M a r c h 2 0 1 0 IN PRACTICE n o . 9 During the 1990s international trade and government tax revenues were stagnant in Pakistan. Aver age annual GDP growth exceeded 6 percent in the 1980s, but in the 1990s it fell to less than 4 percent, and the scal decit and public debt rose sharply. In the 1990s more than 70 percent of Pakistan’s tax revenue was related to imports, through customs duties, sales taxes, and income tax withholdings. Accordingly, the new administration that came to power in 1999 (headed by then President Pervez Musharraf) targeted improvements in trade and customs as part of its reform agenda. Despite attempts at outsourcing, in the 1990s little progress was made on streamlining Pakistan’s cumbersome customs regulations. Goods clearance involved more than a dozen government agencies and usually took more than two weeks. An importer of something as simple as powdered milk was required to complete six copies of a bill of entry, which were then registered, manually checked against an import general manifest, and subject to 8–10 additional steps. At one point in the 1990s, Pakistan’s commercial judiciary had a backlog of more than 80,000 cases brought against the customs administration bytraders and manufacturers. e country was also the leading source of tari classication disputes referred to the World Customs Organization. Ineffective outsourcing In the 1990s the Pakistani government outsourced customs clearance to two Swiss inspection Reforming Customs Clearance in Pakistan Simple, fast, transparent customs clearance procedures encourage trade—and the resulting tari s and related taxes raise government revenue and stimulate economic development. After outsourcing failed to make customs more ecient or increase revenue, in 2002 Pakistan began pursuing a modern single window system for customs clearance. In 2005 the system was introduced at the port of Karachi, replacing numerous procedures with one electronic declaration and sharplycutting customs processing times. Despite dramatically reduced taris, annual customs revenue grew dramatically after the reform—though tariand customs reform have since stalled. TRADE LOGISTICS investment climate Manzoor Ahmad Dr. Manzoor Ahmad is the Director of the Food and Agriculture Organization of the United Nations Liaison Office in Geneva. He served as Pakistan’s Ambassador and Permanent Representative to the World T rade Organization from 2002 to 2008 and as Director-General of Pakistan Customs from 2000 to 2002. He also worked for 10 years (1986–96) for the World Customs Organization in Brussels. This note is one in a series developed by the T rade Logistics team of the World Bank Group’s Investment Climate Advisory Services. The series focuses on implementation aspects ofrecent trade reform initiatives and risk management issues. The Trade Logistics team advises governments in devel- oping and transition economies on improving their import, export, and risk management systems and procedures to increase the potential for trade and investment.
During the 1990s international trade andgovernment tax revenues were stagnant inPakistan. Average annual GDP growth exceeded6 percent in the 1980s, but in the 1990s it fellto less than 4 percent, and the scal decit andpublic debt rose sharply. In the 1990s more than70 percent of Pakistan’s tax revenue was relatedto imports, through customs duties, sales taxes,
and income tax withholdings. Accordingly, thenew administration that came to power in 1999(headed by then President Pervez Musharraf)targeted improvements in trade and customs aspart of its reform agenda.
Despite attempts at outsourcing, in the 1990slittle progress was made on streamliningPakistan’s cumbersome customs regulations.Goods clearance involved more than a dozengovernment agencies and usually took more
than two weeks. An importer of somethingas simple as powdered milk was required tocomplete six copies of a bill of entry, which
were then registered, manually checked againstan import general manifest, and subject to8–10 additional steps.
At one point in the 1990s, Pakistan’s commercial
judiciary had a backlog of more than 80,000 casesbrought against the customs administration by traders and manufacturers. e country was alsothe leading source of tari classication disputesreferred to the World Customs Organization.
Ineffective outsourcing
In the 1990s the Pakistani government outsourcedcustoms clearance to two Swiss inspection
companies—Cotecna in 1990–91 and SociétéGénérale de Surveillance (SGS) in 1995–97—
with the goals of: raising government revenuethrough more e ective collection of customs
tari s and related taxes, facilitating trade, andreducing corruption.
e government had predicted that outsourcingcustoms could double customs revenue, but theinspection fees charged by the outsourcers raisedclearance costs by 2–3 percent for traders, andcustoms revenue did not increase. Meanwhile,clearance times did not improve, so complaintspersisted about goods being held up at ports. Inaddition, the customs administration resented thepresence of the Swiss companies.
In 1998 a rudimentary single window system, theCustomer Service Center, was introduced. ecenter was run by a localrm under an outsourcingagreement. A small xed fee was levied on eachgoods declaration to cover expenses, and whilethe center was an improvement over the previoussystem—eliminating 8–10 steps and introducingsome automation and transparency—customsclearance remained predominantly paper-basedand cumbersome.
Customs House Karachi, which handles 60 percent
of Pakistan’s imports and exports, then became thevenue for a series of reforms, including:
1998: the Express Lane Facility wasintroduced to simplify examinationprocedures. 2000: the Electronic Assessment Systembegan assessing duties based on risk proles.
2001: a single goods declaration wasintroduced. 2002: risk-indicated selective examinationstarted assessing risks in examination
procedures. 2004: an automated clearance procedure wasintroduced.
ough these reforms simplied clearanceprocedures, most companies had to continuefollowing arcane procedures because it wasfeared that fewer customs checks would leadsome traders to try to cheat the system, resultingin lost revenue.
Broad tax reforms lead to
simpler customs
As part of a structural adjustment program
developed with the World Bank and InternationaMonetary Fund, in 2001 Pakistan’s CentraBoard of Revenue (now the Federal Board ofRevenue) began simplifying tax laws. Reformsincluded introducing self-assessment for altaxes, including customs tari s and related exciseand value added taxes. With a few exceptionsthe maximum tari was lowered from 45 percenin 1998–99 to 25 percent in 2002–03. Thenumber of tariff duty ranges was cut from 16 to4, and tariff exceptions were reduced or clarifiedFifty years’ worth of procedural notifications on
tariffs were reviewed and updated to simplifycustoms declarations.
Clearance reform also occurred as part of customadministration reforms. In early 2002 a reformteam of three mid-level customs ocers wacreated to develop an all-encompassing, fullyautomated customs system. e team visitedcustoms authorities that were using the UnitedNations Automated System for Customs Data(ASYCUDA)—designed to automate andadminister core customs processes and obtaintrade data to support government planning—bu
decided that the system did not meet all the needsof stakeholders in Pakistan. ASYCUDA was beingused in countries with small customs operationsand the version available then did not enable thelevel of integration required with stakeholderssuch as carriers, commercial banks, and regulatorsFurthermore, while the ASYCUDA software wasfree, hiring consultants to implement it wouldhave cost at least $1 million.
e reform team decided that it would be better toadopt a system customized to Pakistan’s needs, which
the team described in a 4,000-page document.
eteam’s vision was to create a customs system that was Web-enabled, paperless, automated, and alloweinterference by customs only through an automatedrisk management system.
e team wanted the system to provide real-timeintegration with other government authoritiesto create an integrated tari regime, as well as
and customs clearance (such as carriers, portsand terminals, non-vessel operating commoncarriers, freight forwarders, warehouses, customsbrokers, and banks involved in collecting
customs revenue). Finally, the new customssystem was to be compliant with internationalbest practices such as the Convention onFacilitation of International Maritime Trac,
World Customs Organization Data Model,revised Kyoto Convention, and post–September11 security requirements.
e resulting Pakistan Customs ComputerizedSystem (PaCCS) was formally launched in 2005 atthe port of Karachi.
The “80-20 rule” as
applied to managing customs
stakeholders
Relatively few government agencies are involvedin Pakistani customs (port authorities, StateBank of Pakistan, Central Statistical Oce,Ministry of Commerce), so private companiesare key stakeholders in customs reform. Pakistan’sstrategy for stakeholder management involvedusing the “Pareto principle” (also known as “thelaw of the vital few” or “80-20 rule”), which
states that for many events, 80 percent of thee ects result from 20 percent of the causes.Studies by the small reform team found that of the 24,000 registered importers and exportersin Pakistan, 200 accounted for more than 70percent of international trade. Shipping wasalso concentrated, with the top four shippinglines carrying more than 80 percent of businessthrough Pakistani customs.
Winning the early support of key players inPakistan’s private sector helped create momentum
for broad participation. Key companies thatembraced the single window included theport operator Karachi International ContainerTerminal Limited (KICTL) and AmericanPresident Lines (APL), a major shipper. KICTLhad already automated, and its managementimmediately recognized the potential of a fully automated, risk-managed customs system that
worked 24/7 with the company’s servers usingelectronic data interchange—including the
benets for KICTL’s competitive standing.Similarly, APL’s management immediately understood the savings that would result fromships not being tied up for days in the Karachi
port. Other companies, seeing the enthusiasticparticipation of KICTL and APL, then becameeager to participate.
Not all private actors were won over so easily. Someagents that served as intermediaries for tradersremained committed to arcane practices, as didsome traders that beneted from nontransparentprocedures. While these critics account for just10–15 percent of companies, and for even less of trade volume, they continue to be vocal opponentsof customs reform.
Between 2002 and 2004 a series of seminars, workshops, and other sessions were conducted with key traders and shippers to develop new procedures. Having small teams manage theentire process helped expedite reforms. Althoughit later contributed to reform stagnation, the key reform group made nearly all key decisions in thereform process. Active support and involvementfrom the top (such as the minister of nance andchair of the Federal Board of Revenue) greatly facilitated reform.
While work on PaCCS was still at the conceptualstage and mostly being done at Customs HouseKarachi, two teams of two mid-level ocers,selected by the head of customs, were stationedat the headquarters of the Federal Board of Revenue to simplify tari and customs rules. iselement of reform was independent of PaCCSand coincided with budget making exercises forscal 2002 and 2003.
Pakistan’s single customs
window in action
PaCCS relies on self-assessments by lers, usingsoftware developed by vendors selected throughthe World Bank’s international tendering process.1 Traders or their agents le declarations onlineand pay duties or taxes at any bank connectedto PaCCS or by debiting their prepaid accounts
with the government (Figure 1). PaCCS thengenerates an online receipt of the declaration,
assigns a customs reference number, and veriesthe declaration through its risk managementsystem. e customs administration makes anonline request to the ler if it requires any
clarication or additional documentation, whichcan also be provided online.
PaCCS was designed to perform customs functions without manual intervention. Physical inspectionof goods, if needed, can occur without the traderbeing present. Processing can take place in just afew seconds.
Importers le disputes electronically and canrequest reviews of any duty or other customsissue. If the problem is not resolved on rstreview, importers can request a second review and
personal hearing with a mid-level manager at theCustoms House. Although few disputes are notresolved by that point, importers can still clearcargo by ling security payments equivalent tothe amount in dispute. e trader’s funds are then
kept or released based on a nal assessment by thValuation Department.
Results of implementingthe electronic single
window system
e government and customs administration hopedthat implementing a single window would:
Lower the costs of doing business by reducingdelays and demurrages, simplifying processesand enabling just-in-time inventory. Increase government revenue through morereliable collection of customs duties andrelated taxes.
Improve cash ow for businesses by expanding access to markets through simplerprocedures and expediting rebates of exportduties to traders. Reduce corruption.
Figure 1: Processing of Goods Declarations for Imports by the Pakistan
Customs Computerized System
Requestssecondreview
Requestsreleaseagainstsecurity
Risk Management System
Agrees
Client
Disagrees
Green
Yellow
Red
Agrees
Customs
Disagrees
Declarationaccepted
Declarationrejected
Requestsreview
Seriousmis-declaration
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.
Customs processes at the port of Karachi havebeen simplied considerably since PaCCS wasimplemented. e port, once considered amongthe worst functioning in the world, is now
competitive with any in the region—includingthose in India.
Under PaCCS one simple electronic declarationhas replaced up to 26 clearance steps, 34 signatures,and 62 verications. After the system was rstintroduced, 87 percent of consignments cleared thesingle window within an hour (Figure 2), thoughthat pace has slowed considerably since somemanual checks were introduced.2 Rebates to tradersare made automatically without their having to leclaims, and refunds now take less than 2 days—compared with 90 before.
PaCCS also introduced more sophisticated risk management. It maintains a taxpayer compliancehistory for the past year, and taxpayers withhigher compliance ratings are considered lessrisky. Conducting fewer examinations based onautomated risk proling greatly reduces processingcosts for port operators, who can begin processingbefore shipments arrive, and for shipping com-panies, which no longer have to maintain ships atport while goods are cleared.
Figure 2: Clearance Times at the Port of Karachi Before and After Reform
(percent)
AfterBefore
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.
4 Less than 1 day
13 Less than 2 days
32 Less than 4 days
26 Less than 6 days
25 More than 6 days
70 Less than 5 minutes
14 Less than 30 minutes
3 Less than 1 hour
5 Less than 12 hours
1 Less than 24 hours
7 More than 24 hours
e single window system was designed to reducecorruption by eliminating contact between tradersand customs agents. Pakistani ocials estimate that90 percent of corruption has been eliminated for
goods passing through the single window systemin Karachi (which accounts for 60 percent of Pakistan’s international trade). Collusion betweentaxpayers and tax collectors is largely mitigated by physical structures that separate taxpayers fromexamination and assessment areas. In addition,biometric identication and cell phone jammersare used to ensure that customs sta remainsunaware of the identity of taxpayers.
e introduction of the single window, combined with the lowering and simplication of tari s,has made traders more cooperative and reduced
opportunities and motivations for bribery. As aresult, despite sharp cuts in tari s between 1998 and2002, tari revenue grew by more than 20 percent ayear after reform (from scal 2003 until scal 2006).
Lessons from Pakistan’s
experience
Carefully consider outsourcing In Pakistan outsourcing customs inspection andclearance raised costs for traders by 2–3 percent and
did not achieve any of the intended goals. Customsrevenue did not increase, trade was not simplied,and corruption may have intensied. Outsourcingalso created resentment among customs workers,
eroded domestic expertise, and stunted customscapacity building.
Develop the legal and regulatory framework for reformTo enable the single window, Pakistan had toenact more than a hundred changes to its Customs
Act. Most involved the switch to electronicdocumentation—for example, revisions wereneeded on provisions requiring signatures, harddocuments, and the physical presence of traders (ortheir agents) during goods clearance. Other stepsincluded introducing a single goods declaration,
implementing the World Trade Organization Agreement on Customs Valuation, and loweringthe maximum tari from 45 to 25 percent.
Aim for a critical mass of reformsbuilt on quick winsLimited reforms will likely not satisfy stakeholdersor achieve reform goals, and implementing a single
window can take several years—sometimes more.But reaching smaller goals along the way can helpbuild momentum. In Pakistan one quick wininvolved simplifying, at relatively low cost ande ort, arcane tari rates and rules accumulated over50 years. ough Pakistan had been the leadingcountry in tari classication disputes referred tothe World Customs Organization, such complaintsnearly disappeared after tari s were simplied.Pakistan also introduced some risk proling beforeintroducing the single window, which reduced thevolume of goods backlogged on docks awaitinginspection.
Adopt a countrywide plan forreform while momentum is strong e increased transparency and accountability that
accompany reform can threaten customs agentsand authorities, as well as trader intermediariesand legacy vendors. Indeed, these vested interestshave stalled further adoption of single window
customs reforms throughout Pakistan, reectingthe lack of a widespread PaCCS rollout plan fromthe outset. Today only 60 percent of Pakistan’sinternational trade (what passes through the port
of Karachi) goes through PaCCS. As a resultshipping lines and terminal operators must cateto dual processes and maintain a paper-basedsystem, which raises costs.
Maintain a stable but inclusiveteam for reform management
Achieving a single window requires a dedicatedmanagement team working for a sustained periodis team must have ownership of the reformprocess and be motivated to overcome obstaclesPakistan’s reform management team may have beentoo small, possibly fostering resentment among
trade and customs colleagues. Reform managementeams should include as many stakeholders apossible to help minimize criticism after reformsand to sustain reform momentum as managerspolicymakers, and administrations change.
Use private sector champions and market forces to catalyze reforms where possiblePakistani reformers recognized early that internationatrade was highly concentrated among traders, shippersand port operators. Winning early support from keycompanies drove momentum for participation in
the single window because other companies becameeager to maintain competitiveness—providing alesson in how market forces can be harnessed toencourage reforms.
Measure the results of reformReform outcomes should be measured andbenchmarked where possible. In Pakistan the keyindicators of customs reform were the averagetime to clear goods and the number of court casesreferrals to the World Customs Organization, anddays to refund trader duty drawbacks. Such dataare often not available before an automated system
is adopted, so determining reform results mayrequire comparing anecdotes or surveys of tradersand other stakeholders with hard data once thenew system is in place.
reflect the views of the ExecutiveDirectors of the World Bank or the
governments they represent.
About the Investment
Climate Advisory
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helps governments implement
reforms to improve their business
environments and encourage and
retain investment, thus fostering
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job creation. Funding is provided b
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Conclusion
Many governments share the same basic goals forcustoms reform: facilitating trade while reducing
corruption and increasing revenue from tari sand customs-related taxes. Achieving these goalsis more likely when reforms simplify procedures,clarify tari structures, and minimize humaninteractions. Governments seeking a quick x sometimes outsource customs functions toprivate companies—but this should be done withcaution. Outsourcing was ine ective in Pakistan,
where streamlined customs procedures and highercustoms revenue were achieved only when asingle window system for trade declarations wasimplemented in 2005.
Ideally, implementation of a single window shouldoccur in the context of broader trade reforms. Tari structures must be simplied, and duties should below enough to encourage payment of tari s andrelated taxes. A single window system must alsoallow electronic exchanges of documents and besupported by a legal and regulatory framework based on international standards.
A properly implemented single window systemcan deliver signicant benets. During 2002–07Pakistan’s single window system eliminated numerous
procedures, and customs revenue soared becausebribes were replaced by legitimate duties and relatedtaxes at the port of Karachi.
But powerful vested interests can impede reform,especially as government administrations change.us reformers should act aggressively, whilereform momentum is strong, and reform e ortsshould include as many stakeholders as possible tofoster lasting support.
Since PaCCS was successfully implemented, therehas been some rollback of automation in favor of
more manual checking, and new management isconducting an audit to inform plans for furthersystem rollout. For more information, contact UmaSubramanian ([email protected]).
Endnotes
1 ese vendors include Microsoft, PWCLogistics of Kuwait (now Agility), and
Accountancy Outsourcing Systems of Pakistan.
2 Since the introduction of these checks, only one-third of consignments are now cleared
