Customs Administration Post CA Elections

By Madhukar SJB Rana

Much work, to say the least, remains to be done to design the very contours of an ‘inclusive’, ‘federal’ Nepal . Beyond designing the structures of the federal (not federated) state of Nepal, there remains the vital issue as to which functional responsibility and authority should be ‘central’ and which ‘provincial’ or ‘regional’ or, indeed, which lie within the authority of the so-called ‘autonomous republics’, as perceived by the Maoists. With the kind of issues being raised here, one can sense the challenge getting more complex to hold Constituent Assembly Elections to draft the new constitution acceptable to, and endorsed by, the entire people of Nepal .

Whatever may be the political and demographic shape and form of the ‘federal’ Nepal , one can expect with certainty that functions like law, justice and security will be in the central domain. So too, one supposes, economic functions pertaining to the national treasury, budget-making and revenue administration. These functions should be matters for serious consideration by the national parliament as revenue mobilisation will be a fundamental issue for the effectiveness of the ‘inclusive’, ‘federal’ Nepal.

It is estimated here that revenue leakages by way of customs evasion and non-payment of income taxes could be around 35-40 of the current revenue being mobilised. To garner full revenue potential, which could be around 20 percent of GDP, world class institutions for revenue administration are required. Let’s examine a case on how this might be possible with customs administration.

Customs administration is a national institution with a strategic role and importance in the affairs of any state. Liberalisation, globalisation and regionalisation will be ineffective, to say the least, if reform and modernisation are not duly implemented with utmost priority and care. In the 21st century, customs can be visualised as Nepal ’s “eyes and ears” in the international marketplace for gauging the competitiveness of the Nepali economy.

Customs are one administration that is in the vortex of globalisation of international trade and commerce dealing with and collecting duties and taxes from innumerable export and import houses, clearing and forwarding agents, insurance and survey agents; equally dealing with masses of border peoples trading with each other for their daily livelihood— not to mention the vast number of tourists and migrant workers that flow into the country. It also is in the vortex of the ‘other-globalisation’ players that are responsible for controlling criminal acts of breaching intellectual property rights, smuggling, trafficking, money laundering — not to mention the protection that needs to be rendered for the preservation of the natural environment and the health and safety of the general public.

To be world-class would require, first and foremost, downsizing the customs administration so as to achieve ‘more for less’. It would also require rightsizing to keep abreast of the tempo of growth in knowledge and technology worldwide. The crying need for reform must, certainly, be the need for reforms in Nepal ’s human resources mobilisation, utilisation and development policies and practices. No world-class feature is attainable without this reform.

Recruitment and placement; training and retraining, transfer and promotion and sub-systems must be re-engineered to suit the precise requirements of the customs specifically and not the civil service generally. Full respect must be given to the knowledge, skill and behavioural requirements for each function and each position therein. A ‘position classification system’ is a dire must for scientific human resources management. Attractive and adequate remuneration is crucial.

To assure integrity, a code of conduct is a must with full-fledged programmes for compliance by all levels of the staff, especially focused on supervisory and leadership rungs. A system of grievance handling should also be incorporated into the personnel administration system to allow for the recourse to immediate justice and for incorporating solidly a system of rewards and punishment and incentives and disincentives. All procedures must be kept transparent.

For a world-class customs administration, all employees must be made sensitive to market forces and learn to treat all citizens as customers to be served and not as people to be administered, as has been customary till now. This calls forth a revolutionary change in attitude and behaviour where public servants begin to see themselves as service providers and not simply legal or semi-legal administrators.

Re-organisation is fundamental as the existing departmental organisation structure is not in tune with the desired role of customs administration to conform to WTO provisions and requirements. It needs to take radical measures to keep abreast with developments in the field of information technology to be an easily accessible world-class institution. It has to constantly monitor and compare regional transaction costs and set benchmarks for itself in respect of efficiency, cost effectiveness and total productivity to be recognised as a world-class organisation

Take Peru for example, which presents a valuable case study of how it is possible to achieve world-class status in customs administration through reforms. Re-engineering, combined with the decrease in ad valorem tariff from 1990-98 by 45.0 percent, led to imports increasing by 182 percent and revenue by an astounding 353 percent. The Peruvian Customs were considered to be perhaps the most corrupt in South and Central America . Yet, by now it is providing technical assistance to Bolivia, Cuba, Columbia, Costa Rica, Ecuador, El Salvador, Guatemala, Haiti, Honduras and Venezuela.

How did that happen? Well, there was steadfast political commitment at the highest levels. Additionally, the integrity programme was closely inter-linked with in-house functions like intelligence, post clearance audit, internal audit, external audit and risk management. There was also recourse to outsourcing for such services like pre-shipment inspection, warehousing operators, security services, banking services etc. Important too was stakeholder partnership with the business community. We might even say that Peru thus evolved a ‘managerial civil service’ as opposed to the traditional customs administrative service to achieve this miraculous performance.

Last, but by no means the least, it requires a new attitude in the Ministry of Finance where expenses are seen as investments and not simply as costs so that adequacy of financial resources is assured—and thus avoid recourse to the informal system of fees or dastur that has backfired to give a poor social image to customs administration. No world-class customs service is possible unless infrastructure is improved, accountability enured and transparency is paramount.

Deeply concerned about the lack of meaningful accountability by the tax authorities in India , the Report of the Task Force on Direct and Indirect Taxation (Kelkar Commission) has recommended that the tax departments be outside the Ministry of Finance as semi-corporate entities with full personnel and financial autonomy as was innovated upon by Canada .

Each tax authority would have its own Board which, it is suggested, should sign a five year Memorandum of Understanding with the central government to lay down, very broadly, the general conditions to guide the Board’s decisions with respect to strategy formulation; specify precisely the financial and personnel autonomy and powers; indicate clearly the financial commitment of government for the coming five years and how funds are to be released for the authority’s annual budget; state the performance criteria for accountability, monitoring and evaluation and determine penalties, reward and disincentives for underperformance.

Also recommended was a set of precise rules for the selection of the Chairperson of the concerned tax authority as well as the recruitment of Chief Executive Officers (CEOs). Interestingly, New Zealand has gone a step further than Canada where the CEO is appointed on internationally competitive merit. Along the lines of the Kelkar recommendations, it is strongly recommended that a Nepal Customs Authority be established to take it out of the Ministry of Finance.

To conclude, so rapid is the change in transportation and communication that the days will not be far off when we find customs administration of landlocked Nepal providing transit and trans-shipment services to most of its regional neighbours. This is likely to happen by 2012, if not earlier, with the operationalisation of SAFTA and the Asian Highway and Asian Railway stretching all the way from Tokyo to Istanbul .

(Rana is a former Minister of Finance)