55872 MAY 2010 ABOUT THE AUTHORS Breaking Up the Logjam: NATALIA BERUASHVILI GBCR Fiscal Reform Team Automated Customs Risk Management Leader, is a lawyer with 12 years' experience in commer- cial law and fiscal reform System Implementation in Georgia implementation in Georgia and Russia, and has worked on projects with USAID and IFC. How do you turn a confusing tangle of red tape into a smooth Natalia has managed GBCR operation? In Georgia, the solution involved risk management, initiatives in customs and tax administration and trade and automation, and a good mechanism for public-private dialogue. investment promotion. Aggressive customs reforms powered Georgia's leap ahead of 119 OLIN MCGILL other countries on the World Bank Doing Business (DB) "Trading GBCR Chief of Party or Project Director, is a director of Across Borders" indicator, from No.149 in 2006 to No. 30 in 2010 (see Chemonics International Inc., and a former journalist and table). This customs reform was a key component of the trade logistics commercial lawyer with more than 30 years of experience, reform introduced by the Government of Georgia and supported by including USAID projects in Ukraine, West Bank/Gaza, and the United States Agency for International Development (USAID) Bosnia and Herzegovina. Georgia Business Climate Reform (GBCR) Project, implemented from September 2005 to August 2009. This SmartLessons captures some of what made this project a success. Background or coordination. Similar confusion among other agencies with responsibilities at the When GBCR began, customs administration border, plus a complicated, ambiguous, and was arbitrary, disorganized, nontransparent, conflicting customs legal framework, made it and extremely unfriendly. Public opinion all but impossible for traders to be customs- ranked customs the most corrupt agency in compliant. Georgia. Separate Tax and Customs Departments and Financial Police acted on Risk management--the process of allocating overlapping mandates under completely resources where the risks of noncompliance separate authorities with little communication are greatest--did not exist in Georgia. Every Trading Across Borders DB 2006 DB 2007 DB 2008 DB 2009 DB 2010 Gains Overall Rank 149 35 64 81 30 +119 Documents to Export 9 8 8 8 4 -5 Time to Export 54 13 12 12 10 -44 Cost to Export - 1370 1105 1380 1270 - Documents to Import 15 11 7 7 4 -11 Time to Import 52 15 14 14 13 -39 Cost to Import - 1370 1105 1340 1250 - Table: Georgia's Progress in DB "Trading Across Borders" Indicators IFC SMARTLESSONS -- MAY 2010 1 import and export, regardless of the risk represented, was cumbersome formalities at the Inland Clearance subject to physical inspection. Consequently, the time and Terminals; b) post-payment of customs duties for up to costs associated with clearing goods were significant for 30 days; c) electronic submission of declarations with no both businesses and customs administration. Because attached documents required; and d) advance declaration everything was inspected, the superficial methods used in filing. Since November 2009, no customs guarantee is the process accomplished little other than to create required for Gold List members. opportunities for corruption. Electronic submission of documents was impossible, and the legal framework Georgia's Revenue Service originally implemented the obscured the documents and procedures required for Gold List program with strict requirements during a pilot clearance. Customs officials were authorized to demand of phase. Companies approved were required to submit a traders any of 23 specifically identified documents, or customs guarantee (bank guarantee, insurance policy, anything else they wanted to require. Importers could not deposit) of 100,000. Importers of excise goods are still determine in advance what they had to submit or how required to submit a general customs guarantee, but the much they had to pay, and customs did not follow the amount has been reduced to 100,000 GEL instead of World Trade Organization customs valuation rules. Finally, 500,000. Moreover, since November 2009, the Gold List there was no mechanism for communicating and sharing has been expanded from import to include customs feedback between the private sector and customs warehouse regimes, with export soon to follow. The administration to facilitate meaningful reform. number of companies taking advantage of the Gold List program has grown tremendously, from the four After several rounds of dialogue with the Ministry of companies that were part of the pilot group to over 200. Finance and the Revenue Service, the government decided The largest 100 importers in Georgia account for more to replace 100 percent of its physical inspections with a risk- than 40 percent of the volume, value, and number of based cargo selectivity system. The introduction of customs import declarations filed. risk management significantly reduced petty corruption and, in combination with rational laws and procedures, Lessons Learned allowed traders to comply voluntarily with revenue laws. Results included: 1) Implement comprehensive reforms. · Customs Risk Management: The risk-based cargo The scale of the increases in trade volumes and values and selectivity was fully implemented throughout Georgia revenues noted above almost certainly resulted from the by July 2008. The implementation began on February synergies of sweeping reforms that were taking place in 1, 2008, and was systematically expanded to all customs every aspect of the business climate (see box), as well as the clearance offices. Now, 90 percent of shipments are international publicity Georgia received as it rose from No. subject only to documentary review ("yellow channel"), 112 on Doing Business 2005 to No. 11 in 2010. reducing the time to clear most shipments by several days. The remaining 10 percent (recently reduced from 15 percent) are referred for physical inspection ("red How GBCR Provided Assistance on Customs Risk channel"). This decision is based on a combination of Management risk criteria programmed into the UNCTAD (United Nations Conference on Trade and Development) Broad-based technical assistance helped lay the ground- ASYCUDA (Automated System for Customs Data) work for risk management, create the organizational and customs processing software and random selection. physical infrastructure required, and then plan and imple- The automated selection of shipments for physical ment effectively. It included the following: inspection focuses customs resources where the risk is greatest, makes the process more objective, and · Legal drafting--GBCR legal experts supported the gov- provides fewer opportunities for corruption. ernment's proposal and review of multiple changes to the Customs Code, regulations, and procedures, to authorize In the first quarter of 2009, the automated cargo and implement risk-based inspections and the Gold List selectivity was expanded to exports and customs program; warehouses as well. The Revenue Service plans to · Institutional development--The Revenue Service, sup- introduce the "green channel" and "blue channel" for ported by the GBCR team, created a Risk Analysis Depart- international and diplomatic organizations as well as ment, which included specialists to analyze and recommend for low-risk companies. risk criteria and to be responsible for processing and evalu- ating Gold List applications; · Authorized Economic Operators ("Gold List") Program: · Capacity building--The GBCR project team worked hand As part of the customs risk management system, the in hand with the government to provide multiple risk man- "green channel" (no physical or documentary checks) agement training sessions for Risk Analysis Department was implemented for Gold List program importers. The employees; Gold List program provides simplified import procedures · Automation of cargo selectivity--GBCR closely collabo- for high-value/high-volume traders--5 million Georgian rated with UNCTAD to input risk profiles into ASYCUDA, Lari (GEL) of import value--with a demonstrated history and developed an ASYCUDA module for simplified clear- of compliance. Simplified procedures include: a) ance procedures for Gold List program participants. immediate release of goods, which circumvents 2 IFC SMARTLESSONS -- MAY 2010 2) Combine technical assistance with procurement. automated. Our experience of focusing on streamlining specific business processes to make them simpler, faster, and GBCR reserved $2.5 million of its $13 million four-year less costly, rather than investing in comprehensive top-down budget for procurements to support implementation of the reforms of legal regimes, led us to the following reform initiatives it supported. This was crucial to success in conclusions: reforming, particularly in automating business processes in the early days. As revenues rose, the government adjusted · Ruthless transactional efficiency produces dramatic its budget priorities and the project substituted technical increases in transaction volumes and values. The assistance for procurement activities. examples of increases in total trade, value-added tax (VAT) revenues, and commercial trucks transiting Examples of procurements that were important for Customs Georgia are typical of what happened in every area we Reforms: worked in. Whether it was business or property registration or construction permitting, in every · When the project started in October 2005, the Customs instance in which the time and cost of a transaction Department, Tax Department and real property was reduced, the volume and value increased. registrar (National Agency of Public Registry) were all using unlicensed, out-of-date Oracle software. GBCR · Petty corruption is somewhat a technical issue. procured licensed Oracle software for all three According to annual surveys by the International agencies. Without licensed software, applicable Republican Institute, more than 90 percent of Georgians regulations prevent technical assistance that violates haven't paid a bribe in the last year. The government intellectual property rights. attacked corruption on several fronts. Arrests were frequent and well publicized. Salaries were increased, · GBCR issued a competitive tender for a customs time and revenue officers were actually trained in how to measurement study that provided a detailed baseline carry out their functions. However, the government that identified bottlenecks and logjams at particular believed that the most effective strategy for virtually sites and with particular processes. This helped us rooting out petty corruption was to eliminate regulatory identify issues and prioritize reforms. The methodology complexity and ambiguity, and then to automate. was subsequently exported by the Georgian provider on Streamlining reduces opportunities for corruption. a similar project in the Caribbean. Automation increases the risk of discovery. · With GBCR support, Georgia's Soviet-era Customs Code Note: Automated risk management reduced corruption was replaced with much more modern legislation. risk in part by minimizing discretion for customs officers Parliament passed the law in November 2006; it took in making certain clearance decisions. Most of the effect on January 7, 2007. After passage of the law, the decision making in Georgia now is concentrated in high- Ministry of Finance asked GBCR to organize training for level management. The challenge is that the absence of about 500 customs officers before the law took effect on discretion at lower levels can delay processing or produce January 1. An emergency procurement to the American unprofessional decisions. For example, decisions about Chamber of Commerce in Georgia and Georgia American customs valuations that confront line customs officers University resulted in successful training in modern who lack discretion are sometimes either forwarded up facilities with computer labs. to higher-level officials or decided by using inappropriate rules. · Other procurements included Web site development, and publication of brochures and educational materials. · Aggressive incrementalism reduces the time required for far-reaching reforms. Georgia rose from 149 to 30 on the As the examples above illustrate, the ability to procure DB "Trading Across Borders" indicator in four years by goods and services in support of our technical assistance undertaking multiple reform wavelets. Hundreds of variously: changes were made to laws, regulations, and business processes. It helped that most of the changes were to reduce · Actually enabled us to provide technical assistance, as complexity, expense, and delay. The project's experience in in the case of the Oracle software. this and other technical areas in which we worked is that · Helped us and the government of Georgia identify and each incremental change made the next easier. prioritize problem issues. · Build capacity of customs officers; and 4) Create a mechanism for public-private dialogue. · Increase public awareness of reforms and requirements. Initially, the private sector complained that frequent, 3) Streamline, and then automate. aggressive changes to customs legislation made the trade- related environment less predictable, increasing risk. As Implementation of risk management occurred only after the direction of change became clear, however, and with numerous customs business processes were revised and a larger role in shaping the reforms, the private sector streamlined. Clearance procedures were simplified to include became a vigorous advocate for reform. Business, initially advance declarations, immediate release of goods for low- distressed by the constant change, became its champion risk traders, and so on. Customs physical inspection procedures and enabler, providing literally hundreds of were optimized, and customs inspection selection was fully recommendations. IFC SMARTLESSONS -- MAY 2010 3 6) Monetize the benefits of every reform. To impact the DB "Trading Across Borders" rankings, customs reform requires perhaps more work, and over a longer period, than does any other indicator. On the other hand, it was GBCR's experience that the monetized benefits of customs reform were significantly greater than in other areas. Monetizing early and often helps popularize customs reforms, and provides results for customs reformers to trumpet when senior officials complain about the lack of progress on Doing Business. GBCR attempted to monetize the efficiency savings--to traders and government--from customs reforms Before: In 2005, trucks attempting to clear customs at the implemented by the government with USAID support. Azerbaijan-Georgia border were subjected to long lines, 100 Annual savings from customs reforms for which benefits percent physical inspection of goods, unclear regulations, and could be monetized were about $388 million. For example, changing interpretation of clearance requirements. Today, with in September 2006, the project calculated savings to assistance from USAID, physical inspection has been decreased to traders from reforms that reduced by one day the time it 10-15 percent for imports and 13 percent for exports. (GBCR takes for a commercial truck to cross Georgia's border. The photo). $288 per day cost of operating a commercial truck, times the 139,000 truck crossings in the prior 12 months, produced an estimated annual savings of $40 million. Two A key turning point was the creation of a mechanism for years later, the volume of truck transits had grown to over public and private sectors to talk coherently. Officials 600,000 annually, generating an additional $133 million in complained that dialogue with business was all complaints annual savings. and special pleading, with no solutions. GBCR worked with AmCham Georgia to convene a public-private task Initially, measurement of monetized benefits was based force on customs issues. The customs working group on a methodology developed by the Dutch government to surveyed businesses in order to discover the problems measure the costs to business due to administrative they experienced, identify the causes, and propose burdens resulting from government-imposed information- solutions that were then incorporated into amendments reporting requirements. This methodology has evolved to the customs code and secondary legislation. into the well-known Standard Cost Model. In addition, we include direct financial impacts on the government and Government listened, and change happened even more private sector that are not related to information often. The Ministry of Finance recently created a formal requirements, including reducing or eliminating fees, and Business Advisory Council to enhance the dialogue, to estimating the time value of money. The methodology provide businesses with a mechanism for providing was further refined to ensure that all parties affected by a feedback to the Ministry and to the Revenue Service, and reform initiative are at least identified, even if we are not to identify capacity deficiencies. able to quantify the specific benefit received. This objective 5) Transaction-based reforms build capacity faster. When implemented top-down, regime change requires huge expatriate resources. It exhausts local partners, because the benefits seem so remote and debatable, and the theory requires huge investment to master. Transaction- based reform produces bigger results sooner. The principles are easier to understand and apply to diverse situations. With GBCR support in mastering transactional efficiency, the capacity and professionalism of the Revenue Service in streamlining, automating, and developing and implementing the customs risk management program increased dramatically. Mid-level managers in particular were able to apply reform principles in new settings. GBCR After: The introduction of Risk Management and training of also provided specialized training and mentoring in certain customs officials has allowed Georgia to dramatically improve areas, such as the new risk analysis unit, focusing on the the environment for cross-border trade. Today at the Azerbaijan/ transactional principles. Now, a cadre of technically Georgia border crossing, lines are short, regulations are clearer, competent middle managers has emerged. Senior and most goods clear customs in less than two hours. (GBCR management increasingly trust these managers, and photo). delegate greater authority to them to streamline and rationalize business processes. 4 IFC SMARTLESSONS -- MAY 2010 was achieved by standardizing the process of · About 90 percent of all shipments are monetizing reform impacts rather than the cleared through the yellow channel, specific calculation methods used, which vary requiring only documentary checks. depending on the initiative. · The goal of implementing risk-based Conclusion inspections and post-clearance audits encouraged the streamlining of customs The dramatic reductions in clearance times procedures, which have been introduced produced by streamlining customs procedures for various customs regimes, including and introducing risk management between customs warehousing, inward processing 2005 and 2009 directly reduced the cost of relief, outward processing relief, temporary doing business for traders and the Revenue importation, export, re-export, and Service. They were accompanied by similarly returned goods relief. dramatic increases in trade turnover from $3.4 billion in 2005 to $5.5 billion in 2009, and in · Documentation requirements have been VAT revenues (60­65 percent of which are clarified and dramatically reduced in collected at the border) from 1.3 billion GEL to number. Now, only two documents are 2.5 billion GEL. Key benefits included the required for export and three for import. following: The simpler systems make it easier not only for · The risk management system has reduced businesses to comply, but also for the physical inspections to 10­15 percent for government to detect evasion. The risk-based imports and 13 percent for exports. inspections also identify about 100 percent more violations than physical inspections did. · The time required for release of goods has decreased from three days or more to an average of two hours. DISCLAIMER IFC SmartLessons is an awards program to share lessons learned in development-oriented advisory services and investment operations. The findings, interpretations, and conclusions expressed in this paper are those of the author(s) and do not necessarily reflect the views of IFC or its partner organizations, the Executive Directors of The World Bank or the governments they represent. IFC does not assume any responsibility for the completeness or accuracy of the information contained in this document. Please see the terms and conditions at www.ifc.org/ smartlessons or contact the program at smartlessons@ifc.org. IFC SMARTLESSONS -- MAY 2010 5