59823 investment climate April 2010 IN PRACTICE TRADE LOGISTICS no. 9 Reforming Customs Clearance in Pakistan Simple, fast, transparent customs clearance procedures encourage Manzoor Ahmad trade--and the resulting tari s and related taxes raise government Dr. Manzoor Ahmad is the revenue and stimulate economic development. After outsourcing failed Director of the Food and Agriculture Organization of the to make customs more e cient or increase revenue, in 2002 Pakistan United Nations Liaison Office in began pursuing a modern single window system for customs clearance. Geneva. He served as Pakistan's In 2005 the system was introduced at the port of Karachi, replacing Ambassador and Permanent Representative to the World numerous procedures with one electronic declaration and sharply Trade Organization from 2002 cutting customs processing times. Despite dramatically reduced tari s, to 2008 and as Director-General of Pakistan Customs from annual customs revenue grew dramatically after the reform--though 2000 to 2002. He also worked tari and customs reform have since stalled. for 10 years (1986­96) for the World Customs Organization in Brussels. During the 1990s international trade and than two weeks. An importer of something This note is one in a series government tax revenues were stagnant in as simple as powdered milk was required to developed by the Trade Logistics Pakistan. Average annual GDP growth exceeded complete six copies of a bill of entry, which 6 percent in the 1980s, but in the 1990s it fell were then registered, manually checked against team of the World Bank Group's to less than 4 percent, and the scal de cit and an import general manifest, and subject to Investment Climate Advisory public debt rose sharply. In the 1990s more than 8­10 additional steps. Services. The series focuses on 70 percent of Pakistan's tax revenue was related implementation aspects of to imports, through customs duties, sales taxes, At one point in the 1990s, Pakistan's commercial recent trade reform initiatives and income tax withholdings. Accordingly, the judiciary had a backlog of more than 80,000 cases and risk management issues. new administration that came to power in 1999 brought against the customs administration by (headed by then President Pervez Musharraf ) traders and manufacturers. e country was also The Trade Logistics team targeted improvements in trade and customs as the leading source of tari classi cation disputes advises governments in devel- part of its reform agenda. referred to the World Customs Organization. oping and transition economies on improving their import, Despite attempts at outsourcing, in the 1990s export, and risk management little progress was made on streamlining Ineffective outsourcing systems and procedures to Pakistan's cumbersome customs regulations. Goods clearance involved more than a dozen In the 1990s the Pakistani government outsourced increase their potential for trade government agencies and usually took more customs clearance to two Swiss inspection and investment. companies--Cotecna in 1990­91 and Société Broad tax reforms lead to Générale de Surveillance (SGS) in 1995­97-- simpler customs with the goals of: raising government revenue through more e ective collection of customs As part of a structural adjustment program tari s and related taxes, facilitating trade, and developed with the World Bank and International reducing corruption. Monetary Fund, in 2001 Pakistan's Central Board of Revenue (now the Federal Board of Reforms sought to e government had predicted that outsourcing Revenue) began simplifying tax laws. Reforms create a customs system customs could double customs revenue, but the included introducing self-assessment for all inspection fees charged by the outsourcers raised taxes, including customs tari s and related excise that was Web-enabled, clearance costs by 2­3 percent for traders, and and value added taxes. With a few exceptions, customs revenue did not increase. Meanwhile, the maximum tari was lowered from 45 percent paperless, automated, clearance times did not improve, so complaints in 1998­99 to 25 percent in 2002­03. The and more transparent. persisted about goods being held up at ports. In number of tariff duty ranges was cut from 16 to addition, the customs administration resented the 4, and tariff exceptions were reduced or clarified. presence of the Swiss companies. Fifty years' worth of procedural notifications on tariffs were reviewed and updated to simplify In 1998 a rudimentary single window system, the customs declarations. Customer Service Center, was introduced. e center was run by a local rm under an outsourcing Clearance reform also occurred as part of customs agreement. A small xed fee was levied on each administration reforms. In early 2002 a reform goods declaration to cover expenses, and while team of three mid-level customs o cers was the center was an improvement over the previous created to develop an all-encompassing, fully system--eliminating 8­10 steps and introducing automated customs system. e team visited some automation and transparency--customs customs authorities that were using the United clearance remained predominantly paper-based Nations Automated System for Customs Data and cumbersome. (ASYCUDA)--designed to automate and Customs House Karachi, which handles 60 percent administer core customs processes and obtain of Pakistan's imports and exports, then became the trade data to support government planning--but venue for a series of reforms, including: decided that the system did not meet all the needs of stakeholders in Pakistan. ASYCUDA was being 1998: the Express Lane Facility was used in countries with small customs operations, introduced to simplify examination and the version available then did not enable the procedures. level of integration required with stakeholders 2000: the Electronic Assessment System such as carriers, commercial banks, and regulators. began assessing duties based on risk Furthermore, while the ASYCUDA software was pro les. free, hiring consultants to implement it would 2001: a single goods declaration was have been rather expensive. introduced. 2002: risk-indicated selective examination e reform team decided that it would be better to started assessing risks in examination adopt a system customized to Pakistan's needs, which procedures. the team described in a 4,000-page document. e 2004: an automated clearance procedure was team's vision was to create a customs system that was introduced. Web-enabled, paperless, automated, and allowed intervention by customs only through an automated ough these reforms simpli ed clearance risk management system. procedures, most companies had to continue following arcane procedures because it was e team wanted the system to provide real-time feared that fewer customs checks would lead integration with other government authorities, some traders to try to cheat the system, resulting to create an integrated tari regime, as well as in lost revenue. with other parties involved in the supply chain IN PRACTICE TRADE LOGISTICS 2 and customs clearance (such as carriers, ports bene ts for KICTL's competitive standing. and terminals, non-vessel operating common Similarly, APL's management immediately carriers, freight forwarders, warehouses, customs understood the savings that would result from brokers, and banks involved in collecting ships not being tied up for days in the Karachi customs revenue). Finally, the new customs port. Other companies, seeing the enthusiastic system was to be compliant with international participation of KICTL and APL, then became best practices such as the Convention on eager to participate. Facilitation of International Maritime Tra c, Winning the early World Customs Organization Data Model, Not all private actors were won over so easily. Some support of key players revised Kyoto Convention, and post­September agents that served as intermediaries for traders 11 security requirements. remained committed to arcane practices, as did in Pakistan's private some traders that bene ted from nontransparent e resulting Pakistan Customs Computerized procedures. While these critics account for just sector helped create System (PaCCS) was formally launched in 2005 at 10­15 percent of companies, and for even less of momentum for broad the port of Karachi. trade volume, they continue to be vocal opponents of customs reform. participation. The "80-20 rule" as Between 2002 and 2004 a series of seminars, applied to managing customs workshops, and other sessions were conducted stakeholders with key traders and shippers to develop new procedures and reach consensus. Having small Relatively few government agencies are involved teams manage the entire process helped expedite in Pakistani customs (port authorities, State reforms. e key reform group made nearly Bank of Pakistan, Central Statistical O ce, all key decisions in the reform process. Active Ministry of Commerce), so private companies support and involvement from the top (such as are key stakeholders in customs reform. Pakistan's the minister of nance and chair of the Federal strategy for stakeholder management involved Board of Revenue) greatly facilitated the reform using the "Pareto principle" (also known as "the implementation process. law of the vital few" or "80-20 rule"), which states that for many events, 80 percent of the While work on PaCCS was still at the conceptual e ects result from 20 percent of the causes. stage and mostly being done at Customs House Studies by the small reform team found that of Karachi, two teams of two mid-level o cers, the 24,000 registered importers and exporters selected by the head of customs, were stationed in Pakistan, 200 accounted for more than 70 at the headquarters of the Federal Board of percent of international trade. Shipping was Revenue to simplify tari and customs rules. is also concentrated, with the top four shipping element of reform was independent of PaCCS lines carrying more than 80 percent of business and coincided with budget making exercises for through Pakistani customs. scal 2001 and 2002. Winning the early support of key players in Pakistan's private sector helped create momentum Pakistan's single customs for broad participation. Key companies that window in action embraced the single window included the port operator Karachi International Container PaCCS relies on self-assessments by lers, using Terminal Limited (KICTL) and American software developed by vendors selected through President Lines (APL), a major shipper. KICTL the World Bank's international tendering process.1 had already automated, and its management Traders or their agents le declarations online immediately recognized the potential of a fully and pay duties or taxes at any bank connected automated, risk-managed customs system that to PaCCS or by debiting their prepaid accounts worked 24/7 with the company's servers using with the government (Figure 1). PaCCS then electronic data interchange--including the generates an online receipt of the declaration, IN PRACTICE TRADE LOGISTICS 3 assigns a customs reference number, and veri es kept or released based on a nal assessment by the the declaration through its risk management Valuation Department. system. e customs administration makes an online request to the ler if it requires any clari cation or additional documentation, which Results of implementing can also be provided online. the electronic single window system PaCCS was designed to perform customs functions without manual intervention. Physical inspection e government and customs administration hoped of goods, if needed, can occur without the trader that implementing a single window would: being present. Processing can take place in just a few seconds. Lower the costs of doing business by reducing delays and demurrages, simplifying processes, Importers le disputes electronically and can and enabling just-in-time inventory. request reviews of any duty or other customs Increase government revenue through more issue. If the problem is not resolved on rst reliable collection of customs duties and review, importers can request a second review and related taxes. personal hearing with a mid-level manager at the Improve cash ow for businesses by Customs House. Although few disputes are not expanding access to markets through simpler resolved by that point, importers can still clear procedures and expediting rebates of export cargo by ling security payments equivalent to duties to traders. the amount in dispute. e trader's funds are then Reduce corruption. Figure 1: Processing of Goods Declarations for Imports by the Pakistan Customs Computerized System Risk Management System Bill of lading cleared. Client and terminal operator informed online Declaration accepted Goods Duties paid Pays as declaration against the determined led goods Green Declaration Agrees or Information and Declaration against a declaration. routed to rejected provides documents bill of Customs Yellow Customs Client security payment requested lading. reference House for from client Duties number Red scrutiny Disagrees computed generated by PaCCS by PaCCs Requests Requests Requests second release Minor or review review against Agrees security Physical no issues examinations Customs Serious Disagrees mis-declaration Further action Source: PaCCS management. When a goods declaration is led, PaCCS computes the importer's duties, logs payment, assigns a customs reference number, and then either clears the goods declaration through customs or requires further scrutiny by customs. IN PRACTICE TRADE LOGISTICS 4 Figure 2: Clearance Times at the Port of Karachi Before and After Reform (percent) Before After 70 Less than 5 minutes 4 Less than 1 day 14 Less than 30 minutes 13 Less than 2 days 3 Less than 1 hour 32 Less than 4 days 5 Less than 12 hours 26 Less than 6 days 1 Less than 24 hours 25 More than 6 days 7 More than 24 hours Source: PaCCS management. After the customs computerized system was rst introduced in Pakistan, 87 percent of consignments cleared customs in less than one hour and 93 percent cleared in less than 24 hours. Customs processes at the port of Karachi have e single window system was designed to reduce been simpli ed considerably since PaCCS was corruption by eliminating contact between traders implemented. e port, once considered among and customs agents. Pakistani o cials estimate that the worst functioning in the world, is now 90 percent of corruption has been eliminated for competitive with any in the region--including goods passing through the single window system those in India. in Karachi (which accounts for 60 percent of Pakistan's international trade). Collusion between Under PaCCS one simple electronic declaration taxpayers and tax collectors is largely mitigated by has replaced up to 26 clearance steps, 34 signatures, physical structures that separate taxpayers from and 62 veri cations. After the system was rst examination and assessment areas. In addition, introduced, 87 percent of consignments cleared the biometric identi cation and cell phone jammers single window within an hour (Figure 2), though are used to ensure that customs sta remains that pace has slowed considerably since some unaware of the identity of taxpayers. manual checks were introduced.2 Rebates to traders are made automatically without their having to le e introduction of the single window, combined claims, and refunds now take less than 2 days-- with the lowering and simpli cation of tari s, compared with 90 before. has made traders more cooperative and reduced opportunities and motivations for bribery. As a PaCCS also introduced more sophisticated risk result, despite sharp cuts in tari s between 1998 and management. It maintains a taxpayer compliance 2002, tari revenue grew by more than 20 percent a history for the past year, and taxpayers with year after reform (from scal 2003 until scal 2006). higher compliance ratings are considered less risky. Conducting fewer examinations based on Lessons from Pakistan's automated risk pro ling greatly reduces processing experience costs for port operators, who can begin processing before shipments arrive, and for shipping com- Carefully consider outsourcing panies, which no longer have to maintain ships at In Pakistan, outsourcing customs inspection and port while goods are cleared. clearance raised costs for traders by 2­3 percent and IN PRACTICE TRADE LOGISTICS 5 did not achieve any of the intended goals. Customs customs reforms throughout Pakistan, re ecting revenue did not increase, trade was not simpli ed, the lack of a widespread PaCCS rollout plan from and corruption may have intensi ed. Outsourcing the outset. Today only 60 percent of Pakistan's also created resentment among customs workers, international trade (what passes through the port eroded domestic expertise, and stunted customs of Karachi) goes through PaCCS. As a result, capacity building. shipping lines and terminal operators must cater to dual processes and maintain a paper-based Tari classi cation Develop the legal and regulatory system, which raises costs. framework for reform disputes nearly To enable the single window, Pakistan had to Maintain a stable but inclusive disappeared after tari s enact more than a hundred changes to its Customs team for reform management Act. Most involved the switch to electronic Achieving a single window requires a dedicated were simpli ed. documentation--for example, revisions were management team working for a sustained period. needed on provisions requiring signatures, hard is team must have ownership of the reform documents, and the physical presence of traders (or process and be motivated to overcome obstacles. their agents) during goods clearance. Other steps Pakistan's reform management team may have been included introducing a single goods declaration, too small, possibly fostering resentment among implementing the World Trade Organization trade and customs colleagues. Reform management Agreement on Customs Valuation, and lowering teams should include as many stakeholders as the maximum tari from 45 to 25 percent. possible to help minimize criticism after reforms and to sustain reform momentum as managers, Aim for a critical mass of reforms policymakers, and administrations change. built on quick wins Limited reforms will likely not satisfy stakeholders Use private sector champions and market or achieve reform goals, and implementing a single forces to catalyze reforms where possible window can take several years--sometimes more. Pakistani reformers recognized early that international But reaching smaller goals along the way can help trade was highly concentrated among traders, shippers, build momentum. In Pakistan one quick win and port operators. Winning early support from key involved simplifying, at relatively low cost and companies drove momentum for participation in e ort, arcane tari rates and rules accumulated over the single window because other companies became 50 years. ough Pakistan had been the leading eager to maintain competitiveness--providing a country in tari classi cation disputes referred to lesson in how market forces can be harnessed to the World Customs Organization, such complaints encourage reforms. nearly disappeared after tari s were simpli ed. Pakistan also introduced some risk pro ling before Measure the results of reform introducing the single window, which reduced the Reform outcomes should be measured and volume of goods backlogged on docks awaiting benchmarked where possible. In Pakistan the key inspection. indicators of customs reform were the average time to clear goods and the number of court cases, Adopt a countrywide plan for referrals to the World Customs Organization, and reform while momentum is strong days to refund trader duty drawbacks. Such data e increased transparency and accountability that are often not available before an automated system accompany reform can threaten customs agents is adopted, so determining reform results may and authorities, as well as trader intermediaries require comparing anecdotes or surveys of traders and legacy vendors. Indeed, these vested interests and other stakeholders with hard data once the have stalled further adoption of single window new system is in place. IN PRACTICE TRADE LOGISTICS 6 Conclusion Endnotes IN PRACTICE Many governments share the same basic goals for 1 ese vendors include Microsoft, PWC The Investment Climate IN customs reform: facilitating trade while reducing Logistics of Kuwait (now Agility), and PRACTICE note series is published corruption and increasing revenue from tari s Accountancy Outsourcing Systems of and customs-related taxes. Achieving these goals Pakistan. by the Investment Climate is more likely when reforms simplify procedures, 2 Since the introduction of these checks, only Advisory Services of the World clarify tari structures, and minimize human one-third of consignments are now cleared Bank Group. It discusses practical interactions. Governments seeking a quick within one hour. considerations and approaches x sometimes outsource customs functions to for implementing reforms that private companies--but this should be done with aim to improve the business caution. Outsourcing was ine ective in Pakistan, where streamlined customs procedures and higher environment. The findings, customs revenue were achieved only when a interpretations, and conclusions single window system for trade declarations was included in this note are those of implemented in 2005. the author and do not necessarily reflect the views of the Executive Ideally, implementation of a single window should Directors of the World Bank or the occur in the context of broader trade reforms. Tari structures must be simpli ed, and duties should be governments they represent. low enough to encourage payment of tari s and related taxes. A single window system must also About the Investment allow electronic exchanges of documents and be supported by a legal and regulatory framework Climate Advisory based on international standards. Services A properly implemented single window system can deliver signi cant bene ts. During 2002­07 The Investment Climate Advisory Pakistan's single window system eliminated numerous Services of the World Bank Group procedures, and customs revenue soared because helps governments implement bribes were replaced by legitimate duties and related reforms to improve their business taxes at the port of Karachi. environments and encourage and But powerful vested interests can impede reform, retain investment, thus fostering especially as government administrations change. competitive markets, growth, and us reformers should act aggressively, while job creation. Funding is provided by reform momentum is strong, and reform e orts the World Bank Group (IFC, MIGA, should include as many stakeholders as possible to and the World Bank) and over 15 foster lasting support. donor partners working through the Since PaCCS was successfully implemented, there multidonor FIAS platform. has been some rollback of automation in favor of more manual checking, and new management is conducting an audit to inform plans for further system rollout. For more information, contact Uma Subramanian, Global Product Leader, Trade Logistics (usubramanian@worldbank.org). IN PRACTICE TRADE LOGISTICS 7 International Finance Corporation World Bank Group WWW.WBGINVESTMENTCLIMATE.ORG