63804 The Role of Clearing and Forwarding Agents in Africa Trade Policy Notes Reforming the EAC Note #17 Logistics Sector John Arnold, John Mathenge, Nora Dihel and Nicholas Strychacz May, 2011 Introduction The efficient flow of international trade act as representatives of the importer, as relies on a range of skilled service providers well as occasional rent seeking behavior, working together effectively, including can have a negative effect throughout the shipping lines, port terminal operators, logistics chain, hindering the flow of customs officials, operators of off-dock international trade. In addition, this policy container yards, land transport agents, and note considers the wider problem of the clearing and forwarding (C&F) agents. The fragmented and fractured nature of the relatively low quality of international trade logistics chain itself, a structure that can lead logistics in the East African Community to fundamental inefficiencies throughout the (EAC) as it exists today, however, limits the system. After examining the role and potential for growth in trade, which in turn characteristics of C&F agents in the EAC limits the potential for economic growth and and the effects of their performance on development to take place throughout the international trade, this note discusses region. For this reason, the reform of policies, particularly with regards to training international trade logistics, and in particular and education, that can be enacted in order the quality of services offered by the various to strengthen the participation of C&F market actors, can yield important economic agents in the international trade logistics gains throughout the region. chain, and can help to facilitate greater flows of international trade throughout the EAC. This policy note examines the current role of clearing and forwarding agents within the The Role of Clearing and Forwarding international trade logistics chain in the Agents in the EAC EAC, an aspect of the logistics industry that has been relatively under-examined. Clearing and forwarding agents act as Inefficient and low quality services offered intermediaries in transactions between by some C&F agents, who are supposed to shippers and suppliers of logistics services, 1 Figure 1: Simplified Inbound Supply Chain Shipping Line Transporter Forwarder Terminal Operator Customs Officer C&F Agent Importer Shipping Line C&F Agent Importer Importer Importer ACTORS Port ODCY Operator Importer Port Ocean Cargo Inland Handling and Shipping Clearance Transport Storage ACTIVITIES ODCY Truck Availability Reliability Border Delays Inspections Clearance Fees Delays Shifting Time and Cost Storage Charges Yard Management SOURCE OF PROBLEMS Older Equipment Draft Limit Congested Yard Space Berth Productivity Small Scheduled Feeders Shipment Terms, Electronic Manifest Queuing Delays and are required by customs to represent the The international trade logistics industry in owner in the procedures for clearing cargo East Africa is characterized by vertical over international borders. In the EAC, the segmentation, in which large firms that common practice is for C&F agents to supply logistics services take the largest perform not only customs clearance but also clients, and the small logistics firms are conduct freight forwarding work, and where limited to dealing with small clients. Due to appropriate, provide specialized logistics this segmentation, different sized logistics services. However, the license required for firms offer different sets of services to their C&F agents, which is required for an agent clients. Small logistics firms oftentimes to act as a customs broker, is usually granted limit their participation to arranging to a firm, rather than to an individual. transport, and individual agents, called Currently, a logistics firm must employ at “suitcase� forwarders, sometimes only least one person who is licensed as a C&F handle a few shipments per year on an agent in order to perform customs brokerage informal basis. On the other hand, larger services.1 In the past, the function of the logistics firms offer a variety of logistics license-holder would sometimes be to services which can include warehousing, provide access to individual customs consolidation, packaging, goods inspection, officers and to facilitate informal payments. and import/export advisory services. They This is no longer the case, although these can also offer multimodal services in which bad practices persist to a certain extent they consolidate loans and act as the shipper among small firms and individual agents. of record with a house bill of lading, in the process forming partnerships with overseas 1 service providers. Figure 1 illustrates the Although customs authorities record the number of complex linkages between the various licensed C&F agents (estimated to be 1000 agents in Kenya and 650 in Tanzania), governments do not components of the international trade recognize freight forwarding as an industry, so logistics chain, and also shows the additional data on C&F agents’ activities is limited fragmented nature of the industry. and incomplete. 2 Most countries in the region have several Figure 2: large firms in operation, including several Professionals Registered with Freight multinational firms, a modest number of Forwarding Associations firms owned jointly by locals and foreigners, Total Foreign and a large number of smaller domestic Burundi 45 9 firms. The larger firms, such as SDV and Kenya 433 0 Kuehne & Nagel, have a substantial level of Rwanda 1137 7 foreign equity. In Kenya, six of the sixteen Tanzania 1440 72 largest firms have a significant level of Uganda 55 0 foreign equity while in Tanzania five of the Source: Freight Forwarding Associations fifteen largest firms are foreign-owned, and two others have a significant level of foreign equity. Clearing and forwarding companies in Rwanda and Burundi tend to follow a Small domestic firms: These firms similar pattern. Throughout the region, offer services to medium-sized importers small and medium-sized companies are and exporters, and can handle several usually owned and operated by families. hundred containers per year. Small firms provide clearing and forwarding services for Figures 2 and 3 show the number of C&F domestic and international cargoes in professionals and the number of C&F firms conjunction with overseas partners, and can operating in the EAC in 2008, respectively. also provide warehousing and trucking Logistics firms in the EAC can be divided services through subcontractors. The market into three general types based on size, and for small C&F firms is limited, though, each category tends to have its own set of since their clients are usually mid-sized services offers, clients, and requirements for C&F agents. The three types of logistics Figure 3: firms are explained in more detail below. C&F Firms 2008 Burundi 43 Kenya 1200 Large foreign and domestic firms: Rwanda 124 These firms offer clearing and forwarding Tanzania 480 services to larger importers and exporters, Uganda 339 and can handle more than 5,000 containers Totals 2186 per year. Large firms account for a Source: Freight Forwarding Associations relatively small percentage of C&F agents, but process a volume of cargo that accounts domestic companies, which oftentimes have for 60 percent to 80 percent of duties in-house shipping departments and retain collected. Most large firms operating in the C&F agents on their staff. EAC are well-known multinational freight forwarders that offer efficient document processing and relatively transparent Individual agents: Individuals can procedures. They provide complete provide clearance services to small shippers, international forwarding services to their and typically handle one shipment per week clients including warehousing and transport. or less. Still, individuals comprise the Many large firms have been granted majority of C&F agents in the EAC, and Authorized Economic Operator status with although the shipments are small, they customs. process a significant portion of customs declarations. Many individual C&F agents 3 are former customs officers and others who constraint on trade and limit the economic previously worked in the logistics industry. gains from trade. Beyond clearing services, individual agents that engage in forwarding are usually limited Second, the vertical segmentation of the to arranging for trucking services. Many sector affects the types of services that are individual C&F agents lack substantial distributed through the logistics chain, and professional skills but can offer influence has led to differing levels of quality among and other benefits to customs officials in C&F agents and logistics firms. In general, order for duties and taxes to be reduced. the larger firms are the most reputable and the most professional; they deal with large The dichotomy between the objectives of the clients that demand a high level of service, large formal enterprises and the small firms and their C&F agents tend to be the best and individual agents parallels a dichotomy trained and most skilled. Small firms and in the types of clients that they serve. The individual agents, on the other hand, are larger formal enterprises take on larger more likely to be untrained, and sometimes clients with complex shipments and are most engage in unprofessional or even corrupt concerned with efficient logistics as a means behavior. Up until about five years ago, a to increase market share over the longer significant portion of the C&F agents were term. The smaller traders take on small involved in unethical practices related to clients with simple shipments and are most avoiding duties and taxes and diverting interested in limiting their cash flow and transit cargo into the local economy. They maximizing the profits from individual sometimes also acted as intermediaries for shipments. informal payments paid to customs officials by importers. Although this problem is now Challenges Facing the East African less severe, there is a continuing problem in Logistics Industry the EAC of inexperienced C&F agents filing documents that misrepresent the There are several ramifications that arise characteristics and value of the cargo. from the fragmentation observed in the East African logistics system. First, Recently, in many EAC countries C&F fragmentation means that the various actors agents have been required to receive and within the logistics chain have little maintain a certain level of training, but in interaction with one another, leading to the past many C&F agents were able to enter longer waiting times for freight in the the profession during lapses in many shipyard as well as inefficient customs countries’ regulatory procedures. For processes that can result in costly errors and example, in the mid-1980s in Tanzania the delays. In addition to the problems responsibility for clearing cargo was stemming from the myriad of actors taking transferred from the public sector to the part in the logistics chain, poor private sector without sufficient oversight, infrastructure, physical constraints in ports, and there were no standards in place for the and inefficient customs processing systems certification of new C&F agents. For this can cause delays and confusion, creating an reason, the quality of many smaller C&F environment where errors can easily occur. firms and individual agents in the region is These problems increase the cost of still suspect. Unprofessional and bad conducting international trade in East practices in the logistics sector have Africa, and in this way they act as a generally involved individual agents 4 (sometimes former customs inspectors) and bureaucracies. While it will be difficult to small logistics firms. There are two primary overcome this fundamental lack of ways in which these actors introduce infrastructure quickly or easily, the efficient inefficiencies into the logistics sector. First, use of modern technology can be an these actors oftentimes lack the technical important part of reform by linking different capacity or skill level for expediting and parts of the logistics chain in order to reduce processing their shipment efficiently. or eliminate delays and errors during Second, individual agents and small firms customs processing. In the longer run, are more likely to demand bribes from their technological upgrades can improve overall clients in order to “facilitate� processing, or supply chain performance as well as the to help their clients evade tariffs. accountability of individual participants in the logistics chain. Due to the vertically segmented structure of the EAC logistics sector, small trading firms For this reason, the customs authorities in often have no recourse to the larger and Kenya and Tanzania are midway through a more expensive logistics firms and so are much-needed process of technological resigned to dealing with the inefficient reform. They have simplified the customs smaller actors. Although these small firms declaration form and introduced information and agents handle a small percentage of and communication technology (ICT) cargo relative to the large firms, such low systems for processing documentation, skill levels and unprofessional behavior upgraded their processes for valuation, raise costs for the small trading firms and developed simple risk profiles, introduced help to perpetuate a culture of corruption channeling, and set up preferred trader that is detrimental to economic growth and programs. Importantly, customs authorities development. have also upgraded procedures for the clearance and movement of transit cargo and Policies for Overcoming the Challenges improved communication throughout the Facing the Logistics Industry logistics chain. The result has been a reduction in clearance times for a significant The structure of the international trade portion of trade as well as opportunities for logistics system, the lack of training for expediting the remaining cargo. In addition, many of the C&F agents, and the culture of the introduction of electronic systems for corruption that is practiced by some agents processing customs declarations has and firms, are the main problems currently improved the accuracy of the documents facing the logistics industry in East Africa. submitted. This has reduced the level of This section examines some solutions and effort required by logistics firms and in policies that can be enacted that could many instances has led to downward mitigate some of the negative outcomes pressure on fees. coming from these inefficiencies. Kenya introduced its IT system, called Overcoming the Fragmented Nature of the SIMBA, in 2005. It allows internet-based Logistics Industry submissions of customs declarations, and has modules for performing most modern The East African international logistics customs processes, although not all have chain is characterized by a sprawling and been implemented. Statistics from the fragmented collection of actors and system indicate that the average clearance 5 time is three days, with a significant for improvement. Efforts to coordinate their percentage of goods cleared in two days or activities have focused on the development less. This is offset by a smaller portion of of a single window for submitting the the cargo that continues to be physically required documents for customs. Kenya has inspected and therefore requires a longer introduced this within the port of Mombasa, clearance time. Additional reductions in which has greatly simplified the processing clearance time are expected once the of cargo, and Tanzania is proposing to modules for electronic submission of introduce a similar system in Dar es Salaam. supporting documents from other government agencies and for electronic Overcoming the lack of training for some payments of duties are introduced. C&F agents While the SIMBA system is capable of The level of competence of C&F agents in tracking a container’s progress through the the EAC varies dramatically. In general, customs clearance procedures, Kenya’s large firms with foreign ownership and customs authority has yet to use this international scope employ the majority of information substantially to improve its the trained C&F agents. Although this is procedures, leaving significant scope for partly due to the fact that large firms are further improvement. For example, better able to compensate highly trained although data is collected on average agents, it also is due to the roles that clearance times, it is not used to evaluate the different firms play as well as the effect on clearance times of different levels requirements of their clients; large firms of inspection. Similarly, information on tend to handle complex transactions for detection rates has been used to develop risk international companies. Most agents profiles but not to determine the working for small C&F firms have only on- effectiveness of different levels of the-job experience, and while this is inspection. This information has also not sufficient for simple transactions, they lack been used to evaluate the effectiveness of knowledge of modern trade practices such as individual customs officers or to control incoterms, rules of origin, documentary questionable behavior. Equally important, requirements for bilateral trade agreements, information on the status of cargo awaiting procedures for temporary admission, clearance has not been made available to the warehousing and inventory management, consignees on a real-time basis other than intermodal transport, bonded operations, through phone queries. As a result, technical and SPS standards, and supply consignees are not able to anticipate the chain software. requirements for clearing and removing the cargo from the port and are not able to A recent trend is that a greater number of assess the effectiveness of their C&F agents. customs authorities are enforcing the requirement that C&F agents must be Customs agencies in East Africa have made certified and licensed, and are suspending progress in introducing ICT systems that licenses where a pattern of illegal behavior have reduced inefficiencies in moving and is observed. The standards for certification processing freight. However, other agencies at the national level have been improving within the international trade logistics chain and now include an examination and have been slower to upgrade their systems, training in modern customs procedures in and it is here where there is significant room several countries. For example, in Kenya, a 6 C&F firm must be approved by an official individuals have been trained and qualified oversight agency and retain individuals that as C&F agents, and the program aims have fulfilled a number of criteria, including eventually to train two agents per C&F firm. passing a written exam, becoming proficient As there are approximately 2,500 companies in the electronic systems for the submission in operation, there remains significant scope of customs declarations, and undergoing for training and employing skilled C&F training provided by the government. agents. Customs officials and service However, despite these small steps towards providers have been impressed with the greater official oversight, freight forwarding quality of C&F agents that the program has remains largely unregulated in the EAC and created, and demand for the program is high compliance with regulations among the throughout the region. Most of the training small logistics firms is uneven. effort has been in Kenya, with the other countries in the region are expected to Due to the many unskilled C&F agents in increase their participation in the coming the East African logistics system, officials years. have recognized that rigorous training and certification for C&F agents is essential, and Another training program that has not yet demand for higher levels of training from been implemented in the EAC but will also freight forwarding associations is growing. help to train C&F agents is the International Training and education will help to mitigate Federation of Freight Forwarders many of the errors and inefficiencies that Association (FIATA) Diploma in Freight currently exist in the system, and knowledge Logistics. Although there is sufficient of best practices can also help to reduce the demand for the training program, the key level of the corruption in the system. An challenge in starting the program has been a additional benefit of increased training is lack of funding and technical resources such that small C&F firms that employ trained as appropriate syllabi, modules, materials, and skilled agents will be better able to and trainers. Once begun, however, the expand the types of services they can offer program is expected to be self-sustaining. into more complex and higher value added The diploma will focus specifically on the services for larger international firms. For areas of terrorism, security and piracy, these reasons, training programs are corporate governance, and the transport of currently being implemented on the national dangerous goods. In addition, the diploma and regional levels to improve the quality will include seminars on the EAC Common and skill level of C&F agents, with the Market, the operation of one-stop border possibility of further programs to follow. posts, regional customs transit guarantees, and the similar trade facilitation topics. At the regional level, the customs Also under consideration is the development administrations in East Africa have of an accreditation system for the diploma partnered with national freight forwarding that would increase the legitimacy and associations to create an organization called transparency of the diploma but would also the Federation of East African Freight require significant financial and technical Forwarders Associations (FEAFFA). This support to create. organization’s goal is to put together a comprehensive regional training program in In order to expand these programs and make order to enhance the skills of C&F agents. them even more effective, several tasks must Since the program’s inception, over 1,000 be accomplished at the national level. These 7 include training and retraining more likely future cross-border consolidation in program teachers, who are vitally needed in the provision of C&F services. Such order for the program to keep pace with reforms would further assist in the demand, and reviewing the syllabus and development of a modern and efficient training materials with a view to updating international trade and customs processing them and keeping them current. The system in East Africa. program will also require the development of the institutional capacity of national About the Author associations’ secretariats in order to John Arnold is a Consultant in the Africa facilitate high quality professional Poverty Reduction and Economic management of the training program. Management Unit. Nora Dihel is a Trade Finally, the program will need a more Specialist in the Africa Poverty Reduction complete set of dedicated training facilities. and Economic Management unit. John Most countries are currently conducting Mathenge is Regional Executive Officer for training in Revenue Authorities’ training the Federation of East Africa Freight institutes, and the C&F training program has Forwarders Association (FEAFFA). had to be suspended at times to make room Nicholas Strychacz is a Consultant in the for Revenue Authorities’ training activities. Africa Poverty Reduction and Economic Forming dedicated facilities for C&F Management Unit. Comments from Gael training will allow both programs to expand Raballand and Charles Kunaka are and flourish, and will help the C&F program gratefully acknowledged. This work is to become self-sustaining. funded by the Multi-Donor Trust Fund for Trade and Development supported by the Concluding remarks governments of the United Kingdom, Finland, Sweden and Norway. The views Although substantial progress has been expressed in this paper reflect solely those made over the past several years in of the author and not necessarily the views simplifying procedures and regulations and of the funders, the World Bank Group or its upgrading the customs authorities’ Executive Directors. technological infrastructure, the greatest necessity and challenge for the logistics industry is to improve the skills and behavior of the participants. Policies of education reform and technological modernization must balance the requirement for efficient and effective collection of tax revenues with the promotion of economic growth through international trade. Efforts to improve the skills of C&F agents must be complemented by efforts to familiarize exporters with the commercial advantage to be gained from the use of these services offered by small firms. The effort should be conducted at both the national and regional levels, taking into consideration the 8