Philippine Customs Reform

   
Abstract

Using an "off-the-shelf" customs application package as the main building block, the Philippines Customs Bureau has developed an on-line system to process clearance of imports, payment of duty, and delivery of release orders for shipments to leave the docks. The new on-line system has lessened the cost of trade for businesses, reduced opportunities for fraud, and helped the Bureau to maximize revenue collection.

Application Context

In 1995, the Customs authority in Philippines decided to implement a new IT based system for payment, clearance processing and shipment release from Customs control. Diversion of duty and tax payments through the banking system was a serious problem, as were the number of instances when Customs collecting officers ran away with their collections. Another major concern was the unduly long clearance time taken to clear the cargo. The process involved nearly 10 separate documents in multiple copies, that passed through several desks being logged into 20 registers. Over 90 steps and more than 40 signatures and initials were involved. As a consequence, surveys consistently named the Customs Bureau as one of the most bureaucratic and corrupt government offices.

Just like many other Customs administrations in the world, Philippine Customs also was faced with an ever-increasing workload against budgets that remained stagnant in real terms. In fact, the entire government was implementing cost saving measures which included a personnel attrition program.

A New Approach

The Bureau implemented a standard software package ASYCUDA, developed by UNCTAD and used by more than 60 countries. (A new version of the software was developed under a World Bank funded project.) Project Abstract Secure (PAS) is a joint undertaking between the Philippine Customs Bureau and the Bankers Association of the Philippines. Payment of duties and taxes must be made to the Authorized Agent Bank. Thus, no cash is handled by any Customs Officer.

The system also has become nearly paperless. An encrypted file verifying the payment received at banks is sent to Customs via a gateway. Customs computers match this information with the amount of duties and taxes payable. The need for a paper Order of Payment and a Customs Invoice have been eliminated. A release order for the shipment is issued once a match has been made.

In ports where authorized banks do not exist, in-house banks were established to handle collections, and the Bureau's Computerized Tellering System was extended to these banks. An electronic reconciliation system matches the amount collected by banks with the amount deposited with the Treasury.

An Automated Customs Operating System (AOCS) allows an importer or an agent to create one single electronic clearance document using work stations in their offices. These documents are then processed by the Customs Bureau. For those who have not been extended this Tele-clearance facility, Service Centers operated by the Philippine Chamber of Commerce and Industry digitizes the paper declarations into electronic declarations that are then processed by Bureau computers electronically.

At the heart of ACOS is a computer program called SELECTIVITY. The program analyzes the "risk profiles" of shipments by comparing their details with some 18 reference files, and then categorizing them as either High, Medium, or Low risk transactions. For low risk transactions it is only necessary to make an automated calculation of the required duty and match this to the amount actually paid to an authorized bank. If the transaction profile is deemed high risk, then a physical examination of the goods is mandated prior to assessment. Medium risk shipments require document checks, but not physical examination of goods.

The On-Line Release System (OLRS) facilitates the final release of in-dock shipments from Customs control. The off-dock OLRS utilizes the public telephone system for transmitting release instructions to the inland Container Freight station located many kilometers from the ports. Previously, messengers had to hand carry the release authorizations, which could take a day or two to deliver due to traffic congestion in the metropolis. The physical handling of the release authorization also provided an easy opportunity for corruption.

Implementation Challenges

Planning and management of the project was the biggest challenge. The project extended over 13 regions of the Philippines and involved multiple partners: the World Bank, Crown Agents, Unisys, UNCTAD, and the Department of Finance. Mistakes were made in developing a management structure for the project. For instance, Crown Agents, who handled all the procurement, were not part of the steering committee.

The long duration of the project also created several problems. Project system requirement specifications were drawn up in 1992. By 1999, when the project was nearing completion, the leading technology had changed from DOS based systems to a Widows platform. Nearly 550 nodes and 40 servers had to be upgraded. In addition, nearly 300 change request notices for modification were made to the implementers, escalating the costs by 40%.

Certainly, in the initial stages the effort required to undertake a project of this magnitude was under-estimated. A large effort to train 2,500 people had to be mounted, whereas the World Bank's SAR estimated that only 650 people would need new training. Project monitoring and advice from the World Bank team was unimpressive. A total of 51 staff weeks were spent on project identification, preparation, appraisal and negotiation.

Given the high propensity for corruption and fraud prevalent in the earlier system and the absence of a private/secure Wide Area Network, several features had to be built into the system to prevent electronic fraud. For instance, the electronic payment files kept in the Central Office are matched with those kept at the ports to check that electronic records have not been tampered with at the ports.

Benefits and Costs

The total cost of the project was approximately $27 million, of which $19 million was provided by a World Bank loan. The bulk of the funding was used for hardware and software.

The project was expected to increase revenue collection. Given the phased roll out and varying economic conditions, it is difficult to determine the impact of computerization on revenue collection. However, the net present value of increased revenue is considered to be significantly higher than the expenditure. The department was not able to meet its revenue targets in 3 of the 6 years, but that may be attributed to the East Asian economic crisis.

Improved service was a major benefit. Quick clearance of a majority of transactions has brought down the cost of trade significantly. Cargo is released between four hours to two days, as opposed to eight days in the earlier system. Under the new system, business people also enjoy the greater convenience of making payments at familiar banks, instead of lining up for service at the Customs collection stations.

The manual system of reconciling payments collected by the banks and the remittances to the National Treasury used to have a back log of up to four months. The electronic reconciliation process is completed within the day. And banks that fail to remit any collection are immediately detected and penalized.

The automated computation of payables utilizes fifty-two reference tables such as the tariff database, the applicable exchange rates and the various taxation rules. The system enhances revenue generation as computational errors, deliberate or otherwise are avoided.

Customs cashiers now have additional time available to carry out audit and reconciliation work. And the SELECTIVITY program in ACOS also makes it easier to focus limited enforcement resources on a more manageable number of shipments.

Key Lessons

Successful implementation was partly the result of using a standard, tried and tested software rather than re-inventing the wheel. The package ensured a significant amount of process simplification, which led to process re-engineering.

The use of an independent agency for procurement of hardware was considered a major contributor to the success of the project.

Use of a data warehouse (FINLINK) for analysis and linking revenue departments with the Ministry of Finance has led to improved policy formulation. This is an extension of the original project carried out during the last year. Developments such as this, which help to extract maximum value from investment in service delivery systems, can be jeopardized by a lack of assured maintenance budgets.

Case study author: Subhash Bhatnagar
Information used to develop the case: The case is based on documents of the World Bank and a paper by former Commissioner Guillermo L. Parayno, Jr. delivered at the international conference, "Information Technology in Government," held December 1-2, 1997 at the Marco Polo Hotel in Singapore.
Date submitted: January 3, 2001