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In May 2000 the Government of the Russian Federation approached

By Juanita Carroll,2014-05-13 22:13
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In May 2000 the Government of the Russian Federation approached

    The Reform of Russia

    Customs

    Carlos D. C. Ferreira Background

    In May 2000 the Government of the Russian Federation approached the Bank for assistance in

    modernizing its Customs Service. The initial request was very much automation oriented

    focusing on the “Development of a Unified Computerized Information System of the Customs

    Authorities of the Russian Federation (EAIS GTK)”. Initial discussions with Customs confirmed that the reform approach was rooted in the use of information technology to promote the

    introduction of better Customs practices. The box below quotes the project scope as defined by

    Customs as part of this initial request.

Project Scope: The aim of this project is to achieve a quality upgrade in the computerization of the activities of the customs authorities of the Russian Federation, establishment of single information space and creation of

    conditions to carry out modernization of other components of the customs service. Main areas of project implementation would be as follows:

     ? Provision of prompt information interaction between the RF State Customs Committee (SCC) and other

    ministries and agencies of the Russian Federation;

     ? Provision of up-to-date computer equipment, data protection means, communications and telecommunications means;

     ? Introduction in the operation of the customs authorities of up-to-date information technologies for customs

    clearance and control based on the electronic flow of documents and provisions of identity of the customs procedures in Russia to those in the developed countries; ? Introduction of new forms and methods for building and maintaining statistical data on foreign trade carried out by the Russian Federation or its regions; ? Training the customs authorities personnel in the forms and methods for using new technologies.

    Overall, the project implementation would significantly improve the SCC operating efficiency, facilitate,

    accelerate, formalize and increase transparency of the customs clearance and control procedures, and considerably

    improve collection of customs payments.

     Project Cost: US$165 million.

Following the Russian Government request the Bank sought a strategic alliance with the IMF for

    the preparation phase of the project in general and in carrying out a diagnostic of Customs and its

    operations, particularly during the project identification phase. The Bank also sought to

    cooperate with the World Customs Organization in this effort, particularly to ensure that the

    project design would meet the WCO’s recommended criteria for modernization programs.

    Agreement on the terms of reference and time for the diagnostic mission proved to be a

    significant challenge as the Bank insisted on the need to expand the scope of the intervention,

    while Customs resisted the international intrusion on its business.

    In December 2000 the SCC issued its “Targeted Program of Development of the Customs Service

    of the Russian Federation for 2001-2003,” which provided a much more strategic concept of

     Chapter on the Reform of Russia Customs

    modernization based on (a) achieving expeditious customs clearance; (b) bringing transparency and predictability to Customs activities; and (c) enabling a partnership attitude in relationships between the Customs and the trading community, including the creation of efficient dispute handling procedures. The Bank accepted to use this program as an initial basis for project design. But it was not until December 2001, some 18 months after the Government’s request for the

    project, that an agreement was reached on the terms of reference for the identification mission, which was launched the following month. Following the identification mission, through project preparation and implementation there was a deep transformation in the relationship between Customs and the Bank to one of trust and efficient progress toward the common objectives of the project.

    One year later the project was being negotiated. Project implementation commenced in earnest after the official project launch in September 2003, with strong political commitment of the SCC and the Government. The project is being executed under the experienced leadership of Leonid Lozbenko, First-Deputy Chairman of the SCC and ex-Deputy Secretary General of the WCO. Strategic Context

    World Bank Country Assistance Strategy for the Russian Federation, FY 2003-2005 notes that over the period FY 1999-2002, Russia made remarkable progress in moving out of crisis and towards sustainable development and poverty reduction, but in spite of the progress formidable challenges remained. One of the key challenges for the Government is to achieve the high growth rates announced by President Putin when exports are largely commodity based, investment remains overly concentrated in a few sectors, and small and medium enterprise (SME) growth has been anemic. In this context reforming Customs became one of the priorities to meet the Government’s strategic goals in the areas of improving the business environment and

    strengthening public sector management.

    A major challenge was the insufficient quality of public administration at federal, regional, and municipal levels. The Government has recognized that Russia needs an effective, merit-based and corruption-resistant public administration if the country is to be able to compete internationally and create an investment climate capable of attracting Russian and international capital. Fortunately, the staff of Customs was of a higher caliber and compensation, including incentives, at Customs was more developed than in other areas of Government. Unfortunately, a civil service reform planned to fold Customs officers into the civil service. Business surveys suggested that corruption remained deeply embedded, with expenditures on corruption by businesses and households at the same order of magnitude as tax revenues. The Bank planned to assist the government with a strong public sector reform program consisting of operations to improve institutional capacity of the Treasury, Tax, and Customs administrations. Key Customs Issues and Agreed Strategy

    At the time of project preparation it was generally accepted that Russian Customs was in need of a major shift in the way it carried out its mandate, a shift from a mindset of protection of the domestic economy from international exploitation to one of facilitating international commerce and promoting private sector development. It was also generally accepted that there was a need to improve the integrity and professional skills of customs officers and to substantially reduce the opportunities for rent seeking by officers and by traders.

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     Chapter on the Reform of Russia Customs

    A critical factor in the design of the project was its dimensions: the size of the country and of the Customs organization: over 60,000 staff operating 24 hours a day, 7 days a week, over 11 time zones. Customs was organized into a headquarters, 7 regional customs directorates, 141 customs offices processing goods and vehicles, 670 customs posts, of which 416 are border checkpoints and 216 are inside posts.

    By law, customs officers perform their duties based on the same legislation, regulation, and instructions. Nevertheless, actual interpretation and implementation of these instruments vary widely throughout the territory. Ensuring that officers are uniformly trained and kept up-to-date with changes in the regulatory environment was identified as a major challenge. The lack of an efficient, fair, and impartial means for dispute resolution, the presence of a large gray economy trying to take advantage of systemic weaknesses, and the high suspicion of corruption clouding customs officer’s activities, promoted an environment unfriendly for business development.

    At the time of project development the legal and regulatory environment for Customs operations was identified as an area where significant improvements were required. To this end, the Bank required and received assurances from the Government that a new and significantly improved Customs Code would be introduced to underpin the project. This new Customs Code became effective on January 1, 2004 at the very beginning of project implementation. This new code was developed with strong participation and support of the private sector. It attempted to make procedures for customs clearance simpler, clearer, and more transparent, and to reduce opportunities for traders and customs officers to arbitrarily interpret customs legislation and transaction documentation. Under the project the Code would be reviewed for consistency with international standards and for further improvement.

    In the area of customs operations three key concepts were targeted for improvement. First, to introduce risk management as an overarching concept that would provide the basis to improve the speed of all operations. Second, to employ selectivity and automation in the clearance system to reduce substantially the level of physical inspections. Third, to strengthen post-release control, and control over transit operations to improve compliance. It is important to note here that at the time of project design, while most consignments and cargo were subject to physical inspection, it resulted in very little fraud detection. This in spite of the large size of the informal economy fed, at least partially, through customs. Improvements in these areas should contribute both to trade facilitation and revenue improvements.

    To limit the size of the investment and implementation time Customs and the Bank agreed to limit the investment in infrastructure to the central and northeast regions, while institutional investment would be deployed countrywide. Government budget, at a pace convenient for the country, would be used to ensure countrywide uniformity in the long-run.

    Project Objectives and Goals

    After the initial difficulties in defining the scope of the diagnostic mission and ensuring that the scope of the project was completely open for discussion after the diagnostic, Customs and the Bank embarked on an open and fruitful cooperation to define the strategic development objectives of the project and how they would be achieved. The project preparation team included World Bank and IMF staff, and was positively impressed by the excellence of the collaboration with Russia Customs technical staff and the expedient access to statistical data on the SCC operations.

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    It was agreed that the project would support the SCC's implementation of the three-year Targeted Program for the development of Customs, and that the program would be augmented as needed to ensure the development objectives of the project would be accomplished. As a result, the SCC and the project team were able to agree on the project concept and the necessary investments in less than one year, in spite of the complexity of the design and the holistic approach adopted for the operation.

    Following the agreement on the project and its investments Customs prepared a new investment program to complement the investments under the project and to further deploy the results of the project throughout the country, the Targeted Program on Development of Customs Service in the Russian Federation in 2004-2008.

    Project development objective

    The project development objective is to reform and modernize the Russian Customs administration, with a view to (a) promote internationally acceptable practices for processing of international trade flows by Customs, so as to further integrate the country into the world trading community, improve the investment climate and secure the benefits from foreign and domestic investments in the economy; and (b) increase taxpayer compliance with the Customs Code and ensure uniformity in its application, to support macro-economic stability and increase transparency, timely transfer of collected revenues to the Federal budget, and equity and predictability in customs operations.

    Project Goals

    The project would promote internationally acceptable practices for processing of international

    trade flows by Customs by: (a) adopting Customs standards that facilitate trade through the

    implementation of procedures to expedite the processing of low-risk transactions while improving the detection and prevention of contraband; (b) facilitating international commerce and accession of the Russian Federation to the World Trade Organization (WTO); (c) fostering a stronger partnership between Customs and participants of foreign economic activities; (d) transforming the mindset of SCC officers towards the trade activity from one of protection of the domestic economy to one of facilitating legitimate international commerce; (e) implementing improved business processes and automated systems designed to increase efficiency and reduce discretion and opportunities for rent-seeking behavior; (f) modernizing the Information Technology infrastructure of the SCC, and adopting standardized, highly automated operational procedures, including electronic filing of declarations, which would reduce the level of discretion by customs officers, and e-Government facilities for information and interaction with the trade community. The project would increase taxpayer compliance with the Customs Code and ensure uniformity

    in its application by: (a) adopting standardized and automated procedures countrywide to

    facilitate voluntary compliance and reduce compliance costs; (b) improving the knowledge and training of participants in foreign economic activities about the customs laws and procedures; (c) improving transparency, uniformity and predictability of Customs actions; (d) implementing efficient dispute resolution procedures; (e) improving enforcement capacity against smugglers and tax evaders through improved risk management, intelligence, investigation, improving efficiency of inspection activities, including post-release audit of goods and vehicles; (f) further developing the organization of the SCC and its management systems to increase overall organizational effectiveness; (g) enhancing professional integrity and skills of SCC officers; and (h) improving the conditions for countrywide training and retraining of SCC officers.

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    Project Design Philosophy

    The project design philosophy is one of promoting private sector development to assist the

    government in achieving its ambitious GDP growth rate objectives.

    Most of the goals listed above against the two project development objectives seek to reduce the

    administrative cost of foreign trade transactions and to increase the cost, speed, and predictability

    of Customs operations. If the goals are achieved Customs will change into an agency that

    cooperates with the private sector, becomes nimble and responsive to legitimate commerce trade,

    becomes more predictable, and less corrupt. This in turn should allow private sector firms

    operating in the formal sector to become more competitive, nationally and internationally, making

    the country more attractive to foreign investment and to local entrepreneurs, thus reducing local

    capital flight to abroad.

    On the other hand, these same project goals should make trade more costly for unreliable traders.

    Their documentation would be subject to additional scrutiny, their transactions would be subject

    to much more intensive physical inspections by better trained inspectors, and then to post-release

    control inspections that would be enhanced to ensure the integrity of the system.

    If one accepts that there is a current economic balance between the formal and informal sectors,

    the project would attempt to increase the competitiveness of the formal sector operators by

    reducing their trade costs and, at the same time, increase the trade costs of those operating in the

    informal sector by increasing their direct costs and increasing the probability irregular

    transactions would be identified and either confiscated or subject to additional interest and

    penalties.

     Expedite low risk Full physical inspection

     Increased partnership Improved risk assessment

     Trade facilitation mindset Improved detection training

     Highly efficient and automated Reduced corruption

     Better dispute resolution Post-release control

     Uniform application of code No rule interpretation

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    The project intends to increase compliance levels by making it a better economic choice for all

    traders to comply with the laws and regulations of the country: the legitimate operators to gain

    trade facilitation advantages awarded to low-risk transactions, a significant part of which is the

    risk level of the trader; and the current gray-market operators to avoid the excessive interest and

    penalties costs that might make them non-competitive in the market.

    Moreover, the project team expects a second order economic gain stemming from improved price

    signals in the economy because increased compliance would reduce price distortions.

    The team carried out both an economic and a financial analysis of the investment, which are

    detailed in the Project Appraisal Document. Both analyses yielded evidence that the project

    would generate significant benefits and ensure very high return on investment. The economic

    analysis considered the planned efficiency gains from:

    ? Speeding up customs clearance procedures;

    ? Reducing the cost of customs brokers services; and

    ? Savings from lower WTO/GATT-compliant customs fees.

    The financial analysis considered the following key planned fiscal benefits and costs:

    ? Ten percent increase in the compliance level of foreign trade participants;

    ? Improvement in enforcement efficiency to three percent

    ? Improved control over export-based VAT refund claims;

    ? Improved application of temporary import (export) customs regulations;

    ? Reduced budget revenues due to WTO/GATT-compliant customs fees; and

    ? Increased equipment maintenance and replacement costs stemming from the project.

    Another crucial issue considered in project design was the need to ensure that the project would

    help the government fight corruption. World Bank management identified early on the high

    reputational risk of the project and asked the project team to mitigate this risk to the extent

    possible. Accordingly, the Project’s PAD contains a special annex describing the strategy

    adopted in the project to promote integrity. Surveys to be conducted periodically during project

    implementation would validate the achievement of results. The table below summarizes the

    strategy.

    Measures Addressing Opportunity Measures Addressing Motive

    ??Elite ethos and esprit de corps ??Clarified valuation procedures

    ??Positive career development ??Computerization

    ??Incentives for high performance ??Inspection based on risk analysis

    ??Stronger supervision and controls ??Arms-length transactions

    ??Sanctions for corruption ??Reduction in discretionary authority

    ??Stakeholder surveys ??Transparent clearance requirements

    ??Rotation of officers

    ??Functional organization

    ??Internal anti-corruption strategy and audit unit

    ??Stakeholder surveys

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    Targeted Performance Improvements

    The Bank recognized early on that this was a very high-risk operation involving a substantial

    investment by the Russia Federation. In this context it was considered critical that clear

    indicators were agreed upon that would demonstrate whether the project had achieves its intended

    objectives. It is important to note here that these indicators are not intended for the used of

    Customs management to manage the business of Customs, and neither are they indicators that

    might be used by the Government to measure the efficiency of the Customs agency; they are

    simply indicators that the project is achieving its intended objectives. Among the many project

    studies, there is a specific study to assist Customs in the development of indicators that can be

    used by management to manage the service, and indicators that can be used by management to

    report to the Government on the performance of the Customs Service.

    The following are the key indicators to be used to measure project performance. They will be

    monitored at designated project sites:

    ? Reduce the number of import declarations selected for physical inspection to no more

    than 23% by the end of 2006, and no more than 10% by the end of the project.

    ? Reduce the number of non-energy export declarations selected for physical inspection to

    no more than 12% by the end of 2006, and no more than 8% by the end of the project.

    ? Reduce the average import clearance time, (from the entry of a truck into the import

    clearance terminal to the release of goods from Customs control) by 25%, by the end of

    2006, and 50% by the end of the project.

    ? Reduce the average customs clearance time, (between lodging of the customs declaration

    to the issue of the release note) by 25% by the end of 2006, and 50% by the end of the

    project.

    ? Increase enforced compliance in the collection of taxes and duties (ratio of additional

    revenues to total revenue collected by the SCC) to 1.5%, by the end of 2006, and to 3%,

    by the end of the project.

    ? Reduce by 5% the compliance gap measured by the following ratio, by end of 2006, and

    by 10%, by the end of the project.

     [Value of the EU exports to Russia as reported by the EU) - (Value of imports from the

     EU recorded by SCC)]/ (Value of the EU exports to Russia as reported by the EU)

    ? Improve perceptions of traders and other stakeholders regarding the quality of service,

    responsiveness to complaints, and integrity of customs administration as indicated by

    periodic surveys.

    Project Structure

    The project was designed to change substantially how customs administration was carried out.

    Implementation is anchored on a comprehensive project management structure that provides the

    necessary political, policy, and technical support during the life of the project, attempting to make

    it resistant to government changes over the six years of implementation. Fundamental to the

    project management strategy is the presence of significant private sector representation steering

    and providing technical input to Customs. The concept consists of:

    ? At the policy level, a “Consultative Council”, chaired by SCC Chairman and comprising

    15 representatives from SCC and other Government stakeholders and 15 representatives

    of the business community.

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    ? At the executive level, a “Managing Council”, chaired by the SCC First Deputy

    Chairman and responsible management guidance and oversight. It would include

    representatives of the ministries of economy and finances, Chamber of Commerce, and

    Customs Brokers Association.

    ? Actual project execution is the responsibility of the “Project Management Directorate”,

    including procurement, disbursement, financial management, and reporting activities.

    ? Technical support to the project is provided by an “Expert Council”, comprising

    representatives of all key SCC departments. It is organized into three thematic groups:

    Institutional Development; Operations Development, and Information Technology.

    Project activities were structured to ensure that the project dealt with all aspects of the Customs

    Service that needed to be improved to ensure that the development objectives of the project were

    achieved. This holistic approach led the team to plan, in addition to the traditional operations of

    Customs, substantial investments in the review of fiscal policy, organizational development,

    management systems, and human resources management that are not usual for a Customs project.

    Also, because of the complexity and geographic spread of the reform it was felt that a formal

    project management component needed to be added to ensure changes were managed

    professionally. Finally, it was considered important that project components created a

    segmentation that would permit the SCC to absorb the modernization effort into its organization

    more or less naturally. As a result, the project became composed of ten components as follows:

    Component 1 - Customs Control and Clearance: This component would develop a strategy to

    introduce selectivity in customs control based on risk analysis and management. It would also

    strengthen the current post-clearance control and audit, design and implement a new transit

    system. Finally, to increase compliance, uniformity of application of the customs legislation and

    transparency of customs actions, it would implement an improved level of cooperation with key

    stakeholders: the tax authorities, other executive authorities, and the trading community.

    Component 2 - Trade Facilitation: This component would development a comprehensive trade facilitation program. Salient features are the development of new mechanisms of cooperation

    between the customs administration and trade community; new procedures for declaration and

    processing of documents, simplification of documentation, implementation of e-filing for customs

    declarations, and new facilities for the payment of duties and taxes. Internally, staff would be

    trained to recognize the advantages of trade facilitation to the national economy, and of upgrading

    customs procedures to international standards. Component 3 - Fiscal Policy: This component would seek to improve the SCC capacity to assist the government in its fiscal policy planning particularly regarding customs duties, customs

    exemptions and non-tariff customs policies, and in establishing a WTO/GATT-compliant system

    of customs fees.

    Component 4 - Improve Legal Framework for Customs Activities: This component would

    assist the SCC in ensuring that the new Customs Code is consistent with WTO standards and the

    revised Kyoto Convention. Also, it would introduce a new administrative appeals system;

    improve coordination with the judiciary; strengthen SCC representation in courts, and enhance

    the SCC law enforcement function.

    Component 5 - Organizational Structure and Operational Management: This component

    would improve the organizational structure of customs, facilitate teamwork, and adjust the

    structure to maximize the outcomes of the project. It would improve the management systems,

    and improve organizational performance evaluation through the use of a system of performance

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    indicators. Also, the component would promote coordination and information exchange with other government agencies, neighboring countries and trading community.

    Component 6 - Financial Management: This component would introduce improved budget

    preparation and execution procedures allowing for greater flexibility in resource management and greater accountability for results.

    Component 7 - Human Resources Management and Training: The component would develop

    and implement a comprehensive human resources strategy; enhancing human resource management procedures and practices, including remuneration and non-monetary incentives for customs inspectors and managers, aiming at improving recruitment capacity, retention of qualified staff, and raising integrity levels.

    In the area of training, the component would strengthen the capacity of the regional Customs training centers and the Russian Customs Academy. It would develop and implement a comprehensive training strategy for customs operations including new curricula, and improve distance-learning faculties, capacity, and courseware.

    Component 8 - Improving the Integrity of the Customs Service: This innovative component

    would develop and implement a comprehensive customs integrity strategy through placing into operation a new Customs Code of Ethics, developing a strategy of preventing breaches of professional ethics, developing corruption risk maps, implementing changes in business processes to mitigate risk, using automation to decrease subjectivity and discretion in the decision-making process, and exploring the use of DataMining technology for identification of cases of misconduct.

    Component 9 - Information Technology: This component would be responsible for disbursing

    about 70% of the project investment and supports all other components of the project. It was designed in compliance with recommendations of Section 7 "Application of Information Technologies" of General Annex to the Kyoto Convention. It would develop and implement a telecommunications infrastructure for seamless countrywide Customs operation and secure electronic interface with the trading community. Over this network the project would deploy an enhanced Unified Automated Information System (UAIS) and databases to support much improved Customs operations: risk assessment and management, cargo clearance and control, valuation, transit, electronic processing of customs declarations, export control, and control over the import of private vehicles. Special scanning equipment for customs control would be integrated to aid in the prevention of fraud and smuggling. Countrywide plans for business continuity and disaster recovery would be put in place. Finally, it would deal with the difficult public sector issue of retention of highly qualified Informatics staff. A human resource strategy would be developed for Informatics staff including their recruitment, training, and skills maintenance based on distance learning and closer integration with Russian Customs Academy. Component 10 - Project Management: This component would manage project implementation

    in accordance with the Bank’s procedures, including conducting procurement, disbursement, and financial management and reporting under the project. The component would also monitor implementation progress, track achievement of project development objectives, and identify improvements necessary for the project's success.

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    Conclusion

    The Government of the Russian Federation and the Bank have embarked on a substantial effort to reform the country’s Customs Service. The project was developed through a strong partnership fueled by the Government’s strong desire for economic development and Customs’ enthusiasm and commitment to the reform. Clear development objectives, goals, and key indicators of success were defined. Project activities were designed to involve the main internal and external stakeholders into a holistic institutional development approach covering all major success factors. Project steering was designed to give the private sector a strong voice in the initial strategy and in keeping the project relevant throughout execution. Difficult issues, such as organizational development, compensation incentives, and fighting corruption were faced head on. And stakeholder surveys were planned to continuously measure and help adjust implementation so that the project in fact achieved its objectives. Finally, project management was placed in the capable hands of Leonid Lozbenko who returned to Customs after a stint as Deputy Secretary General of the WCO where he led in the development of Customs modernization concepts.

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