toward the end of many corrupt customs officials were sacked. In 1992. From a thorough analysis of the environment 1974, the valuation methodology was drastically projected for customs service operations until the revised, shifting from export value to home con- end of the century, the BOC carefully defined the sumption value. In 1976, a mainframe computer objectives of the service and mapped out the strate- system was installed to generate databases of impor- gies for achieving them. In addition to the primary tant customs transactions such as customs bonds, target of revenue generation, other equally impor- orders of payment, and customs declarations. In tant reform objectives were set, including attaining 1986, a new purge of corrupt BOC officials was a better business and investment environment, pro- undertaken. That same year the BOC engaged a pre- tecting people's health and the environment, and shipment inspection (PSI) service for the first time. streamlining the bureaucracy. During the 1986­92 administration, the Public Some of the factors that were perceived as helping Ethics and Accountability Program was launched to the program achieve its objectives were as follows: increase the risks and reduce the rewards of engag- ing in corrupt practices. Attempts to exempt certain · The introduction of PSI and the Comprehensive key customs positions from the civil service law that Import Supervision Scheme (the mechanism for regulated those positions failed. reviewing imports within the customs adminis- This chapter focuses mainly on the changes tration), which was seen as an opportunity for implemented from July 1, 1992, to June 30, 1998, the BOC to gradually assume full responsibility because that reform was the only one that was pre- for all customs administration. ceded by the publication of a well-thought-out · The World Bank loan and the PTCP, which were reform program. This publication was the Blue- already in the final stages of deliberations and print for Customs Development Towards the Year were expected to provide technology that would 2000, which proposed a clearly identifiable pro- allow the BOC to overhaul its systems and proce- gram, was approved by the president and the cabi- dures to better support organizational objectives. net, was disseminated to the public, and was · The widespread use of information and com- updated over the years. The World Bank supported munication technology (ICT) by customs Philippines 87 partner entities, such as the shipping and airline documents provided more details and amplified industries, port operators, and banks, which the development plans outlined in the blueprint. would permit sharing databases and automating One such document suggested a number of devel- cargo clearance processes. opment activities, including the following: · The readiness of many business groups, such as the Federation of Philippine Industries, the var- · Introduce by 1997 remote lodgment of declara- ious domestic industry associations, and the tions, mainly by means of electronic data chambers of commerce, to collaborate with the interchange. BOC for more effective enforcement of customs · Carry out advance screening of cargo manifests laws. for suspicious and high-risk shipments. · Ensure computer connectivity between the BOC The following were the major strategies and and major port operators by the end of 1993. development principles lined up to achieve the · Establish the BOC as a major hub for all trade- objectives: related information in the country, such as trade statistics,shipping schedules,and cargo locations. · The BOC would increasingly rely on clients' self- · Reduce progressively the percentage of ship- assessments and voluntary compliance with cus- ments undergoing physical clearance to, at most, toms laws, rules, and regulations. 20 percent by 1998 and to less than 5 percent by · The clearance of low-risk shipments and pas- 2000­05. sengers was to be expedited, while enforcement · Develop an intelligence module as part of the resources would be concentrated on high-risk Automated Customs Operating System, which shipments through increased reliance on postre- is based on the latest version of the United lease clearance procedures and other postaudit Nations Conference on Trade and Development processes. (UNCTAD) Automated System for Customs · Information, communication, and other tech- Data (ASYCUDA), and also develop an auto- nologies would be used extensively to advance mated examiner assignment routine. customs processes well ahead of the arrival of · Strengthen the customs service to assume in- cargo, to automate processes, and to reduce creasing responsibility for examining shipments, human intervention to a minimum. and focus the service on gathering information · Information and other resources would be about the value of imports. shared extensively with clients, partners, and · Procure fixed and mobile X-ray machines capa- stakeholders both in the Philippines and abroad. ble of detecting prohibited drugs, firearms, · A high degree of harmony and complementarity and other controlled articles, as well as highly would be attained by means of extensive consul- dutiable goods. tation with all affected groups. · Reduce the number of customs staff members · A climate that promoted involvement, commit- through attrition and through the reclassifica- ment, integrity, and professionalism in the cus- tion of positions to fewer but better-paid jobs. toms service would be cultivated. ICT specialists, accountants, chemists, and man- agement professionals would increase in num- The blueprint was presented to the president and ber relative to other position classifications. his cabinet for approval and then disseminated widely to the public as well as to the BOC's rank and file. The public welcomed the blueprint's objectives Cargo Clearance but was somewhat skeptical that it would ever bene- The principles that were to be adopted to speed fit from them. Few commented on the blueprint. up customs clearance for cargo were announced under the acronym SPACE, which stands for The Shape of Things to Come in selectivity, postaudit, advance clearance, client self- the Bureau of Customs assessment, and electronic data processing, and Subsequent documents were prepared and issued information about the program was widely dissemi- to the public as well as to the BOC. Those nated. A publication titled "2000 Today" provided a 88 Customs Modernization Initiatives: Case Studies detailed description of the various projects included Average nominal tariffs were reduced from a in the SPACE Program. The various customs tech- high of 41.0 percent in 1980 to 26.0 percent in 1992, niques advocated were already in widespread use in 10.7 percent in 1998, and 8.0 percent in 2000. The advanced customs administrations and were some number of tariff lines that were on the restricted list of the main principles that underlay the reform and was reduced from 32 percent before the liberaliza- modernization program of the Philippine customs tion to 8 percent in 1980 and 3 percent in 1992. service. The projects making up the SPACE Program A related positive factor in relation to the cus- included the following: (a) green lane processing, toms revenue program was the lifting of foreign (b) electronic manifest system, (c) secure and elec- exchange controls and the legalization of other tronic transmittal of bank payments, (d) automated sources for funding imports. Combined with tariff matching of payments and payables, (e) postrelease restructuring and import liberalization, those pol- review, and (f) automated computation of payables. icy measures resulted in a drastic shift of trade from illegal and undocumented channels into legitimate and official channels. Thereby they helped offset Tracing the Seeds of the Reform other factors that were eroding customs revenue. A summary section tracing the seeds of the reform The government's trade liberalization programs follows. The subsequent subsections summarize strained the BOC's ability to achieve its pro- the key elements of those seeds. grammed level of collections. Although customs collections continued to rise except for the years following the 1997 Asian financial crisis, they gen- Revenue Base erally declined as a percentage of both overall tax The government's Medium-Term Revenue Pro- revenues and revenues from other sources. Collec- gram (1993­98) required the BOC to increase its tions fell from 25 percent of total tax revenue in revenue collections by 16 percent per year, whereas 1990 to 17 percent in 2001. The relative decline of the economy was expected to grow at no more than customs duties coincided with the increase in 14 percent per year in nominal terms. The govern- importance of the value added tax. The value added ment had no plans to introduce new measures that tax equaled about one-third of customs duties in would expand its overall revenue base. On the con- 1991 but almost as much as all customs duties by trary, in an effort to boost business, the new admin- 1997. As a percentage of gross domestic product, istration planned to phase out two emergency customs collections fell from 4 percent in 1996 to revenue measures that the preceding administra- 2.7 percent in 1998. tion had imposed, the special import levy and the Changes in the macroeconomic environment special levy on oil, which had provided 24 percent since the beginning of the Customs Reform and of total customs collections in 1991. Modernization Program in 1992 have magnified The government's tariff reform program, which the customs dilemma. On the one hand, the ambi- it started in 1981 and which had drastically reduced tious revenue program set against a backdrop of tariff rates on imports and lowered the customs rev- a shrinking revenue base compels the BOC to enue base, was accelerated in the 1990s in compli- take measures to control revenue leakages and ance with the country's commitments to the World to improve its collection efficiency. On the other Trade Organization, Asia-Pacific Economic Cooper- hand, the liberalization programs compel the BOC ation, and the Association of Southeast Asian to embrace trade facilitation as an objective and to Nations Free Trade Area. Before the initiation of the adopt more appropriate control measures. program, 27 percent of the tariff lines had rates ranging from 55 to 100 percent, and 16 percent had Revenue Leakages and Collection Inefficiencies rates between 35 and 50 percent. By 1985, the 55 to 100 percent rate bands had been abolished, although The challenge that the macroeconomic environment the majority of tariff lines remained in the high-rate posed to the customs revenue program was the rea- range of 30 to 50 percent. By 1995, 51 percent of tar- son that the Department of Finance sought a World iff lines were in the 0 to 15 percent band, and virtu- Bank loan in 1990 to fund a computerization pro- ally all the rest were in the 20 to 30 percent range. gramattheBOCandtheBureauof InternalRevenue. Philippines 89 Plugging customs revenue leakages and improving with the percentage to be increased gradually to collection efficiency has been a primary concern of 95 percent the Department of Finance. In 1989 the department · repositioning controls to the points where they estimated that revenues that were actually collected can be most effective, without obstructing busi- were as high as revenues that went uncollected. ness and trade Other estimates broadly agree with the extent of · providing remote facilities for lodging the tax leakage (Parayno 1995). For example, esti- declarations mates indicate that the extent of underinvoicing · introducing paperless and cashless processes ranges from 12.2 to 53.0 percent of recorded throughout the customs service imports. The World Bank supported the PTCP, · privatizing certain operations which was aimed primarily at revenue mobiliza- · linking all the agencies participating in the sys- tion, a key component of the 1992­98 Customs tem electronically Reform and Modernization Program. · using clear and simple rules. A number of private sector groups called for the Preshipment Inspection Program strict enforcement of customs controls because of The seeds of reform may also be traced to certain the unfair competition that smuggled goods pre- programs that were undertaken before the new sented for domestically produced goods. Compa- wave of reforms. The engagement in 1987 of a nies engaged in both manufacturing and exports PSI company to conduct import inspections at the complained of the excessive bureaucracy and the country of export helped increase revenue. The high cost of doing business, which made exports company also provided training, observation tours uncompetitive and discouraged investment. Legiti- abroad, consultancy, and equipment to improve the mate traders complained of being pushed toward efficiency of the Philippine customs service. More- underground and illegal trade channels. The media over, the PSI program opened up trade facilitation were also clamoring for reforms. Occasionally the possibilities for the BOC by waiving inspection for media prepared special reports about sensational 10 percent of all packages, as mandated by the Tar- corruption cases and demanded meaningful and iff and Customs Code, because the Department of long-lasting changes at the BOC. Justice considered inspections performed by the PSI company abroad to be in compliance with the Harmonization of Customs Procedures and examination required under the code. A 1988 law Adoption of International Best Practices recognized the prerogative of the BOC to under- The call by international and regional organiza- take only a selective examinations of goods. tions for customs administrations to adopt inter- national best practices and to harmonize their Public Ethics and Accountability Program procedures and practices was a strong motivation for developing the Customs Reform and Modern- The Public Ethics and Accountability Program, ization Program. Documents by such bodies as the which the Aquino administration introduced to World Customs Organization, Asia-Pacific Eco- combat corruption, had a major influence on the nomic Cooperation, and Association of Southeast shape of the 1992­98 Customs Reform and Asian Nations Working Group on Customs Matters Modernization Program. Customs transactions highlighted best practices, including just-in-time provided opportunities for as many as 40 million inventorying, electronic commerce and paperless face-to-face interactions each year, each one of transactions, remote entry lodgment of declara- which was fertile ground for corruption. In keeping tions, risk management and selectivity, electronic with the philosophy of the Public Ethics and funds transfer, advance clearance, and postaudits. Accountability Program, systems and procedures Catching up with the leaders in advanced customs covering customs transactions were reengineered administration and making headway in relation to to use the following techniques: efficiency benchmarks have become matters of · automating processes to avoid intervention by national pride and matters of survival in global customs officers in 80 percent of all transactions, trade competition. 90 Customs Modernization Initiatives: Case Studies Sponsors of Reform and model for developing their respective blueprints for Modernization reform. In addition, the president demonstrated his The following paragraphs discuss the key sponsors political commitment by publicly calling for every- of reform and modernization. one's support, particularly that of customs offi- cials, and warning in the strongest terms that those The Private Sector who would not cooperate would be subject to severe sanctions. Expressing his support for the Other than the networked computers strategically leadership and its program in clear terms, he pub- located in the central areas of customs buildings, the licly commended all who supported the program most visible proof of customs modernization is the and issued public citations to private sector indi- newly built or renovated customs buildings across viduals and groups who provided support. The the country. Before modernization, customs offices president dipped into his social funds to augment were in such poor shape that it was unrealistic to the resources available for the program and expect personnel to pursue such ideals as customer exempted the BOC's modernization program from service and dedication to good service delivery. The the general moratorium on government capital reform process targeted the improvement of offices expenditures in 1998. The president provided not only to provide better working conditions but strong moral support to the BOC's commissioner, also to harmonize the physical infrastructure with especially when threats to his leadership and to the automated and computerized work processes. The reforms he was pursuing were reported. In the renovated customs offices became better than most final analysis, the strong expression of political government offices and were as good as or better support enabled the program to overcome the than offices in the private sector. obstacles it faced. Because the amount allocated for facilities improvement by the PTCP was insufficient, private sector sources supplemented the resources available The Legislature to renovate buildings. Among others, port opera- The House of Representatives and the Senate tors, the banking community, chambers of com- approved the BOC's annual budget and left it merce, and port users such as brokers, forwarders, essentially intact, particularly those elements and transportation companies contributed to the related to the implementation of the reform and effort and embraced the reform's objectives. of modernization. Budget committees assisted by holding investigations "in aid of legislation." The The Government BOC commissioner took those investigations as The secretary of finance and senior officers of the opportunities for taking drastic measures. How- Department of Finance provided support by regu- ever, many individuals in the legislature harmed larly citing the reforms being undertaken in the the program by making unfavorable declarations to BOC in their speeches and press conferences and by the media and by using their power to summon ensuring that budgetary resources were made avail- customs officials for investigation. The legislators able in a timely fashion. The Civil Service Commis- appeared to be seeking to gain influence and con- sion also played an active role in expressing support trol and to solicit favors and gifts indirectly. for the program. Its chair cited the effectiveness of the reform in her weekly radio program and show- The World Bank and the International cased the BOC in the commission's national sym- Monetary Fund posiums of successful reform programs. However, it was the president who really brought customs The centerpiece of the Customs Reform and Mod- reforms to the public's attention, by organizing the ernization Program was the PTCP. The World Bank presentation of the reform process blueprint to the provided a credit for about one-third of the cost of cabinet and announcing that, henceforth, the cabi- the PTCP and provided technical advice. Equally net was to consider the plan as the government's important were the calls made by the World Bank program for the customs service. He also called on and the IMF for vigilance, sustainability, and other government agencies to consider the plan as a continuity in relation to the reform program. Philippines 91 Those organizations objectively reported on slip- free himself of such routine matters as dealing with pages and deviations from the program. personnel promotions and mobility, the commis- The IMF sent a team to the Philippines in 1991, sioner rationalized procedures so that they would accompanied by a World Bank consultant, to assess require less direct input from him. He also insti- the BOC's existing organization and procedures and tuted a clear delegation of authority to his deputy to review the plans for computerization. To follow commissioners in relation to personnel and pro- up on the implementation of the PTCP, the IMF curement matters. The commissioner tracked the assigned a customs adviser, a former comptroller of progress of the reform in detail and personally the New Zealand customs service who had served intervened to address problems as necessary. two stints in the Philippines as an adviser. Groups were organized in the BOC to assist the adviser and Public­Private Sector Cooperation to pursue individual components of the PTCP. Most of the IMF's recommendations were incorporated In mid-1992, while the decisionmaking process on into the BOC's customs reform program, and the the PTCP was still under way, early measures were IMF tracked the implementation of its recommen- required to step up revenue collection, intensify dations during successive visits to the Philippines. enforcement, combat corruption, and improve trade facilitation and the investment climate. The BOC felt compelled to call on the private sector The Media for assistance. The BOC reached agreement with In general, newspapers and television networks private sector groups on solutions that were imple- provided support by disseminating information mented at no cost to the government. In coopera- pertaining to the reform. The media gave the pub- tion with freight forwarders, the BOC put in place lic good accounts of the developments, at times the online release system to counter the illegal issuing not just news reports but in-depth cover- release of shipments through the use of spurious age. However, the media's propensity for sensa- documents and to ease the lengthy and time- tionalizing the news sometimes took the upper consuming release process. In cooperation with hand, and gradual improvements in service deliv- the Philippines Banking Association, the BOC ery were not deemed newsworthy. As the customs launched Project Abstract Secure. It uses encryp- leadership did not have a policy of paying for news tion technology to electronically transmit payment coverage, some elements of the news media data from the banks to the BOC, with the objective ignored significant developments or even reversed of reducing the massive revenue leakage resulting their presentations in favor of opponents of the from the introduction into the payments system of reforms who paid for media coverage. Luckily, spurious documents or documents that have been those stories were printed mainly in newspapers tampered with. The advance submission of mani- with a limited circulation. fest information through the facilities of the Société Internationale de la Communication Aéronau- tique, the port operators' computer systems, and The Reform Process the consolidator's data exchange center were all The following provides a summary of the main ele- solutions that did not cost the government any- ments of the reform process. thing. A number of other customs operations were outsourced in a similar fashion. The private sector, which had urged the BOC to Leadership reform, at times thought that the reform was going Because customs managers risk being overwhelmed too fast and that the BOC was changing habits too by day-to-day emergencies and policy issues and briskly. The private sector's suspicions about the often do not have the time to plan for the future, BOC's intentions were aroused when the BOC the BOC commissioner took it upon himself to introduced mandatory payment to banks as the manage the reform and provide guidance on the first step in the cargo clearance process, when it direction to be taken. The reform used a strong simplified the formula for computing port charges top-down approach, with relatively few consulta- and the landed cost of goods, and when it initiated tions with stakeholders or BOC management. To the electronic lodgment of declarations through the 92 Customs Modernization Initiatives: Case Studies electronic data interchange and direct trader input One set of regulations allowed the customs serv- systems. However, the BOC explained the rationale ice to implement paperless and complete automa- for those changes and gradually received full coop- tion of the cargo clearance process even before eration from most elements of the private sector. the e-commerce legislation was enacted. At that time, the Tariff and Customs Code had 52 sections explicitly requiring the submission of paper Selective Inspection, Risk Assessment, documents for customs clearance. Legislation on and Other Regulations e-commerce passed the lower house in 1997 but In preparation for the automation of the cargo failed to pass the Senate before the change in gov- clearance process under the PTCP, the BOC sought ernment in 1998. Nonetheless, the BOC issued a legislation to abolish mandatory physical examina- regulation allowing the fully automated processing tion of all shipments. It would be incongruent to of an electronic declaration without requiring fully automate and speed up the computational seg- importers or their representatives to come to a cus- ments of assessment but then allow the process to toms office. be caught in the gridlock of physical examinations Legislation pertaining to the implementation of all shipments at the docks. The Republic Act of the World Trade Organization Agreement on Number 7650 of April 1993 abolished the manda- Customs Valuation came into effect in 1998, with tory inspection of all shipments. In lieu of 100 per- export value used as an interim basis for customs cent inspection, the BOC was allowed to inspect value. In addition, the BOC formed the Manage- cargo selectively on the basis of risk analysis and ment Information System and Technology Group threat assessment. Automation of the entire cargo and charged it with developing ICT for use by cus- clearance system and full electronic services at toms operations. remote sites are facilitated by a risk assessment and selectivity approach that decides which consign- Funds and Resources ments will be extended green lane processing--that is, do not require intervention by customs officers. The government appropriated 18 percent of the Even before the Republic Act Number 7650 was BOC's total budget for the customs component of passed, Customs Memorandum Order Number the PTCP for 1994­99. Because of judicious han- 96-92 stipulated that full container load shipments dling of the procurement process and tight controls that the government surveyor at the port of expor- on expenditures, the amount actually spent was sig- tation had inspected and sealed should be deemed nificantly less than the amount budgeted. For to have been examined for customs purposes. Such example, the amount budgeted for hardware was shipments therefore would not have to be reexam- about US$21 million, but the winning bid came in ined upon arrival in the Philippines. Separate acts at less than US$9 million. Also US$2.3 million was of legislation strengthened customs enforcement budgeted for software acquisition and develop- and the BOC's ability to collect the targeted rev- ment, but a balance of US$300,000 remained at the enues by removing a number of legal loopholes conclusion of the contract with the supplier. The that traders had used to reduce their tax liability. government borrowed 35 percent of the funding The reform process thus used all available avenues for the PTCP from the World Bank and obtained to ensure that revenue generation would be the remainder from local counterpart funds. Ten protected. information systems specialists from the BOC's From March 1993 to June 1998, the BOC com- Information Technology Group were assigned full- missioner issued 277 regulations. Many of the time with UNCTAD. More than 100 mid-level and regulations concerned the Automated Customs senior customs managers were assigned to various Operating System and the manual processes task groups to support system development and surrounding each of its subsystems. Many others implementation. pertained to control systems designed to reduce the Work on the PTCP commenced in the third opportunities for engaging in irregularities, to quarter of 1994, although several projects were heighten the capability to detect wrongdoing, and started early in 1992, including ICT initiatives that to increase the chances of successfully prosecuting did not use PTCP funding. Support for those proj- offenders. ects came mainly from private sector groups that Philippines 93 benefited from them, such as the airlines and ship- automated system. Examples of activities in which ping lines, the foreign trade operators, the bank- the staff lost control included the following: ing community, and the chambers of commerce. Those private sector groups contributed technical · For green lane shipments, customs officers were personnel, hardware, and even office furniture and required to work on unaccompanied electronic equipment. documents instead of paper documents, which importers' representatives used to carry from desk to desk and from office to office. External Consultants · Electronic documents submitted in the green The BOC engaged the services of two external con- lane channel were processed without interrup- tractors: UNCTAD and Unisys. The BOC selected tion until completion, whether or not the UNCTAD to develop and implement the applica- customs officer actually viewed the electronic tion systems following its decision to use ASYCUDA documents. as the main software for the PTCP. ASYCUDA was · Officers who scrutinized the electronic docu- chosen over the French information solution soft- ments and were convinced that a violation had ware (known as SOFI), primarily because of its occurred had to obtain clearance from their compatibility with the BOC's hardware and because superiors before they could hold the shipment, UNCTAD agreed to upgrade its version 2.0, then the through an alert system that makes the process most widely used customs software in the world, to transparent. meet the BOC's requirements. Some staff members inside the BOC contested the decision to use ready- Before the reform, the handling of clearance papers made customs software, claiming that the Philip- and the discretion to hold shipments were the pines had a large pool of experts that the BOC source of customs officers' power and control over could have tapped to develop a system. The BOC the transacting public. The face-to-face interac- defended its outsourcing decision on the basis of tions that characterized the manual and paper- the speed with which ASYCUDA could be intro- based systems created opportunities for customs duced and argued that the modules lacking in the officers to obtain gifts and favors. The reengineer- UNCTAD system could be developed locally. ing eliminated much of the paper handling, Tenders for computer hardware, facilities man- enabled clearance without face-to-face interaction, agement, and systems integration were selected on a and allowed most transactions to bypass customs competitive basis, using tender documents that had procedures completely. Many of the traditional been prepared with the assistance of Crown Agents. customs activities could now be undertaken by the The contract was awarded to Unisys after two other customs computer system, including the computa- contenders submitted proposals that were twice as tion and collection of duties and taxes, the determi- expensive. Prior to approval by the secretary of nation of payments made, the issuance of release finance, the bid was evaluated by the Customs Tech- instructions for shipments to the cargo handler, nical Committee, the Bids and Awards Committee, and the keeping of document receipts and releases and the Department of Finance's Advisory Com- by various offices. The computer system even mittee, which was represented by recognized ICT determined which shipments were to be examined professionals from the private sector. and assigned the customs officer who would con- duct the examination. Some staff members resisted the reforms and brought their grievances to the Change Management media. In response, BOC management met with The BOC undertook a change readiness survey to those opponents and repeatedly presented the gains measure the readiness of the staff for reforms and that the Philippine economy would realize from a to develop communication strategies to overcome streamlined and modern customs service. opposition. The main objection to the reform pro- gram was the loss of control by customs employees Personnel that resulted from the reengineering of the clear- ance process and the shift from a manual and A year before the reform, the Attrition Law was paper-based system to an electronic, paperless, and passed. It prohibited for seven years new hiring by 94 Customs Modernization Initiatives: Case Studies the government and the replacement of staff mem- Remuneration bers who left for any reason. The customs leader- The blueprint identified the low pay of customs per- ship used the law to downsize the workforce and to sonnel relative to the temptations they encountered force it to adapt to automation and modern work as one of the threats to the achievement of develop- methods. ment objectives and called on Congress to address After a review of the workload, estimates indi- the threat immediately. Stakeholders had attacked cated that--assuming the introduction of modern the salary of customs personnel as corruption in customs techniques as planned by the reform--a itself, because the salaries of nearly half the staff staff of 4,300 would be adequate, or 200 fewer staff members were below the official poverty line for members than the number on the payroll at the an income earner with a family of six. Allowances time. Such a finding led to much debate, because added little to customs officers' low salaries. The most could not imagine a customs service that did blueprint's proposal would have exempted customs not rely on labor-intensive techniques. Contribut- employees from the Salary Standardization Law and ing to the perception that the customs service was would have provided remuneration equivalent to undermanned was the highly uneven distribution that in the private sector to those holding sensitive of personnel. In general, the line offices where con- customs positions, such as examiners and apprais- tacts with importers and their representative were ers. However, both the commissioner of the civil frequent--and where the opportunities for making service and the chair of the Senate Civil Service extra income were plentiful--were heavily over- Committee rejected the proposal on the grounds staffed, but many other offices were practically that approving it would remove the security of deserted. For instance, the management informa- tenure for the customs officials concerned and that tion system office was in theory manned by more making an exception to the law could lead other than 50 people, but fewer than 20 were actually in civil servants to ask for higher salaries. In addition, place. Interest was high in staffing those positions many lawmakers believed that customs personnel that could benefit from "facilitation money," as was had access to other sources of income--mostly political meddling on behalf of individual staff illegal--because of their positions and that they members. therefore did not need a salary increase. Modernization efforts, in combination with the law against new recruiting in the civil service, led to Anticorruption Measures a reduction in staff size by 1,000 between 1992 and 1998, as the number of positions rendered unnec- The reform and modernization measures drastically essary by the new work procedures exceeded the reduced the opportunities for bureaucratic corrup- number of new positions required by the postaudit tion, strengthened the system against the vulnera- and ICT functions. bilities that had facilitated fraud and reduced the Restrictions on hiring new civil servants ended BOC's revenues, and enhanced the visibility and in 1998. When the new government came into transparency of the customs service. However, staff office, about 300 new recruits entered the service of members initially resisted the changes and at times the BOC almost overnight. Political meddling in referred to the reform measures as World Bank and the hiring, assignments, and promotions led to IMF impositions in conspiracy with the Société widespread demoralization, and frequent reassign- Générale de Surveillance, the government- ments in staff destabilized the customs service. A appointed PSI company. Staff members often paid fiscal crisis led to the adoption of a new hiring lip service to the reform program but did not give it freeze in the BOC. any real commitment and support. The Civil Service Law states that a staff member Value formation workshops and training were rated unsatisfactory for two consecutive rating provided in parallel with the main reform measures periods may be let go. Although that would give the to promote integrity and to add an internal dimen- BOC's management greater flexibility in managing sion to the "external impositions." Various offices its human resources, implementation of the law has down to the division level were required to develop been delayed because, under the present rating sys- anticorruption programs and put them into effect. tem, no one has been rated unsatisfactory. Neither the training nor the programs had any Philippines 95 significant effect on corruption. Parliament's fail- The various components of the Automated Cus- ure to improve staff compensation undermined toms Operating System have been fitted together internal motivation. Weak organizational support into one seamless whole. Only part of the system resulting from inadequate compensation is the uses the UNCTAD customs software, ASYCUDA. main vulnerability of the reform program, espe- The rest makes use of software developed and oper- cially given the level of material benefit available if ated through the joint efforts of the BOC and its the status quo is maintained. partners in the private sector. By the end of 1997, the BOC was recognized as a leader in electronic governance in the country. In 1993, the government Funding for Information and made arrangements for a five-year budget for the Communication Technology PTCP; however, the budget did not include funds The BOC was among the earliest government enti- for system maintenance after that period because ties to use ICT. In the 1960s, through reparations the later periods were considered a responsibility of for World War II, the BOC acquired the first Fujitsu the next administration. That failure to provide for automatic computer model in the country, ahead system maintenance beyond 1998 was the biggest of even the National Computer Center. In 1976, oversight of the government and of customs leader- the BOC built a computer center and a Burroughs ship at that time. 700 mainframe computer became operational es- The BOC commissioner proposed several meas- sentially to capture transaction data and generate ures to ensure additional funding for ICT activities: management information. However, the low value that management attached to the outputs led to · The introduction of an entry encoding charge to the early demise of the system. raise substantial amounts that would be used to Before the start of the 1992­98 reforms, the only finance some costs of daily operations, facilities system still running was the manifest clearance sys- maintenance, and support for the BOC's other tem. This system entailed encoding paper cargo ICT requirements. However, funds levied in this manifests to create an electronic file into which way were badly managed and were not used for declarations and cargo claims were posted, in order the intended purpose. to generate shipment reports. The new ICT systems · An increase of the import processing fee from introduced at the start of the reform focused on P 250 to P 1,000, with P 500 of the increment the BOC's core business of cargo clearance, which earmarked for ICT maintenance and upgrading. involves assessing and collecting duties, taxes, and The business community objected to this fees and implementing cargo control objectives. increase, and it was introduced only much later, Those ICT systems have proved extremely useful. with revenues not earmarked for ICT operations. Management's decision to use generic software · The private sector group that benefited the most rather than to build a custom-tailored system ini- from particular new projects would contribute tially faced strong criticism from certain quarters, the most to the projects. Recently, the Automated such as academia, for not making use of the coun- Customs Cargo Transfer System, adopted by the try's ICT professionals. However, the decision cut Philippine Economic Zone Authority, was imple- the waiting time for the implementation of the mented at the customs house at Manila's Ninoy core functionalities and allowed the BOC to focus Aquino International Airport for transferring on implementation rather than on design and shipments from the airport to the various special development. Customs officers participated in cus- economic zones in the Calabarzon area.1 The tomizing the system to the BOC's business and private sector, notably the semiconductor and process rules and in developing other systems that electronics industry, defrayed the total amounts were then attached to the core software. The ICT involved. The BOC's only contribution is the achievements during the reform years were the out- use of ASYCUDA. Even the configuration of come of a coordinated and harmonious implemen- ASYCUDA for use in this customs regime was tation of the generic and homegrown systems. By 1997, practically all segments of the cargo clearance 1. Calabarzon stands for the four provinces near Metro Manila: process had been fully automated. Cavite, Laguna, Batangas, and Rizal. 96 Customs Modernization Initiatives: Case Studies spearheaded by private sector ICT professionals. provided by the report, which contains the esti- The private sector also paid all the costs for mated duty and tax payable implementing the automated export documen- · the loss of deterrence to smuggling provided by tation system, from the server, router, and fire- cargo inspections abroad. wall to the operating, communications, and frame relay systems. Private ICT practitioners The following are among the lessons the BOC designed the application system and worked learned in relation to PSI: with customs staff to configure ASYCUDA. · The BOC organized golf tournaments, known as · The utility of PSI can be maximized by identifying the customs commissioner's golf cups, to raise areas where it is ineffective or not deployed and funds for particular projects. then deploying customs resources to fill the gaps. For example, PSI cannot improve controls on Preshipment Inspection bonded warehouse operations or other suspense The government introduced the PSI service in 1986 regimes. In addition, in the Philippines, oil and and contracted it to the Société Générale de oil products are exempt from PSI, and therefore Surveillance. From its initial coverage of three sup- qualified customs personnel need to be deployed plying countries, the program was progressively to control imports of those commodities. expanded to more countries until it became global · The use of PSI should be for a fixed term only in 1992, before the new administration assumed and should be accompanied by a clear exit strat- office. The government undertook the progressive egy. The Philippines only developed an exit expansion in both geographic coverage and types strategy during the reform years, and ultimately of goods subject to inspection in an attempt to that strategy was not implemented properly. As reduce the level of smuggling. a result, the customs service was still unprepared The PSI addressed two major problems in cus- to assume sole responsibility for all customs toms operations: valuation and classification. The work by the time the PSI contract ended. downsizing of the country's diplomatic offices · The customs service must make it clear right abroad and the recall of many diplomatic officials from the start of any PSI program that it owns because of budgetary constraints, along with the the database developed from the inspections, removal in 1985 of the requirement to present com- and an adequate ICT infrastructure must be mercial invoices for goods imported to a consulate made available to the customs service so that it or embassy abroad, left the BOC with few means of can make proper use of the data gathered. gathering home consumption values in the coun- · A clear system for verifying whether PSI serv- tries of exportation. With no reliable basis for con- ices have actually been rendered must be estab- testing submissions, customs officials generally had lished and agreed upon before the start of the to accept whatever value importers declared. As a service to avoid disputes about the payment result, customs officials increased declared values by of fees. an insignificant 0.81 percent of invoice values. · A dispute settlement system for good value and In 1997, the BOC established a study group to classification is essential for the proper func- evaluate the PSI contract. The group noted that if tioning of PSI. Adequate system support is the service were to be terminated at that time, the essential, including ICT for the dispute settle- following negative impacts were probable: ment process. · The benefits of trade facilitation may outweigh · an estimated P 2 billion per year--net of inspec- the additional revenue that a PSI system can tion fees--uncollected (that is, the difference provide. between the Société Générale de Surveillance's estimated valuation of shipments and the Assessment of the Reform declared invoice values) · a deflation of the repetitive effect of Clean The overall results of the 1992­98 Customs Reform Report of Findings values on declarations and and Modernization Program were encouraging. Its the loss of deterrence to incorrect payment achievements were recognized not only by the Philippines 97 country's trade community in particular and the for the first time [the business community] expressed public in general, but also by such prestigious confidence that this social ill [smuggling] will be organizations as the World Customs Organization finally addressed in the BOC. and UNCTAD and by numerous regional customs Some small publications (no more than groupings. 1,000 copies per issue) that were published irregu- larly and distributed to customs personnel went Evaluation against the assessment of the national dailies and other media to express strong opposition to the Theevaluationof thereformcanbedividedintolocal reforms in the BOC, especially those components opinions and international experts'evaluations. that significantly reduced opportunities for corrup- tion. Those tabloids were apparently financed by Local Opinions The media's reviews of progress customs staff members and their sympathizers. in customs administration were generally positive. The reform has substantially improved how the At the time of the presentation of the legislation, public views the BOC's services. In 1990, a survey an article in the Philippine Star provided a good by the Social Weather Station, a polling organiza- example of how the progress and promises of the tion, showed that those interviewed considered the reform measures were reported: BOC to be the most corrupt agency of all those sur- One of the most sensible bills now pending in the veyed, with 74 percent of respondents considering House of Representatives is that authored by Quezón corruption to be a big problem (24 percent per- City Rep. Feliciano "Sonny" Belmonte: The Customs ceived the level of corruption to be small and 1 per- Modernization Bill or HB 8687. The modernization cent had no opinion). In that survey, the BOC tied of customs processes, as envisioned by Sonny with the police force in registering the lowest mar- Belmonte's bill, will mean faster release of goods and gin of satisfaction on the issue of what was being more efficient collection of revenues for duties and done to reduce corruption (56 percent dissatisfied, taxes. It will also make it easier to identify suspicious 7 percent satisfied, and 36 percent undecided). customs transactions including under collection. In Those findings were reconfirmed in the Social other words, the use of computers and information Weather Station survey of December 2001. How- technology will make customs processes safe from ever, by 1996, according to testimony by Civil Ser- external manipulation. And the network of comput- ers covering customs offices across the nation will vice Commissioner Ramon Ereneta Jr. before the deal a major blow to smugglers and grafters. Fully Committee on Civil Service and Professional Regu- computerized operations would also allow for cash- lation, the BOC no longer appeared in the list of the less transactions. The BOC can levy the tax via com- top 10 most corrupt and bureaucratic government puter, and the importer can then instruct his bank to agencies.2 remit the amount directly to the designated customs bank electronically, via telephone (modem) instruc- Evaluation by Foreign Experts UNCTAD praised tions. Which will mean elimination of third parties the program, as did an unpublished IMF review, into whose hands the customs collections go into. which noted that the strategy followed by the BOC The business community is pushing hard for the over the past five years has resulted in significant enactment of the Belmonte Bill. The businessmen say improvements in terms of both the implementa- that its passage will not only benefit the traders, tion of more effective controls and the reduction in manufacturers, and importers but also the national economy. And there is sense in their observation that the time it takes to process transactions (70 percent in all modern and economically emerging societies, of imports are processed through the green channel the buzz words are paperless, queueless and cashless in two to three hours). It is not just the extensive transactions available 24-hours a day and 365 days use of automation that has produced this change a year. An article in the Business Star (1994, p. 4) noted: 2. Although the 1996 source was not comparable with the 1990 The strategy being followed by Customs to move out survey, it was at that time a generally accepted fact that the pop- of the way of the business process is indeed the most ulation's perception was that corruption at the BOC had been sensible way of addressing bureaucratic red tape and reduced. 98 Customs Modernization Initiatives: Case Studies but, more important, the implementation of sim- · Strong leadership. Customs leadership provided plified procedures supported by automation. The the vision for the customs community and review goes on to state that the BOC has put in enlisted the support of key stakeholders. place a good foundation from which it can now National leadership, for its part, lent its full sup- move to develop and implement a modern customs port to the program and provided backing for administration. the leadership, even as it warned all those who would not cooperate of the dire consequences of noncooperation. Performance · Generic customs software. Adopting a generic customs software solution rather than building The BOC's overall revenue performance was influ- a system from scratch cut the waiting time enced by the drastic drop in imports caused by for implementing the system's core functionali- the Asian crisis and by the substantial trade liberal- ties and allowed the BOC to focus on imple- ization measures introduced during the reform mentation issues rather than on design and period. The Department of Finance measures the development. Customs officers participated in BOC's efficiency in terms of its collection rate, customizing the system and in developing other which stood at about 100 percent in 1992­94 and systems that were then attached to the core soft- averaged 87.5 percent during 1995­96. These fig- ware. By June 1998, the system was already run- ures compare favorably with an average collection ning at all the major ports, with some ports rate of 65 percent in 1986­91. already offering electronic lodgment technolo- As far as entry processing is concerned, the pres- gies. By comparison, the Bureau of Internal Rev- ident's mandate to clear shipments within 48 hours enue's component of the PTCP, which started at has been achieved. In the case of entries lodged the same time as the BOC program, was not yet electronically, the results have been even more dra- operational by mid-1998. matic. Green channel processing was extended to · Analysis and selectivity. The benefits of ICT in 95.4 percent of shipments, with assessment com- terms of facilitating trade and reducing bureau- pleted instantaneously and payment matched in cratic corruption would not have been realized less than 19 hours. without the legislation that permitted selective inspections based on risk analysis. Primary Success Factors Threats to the Program The following were among the factors that con- tributed to the success of the reforms: An opinion survey conducted in December 2001 by the Social Weather Station accorded the BOC the · Strong government support. Never in the BOC's most unfavorable rating of its sincerity in fighting history has the government allotted so many graft and corruption among the government agen- resources for ICT development. The government cies surveyed. Seventy-one percent of respondents made funds available not just for procuring hard- rated the BOC as the most insincere agency in ware and software, but also for improving cus- fighting graft and corruption. Also the investment toms facilities, training, and managing change. climate survey (Pernia and Gupta forthcoming) · Private sector involvement and support. Know- suggests that clearance times have lengthened ing that strong government backing was not again; at the end of 2003 clearance times were enough, the BOC also relied on substantial sup- 9.1 days for imports and 6.6. days for exports. port from the private sector. In addition, pro- Many reasons could account for the return of the curement for the PTCP had to follow a set legal BOC's unfavorable image, including the following: process and schedule and, therefore, could not respond quickly to pressing ICT needs; in this · Failure of the PTCP's sustainability measures. connection, the private sector helped accelerate Appropriate and specific measures intro- the implementation of reform components. duced from 1996 to 1998 assured the funding Philippines 99 institutions (the World Bank and the IMF), start to provide a steady source of funds. Cur- business groups, and the government that the rently, the customs budget for replacing hard- ICT program would function adequately no ware that has reached the end of its useful life is matter who ran the BOC. One measure was the insufficient. establishment of the Management Information · Failure to obtain staff support. Many customs Systems and Technology Group, which was to be personnel viewed the reform program as being responsible for continuing the reform process. imposed on them by international organizations Another was the creation of the Change Man- and as counter to their own interests. Thus, most agement Group, which was to identify and train customs staff members did not support the pro- ICT champions among BOC officials. The con- gram and were not committed to its success. tinued active participation of the Philippine · Failure to provide for adequate compensation for Chamber of Commerce and the Bankers Associ- customs staff. Passage of the Customs Modern- ation of the Philippines was formalized with the ization Bill and the Reward Laws would have privatization and transfer of the lodgment dec- provided customs staff members with adequate laration and payment systems to those private compensation and would have rewarded good groups. However, the momentum of modern- performance. However, Congress failed to ization has not been sustained in more recent pass both laws and thereby failed to address years. Although the hardware contractor has employees' basic rights to fair and adequate been able to extend the geographic reach of the compensation for the work performed. network to more ports and customs stations, the · Failure of trade sectors to keep pace with the move coverage of the application system has stag- toward modernization. Customs readiness alone nated. Attempts to add new capabilities have had is insufficient for the entire trading community questionable success, while ICT application sys- to realize the benefits of ICT and e-commerce. tems have suffered setbacks on practically all The lack of readiness among partner agencies is a fronts. Most heavily damaged have been the major stumbling block for the BOC. Unless those selectivity and remote lodgment systems, and agencies enable e-commerce by improving the interfaces with other government agencies. The way they handle the processing of applications private sector has tried to reach out to the new for all sorts of authorizations--such as licenses, management to offer the same partnership it permits, clearances, quotas, and certificates--this had had with the previous leadership, but the unreadiness will negate whatever improvements incoming management has ignored those offers e-commerce can generate in the customs area. or even viewed them with suspicion. · Inadequacy of the BOC's performance manage- · Change in leadership. A major sustainability ment system. Performance management could measure, which was introduced in April 1998, include indicators for evaluating and monitor- was the BOC's appointment of an ICT and man- ing the progress of reform. The BOC could also agement professional from the private sector to pursue the concept of a report card, so that head the Management Information Systems and external and internal stakeholders could moni- Technology Group. Unfortunately, the manager tor the effect of improvements in the BOC's was among the first to leave following the management systems and programs. change in administration in July 1998. For the · Inadequacy of audits and related judicial next two and a half years, the BOC suffered from processes. Audit reforms need to be given more an ICT leadership vacuum, and several key ICT emphasis, together with the swift and effective staff members became demoralized and eventu- prosecution that should follow them. The ally also tendered their resignations. reforms are crucial in sending a strong signal to · Depletion of financial resources. A steady source corrupt people within and outside the BOC that of funds for the maintenance and further devel- the government means business. opment of ICT was missing. With the high rate · Inadequacy of reform partnerships with nontradi- of technical obsolescence of ICT products, tional constituencies. The BOC needs to build measures should have been taken from the partnerships for reform with academia, civil 100 Customs Modernization Initiatives: Case Studies society groups, and other interest groups in particular to sustain the reform process. The order to develop a cadre of stakeholders that will groups should designate a leader who could promote the sustainability of the reform. work directly with the BOC commissioner. · Negative reinforcement. Until the BOC can obtain genuine support for the program and Conclusions commitment to it from its rank-and-file The achievements that the BOC realized and the employees--for example, by compensating extent of difficulties encountered in the implemen- them adequately for their work--it must make tation of reform and modernization were strongly them aware of the negative consequences of cor- influenced by a number of factors. The revival of ruption and other illegal activity and follow the BOC's modernization efforts is more likely to through with actual sanctions. succeed if particular attention is paid to the follow- · Regular audits. A strong mechanism must be in ing factors: place to monitor progress or the lack of it. The leadership should use external help for this · Leader's role. The most important determinant activity, considering the propensity of BOC per- of a program's success or failure is the extent to sonnel not to present an objective picture of which the leader owns the program and is the level of corruption and to cover up for each engaged in hands-on management. Also impor- other. An independent auditing unit that reports tant are the rewards and recognition that the directly to the top leadership is desirable. The leader dispenses to those who contribute to the business sector should also carry out its own program's success and the sanctions meted out independent assessments of reform progress to those who refuse to cooperate. and the BOC's performance. · Private sector's role. The business sector can be · Resource availability. If sufficient groups are the BOC's strongest ally in the development and concerned about the need for reform, resources execution of reform. The BOC must try to will be made available. It is high time that the directly involve the chief executive officers of BOC experimented with creative funding businesses affected by the program. They are the schemes, such as pay-for-use or build-own- ones who are in contact with top government operate schemes. officials and are in a position to impress on such officials the need for and the value of the reform, The Philippine Customs Reform and Moderniza- including the need for continuity and sustain- tion Program, like many other undertakings in the ability. The private sector must demand better country's history, might become another missed service from and higher ethical standards opportunity. However, opportunities exist for get- among civil servants. At the same time, customs ting the reform back on track. The hope is that all managers must inform their staffs that the concerned sectors of society can be mobilized to BOC's policy is to encourage feedback from the take a stand, resume the work from where it left off private sector. in a more coordinated fashion, and finish the job. · Multisectoral watchdog. Foreign trade operators may have vested interests that would be harmed by the reform, and therefore the BOC should References not rely on them to sustain the reform and mod- Business Star. 1994. "Parayno, A Rare Bird." January 14, p. 4. ernization process. Thus, many private sector Parayno, G. 1995. "Extent of Smuggling in the Philippines." groups, including those not directly involved in Futuristics 7:70­92. Pernia, Ernesto, and Arvind Gupta. Forthcoming. "Philippines: trade operations, must join hands to pressure Improving the Investment Climate." Asian Development the government in general and the BOC in Bank and World Bank, Manila. 8 Turkey M. Bahri Oktem This chapter reviews recent reforms undertaken by The International Monetary Fund was closely as- the Turkish Customs Administration (TCA) since sociated with the reform process and periodically 1993. The findings are based on a series of inter- sent missions to monitor its progress. views with individuals who participated in the The broad objectives of the customs reform reform process from its outset, customs officials were to ensure that Turkey had modern customs and other government officials who implemented it laws that conformed with the EU's requirements, and were affected by it, and representatives of the to simplify customs procedures, to adopt modern trading community. information and communication technology (ICT) The reform was initiated as a result of both that would help make customs clearance more external and internal forces. They included the efficient and predictable, and to ensure faster and association agreement between Turkey and the more efficient production of trade statistics. European Union (EU), which required that Turkey's trade legislation be aligned with European Background practices. In addition, in the early 1990s Turkey's customs services were generally perceived as ineffi- Turkey's customs modernization initiative comple- cient and corrupt. Public officials and traders alike mented its overall policy ambition of greater inte- viewed the situation as a major handicap to busi- gration into the world economy, particularly into ness that had to be eliminated in order for the the EU. country to integrate better into the world economy and benefit from international trade. Tariff Structure Government officials saw customs reform as part of a broader process of modernizing public Before 1992, Turkey levied multiple import taxes sector management, and they included it in a and surcharges. In addition to customs duties and request for support from the World Bank. The value added taxes (VATs), those taxes included World Bank began preparation to provide such municipal charges; stamp duties; Promotion Fund, support in 1993, an effort that eventually resulted Mass Housing Fund, and Price Stability Fund taxes; in the Public Financial Management Project. and duties for transportation infrastructure. 101 102 Customs Modernization Initiatives: Case Studies Levying the additional taxes was complicated, and special transaction tax, which raises approximately the government abolished them in 1992. US$7 million per year. Turkey's policy of moving toward trade integra- tion with the EU required that it adopt the EU's common external tariff. In 1995, the European Relations with the World Customs Community­Turkey Association Council commit- Organization and Other International ted Turkey to adopting an entire body of Organizations legislation in the field of trade and adhering to Turkey belongs to a number of organizations that conventions in the fields of intellectual, industrial, seek to facilitate trade and strengthen customs and commercial property rights. In 1996, Turkey operations. In 1953, Turkey became a member of entered into a customs union with the EU and the World Customs Organization, and it is a signa- incorporated the basic rules of the European tory of its major conventions and declarations. Community's Customs Code into its customs Turkey has also entered into mutual administrative legislation. At that time, the government removed agreements with many countries. Those agree- all customs duties and quantitative restrictions on ments are based on the model bilateral agreement industrial products imported from EU countries. of the World Customs Organization. The EU­Turkey Customs Union currently covers With the EU, Turkey signed the United industrial and processed agricultural products. Nations­European Economic Council Convention After a five-year transition period, the government on the International Carriage of Goods by Road, introduced the EU common external customs the 1954 Tourist Facilitation Convention, the Con- tariff in early 2001. Turkey's coding, description, vention for Temporary Importation of Private and classification of goods became harmonized Motor Vehicles, the Transport International Routier with the EU's system of combined nomenclatures. Convention, the Container Convention, and the Turkey also implements the EU's preferential Pallet Convention. trade regimes, adheres to the Common Transit Turkey also participates in activities under System and Single Administrative Document con- the aegis of the South East Cooperation Initiative, ventions, and signed the relevant protocols with the Economic Cooperation Organization, and the EUROCUSTOMS. The application of the single Regional Intelligence Liaison Office. administrative document was initiated unilaterally on January 1, 1996. In addition to the EU­Turkey Customs Union, Membership in the World Trade Organization Turkey entered into free trade agreements with and Customs Valuation the European Free Trade Area, Bulgaria, the Czech Republic, Estonia, Hungary, Israel, Latvia, Turkey became a member of the World Trade Lithuania, the former Yugoslav Republic of Organization (WTO) in 1994 and thereby accepted Macedonia, Poland, Romania, the Slovak Republic, the WTO valuation principle, according to which and Slovenia. imports are to be valued on the basis of their trans- The import duty regime is still rather compli- action value unless reasonable doubt permits the cated, because the TCA also administers the VAT use of secondary valuation rules. Before 1994, the and a series of other taxes that are intended for ear- TCA used the Brussels definition of value and marked funds. The regular VAT rate is 18 percent, relied heavily on reference prices. Customs officials but basic goods are taxed at 1 percent or 8 percent state that they are using the WTO definition of and luxury goods at 26 percent. In addition, some value for 99 percent of import transactions, an esti- excise taxes and earmarked taxes benefit the mate confirmed by traders, who mentioned that Agricultural Fund, the Tobacco Fund, the National this new valuation practice initially caused some Education Fund, the Fund for Promoting the delays and difficulties, but that those difficulties Defense Industry, and the Price Stability Fund. The appear to have subsided substantially. Manufactur- TCA also levies two lump-sum taxes per declara- ers, by contrast, are not pleased with this valuation tion: a charge contributing to education, which system, because it deprives them of the protection raises approximately US$2.7 million per year, and a granted under the prior system. Turkey 103 TABLE 8.1 Revenue Importance of Customs Duties and Taxes, Selected Years (percent) Category 1994 1997 1999 2000 2001 Duties and taxes, collected by the TCA 15.25 17.41 13.36 16.18 13.96 as a share of total tax revenue Custom duties as a share of total tax revenue 3.73 2.61 1.62 1.46 0.96 VAT on imports as a share of total tax revenue 11.20 14.76 11.69 14.68 12.95 Customs duties as a share of the value of 3.50 2.00 1.70 1.37 0.94 total imports Source: TCA data. Revenue Importance of Import Taxes to implement the program, but until 1997 it made virtually no progress. In 1997, the reform program The importance of customs duties as a source was relaunched and a project unit staffed with of budgetary revenue has fallen considerably in customs employees was established to manage the recent years. By 2001, duties raised less than reform and accelerate the decisionmaking process. 1.0 percent of total tax revenue, down from The deputy undersecretary of the TCA was desig- 3.7 percent in 1994 (see table 8.1). That decrease is nated as the project coordinator. the result of the trade liberalization policies of the The remainder of this section discusses the 1990s. By contrast, the revenue contribution of reforms as they affected customs law and import VATs on imports rose slightly, from 11.2 percent in processes; reorganization of the TCA; improve- 1994 to 13.0 percent in 2001. Because the TCA also ment of physical infrastructure with support from levies VAT at the importation stage, the TCA the private sector; human resource management; remains responsible for about 14 percent of total automation; and customs controls, selectivity, and tax revenue. Nevertheless, the share of total budget postrelease inspection. revenue managed by the TCA is much lower than that in most developing countries. Without neglecting its revenue mobilization role, the TCA New Customs Code and could increasingly look for ways to enhance the Simplified Trade Procedures efficiency of its operations and to manage its The modernization process included issuance of a processes so as to reduce the burden that paying new Customs Code and simplified trade procedures. import taxes imposes on traders. New Customs Legislation The reform of cus- The Modernization Program toms legislation began with the adaptation of the At the outset of the reform,the TCA prepared a four- Customs Law to EU standards. Initial efforts in year action plan that presented in chronological 1995 to ensure that Turkish customs laws con- order the various interconnected activities that it formed to the main principles of the EU Customs intended to undertake to achieve the reform objec- Code were not totally satisfactory, and in 1996 tives. Those objectives focused on bringing customs the government submitted a new Customs Code to practices in line with those prevailing in the EU and the Grand National Assembly. Approval of this code on easing the burden of customs operations on trad- was delayed; it was not obtained until 2000. The dis- ing activities. The achievement of the objectives was cussions during the last Assembly meeting lasted to benefit substantially from the introduction of an less than four hours, a tribute to the efforts of up-to-date computerized import and export pro- the state minister responsible for the TCA in cessing facility. Table 8.2 sets out the components of convincing Assembly members of the advantages of the four-year action plan. the reforms ahead of the final Assembly discussions. The Reform Steering Committee, chaired by the The TCA made a special effort to explain the deputy undersecretary of the TCA, was established practical implications of the new Customs Code to 104 Customs Modernization Initiatives: Case Studies TABLE 8.2 The TCA's Four-Year Action Plan Year 1 Year 2 Year 3 Year 4 · Prepare the plan for · Complete · Complete imple- · Pilot test the modernizing the development of the mentation of the computer system Customs Code. The e-base system and hardware and with the brokerage plan needs to deal launch it in a pilot software in the community. with the simplifica- office. remaining smaller · Offer the computer tion of procedures; · Assess the ability of locations. system to all the production customs facilities · Complete the roll brokers. of the new forms to operate the out of the e-base · Complete required by proposed IT system system. implementation these simplified efficiently. · Gradually phase in of the computer procedures; the · Develop and the modules of the system, including development and implement the overall customs IT participation by acquisition of a public information system as they other government computer system; campaign. become available. departments, the training of banks, and customs staff; and · Develop and transport the development of implement training companies. a public information for the e-base program to system. acquaint traders · Acquire hardware and their brokers and software. with the new · Roll out the e-base procedures, in system in the particular, the largest locations. use of the comput- · Develop and erized system. implement · Decide on the simplified manual hardware, software, procedures for the and telecommuni- sites that have not cation requirements been automated. of the IT system. · Develop the · Prepare and issue remainder of the tender documents customs IT system, for the hardware particularly the and software. components · Acquire the related to export electronic customs declarations, management revenue system and begin accounting, development of the manifest electronic import declaration, declaration transit, and processing system warehousing. (e-base system). Source: TCA. the trading community and to customs staff mem- those circulars. Some of the documents were revised bers. It started out by producing a publication that several times in 2000 to accommodate various issues clarified the Customs Code. It also prepared a large that arose during the implementation of the new number of documents for detailed guidance on spe- legislative framework. For instance, a decree was cialized issues. Those documents led to the rapid issued at the end of 2000 that explained the deter- production of decrees explaining the Customs mination of the rules of origin; however, by March Code, regulations, and general notifications, as well 2001, seven new amendments to the decree were as to circulars and explanatory notes in relation to issued. The regulatory framework that constitutes Turkey 105 the legal basis for computerized customs procedures period that some traders claim is too short to per- was promulgated in 1998. To consolidate the vari- mit preparation of the necessary documentation. ous updates of the regulations, the TCA published Traders also complain that they are often fined for new customs regulations, consisting of 756 articles, small, inadvertent mistakes. in the Official Journal at the end of May 2002 and At that stage, the computer system verifies the readied them for general distribution in July 2002. declaration and assesses the risk that the declara- This publication reflects the TCA's desire to be tion may be faulty or erroneous. This verification responsive to comments from the public and to may prompt customs staff to ask for additional strive for transparency in the regulatory framework documentation. Traders interviewed for this study of its operations. noted that this process often takes excessive time and is sometimes erratic. The computer system New Import Procedures Import transactions calculates the duties due, informs declarants of the begin with the carrier's submission of the cargo outcome of the risk analysis for their cargo, and manifest of goods to be shipped in from abroad to a gives them a registration number. Goods are customs office.1 The cargo manifest and declaration assigned different clearance channels: red for phys- data has to be entered into the Computerized ical examination, yellow for documentary checks, Customs Management System (CCMS) through a blue for goods under postrelease controls, or green kiosk or electronic data interchange (EDI) and reg- for immediate release. The risk rating is performed istered by the CCMS. At that stage, customs person- in light of details previously entered by customs nel match the number of packages of cargo with the headquarters staff members into the customs number that is declared in the cargo manifest. computer system through a risk analysis module. Goods that are not to be cleared immediately are Goods are routed through the red channel only if promptly moved to temporary storage places and they are included in the analysis list. Until 2001, warehouses. The storage procedure causes serious declarants paid the assessed duties at the cashier's disruptions and delays at several ports, particularly desk at the Ministry of Finance, but now they in Haydarpasa (Istanbul), Izmir, and Mersin, where can make payments at banks. Traders have wel- port authorities have not computerized their ware- comed payment at banks, because they no longer housing procedures. Traders can clear their goods need to transport large amounts of cash or themselves, but they use brokers for 89 percent of obtain checks from the banks to present at the their trade transactions because they still view for- Ministry of Finance and wait for their clearance. eign trade procedures as technically complicated, An alternative process for clearing goods is to requiring the involvement of many organizations secure a bank guarantee. After the bank informs and entailing substantial paperwork. customs agents that the duties have been paid, the In the past, customs declaration formalities had goods are released. to be completed within 45 days in the case of sea Besides having to comply with customs proce- freight and 20 days in the case of goods transported dures, imports must conform to specific product by other means. Today traders or their brokers sub- standards that aim to protect public security, mit their declarations electronically by using their human health, and the environment. Organizations dedicated user codes and passwords and by identi- entrusted with establishing product standards and fying the final importer of the goods, the docu- controlling conformity with the standards include ments attached, and the harmonized system code the Turkish Standards Institution, the Ministry of for the goods declared. This declaration needs to be Agriculture, the Ministry of Health, and the Under- made within 24 hours of the arrival of the goods, a secretariat of Foreign Trade. Each organization has its own laboratory and procedures for conformity checks. The Turkish Standards Institution inspects 1. The Council of Ministers set up an importers' association in about one in five import declarations. Because the May 2002. All importers were instructed to obtain an import various laboratories are located at a considerable permit from that association, as is already the case for exports. distance from customs offices, the verifications The legislation was to become effective in July 2002, but it was postponed for one year. Traders oppose the new regulation sometimes take months to finalize and thus because it is certain to delay import transactions. result in considerable costs and delays. Traders 106 Customs Modernization Initiatives: Case Studies interviewed for this study believe that the verifica- associated with the TCA.Registration requires mem- tions act as nontariff barriers to imports. They bership in the association (and a hefty membership noted that the inspections undertaken by the Min- fee), as well as a fee equivalent to 1 percent of the istry of Agriculture and the Ministry of Health are export value per registration, although some goods particularly burdensome. Because of recommenda- are exempt from the fee.2 Once the declarations are tions by the World Bank's Foreign Investment registered, they are submitted to the TCA and are Advisory Service, the TCA set up the Committee of issued a computer-generated registration number. A Foreign Trade Standards and Customs to propose customs official electronically verifies the declara- ways to simplify the procedures. The committee is tion, and the computer system directs the shipment to work in close association with the private sector through a red, yellow, or green control channel, a and the standard-setting organizations. process similar to the one used for imports except for the absence of a blue channel.Once checked through Simplified Import Procedures for Certified the assigned channel, goods are cleared for export. Importers In accordance with the Kyoto Conven- As is the case for simplified import procedures, tion of the World Customs Organization, the companies can be given the status of certified Customs Code has provisions for accredited com- exporter and can thereby qualify for a simplified panies to benefit from simplified procedures. To export processing formula. However, these certifi- qualify for the simplified procedures, enterprises cates are issued by trade associations, not by the must have clean records with the customs and tax TCA. Some 70 companies have earned the status of authorities and must keep adequate records so that certified exporters. postclearance verifications can be performed. The simplified procedures specify that goods will be Reorganization of the TCA cleared without the usual documents required for customs clearance (invoices, certificates of origin, In 1996­97, the organization of the TCA was movement certificates, and administrative or other reviewed in the context of the modernization pro- commercial documents). Importers have to keep gram for which World Bank support was being those documents and make them available to the mobilized. The review concluded that customs inspector if their transactions are audited. The procedures are expected to speed up the cus- · Customs offices with low efficiency, determined toms clearance process greatly. As of mid-2002, in accordance with economic and not political 289 companies had been certified for simplified criteria, should be closed. procedures, but the simplified procedures had not · Customs clearance and enforcement services are yet taken effect. Importers anxiously await their closely interconnected, and to enhance the coor- introduction. dination of their functions, the respective direc- The trading community has welcomed the new torates should be integrated under a single import procedures but notes that progress is still regional directorate. somewhat uneven because manual procedures are · Operational responsibility and authority should still in place at a number of regional customs posts. be delegated to regional and local offices. They complain about the time it takes to satisfy organizations other than the TCA that are involved Some 73 customs offices with low efficiency were in goods clearance, because the control procedures closed in 1999. The consolidation or closure of of those organizations are lengthy and excessive other customs directorates is under consideration. and tend to undermine the progress made by the Measures to adjust the TCA's administrative TCA. Traders claim that providing illegal "facilita- structure have, however, encountered severe prob- tion payments" at this stage to speed up the process lems, because the Constitutional Court nullified is the current practice. Export Procedures Export declarations must first 2. A plan to communicate export permissions electronically be registered for approval by the Exporters' Associa- between the Exporter's Association and the TCA is being tion, a nongovernmental organization that is not prepared but is not yet in place. Turkey 107 the decisions that the Council of Ministers made in limits the TCA's flexibility in relation to human 2000 to put a new administrative structure in place. resources. Because of budget problems at the A legislative proposal to adjust the administrative national level, the TCA could not hire any new staff structure was again put before the government in members after 1996 despite major changes in oper- mid-2002 and was presented for consideration by ational procedures since that time. In light of that the Grand National Assembly. The most important situation, the TCA undertook two major initiatives. change proposed by the Draft Law for the Reorga- First, the TCA launched a major training and nization of Customs Administration is that cus- continuous education initiative to familiarize toms clearance and enforcement offices would be customs staff members with automated customs consolidated, thereby further streamlining the pro- processing, with a special focus on training man- cessing of import declarations. agement staff members. Some 158 customs officials As an integral part of the administrative reform have been trained for total quality management of all public organizations, the number of direc- under a protocol signed by the Undersecretariat torates was reduced from 36 (18 customs direc- of Customs and the Turkish Society for Quality torates and 18 regional directorates) to 14 in 2002. in March 2002. Following training, continuous The reform was also intended to delegate greater improvement teams were established to motivate authority to regional and local offices. The goal of personnel and provide more standardized services that change was to increase the efficiency of cus- at central and regional units. However, traders indi- toms operations by reducing both operating costs cate that, as of mid-2002, the results were mixed. and staff numbers, and it achieved its intended Many customs personnel are unfamiliar with the objectives. new procedures and, therefore, do not apply the new regulations correctly, causing problems and delays in the processing of traders' goods. Traders Improvement of Physical Infrastructure also complain about the high staff turnover at with Private Sector Support regional customs offices. One goal of the modernization program was to Second, the TCA entered into contractual agree- refurbish and upgrade the physical condition of ments with a number of experts--especially customs offices. Existing buildings needed to be computer programmers, analysts, and controllers-- adapted to meet workflow requirements and the whose expertise was required to implement the use of ICT. Even though the Customs Fund and reforms. The contractual staff is located mainly at regional chambers of commerce and industry have customs headquarters. contributed funds to improve the physical infra- During 1996­2001, the number of staff mem- structure, the programmed improvement of the bers fell by 10 percent, with staff reductions infrastructure included in the World Bank loan was concentrated at the regional offices, which were not realized because of budget constraints. consolidated during that period. During the same In a joint effort by the TCA and chambers of period, the number of trade declarations rose by commerce and industry, the construction of mod- 40 percent (70 percent for exports and 24 percent ernized premises for the Kayseri, Gemlik, and for imports), reflecting a 54 percent increase in the Konya customs offices was completed in 2001­02. number of trade declarations handled by each staff The regional chambers of commerce and industry member. and the Association of Transporters were also com- The salaries of customs officers comply with mitted to building customs facilities on the basis of civil service regulations, and thus the TCA has no a build-operate-transfer model by the end of 2002 flexibility in the matter; however, employees sup- at the customs offices in Gürbulak (border post plement their salaries with overtime work, which with Iran) and Ipsala (border post with Greece). traders request and pay for. This practice is not without its inconsistencies and problems for traders, because some customs employees arrange Human Resource Management to concentrate their work during periods that call TCA personnel policies must follow the policies for overtime pay. Overtime pay can amount to that apply to the overall civil service, which severely 50 percent of employees' base pay, so those who 108 Customs Modernization Initiatives: Case Studies have the opportunity to work overtime can earn charge traders. Thus, traders may not even be aware substantially more than other customs staff mem- that they are paying such gratuities. bers or civil servants in general.3 In addition to base salaries and overtime pay, customs staff members Automation receive rewards for uncovering smuggling opera- tions and also share in the fines levied on traders A key component of the modernization project was who provide erroneous customs declarations. the use of automated customs processes as much as Traders resent this practice. possible to enhance efficiency and transparency. The reform aimed to stem corrupt practices and Until September 1997, the TCA's reliance on ICT appears to have made progress in that regard. One was relatively insignificant and was limited to the contributing factor has been the emphasis placed on production of trade statistics and a limited ICT the automatic processing of customs declarations, clearance system that had been developed in-house. which has enhanced the overall transparency of In 1997, the management of customs automation transaction processing. was entrusted to the Modernization Project Unit. The TCA addresses corruption head on. In The unit consisted of 3 senior managers, 14 cus- 2001, it disseminated a circular on ethics and con- toms experts, and 14 programmers and analysts. duct. The circular spells out the core principles of Its work program showed remarkable continuity, conduct and integrity for customs staff members because its staff was unaffected by frequent man- and clearly defines what is meant by integrity. The agement changes elsewhere in the TCA. This man- circular instructs customs staff members not to agement continuity has contributed greatly to the accept any gratuities in the course of exercising success of the customs automation program. their duties and not to engage in activities that could provide an appearance of conflict of interest. The Computerized Customs Management The circular permits customs authorities to use System To save time and costs and to minimize an unexplained accumulation of assets as an indi- implementation risks, the TCA decided to cus- cation of "unjustifiable and illegal profit and tomize an existing software package rather than to possession." It explains in plain language what develop a new system. Eighteen months of inten- customs personnel are expected to do when sive work was needed to customize the selected offered a bribe. software to the new streamlined operational proce- Despite the wide publicity surrounding the dures, translate the user interface into Turkish, and circular's publication, many customs employees train customs personnel so that they could main- apparently still do not recognize that accepting gra- tain and enhance the application source code. tuities on the job constitutes bribery. Indeed, in The package chosen was the Solutions Françaises response to a TCA survey in 2001, 23 percent of Informatiques (or SOFIX, UNIX), a derivative of customs employees noted that they did not regard the French computerized customs management sys- gratuities as bribes. Although the TCA has success- tem. In Turkey, the system is known as the CCMS. fully addressed significant payments of facilitation The software was provided by a consortium of bribes, some petty corruption remains, and a sig- French Customs and Bull S.A., with an initial con- nificant number of staff members may not view tract that covered the provision of the software these activities as corrupt practices. Traders stated source code, of the customization of the software, of that customs officials generally adhere to the strict the hardware, and of the implementation support at application of customs legislation but at times a pilot site. It was successfully launched in mid-1998 request modest gratuities, which the traders rou- in a pilot operation at Istanbul Airport, one of the tinely pay to prevent possible clearance delays. The busiest customs facilities in Turkey. gratuities are most frequently paid by brokers, who The CCMS is a client-server application based include their cost in the brokerage fee that they on an Oracle database that supports a full range of customs operations in real time, including an inte- grated tariff, accounting, import and export 3. At the local level, salaries range between US$400 and US$850 per month; the range for top management officers at customs clearance, inspection selectivity, transit and other headquarters is US$1,000 to US$1,300 per month. temporary admission regimes, and trade statistics. Turkey 109 The CCMS was installed in 65 customs offices The CCMS has received national and interna- throughout Turkey between 2000 and July 2003, tional recognition. It was named the best ICT proj- following an international tender and contract ect in a 2000 competition organized by INTERPRO award to a large Turkish firm. The firm installed a in Turkey for leading ICT applications in the local area network and application and database public and private sectors. At the 2003 European servers at each site. A wide area network served as a E-Government Conference, the modernization backup system for all localities, centered at customs project was selected as one of the 65 best practices headquarters in Ankara, where a national data of public administration in Europe. warehouse was established. The warehouse pro- The CCMS is designed to share data with other duces trade statistics and serves management infor- government agencies. It already shares export data mation needs. The contractor successfully trained with the Ministry of Finance's Revenue Department thousands of customs staff members and traders and plans are to provide detailed import data as while the system was simultaneously rolled out well. The CCMS uses a common tax identification across the country. Traders were consulted on the number assigned to each taxpayer, thereby facilitat- design and rollout of the CCMS through their ing the cross-checking of taxpayers' records by representatives on the Consultancy Committee, the Revenue Department. The TCA also routinely which was established for that purpose at the outset shares data with the State Institute of Statistics. of the computerization program. They note that Plans are under way to extend data sharing to the the intensive training provided in the CCMS and undersecretariat of foreign trade, the banking sec- EDI contributed to their acceptance of the system tor, and the Exporters' Association, among others. and its eventual success. As of mid-2002, about The other entities appreciate this data exchange. For 99 percent of all customs declarations were instance, the State Institute of Statistics notes that it processed through the CCMS. can now produce accurate statistics more quickly Traders have a choice of three methods for and at the same time has been able to reduce the entering their declarations. They can use a kiosk, number of staff members working on trade statis- EDI, or the Internet. Some 54 kiosks, equipped tics by 60 to 70 percent. To date, data exchanges have with a total of 800 computers and 400 printers, are been undertaken by means of CDs. The State Insti- made available to traders. Traders complain about tute of Statistics looks forward to having a direct the lack of personal computers and about continu- link with the CCMS, which would make the ex- ous defects, mistakes, overcrowding, and conges- change of data even more efficient. tion at these kiosks. The TCA encourages traders The CCMS feeds its information into a data to use EDI and plans to close the kiosks eventually. warehousing system that is available for analysis Acceptance of EDI was more rapid than expected. and other applications. One application that is First introduced at Istanbul Airport in August scheduled for rollout is the management of the 1999, EDI was used in 42 percent of all declara- return of securities deposited for duty-free imports tions by the early part of 2002, with the share ris- related to inward processing. To date the Ministry ing to 50 percent by mid-2003.4 Traders rarely use of Foreign Trade has provided permits for inward the Internet to enter their declarations, largely processing, and the Exporters' Association has because of inadequacies in the communications carried out security procedures. That process, as infrastructure. Initially, traders were opposed to it operated in mid-2002, was cumbersome and the computerized declaration system, but they time-consuming, and thus it resulted in additional were quickly convinced that the system worked to costs to processors. Drawing on the data warehouse their advantage. The media supported the new to manage the release of the securities could system. drastically reduce those costs. Plans exist to exploit the valuation data stored in the data warehouse to construct a database that could help head- 4. Traders note that their investment in EDI is rather high-- quarters and regional staff members in their valua- $300 to $4,000--and that the transmission of messages is tion work. frequently not as fluid as it should be. The authorities are study- ing the possibility of introducing leased lines or other alternative The total cost of introducing the CCMS was technologies to improve the technology. US$32 million, with the costs coming out of a 110 Customs Modernization Initiatives: Case Studies US$48 million World Bank loan (of which US$16 The selectivity system does not work exactly as million remained undisbursed as of mid-2002). intended, however. To begin with, the green chan- The government's budget covered VAT expenses nel is rarely used. In addition, customs staff mem- and the costs of customs enforcement services. bers can modify the selectivity choices made by the CCMS, particularly by overruling yellow channel Other Customs ICT Systems The customs ad- selections and orienting shipments toward the red ministration uses specially designed ICT applica- channel so that they require full inspection before tions for tracking vehicles driven by travelers who the release of the goods. In 2001, 25 percent of enter Turkey and for transit procedures. In addi- all goods were cleared through the red channel, tion, a security system for customs borders was 62 percent through the yellow channel, and 12 per- started in 2003 with the aim of improving transit cent through the blue channel. For exports, the per- traffic. It is based on a vehicle tracking system that centages were 10 percent for the red channel and uses license plate scanning. 90 percent for the yellow channel. Those achieve- ments are below the reform program's targets, which called for reducing red channel inspections Customs Controls, Selectivity, to 12 percent for imports and 2 percent for exports. and Postrelease Inspection In relation to postrelease inspections, the CCMS Before the reform, all shipments were physically allocates the personnel so that neither importers inspected. That process was intrusive and time nor customs employees know in advance with consuming, and it often led traders to pay substan- whom they will be dealing, a procedure introduced tial facilitation money to speed up the process or to to enhance the predictability and transparency of gain favor with customs officials in charge of their the inspection exercise. Some of the problems inspections. As part of its trade facilitation work, encountered with the implementation of the selec- the TCA sought to develop its ability to undertake tivity processes appear to be due to a lack of its control function without having to open every specialized training in these new procedures for single cargo shipment while retaining effective con- frontline staff. trol over the flow of goods and duties payable. The TCA sought to achieve those goals by carefully Performance of the TCA selecting the shipments that would undergo physi- cal inspection upon arrival and those that would be The reforms can be evaluated on the basis of inspected after the goods had been released to clearance times, transparency of operations, and traders. A specialized selectivity module in the efficiency. CCMS was prepared by the Risk Analysis Unit, which was established in 1998. The module checks Clearance Times each declaration against preselected risk assessment criteria and assigns the shipments to the green, yel- Customs clearance times have been reduced signifi- low, red, or blue channels. Companies cleared for cantly, an achievement that represents the clearest simplified procedures use the blue channel for all sign that the reform has eased the burden on imports. traders (table 8.3). The share of imports that TABLE 8.3 Customs Clearance Times, 1996 and 2001 (percentage of total shipments cleared) 1996 2001 Clearance Time Imports Exports Imports Exports Less than 24 hours 61 40 71 96 Less than 48 hours 68 60 83 97 Source: TCA data. Turkey 111 cleared customs in fewer than 48 hours rose from 61 days for such information to be made available 68 percent of the total in 1996 to 83 percent in to importers. 2001, and for exports the share rose from 60 per- cent to 97 percent. Those increases were made Efficiency possible by the reduction in physical inspections, which are gradually being replaced by postrelease As noted earlier, the number of customs staff mem- verifications and audits. Laboratory inspections, bers fell during 1996­2001, while the number of which were a routine matter for a lengthy list of trade declarations rose substantially. As a result, the commodities before the reform, are now required number of trade declarations handled per customs only for imports that are assigned to the red chan- officer increased, a gain that was made possible by nel. As a result, the share of total imports that increased automation. undergoes laboratory inspection fell from 20 per- cent of total imports before the reform to 5 percent The 2001­05 Reform Program in the first five months of 2001. However, traders note that delays caused by the The TCA's management is committed to continu- Turkish Standards Institution, the Ministry of Agri- ing the pace of reforms. At the end of 2000, it culture, and the Ministry of Health slow the provi- announced a new five-year reform program sion of documents to customs offices. In a sample (2001­05). Noting that substantial progress had of four tariff columns subject to certification by been achieved in improving the application of the the Turkish Standards Institution, only 40 percent new Customs Code and in implementing the ICT cleared customs in fewer than 48 hours. Hence, support system, the TCA said that its goal was to these inspections clearly slow down customs clear- ensure that the reform does not stall and to provide ance substantially. still better services to the trading community. The following are the main features of this program: Transparency · Adapting customs services to developments The reforms have led to a substantial increase in in international trade so as to further reduce the transparency of customs operations. The the cost of foreign trade through streamlining streamlined legislation is made available on the and accelerating customs formalities. This TCA's Web site (http://www.gumruk.gov.tr/), adaptation implies that ICT resources will be along with a large number of explanatory notes used more efficiently and that progress on risk and circulars. As a result, traders and their repre- management to reduce the number of physical sentatives are fully informed about their obliga- inspections will continue. This effort will tions and are shielded from arbitrary decisions by further improve the TCA's relationship with the customs staff members. The site provides complete trading community. details about the Turkish import tariff and · Fighting against customs fraud and corruption explains how to register for access to the system through further staff training and strengthening for electronic submission of trade declarations. In of existing control mechanisms, including those addition, it provides contact information for all applicable to transit trade, and making greater customs management staff members and a dedi- use of valuation databases and mutual support cated help line for general queries and for special- agreements with other customs administrations. ized questions about the ICT system. Some traders · Ensuring public security by emphasizing the said that they rarely consult the official Web site protection of national security, health, and the but consult private Web sites that provide the same environment. information. · Assigning more resources to staff training, with The TCA aims to provide traders with binding the objective of retraining 25 percent of the staff tariff and origin information in a timely manner annually, and improving the expertise of cus- so as permit them to make long-term import toms staff members in working with the virtual commitments. Yet to date the decisionmaking environment in which modern trade increas- process has been lengthy: it takes an average of ingly takes place. 112 Customs Modernization Initiatives: Case Studies · Striving for a proactive and democratic manage- they cite their ability to access goods more rapidly ment system and for improved integration of than in the past because they can now submit their customs personnel and customs partners into declarations electronically and are subject to lighter the decisionmaking process. inspections. They hope that customs staff members will follow instructions more rigorously, particu- larly in the area of selectivity, where they do not Conclusion strictly follow the CCMS-assigned channels. They As a result of the modernization project, Turkey would also like the other agencies involved in the has had modern customs laws that are harmo- customs clearance process to modernize their pro- nized with those of the EU since 1995. Customs cedures. Doing so would further facilitate import laws, including those pertaining to valuation, clas- and export processes and reduce traders' costs of sification of goods, and rules of origin, have been doing business. made consistent with international standards. The Additional benefits of customs reform include processing of trade declarations has been simpli- the provision of trade statistics with fewer delays fied, and a computerized mechanism has been and in full conformity with international standards, implemented, with an emphasis on selective as well as the planned increase in the sharing of inspections guided by an advanced risk analysis data on importers and exporters, which will allow methodology. In this regard, the TCA has success- other government bodies to perform their own fully reduced the level of corruption in customs responsibilities more efficiently. The reform is an operations. ongoing process, and the decision to launch a new Traders who were interviewed for this study phase of the reform is a sign of the continued vital- were pleased with the progress so far. In particular, ity of the TCA. 9 Uganda Luc De Wulf During the 1990s, Uganda undertook a compre- 1991­92, Uganda's fiscal revenues were among the hensive economic reform program that included lowest in the developing world, averaging only liberalizing external trade and modernizing its cus- 7.5 percent of gross domestic product (GDP). Fol- toms administration. As a result of those initiatives, lowing the turbulent years of President Idi Amin Uganda's trade tariffs are now among the lowest and President Milton Obote, corruption remained and most streamlined in Sub-Saharan Africa. rampant, particularly in the area of revenue collec- Moreover, the government created an independent tion. In the context of periodic meetings of finance revenue agency, the Uganda Revenue Authority ministries organized by the Commonwealth coun- (URA), to improve overall revenue collection. The tries, Uganda's minister of finance met with his initiatives have enabled the authorities to improve counterpart from Ghana, who a few years earlier their revenue mobilization performance, ease trade had established an autonomous revenue agency in operations, and initiate a fight against corrupt his country. Such an approach to managing the practices in the customs service. customs service had been inspired by Margaret This chapter begins by highlighting the key ele- Thatcher's reform of the United Kingdom's public ments that led to the creation of the URA. It then sector, which drew on a private sector business turns to a review of customs reforms before look- model. ing at the future of reform. This chapter is based The United Nations Development Programme on a field study undertaken in June 2002 and supported the search for new approaches to make was updated in November 2003 with information the customs service more efficient, provided the obtained from the URA. funds for a team from Uganda's Ministry of Finance (MOF) to visit Ghana, and commissioned a consultant study to define the steps needed to cre- The Uganda Revenue Authority ate an independent revenue authority. The United Toward the end of the 1980s, the minister of Kingdom's Department for International Develop- finance became frustrated with the ministry's ment (DFID) supported the creation of the URA revenue performance and looked for ways to with a UK£4.6 million grant, UK£3.6 million of strengthen revenue collection. In 1990­91 and which was provided in the form of technical 113 114 Customs Modernization Initiatives: Case Studies assistance, with the remainder as a capital grant. recourse against disputable tax assessments and This United Nations Development Programme abuse by revenue officers. Clearly, those changes study compared salary levels in the private and were largely intended to enhance the URA's revenue public sectors with a view to suggesting a salary performance and the government's compliance level for the customs service that would enable it to with Enhanced Structural Adjustment Facility attract qualified personnel. Following internal dis- commitments related to the mobilization of larger cussions of the study, a new revenue regulation was budget revenues. The DFID supported the URA by drafted and presented to the parliament in early providing an external adviser with line manage- 1991. Following approval of this legislation, the ment responsibilities. Unfortunately, the changes ensuing legislation led to the creation of the URA did not yield the expected results. in September 1991. The main difference between the fiscal depart- Administration ment that the URA was to replace and the URA itself was that the URA would pay better wages The URA's Board of Directors consists of a chair- and would have greater flexibility in managing person, representatives of the MOF and the Min- its human resources, including the ability to fire istry of Trade and Industry, a representative of the corrupt staff members. In establishing an inde- Uganda Manufacturers Association, and the URA's pendent revenue authority, Uganda led the way to commissioner general (since 1998). The minister of similar initiatives in other Sub-Saharan African finance is authorized to appoint two additional countries--Kenya, Malawi, Rwanda, Tanzania, and members on the basis of the professional expertise Zambia--that have also taken this important step that they can bring to help the URA function effi- to strengthen revenue mobilization. Efforts to ciently. The minister of finance is also authorized to enhance revenue and fight corruption were high impart directives to the board regarding the per- on the URA's agenda, whereas trade facilitation formance of its functions, and the board must received little attention. Moreover, the private sec- comply with those directives. The legislation was tor was not consulted during the process of setting drafted in such a way as to give equal and conflict- up the URA. ing power to both the board and the commissioner The URA was set up as an autonomous agency general to manage the URA. This allocation of in the finance portfolio and was put in charge of power is likely to lead to conflicts and runs counter collecting and accounting for all revenue provided to effective management. Excluding the URA from for in the tax legislation. Initially, the URA was the tax policy field would appear to be well inten- empowered to advise the government on tax policy tioned, but its total exclusion from such discussion issues, but later the Cunningham Report (DFID has at times been counterproductive. 1995) identified a number of institutional issues The URA currently has a commissioner general, at the URA that prevented it from improving its two deputy commissioners general, and four rev- operational performance to the desired level of enue departments: the Customs Department, the effectiveness. In reaction to those suggestions, the Domestic Indirect Taxes Department, the Domestic government made some changes to strengthen the Direct Taxes Department, and the Expansion and URA's management and autonomy. The govern- Collection Department. The following departments ment appointed a new board and a commissioner support the revenue departments: Legal Affairs, general, made other changes in the senior manage- Information Technology, Human Resources, ment team, passed legislation intended to clarify Finance, Administration, and Internal Audit and the role of the board and its relationship to the Investigation. There is also a Staff Monitoring Unit. URA's management, and clarified the relationship between the MOF and the URA. The changes also Budget, Salary, and Staffing Issues granted the MOF greater authority in tax policy, while giving the URA greater flexibility in tax While the URA was being created, extensive discus- administration plus a somewhat larger budget. In sions took place regarding the formula that would addition, the government created the Tax Tribunal, set its operational revenues so as to endow it with a which was intended to give taxpayers a means of solid revenue base that would ensure its efficient Uganda 115 operation. Some argued that the URA should be probationary period, but few, if any, are not con- allowed to retain a share of the revenues it col- firmed following the probationary period. lected. One formula would have established that the URA could retain 2 to 4 percent of collected Customs Reform revenues, depending on the amount specified in the budget each year, as a way to motivate the URA The early customs reform involved import tariffs, to enhance its revenue collections. Although the legislation, procedures and clearance times, in- URA's budget is set during the regular budget tegrity and corruption, valuation and preshipment process without any explicit reference to a share of inspection (PSI), certificates of origin, personnel collections, in recent years that share has amounted issues and training, information and communica- to 3.0 to 3.5 percent of revenue collected. tion technology (ICT), special import regimes, and Staff salaries were adjusted upward and set at goods in transit. levels comparable to the highest salaries paid to the staff members of any large organization in the Tariff Policy Changes and Revenue Performance country, namely, those at the Bank of Uganda. However, since the URA's creation, salaries have Reform included the following changes in taxes and been eroded by inflation and by a lack of the sys- duties: tematic adjustments called for by the URA's origi- nal provisions. By 1999, URA salaries ranked twelth · The authorities streamlined customs duties in in a sample of 50 private sector comparators, and 1995. They now consist of three tariff schedules: by 2002 they had slipped even further, ranking sev- 0 percent, 7 percent, and 15 percent. The zero enteenth. Salaries at the Bank of Uganda are cur- rate is applied to agricultural inputs, pharma- rently 40 percent higher than those at the URA. The ceutical goods, school textbooks, and some basic wage compression that has been taking place over consumer goods. Imports that are certified to the years has affected lower-level staff more than originate from Common Market for Eastern and management. Although the MOF was to approve a Southern Africa (COMESA) countries receive 10 percent basic salary bonus for all staff members preference: rates for such imports are 0 percent, in years when the URA surpassed its revenue target, 4 percent, and 6 or 7 percent. Those tariffs this bonus was approved only in 1994 and 1998. In resulted in a drop in the unweighted nominal other years, the revenue target was set at an unreal- protection rate for consumer goods from istically high level. For 2002, the bonus formula was 30.8 percent to 16.5 percent. In some cases, the changed, and the staff was to share 15 percent of tariff depends on the use for which the imports the revenue collected in excess of the budgeted are intended, as is the case with sugar imported amounts. by manufacturers, which is subject to determi- In 1991, all MOF Revenue Department staff nation by the Tax Department import quota. members had to apply for their jobs at the newly Such use-based tariffs easily lead to leakage and created URA. A committee made up of MOF repre- corruption, and customs experts discourage sentatives and the URA's core team screened the their use. applications, assisted by a human resource officer · A 10 percent excise tax is imposed on some from the Bank of Uganda. About 70 percent of goods--textiles, for instance--that are also pro- the applicants were accepted, and the remaining duced domestically. 30 percent were redeployed in other MOF depart- · A value added tax (VAT) is levied at a unified ments, with some subsequently affected by the rate of 17 percent, but goods for which the cus- retrenchment polices of later years. Senior staff toms duties are zero are exempted. members--a total of 42 in 2002--were recruited · A 4 percent tax is levied as a presumptive on the basis of three-year contracts. The board is income tax on importers that are not listed as authorized to renew those contracts only once paying income tax. for people in the same position; thus managers who · A presumptive 2.5 VAT is levied on importers are not promoted must leave the URA. Nonman- that have no valid VAT registration. This tax gen- agerial personnel are hired following a six-month erated US$800 million in revenue in May 2002. 116 Customs Modernization Initiatives: Case Studies TABLE 9.1 URA Revenue Performance, 1990­2002 Duties on Percentage of GDP Sales Taxes Imports as a URA Taxes on Customs and VAT on Percentage of Year Revenue Imports Duties Imports URA Revenue 1990­91 7.8 1.7 0.8 0.1 22.3 1991­92 7.0 1.6 0.8 0.1 23.2 1992­93 7.7 2.0 1.0 0.1 26.3 1993­94 9.5 2.8 1.5 1.3 29.7 1994­95 10.6 3.0 1.4 1.5 28.6 1995­96 11.5 3.6 1.5 1.7 29.2 1996­97 12.3 3.7 1.4 2.2 30.4 1997­98 12.0 3.6 1.2 2.2 30.3 1998­99 13.1 4.2 1.3 2.6 32.3 1999­00 12.7 4.1 1.4 2.4 32.1 2000­01 12.3 4.1 1.6 2.3 33.7 2001­02a 13.0 3.8 1.2 2.3 29.4 a. Provisional. Source: URA data. Kenya, Tanzania, and Uganda constitute the East In 2001­02, taxes on imports accounted for African Community, which over time is expected close to one-third of overall URA revenue. The to grant duty-free access within the community reduction and streamlining in customs duty rates for originating commodities, with exceptions to that took place in 1995 did not reduce customs accommodate the different levels of industrial duties revenues as a share of either GDP or total development among the partner states. A three- URA revenue. Even if the relative contribution of band external tariff has been accepted (0 percent, customs duties in the overall revenue structure 10 percent, and 25 percent) with the agreement that were to fall in the future, the role of the URA in the 25 percent rate will be progressively reduced to revenue generation would not decline, as the man- 20 percent over a five-year period. agement of import taxation would still require that Uganda has accepted the transaction value defi- import values be assessed. In addition, the fight nition of the World Trade Organization (WTO). In against corruption, false invoicing, undervaluation, theory, Uganda does not use reference prices for and misclassification of goods would need to administrative or protective purposes. It has also continue. abolished export taxes, although the last budget Effective tariff rates (that is, import duties as a reapplied them on exports of animal hides. percentage of total imports) were 6 percent in 2001, Since the URA was created, overall revenues and total taxes on imports were 15 percent.1 Aver- have risen from 7.8 percent of GDP in 1990­91 to age effective customs duty rates are lower than the 13 percent in 2001­02 (table 9.1). That figure is still unweighted average tariff because of exemptions rather low when compared with figures in coun- that in 1997 still amounted to 17 percent of total tries at similar stages of development. Total taxes imports. The exemptions include those granted to on imports (customs duties, excise taxes, and sales diplomats and those granted in the context of the taxes or VAT) increased from 1.7 percent of GDP in Investment Code. Changes in tariff rates and the 1990­91 to 3.8 percent in 2001­02, an increase that was largely due to an increase in the relative impor- tance of domestic sales taxes: domestic sales taxes 1. In 1997, the import-weighted average collection rate was on imports, which after 1994­95 include VAT, rose 8.0 percent, whereas the import-weighted average statutory rate was 11.4 percent. The total value of exempted imports from 0.1 to 2.3 percent of GDP during the period amounted to 17.2 percent of total imports (Hinkle and Herrou- under consideration. Aragon 2003). Uganda 117 Investment Code altered the relationship between Procedures and Clearance Times statutory and effective rates, but no up-to-date esti- The authorities do not keep detailed records on mates are available. how long it takes to clear goods through customs The MOF prepares annual revenue projections even though the Automated System for Customs with tight targets. Yearly consultations with the Data (ASYCUDA) of the United Nations Confer- International Monetary Fund are a major input ence on Trade and Development (UNCTAD) could into those projections, which are based on a set of easily provide the data. Importers and brokers assumptions that may or may not be realized. The complain that the average of one week needed URA carefully records the performance of all rev- to clear goods is too long and adds substantially enues under its purview on a monthly basis and to their costs. Clearance times are long because explains the difference between the budgeted of the multiple, tedious, and time-consuming amount and actual revenue. With respect to the import procedures. In addition, problems on the revenues from import taxes, the URA compares importers' side include poor preparation of import budget assumptions and actual results for the documents, low tax compliance, willingness to par- exchange rate, real GDP growth, inflation, and ticipate in corrupt activities, and poor understand- change in import structure. ing of customs. The inclination of customs officials In recent years, a shift toward zero-rated to slow down the process in order to collect "facili- imports seems to have occurred--they accounted tation money" also contributes to the slow pace of for 58 percent of total imports in 2001­02-- clearance. Finally, goods encounter major process- alongside a growth of imports that benefit from ing delays at the Kenyan and Tanzanian ports and regional agreements. The average unweighted tariff borders, and transport from those borders to loca- (that is, import duty revenues over import value) tions in Uganda is cumbersome and costly. dropped from 8.9 percent in 1999­2000 to 6.5 per- cent in 2001­02. The URA is well aware that the importance of customs revenue will decrease over Simplification of Procedures Current customs time and will have to be compensated for by greater procedures are excessively lengthy and require a reliance on domestic taxes. This shift will not number of verifications that do not contribute to reduce the burden on URA staff of ensuring that good business practices. They do, however, increase import values and volumes are correctly declared, the number of contact points between URA staff but it will ease the problem of classification and and importers or clearing agents, which provides origin somewhat. The URA is not penalized if opportunities for collusion. They certainly lead to a its revenues fall short of targets, but the staff is perception that importers need to provide facilita- rewarded if the URA surpasses its targets. tion money to ensure that their paperwork is han- dled promptly. Such facilitation money is included in brokerage fees, and importers report that this Legislation practice adds about U Sh 100,000 (roughly equiva- During the URA's inception, the government did lent to US$50) per shipment if the shipment is to not introduce any new customs procedures, and the be processed in four days. East African Customs Act of the 1960s remained in Beginning in early 2002, customs procedures effect. New customs instructions were gradually were streamlined to accelerate the clearance of introduced to streamline the existing procedures goods and fight corruption. Pilot tests are under somewhat and to prepare for the introduction of way to see how well this simplification process is the ICT system. Those instructions have yet to be doing. The Association of Brokers has been closely consolidated in a new customs code. Doing so associated with the review of those procedures. The would improve the transparency of customs regula- simplification process involves the following: tions, which are not readily available to importers, clearing agents, and customs officials. The lack of · Trucks arriving at the border are cleared and transparency leaves scope for individual interpreta- allowed to proceed to Kampala individually. In tion of the procedures, negotiation, and arbitrary the past, they could proceed only in convoys behavior on the part of URA staff. that traveled under supervision by the customs 118 Customs Modernization Initiatives: Case Studies authorities, a procedure that could delay the Verification and Inspection of Cargo The journey for up to a day. inspection rate is currently close to 100 percent, · Border documentation is forwarded to URA causing considerable delays. As of early 2003, URA headquarters in Kampala in a more efficient management was looking into risk-based, post- manner. clearance inspection, and about 25 percent of · Document verification has been simplified to employees have undergone pertinent training. Two single verification at the internal container PSI companies, Intertek Testing Services and the depot. For warehousing, the single verification is Société Générale de Surveillance, have given pre- done at the bonded warehouse. This system cuts sentations to URA staff members on the support at least two days from the time it previously took that they could provide in a risk-based approach to to process goods. inspection. To date, the URA has not shown much · Verifications--because of the reduction in their interest in this approach; however, the customs number--now require fewer workflow man- administration has recently introduced a fast-track agers, whose interventions caused delays and led clearance procedure for some commodities and to demands for facilitation money. This reduc- some importers. Now that ASYCUDA has been tion, in turn, speeds up the paper flow. installed, it can be relied on to introduce a fully · Secondhand cars are inspected at the border developed risk-based verification system, the jointly by customs agents and internal revenue advantages of which will be reaped only when staff officers rather than being inspected by internal are redeployed and training to effect postclearance revenue agents separately in Kampala. audits has been completed. At one point, the URA looked into using scan- Clearing agents that use direct trader input (DTI) ners in the verification process as one element of are allowed to use their own stationery, whereas risk analysis. The URA solicited indications of others use bills of entry printed by the URA. DTI is interest from a number of scanner service providers not yet Web based. A pilot project was first done and initiated a preliminary evaluation; however, with two large clearing agents, but the URA antici- this process has stalled. pates that eventually all larger importers and clearing agents will use DTI from their premises. Certification of Brokers Documentation submit- Smaller brokers are using privately established ted in relation to goods clearance is often completed front-end bureaus for DTI. The pilot companies incorrectly, and data are frequently missing, thereby note that they would prefer to scan documents and slowing down the clearance process. To some extent, forward them to the URA, but the URA does not this problem is due to the presence of a large num- have the equipment to receive scanned documents. ber of clearing agents, many of whom are small, Under the simplified procedures, single-item cargo part-time operators whose operational capacities is estimated to clear customs in one day, whereas and ethical standards are at times dubious. In many mixed cargos take three days. However, the error cases, the import documents are incomplete or rate of electronic data interchange declarations is incorrect, and the attachments--invoice, bill of lad- significant (up to 50 percent), which slows down ing, insurance certificate, importer's declaration, customs clearances. ASYCUDA was introduced and certificate of origin--are incomplete. and new customs clearance procedures were to The URA is currently rectifying this situation, come into effect by the end of November 2003. and transparent accreditation criteria are being URA staff initially resisted these simpler procedures established to ensure that all clearing agents are because of their implications for staff assignments capable operators. The URA manages the agent and workflow. Despite management's awareness of certification process, with full participation by a the need for the rollout of the new import clearing representative of the Uganda Freight Forwarding procedures, to be accompanied by planned staff Association (created in 2001), which has about redeployment, no planning had taken place at the 27 members. The 12 criteria for certification time of the initial rollout. Planning was expected to include whether the qualifications of the appli- commence by January 2004. cant's board of directors and personnel are Uganda 119 appropriate, whether the applicant has the financial interviewees suggested that the corruption issue capacity, whether the applicant is registered to pay has been brought much more into the open than VAT and income tax, whether an insurance bond is before as some progress is made in fighting corrup- in place, and whether personnel are bonded. As a tion. This visibility leads to a public perception that result of this process, the number of active clear- corruption is getting worse even though it may ance agents could drop from about 370 to 200. The actually be decreasing.2 certification process is taking longer than expected, That perception can be reviewed in the context in part because some clearance agents are not of Transparency International's 2000 corruption responding to the URA's requests for information. index, which reflects the perceptions of business Some observers believe that the URA does not sector managers.3 On a scale of 10 (best) to 1 always adhere to the strict qualification standards it (worst), Uganda scores 2.3, above Nigeria (1.2) and sets, possibly in reaction to political intervention. Cameroon (2.0), but below Senegal (3.5) and South Africa (5.0). Transparency International does not Clearance and Transport of Goods from Kenyan keep track of perceived corruption in revenue and Tanzanian Ports Importers note that goods departments, but survey data suggest that corrup- that are imported into Uganda mostly come through tion in revenue departments is worse than in the the ports of Mombassa in Kenya or Dar Es Salaam in government in general, and there is no reason to Tanzania. Substantial delays occur at those ports. In believe that the situation in Uganda is any different. Mombassa, the delays can easily amount to 10 days, Efforts to stem corruption among revenue staff even after the recent process of simplification that were high on the URA's reform agenda when it was was put in place. For example, even though the created. To shelter staff members from the tempta- number of required signatures was reduced from 13 tion of corruption, they were paid the highest to 4, importers still have to make 26 trips in and salaries then prevailing in Uganda; however, as around the port to get their goods cleared. The cus- noted earlier, their salaries have stagnated. All URA toms clearance process has also improved in Dar Es personnel are required to fill in an asset declaration Salaam, but Tanzania's railroad services are so poor form during the selection process and must update that Mombassa is still the preferred route. There this declaration every time a significant change seems to be substantial scope for better regional in family status or asset ownership occurs. The cooperation, both to improve transit arrangements Human Resources Department keeps the declara- and to look into the possibility of arranging for cus- tions, and the Staff Monitoring Unit, which has 6 to toms clearance in the ports of Kenya and Tanzania. 10 members, is supposed to follow up. The URA is This effort appears to be on the agenda of the the only government unit or autonomous depart- recently revived East African Community. ment that requires such asset declarations, even though civil service regulations require them for all civil servants. In theory, the nondeclaration of Integrity and Corruption assets or a false declaration is reason for dismissal. Uganda has signed the World Customs Organiza- In a few cases, the authorities have used asset decla- tion (WCO) Arusha Declaration and has included rations in the investigation of bribery. For instance, an integrity section in the customs Staff Handbook. in 1997, 60 URA staff were accused of corruption, To date, this effort does not seem to have had any but 45 were brought back, in part because no illicit effect on corruption, which existed long before the creation of the URA and seems to be wide- spread, well beyond the customs staff. Both URA 2. One importer of steel products notes that he suffers consider- ably from fraudulent imports of steel products that compete management and private sector operators share with his. These fraudulent imports come in hidden among other the perception of pervasive corruption, although cargo and benefit from fraudulent valuation and classification the latter have suggested that corruption seems to between the importer and URA staff. He notes that in recent years his business has improved because fraudulent imports, have been reduced somewhat. According to URA which the URA estimated to account for up 60 percent of total sources, some 50 to 70 percent of URA employees steel imports, have fallen back to 30 percent of total imports. working in the customs service are corrupt. Some 3. See http://www.transparency.org/. 120 Customs Modernization Initiatives: Case Studies gains could be detected on their asset declarations. the URA's operational values and principles in One of the difficulties with the asset declaration is somewhat general terms. What the function or that female staff members often do not know the effect of the Ethics Code will be is still unclear. details of their husbands' assets and therefore can- The code could focus more clearly on corrup- not include them in their own asset declarations, tion and the penalties for violating the code, and making their declarations incomplete and difficult it could include examples of what might consti- to exploit if disputes arise. Also, corrupt staff mem- tute corrupt behavior, without blurring the mes- bers can easily register their assets under the names sage with other issues related to the need to of family members so as to escape future scrutiny. deliver professional service. In addition, all URA The URA renewed its anticorruption efforts in staff members could be made to sign this simple 2002. In the process, it wanted to be explicit about code when they receive a salary increase. the problem that corruption creates for society in · The campaign was publicized through announce- general and the URA specifically, even if some found ments in the press and visible anticorruption it embarrassing to acknowledge the prevalence of signs posted at URA headquarters. corruption in the URA so openly. The URA's man- · The commissioner general sent a circular to agement defends its position by drawing on the anal- all URA staff members in early 2002 inviting ogy of Uganda's approach to HIV/AIDS, whereby them to join in the fight against corruption and the government openly declared HIV/AIDS a major asking them for advice and details of corrupt national emergency and organized a campaign practices. The message advised corrupt staff against it even though doing so touched on delicate members that they could take the opportunity matters of sexual practices and morals. The anticor- to resign with termination benefits paid--a type ruption campaign was supported at the highest of amnesty for those willing to leave the URA. political level, and the government has created the Responses were to be sent directly to the com- new Ministry of Integrity to promote the cause of missioner general within four days and were to integrity across all spheres of public life. be kept confidential. There is no indication that The current URA campaign against corruption any staff members resigned. has several facets. The intended simplification of · The Judicial Committee of Inquiry, headed by a procedures is probably the most important, as it high court judge, was created in February 2002 aims to provide greater transparency to transac- to look into corruption in the URA. Because of tions as well as reduce contacts between importers unresolved issues relating to its funding, the and URA agents. The transparency of customs committee did not start work until June 2002. Its operations will also benefit from the introduction report was scheduled for the end of September of ASYCUDA . The latter is supported by the 2002 but in mid-2004 was still being awaited. following initiatives, which were to crystallize the (Hearings were completed in February 2003.) campaign against corruption, although relatively · A questionnaire was circulated to all staff mem- little follow-up on the initiatives has taken place: bers regarding their views about and attitudes toward corruption. So far, few responses have · The URA organized an integrity workshop in been collected, and the Human Resources November 2001 to launch a new ethics and anti- Department has not carried out any analysis of corruption campaign, during which the Ethics those responses received. and Integrity Committee was created in the URA. The committee's objective was to help instigate Staff members can be sanctioned for corrupt behavioral change among URA staff members behavior or other failures in performing their and thus enhance the overall image of the URA. duties. The staff member's supervisor advises a One of several initiatives that were to follow from disciplinary committee of the intended staff action. this workshop was the selection of ethics coun- The staff member concerned can consult an selors from among URA staff members; however, appeals committee and can even appeal to the URA their selection has not yet been completed. board. In 2001, 18 of the URA's 2,240 staff mem- · The Code of Ethics is being prepared. Drawn bers were dismissed, of which 12 were from the from the Staff Handbook, this code will set out Customs Department. Recovering ill-gotten wealth Uganda 121 is extremely difficult, not only because the external interlocutors do not believe that the current staff, judicial process is complex and corruption much which they perceive to be corrupt at all levels, is more difficult to prove than in an internal URA capable of reforming itself, especially because the process, but also because people in the private sec- supervisors tend to be accomplices in most corrupt tor who offered bribes are involved. In such cases, practices. The observers note that, while better the URA should start proceedings to claim pay- training and the recent progress in recruiting well- ment of the correct amount of duties and taxes plus educated staff may reduce corruption somewhat, appropriate penalties, but such action appears to the scope of the problem appears to warrant a dras- have taken place in few prior and current corrup- tic solution. tion cases. This lack of action explains why some corrupt URA staff members who were dismissed Valuation Issues and Experience used their ill-gotten wealth with impunity to create with Preshipment Inspection visible businesses, a situation that undermines the credibility of the anticorruption campaign. As a member of the WTO, Uganda is a signatory of The URA also tends to move some corrupt staff the Agreement on Customs Valuation (ACV) and, members around rather than to dismiss them out- as required, notified the WTO in 2000 after the right. Political interference is claimed to play a role transition period had lapsed. Uganda notified the in this practice, which private sector operators find WTO of three sets of exceptions that it wants to extremely galling. apply: safety matches, dry batteries, and textiles. In mid-2002, some changes seemed to have However, the URA does not apply the ACV widely. taken place in the fight against corruption that URA officials argued for a much longer transition involved actions outside the URA or the MOF. An period than the one provided by the WTO on the external investigation looked into payments against grounds that building capacity to implement the faked drawback documentation. The case involved ACV effectively will take time. the head of the Large Taxpayers Department as Several reasons account for this situation. First, well as several staff members of the Internal Audit invoices presented by importers are largely false. Department. They were accused of falsifying draw- A detailed audit--based on a raid of importers' back documents in which specially created compa- records and their computer hard drives--of a sam- nies obtained illegal duty drawbacks amounting to ple of those invoices suggests that up to 70 percent more than US$2.5 million. The accused were jailed are falsified in Uganda (that is, values or classifica- pending further investigation (bail is not permitted tions are changed), are total fabrications, or are only for this kind of offense) and the next phases of the partial declarations (that is, only free-on-board judicial process. Such well-publicized treatment is a values are declared, not cost, insurance, and freight stark departure from earlier practices and is likely values). Even reputable firms provided partial and to set an example for URA staff members at all lev- falsified invoices. Imports from Dubai and Kenya els. URA staff members and civil society at large are are particularly likely to be fraudulent. Second, URA closely following the outcome of this case. Since personnel are complacent and participate in the then 12 more customs staff members, including an fraud. Third, URA employees are poorly trained to assistant commissioner, have been charged and challenge prices or classifications in invoices. A were put on trial in late 2003. further problem that makes reliance on the ACV Some Ugandans have argued that a more drastic difficult is that more than half of the dutiable com- solution should be adopted to counter corruption in modities imported into Uganda are secondhand the URA, one that would rely on drastically altering goods, for which the ACV is particularly ill-suited. the composition of the staff, as has been done in The secondhand goods include clothing; shoes; Bolivia and as Uganda did when it first set up the white goods (refrigerators, freezers, kitchen stoves, URA. Employment in the URA is still extremely and so on); automobile tires; spare parts for motor attractive, and the authority would have no diffi- vehicles; televisions; computers; and telephones. culty recruiting highly qualified staff members that In practice, the URA frequently relies on price it could train in the new customs procedures and lists that are based on the best information hold accountable to high ethical standards. These obtained from reliable importers. Private sector 122 Customs Modernization Initiatives: Case Studies importers complain that the lists are arbitrary; would support such a development. In some however, they are concerned more about the instances, customs agents are using chemical tests secrecy surrounding the lists, which creates uncer- to identify the composition of commodities whose tainty for their businesses. declared prices deviate significantly from similar The URA is looking at alternative ways of find- commodities, as could be the case with cigarettes. ing a price basis that can be used to calculate the Private sector importers, who claim that the effort duties and taxes due at importation. The options to improve valuation has been piecemeal, acknowl- exclude having recourse to PSI companies, which it edge that the customs service is undertaking some sees as costly and as an option to which importers initiatives, but they note the total lack of training of and URA staff would object. Although the imposi- most of the people they are being asked to assist tion of this solution from outside the URA could and the lack of continuity in their assignments. restart a PSI program, its full benefits might not be Several interviewees noted that, given the realized if it ran into staff resistance. In this context, absence of any reward for whistle-blowing, few cus- only demand-driven PSI support would stand a toms staff members would volunteer to bring cor- chance of working. rupt practices to the attention of the authorities, An alternative approach that the URA is investi- because they would be afraid of retaliation. gating is the compilation of a price list using a trans- Uganda had an agreement with the Société parent methodology. Importers and clearing agents Générale de Surveillance until 1996, when Intertek appear to be inclined to go along with such an Testing Services won the PSI contract through approach, as long as the price list is made public and competitive bidding. Intertek Testing Services compiled in a transparent manner. For them, what operated PSI services until 2001, when the contract matters most is predictability and a system that was terminated and the decision was made not to avoids the present aggravations with URA staff. engage any PSI company. The private sector was URA management indicated that it would welcome extremely vocal about not wanting a new PSI con- assistance in preparing a position paper that would tract. Both URA staff members and the private sec- spell out how developing countries apply the ACV. tor thought money spent on the PSI companies COMESA or the East African Community could would be better spent on improving customs serv- submit such a paper to the WTO. A senior URA offi- ices. Critics also complained about inconsistencies cial has had private discussions with a South African in the PSI documentation regarding valuation and consultant to investigate how the URA might draw classification, although they offered no details. on the price database from bar-code companies. In The MOF had instructed the URA not to chal- the process, a list of 12,000 bar codes was obtained lenge the PSI findings, but later the URA started from a Kenyan retailer. The list permitted the con- challenging PSI findings in isolated instances. sultant to obtain wholesale prices for 80 percent of No serious comparison of the PSI data and the the items. When those prices were compared with data that were ultimately used to calculate customs invoice prices, the exercise suggested that invoice duties and VAT was evident. Reconciliation prices should be increased by 30 to 50 percent for occurred only sporadically and was complicated by customs valuation purposes. long delays in the transmission of documents One problem with the bar-code approach is that between the PSI company and the URA's Customs fake and imitation goods that bear the same bar Department. Internal fraud also prevented the code as the original product would be subject to the URA from making the most of the PSI documenta- same import duties as real ones.4 In the meantime, tion. In addition, the Treasury did not cooperate in the Valuation Unit intends to have team leaders making this reconciliation, in part because its cash- trained to become experts in particular commodi- book was not computerized. URA personnel claim ties. Private sector importers and business people that they maintained a parallel value database that relied on invoices from earlier imports and on data provided by the PSI on earlier shipments. 4. One instance given was the case of a Barbie doll that has a The PSI company was supposed to have pro- wholesale price (verified with the bar-code process) of US$12. vided staff training and to have given the URA a The importer claimed that it was an imitation product that cost him US$6.50. database as well as computers. Aside from a little bit Uganda 123 of management and ACV training, URA officials screening. After this initiative, new recruitment was claimed that the PSI companies did not honor their based solely on interviews and was better isolated training commitments. from the influence of politicians and from other nonprofessional criteria. In 1999, the last year of new recruitment, the applicants had to take a writ- Certificates of Origin ten examination before they could be selected for Substantial abuse occurs in the use of certificates of oral interviews. They then took an introductory origin, even though import tariffs are generally low. course, and if their examination results were good Only imports from COMESA qualify for tariff pref- enough, they were selected for URA employment. erences. The preferences reduce the 7 percent tariff Training for staff members who are already on to 4 percent and the 15 percent tariff to 6 or 7 per- board is weak. Most staff members have not cent. The creation of the East African Community, received any formal training since joining the URA with duty-free imports for commodities from in 1991. Training facilities are underused, and the member countries, has made the correct establish- Customs Department uses the facilities less than ment of origin even more crucial, because the rev- the other branches of the URA. This lack of train- enue loss from fraud could become significant. ing is blamed in part on the reluctance of customs Uganda is a member of other regional agreements, managers to release qualified staff members to pre- but none has tariff preferences. pare for and deliver training courses. Staff promo- The ministries of trade or the chambers of com- tion is unrelated to job performance or to training. merce of exporting countries prepare the certifi- Because all involved see poor training as one of the cates of origin. Their main concern seems to be to shortcomings of URA staff, the issue needs to be please exporters and to facilitate the export process. addressed with some urgency. The training pro- Even if a certificate of origin has been issued gram was redesigned in 2003, but it has not yet according to regulations, the information is fre- been implemented. Some training could well bene- quently either not reliable or false. Challenging the fit from a regional initiative. Recruitment proce- certificates is difficult and often beyond the capaci- dures were revamped as of November 2003 and ties of URA staff. Also the cooperation the URA now rely on initial screening, written tests, further receives from customs departments in countries of interviews, and psychometric testing (including origin is sometimes problematic. The cooperation integrity testing). Applicants are interviewed and, if agreement with Tanzania works well, that with qualified, undergo two weeks of introductory train- Kenya works less smoothly, and countries like ing, followed by two months of basic training in a Egypt and the United Arab Emirates do not coop- revenue department. The latter training includes erate at all. Pursuing the veracity of certificates of both practical and classroom training. After passing origin is a lengthy process, and routine verifications an examination, selected applicants are appointed exceed staff resources. This issue remains a major for a probationary period. problem, and a ready solution does not appear to be available. One possibility is for customs offices Information Technology in the countries of origin to become involved in issuing certificates of origin, a change that was pro- At the time that the URA was created, the customs posed at the Doha WTO Conference and that the ICT that had been introduced in 1990 did not WCO is looking into. include a number of valuable functionalities. The URA launched a search for a better system in 1993 and settled on ASYCUDA version 2. However, the Personnel Issues and Training software was not installed at the Entebbe airport The URA has no difficulty recruiting university until 1997. Installations were later completed at graduates, both because of its attractive pay levels seven more customs stations. Not all URA stations and because of the high level of unemployment. used all the functionalities of the system, a situation Confirmation of URA employment and recruit- that could still be significantly improved. Not only ment at the time of the URA's creation was a seri- was the new UNIX platform more stable than the ous undertaking because it involved professional platform it replaced, but it also helped the URA 124 Customs Modernization Initiatives: Case Studies compile statistics and had the ability to randomly noted earlier, DTI for smaller traders is in place at select customs officials to perform cargo verifica- facilities made available through kiosks. Making tions. However, the limitations of ASYCUDA ver- full use of ASYCUDA will require staff rede- sion 2 became apparent over time: the data retrieval ployment and intensive training, issues that have systems were complex, the software components not been adequately addressed in the past. for bond security management and risk manage- Importers pay duties through the banking sys- ment were missing, and UNCTAD was slow in tem, which is connected to the URA by a wide area responding to requests for support. network. This system is operational in only two Staff resistance to the introduction of the ICT customs stations and does not yet work efficiently, was initially high, but it dissipated substantially because the network often breaks down. A new over time and with sensitization and training. process is to be studied in a pilot project as part of However, difficulties in funding a training contract the ASYCUDA rollout. with UNCTAD complicated the installation process, which had to rely extensively on inade- Special Import Regimes quate in-house support and on technical assistance The government must pay duties on its imports. from Zambia. Staff training was largely neglected, Some URA staff members have suggested that the and most staff members had to learn the system on system could be improved to smooth the release of the job from more experienced agents. So even such imports. though computerization had been introduced, The drawback system is intended to provide many employees continued to use a number of the exporters with access to imports and VAT-free old manual processes. The full benefits of the new inputs. The system is part of the overall export pro- ICT system, including those aspects of the system cedure, which entails the following steps: that would have helped fight corrupt practices, were not realized. · The exporter prepares a packing list of exports The URA has reviewed most of the customs ICT and presents them to the clearance agent. available on the market. For instance, it commis- · The exporter presents the truck at the internal sioned a detailed comparison of an alternative container depot, but trucks are rarely in- computerized customs management system and spected because of the lack of proper weighing ASYCUDA , then the most recent ASYCUDA equipment. version. On the basis of the results, the URA chose · A copy of the export documents is sent to the ASYCUDA , which has most of the functionali- appropriate border crossing point, but because ties that were missing in its predecessor. Because truck convoys to the border do not leave every other countries in COMESA had also adopted day, some delay occurs at this stage. ASYCUDA , the URA considered it wise to stick · The documents are stamped at the border, and to that system, given its plans for the future inte- the claim for the drawback of import duties and gration and coordination of customs work in a VAT is sent to the URA. regional context. UNCTAD's contract for training · The URA pays drawbacks after verification by and some site visits ended in 2002, and the URA the Commissioner General's Office, the Audit modernization program, financed by the DFID, has Bureau, and the Refund Section. Drawbacks are restarted the ASYCUDA program, which was calculated on the basis of permitted wastage that expected to go live at the end of November 2003. occurs during the production process, which is The new modernization program is expected to often set at 3 percent, and an input-output coef- closely follow the ASYCUDA rollout, so as to maxi- ficient that is proposed by the exporter. mize the efficiency gains to be reaped from this ICT support to customs operations. The coefficient is recalculated every three months Full electronic data interchange is not yet feasi- and takes the price of imports into account. Private ble in Uganda because of poor infrastructure, but sector operators have no problem with the calcula- the new ICT system aims at close to 100 percent tion of duty drawback payments, but they do DTI. Two clearing agents already use DTI and, as complain about the delays in obtaining refunds. Uganda 125 Refunds often take up to four months and would Department--to enhance integrity and antifraud take longer if exporters did not systematically activities. This work program was being imple- pursue them. mented in November 2003. Another task high on the agenda of the commis- Goods in Transit sioner of customs is finding a solution to the vexing problem of customs valuation--that is, how WTO Uganda faces major difficulties in efficiently man- commitments can be reconciled with obtaining aging transit trade. Fraud tends to be high, and reliable valuation data for use in calculating cus- goods exported in transit to the Democratic toms duties and the VAT, so as to be fair to all Republic of the Congo are often fraudulently reim- importers while still protecting revenue collection. ported into Uganda. This problem seems to be due Private sector operators have a number of sugges- to the lack of proper border controls on the Con- tions for improving the current situation: golese side. Some of those interviewed suggested using electronic monitoring devices that could be · Have the private sector and the URA agree on installed in trucks and monitored in Kampala to the principles that should guide price lists and detect any tampering. The URA has now called for make the lists publicly available if they are to be tenders to supply electronic tracking seals for tran- used in the valuation process. Avoid giving price sit containers. Most URA staff members believe ranges on the lists because such ranges give indi- that an effective solution to the transit problem will vidual customs officers too much discretion. require a regional approach. · Clear goods at the border, as was done for some goods four years ago. Doing so would require The Way Forward that the border posts be equipped with an inter- The URA is acutely aware that the performance of nal container depot and other facilities, includ- customs services can be improved within the con- ing banking facilities and housing for URA staff. text of the URA's revenue generation and trade It would help alleviate delays and would scale facilitation responsibilities. To that end, it called on down the activities of the Revenue Protection the DFID to continue the support it had provided Service, which stops trucks between the border since the URA's creation. A 1998 project memoran- and the internal container depot in Kampala. dum spelled out the support that the DFID was Private sector operators resent the activities of prepared to provide to the URA; however, no real the Revenue Protection Service and special con- action was taken on this proposal until 2003. trols because they delay trucks and frequently The project document spells out a clear business (some say always) require payment of facilita- plan for the URA, a plan that DFID support will tion money. help implement. The major objectives are to sup- · Look into regional cooperation for customs port the URA in its modernization program, which clearance. There is no reason why most cargo will ensure that, in relation to customs services, it cannot be cleared in Mombassa or Dar Es (a) will provide accurate and timely trade statistics, Salaam. A well-functioning transit system is (b) will clear goods efficiently in order to facilitate needed, something that should be easier to put trade, (c) will be staffed by well-trained and honest into place once the East African Community is officers, and (d) will protect society from undesir- operational. able products and substances. · Install one document verification room per The major components of the ongoing technical internal container depot to speed up the clearing assistance project as it affects customs operations process. are (a) assessing training needs and delivering · Provide a time frame and targets for managing training modules to improve employees' technical the different import clearance documents and knowledge of customs matters; (b) assisting in the publish the results. Publish the time required installation of ASYCUDA and activating a good for the release of goods on a monthly basis. The risk analysis module; and (c) supporting the URA's ASYCUDA system can provide these data, which administration--in particular, the Investigation could be used as a management improvement 126 Customs Modernization Initiatives: Case Studies and monitoring tool to reward those who participate in or tolerate corruption, even though improve release times. salaries in the URA are relatively better than those · Move to accept electronic signatures. in the revenue agencies of other countries. In · Disseminate customs procedures in detail. addition, the URA does not appear to have taken · Invest in reliable weigh stations and bridges. advantage of the management flexibility that it · Invest in scanners to use in a risk-based process was afforded through its status as an autonomous that would reduce the number of physical agency. Finally, the valuation of imports presents inspections. Also, investigate the use of low-cost a major problem. The URA has tested the PSI surveillance systems that could ease the transit approach and has excluded it for the moment. It is of goods from Mombassa to Uganda and from currently searching for innovative approaches that the border to the internal container depot in would both satisfy the demands of the trading Kampala. community and safeguard revenue collection. · Make a clear distinction between reliable and Relations with the private sector are satisfactory, unreliable importers so as to avoid performing and the URA has invited the private sector to help 100 percent physical inspections. Make simpli- find solutions to issues that plague the efficient fied import procedures available for authorized functioning of customs services. Signs of this importers--that is, importers with a good improving cooperation between the public and record with the customs service and other fiscal private sectors are the presence of representatives authorities--as specified in the WCO Kyoto of the Uganda Manufacturer's Association on the Convention. board of the URA, the periodic meetings with · Standardize the penalties that are levied on dis- freight forwarders invited to participate in simpli- covered fraud by providing clear guidelines to fying the clearance processes, and the certification URA staff, and publish information about of clearance agents. These relations augur well for infractions. the agenda of trade facilitation, to which the URA is · Set up a system whereby payments for draw- giving increasing attention. backs are made out of URA revenue without The URA is fully aware that the reform agenda is having to wait for the MOF to make funds avail- far from finished and, with DFID support, is cur- able. Such a procedure would still require that rently implementing a new modernization project. the MOF carefully audit transactions. This project supports the definition of a business plan, provides training to URA staff, establishes a modern ICT support system, and provides man- Key Conclusions agement support. The issue of pervasive corruption The customs administration is organized according is high on the agenda. A more focused approach to the rules of an independent revenue authority, may be needed. and tariffs are low by regional standards, yet these features have not sheltered the URA from many of References the problems that other customs organizations in DFID (Department for International Development). 1995. developing countries face. Traders complain that Cunningham Report. London. clearing goods through customs is a slow and costly Hinkle, Lawrence, and Alberto Herrou-Aragon. 2003. "How Far Did Africa's First Generation Trade Reforms Go?" process. Many people inside and outside the African Working Paper 58a, 58b. World Bank, Washington, URA believe that numerous URA staff members D.C. Index Boxes, figures, and tables are indicated by b, f, and t respectively. accountability programs. See integrity and tax revenues, 7­9, 8f 2.1 & 2.2, 9f 2.3 anticorruption policies team, support, and financing, 10­11 African Conference on Integrity, 54, 61 trade agreements, 9 anticorruption measures. See integrity and training, 12­13 anticorruption policies users' reactions, 17 Aquino, Corazon, 85 valuation issues, 13­14 audit function bribery. See corruption; integrity and Morocco, 38 anticorruption policies Peru, 74 Philippines, 99, 100 certificates of origin Automated System for Customs Data (ASYCUDA) Uganda, 123 Bolivia, 13, 16 certification Ghana, 24­25 Turkey, 106 Philippines, 93, 95­96 Uganda, 118­119 Uganda, 118, 120, 124 civil service. See personnel and pay issues clearance procedures. See import procedures Ballivián, Amparo, 10 clearance time best practices, adoption of Bolivia, 15­16, 16t2.1 Morocco, 39 Ghana, 29, 31 Philippines, 89 Morocco, 35, 38, 39­40, 47t4.4 Blueprint for Customs Development Towards the Year outside customs zones, 39­40, 39b4.1 2000 (Philippines), 86­87 Mozambique, 60, 60f 5.1 Bolivia customs reform, 7­18 Peru, 73­74 administration of customs, 9­10 Philippines, 87­88 background, 7­9 Turkey, 106, 110t8.3 clearance time, 15­16, 16t2.1 Uganda, 117­119 components of, 11­14 communications. See information and controls and selectivity, 16 communication technology corruption, 9, 15, 16 controls and selectivity enforcement, 16 Bolivia, 16 external financing, 15 Morocco, 39, 40 financing of, 10, 15 Mozambique, 57 free trade zones, experience with, 14 Philippines, 92, 98 information and communication technology, 13, 15 Turkey, 110 integrity and anticorruption policies, 12 corruption legislative and regulatory framework, 11 See also integrity and anticorruption policies lessons learned, 18 Bolivia, 9, 15, 16 management changes, 11, 15 Mozambique, 53, 62 National Customs Council role, 10 Philippines, 94­95 objectives and scope, 10 Uganda, 113, 115, 117 outcomes, 14­17 Côte d'Ivoire as competition to Ghana, 21 overview, 2 CrimsonLogic, 20, 22 personnel and pay issues, 10, 11­12, 15 Cross-Border Initiative, 49 risks for sustainability, 17­18 Crown Agents, 51­52, 52t5.1, 54, 57, 58, 62, 93 tariffs, 7 Trade Information Management System (TIMS), tax collection, 16­17 53, 56 127 128 Index debt management overview, 4­5 Mozambique, 61­62 personnel issues, 31 DFID. See U.K. Department for International pre-reform status, 22­24, 23f 3.1, 32 Development revenue increases, 28­29 risk assessment, 30 electronic payment rollout, 22­26 Peru, 83 simplified import procedures, 27­28, 27f 3.3 enforcement tariffs, 21, 26 See also integrity and anticorruption policies users' evaluations, 29 Bolivia, 16 valuation issues, 30 Morocco, 47­48 government agency involvement. See public sector Mozambique, 60­61, 61t5.5 involvement Philippines, 89 guarantees Estrada, Joseph Ejercito, 85 Morocco, 41 ethics. See integrity and anticorruption policies Mozambique, 58 European Union, relations with Morocco, 37 Hassan II, King of Morocco, 33 Mozambique, 49 Higaonna, Carmen, 67 Turkey, 101, 102 human resources management. See personnel and export procedures pay issues Turkey, 106 Uganda, 123 IDB. See Inter-American Development Bank as sponsor financing IMF. See International Monetary Fund as sponsor Bolivia, 10, 15 import procedures Morocco, 36 See also special import regimes Mozambique, 50­51 Ghana, 27­28, 27f 3.3 Peru, 68 Morocco, 38 Philippines, 92­93, 99 Mozambique, 58 Uganda, 114­115 Peru, 74­75, 82­83 foreign consultants Philippines, 87­88 Morocco, 34 Turkey, 105­106 Mozambique, 51­52, 52t5.1 Uganda, transport of goods from Kenyan and Philippines, 93 Tanzanian ports, 119 fraud. See corruption; integrity and import taxes. See tax revenues anticorruption policies information and communication technology free trade zones Bolivia, 13, 15 Bolivia and, 14 Ghana, 22, 24­25 Mozambique and, 58 See also Ghana Community Network (GCNet) Morocco, 36, 42­43 Ghana Community Network (GCNet), 22, 30 Mozambique, 56 clearance times, 29 Peru, 73­74, 82­83 operations, 26 Philippines, 95­96, 99 rollout of, 25­26 Turkey, 108­110 steps of typical transaction, 27­28, 27f 3.3 Uganda, 123­124 Ghana customs reform infrastructure improvements See also Ghana Community Network (GCNet) Mozambique, 62 background, 20­22 Turkey, 107 clearance times, 29, 31 inspection process community networks, 29 See also audit function efficiency of transactions, 24­25 Bolivia, 11, 13 information and communication systems, Mozambique, 57 22, 24­25 Philippines, 92 lessons learned, 30­31 preshipment, 96 management needs, 30 Turkey, 110 outcomes, 28­29 Uganda, 118 Index 129 integrity and anticorruption policies Computerized Support for Customs Clearance Bolivia, 12 (CSCC) System, 42­43 Morocco, 38, 47­48 diagnosis and strategy, 34­38 Mozambique, 54, 56, 60­61, 61t 5.5 financial resources, 36 Philippines, 89, 94­95, 98 foreign consultants, 34 Turkey, 108 improvements, 39­45 Uganda, 119­122 information technology, use of, 36, 42­43 Inter-American Development Bank (IDB) as sponsor institutional resources, 34 Bolivia, 10 monitoring of, 44­45 Peru, 68 organization of customs services, 37­38 International Monetary Fund (IMF) as sponsor outcomes, 45­48 Bolivia, 10 overview, 2­3 Ghana, 20 personnel, 34, 35­36 Morocco, 34 pre-reform status, 34­35 Mozambique, 50, 51, 54, 56 private sector involvement, 36­37 Philippines, 90­91 problems and goals, 34­35 Turkey, 101 public sector involvement, 43­44 Intertek Testing Services (ITS), 52­53, 122 risk analysis, 40, 40b4.2 special import regimes, 40­42, 41b4.3 Kenya, relations with Uganda, 119, 123 surveillance, 38 Kyoto Convention tariff policy, 37 Morocco compliance, 37 tax revenues, 45­47, 46t4.1 & 4.2, 47t4.3 Turkey compliance, 106 valuation issues, 36­37 Mozambique customs reform, 49­64 Lee, B.G., 20 anticorruption measures, 60­61, 61t5.5 legislative and regulatory framework background, 49­50 Bolivia, 11 change management and, 54, 62 Morocco, 44 clearance times, 60, 60f 5.1 Mozambique, 54 components of, 54­59 Peru, 68­70 debt management and, 61­62 Philippines, 90, 92 economic reform program and, 49­50 Turkey, 103­105 enforcement, 60 Uganda, 117 external support for, 51­52 lessons learned funding, 50­51 Bolivia, 18 importation process, 58 Ghana, 30­31 information and communication technology, 56 Mozambique, 63 infrastructure, 62 Leyton, Alberto, 10 institutional reform elements of, 51 integrity and corruption, 56 management Intertek Testing Services, 52­53 See also personnel and pay issues lessons learned, 63 Bolivia, 11, 15 new customs code, 54 Ghana, 30 objectives and innovations, 50­54 Mozambique, 54, 62 outcomes, 59­61 Peru, 67, 70­71 overview, 3 Philippines, 91, 93, 99 personnel and pay, 54­56, 54t5.2, 55t5.3, 62 media support physical inspections, 57 Philippines, 89, 91, 97 private sector involvement, 51, 61, 62 Morocco customs reform, 33­48 regional and preferential trading arrangements, 49 anticorruption strategy, 47­48, 57 safeguarding revenues, 57­59 approach taken, 34 smuggling, 62 audit function, 38 special import regimes, 58 background, 34­35 tariffs, 53­54, 64t5.A clearance, 38, 39­40 tax revenues, 57­59, 59t5.4 outside customs zones, 39­40, 39b4.1 Trade Information Management System (TIMS), clearance times, 35, 39­40, 47, 47t4.4 53, 56 130 Index Mozambique customs reform (continued) external consultants, 93 transit trade, 58­59 funding, 92­93, 99 users' reactions, 61 harmonization of customs procedures, 89 valuation, 56­57 information and communication technology, Muller, Herbert, 10 95­96, 99 inspection process, 92 personnel and pay issues preshipment, 96 Bolivia, 10, 11­12, 15 International Monetary Fund as sponsor, 90­91 Ghana, 31 leadership role in, 91, 99, 100 Morocco, 34, 35­36 legislative support, 90 Mozambique, 54­56, 54t5.2, 55t5.3, 62 media support, 89, 91, 97 Peru, 71­73, 72t6.2 outcomes, 96­100 Philippines, 93­94, 99 overview, 3­4 Turkey, 107­108 personnel, 93­94, 99 Uganda, 114­115, 123 preshipment inspection program, 89 Peru customs reform, 65­84 private sector involvement, 90, 91­92, 98, 99­100 audits, 74 process of, 91­96 background, 66­67 public sector involvement, 90 clearance procedures, 73­74, 82­83 remuneration, 94 comparison of customs before and after, 76t6.3 revenue base, 88 design, planning, and monitoring, 68 revenue leakage and collection deficiencies, 88­89 electronic payment, 83 risk assessment, 92 external support and financing for, 68 risks to sustainability, 98­100 foundation for, 67­68 SPACE program, 87­88 government support for, 67 success factors, 98 import verification program, 74­75 World Bank as sponsor, 90­91 information technology, 73­74, 82­83 preshipment inspection legislation, 68­70 Bolivia, 13­14 monitoring, 80­81 Philippines, 89, 96 1990 economic crisis, 66­67 Uganda, 121­123 objectives and strategies, 68 private sector involvement organization and management, 67, 70­71, 70f 6.1 Bolivia, 15 comparison of customs before and after, 76t6.3 Morocco, 36­37 management agreement, 71, 82 Mozambique, 51, 61, 62 outcomes, 75­78 Peru, 71 overview, 3 Philippines, 90, 91­92, 98, 99­100 personnel recruitment and development, public sector involvement 71­73, 72t6.2 Morocco, 43­44 risks to sustainability, 80 Peru, 67 success factors, 78­79 Philippines, 90, 98 sustainability factors, 79­80 tariffs, 66, 69t6.1 Ramírez, Jorge Quiroga, 10 tax revenues, 78, 78t6.4 regulatory framework. See legislative and valuation, 74­75 regulatory framework Web site, 83 revenues. See tax revenues Philippines Banking Association, 91 risk assessment Philippines customs reform, 85­100 Ghana, 30 anticorruption measures, 94­95 Morocco, 40, 40b4.2 audit function, need for, 99, 100 Philippines, 92 background, 85­88 risks to sustainability best practices, adoption of, 89 Bolivia, 17­18 change management, 93 Peru, 80 clearance times, 87­88 Philippines, 98­100 design for, 86­87 ethics and accountability program, 89 SADC. See Southern African Development Community evaluation and reviews of, 97­98 salary structure. See personnel and pay issues Index 131 SARA software (Bolivia), 13 Turkey, 107 selectivity. See controls and selectivity Uganda, 123 Singapore Network Services, 20 transit trade Singapore TradeNet, 19­20, 24f 3.2 Mozambique, 58­59 smuggling Uganda, 125 See also corruption; integrity and transparency anticorruption policies See also integrity and anticorruption policies Bolivia, 9, 15, 16 Bolivia, 11 Morocco, 38 Peru, 71 Mozambique, 53, 57, 62 Turkey, 110, 111 Philippines, 96 Uganda, 119­120 Southern African Development Community (SADC), Transparency International's 2000 corruption index, 119 49, 53 Turkey customs reform, 101­112 special import regimes background, 101­103 Morocco, 40­42, 41b4.3 CCMS, 108­110 Mozambique, 58 certified importers, 106 Uganda, 124­125 clearance time, 106, 110t8.3 surveillance controls, selectivity, and postrelease inspection, 110 See also smuggling efficiency, 111 Morocco, 38 export procedures, 106 sustainability factors four-year action plan, 104t8.2 See also risks to sustainability human resource management, 107­108 Bolivia, 14 import procedures, 105­106 Peru, 79­80 information and communication technology, Philippines, 98­99 108­110 infrastructure improvements, 107 Tanzania, relations with Uganda, 119, 123 modernization program, 103­110 tariffs four-year plan, 104t8.2 Bolivia, 7 new customs legislation, 103­105 Ghana, 21, 26 overview, 4 Morocco, 37 pre-1992 tariff structure, 101­102 Mozambique, 53, 64t5.A reorganization of TCA, 106­107 Peru, 66, 69t6.1 tax revenues, 103, 103t8.1 Philippines, 88 transparency, 111 Turkey, 101­102 2001­05 program, 111­112 Uganda, 115­117 value added tax, 101, 102 tax revenues World Customs Organization, relations with, 102 See also value added tax World Trade Organization membership, 102 Bolivia, 7­9, 8f 2.1 & 2.2, 9f 2.3, 16­17 Ghana, 28­29 Uganda customs reform, 113­126 Morocco, 37, 45­47, 46t4.1 & 4.2, 47t4.3 administration of customs, 114 Mozambique, 57­59, 59t5.4 certificates of origin, 123 Peru, 78, 78t6.4 certification of brokers, 118­119 Philippines, 88 clearances and transport of goods from Kenyan and Turkey, 103, 103t8.1 Tanzanian ports, 119, 123 Uganda, 115­117, 116t9.1 clearance times, 117­119 trade agreements goods in transit, 125 Bolivia, 9 information technology, 123­124 Morocco, 37 integrity and corruption, 119­121 Mozambique, 49 legislation, 117 Turkey, 101­102 overview, 4 TradeNet, 19­20, 21, 24f 3.2 personnel and pay issues, 114­115, 123 training policy changes and revenue performance, See also personnel and pay issues 115­117, 116t9.1 Bolivia, 12­13 preshipment inspection, 121­123 Mozambique, 52­53, 55 Revenue Authority, 113­115 132 Index Uganda customs reform (continued) value added tax simplification of procedures, 117­118 Bolivia, 7 special import regimes, 124­125 Ghana, 31 training, 123 Mozambique, 53, 59 valuation issues, 121­123 Turkey, 101, 102 U.K. Department for International Uganda, 115 Development (DFID) Mozambique, assistance from, 50, 51, 52, 54 World Bank as sponsor Uganda, assistance from, 113, 125 Bolivia, 10 UNCTAD as contractor Ghana, 20, 21 Philippines, 93, 95, 97 Morocco, 34 Uganda, 124 Mozambique, 50, 54 United Nations Development Programme as sponsor Philippines, 88, 90­91 Mozambique, 50, 51 Turkey, 101 Uganda, 113­114 World Customs Organization, users' reactions relations with Bolivia, 17 Morocco, 33­34, 36, 37 Ghana, 29 Mozambique, 56 Mozambique, 61 Turkey, 102, 106 Uganda, 119 valuation issues World Trade Organization commitments Bolivia, 13­14 Bolivia, 13 Ghana, 30 Morocco, 37 Morocco, 36­37 Mozambique, 57 Mozambique, 56­57 Peru, 68 Peru, 74­75 Philippines, 92 Uganda, 121­123 Turkey, 102 T R A D E A N D D E V E L O P M E N T S E R I E S T rade liberalization, which emphasizes improving market access and lowering both tariff and nontariff trade barriers, will play a vital role in global economic growth and poverty alleviation. Improved trade facilitation should complement this liberalization process for it to achieve its objectives. Increasing the effectiveness and efficiency of customs operations is a key component of this trade facilitation agenda. Drawing upon the real-world customs modernization initiatives in eight countries--Bolivia, Ghana, Morocco, Mozambique, Peru, the Philippines, Turkey, and Uganda--the authors provide a firsthand view of how these countries undertook their reforms and assess their successes. The countries were selected to demonstrate initiatives in diverse settings. The initiatives show similarities as well as differences in approach and design that correspond to the diversity of culture and geography. Some relied on a model of Independent Revenue Authorities (Uganda and Peru); others called upon private sector service providers to initiate the modernization process (Mozambique); others took the drastic step of a complete overhaul of their customs staff (Bolivia and Mozambique); and still others approached the modernization process as a pragmatic, well- focused, results-oriented process (Morocco and the Philippines). The lessons learned from the eight case studies will be of particular interest to policymakers and development practitioners and will complement the broader scope of the companion book by the editors, Customs Modernization Handbook, to be published by the World Bank. Together these publications provide information, analyses, and insights that will make a significant contribution to the reform process and facilitate the progress of countries seeking to integrate into the global economy and alleviate poverty. THE WORLD BANK TMxHSKIMBy357521zv,:;:(:&:# 0-8213-5752-2