Abstract

Many governments in developing and transition countries have engaged the private sector to provide certain services that have traditionally been the responsibility of the customs administration. This option is often seen as a way to address corruption, as well as to combat smuggling and improve customs revenue collections more generally.

Many governments in developing and transition countries have engaged the private sector to provide certain services that have traditionally been the responsibility of the customs administration. This option is often seen as a way to address corruption, as well as to combat smuggling and improve customs revenue collections more generally.

A. Traditional Private Sector Support for Customs Administrations

Traditionally, the uses made of the private sector in administering customs include the operation of customs warehouses, the use of approved and/or licensed customs agents or brokers, customs-approved/licensed duty-free shops, and customs-bonded transportation operators. Customs administrations, like other public sector institutions, also often use banks to provide cashiering services and other private firms for computer systems development, operations, and maintenance services (such as cleaning). The private sector is also used by some customs administrations to provide laboratory analysis. The focus here is on its role in operational aspects of customs work.

B. Import Verification Programs

The use of the private sector in direct customs operational activities has been largely restricted to developing countries and countries in transition, where there are significant problems of corruption and/or lack of capacity, or in post-conflict countries where there has been a need to implement quickly a customs administration following the cessation of hostilities. The types of programs that have been implemented include investigations and intelligence operations supported by antismuggling teams headed by experienced foreign customs officers; the outsourcing of the management of the customs administration; destination inspection; and the widely used preshipment inspection (PSI) program, which over the past 25 years has been implemented in more than 40 countries worldwide. Box 12.1 describes the first three of these programs—PSI is discussed in more detail later in this chapter.146

Import Verification Programs

In the past several years, various programs have been implemented using the private sector to assist with verification of quantity, quality, value, and tariff classification of imports. In addition to PSI, discussed separately below, these include the following:

Investigations and intelligence operations. In the mid-1990s in Latvia and in 2001 in Bulgaria, a private sector company provided support for the development and implementation of customs intelligence and investigations that was designed to combat smuggling. The key component of the programs was the creation of antismuggling teams led by experienced foreign customs officers. In addition, the programs provided for the development of intelligence to be used to assess risk—identifying importers, exporters, transportation companies, routes, and so on, that posed the greatest threats—supported by a computerized system. The foreign customs officers worked with local counterparts, in order to increase the capacity of the customs administration to continue with this type of activity when the contract was completed.

Outsourcing the management of the customs administration. In Mozambique (1996) and Angola (2001), the management of the customs administration was outsourced. The company responsible for the management of the customs administration employs large numbers of experienced foreign customs officers to staff key positions within the administrations. The projects are designed to introduce the legislative changes necessary to support a modern customs administration, develop systems and procedures that support effective revenue collection, address issues of smuggling and fraud, and develop and implement computer systems to support import and export declaration processing and risk analysis. The programs also include capacity-building measures designed to ensure that the local customs administration is able to regain its full range of responsibilities in the future. Programs of this type may be appropriate for a period of time in certain post-conflict countries where taxes on imports make a significant contribution to total revenue and where it will take considerable time to build capacity to manage the customs administration effectively.

Destination inspection. This is a new concept that is fully operational in one country, Ghana. Like PSI, this program uses resources of private sector companies to certify the value and tariff classification of the goods to be imported and to determine the duties and taxes payable prior to the importation of the goods. The major difference is that physical inspections are carried out on a risk-based selective approach in the country of importation. Inspections are conducted jointly by the private sector company and the customs administration. In Ghana, it has beneficial features including sending customs administration staff to the inspection companies to undertake the valuation and tariff classification of the importations under the supervision of inspection company staff. These determinations are based on information from the overseas affiliates of the inspection companies that conduct the preliminary investigation of the value and tariff classification who send the information to their office in the country of importation for final determination. It also includes the use of an x-ray scanner for containers, although this is not a necessary part of a destination inspection program.

Implementation of a contract with the private sector to undertake certain operations in the customs administration can be very expensive: PSI contracts, for example, typically cost between 0.75 percent and 1 percent of the value of the goods inspected. In addition, experience indicates that most governments that enter into such contracts do not reduce the costs associated with customs administration. Therefore, the cost is added to ongoing operating costs and, as a result, there must be real, measurable benefits to ensure that the investment is worthwhile.

As countries consider the option of contracting out certain traditional customs operations to the private sector, they need to consider carefully whether the government and the customs administration can manage the implementation of the necessary reforms on their own. In other words, would the several million dollars or so that it would cost to engage the private sector achieve the same or better results if it were, instead, invested directly in the customs administration?

Typically, private sector offerings include components that are not available readily in the customs administration (e.g., to address undervaluation, the administration needs access to pricing information and this can be acquired from private sector companies). Similarly, risk-assessment and risk-profiling methodologies can also be acquired. If the administration does not have the information technology support that it needs, in the short term, support can be obtained from the private sector.

C. Preshipment Inspection

PSI programs are offered by a number of companies and are used by more than 40 countries all over the world: Box 12.2 lists the countries that have contracted for such services (as of November 2000).

Countries with Preshipment Inspection Program Contracts (as of November 2000)

Africa

  • Angola, Benin, Burkina Faso, Burundi, Cameroon, Central African Republic, Comoros, Congo, Côte d’Ivoire, Democratic Republic of Congo, Ethiopia, Gambia, Ghana, Guinea, Kenya, Liberia, Madagascar, Malawi, Mali, Mauritania, Mozambique, Niger, Nigeria, Rwanda, Senegal, Sierra Leone, Tanzania, Togo, Uganda, and Zanzibar.

Latin America

  • Argentina, Bolivia, Ecuador, Mexico, and Peru.

Middle East

  • Iran.

Asia

  • Bangladesh and Cambodia.

Former Soviet Union

  • Georgia, Moldova, and Uzbekistan.

The objectives and priorities of PSI programs have evolved over time and they vary among governments. In the early 1960s, PSI programs were used almost exclusively to address issues of capital flight (by preventing overvaluation of imports). In more recent years, as trade has been liberalized and exchange controls have been removed, the emphasis of PSI programs has been shifting toward revenue issues. Today, the key objectives of PSI programs are to detect false invoicing (over- and underinvoicing); provide governments with accurate information on importers’ activities and tax liabilities; and, in some cases, verify the appropriate use of donor funds provided for import support.

Main features of PSI programs

Goods are inspected by the PSI company in the country of export before they are shipped to the country of destination, in order to verify that the price paid by the importer is reasonable and that the goods conform with the specifications of the contract (quality and quantity). Price verification focuses on the declared invoice price of the goods, comparing this with “the price(s) of identical or similar goods offered for export from the same country of exportation at or about the same time.” 147 PSI programs typically cover all imports, with some notable exceptions. Most programs specify a threshold value (such as US$3,000), below which goods are not required to be inspected. Certain categories of goods (such as newspapers, diplomatic goods, personal effects, and fresh produce) also may be excluded from inspection.148 Most of the recently implemented PSI programs are comprehensive, in that they include verification of value, determination of tariff classification, computation of the duties and taxes to be paid by the importer, and reconciliation of the PSI documentation with import declarations and duty payments.

Costs for the PSI service may be borne by the government or the importer. As mentioned earlier, these costs are typically around 1 percent of the f.o.b. value of the goods inspected, with a minimum inspection fee (around US$250 per inspection). The role of the customs administration in countries with a PSI program is to control goods that are not subject to inspection and to ensure that the laws and procedures related to PSI are applied.

Views on PSI

Proponents of PSI see it as a means of deterring fraud in international trade. As nearly all developing countries suspect suppliers, importers, and multinationals of manipulating invoice prices to the detriment of their economy and revenue collections, the fee is judged to be well justified.

Detractors of PSI are of the opinion that physical inspections by PSI companies create delays and generate additional costs for both exporters and importers. They argue that substitution of goods can easily occur after inspection, due to the difficulty of totally sealing all consignments. The discretion given to PSI companies to dictate quality standards and the obligation on the part of exporters to entrust commercially sensitive pricing information to PSI agencies are perceived by some as an unnecessary intrusion into commercial dealings and confidentiality. It has been argued that the hard currency required to pay for PSI services is a scarce resource that could be better spent elsewhere. Perhaps most fundamentally, some argue that the use of PSI agencies is an admission of failure on the part of the government in its attempts to police and reform a corrupt customs administration. This is indeed a risk unless a clear exit strategy is in place for building up a strong domestic customs capacity to take over, within the foreseeable future, from the PSI company.

It is difficult to quantify performance results of PSI programs and to take at face value results reported by PSI companies on foreign exchange and revenue savings. It is virtually impossible to determine the weight to be assigned to the individual elements of PSI programs, since governments often are undertaking other reforms at the same time. For example, a number of years ago, Indonesia and Peru experienced significant improvements in revenue collections shortly after PSI schemes were introduced; but government officials in those countries could not determine with precision how much was attributable to any particular aspect of the broad customs reform package. It is important to note that the inspection of cargo in the country of export does not solve, in and of itself, the problem of an ineffective and/or corrupt customs administration in the country of import.149 In addition, the implementation of PSI contracts may not always have been undertaken in the best interests of the country, as the awarding of certain contracts has not been transparent (awarded on the basis of public tenders) and has resulted in corrupt practices by government officials and PSI companies.

In a comprehensive study for the World Bank, Low (1995) found that the effects of PSI have often been disappointing, particularly on the revenue side. This reflects a lack of serious monitoring and follow-up of information generated by the inspections, with the implication that “governments that contract PSI services should use them to greater effect than appears to have been the case to date in many countries.”150

The World Customs Organization (WCO) has also taken a dim view of PSI, concluding from a review of PSI in 1994 that it did not provide value for money, with any additional revenues gained lower than the costs. Moreover, it was felt that PSI had a detrimental effect on the long-term development of the local customs administration.

In October 1994, the United Nations Conference on Trade and Development (UNCTAD) conducted an international symposium on trade efficiency in Columbus, Ohio, in the United States, where a Ministerial Declaration covering trade practices was adopted. In relation to PSI, it made the following recommendation:

While recourse to the services of preshipment inspection agencies to carry out customs-related activities might be a necessity in certain circumstances, this should be regarded as an interim measure, and governments should avoid long-term use of such services. Where appropriate, governments should initiate customs reform programs aimed at enhancing the efficiency and effectiveness of their customs services, thereby avoiding the need to use the services of PSI agencies.

A common criticism of PSI operations is that there is no arrangement for monitoring and auditing PSI firms.151 Nor are there always assurances of the transfer of skills to local customs administrators. It is sometimes the case that PSI companies operate for long periods of time with the result that the needed buildup of local administrative capacity is delayed or frustrated. Of course, there is little incentive for PSI companies to assist in the reform of the customs administration if it means that their contracts may not be renewed.

Lessons from experience

Any government considering PSI should understand the program’s strengths and weaknesses, with special consideration given to the following potential problems:

  • PSI cannot provide protection against all threats facing a customs administration. Smuggling will continue and other fraud can be undertaken, for example, through bonded warehouses, free economic zones, and duty-free shops.

  • There could be a shift in the types of fraud away from the ones for which PSI is designed to deter toward those beyond the reach of PSI. For example, importers might claim exemption from PSI by declaring the value of their goods below the inspection threshold. In many countries, it has been found that importers split shipments to avoid inspection. With a threshold of US$3,000, for example, goods worth $9,000 might instead be shipped as three consignments, each falling below the threshold. “Household goods and personal effects” can become a camouflage declaration to escape inspection, as can humanitarian aid, parcel post, samples, and other exempt items.

  • The customs administration must avoid becoming too dependent on PSI. For example, staff may see little incentive to acquire the skills required for customs valuation if they perceive that all the valuation work is being carried out by the PSI company.

  • Experience shows that the inspection undertaken by a PSI company is no guarantee that the goods arriving in the country are the same ones reported in the PSI inspection certificate. Many techniques have been employed to circumvent these inspections. Container seals have been tampered with and containers have been opened after being sealed without breaking the seals. Goods have been substituted or goods added after the departure of the inspectors from the premises of the shipper.

  • For many imports, physical inspection at the port of exportation may not be the most appropriate way of preventing undervaluation. When the nature of the product being imported is clear from the documents presented to the inspection company, a physical inspection is not necessary for the proper valuation of the goods.

Experience suggests that the following are critical to the success of PSI arrangements:

  • The option of introducing PSI should never be considered in isolation. Instead, it should be integrated into an overall strategy for the reform and modernization of a customs administration. In particular, there must be careful delineation of the functions to be performed by the PSI company and those that remain the responsibility of the customs administration.

  • The comprehensive customs reform package should address (1) updating legislation; (2) harmonizing duty rates; (3) simplifying procedures supported by computerization; and (4) introducing controls based on risk and post-release controls. The reform program should include organizational issues, raising ethical standards, and developing effective human resource strategies, including training plans. The expected role of the PSI company in assisting with training and skills transfer should be clearly set out and monitored throughout the life of the contract.

  • The detailed specification of services to be provided by the PSI company is a crucial step and the following provisions should be included in a contract:

    • A fixed term of—say—two or three years. This provides enough time for the reform measures to be developed and implemented.

    • Clear definition of the goods to be inspected, including the threshold for inspections, prohibition on the splitting of shipments, and goods that are exempt (e.g., household effects, postal shipments, etc.).

    • Supply of pricing information to the customs administration, ideally through access to a database of prices.

    • Systematic reconciliation of PSI inspection reports against customs declarations and payments.

    • Measurable performance criteria that will enable the government to assess whether the contract is being fulfilled and providing value for money. It is important here to set performance standards (such as response times for completion of physical inspections and the time within which the inspection report will be produced), with specified penalties (such as withholding the PSI company’s fees) for failure to meet them.

    • Contract commencement accompanied by a publicity campaign to alert the trading community.

    • Full briefing of the customs administration concerning the contract terms and conditions and the scope of the program.

    • Clear specification of proposed methods of skills transfer from the PSI company to the customs administration.

    • Regular and timely reports from the PSI company including the number of shipments inspected, irregularities uncovered, value of uplifts,152 complaints lodged, appeals against decisions, and other benefits derived by the government (training provided to customs staff, technology transfer, and the like).

  • There is a need for full cooperation between the PSI company and the customs administration, which will happen only if there is high-level (political and administrative) support for both the PSI program and customs reform, including clearly defined roles for both organizations. In many countries, this has proved very difficult to achieve when the customs administrations feel threatened and have been given little incentive to cooperate.

  • The creation of a PSI steering group can do much to ensure that the PSI contract is properly managed and performance standards are adhered to. Any tensions that arise between the PSI company and the customs administration can be quickly resolved.

  • There should be an anticipated end date to the PSI service and an exit strategy whereby functions can be returned to the customs administration (assuming success has been achieved in implementing the customs reform program). The critical path leading to this return should be clearly mapped out and progress monitored.

  • An evaluation of the performance of the customs administration should be conducted regularly after the PSI program has been completed to determine if there is a need to reintroduce PSI for some or all of the goods that were previously covered.

Emerging trends in PSI

Over time, there have been changes in the ways some countries have made use of PSI services. A number of governments have moved away from (or are currently examining alternatives to) the traditional system of “blanket” PSI coverage and instead have turned to innovative solutions specifically aimed at key problem areas. Some of the features of recently negotiated PSI contracts include the following:

  • The customs administration determines which goods are to be inspected by the PSI company based on an assessment of risk related to, for example, the types of goods, record of the importer, origin of the goods, etc.

  • PSI contracts are not awarded to a single service provider, instead several companies are allowed to compete in the local market, thus giving importers a choice as to which company to use.

  • The PSI company creates databases and develops management information systems for the customs administration.

  • The PSI company develops risk-profiling techniques and trains customs officers in their use.

  • The PSI company monitors import trends, tax incentive schemes, and duty exemptions.

  • The PSI company provides quality assurance testing of government imports and analytical services such as laboratory testing.

  • The PSI company inspects only consignments with the highest tariff rates or with the possibility of misdescription, for example, chemicals, textiles, and high-technology products.

There is now a growing realization, even among the PSI companies, that traditional services may no longer be the most effective way to address issues and that the needs of customs administrations are changing. The strong movement toward trade liberalization and the relatively high cost of PSI against the backdrop of the general lowering of rates of duties on imports worldwide have raised questions about the usefulness of traditional PSI services. In response to these developments, PSI companies are redesigning their services to include more measures to facilitate trade and reduce the cost of customs controls. Other emerging services relate to

  • assisting customs administrations in the field of electronic commerce;

  • advising on compliance with WTO conventions;

  • developing risk-analysis systems;

  • setting methods for verifying origin determination;

  • establishing systems to control transit trade;

  • setting up post-release verification and audit units; and

  • certifying that goods meet International Standards Organization (ISO) standards.

D. Conclusion

Experience shows that contracting out services to the private sector is not a miracle cure for treating inefficient or corrupt customs services. Nevertheless, in certain circumstances it can provide the authorities time to bring about institutional improvement, if it is implemented as part of a comprehensive and well-designed customs reform program. Before any such program is implemented, however, there should be a careful analysis of the costs and benefits to establish that the money being invested will bring a reasonable return.

146

In addition to these private sector programs, bilateral donors have financed the recruitment of senior foreign customs officials to assume senior line positions (including head of the administration) in a number of countries; the U.K. development agency, for instance, has financed such programs in Malawi, Zambia, and Uganda).

147

Article 2.2b of the WTO Uruguay Round Agreement on PSI. For WTO members, the price verification rules in a PSI agreement must conform with WTO valuation rules (discussed in Chapter 6).

148

There are also examples of contracts in certain countries with much more extensive lists of goods that are not required to be inspected (e.g., government importations, exempt goods, and goods to be further manufactured).

149

The passage of a law to implement PSI and the signing of a contract for the services will not deter unscrupulous importers from bribing customs officers to allow goods into a country without the required inspection. It will also not prevent outright smuggling.

151

The program in Argentina, which began in November 1997 (and was terminated in 2001), included the appointment of independent auditors to review a sample of the PSI companies’ reports of findings.

152

That is, valuation adjustments.

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