World Bank Customs Modernization Handbook

1. World Bank Customs Modernization Handbook Luc De Wulf World Bank GFP Meeting Washington D.C., July 7, 2004

2. Context and Objectives Trade liberalization has at times not led to the hoped for development, growth and poverty alleviation. Some of this is due to limited market access and behind- the-border structural problems. But, inadequate trade facilitation services �including Customs administration--also share the blame. This project aims at supporting Customs modernization and complements the limited publicly available literature on the subject (IMF,WCO). A sister publication with eight Customs Modernization case studies is being prepared.

3. Audience of the Project Policy makers : highlight the importance and key aspects of customs reforms so as mobilize support Practitioners in national government, Customs agencies and donor organizations: inform on the major elements of a successful customs reform and assist in the design of the reforms Private sector: present the customs reform as an element of trade facilitation Students and academics: Provide a systematic overview of the major issues of customs operations and guidance on new thinking on u issues such as valuation and rules of origin.

4. Customs Operations : Before and After Reform Before Reform Revenue and control focused. Lip service to trade facilitation Elaborate and largely manual procedures 100% physical inspection Long clearance times Exporters have poor access to duty free inputs After Reform�XXI Century Move from physical control to post release verification using risk management techniques. Trade facilitation is important Single agency for border control; security concern Intensive use of ICT Regional groupings promote harmonization

5. Major Challenges of Customs Operations in Developing Countries Complex trade regimes: multiple rules of origin, difficult to implement tariff regimes and ambitious valuation rules. Government wide personnel policies often make it difficult to attract, retain and motivate staff with the required skill mix required by the increasingly complex trade transactions.

6. Corruption is often high at Customs and undermines the confidence of traders and investors Exporters frequently have inadequate access to duty free import, thereby undermining the external competitiveness of the country. International trade techniques are increasingly complex and rely on IT support (DTI, advance information , etc.). Customs need to match this ICT reliance. Clearance times are often very long, imposing substantial costs to the trader in terms of �facilitation money�, higher inventory level and financing costs.

7. Chapter 1 Strategy for Modernization The objectives of Customs are now broader than in the past and are evolving. They include revenue generation, protection of society �also against unfair competition of smugglers-, security and trade facilitation. Reforms must be adjusted to the country circumstances. There is no �One size fits all�. Reform strategy should be based on good diagnostic analysis.

8. All stakeholders should be brought on board. The MOF must be assured that revenue generation will not be jeopardized; the private sector must believe that the initiative will help them; Customs staff and management must �buy in� to the reform, external TA and financing may have to be mobilized and coordinated. Performance indicators should be prepared to ensure that objectives are clear and to permit adjustments to the reform process. Such indicators should be updated and regularly shared with all stakeholders.

9. Chapter 2 Organizational and HR Issues in Customs The performance of Customs is crucially dependent on its staff. The organization of Customs may impact on HR and other issues and therefore deserves to be carefully reviewed during any modernization initiative .

10. Human Resource Issues Customs operations are increasingly demanding and require that the adequate skill mix is available and that staff is motivated. Issues that demand the attention of management include : Define the desired skill mix Adjust recruitment and training practices to acquire over time such skill mix. Seek out a compensation package that motivates staff; a bonus system may be useful if well designed and implemented.

11. 2. Customs Organization The traditional Organization is undergoing strong changes as its position within G�nt is being revisited and as several are merging with other Revenue Agencies. Autonomous Revenue Agencies : An attempt to take advantage of autonomy, so far mostly related to compensation packages. Need to use enhanced autonomy for modernizing operational procedures, IT and training. Management Contracts: Can help to raise revenue in post conflict situations and gradually hand over management back to national authorities. Need for good performance indicators and clear contract commitments.

12. Chapter 3 Legal Framework An inadequate legal framework can seriously hamper effective and efficient customs operations. It may prevent the use of advanced ICT, selectivity, electronic lodging of declaration or bestow excessive powers to customs officials. The Revised Kyoto Convention incorporates modern customs procedures. The Convention was adopted by 114 countries at the 94the Session of the Council in 1999, it has been ratified by 32 Contracting Parties. In addition it is reflected in a flexible manner in the customs legislation of many other countries.

13. Chapter 4. Integrity in Customs �Misuse of public power for private gain� Whenever such misuse can go unchecked corruption can be expected. Corruption at Customs reflects society at large and anti corruption efforts will benefit from �whole government approach�. WCO�s Revised Arusha Declaration spells out ten key elements of an anti corruption Program. SUMMING UP: Modernization is the most powerful anti-corruption policy, but a targeted anti-corruption strategy can make substantial contributions.

14. Chapter 5 Managing Risk Risk management seeks to strike an appropriate balance between trade facilitation and control. Aims at adjusting operational practices to minimize the chances that events occur that prevent the organization from achieving its objectives. Allocates resources in accordance with the risks, and thus eases control of less risky shipments (selectivity in inspection, pre-arrival import declaration, delivery of goods before duty payments, rewards for recognized importers).

15. Chapters 6-7 Lessons learned from Modernization Initiatives National authorities, at times with donor support, have devoted lots of resources and attention to modernization of customs operations. Drawing on eight case studies and the WB experience these are several key lessons that should be kept in mind when setting up such projects.

16. Political commitment from the top. Provide clear project objectives. Prepare good diagnostic Ensure that other trade agencies are also improving, unless that trade facilitation objectives will not be achieved. Identify performance indicators. Partial reforms can be useful, but the long term objective of modernizing customs operation should not be lost sight of. Get stakeholders on board (MOF, Staff, private sector). Ensure adequate life cycle funding for the reform (also ICT), particularly for the time when donor support stops.

17. Chapter 8. Customs Valuation Customs valuation goes to the core of customs operations. This guiding principles of Customs valuation are given in the WTO valuation principles, that instruct that foremost importance be given to using using invoice prices. Some well identified exceptions are provided (alternate methods). Developing countries have struggled with the application of the WTO valuation principles. Issues : trader�s proclivity to under invoice in the face of weak capacity to check values, importance of informal trade and trade in second hand goods. Proposed Strategy includes: Simplify tariff system, Build Valuation capacity in Customs, Establish Valuation database, Exchange information with other Customs Organizations The PSI Option : Chapter provides guidelines

18. Chapter 9 Rules of Origin (ROO) Non-preferential rules of origin. The desirable WTO/WCO initiative for harmonization has not yet been completed. Such agreement would provide a standard for all trading partners and would set the standard against which to judge the non-preferential ROOs .

19. Preferential Rules of Origin . Practice: They tend to be very complex and differ across products and agreements (NAFTA ROOs are 400 pages) and are difficult to administer, particularly for small developing countries. They often serve other than trade integration objectives and often are restrictive. Suggestion: ROOs should be simple (avoid product by product rules), easy to administer (e.g. standard formula for the value added rule ), predictable for trade and similar across preferential regimes.

20. Chapter 10 Duty Relief and Exemption These import regimes imply substantial �revenue foregone�. Unless clear objectives are achieved they should be abolished. Many are designed to grant exporters access to duty free imports. Necessary for export competitiveness. Revised Kyoto provides clear guidelines.

21. Temporary admission: The preferred method by importers as no cash outlay required. Needs account-based management and inspection and safeguards against loss of revenue. Important to use computer application to effect control. Drawback system should still be available as back up for unexpected or exceptional exports. Drawback: Often preferred by Customs as it protects revenues. Exporters do not like this much because (i) needs cash outlay, (ii) refunds often are delayed,(iii) refunds lose real value because of inflation Temporary admission should be available to exporters in good standing.

22. Exemptions Should be strictly limited to those required by international agreements (e.g Vienna for diplomats) and non-commercial goods (e.g. travelers). Authority to grant exemptions should be transparent and extremely limited. Redundant exemptions should be eliminated as soon as possible.

23. Chapter 11 Transit Issues Transit presents special problems for landlocked countries (leakages and convoys). Transit policies are only in part a Customs issue; other agencies involved. Three key issues need to be addressed: Secure the cargo to prevent leakage. Provide a guarantee in case goods do not leave the country as expected. Ensure that guarantee is promptly released when goods leave the country. This requires good data transmission. . Participation of the private sector to set up effective administrative arrangement often helps. Transit corridor authorities deserve to be studied as examples (e.g Trans Kalahari Corridor)

24. Chapter 12 Cargo Security While not a totally new to Customs, security concerns are receiving great attention after 19/11. New initiatives- multinational and national, are undertaken and Customs should cooperate with other border agencies to enhance the security of cargo. Failing to cooperate with these various initiatives can undermine export competitiveness. This is a rapidly evolving field of concerns for Customs and deserved focused attention.

25. Chapter 13 Information and Communications Technology (ICT) Modern Customs Administration needs appropriate reliance on ICT. Key Observations: ICT is changing constantly Use of ICT has helped in mobilizing revenue, combat corruption and reduce clearance time Much ICT equipment is underutilized Managing ICT should be core function of Customs Administration ICT requires sustainable funding

26. Build own system Costly with frequent overruns Difficult to get it right ; tendency to formalize poor customs practices Some excellent examples exist Buy off the shelf. Several options now available. They incorporate best practices Often come with appropriate TA for implementation and support Choosing the appropriate ICT system should involve comparison shopping. Procuring the ICT system should ensure value for money

27. Thanks for your attention