Aug 4, 1998

 

SOUTH ADVISED TO REDUCE DEPENDENCE ON PSIS

 

Geneva, 3 Aug (Chakravarthi Raghavan) The Pre-shipment Inspection Services (PSI) and the agencies and services providing such services for a fat fee to developing countries got passing grades at a technical seminar organized by the Commonwealth Secretariat here last week, with participants supporting the view that developing countries should be able to reduce their dependence on such services.

Participants in the seminar included capital-based senior officials from the Commonwealth countries, mostly developing countries using such services, and some observers from non-Commonwealth countries where such services are used, as well as 'resource persons' from, and the World Bank and the International Monetary Fund, the World Customs Organization, the Commonwealth Secretariat, and NGOs including the International Chamber of Commerce and the International Federation of PSI agencies.  

PSI services by independent inspection companies have been provided to importers since about the second half of the last century - where the inspection companies charge a fee (about one percent of the FOB price) to inspect and check price and quality of the goods exported.  

Since about 1960, developing country governments have been using the PSI services to inspect imported goods and verify prices, prior to shipment and in exporting countries, so as to bring under control the under- or over- invoicing of imported goods and other improper practices.  

Under these arrangements, the PSI companies undertake physical inspection of goods to be imported to ensure they conform to the terms of the contract, to verify their prices, and ensure they are classified by the exporter under the correct tariff classification of the importing country.  

Some 40 developing countries, many of them the least developed in Africa, now make use of such services, aimed at enabling the governments, and their customs administrations, to deal with problems (and loss of revenues) due to under-invoicing and other fraudulent practices used by importers and exporters.

Since early 1980s, under their 'reform policies' and conditional lending , the IMF and the World Bank encouraged developing countries to use such services, and the Uruguay Round agreement, the number of PSIs  have increased. The PSIs formed themselves into an International Federation (even during the Uruguay Round) to get leverage, and along with the International Chamber of Commerce have a privileged position within the WTO framework.

The biggest of the PSI companies is the Geneva-based Societe generale de surveillance (SGS), with some 130 affiliated companies, presence in more than 140 countries, and a world-wide staff of about 30,000. The SGS had much at stake in the continuance of the system, and was backed by the Swiss negotiators.

The Uruguay Round PSI agreement preserved this lucrative service trade, while circumscribing the ability of developing country customs authorities in customs valuation, even in using information from the PSIs,  

The Agreement on PSI, one of annexed agreements of the WTO, is subject to periodic reviews - the first such review to be undertaken after 2 years, and thereafter every three years. A WTO working party is currently undertaking such a review.  

The PSEs, and their international federation, in the WTO review exercise, and also through lobbying at the World Bank and IMF, understandably have been trying to promote their own interests. Even more, they are trying to discourage any alternative methodologies of strengthened customs administrations, and use of data bases and new technologies that would enable a customs authority in a country to quickly undertake price comparisons etc.

While the PSEs do collect comparative price information for their own work, and can provide it to customs authorities for a fee, the fees sought are reported to be quite high, and would discourage countries using only the data information, and not the entire range of PSI services.  

But Lloyds of London and the Crown Agents are two UK enterprises (and others are coming up too) offering their data-base services to customs authorities of developing countries as an alternative to the PSIs, and some of the remarks at the seminar suggested that they were not being admitted into the international federation of PSEs or enabled to present their alternative instruments in such fora.  

According to some participants, the PSI enterprises federation threatened to pull out of the seminar if other enterprises providing only price data information were participants. But there was no confirmation of this.  

While the PSI agreement is aimed at helping developing countries to reach a correct valuation of imports for customs purposes, developing countries making use of such services are obliged by 2000 to apply the WTO's Agreement on Customs Valuation which provides for use of transaction value as the basis for customs valuation, even between related parties, but enables customs authorities (where they have reasons to believe that the transaction value may not be true value) to apply in sequence five other valuation methods.  

While purportedly aimed at facilitating trade, the Customs Valuation agreement would also facilitate transfer pricing abuses, as a result of importer-exporter collusions and connivance or ignorance of customs authorities and administrations.

While at the beginning of the Uruguay Round, the EC and the US were divided on the customs valuation methods, with the EC and (following its example), many developing countries using the Brussels Definition of Value (BDV) method, also favoured by the Customs Council, midway through, the EC abandoned its position and accepted the US argument for acceptance of the US practice of using 'transaction value' method.  

Whatever the merits of this method for customs valuation in the advanced industrial countries, with their own commercial intelligence and independent sources of price information, and well-administered and reasonably honest customs, the transaction value methods of computing customs tariffs favour TNCs in their parent-branch relationships, and help independent importers and exports acting in collusion.

Developing countries during the Uruguay Round were ill-prepared for the negotiations, and with turf battles back home between ministries, and their trading or other interests mostly ill-informed about the trade negotiations or their sweep in the Uruguay Round, they found themselves having to accept the US-EC accord, with only a 5-year transition period, and some scope for their customs authorities to exercise independent judgements, circumscribed though it is by the sequential order of valuation imposed on them.

The United States and the EC, and their TNCs, also made a determined bid to end the use of pre-shipment inspection services, viewing them as unnecessary interference between exporter-importer relationships and  obstacles to trade..

Once the US and EC took positions, and agreed bilaterally, on supporting the transaction value method of customs valuation and frowning on pre-shipment inspection, the IMF and the World Bank adopted laid-back positions, and did not pursue the pre-shipment inspection methods they had so ardently promoted till then.

And one of the outcomes of the PSI agreement, to the detriment of the developing countries, was that the price quoted or used by exporters for different markets in different countries are acceptable commercial practices that cannot be easily challenged or questioned. 

And while the use of PSIs were encouraged and promoted in the past by the IMF and the World Bank, after the WTO accord, the two institutions are now having second thoughts - and not only because they are 'sensitive' to the views of US and EC and their TNCs.  

There have been recent reports that far from ending corruption in developing country customs administrations, and enhancing revenue collection, some of the pre-shipment inspection enterprises (PSEs) themselves have been charged with corrupt practices in making payments to political masters of countries to get contracts.

The relationship of Pakistan and the SGS has figured in media reports. Pakistan officially announced that it had terminated its contract with the SGS, charging it with some illicit payments to the previous government (of Benazir Bhutto), a charge which SGS has denied (but got rid of some of its employees), as also Benazir Bhutto (against whom cases have been launched.) 

There have also been other cases involving other countries and PSEs cited in media reports.

New Zealand, in a presentation at the seminar, of what it called 'anecdotal' examples of problems with implementation of the PSI agreement, based on complaints from its exporters, spoke of the burden on small exporters, and price discrimination by the PSE between neighbouring Australia and New Zealand for the same products.

Even more, the New Zealand presentation, spoke of the conflicts of interest between PSEs and exporters, when a PSE engaged in PSI operations in New Zealand had a subsidiary dealing in trade with similar products overseas.

Though the World Bank, in the past, had pushed several developing countries to engage PSEs, at the seminar a World Bank resource person said the Bank did not now have a formal position on PSI services articulated in any of its official policies and documents.

At an operational level, he said, the appropriateness of the PSI services for countries was being evaluated on a case-by-case basis, depending on the particularities of the countries in question. The Bank, it was further added, viewed the PSE interventions as at best a second best -- preferring "an open capital account" (reducing incentives for over-invoicing and capital flight), trade liberalization, coupled with local institution building.

The Bank's views about open capital account or trade liberalization eliminating corruption is perhaps a romantic neo-liberal view that even its Chief Economist does not seem to support in more general terms. 

In fact after the outbreak of the financial crisis in Asia, more and more mainstream economists have been coming out against 'open capital accounts' and for that matter other neo-liberal views on development, where market failures are viewed as 'self-correcting' and preferable to 'state failures'.

The IMF for its part has also distanced itself from its earlier promotion of such services. In a paper at the seminar, it said that the Fund had encouraged (in the past?) some of the developing countries to, whose customs administrations had not been able to develop technical capacities to deal with the problems of under- or over- valuation of imported goods and where corruption was rampant to use the services of such PSI enterprises. But while PSIs usually bring about efficiencies in customs operations, the gains may not be always commensurate with financial and other costs of employing them.

And since it is in their interest to remain in place for long periods of time, PSI companies unless closely supervised, have often not given priority to building-up local administrative capacity. Also, employment of PSI services has "sometimes been reported to be associated with special arrangements for high officials".

The seminar's conclusions and report are being prepared by the Commonwealth Secretariat and is expected to be made available in a few weeks.  

But in some concluding remarks, Amb. P.N.Sinyinza of Zambia, Chairman of the Group of Commonwealth Developing Countries, in providing some conclusions of the technical seminar, noted that the services of PSIs was a matter of choice for the governments, some 40 of whom, and a large number of them LDCs, were using them. The basic purpose of the governments using them is to assist their customs administration in ensuring full collection of customs revenue by detecting cases of under- valuation of imported goods and other customs malpractices.

Sinyinza said that it was recognized at the seminar that though the long-term objective of countries using such services should be to reduce gradually their reliance on use of such services, in the short run they would have to take steps to ensure that full benefits are derived from their use. It was hence necessary to select the companies properly, on a competitive basis and open tendering in which all companies were invited to bid. 

But some participants, Sinyinza said, however pointed out that the pre-shipment companies often obtained contracts by resorting to unethical methods and, in a few cases, the integrity of officials from these companies working in countries using these services was also in doubt. "This had a demoralizing effect on customs and was one of the reasons for the reluctance of customs to cooperate."  

There was general support at the seminar for the view that countries using PSI services should gradually be able to reduce their dependence on such services when the delay period for the implementation of the WTO agreement on Customs Valuation comes to an end for many countries by 1 January 2000 and they start applying the rules of the Agreement. But they would still need assistance through reform and modernisation to detect inter alia valuation malpractices. One of the difficulties in detecting cases of deliberate under or over-valuation in invoices is the non-availability at national level of up to date and reliable data on prices and other information needed for determining whether the prices declared by the importer reflect the true value.

In this context, the seminar noted, developments in information technology may make it possible for customs administrations in these countries to obtain readily and promptly their own database for local use, and with coded passwords access quickly the international data base in a secure manner, and compare the prices.

The seminar, in one of its main technical recommendations, asked the Commonwealth Secretariat, the WTO, the International Trade Centre, the IMF and the World Bank to provide technical help to developing countries to develop their understanding of the methods used for price verification using modern-IT based solutions. 

Sinyinza agreed with a suggestion from one of the NGO observers that the report of the seminar be presented to the WTO working party on the PSI Agreement.