CHAPTER THREE

CUSTOMS REFORM AND

MODERNIZATION
The Current Challenges of Customs Administrations
• Some of the challenges facing Customs
Administrations in many developing countries are:
1. More sophisticated and demanding clients, for
example, traders who have invested significantly
in modern logistics, inventory control and
technology;
2. Greater policy and procedural requirements
associated with international commitments;
3.Proliferation of regional and bilateral trade
agreements, which significantly increase the
complexity of administering border
formalities and controls;
4. Heightened security concerns and demands to
respond to the threats posed by international
terrorism and transnational organized crime.
5. There is greater pressure on Customs to implement
new security protocols - (e.g. compulsory scanning
of all containers- before entering US Ports); Such
security measures can increase trade costs by
requiring costly changes in Customs practices and
new investment in technology and infrastructure;
6. Revenue fraud.
• For many countries, achieving efficiency and
transparency in Customs Operations remains a
formidable challenge;
• In 2002, over US$6.3 trillion of goods crossed
international borders;
• Customs services have often had to cope with
these growing trade volumes without any
commensurate increase in staff or resources;
• In addition, Customs Administrations continue
to face changes to their operating environment,
which emphasize the need to adjust and
modernize their processes;
• For example, the Organization for Economic Co-
operation and Development (OECD) has suggested
that ‘border-related costs such as the expense of
supplying the required Customs documents or the
surcharges arising from procedural delays when
importing goods could total as much as 15% of the
goods being traded in some cases’ (OECD 2003);
• The World Bank and other donor agencies such as the
Asian Development Bank and the International
Monetary Fund recognize that a poorly performing
Customs Administration can have an adverse effect
on a country’s economic development;
• The foreword of the World Bank’s Customs
Modernization Handbook sets out its rationale for the
need to Reform and Modernize Customs
Administrations:
• The experiences of recent decades have shown that
the countries that have most successfully integrated
into the world economy also have tended to record
the highest growth rates;
• This result should not come as a surprise;
• Integration brings with it improved allocation of
resources, intensified competition, and pressures to
raise productivity, as well as exposure to new
technologies, designs, and products;
• With world trade growth expanding more than twice
as rapidly as world gross domestic product (GDP)
over the past decade, the potential rewards from
participating in world trade are considerable;
• Increased trade openness, through lower levels of
protection in developed and developing countries, has
contributed to this outcome;
• Nevertheless, it is widely acknowledged that an open
trade regime will only foster trade integration when a
range of complementary policies is in place;
• One of the most important complementary policies is
to put in place a well functioning Customs
Administration that provides traders with transparent,
predictable, and speedy clearance of goods;
• Indeed, a poorly functioning Customs
Administration can effectively negate the
improvements that have been made in other
trade-related areas;
• In this highly competitive world, the quality of
logistics can have a major bearing on a firm’s
decisions about which country to locate in, which
suppliers to buy from, and which consumer
markets to enter;
• High logistics costs and more particularly low
levels of service are a barrier to trade and foreign
direct investment and thus to economic growth;
• Countries with higher overall logistics costs are more
likely to miss the opportunities of globalization;
• As the World Banks’ Logistic Performance Index
(LPI) report 2007 puts it: “Countries that top the LPI
ranking are typically key players in the logistics
industry, while those at the bottom are often trapped
in a vicious circle of overregulation, poor quality
services, and underinvestment”;
• A few facts from the same report include that: the
Customs Clearance of sea cargo takes on average 2.1
days in developed countries, and 4.8 days in East
Asia and the Pacific;
• However, traders in Latin America and Caribbean
must wait up to 9 days, and those in Africa and South
Asia up to 10 days;
• Obstacles to moving goods across borders
quickly, reliably and cheaply pose one of main
development challenges;
• In most of the developing countries, the border
control and procedures have not kept pace with
the changing trading environment;
• It can be argued that these countries’ border
agencies practices and procedures are outdated
and incompatible with modern trading
requirements of the global economy;
• Some of the limitations that characterize
many Customs Regimes in developing
countries include:
1. Excessive data and documentation
requirements;
2. Lack of transparency and use of pre-
ruling systems as well as unclear and
unspecified import and export
requirements;
3. Inadequate procedures and a lack of
audit-based controls and risk assessment
techniques;
4. High degree of unpredictability and lack of
automation and insignificant use of information-
technology;
5. Lack of modernization of, and co-operation
among, Customs and other Governmental
Agencies;
6. Inadequate grasp of Customs Valuation
(Despite receiving substantial technical
assistance, many developing countries have not
succeeded in adequately implementing the
WTO’s transaction-based valuation standard.)
 Customs Reform and Modernization
• As many Customs Administrations in developing
countries are struggling to meet the continually
increasing demands and priorities placed on them,
they urgently need to squeeze reform and
modernization;
• The four identified priorities to be pursued by
developing countries in collaboration with
development partners include:
1. Firstly, Simplification and Harmonization of
Customs Procedures must be pursued
constantly as they are at the heart of Trade
Facilitation;
2. Secondly, the primary focus of Customs’ attention
should shift from physical control over
consignments at the time of importation to Post
Release Verification using Audit-Based Controls;
3. Thirdly, in landlocked countries, there is the need to
establish Integrated Border Management or One-
Stop Border Posts (OSBP); and
4. Fourthly, strengthening of human resources, which
is perhaps the single most important issue that
affects the efficiency and effectiveness of Customs;
This also relates to the critical issues of governance
and integrity.
 WCO’s Influence on Customs Reform and
Modernization
• The WCO has initiated a host of programs that focus
on assisting member administrations to reform and
modernize themselves to keep side by side with the
trends in the international trading arena;
• The WCO view is that in the absence of an efficient
and effective National Customs Administration,
Governments will not be able to meet their policy
objectives in respect of revenue collection, trade
facilitation, trade statistics, and protection of society;
• The World Customs Organization has been
doing a valuable work in enhancing the
capacity of member states in areas such as
those relating to:
– the development of global standards;
– the simplification and harmonization of
Customs procedures;
– trade supply chain security; and
– the facilitation of international trade,
• For businesses, Customs-related costs can be
direct, such as expenses relating to supplying
information and documents or indirect
expenses, such as those arising from
procedural delays, lost business opportunities
and lack of predictability because of unclear or
complicated Customs-related laws;
• For Governments, the costs include poor
revenue collection and increased smuggling.
• Inefficient Customs Administrations can lead
to reduced export competitiveness and less
foreign direct investment;
• On the other hand, countries that pursue
reform and modernization, generally achieve
improvements in revenue collection and
international trade compliance and
administrative efficiency, which provide
benefits to both Governments and the
international trading community;
• In June 1999 the Council of the WCO
approved the revised International Convention
on the Simplification and Harmonization of
Customs Procedures -the Revised Kyoto
Convention;
• The Revised Kyoto Convention has been
developed in the face of mounting pressure
from the international trading community to
minimize the level of Customs intervention in
cargo movements and to maximize the level of
trade facilitation;
• According to the WCO, it represents the
international blueprint for prudent, innovative
Customs Management, and is designed to
maintain the relevance of Customs Procedures
at a time when technological developments are
revolutionizing the world of international trade
and travel;
• Essentially, the Revised Kyoto Convention is
intended to promote the achievement of a
highly facilitative international travel and
trading environment while maintaining
appropriate levels of regulatory control across
all member administrations;
• The development of the Revised Kyoto
Convention has incorporated important
concepts of contemporary compliance
management;
• These include:
– the application of new technology;
– the implementation of new philosophies on
Customs control; and
– the willingness of private sector partners to
engage with Customs administrations in mutually
beneficial alliances.
• Central to the new governing principles of the
Revised Kyoto Convention is a required commitment
by Customs Administrations to provide transparency
and predictability for all those involved in aspects of
international trade;
• In addition, administrations are required to:
– Commit to adopt the use of risk management
techniques;
– Co-operate with other relevant authorities and
trade communities;
– Maximize the use of information technology;
and
– Implement appropriate international standards.
• It is designed to provide the underlying
conditions and instruments to help the
contracting parties to achieve a Modern
Customs Administration and to make a major
contribution to the facilitation of international
trade by:
1. Meeting the needs of both international
trade and Customs Administrations for
Facilitation, Simplification and
Harmonization of Customs Procedures and
Practices;
2. Eliminating divergence between the Customs
procedures and practices of contracting parties that
can hamper international trade and other international
exchanges;
3. Ensuring appropriate standards of Customs control;
4. Enabling Customs administrations to respond to major
changes in business and administrative methods and
techniques;
5. Ensuring that the core principles for simplification and
Harmonization are made obligatory on contracting
parties;
6. Providing Customs administrations with efficient
procedures, supported by appropriate and effective
control methods.
 WCO Initiatives for Customs Modernization –
Capacity Building
• For the WCO capacity building which, it sees as
“Modernization” is a priority activity in its agenda for
member Administrations;
• The Director, WCO Capacity Building Directorate
says that (WCO Capacity Building webpage):
– “Capacity Building is modernization. It is about
building sustainable institutional capacity to
manage change over time. Political will,
ownership and leadership are essential key
mechanisms needed for successful Capacity
Building. Capacity Building is very concrete and
it is about delivering results”.
• In keeping with the strategy and in order to
assist and ensure the successful implementation
of the strategy, the WCO has developed and put
in place a number of policies, tools and services
and is in the process of developing more;
• Some of the key initiatives are:
– The Customs Capacity Building Diagnostic
Framework;
– The Capacity Building Development
Compendium; and
– The PICARD Development Program.
 Customs Capacity Building Diagnostic
Framework
• From a Customs Modernization perspective, the
Customs Capacity Building Diagnostic Framework
could be seen as one of the most important
implementation tools;
• The WCO says that the Framework has been prepared
to:
– Provide a standardized diagnostic tool and project
design and implementation guide to improve the
quality of capacity building initiatives in the
Customs administrations of developing countries;
– Promote the effective implementation of WCO,
WTO and other trade and Customs-related
Conventions, instruments, best practice approaches
and useful reference materials that can assist in the
development of capacity building solutions that are
appropriate to the individual needs and operating
environments of Customs administrations; and
– Equip Senior Customs Officials with the detailed
information necessary to more fully engage and lead
discussions/negotiations with donor agencies and
other Government Officials.
 The Capacity Building Development Compendium
• The WCO has published the Capacity Building
Development Compendium as an implementation tool
under the second phase of the Columbus Programme;
• It is a useful guide and provides guidance on essential
organizational management topics that encompass
strategic management, change management, project
management and benchmarking;
• The Compendium has been put together in order to
codify the documentary tools as a manual for
reference purposes during the implementation process
of a modernization program.
 WCO PICARD Program
• After the advent of the WTO trade facilitation
agenda and the developments in the
international trade arena, the focus on Customs
as a profession gathered momentum;
• The complexity of the role of Customs created
a situation where Customs employees had to
be knowledgeable in the application of various
pieces of legislations emanating from
obligations and also appropriately skilled with
a skill set that could strike a balance between
facilitation and control;
• In this backdrop, the wider community began
to see Customs as a specialized profession;
• The Partnerships in Customs Academic
Research and Development (PICARD) can be
seen as a direct result of the transformation of
Customs Work into a specialized profession;
• WCO sees PICARD as a key instrument or
guideline for its members in their
modernization efforts.
 The WTO’s Influence on Customs Reform and
Modernization
• The World Trade Organization (WTO)
focused on trade facilitation at the WTO
Ministerial Conference held in Singapore in
December 1996;
• At that Conference, three new working groups
were established:
– trade and investment;
– competition policy, and
– transparency in government procurement.
• In addition, the Ministerial Delegation added
trade facilitation to the WTO agenda;
• The Conference instructed the WTO Council
for ‘Trade in Goods’ to begin analysis and
exploratory work on the simplification of trade
procedures to determine the extent of the WTO
Rules in this area;
• Following the Singapore meeting, a WTO
Trade Facilitation Symposium was held in
Geneva, Switzerland in March 1998 where the
following were found to be directly related to
trade facilitation:
– Article V on Freedom of Transit;
– Article VII on Valuation for Customs
Purposes and Agreement on Implementation
of Article VII of the GATT 1994;
– Article VIII on Fees and Formalities
connected with Importation and
Exportation;
– Agreement on Import Licensing Procedures;
– Article IX on Marks of origin;
– Article X on Publication and Administration of Trade
Regulations;
– Agreement on Pre-shipment Inspection;
– Agreement on Rules of Origin;
– Agreement on Technical Barriers to Trade;
– Agreement on the Application of Sanitary and
Phytosanitary Measures;
– General Agreement on Trade in Services (GATS);
and
– Agreement on Trade-Related Aspects of Intellectual
Property Rights (TRIPS).
The Ten Strategic Building Blocks of Customs
in the 21st Century
• In June 2008, the WCO Consulate drafted “Customs
in the 21st Century, Enhancing Growth and
Development through Trade Facilitation and Border
Security”;

• The document was the result of an understanding

with leaders of the World’s Customs Administrations
that a new strategic perspective was needed in the
21st century;
• In the 21st century, the WCO views the
accepted mission of Customs to “develop and
implement an integrated set of policies and
procedures that ensure increased safety and
security, as well as effective trade facilitation
and revenue collection”;

• This new strategic direction, as outlined by the

WCO, has ten strategic building blocks:
1. Globally Networked Customs;
2. Coordinated Border Management;
3. Intelligence-Driven Risk Management;
4. Customs-Trade Partnership;
5. Implementation of Modern Working Methods,
Procedures and Techniques
6. Enabling Technology and Tools;
7. Enabling Powers;
8. A Professional, Knowledge-Based Service Culture;
9. Capacity Building; and
10. Integrity.
 Implementation of a Customs
Modernization Strategy
• Implementing a customs modernization
strategy requires authority, dedication,
progress monitoring, and adjustments to
the strategy to take account of progress
achieved as well as lessons learned.
• These elements are not different from
those that form part of the implementation
process of any other reform.
• A few brief suggestions are below.
 Leadership
• Dedicated leadership will help to ensure
that the reform remains on the agenda of
the various policymakers inside and
outside customs.
• With the substantial workload and diverse
emergencies that customs managers often
have to deal with, it may be best to assign
the management of the reform program to
a dedicated customs official, assisted by a
small team of experts.
• However, it is always the Director General
of Customs who should take the lead, with
strong support from the government.
• Foreign technical staff could become part
of this reform management team, but
should not take a leadership role except in
special circumstances.
• Their role should be to transfer knowledge,
not to implement change.
 Flexible Implementation
• The implementation plan is the key tool for
monitoring the reform process.
• It will have a detailed timeline for implementation
of the proposed actions and will identify
individuals to be held accountable for keeping to
this timeline.
• Keeping the program on track requires the
various steps to be monitored, implementation
problems to be detected early on, and corrective
actions taken as necessary.
• Progress should be regularly communicated to
the head of customs and to the Cabinet.
• Flexibility will be required, because plans never
work as scheduled and the unforeseen must be
dealt with swiftly.
• The management team will need to be given
sufficient flexibility to reallocate resources or to
have rapid access to managers that have the
authority to do so.
• Effectiveness indicators and efficiency criteria
play a crucial role in this course of action.
 Involvement of Stakeholders

• Much is to be gained by keeping in close

communication with all stakeholders to ensure
that the reforms respond to their initial objectives
and do not become part of the routine work of
customs.
• Periodic and well-prepared assessment
meetings that are open to all stakeholders
should take place to inform stakeholders of
progress made, problems encountered, and
measures proposed to address failure and
changed circumstances.
• A periodic stakeholder survey should be
conducted to assess stakeholders’ satisfaction
with the results of the reforms.
• This is the approach utilized by Morocco, which
annually undertakes a survey, publishes its
results, and reports on the measures that
customs management promises to undertake to
address issues.